Opinions?

Walter Molano
BCP's Molano Latin American Daily

The Latin American Adviser

Panama: Canal-Poor



With less than a month to go until the canal referendum, Panama is buzzing
with energy. The tropical air is charged with nationalism. Many Panamanians
are sporting green wristbands to show their solidarity with the "yes" vote.
Investment is surging, as companies and individuals position themselves for
the mega-project. Like a young couple strolling through a model home, there
is a sense of optimism that the new (and expensive) acquisition will allow
them to realize their dreams. However, the optimism turns into remorse when
they find themselves over-extended and house-poor. Unfortunately, Panama is
headed in the same direction.



Most Panamanians believe that the larger locks will catapult them into the
leagues of Singapore and Hong Kong. The project will be the panacea to the
country's pervasive poverty, low literacy and high unemployment rates.
However, few realize that the main beneficiaries of the expansion will be
the major ports along the Atlantic and the Caribbean. The development of
containerized transportation during the 1970s and 1980s, led to a remarkable
growth in the size of cargo ships. Maritime companies discovered that fuel
and operating costs did not increase linearly with ship displacement-a fact
that was also realized by the cruise industry. This led to the construction
of ever-larger freighters until they were too big to fit in the canal-thus
reducing the waterway's traffic. The mega-vessels were forced to discharge
their cargo at U.S. ports along the Pacific coast-providing a bonanza for
Long Beach, Portland, Seattle and San Diego. The expansion of the canal will
allow such ships to discharge their cargos on the other side of the
Americas, bringing them closer to the major markets along the East Coast and
providing a huge boost to Miami, Houston and New Orleans. However, most of
the value-added will be realized outside Panama. The new locks will be akin
to the construction of a mega highway along the side of a small town.
However, unless an exit ramp is built to allow the traffic to exit; the
small town will wither and die. The same thing will to happen to Panama.



The discussion for a new set of locks is almost 50 years old. By the end of
the 1960s, the canal was becoming obsolete-with the construction of oil
supertankers and nuclear aircraft carriers. The expansion project was
studied in great detail. Ten years ago, the estimate for the project was $12
billion-with the possibility of reaching $15 billion. However, the canal
authorities are now saying that the project will not exceed $5.2 billion.
The Panamanian government claims that any additional debt will be assumed by
the canal administration. However, this is not true. Under the Panamanian
constitution, canal assets cannot be pledged. This means that no creditor
can lay claim to the canal or its future revenues. Therefore, any debt
assumed by the canal authorities will become an obligation of the Panamanian
government-a fact that has been emphasized by the credit rating agencies.
Given that the government is already hemorrhaging with a debt ratio of
almost 80%, a fiscal deficit that is growing, and a project that is grossly
underestimated, Panama is headed for a bad case of buyer's remorse.



This is not to say that Panama should not take advantage of globalization.
However, it must focus its limited resources on maximizing the economic
benefits of its strategic location. The geographic proximity to a strategic
waterway is no guarantee for economic prosperity, just ask the people of
Port Said, Montevideo and Gibraltar. The secret to Singapore's success lies
within its labor force. The Singaporean government's decision to invest
heavily in education during the 1960s, created the skilled workforce that
allowed it to provide a variety of value-added services in the 1980s and
1990s. Today, Singapore is the major distribution hub for South East Asia.
It is a leader in financial, logistical and insurance services. It has one
of the friendliest business environments in the world. Panama has one of the
worst. In its most recent "Doing Business" report, the World Bank ranked
Panama 81st out of 175 countries. Therefore, how can Panama expect to
attract the value-added services that will cure its massive social ills? The
main beneficiaries of the mega-project are non-Panamanian ports and the
local construction companies (that are also well represented within the
canal board). In other words, the expanded waterway will leave Panama
house-poor and with a bad case of buyer's remorse.