Caribbean & Central America - March 2024

In mid-February the Panama Canal Authority (ACP) announced more restrictions on the number of ships that can pass through the Panama Canal each day, adding to concerns over its long-term viability as climate change intensifies.

It announced that the number of crossings would be limited to 24 per day, down from 36-38 per day under normal conditions, with officials blaming a prolonged drought which has led to falling water levels in the Gatún and Alajuela artificial lakes which feed the canal. While on 11 March the ACP announced that this would be lifted to 27 per day, these restrictions will last until there is a period of rainfall, according to ACP administrator Ricaurte Vásquez, which is unlikely before the end of the year. Once this happens the ACP will slowly increase the number of transits per day until normal levels are regained. In an interview with the Associated Press published on 24 February Vásquez said that he believes this will not be possible until around February 2025.

This is a problem for Panama, because the canal is a major contributor to the public purse, but also for global trade more widely as it acts as a hub for maritime routes linking 1,920 ports in 170 countries. The ACP estimates that around 3% of world trade transits through the canal. The issue is that each ship transit uses 51-55m gallons of water provided by a network of reservoirs, rivers and artificial lakes, which also supply water to residents of Panama City.

In response to increased competition for water resources, the ACP has enacted a series of water-saving measures including reducing hydroelectric generation at its dams. It has also proposed a number of long-term solutions, such as extending the Panama Canal basin or removing restrictions on the construction of new dams.

According to Vásquez, the best solution would be to build a new reservoir on the Rio Indio river. However this would require action by the government, which Vásquez says has been lacking. With the current administration led by President Laurentino Cortizo set to leave office on 30 June, officials have told Vásquez that no action will be taken until the new government is in place. With this in mind, canal officials have been meeting with presidential candidates to discuss the long-term future of the waterway. Vásquez has also met with investment banks to explore financing for infrastructure projects. One plan is to build grain storage silos on the Pacific side of the canal in order to boost shipments of the grain, which have been badly affected by traffic restrictions. In response to these issues Danish-headquartered multinational shipping giant Maersk has announced that it would start to move some cargo across Panama by rail, but Vásquez says that the railroad is complementary to the canal rather than competition.

However, the effects on canal operations are serious, with Vásquez predicting a US$200m hit to toll revenue from October 2024-October 2025, making a total of US$4.7bn. In turn this will affect the canal’s contribution to the public purse, which was a massive US$2.5bn in the 2022 fiscal year.

On 16 February international credit ratings agency Fitch Ratings said that traffic restrictions at the canal would mean a shortfall in the government budget of around 0.4% of GDP. This is because the budget predicted that contributions from the canal would increase rather than decrease.

Problems at the canal add to an already complicated economic picture in Panama, which also closed the massive Cobre Panamá copper mine late last year [EB-23-12]. Fitch cited this closure as a reason for revising its outlook on Panama’s sovereign rating to negative from stable in September 2023. In its latest statement, Fitch said that “the Negative Outlook relates to interrelated fiscal and governance challenges. Public finances remain structurally weak, amid surging interest costs, spending pressures and sluggish tax revenues.” The agency also increased its deficit forecast for 2024 to 4.7% of GDP, up from 4.3% of GDP. 

As a result the next government will face some difficult choices. One concern raised by Fitch is the defined-benefit pension system, which the agency predicts will deplete its reserves, as well as outstanding payments for a raft of capital investment projects carried out in recent years. As things stand none of the presidential candidates have published concrete proposals for tax reforms to rectify the situation, according to Fitch, which also highlights waves of serious social unrest in 2022 and 2023 as cause for concern for the next government.

The situation is not expected to ease in the long-term either. Jan Hoffmann, chief of trade logistics at the United Nations (UN) Conference on Trade and Development (Unctad), is one of a number of experts that have blamed this on climate change impacts, which are expected to worsen. “Low water levels have caused a decrease of 36% in ship transits compared to a year ago and are almost 62% down on two years ago,” said Hoffmann.

Fixing water issues at the canal in order to secure its future will require massive infrastructure investment at a time when public budgets are increasingly stretched in Panama. For this reason Vásquez’ exploration of external sources of funding is logical, but depending on the terms of potential contracts this could reduce the canal’s contribution to the public purse. Even if financing can be secured, future governments will have to make potentially controversial legislative changes on natural resources, which are a hot button issue in Panamanian society after the closure of the Cobre Panamá mine.

Impact of Panama mine closure

On 4 March the International Monetary Fund (IMF) released a new report on Panama following the conclusion of an Article IV visit to the country. The report estimates that due to the closure of Panama’s massive Cobre Panamá mine, the country’s GDP growth is projected to decline to 2.5% in 2024, down from 7.5% in 2023, before gradually improving over the medium term.