ECONOMISTS AND FINANCIERS:

Crisis around the corner

03-02-2009 | TAGNIA SHOCRON

tshocron@laestrella.com.pa

Problems are accentuated by high current account deficit

Panama Star PANAMA. The heads of a company opted for budgetary cuts when faced by the negative effects of the global financial crisis, as the company’s sales were no longer covering the operational expenses, despite having expanded their operations only last year.

The cost cutting measure cost the jobs of 10 percent of the personnel, among them Andres, a middle-income professional and the bread-provider in his family. The newly unemployed man had been paying his car loan for two years, and had just gotten a mortgage.

This might sound like one of many stories taking place in the United States or the European Union, currently in a recession. But Andres’ story takes place in Panama.

Even though optimism on the economy reigned during most of 2008, there are already voices expressing doubts and others completely pessimistic about the economic development of the country in 2009.

WHY THE OPTIMISM?

For the director of public policy of the Ministry of Economy and Finance (MEF), Horacio Estribi, Panama is better positioned to confront the crisis compared to other countries in the region, as it maintains an open and diversified economy. He mentioned that for 2009, several multi million dollar projects with secured financing are being developed, among those the expansion of the Panama Canal.

The former vice-minister of economy, Domingo Latorraca, agrees in part with this thesis, but recognizes that the “global environment is very complicated” and the majority of the big economies, and some from Latin America, are suffering from an economic contraction. “Of course it is going to affect us and it is already affecting us,” he says.

Someone who does not understand why there is so much optimism is the financial analyst Enrique Ho, who says: “The foreign news gets worse every day, and Panama depends on the world economy, and we will too go into a recession.” He explained that Panama needs $2 billion to keep growing close to 5 percent a year. To the analyst’s judgement, the megaprojects still need bank financing, but “in the current environment, credit does not exist.”

The financial analyst Frank De Lima considers the government forecasts on economic growth a direct response to the need of keeping a positive image in the electoral campaign.

WHAT 2009 – 2010 WILL BRING

The head of the rating company Equilibrium, Ernesto Bazan, announced that the company recently modified the gross domestic product (GDP) growth expectations for 2009. From a 6 percent growth, the forecast was adjusted at 5 percent, and Bazan did not rule out further adjustments throughout the year.

Bazan held that the revision responded to the impact of the global crisis as it is already playing out in industries like construction, and the Free Zone in Colon. But he reserves the worst news for 2010. According to Bazan, next year will be harder, as 2009 began with a residue growth from past project developments.

THE PLUSES AND MINUSES

Even though the forecasts have varied, experts agree that the conditions that will help Panama mitigate the effects of the crisis are: an open and diversified economy, a solid financial center, the use of the dollar as legal tender, as well as the public and private investments currently being developed such as the Canal expansion.

As for situations that could accentuate the crisis, the sources highlighted economic and political factors. The MEF director for public policy mentioned the uncertainty surrounding the presidential elections and the government transition, while Latorraca fears that the next government might adopt populist and protectionist measures.

As for economic factors, they mentioned Panama’s high current account deficit, and the banking restrictions.

Another aspect in which the economists and financiers agree is that the financial crisis has not reached its worst, warning of the gloomy days to come.