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Panamanian government's progress on expanding trade and boosting important sectors in coming year limited by corruption investigation

26 Sep 17

On 17 September, China officially opened its first embassy in Panama, signalling the beginning of a new commercial and diplomatic relationship.



IHS Markit perspective

Outlook and implications

  • Panama's government is seeking to expand trade and to strengthen its infrastructure, tourism, and agriculture sectors over the next year.
  • Its progress will be hindered by a bribery scandal which implicates public officials in irregularities in awarding public works contracts.
  • Preparations next year for the May 2019 presidential election also are likely to delay the Varela administration's agenda.

Risks

Policy direction; Corruption and bribery; Contract revision

Sectors or assets

All

Panama's President Juan Carlos Varela with Chinese Foreign Minister Wang Yi and his Panamanian counterpart Isabel De Saint Malo during Wang Yi's first official visit to Panama in September 2017.

Rodrigo Arangua/AFP/Getty Images

The establishment of diplomatic relations with the People's Republic of China, announced in June 2017, forms an important part of the Panamanian government's objective of expanding trade relations and attracting investment to diversify its economy. President Juan Carlos Varela's government, in power since 2014, has sought to maintain favourable operating conditions for foreign investors, with achievements including the completed expansion of the Panama Canal in mid-2016 and a significant reduction of the country's homicide rate. However, since April 2016, Varela has had to respond both to accusations of an opaque legal and banking system following the Panama Papers scandal, and Brazilian construction firm Odebrecht's admission to have paid USD59 million in bribes to Panamanian public officials to win public work contracts. Both scandals led to new legislation to improve financial and institutional transparency being given priority over the last 12 months, delaying progress in other areas. The next year will prove crucial for the Varela administration to complete its legislative agenda prior to preparations for the May 2019 presidential election.

The investigation into the Odebrecht bribery scandal has dominated government priorities during 2017. To date, over 40 public officials have been implicated, the majority of whom have not been named. Only three arrests have been made and information on the progress of the investigation has been limited. This has been a source of public concern and the investigation will remain a government priority in order to restore confidence in the country's institutions. Legislation approved since late-2016 to improve financial and institutional transparency has increased regulation and supervision of offshore accounts, in addition to electoral changes establishing new campaign financing limits and a public contract law to increase participation in public tenders.

Infrastructure

Varela's government is prioritising infrastructure development to maintain Panama's global competitiveness as a transport and logistics hub and to underpin economic development in other strategic sectors. The two main priorities for the coming year are the October 2017 tender for the construction of the USD1-billion fourth bridge over the Panama Canal, and the USD2.6-billion construction of Metro Line 3, due to begin in December to connect with the expanded Tocumen International Airport. Other major projects include highway expansions, the ongoing regeneration of the port city of Colón, the relaunching of the USD1.05-billion Chan II hydroelectric project tender, the USD2.7-billion Corozal Pacific container port tender, and progress on the delayed third and fourth electricity transmission lines to meet the country's growing electricity demand. Infrastructure projects will continue to be the most vulnerable to delays and contract revisions as a result of the corruption investigations.

Trade relations

Since establishing relations with China in June, 20 new agreements for commercial and tourism co-operation and the development of energy projects have been under development awaiting signature by end-2017. Discussions for a free trade agreement (FTA) with China are also likely to materialise over the next year. Since 80% of Panama's GDP comes from services, the opportunity to expand trade with China and attract greater investment in industries such as manufacturing and energy production could make a valuable contribution to the government's aim to boost exports and diversify revenue sources. The government is discussing Chinese involvement in a railway to the Costa Rican border and the stalled Chan II hydroelectric project. Panama is also in negotiations for a FTA with Israel, and the government will seek a resolution of the four year-long trade dispute with Colombia over textile import tariffs following a pending World Trade Organization ruling expected in late 2017 or early 2018.

Economic development

The Varela administration's 2015–19 strategic plan identified logistics and transport, agriculture and tourism, and to a lesser degree mining and energy, as important sectors for development and economic diversification. Progress in many of these priority areas has been slowed by the greater priority given to financial and institutional transparency legislation over the last 18 months. Over the next year, planned government initiatives to boost these sectors are likely to include the tender for a new cruise ship terminal at Amador and incentives for foreign direct investment in the tourism industry. It is also planning investment in technology and training to boost agricultural production. The government intends to develop the country's mining and energy industries, which are under-exploited versus many of its Central American neighbours. In April 2017, the government approved five-year studies for offshore oil and gas exploration as a potential means of reducing its dependence on oil imports; however, it is advancing cautiously in both the mining and energy sectors given the history of strong environmental and local opposition, and restrictions on exploiting both types of resources in indigenous territories. For example, the Barro Blanco hydroelectric project remains suspended due to significant local opposition in 2015–16, despite being 95% complete.

Outlook and implications

The Varela administration will continue its efforts to diversify the economy and boost exports and trade during the coming year. Progress in many areas will depend on the development of the Odebrecht corruption investigations, which threaten to continue to take priority over other legislation and delay infrastructure projects and tenders over the coming months. In addition, during 2018 there will be a growing focus on preparations for the May 2019 presidential election and the selection of potential candidates. The persistence or resolution of existing divisions within the two largest political parties over support both for their presidential candidates and for Varela's minority Panameñista Party (Partido Panameñista) administration also will be crucial in determining the likelihood of the government being able to progress its agenda in the National Assembly in the coming months.

 
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