Letter from Panama

A Golden Anniversary

It hasn’t just been commodity prices that have been falling in the present international financial climate. Trade barriers have been falling also which impacts directly on the benefits of free trade zones. Tariffs in Chile, for example, will drop from 11 per cent to 6 per cent in under two years time. Panama has the world’s second largest free trade zone located near the Caribbean port of Colon and is acutely aware of any threats to its business. In the six months to last March, Panama’s canal earned $278 million, an increase of 7.5% on the same period a year before. However, trade in the Colon Free Trade Zone (which accounts for about 12% of Panama’s GDP) rose by 15.4% - over double the Canal earnings. The shops and warehouses of the 1,600 businesses operating in the Colon Zone last year traded $5.5 billion of imports and $6.2 billion of re-exports, figures only bettered by Hong Kong, and cause for celebration in it’s 50^th year of operations.

There are three things that the Colon Zone can count on: location, distribution and experience. It is located at the Atlantic entrance to the Panama Canal, at the point where two continents meet. Its capacity for distribution is considerable: new container ports have been built and a concession has been awarded to build a railway linking Colon with more ports on the Pacific Ocean. Experience is a commodity which never drops in value and the Colon Zone’s know-how, when it comes to moving goods, gives it a pivotal role as a logistics nerve-centre that extends beyond Central America and augurs well for Panama in the 21^st century

Faith, Hope and Clarity

Africa as a whole could lose between 1 and 2 per cent of gross domestic product growth in 1998 because of the international financial crisis, according to the United Nations Industrial Development Organisation. Fortunately, it has been spared the havoc that Hurricane Mitch wreaked on much of Central America in October of last year. Nicaragua, for instance, with roughly the same income per capita as Zambia has been devastated. Perhaps a generation or more of economic progress has been lost. Panama, historically, has remained outside the hurricane zone.

After suffering from an economic downturn in the 1980s that was popularly known as the lost decade, Latin America was beginning to regain its confidence as it adopted more orthodox economic policies. In 1997 the region averaged a gross domestic product of 5%. Unfortunately, faith in some emerging (submerging?) markets has now been shattered, many investors believing that if Asia can plummet after decades of stable, strong growth, then perhaps something much worse could happen in Latin America. South Africa, in no small measure, has suffered also from this perception. In order to counter the gloom, it is important that the region maintains tighter microeconomic policies. Banking systems, especially, need to become more cohesive. There has been a lot of improvement, particularly in Argentina, where, so far, over 50 weak banks have either been closed or bought. Strong foreign banks now account for more than 40% of the country’s system. A deposit-insurance scheme has been implemented and bank liquidity requirements have been tightened. Even with the present financial climate, deposits in Argentina’s banks have risen in 1998.

Investors with intestinal fortitude will think about switching some of their assets into Latin America because valuations are now more attractive. That said, the stock markets in the region suffer from a tropical temperament that was vividly illustrated in December last when a populist, Hugo Chávez, was elected President of Venezuela. The Caracas stock exchange surged 41.6 per cent in two days. Brazil, the economic powerhouse of Latin America, has received a multi-billion dollar survival package championed by the IMF and the Sao Paulo stock exchange is already popular with overseas investors. But will Brazil be able to meet the IMF’s tough fiscal targets? The Brazilian Congress is showing no positive signs of co-operating with the domestic policy changes that are needed.

There is an economic hurricane off the coast of Latin America. It could make landfall and at this point in time the analogy is unsettling: Hurricane Mitch was the worst natural disaster to strike Central America in over 200 years.