March 8, 2012
I had dinner the other night with a bank executive in charge of government finance who told me that the aggregate spend of all the infrastructure projects in Panama totals more than $13 billion. This is roughly 50% of the entire Panamanian economy.
The equivalent in the United States would be the government announcing a ‘Rebuild America’ infrastructure spending initiative in the range of $8 TRILLION! No doubt, it’s a lot of money for this small country.
Panama (and particularly Panama City) has been in a seemingly perpetual state of construction for nearly 10-years. The long boom in residential construction created an impressive skyline of condo towers along the new Cinta Costera. But residential demand peaked and petered several years ago.
In an effort to keep the party going, the government has essentially swapped a residential construction boom for an infrastructure boom.
There are so many projects here, you’d think you were in Chonqing, China. And it’s made life miserable for anyone who has to get into an automobile– Panama City’s already dismal traffic has now become utterly hopeless.
The real issue is that Panama’s debt has been steadily rising to finance several projects. In many cases, the debt increase has outpaced the country’s dizzying GDP growth. For example, Panama’s debt rose 10.3% in 2010, while GDP only increased 7.5%.
According to some of my local attorneys who work on the deals, many of these infrastructure projects are now being creatively financed: selling bonds of off-the-books quasi-government entities that own securitized future cash flows.
It’s all an elaborate process to keep the debt from hitting the government balance sheet and obfuscating Panama’s true fiscal status. Official debt is now hovering near 50% of GDP, but the actual figure is much higher.
It’s possible that some of these projects will prove to be good investments– it’s not the same as Chinese ghost cities down here, Panama has legitimate infrastructure needs and is building accordingly.
What remains to be seen, though, is what happens after the infrastructure projects are complete in, say, another 5-years. The hope is that the real economy will have grown enough to absorb the loss of infrastructure spending. This supposition is not out of the question… but it’s definitely not guaranteed.
For now, nobody seems to mind. People are working, they’re making money, the country is improving… and except for the obvious and ridiculously high inflation rate, life is good.
To be clear, Panama is definitely a good news story. It has had one of the most resilient economies in Latin America over the past few years, and perhaps more than anywhere else in Central America, Panama has a very clear (and growing) middle class.
When you go out at night, you see Panamanians out on the town spending their discretionary income… and I mean regular Panamanians, not just the Porsche-driving 20-year olds who inherited papi’s business.
A strong middle class with disposable income is important in any healthy economy, and its emergence marks the transition from ‘developing’ to ‘developed’ nation. Panama still has a -long- way to go, but it’s moving in the right direction.
When I think back to how this place used to be 10-years ago (and all the years in between that I spent here) versus today, the positive change is overwhelming. When I think about how places like the US and Europe used to be 10-years ago, the change is resoundingly negative.
It’s this trend, by far, that’s most important.
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Here are some good macro thoughts that put the oil threat into perspective (via Credit Suisse):
“The impact on GDP: each 10% rise in the oil price takes 0.2% off US GDP growth and 0.1% off global growth. This time the negative impact of a high oil price on growth is limited as: oil is only 10% above its 6-month MA (changes matter more than levels for growth); other energy prices are muted (coal prices are at 12-month lows, US gas prices down 40% yoy) and CPI food price inflation should fall by 5pp from here (adding 0.7% to disposable income); critically, unlike 2008 and 2011, neither the ECB nor GEM central banks are likely to raise rates in response to higher energy costs; and US macro momentum is currently consistent with GDP 0.8% above 2012 consensus, suggesting some buffer before consensus estimates get downgraded.
Impact on equities: since 2007, equities have tended to fall when oil prices rise by 40% yoy (i.e. an oil price of c$150/bbl). From a macro perspective, we would start worrying if the rise in the oil price pushed up US CPI above 4% (that is when equities de-rate, c$160/bbl), US GDP started being revised down (c$150/bbl) or European inflation rose above 2% year-end (c$140/bbl). Another warning signal is when inflation expectations decouple and start falling as oil continues to rise (as has happened in the past week). Each 10% rise in the oil price takes 2% off European EPS and c1% in the US, on our estimates (yet current valuations can accommodate a c10% fall in earnings).
From a regional perspective, we rank countries’ sensitivity to oil by looking at: net oil imports, energy’s weight in the CPI, output gap and the correlation with oil prices. The winners from a higher oil price are Norway, Russia and Canada, while Thailand, Turkey and Korea are negatively affected. We show cheap domestic plays in the ‘winners’ and expensive domestic plays in ‘loser’ countries.”
Source: Credit Suisse
- Credit Suisse Explains When You Should Start Worrying About Oil Prices (businessinsider.com)
- Oil Implications And Fed Policy (zerohedge.com)
- For A Quick-Read On U.S. Economy, Check Oil Prices (ibtimes.com)
- The Mystery Behind Rising Oil Prices Solved (zerohedge.com)
- Emerging Europe: Rising Oil Prices Risk Growth More Than Inflation (ibtimes.com)
- This Is Why Oil Prices Are Hurting Europe More Than The US (businessinsider.com)
- Here Are The Winners In An Oil Price Shock (zerohedge.com)