Caribbean & Central America - August 2024

Panama’s new President José Raúl Mulino faces a complicated economic panorama after taking office on 1 July, but has promised to boost growth, access to public services and job creation.

Chief among Mulino’s initial promises is the revitalisation of infrastructure development, including improvements to the country’s highway system and the expansion of the Panama City metro, with work already underway on a new Line 3, a monorail. His flagship initiative is a train linking Panama City and David, the capital of Chiriquí province. The initiative is not new; a feasibility study drawn up by China Railway Design Corporation in 2019 foresees a 391km line costing US$4.1bn. Mulino announced the creation of a national secretariat for the railway at his first cabinet meeting, and the project has already captured the attention of investors. Raúl Martínez-Ostos Jaye, the president/CEO for Mexico and Latin America for UK-headquartered Barclays Corporate and Investment Bank, was cited by the local media as saying that the bank had expressed an interest in the project, and China, South Korea, and Spain have all reportedly said that firms from their countries would like to be involved.

This is not the first time that Panama has started to plan a railway between the two cities, and details remain vague, with many questions, such as the number of stops or where the termini will be located, still to be answered. Megaprojects such as new railway lines are also associated with environmental damage and increased corruption risks, which could spark demonstrations as protesters have cited both issues during recent periods of unrest.

Mulino has also pledged to improve access to drinking water throughout the country, a key social issue, and outlined plans to build a new water purification plant at Lake Bayano, a reservoir in Panama province, which would boost supplies in the east of Panama City. On 28 July, the president also said he would prioritise infrastructure projects such as the North Water Ring, a system of storage tanks and pumping stations that will provide water to an estimated 200,000 people that live in areas to the north of Panama City.

The president has also said that he will work with the Panama Canal Authority to secure water supplies for the Canal, a key economic driver which has been badly affected by drought that has limited the number of ships that can pass through it. One mooted solution is a new dam and reservoir on the Rio Indio, which moved a step closer in July with a ruling from Panama’s supreme court (CSJ) which will allow the Canal to expand outside its traditional watershed. Some of the water stored here could potentially be used to supply households and agriculture too.

• Reservoir

In July the administrator of the Panama Canal Authority (ACP), Ricaurte Vásquez, said the initiative regarding the Indio River basin would require the acceptance of inhabitants affected. The Indio River basin spans a total of 580km² and is home to over 12,400 people living in some 231 villages. On 3 July the supreme court (CSJ) issued a ruling which struck down a 2006 regulation prohibiting the waterway from expansion outside its traditional watershed. The CSJ ruling allowed a re-interpretation of the boundaries. Vásquez was cited by Spanish newswire EFE as saying that the cost of constructing a new reservoir would be in excess of US$1.2bn while the costs related to sustainability and attention to communities amounted to some US$400m.

Another move from Mulino is the decision to start the process of joining the Southern Common Market (Mercosur) regional trade bloc, which was announced on 8 July. Mulino has said that the private sector will be consulted throughout the process, and the move has been well received by business leaders such as Juan Alberto Arias, president of the Cámara de Comercio, Industrias y Agricultura de Panamá (Cciap), a leading business lobby, who said that opening new markets to Panamanian products is a positive development. 

Although Mulino’s plans to boost growth and job creation have so far been light on detail, his government received a boost on 17 July, when the US announced that Panama would form part of an initiative to foment semiconductor production in the Western Hemisphere. Projects will be funded by the US State Department and the Inter-American Development Bank (IDB).

Mulino may also be hoping to attract more support from Washington after joining US efforts to curb illegal migration in the region. Shortly after his inauguration, the president announced the signing of a deal under which the US will fund repatriation flights from Panama for migrants apprehended crossing the Darién Gap, a roadless expanse of jungle on the border with Colombia which serves as a key migration route to the US.

However, Mulino’s plans could be affected by a number of headwinds. The shutdown of the massive Cobre Panamá mine, while popular among citizens, leaves a massive economic hole. The mine accounts for some 5% of GDP, and the closure could cost Panama billions if the country has to pay out on arbitration claims from the mine owner, Canadian firm First Quantum Minerals. Mulino has said he will hold talks with the miner, but he faces a difficult task lessening the economic hit of the decision to close the facility without causing a political headache.

Another issue is the downgrading of the country’s investment rating by international credit ratings agency Fitch Ratings from BBB- to B+ in March. In a statement published in May, Fitch lists a number of difficulties facing Mulino. This include “a weak fiscal position; a ballooning deficit in one of the pension subsystems; persisting uncertainties around the Minera Copper mine, which was forced to close last year; water-supply issues affecting the Panama Canal; a weak labour market; and simmering popular discontent after years of protests.” The agency added that a “tense social backdrop, fragmented legislature and difficult policy trade-offs may constrain his ability to deliver large and rapid improvements”.

Mulino has said that he will enact constitutional reform, which could help to strengthen institutions and address issues surrounding corruption. However, such a move has been discussed under previous governments but didn’t ultimately happen. Any reform would take a long time to pass and will not help Mulino to address the many immediate challenges that he faces.

IMF uncertainties about Panama

In a statement published on 27 June, the International Monetary Fund (IMF) said that Panama’s economy “is expected to slow and the outlook is uncertain.” In the statement, the IMF said that GDP growth will decrease to 2.5% this year, down from 7.3% in 2023, and it also highlighted the fact that Panama faces higher financing costs. “The near-term economic outlook is subject to a large degree of uncertainty and the balance of risks is tilted to the downside,” said the IMF.