In June 2016 a giant Chinese container ship became the first vessel to traverse the Panama Canal’s newly expanded locks.
“This new transit route is the tip of the iceberg in making Panama once again the logistic center of the Americas,” said Jorge Luis Quijano, then director of the Panama Canal Authority (ACP). But as the shipping industry begins a slow recovery from the COVID-19 pandemic, the Central American nation faces a more enduring challenge: adjusting to the changing global trade patterns brought about by rising US-China tensions.
Transit figures for the Panama Canal are a popular barometer for global trade and during the second quarter of 2020 traffic slowed considerably. There were just 845 transits in June – the lowest since the inauguration of the new locks – compared to 1,226 in February. The pandemic’s effect on tourism and energy prices meant that cruises and Liquid Natural Gas (LNG) shipments were the worst affected. Nevertheless, a rise in trans-shipment from Panamanian ports softened the economic blow and since July transits through the waterway have begun to increase.
Following the rebound, however, a far bigger challenge awaits, according to Rudolfo Sabonge, Panama’s incoming Secretary General of the Association of Caribbean States. “The pandemic has intensified the trade war between the US and China. Companies are increasingly looking to exit China and to near-shore production. We are seeing an overall regionalization of trade,” Sabonge said.
A May survey by McKinsey Global Institute found that one in four respondents planned to regionalize supply chains and/or increase nearshoring. Michael T. Klare, a prominent academic of security issues, forecasts the emergence of semi-autonomous trading blocks centered on China, the US and Europe while Eric Farnsworth, vice president of the Americas Society, and other senior policy wonks have called for a revival of a hemispheric trade deal.
Over the last 20 years the Panama Canal has grown – both in size and in profitability – alongside the rapid increase in US-China trade. In the fiscal year that ended on September 30, 2019 the waterway collected $3.37 billion in tolls, of which just over half was deposited in the national treasury, representing around one fifth of total government incomings. Following the pandemic’s impact tolls fell to $2.72 billion in 2020 and the ACP forecasts they will decline a further 8% to $2.52 billion in 2021, with canal transits falling 11%.
Asia production challenge
One long-term challenge is the shift in centers of Asian production. “The US-China trade frictions and rising labor costs in China mean that production is increasingly shifting to South East Asia,” says Eddie Tapiero, a Panama City based trade economist. “The problem is that any production south of Hong Kong prefers to use the Suez Canal to reach the US and Europe.”
Following Panama’s June 2017 decision to establish formal diplomatic ties with Beijing, the country became a hotspot for Chinese investment in transport and energy infrastructure and negotiations towards a free trade agreement progressed rapidly.
Since the May 2019 election of President Laurentino Cortizo, however, relations with China appear to have cooled with the US now reasserting its presence on the isthmus.
In August, during a visit to Panama City, the US National Security Advisor Robert O’Brien pledged financial and institutional support for private-sector led infrastructure development under the Americas Crece (Growth in the Americas) program. This new initiative is widely viewed as a direct challenge to China’s Belt & Road Initiative (BRI), which has invested billions in resource and infrastructure projects in its 19 partner countries in Latin America.
If global trade is to move towards regionalization, Panama will need to find new sources of finances and adjust its logistics strategy.
Financing is required for a new bridge over the canal and a tunnel below it for Panama City’s third metro line. The metro line itself is backed by a $2.6 billion loan from the Japan International Cooperation Agency. In September Bladex, an NYSE listed trade bank with its headquarters in Panama, sold $400 million of 2.375% senior notes.
Up to $2 billion will be required for major reservoir or desalination projects to resolve the canal’s persistent water shortages. The government is also preparing tenders for three road projects under the new private public partnership (PPP) contracts made possible by a change in the law last year. Other projects will revert to “turnkey” financing, meaning the construction firms will receive the bulk of their payment on completion with the Minister of Public Works stressing the need for “creative ways to finance projects.”
“Resolving the water issues at the canal is crucial as Panama looks to benefit from being a node of global trade,” says Tapiero. “We hope that the America Crece program, backed by strong dollar liquidity in the US, stimulates investment in infrastructure in Panama and the wider region.”
The new trade map could also open opportunities for light manufacturing and near-shoring of inventories for ecommerce clients. In August the government launched a special regime for light manufacturing industries with a 5% corporate tax, aimed at attracting multinational firms in areas such as pharmaceuticals.
The growth of ecommerce – under which goods are shipped by sea then distributed by air – offers Panama a distinct advantage, according Sabonge. As well as having Pacific and Caribbean ports and free trade zones, Copa Airlines – a strong regional carrier – has proved more resilient to the pandemic than its peers, Avianca S.A. and LATAM Airlines Group.
“Panama is built for regional business, companies come here for the connectivity” says Sabonge. “With the free trade zones and the new manufacturing law, the government is looking to bring in more multinationals. We need to attract anchor firms that can create clusters.”
With land and labor prices higher than many regional peers, Panama will rely heavily on the attractiveness of its logistics sector.
“Panama is well placed to add value to the supply chain between the US, Asia and Europe,” says Dulcidio de la Guardia, chief financial officer of the law firm Morgan & Morgan, and a former Minister of Finance. “America Crece could be an opportunity for manufacturing. I am optimistic for the logistics sector in the medium and long term.”
First the country will have to navigate the macroeconomic challenges.
Despite a forecast double digit contraction of GDP in 2020, Panama is expected to be amongst the Latin American countries primed for a swift recovery in 2021 with predicted growth of 4 to 5%. Government finances will take longer to recover, however, as tax revenues slumped and the fiscal deficit is expected to reach 9% of gross domestic product by the end of the year.
In March the government issued $2.5 billion worth of debt, with a coupon of 4.5% and 36 year maturity.
“The government did extremely well to launch the bond in tough economic conditions and spreads have since shrunk, almost to their pre-pandemic levels” says de la Guardia. “But after running operational surpluses for over a decade, in 2021 the Panamanian government will need to bring in $5.2 billion in funding from international capital markets and multilateral institutions.”
The other challenges facing the development of a logistics-inspired recovery are political. Having had a strong start to its COVID-19 response, the Cortizo Administration has been racked with internal divisions and accusations of corruption regarding the awarding of key healthcare-related contracts. Powerful interest groups in the retail sector are also hostile towards new competition from ecommerce. Many doubt, therefore, that Cortizo has the political capital required to make the bold decisions to ensure the crisis doesn’t go to waste.
“Panama talks a lot about becoming a major logistics hub but execution has lagged expectations,” says Tapiero, “the country is losing opportunities due to lack of integrated policies, corruption scandals that affect business confidence and as a result of policies that benefit business elites by subsidising inefficiencies.”
In 1815, a century before the completion of the canal, Simon Bolivar had extolled Panama’s “magnificent position between two mighty oceans” and its opportunity to become “the emporium of the Americas”. The changing map of global trade offers Panama another opportunity. Will it take it?