San José, Costa Rica, since 1956

Panama Business Sector Encouraged

PANAMA CITY, Panama – Presidentelect Ricardo Martinelli will assume power July 1 with years of explosive economic growth at his back, hefty campaign promises on his shoulders and a daunting deceleration of the country’s economy before him.

Fueled by booming construction – particularly of high-rise apartment towers – a flush banking sector and commerce through the Panama Canal, the country’s gross domestic product (GDP) has grown by an average of more than 8 percent annually since 2004, with growth spiking to 11.5 percent in 2007 and 9.2 percent in 2008.

Panama’s economy has been one of the fastest growing in Latin America. However, as credit and commerce contract worldwide, the country has not been immune, and the slump will be one of the biggest challenges Martinelli faces as he begins his presidency.

Growth in Panama plummeted back to earth at the beginning of the year, and analysts predict a GDP growth in 2009 of only 3 percent. This is a rate that neighboring Costa Rica might envy, considering its predicted rate of 0.5 percent for this year.

“In the short term, maintaining positive GDP growth during the global recession will be key,” reads a post-election report from the international credit rating agency Standard & Poor’s.

“Even though, as noted, Panama’s is among the handful of economies that we expect to expand in 2009, growth will decelerate sharply,” the report continues. “This could make political alliances hard to maintain. Here is where we believe that Mr. Martinelli’s proven ability as a successful business manager will come into play.”

The owner of one of the largest supermarket chains in Panama and founder of the Democratic Change Party, Martinelli was elected May 3 with 60 percent of the vote, the highest margin ever achieved in Panama’s 20-year-old democracy. His nearest opponent, Balbina Herrera of the ruling Democratic Revolutionary Party (PRD), received less than 38 percent.

Martinelli also has worked in government, serving as chairman of the board of directors of the Panama Canal Authority, as Panama Canal minister and director of Panama’s Social Security Administration.

“Frankly, the business sector is going to love Martinelli,” said Heather Berkman, a Latin America analyst for the consulting firm Eurasia Group. “He’s planning on cutting corporate taxes to implement the flat tax, and he came out last week saying he would resist any legislation requiring more tax transparency and information sharing – which the U.S. Congress has been demanding as a precursor to movement on the Panama free-trade agreement.”

Trade and Taxes

The George W. Bush administration in the U. S. and Panama’s reigning Martín Torrijos administration finished negations and signed a U.S. – Panama free trade agreement in December, 2006, and current U.S. President Barack Obama has said it is the first such agreement he wants to move through Congress.

But some key U.S. Democrats have said they will not vote for the deal unless Panama – recently mentioned on a tax haven list produced by the Organization for Economic Cooperation and Development (OECD) – agrees to share sensitive tax information with the United States.

“A tax information exchange agreement is the least of what we should get before the free trade agreement,” U.S. Sen. Carl Levin told the U.S. news service Bloomberg.

Though Martinelli has called the trade agreement his “number one priority,” his administration has denied that Panama is a tax haven and has rejected the possibility of giving up tax information.

“The free trade agreement and sharing tax information should be dealt with separately,” Martinelli’s top economic advisor Frank de Lima told Bloomberg. “We are aware that times are changing, but we will not succumb to pressure from the U.S. so that they can start fishing expeditions to look for their citizens.”

Key Sectors Feeling Crunch

U.S. citizens have flocked to Panama in recent years, both for business and retirement, in part driving the real estate boom that has pushed dozens of high rise condo and apartment towers skyward. That too, however, is feeling the crunch.

“Local banks, though they maintain a high level of health, have restricted local credit because of the foreign banks’ lack of liquidity,” said Fernando Duque, president of the real estate development company Buenaventura, in an e-mail. “Obtaining new credit for real estate projects in Panama City has almost entirely been paralyzed.”

Duque said that he expects the Martinelli administration to continue to invest in Panama’s growing tourism industry.

“Panama has been betting on tourism as one of its fastest growing industries, and in this moment there are projects totaling about 1,500 rooms, principally in Panama City,” he said. “However, for tourism to develop in other areas, state infrastructure is necessary.”

Martinelli campaigned on promises to attract foreign investment and build better infrastructure and a subway system for the traffic-choked capital. He also inherits plans for an already partially funded $5.25 billion expansion of the Panama Canal.

Duque said he expects the canal expansion project to begin this year and “neutralize” the economic effects of the slowdown in new construction.


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