Panama: A Bubble Waiting to Burst

Tuesday, September 26, 2006
Panama: A Bubble Waiting to Burst




FROM BOOM TO BUST? The real estate boom in Panama City (above) may be a bubble, argues Walter Molano. (Photo by CanalMuseum).


Panama is a speculative bubble waiting to burst, that is why the government is trying to keep all sharp objects out of the way.

BY WALTER MOLANO

Panama is booming. The economy is growing more than 6 percent y/y, with the possibility of exceeding 7 percent this year. The construction sector is the main engine of growth. Glimmering office towers and glamorous apartment blocs are sprouting out the squalid shanty towns that sit along the Pacific coastline. Property speculators are snatching up scores of newly built apartments.

Panama City's waterfront is starting to resemble the glittering skyline of Hong Kong-with a flair of South Beach. The new facilities are being built for the hundreds of new companies that are expected to arrive in Panama to participate in the mega construction project and the new trade opportunities that lie ahead. Indeed, many global companies are expressing interest in Panama. Dubai Drydocks, for example, is studying the possibility of building a new facility. DHL and Fedex are looking at Howard Airforce Base for their new regional hub. Evergreen is looking at several multi-modal projects. People are taking a closer look at Panama, but the construction sector may have run ahead.

THE REFERENDUMThe housing boom hopes to attend the growing number of retiree's that are relocating to Panama. Immigration applications were up 20 percent y/y this year, and there are active marketing campaigns in Europe and North America to woo senior citizens. Much of this optimism is based on basic assumptions.

The first assumption is that the referendum will pass. Recent polls show that the "yes" vote is winning by a margin of 10 points. However, the margin is starting to erode, and the government is in a panic.

The second assumption is that the private sector will provide the multimodal facilities needed to take advantage of the new locks. Rather than a new concrete ditch, Panama needs a network of highways and railroads that will allow the interconnection of its ports, airports and waterways. The private sector is moving in the right direction. However, the Panamanian government must provide the leadership, planning and incentives needed to coordinate a well-orchestrated program. The government must provide the necessary concessions and right of ways to assure inter-connection capabilities.

The third assumption is that Panama will find the skilled labor to provide the variety services that could proliferate. Panama must be prepared to welcome thousands of skilled workers from neighboring countries, principally Colombia. It must also be prepared to assume the political fallout that will occur when many Panamanians realize that they are being left behind.

The fourth, and last, assumption is that the government will find the resources needed to modernize its infrastructure. Although the newly built towers are beautiful, the roads are atrocious, the hospitals are inadequate, and the pollution is rampant. The Hollywood adage, "If they build it, they will come" may work in the movies. But, it rarely works in real life.

RUDE SURPRISE

These assumptions have a very low chance of ever occurring. This means that Panama may be in for a rude surprise. Unless a wave of foreigners arrive to soak up the growing supply of new apartment and office blocks, there is going to be a major correction in the Panamanian housing market. At $1,500 per square meter, 100 to 400 square meter homes are outside the reach of the typical Panamanian household.

This is the reason why the government is in a 'tiz. Any dissent to the "yes: vote is being silenced. The opposition is being bought off-which ironically is leading to an expansion of the opposition rolls as more people want to enjoy the payola. There are whispers that a rejection of the initiative could spark an economic collapse. However, a correction in the housing market is inevitable, given that most of the assumptions will be impossible to achieve. Panama is a speculative bubble waiting to burst, that is why the government is trying to keep all sharp objects out of the way.

Walter Molano is head of research at BCP Securities