Alfonso Garcia Mora, IFC

A major new investment in the Panama Canal that seeks to address problems with low water levels caused by a sustained drought will have global consequences, according to the the International Finance Corporation (IFC), which is helping to structure the $8.5 billlion financing strategy required for the project.

Alfonso García Mora, vice president for Latin America and the Caribbean at International Finance Corporation (IFC), said the difficulties facing the canal “are not a Panama problem, but a world problem. We have colleagues in Africa who are very worried about it” because of trade flows, he said.

The project includes $3.5 billion for infrastructure, $2 billion for water management systems and another $2 billion for sustainability components. The rest will be for a series of other improvements, including renewable energy. It follows a $5.4-billion expansion of the canal completed less than a decade ago.

A severe drought that began last year forced the Panama Canal Authority, which operates the waterway, to limit access for ships, disrupting trade flows that were just recovering from the pandemic-induced supply chain crisis.  

“We have a huge problem with the canal. They need to structure $8.5 billion to make the canal sustainable and water-use friendly. We are structuring it and will invite others to finance it with us,” Mora said.

The goal is to have the assessment done with mid-2024, so that the project is ready to be formally launched by the end of the year or in 2025. 

IFC is the private sector arm of the World Bank.

ECONOMIC WOES

The project comes as the country grapples with a slump in economic growth after the closure of a large copper mine. Moreover, negative outlooks from rating agencies could make raising capital more expensive. 

Fitch Ratings in a March 6 report on Panamanian banks revised down its 2024 growth outlook to 1.5% from 4.5%. 

The report cited headwinds including the fallout from a Supreme Court decision in November that shuttered the $10 billion copper mine built by Canada’s First Quantum. It was the biggest private investment in Panama’s history and contributed the equivalent of 5% of GDP.  

S&P Global changed its outlook on the sovereign’s rating to negative last November, stating that uncertainty could pose risks to the country’s still favorable medium-term GDP growth prospects, potentially weakening its economic resilience.

Despite these challenges, Idaliz Guiraud, a Panama-based attorney focused on trade issues, said she expects the canal investment to move forward because of the sustainability issues. 

“The Panama Canal Authority will make a significant investment in sustainability, allocating $8.5 billion over the next five years for eco-friendly projects. This initiative comes after the canal faced water shortage challenges and implemented water-saving measures, demonstrating their proactive approach to sustainability,” she said. 

More from LatinFinance at the IDB Annual Meetings | Dominican Republic 2024