Spotlight: Cortizo takes the reins in Panama

Having taken office July 1, Panama’s President Laurentino Cortizo must contend with a weak economy and a corruption problem, just as he attempts to revitalize the country’s deteriorating infrastructure.

Panama is experiencing a rapid expansion of its mining sector which requires a steady stream of investment. But during the boom, Cortizo will also have to keep his promise and extend any new prosperity to the poorest segments of the population to address economic inequality.

In his inaugural address, the new president committed to economic recovery and his determination to clean the country’s image, stained after multiple tax haven scandals.

Cortizo pledged to "consolidate us as the best business, services and logistics center in Latin America. This is a new beginning, to rescue Panama.”

The country has yet to get rid of the bad reputation it acquired due to the 2016 release of the Panama Papers, which exposed the country as a tax haven, landing it on many international watch lists as a non-cooperative tax jurisdiction.

Panama has claimed it has made strides for tax transparency and anti-money laundering and terror financing efforts, including passing a law to punish tax evasion, a key recommendation from the OECD.

Despite the efforts, Panama returned on June 21 to the gray list of tax havens created by the G7’s financial task force after being taken off the list in 2016.

REFORMS

Cortizo has also promised to pass constitutional reforms aimed at strengthening Panama’s political institutions with measures to bolster the separation of powers and augment checks and balances.

The new president will have favorable support from the legislature, with Cortizo’s PRD party holding 35 of 71 seats in the unicameral congress, needing to flip only one vote to secure a simple majority.

Constitutional reforms, however, require a two-thirds majority in congress and need to gain final approval in a public referendum. Fitch Ratings doesn’t believe this could happen before end-2020.

ECONOMY

Cortizo also looks to preside over a muted economic recovery, with 3.7% growth, according to statistics agency INEC, its worst performance since 2009. However, growth is set to pick up in 2019, helped by the momentum coming with development at the Cobre Panamá mine.

Fitch Ratings expects GDP growth to hit 5.8% in 2019 and 5.5% in 2020, while Moody’s has forecast over 5% through 2022.

Fitch, in a recent note, added, “economic activity is expected to recover given new mining operations and ongoing public infrastructure programs.”

INFRASTRUCTURE

Over the past few years, Panama has undertaken a relentless infrastructure drive aimed at boosting economic development and competitiveness – a move that has drawn both praise and criticism.

This push was fueled largely by starting debt-financed infrastructure projects, which also led to corruption allegations involving high-level officials. Cortizo promised on the campaign trail to get the country back on the road to transparency and progress.

In early June, during the transition period, then vice president-elect José Carrizo expressed concerns over the state of public finances and urged comptroller general Federico Humbert not to ratify any new public works contracts that could hurt government resources.

Some analysts have argued the new government will have little room for flexibility in budget management given the existing contractual commitments.

Within this context, many doubts arose regarding the approach the new president would adopt regarding infrastructure, as he will not only be tasked with developing the projects in his portfolio, but also be responsible for the 894 ongoing works from previous administrations, reportedly totaling US$13.4bn.

Some of the major contracts the previous government awarded and which are set to receive financing from the new government include the expansion of metro lines No. 1 and No. 2, the Corredor de las Playas highway, and the construction of the fourth canal bridge. Building the US$2.6bn line No. 3 for the metro system is also on the agenda.

Contradicting his vice-president and softening previous claims about delays and cost overruns resulting from bad planning, Cortizo has pledged to honor all infrastructure contracts already awarded.

During his inauguration address, Cortizo announced that the first measures related to infrastructure he would undertake will involve legal reforms.

The new president will submit two bills to congress this month, one to amend the public contracting law while another is a proposal to create a public-private partnership (PPP) law for infrastructure development.

Unlike other Central American countries such as Honduras, El Salvador, and Nicaragua, Panama lacks a regulatory framework for PPPs as most of the projects developed over the last few years have been financed with public funds. A PPP law would certainly open opportunities for more significant investment from the private sector.

CHINA TIES

Uncertainty also arose on Cortizo’s position toward China, which has started heavily investing in the country since former president Juan Carlos Varela severed ties with Taiwan to accommodate the Asian giant.

But Cortizo made a clear statement when he met with a Chinese delegation on June 30, a day before taking office. He told Chinese agriculture minister Wei Quiang that Panama appreciates the relationship and would welcome Chinese companies as long as they comply with local laws.

The Chinese minister reciprocated by affirming his country’s support and interest in strengthening connectivity in the region.

PROJECTS

Cortizo claimed during the election campaign that Panama suffers under deteriorating infrastructure, inefficient public transport, lack of water, “terrible” waste collection services, and inoperative wastewater and drainage systems. Thus, his government focuses on trying to improve those issues.

For example, Cortizo considers the port and logistics sectors a priority and proposes a master plan to increase competitiveness, which involves relevant state institutions. Projects to integrate the country and solve over-capacity problems in the ports and logistics areas will be prioritized, as will be the development of multipurpose port facilities.

Other projects include launching the Manos a la Obra (Let’s get to work) program, which entails the rehabilitation and maintenance of public infrastructure; the creation of a road maintenance fund (Fomavi) to finance a rehabilitation program; the launching of an urban drainage project for Panama City; and the development of the Panamá Oeste road network, including building a coastal highway in that province.

Additional plans include the construction of 100 modular bridges to link remote communities; a road plan for indigenous communities; the construction of a beltway in David and of the Arenas-Veraguas, Tonosí-Los Santos, and Quebrada López-Santa Rita-María Chiquita highways.

A stretch of the trans-isthmus highway, from Villa Grecia to Dob Bosco bridge in Chilibre, will be widened to four lanes.

Cortizo has pledged to improve the water and waste services provided by national water utility IDAAN, without privatizing the company. His government would invest in new potable water treatment plants, wells, and pumping stations, while maintaining investments in sanitation projects in Panamá Oeste and other parts of the country.

Recycling systems for municipal and industrial waste will be implemented across the country, particularly in Panama City, Colón San Miguelito, Santiago, and David.

MINES HIT STRIDE

Cortizo steps into office in the midst of a mining boom.

First Quantum Minerals’ US$6.4bn Cobre Panamá project – one of the biggest investments in Panama’s history – is on the verge of turning the country into a significant copper producer.

First copper has been shipped, with commercial production scheduled for end-2019. Output will hit a peak of 425,000t in 2023, according to the latest technical report.

But it’s not all plain sailing for the new head of state.

Cortizo will have to perform a balancing act to keep investment flowing while satisfying demands for a greater share of the spoils for the country and local communities.

Problems hinge on doubts over the legality of a contract between the government and concessions owner Minera Petaquilla (now First Quantum subsidiary Minera Panamá).

The supreme court last year declared unconstitutional Panama’s law 9 of 1997, which approved this contract.

First Quantum and Panama’s trade and industry ministry (MICI) have said the ruling does not undermine the validity of the Cobre Panamá concessions, but the legal dispute is ongoing.

The contract has also been met with political opposition.

Members of the economy and finance committee rejected a bill aimed at resolving legal doubts over the contract in May, saying its terms are damaging to the country.

The contract sets royalty payments at 2%, compared to 6% established in previous national laws.

The committee also said communities close to the concessions have yet to see any benefits from the project and continue to live in extreme poverty.

Having pledged to tackle inequality, Cortizo will be keen to quickly improve the lot for poor residents living in the shadow of the multi-billion dollar mine.

It appears likely that these challenges will amount to mere hiccups in Cobre Panamá’s path to profitable production – although the contract terms could be revised to increase the government’s take.

Possible other mining investments include Orla Mining’s Cerro Quema project, which has the potential to become a near-term, small, open pit gold producer.

But any significant changes to the Cobre Panamá contract – and possible disruptions to operations – will undermine investor confidence in Panama’s mining industry and economy as a whole.