Just two years ago, Panamanian President Laurentino Cortizo boasted about his country’s success, saying it was the result of political unity, close government-business partnerships and logistical wonders. Little did he know that by the time his term was about to end this year, all the pillars that made Panama the most successful Latin American economy of the past 30 years would be shaking.
Since Cortizo’s remarks, the Central American nation has endured social unrest, the cancelation of a US$10 billion copper mine (the country’s biggest private investment) and serious doubts about the government’s fiscal sustainability after losing its investment grade with Fitch Ratings. The country’s engineering marvel, the Panama Canal, has also been hit by a historic drought that has created a cargo bottleneck and forced emergency plans to fix a channel that handles US$270 billion a year in global trade.
This combination represents an existential crisis for Panama: The country that captivated corporations and bankers with open trade, business-friendly legislation and its dollarized economy — turning Panama City into a high-rise-packed financial center akin to Miami — requires urgent reinvention.
Illustration: Yusha
It is through this prism that the presidency of Jose Raul Mulino, who won the election on May 5 and is to take power on July 1, should be seen: Despite the vote’s largely muted international repercussions, close attention should be paid to the new government’s approach, because Panama’s geopolitical weight transcends its slender geography.
The problems that Mulino is inheriting are a microcosm of Latin America’s big challenges: political divisions, popular discontent amid corruption and a lack of quality jobs, increasing migration, fast-deteriorating public finances and the impact of climate change on business. Despite doubling the region’s average GDP per capita this century and achieving the income levels of an Eastern European country, Panama remains embroiled in the same difficulties as its neighbors.
The good news is that unlike some of his regional peers, Mulino is biased in favor of the private sector.
“We will promote a pro-investment, pro-private company government,” he told supporters during his first rally as president-elect, also pledging to build a team “with the best people” without forgetting the needy.
The bad news is that Mulino came to power through the kind of unorthodox arrangement that has all too often destabilized other Latin American countries: He owes his win to popular former Panamanian president Ricardo Martinelli, who gave up his front-runner status to seek asylum at the Nicaraguan embassy in Panama and avoid prison after losing an appeal to overturn his conviction for money laundering.
Mulino, who was Martinelli’s running mate, inherited the candidacy. He has vowed to constitute a “national unity” government after capturing just 34 percent of the vote: That is key considering the atomized unicameral assembly, where independents are the first force. He would need to cut deals to be able to pass legislation, but the lingering question continues to be how the new president plans to deal with the former one.
“Mulino must first address the issue of Ricardo Martinelli, and then ensure governance with the different political, social and civic groups of the country,” said Rita Vasquez, director of La Prensa newspaper. “Once that’s achieved, address the other important issues that his government must solve.”
The combination of a long to-do list and a brittle public mood bodes ill: One of the lessons of the past two administrations is that support can quickly evaporate in the young democracy. The 64-year-old lawyer campaigned promising to return to the super growth rates of Martinelli’s years, when the economy expanded more than 7 percent per year on average.
It is now a chimera, with Panama constrained by a growing pension crisis and the threat of additional downgrades after the surge in indebtedness following the COVID-19 pandemic.
The IMF sees the country growing just 2.5 percent this year, improving to 3 percent next year.
Others are much more pessimistic: Economists at JPMorgan Chase & Co expect a 0.5 percent expansion this year, putting the economy in a virtual recession.
However, accelerating growth would only be one of Mulino’s pressing issues. There is no easy, quick resolution to either the dispute with First Quantum Minerals Ltd over the giant shuttered mine or the drought afflicting water management for the canal.
In addition, Panama has a crucial role to play in addressing the humanitarian crisis of migrants crossing the dangerous Darien Gap connecting South America with Central America as they venture toward the US.
“All these challenges, plus the depletion of funds to meet pension spending, have Panama with its back against the wall,” JPMorgan economist Steven Palacio and his colleagues wrote in a report on Monday last week. “The problems are easily identifiable, the solutions are not clear.”
Mulino cannot afford a paint-by-numbers presidency. Panama needs to rewire its economic and political system to adapt it to a new world where supply chains and trade flows are shifting, and nearshoring and energy transition emerge as opportunities for Central America.
The country cannot just be a paradise for capital and maritime refugees anymore; it also needs to satisfy the growing societal demands of its 4.4 million people, not least for greater transparency and accountability, and it has to do so while regaining fiscal credibility.
A new government always offers the chance for a radical course correction. Mulino’s initial consensus-building, head-on strategy goes in the right direction, but for all its short-term appeal, relying on the disgraced Martinelli as the mainstay of his political support can be expected to come at a cost.
Mulino cannot govern if he is seen as the puppet of a strongman in the shadows. An electorate already angry about corruption would also become even angrier if Panama does not regain its economic momentum.
Mulino needs to solve his Martinelli problem quickly, and rally the broad-based support necessary to put Panama back on the path to prosperity.
Juan Pablo Spinetto is a Bloomberg Opinion columnist covering Latin American business, economic affairs and politics. He was previously Bloomberg News’ managing editor for economics and government in the region. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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