PANAMA'S 2006 GDP GROWTH OFF TO STRONG START

UNCLAS PANAMA 001249 SIPDIS SIPDIS DEPT FOR WHA/CEN-SCHIFFER, ALSO FOR WHA/EPSEC E.O. 12958: N/A TAGS: ECON ETRD EAIR PM SUBJECT: PANAMA'S 2006 GDP GROWTH OFF TO STRONG START ¶1. (U) SUMMARY: Panama posted impressive GDP growth during the first quarter of 2006. The 7.9% GDP growth was the largest quarterly GDP growth rate in 16 years. Almost all sectors of economy saw growth in real terms. Increased export demand for agricultural products and construction spending, along with continued growth in the Colon Free Zone (CFZ) and the Panama Canal, were the key drivers. Unemployment edged down to 8.9%, the lowest since 1987. While the 2006 first quarter figures are impressive, there is concern over a skilled labor shortage, a possible real estate bubble and inflation. END SUMMARY. -------------- Impressive First Quarter GDP Growth at 7.9% -------------- ¶2. (U) The GoP's General Controller's Office reported that Panama's real GDP increased 7.9% (in 1996 U.S. Dollars) during the first quarter of 2006 over the same period last year. The 2006 first quarter GDP growth rate was the highest quarterly growth rate in 16 years and surpassed the 5.4% growth rate previously predicted by private economists. As Panama posted GDP growth in 2004 and 2005 of 7.6% and 6.4%, respectively, the economy appears on track to another solid year. The Ministry of Economy and Finance predicts Panama's GDP will grow between 7.5% and 8.0% during 2006. -------------- -------------- Key Drivers - Agriculture, Mining, CFZ, Tourism, Aviation, Construction, Panama Canal, Banking -------------- -------------- ¶3. (U) The agricultural sector grew by 12.1% during the first quarter of 2006. Growth was lead by a 44.2% increase in the export of pineapples, melons, papayas and mangoes, and a 23.5 % increase in live cattle exports. Non-traditional fruits such as pineapples, melons, papayas and mangoes are among Panama's fastest growing exports. Panama's largest exports, fish and shrimp, posted a 6.5% decrease due to a reduction in fishing yields. ¶4. (U) Mining grew by 15.6% during the first quarter due to increased production in response to higher commodity prices. Post has seen increased interest by Canadian and U.S. mining companies to engage in gold and copper mining. The Panamanian mining industry had been largely dormant for many years. ¶5. (U) Wholesale activity in the CFZ increased by 21.0% during the first quarter due to increased demand by Venezuelan and Central American companies. The CFZ growth is particularly impressive given Colombia limits Panamanian imports from the CFZ to only one Colombian port. The CFZ Users Association claims this restriction resulted in losses of over $480 million through April 2006. As a result, the CFZ Users Association has threatened to bring the matter before the WTO. Colombian firms historically are the principal source of demand in the CFZ, buying approximately 16% of all exports. ¶6. (U) Tourism posted a first quarter increase of 12.3%. The number of visitors to Panama grew by 10% during this period. ¶7. (U) The aviation sector grew by 24.7% during the first quarter. CopaAir Vice President of Operations told EconOff that business in Panama was expanding at a rapid pace. The airline is averaging 85% passenger capacity, introducing new service to six "secondary" Latin America cities, and seeking to hire 55 to 60 new pilots a year over the next few years. The executive said CopaAir's growth is being constrained by airport capacity limits and a lack of skilled labor. For the first time, CopaAir will look to hire non-Panamanian pilots. ¶8. (U) Construction spending increased 15.8% during the first quarter of 2006. The bulk of this increase was due to construction of 30-story plus residential buildings in the affluent areas of Costa del Este and Punta Pacifica in Panama City. Correspondingly, sales of newly constructed residential property grew by 5.2% during this period. Post continues to hear of skyrocketing real estate values in Panama City, as well as concerns about over-building, infrastructure limitations and a possible speculative bubble. ¶9. (U) The business of the Panama Canal continues to grow. Canal revenues increased by 7.9% during the first quarter of ¶2006. Net tonnage transited through the canal grew by 5.7%, services to canal users grew by 13.6% and tolls collected grew by 23.0%. The Panama Canal Authority reports that it is operating at close to capacity. ¶10. (U) The financial services sector grew by 13.0% during the first quarter of 2006. Loan demand increased by 12.5% during the same period. While rates on bank deposits increased, interest rates on loans remained stable. -------------- -------------- Unemployment Slips to Lowest Level in Nearly 20 Years -------------- -------------- ¶11. (U) Unemployment is reported at 8.9% as of March 31, 2006, the lowest unemployment rate since 1987. The GoP reports the Panamanian labor force is approximately 1.4 million. Most job growth came from the construction sector and the manufacturing sector supplying building materials, especially concrete. These sectors saw an increase of approximately 12,500 jobs since August 2005. Post continues to hear reports of a skilled labor shortage throughout the economy. However, in household polling by the General Controller's Office, the number of people who say they have not looked for employment during the preceding four weeks and do not plan on seeking employment in the next six months increased by 43,130 from August 2005. Between August 2004 and August 2005, 13,701 people exited the workforce. There is no official explanation for this trend. Post will continue to analyze this trend to determine if it portends some structural weakness in the labor market. -------------- Government -------------- ¶12. (U) The government share of GDP declined to 8.3% from 8.8% in 2005. This is despite a 0.6% increase in government spending during the first quarter. -------------- Inflation -------------- ¶13. (U) Historically, Panama has experienced an annual inflation rate of between 0.5% and 1.5%. Inflation hit a 23-year high of 2.9% in 2005. Annual average consumer price inflation has now eased to aproximately 2.6%. Business leaders have expressed a fear that canal expansion and megaport construction, along with the construction boom, will result in increased labor and material costs. Gasoline is over $3.00 a gallon. The price of steel has increased 36%. As a result, a real estate executive said that the price of an apartment that used to cost $50,000 is now $59,000 solely because of increased steel prices. -------------- -------------- Comment: Broad-based Growth is Encouraging But . . . -------------- -------------- ¶14. (U) The 2006 first quarter GDP figures are impressive. Almost every sector monitored by the GoP showed significant growth in real terms. However, poverty and income inequality remain a nagging issue. Most of the construction spending is limited to luxury condominiums. The skilled labor shortage will likely become more acute in the event the proposed Panama Canal expansion is approved and construction of the estimated $600 million Pacfic Coast megaport becomes a reality. If the economy continues to expand, business will have to import labor. In a country with 40% poverty levels and 8.9% official unemployment, imported laborers pose a risk for discontent among poor and unemployed Panamanians. EATON