Panama is only an external shock away from turning into a road wreck.

BY WALTER T. MOLANO

In the 1989 melancholic tale, Field of Dreams, Ray Kinsella, played by Kevin Costner, decides to bet the farm on building an improbable baseball diamond in the middle of Iowa. Against all odds, Kinsella completes his dream, with the closing scene suggesting that it blossoms into a commercial success.

The plot seems to be Panama’s inspiration, as it constructs a modern set of canal locks on a shoe-string budget and transforms the mudflats of Panama City into a thriving metropolis.

However, Hollywood is one thing, where overcoming the impossible is the secret ingredient for selling movie tickets, and the other thing is reality, where life according to Thomas Hobbes is “nasty, brutish and short.”

Fortunately, Panama was able to take a quick hiatus from reality, thanks to the largess of Quantitative Easing. Seven years ago, the country embarked on the bold venture, putting the project up for bidding. The contest was won by a European consortium, led by the Spanish construction company SACYR, which won with a winning bid of $5.25 billion.

Even though it beat out the next best competitor by a billion dollars, private engineers and academics estimated the true cost of the project at almost $10 billion. Part of the savings was attributed to the use of excavations that were conducted by the U.S. in 1939 to build a larger set of locks, but were abandoned at the start of World War II.

Yet, from early on, it was clear that there were going to be problems. In 2012, the consortium announced a six month delay. There were rumors that the geological studies were far from complete, and there were also complications with the doors, which had design flaws. That is why at the start of this year, it was no surprise that the consortium announced that it was facing cost overruns of $1.6 billion. Although the two sides arrived at an agreement to resume work, the project is a little more than half way completed, and there will surely be more cost overruns on the horizon.  

BROKEN DREAMS

Unfortunately, Panama has a long history of broken dreams. Before anyone imagined of digging a ditch through the isthmus, Scotland tried to catapult itself into the big leagues of the colonizing superpowers by establishing a commercial beachhead along the Gulf of Darien in 1690. Not only was the venture a complete disaster, it bankrupted the country and forced it into the arms of England through the Acts of Union, a move that it is only now trying to dissolve.

A short distance from Gatun is another grim reminder of the perditions that lurk in the dense jungles of Panama. A sad meadow of white crosses holds the remains of hundreds of French engineers and workers who succumbed to tropical diseases 130 years ago, when they tried to cut a path between seas. The hapless French venture not only resulted in a large loss of life, it triggered a financial crisis and deep recession. Of course, there were also winners along the way. England was able to incorporate Scotland into the United Kingdom. Likewise, scores of French contractors and suppliers made small fortunes two centuries later. Now, the echoes of history are reverberating again.

IMPRESSIVE GROWTH

Panama had one of the most impressive growth rates in Latin America during the past few years. A veritable forest of skyscrapers crowds the overcast horizon of Panama City. A bevy of slippery merchants from the Colon Free Zone have made handsome fortunes building the new monoliths along the tidal wetlands of the Pacfic, but the dark outlines of the buildings, under the cover of night, divulge their true occupancy. Hence, contrary to the movie’s script, even though “it” was built, “they” have not come.

Moreover, there are growing concerns about the health of the Panamanian financial system. The easy availability of credit, thanks to the expansionary monetary policies of the U.S., eventually manifested itself into a wide range of mortgage products. Today, mortgages represent as much as a quarter of the larger banks’ balance sheets. Most of these obligations are floating rate, which will come under pressure when the Fed moves to a more neutral monetary posture. As we have seen repeatedly in the developed and developing world, banks are a potential sovereign liability.

However, Panama is already teaming with a wide gamut of off-balance sheet liabilities, from the construction of the metro system, to the new highways, to the widening of the Canal. Therefore, the country is only an external shock away from turning into a road wreck. In other words, it’s not clear whether Panama is truly a “field of dreams.” In the past, it has been a field of shattered dreams, and it may become one again.

Walter Molano is head of research at BCP Securities.