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