Panama’s Arrocha Outlines Vision for an Infrastructure Economy

Emerging Markets, IMF editions, October 2015

A senior Panamanian minister has outlined a future for his country’s economy based not on tax but infrastructure, with hubs built upon increased trade in an expanded Panama Canal.

Panama’s economy grew by 5.9% in the first quarter of 2015, compared to 0.2% for Latin America. “We are growing at least 10 times faster than the rest of Latin America and the Caribbean,” said Minister of Commerce and Industry, Melitón Arrocha (in fact the multiple is much higher, and the regional economy is expected to contract in the second quarter).

Arrocha attributes this relative outperformance to a number of things, including a sound macroeconomic position that allows Panama to acquire sovereign debt, a strong budget expected to be around $20 billion next year, and in particular ambitious public and private sector investment packages. Among other things, construction is about to start on the second line of Panama City’s metro system, a $500 million housing project has been awarded in Colon on the Atlantic coast, and work is underway for a third metro line including a fourth bridge over the Panama Canal, a project that is said to be worth over $1 billion (a US$450 million bond offering to finance the third bridge was completed on October 1). “We have an important group of large public spending items that will create stimulus for the economy to keep on growing,” Arrocha said.

But the key driver, as always, is the Panama Canal, which is amid a considerable expansion of its lock system. Global traffic permitting, the effect on the national finances should be transformative. “We now receive direct revenue to the national budget of a little over a billion dollars annually,” Arrocha said. “There are some expectations we will be able to quadruple that. For a budget of $20 billion, receiving $4 billion from a single project is very significant.”

Moreover, the expansion is intended to allow far larger ships to navigate the canal, and it is hoped that this will motivate the development of other activities in Panama. When projections were undertaken for the canal expansion’s impact on the economy, no account was made of LNG, since fracking technology did not at the time exist in the US. “Now, we expect large gas tankers to pass through the canal, and we are trying to make Panama a gas hub.” He wants the country to play a greater role in cargo than simply watching it sail through from the Atlantic to the Pacific, and has submitted new legislation aimed at attracting manufacturing capacity to Panama. “We have all the logistics: a railroad from the Atlantic to the Pacific, the canal, the ports, the cranes, the highways. Now we have to add manufacturing to that.”

Alongside the canal, the national airport is also undergoing expansion, and Arrocha said this will be complete next year. The airport already moves eight million people a year – twice the national population – and the target is 18 million.

Arrocha appears more keen to attract expertise and on-the-ground commitment than foreign capital. “We have a fairly sophisticated financial system which is very liquid,” he said. “We are not looking that much for capital. What we are looking for is people to set up national manufacturing capacity, to start looking at Panama as another option.”

Asked about the role of tax haven policies in Panama’s future, Arrocha said the question should be considered in two ways. He said Panama’s existing tax arrangements – 25% of tax on income sourced from Panama, nothing from countries outside it – would not change. “My personal stand on this is that we need to foster competition among governments in order to oblige them to charge the least amount of tax possible while running the government efficiently.”

The question of anti-money laundering is a different matter, he said, and pointed to the enactment of a new law requiring more robust due diligence processes. “If you go to Panama and try to open a bank account, you are going to tell me a story about how hard it is,” he said. “It comes to the point of being almost impossible. But being a financial centre we strongly believe we have an obligation to fulfill the security not only of the region but the world.”