January, 2005.        

                                                                                                                         Volume 7

Number 1

In Fortune’s Favour

Christmas in Panama last year was, as usual, a colourful affair.  The main streets were festooned with bright lights and effigies of Santa Claus, The Three Wise Men and other biblical images.  Christmas trees, imaginatively decorated, many with flashing lights strung over them, stood in the stores, banks, government and commercial offices.  Christmas, of course, is also a time for giving and the Panamanian government received a very nice surprise gift which augurs well for 2005.

It was delivered by the international ratings agency, Fitch Ratings, that has given Panama’s US$600 million bond issue a long-term foreign currency rating of BB+.  The agency said that “dollarization, a stable financial system and the government’s considerable financial and land assets” support the rating.  Panama’s use of the US dollar, as I have said frequently before, has produced a long history of monetary and price stability not found in other emerging markets where, for example, forced devaluations of currency have been experienced.  Fitch is optimistic about the new government of president Martín Torrijos that intends to address fiscal and social security reform as well as the expansion of the Panama Canal. This report from Fitch coincided nicely with remarks from the International Monetary Fund that has expressed its delight at actions taken by the Torrijos government to control public spending, reform taxes and spur on economic growth.

Panama’s progress is symbolic of a general upturn in the fortunes of Latin America as a whole.  The region had its first current account surplus since the 1950s in 2003 partly due to robust exports of iron ore, copper and soya to China.  After a 70 per cent rise in 2003, Latin American stock markets were up by some 27 per cent in US dollar terms by the end of last year.  The shares of mining and resources groups have made great gains and by one estimate (J P Morgan, the US investment bank) average prices of shares of Latin American mining and metals companies rose, in US dollar terms, by over 40 per cent in 2004, significantly out-performing other sectors such as banks, consumer goods and telecommunications companies.  Petrobrás, the partly state-owned Brazilian oil group, now has a market capitalisation of US$39 billion and its shares appreciated by 31 per cent last year.

Chinese president Hu Jintao’s trip to Latin America at the end of last year emphasises the growing ties with the continent.  The Chinese recognise that direct investment in Latin America will guarantee a steady source of supply for its expanding economy.  China’s demand for raw materials has increased prices in the international market considerably which, in turn, has contributed significantly to Latin America’s economic good fortune.  Additionally, increased foreign investment in the region and the extent of economic growth in North America, Europe and Japan have all played their part.  The World Bank expects that the economic growth rate of Latin America in 2005 will be just under 4 per cent.

Relations with China and Latin America have their problems and jobs is one of them.  China’s cheap labour has already hurt Mexico’s exports to the United States.  Argentina, to take one example, is worried about competition in its shoe, toy and textile industries.  China, however, is a seductive trading partner and Argentine concerns are countered by Chinese plans to invest about US$20 billion in Argentina during the next decade.  At the moment, Argentina’s annual exports to China are worth around US$2.6 billion which is more than six times the value of its imports from China. 

The Widening Door

China is one of the world economy’s emerging giants, along with India, Brazil and Russia, but, significantly, besides having a bigger GDP than the other 3 combined, it is also more integrated into the world economy.   As China’s door opens wider to the world, it comes at a time when many trade regimes are being liberalised across Latin America. Direct trade has edged out some of the middlemen, a role in which the traders in Panama’s Colón Free Zone (opened in 1948 and the world’s second largest free trade zone) have traditionally found themselves.  The strategic location of the country’s canal has meant that many overseas suppliers have used these traders as a means of tapping into the continent’s markets.  If the need for go-betweens is diminishing, however, the same cannot be said about the country’s canal that has a thriving and growing container business in large part due to Asian manufacturers (especially in China) trying to meet the demand of US consumers.  One study estimates that in 2003 China accounted for 37 per cent of US imports by weight, compared with only 5 per cent in 1989. 

About 60 per cent of the ships using Panama’s canal travel between Asian ports and the eastern seaboard of the US and it is estimated that total container traffic from Asia to the US grew by over 14 per cent in 2004.  The Panamanian authorities say that the canal is operating at 93 per cent of its capacity.  In fact, some of the ships are riding so low in the water at the canal’s Pacific entrance that they must offload containers before being able to enter the canal and have them carried by train and put back on board at the other end.

In China, Santa Claus is known as “Old Man Christmas” and, as in Panama, he is a feature every December in Beijing, Shanghai and elsewhere, despite government attempts to curtail such inevitable western influences.  The Chinese economy is imitating another old man called Old Man River (the song from the musical, Showboat) because it “just keeps rollin’ along”, just like the resulting benefits do for Latin America.