Back to the Future

 

We are already in the month of October 2020, a year that will go down in the history of the world as a year full of surprises, especially bad ones, but from which, as always, we will recover. Even though to date, the INEC has not provided any figures to be able to measure the economy properly, we have certain data that will allow us to infer, calculate and analyze how we are at this moment, and be able to make a forecast of how we will close the 2020 and a first attempt at how we see 2021.

It is important to remember how we closed 2019, with a GDP growth of 3%, unemployment of 7.1%, inflation of -0.8%, a Foreign Direct Investment (FDI) of $ 4.8 billion, a debt of $ 28,000, and a debt-to-GDP ratio of 39%, a fiscal deficit of the central government of 3.85%, figures that although they have been deteriorating, especially in the last five years, still maintain us as a prosperous country, not only in the region but in the world.

Panama needs to grow at a rate of 5% per year in GDP, maintain inflation of no more than 1%, and unemployment of 5%, so that an improvement in the living conditions of its inhabitants can be seen. We maintain the highest GDP / capita in Latin America, but at the same time, we have the highest minimum wage in the region. Our FDI is the sixth highest in Latin America in 2019, but the highest FDI / capita in the region. And as a cherry on the cake, we are one of the 27 countries in the world with investment grade, which allows us to access international markets with really low-interest rates.

But the pandemic has changed our face (not only in Panama but the entire world). The only good news, within the bad news of the pandemic that kept us in the most demanding quarantine in the region, is that our inflation for the month of April is -2.4%, and we forecast that it will be -2% at the end of 2020. This does not mean that everything is cheap, on the contrary, the supermarkets took advantage of the situation during the quarantine, since we had no other options, but this must be corrected with the economic opening from the month of September.

I am concerned about the lack of information on unemployment, the last reliable information is that of the August 2019 Census, with unemployment of 7.1%. If a survey had been done in March 2020, I estimate that unemployment should have been very close to that same figure. But something unusual happened from this date. The government sent us to a total quarantine, and to "protect" jobs, they approved the temporary suspension of contracts.

The peak of the suspension of contracts is about 300,000 workers, which, added to the 592,000 independent/informal workers, which resulted that at the worst moment of the quarantine we had a total of 1,000,000 unemployed, around 50% unemployment. With the openings, we have recovered around 75,000 suspended contracts, and 50% of the informal workers, which should put our unemployment at 31%, and which should end at 20% by the end of 2020.

Now let's look at our most important sectors of the economy, to be able to forecast our GDP for 2020. Let us remember that the GDP of Panama grows, mainly, by 5 sectors of the economy: Construction and Real Estate, Transportation, Financial Intermediation, Commerce, and Manufacturing. The INEC (National Institute of Statistics and Census) provides us with figures for the first quarter of 2020, with an annual growth of 0.3%, where mining, agriculture, and transportation were the sectors that grew the most in the first quarter of 2020 against 2019, and construction, hotels and restaurants, and fishing where the sectors of the economy that decreased the most.

The performance of the sectors over the months, measured by some of their activities, was not entirely good. In the Transportation Sector, we have the Panama Canal, which reflected, as of August, a 7% decrease in the number of total transits, while the amount of tolls remained the same as the same period of the previous year. The latter is the result of the transits of Panamax vessels being replaced by NeoPanamax vessels, which are larger and pay more tolls.

While air transport activity died from March to October, maritime transport did not stop, since the metric tonnage had a growth of 11%, and the number of TEU's grew 9%, both as of August. Land transport was the one that kept going, supplying the country with goods during the quarantine, and which also benefits from the closure of the railway in August due to the collision of a ship against the Gamboa bridge.

Construction has been hit hard since the quarantine, and almost all of its employees were put on the suspension of contracts. As construction was activated, jobs have been reactivated little by little, and there is already some movement in the sector, employing more than 100,000 directly and indirectly. To date, we have seen a decrease, as of August of 60% in the number of construction permits granted, a decrease of 75% in the production of concrete, and a decrease of 60% of gray cement. With the reactivation of the sector, we will see a reduction in unemployment and an increase in activity.

What worries me the most is the real estate activity, especially since we had been seeing since before the pandemic, and during the 5 years of the Varela government, an increase in premises, offices, and rental housing, something that was more accentuated during the quarantine. We took a tour of Vía España, Vía Brasil, Vía Argentina, Vía Porras, Vía Israel, Avenida Balboa and Calle 50, and our appreciation is that 50% of the commercial premises on the ground floor are for rent or sale, the other 50% maintains some type of business in place. But of these businesses, 50% are already operating, while the other 50% have not yet opened. And of the 50% for rent or sale, 10% already have some type of remodeling work.

Another worrisome sector is commerce. This depends on a lot on-demand, and with high unemployment, we see it difficult to recover so quickly. Merchants did not adapt so quickly to the issue of e-commerce, their picking, dispatch, and the delivery system collapsed in most of what they tried, and I do not think they can do it so quickly without professional help. The ITBMS (VAT) is 34% down compared to the same period as of August 2019, and the movement of the Colon Free Zone (ZLC) is down 29% against the month of July 2019. This sector employs around 325,000 workers directly, and the decreasing unemployment will depend greatly on the recovery of this sector of the economy.

Manufacturing is a sector that has pleased me in its activity until the month of August. Production is only 13% down compared to August 2019, and we must remember that alcoholic beverages suffered from a prolonged dry law where nothing was produced or sold for about 3/4 months. Therefore, this sector should have an excellent rebound by the end of the year when the dry law is eliminated.

The financial intermediation sector is doing relatively well for the moment. However, it is in the medium term that we can see if the sector is going to suffer or not. As of August, assets grew 7.6%, while loans fell 2.1% (I don't think there are new loans, at least so far, but only restructuring and cancellations), deposits grow 7.1%, and equity decreases 2.6% (mainly due to reserves on bad accounts). If the bank suitably restructures the loans, it will be able to ensure that the majority of its clients can pay their debts, if not, we see problems for the bank.

The Stock Market has decreased by 1% since debt restructuring has been carried out so that issuers can fully comply with their obligations. In the Insurance Market, we have a decrease of only 4% of premiums paid. The financial intermediation sector has a good near future, but its medium-term future requires mass restructuring to be able to recover its capital in loans (banks and non-banks).

How can the future of our economy be? The Construction and Real Estate Sector will continue to be hit until the end of 2020 and 2021, however, it can recover. Its recovery will depend on the economy of the buyers and renters. Opportunities in homes under $ 180,000, and especially homes under $ 70,000. The segment of commercial premises and offices, especially in Malls and areas such as Bella Vista, San Francisco, and Costa del Este, will be with excess supply. If unemployment falls, the sector will be able to come out of slumber.

The Hub of the Americas will be reactivated in mid-October, but the end of 2020 will be catastrophic for air transport. 2021 could be much better. Land transport will continue its normal course, it was one of the few that did not stop in quarantine and then benefited additionally from the interruption of rail transport. The ports will continue to grow, but even so, we must improve to compete internationally. The Canal, although it will be down in transits, will be able to benefit from the swap of transits of Panamax vessels to NeoPanamax, which means that tolls do not decrease and may even increase. Still, we need international trade to pick up.

The commerce sector will continue to be affected by 2020 and 2021. Its recovery will depend on the size of unemployment in Panama. We have to see a greater effort in e-commerce sales - website/app and delivery (this is here to stay). The trend in the sector will be that of more virtual stores. ZLC has to reinvent itself. The model was left behind, but our geographical position is enviable and new things have to be done. We have to look for the big business - Amazon, Alibaba, JD to establish themselves in Panama and operate in Latin America from here - with the Colon airport included.

The financial intermediation sector will end in 2020 well. However, this may be cosmetic due to the moratorium issue. We will see the real effect in 2021 when the moratorium no longer exists. If the bank does not react and does not restructure its clients before this happens, we can hardly see a good 2021 for the banking sector. Another additional option that banks have: Savings in expenses (which we are already seeing but did not want to do before the pandemic) - branch closures, mergers, & Fintech. The same can happen with the stock market, up to a point, as this is a more specialized market, and your options may take a less traumatic turn. The insurance market may end tables in 2020 and navigate for growth in 2021.

The tourism sector - Hotels and Restaurants - may recover according to the international tourism movement. 2020 will be a year for domestic tourism, and 2021 will have to do the impossible so that the high season from January to April is good - local and international. We expect offers for domestic tourism and good prices in the surviving restaurants and hotels. The Restaurant Association foresees 30% of closed restaurants and 25% of unopened hotels by 2020. Mining will be reactivated 100% by the last quarter of 2020. Agriculture will continue to grow, but even so, it will not reach 3 % of GDP by the end of 2020 and maybe it will do so by 2021.

Regarding the Fiscal Balance, the MEF (Economic and Finance Minister) has done nothing to control current spending. All his "efforts" have been turned to contain Public Investment. Even so, the decrease in GDP has an important weight in the increase in the deficit / GDP ratio. Unfortunately, the 2021 budget seems to be made as a Business as Usual, instead of putting a brake on many current expenses and that the deficit can be controlled.

How will we end in 2020? Forecasts for 2020 are not encouraging, but not too bad for Panama, given the circumstances. Many international entities/organizations give us a decrease in GDP between -4% to -8%. My forecast of GDP decline is between -10% to -15%. Inflation is estimated at -2%, unemployment between 10% and 15%, Foreign Direct Investment of $ 3,000 million, a decrease of 30% compared to 2019, Debt / GDP ratio of 58%, and a Fiscal Deficit of less than 10%.

Why are we going to recover in 2021? The fundamentals of our economy are maintained: an economy based on US$, geographical position, the Canal is working quite well, and billing, we continue with our enclaves - ZLC, Panama Pacifico, City of Knowledge, Multinational HQ Law, and now Manufacturing HQ & Production Law, low inflation, immigration - pandemic changed the way people think, and we are still considered as a destination for retirees, tourism, and buying real estate.

Why can't we recover so quickly? Negative local idiosyncrasy, fiscal irresponsibility of the current government, corruption in the state, lack of justice, depending on international development for the Canal and the HUB of the Americas and Tourism, unemployment in two figures and the reaction of the banks.

And how will we end 2021? With a GDP growth of between 4% to 5%, inflation of less than 1%, unemployment of 7%, an FDI of 9% of GDP, a Debt / GDP ratio of 50%, and a Fiscal Deficit of 4%. We must remind the government that the economy is driven by private companies and not by the government, and if they promote private investment, we can reach these metrics very easily.