Latin Finance - September/October 2014 - 92

CENTRAL
AMERICA
PANAMA

Panama's new president inherits a country with Chinese-style growth levels,
but maintaining that expansion, and realizing the country's ambitions as a
logistics hub, will require careful attention. By Lucy Conger

Keeping pace

n May 4 Panamanians handed Juan Carlos Varela a surprise victory in the
presidential race. The former engineer and businessman won narrowly, edging past former
Panama City mayor Juan Carlos Navarro, and roundly defeating the party of departing president Ricardo Martinelli.
Varela moved quickly to strengthen his mandate. In his first week in office, on July 7,
he delivered on a campaign promise by announcing price controls on 22 basic foods. The
government claims the move will allow families to save $58 a month, as food inflation tops
8% annually for some products, partly due to import costs. "This will allow him to get some
points," says Marco Gandásegui, a sociologist at the Universidad de Panamá, speaking of the
new president's popularity rating.
The president also forged a coalition with the opposition Partido Revolucionario
Democrático. The deal bulks up his slender 12-seat Panameñista Party bloc to 40 seats, and
gives his government an operational majority in the 71-seat National Assembly.
Many leaders would welcome the hand the new president was dealt. Panama boasts
Latin America's fastest-growing economy, steaming along at 10.7% in 2012 and 8.4% in 2013.
Growth has averaged 8.5% in the last five years. Unemployment runs at about 4% and the
economy has doubled in size in the past decade.
But Varela's term will not be easy. Growth is slowing, in a large part due to the international
environment. GDP is expected to expand by between 6% and 7% in the coming years, according to economy ministry and rating agency estimates. The president must manage growing
public debt, and deliver on promised social programs.
"The picture looks good now, but if you fast forward a few years, there will be trouble,"
Walter Molano, managing partner and head of research at BCP Securities, tells LatinFinance.
Power crunch
By mid-August, the new finance minister, Dulcidio de la Guardia, was signaling a squeeze
and warning of new measures to square the accounts in a report to the National Assembly.
Revenues in the first half of the year came in $335 million less than what he said was an overly
optimistic projection by the previous government. Debt taken on by Martinelli's administration exceeded the $1.34 billion ceiling.
"We are going to evaluate mechanisms to increase the income of capital this fiscal year
[and] contain public spending," de la Guardia said.
Varela's leadership and ability to respond on important economic matters has already
been tested. On July 24, demand for electricity spiked to a record high of 1,503 megawatts,
triggering power outages. Electricity demand will continue to rise at an annual rate of 4.8% to

92 L ATINFINA NCE.COM - September/October 2014

7.5% over the next 16 years, according to the
energy ministry. The El Niño phenomenon,
in addition, could bring drought in the
first quarter of 2015, drying up reservoirs,
and choking the hydro-electric plants that
provide over 60% of Panama's power.
The government issued a set of emergency, short and medium-term measures
on July 28 to help guarantee an adequate
supply of electricity, and to expand generation and transmission capacity. It will soon
take bids for installation of new thermal
power plants near the two biggest cities,
Panama City and Colón. Next year, bids will
be invited for upgrades to the transmission
network. The economy ministry has called
for more energy-saving practices too.
Varela reached agreement on July 25
with visiting Colombian president Juan
Manuel Santos to re-launch plans to build
a 300 to 400-megawatt transmission line
between the two countries. Former president Ricardo Martinelli had shelved the
plan due to the $500 million price tag. The
Panama-Colombia interconnection is now
slated to be operational by early 2018 and
"would give energy security to Panama",
Varela said.
Martinelli's administration spent some
$14 billion in a four-year public investment

IVÁN ZARAK, FINANCE MINISTRY

"TRANSPARENCY AND
AN EMPHASIS ON
CLEAR RULES OF THE
GAME WILL HAVE A DIRECT EFFECT ON THE
SUSTAINABILITY OF
ECONOMIC GROWTH"

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Latin Finance - September/October 2014

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