Molano Strikes Back

The Latin American Adviser

Panama: A Bubble Waiting to Burst

Panama is booming. The economy is growing more than 6% y/y, with the
possibility of exceeding 7% this year. The construction sector is the main
engine of growth. Glimmering office towers and glamorous apartment blocs are
sprouting out the squalid shanty towns that sit along the Pacific coastline.
Property speculators are snatching up scores of newly built apartments.
Panama City's waterfront is starting to resemble the glittering skyline of
Hong Kong-with a flair of South Beach. The new facilities are being built
for the hundreds of new companies that are expected to arrive in Panama to
participate in the mega construction project and the new trade opportunities
that lie ahead. Indeed, many global companies are expressing interest in
Panama. Dubai Drydocks, for example, is studying the possibility of building
a new facility. DHL and Fedex are looking at Howard Airforce Base for their
new regional hub. Evergreen is looking at several multi-modal projects.
People are taking a closer look at Panama, but the construction sector may
have run ahead.

The housing boom hopes to attend the growing number of retiree's that are
relocating to Panama. Immigration applications were up 20% y/y this year,
and there are active marketing campaigns in Europe and North America to woo
senior citizens. Much of this optimism is based on basic assumptions. The
first assumption is that the referendum will pass. Recent polls show that
the "yes" vote is winning by a margin of 10 points. However, the margin is
starting to erode, and the government is in a panic. The second assumption
is that the private sector will provide the multimodal facilities needed to
take advantage of the new locks. Rather than a new concrete ditch, Panama
needs a network of highways and railroads that will allow the
interconnection of its ports, airports and waterways. The private sector is
moving in the right direction. However, the Panamanian government must
provide the leadership, planning and incentives needed to coordinate a
well-orchestrated program. The government must provide the necessary
concessions and right of ways to assure inter-connection capabilities. The
third assumption is that Panama will find the skilled labor to provide the
variety services that could proliferate. Panama must be prepared to welcome
thousands of skilled workers from neighboring countries, principally
Colombia. It must also be prepared to assume the political fallout that will
occur when many Panamanians realize that they are being left behind. The
fourth, and last, assumption is that the government will find the resources
needed to modernize its infrastructure. Although the newly built towers are
beautiful, the roads are atrocious, the hospitals are inadequate, and the
pollution is rampant. The Hollywood adage, "If they build it, they will
come" may work in the movies. But, it rarely works in real life.

These assumptions have a very low chance of ever occurring. This means that
Panama may be in for a rude surprise. Unless a wave of foreigners arrive to
soak up the growing supply of new apartment and office blocks, there is
going to be a major correction in the Panamanian housing market. At $1,500
per square meter, 100 to 400 square meter homes are outside the reach of the
typical Panamanian household. This is the reason why the government is in a
'tiz. Any dissent to the "yes: vote is being silenced. The opposition is
being bought off-which ironically is leading to an expansion of the
opposition rolls as more people want to enjoy the payola. There are whispers
that a rejection of the initiative could spark an economic collapse.
However, a correction in the housing market is inevitable, given that most
of the assumptions will be impossible to achieve. Panama is a speculative
bubble waiting to burst, that is why the government is trying to keep all
sharp objects out of the way.