Economy slows down but mining presents a new opportunity for 2019
The economy´s slowdown in May was the deepest in decades, fueled by a month-long labor strike in the construction sector. The Monthly Index of Economic Activity (IMAE) expanded at a rate of 0.76% y/y in May and 3.17% ytd, confirming our forecast of slower economic growth of around one percent due to the impact of the labor union strike on construction activity. The seasonally-adjusted trend value expanded 0.72% y/y in May and 3.48% ytd.
Last month, the Cabinet approved some changes to the Law of Social Fiscal Responsibility that will apply to the first budget of the new president. The modifications aim at 1) establishing the limit of the Non-Financial Public Sector’s net deficit (NFPS) at 1.5% of GDP; 2) determining the amount of resources transferable to Panama´s Saving Fund; 3) controlling current expenditures in the budget; and 4) eliminating the “rule of deficit adjustment”, which artificially reduces the cash-deficit of the NFPS and has been a regular concern of financial analysts. The dispute between the Varela Administration and the legislature has delayed the enactment of the law.
Seldom in the history of the country, except for bananas in the fifties and sixties, could the production of a commodity become a source of important local activity and supply of foreign exchange. Like bananas, mining will take place in what historically has been considered a low-income and isolated region of the country, away from the Panama Canal area of influence. However, unlike bananas, the relative size of the production of copper in this new mine would mean a quantitative leap in GDP and exports starting next year.
The expected output of Cobre Panamá in the steady-state period will be 350,000 tons per year; the productive life of the mine is 34 years; the capital investment, according to the company, was US$ 6.3 billion (more than the investment for the Panama Canal expansion), and approximately 7,500 workers will be employed, with average salaries three times above the minimum wage. The initial export of concentrate is programmed for the end of 2018. The direct impact on GDP is calculated between 3 percent and 4 percent of current national income, but will drop in relative importance as the economy continues to grow.
In the next couple of months, the race for the presidency will begin with the primaries of the CD, the party once headed by Ricardo Martinelli, who is today in the middle of a trial for wiretapping and embezzlement. In this report, we discuss the profiles of the would-be candidates of the three major political parties.
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