Is the glass half empty or half full?
(http://primapanama.blogs.com/ )This article quotes Citibank analysts on a number of issues that are extremely important to the future of Panama. Although they are very optimistic about the future of the country, they worry about the rising inflation that appears to be escalating. I take issue with several assumption they make. The two big mega projects are what make things so rosy in their eyes. Of course they are counting their chickens before the hatch when it comes to the refinery and they are buying into the continued growth of the worlds economy driving the canal expansion as the other assumption.
First it is important to note that the refinery is in its preliminary research phase where the company engineers are determining the logistical aspects of the project. Once that is complete, the bean counters have to determine the economic feasibility and that has been shaken by the ever rising cost of steel and other building materials that go into such a mega project. The rising cost of oil does not translate into increase profitability for the refinery as they do not operate on a percentage of the price of oil. They are paid for the amount of refining they do no matter the price of oil. Increases in costs of construction and operations dramatically cut into the economic feasibility.
Their optimism about the construction industry is placated on the continued demand for hotel accommodation's for an ever increasing number of business travelers to the country. Of course the hotels are depending on the canal expansion, possible oil refinery and a number of large infrastructure projects for the city, so the optimism is all tied together on these mega projects. The analysts hope that increased productivity may offset some of the inflation shows how little they understand the culture of Latin America.
Don't get me wrong, there is nothing I would like better than to see the refinery project go forward if it does not damage the environment. I would love to see the canal expansion come in on budget and the demand for transits ever increasing. It would be great to see hotels and casinos full to the max with ever higher rates. But I am a realist and the worlds economy, appears to be heading for a long and drawn out recession coupled with high inflation driven by a weakening dollar and high fuel prices. If that scenario is correct, where will that leave Panama? They will be left with a lot of debt, an underutilized canal, and a bunch of hotel rooms competing for a dwindling number of business travelers. Damn I hope I wrong!
Citibank worries
Citibank analysts appear to have confirmed the opinion held by some Panamanians that the prospects for the country's continued economic growth remain strong, but they are concerned about rising inflation.
According to a recent company report, the analysts were in Panama during the first week of July and held meetings with the Ministerio de Economía y Finanzas (MEF), the Autoridad del Canal de Panama (ACP), several local companies, and local economists. The report stated that “the widespread optimism we had observed during our previous visit to Panama in September 2007 remains virtually unchanged.”
The Panama Canal expansion and “the likely construction of the Qatari refinery support this optimism,” the report says. Qatar Petroleum and Occidental Petroleum (OXY) are expected to submit their final proposal for building the project before the end of the year. In the meantime, there is “an increasing sense of hope” that construction of the refinery will begin “over the next 1-2 years.”
Citibank reported that the refinery project “could be worth” around $7 to $8 billion. The Canal expansion has been estimated at $5.2 billion.
Panama's construction boom, in the analysts's opinion, will be maintained at least in the short term by “the need to increase hotel capacity.”
However, Citibank has been worried about rising inflationary pressures “[f]or some time,” the report states, noting that inflation is currently close to 9 percent. “We believe that inflation could not only hurt the country's competitivenesss, but also could damage consumer confidence.” Given the absence of hard data to confirm that view, the analysts found it difficult to assess whether the country's current increase in productivity could offset inflation.
Last July 14, the Contraloría General de la República reported that the consumer price index had risen 9.6 percent from May 2007 to May 2008. That is the fastest escalation in prices since the 1980s. Moreover, it's greater than the 9.2 percent increase Citibank had predicted for the same period.
