Tropiland

Here is a great piece of news for all who live, work and have invested in the Los Santos province in Panama (like yours truly), coming straight from the Ministry Of The Presidency web site.

Martinelli’s government will be investing $107.5 million (this year alone) in the province of Los Santos, according to vice Minister of Finance Dulcidio De La Guardia, who made the announcement  during the celebration of the Cabinet Council held in Las Tablas.

Since Los Santos is  a region dedicated to agriculture, the bulk of the investment will be directed to this sector , some $38.3 million, mostly directed to agricultural management, agriculture activities and construction. .

In the transportation sector, projects will be funded with  o$24 million, $5 millions of which  are being devoted to rehabilitation and maintenance of the road between Guarare-Las Tablas, and rehabilitation of a section of the road Macaracas – Sabana Grande, an estimated $4 million.

Amother important project is the expansion to four lanes of the road over the river La Villa. The project  could be completed this year.

The government also plans to build and rehabilitate secondary roads throughout the Los Santos region, so that the province is left with a road network that will lead to effective marketing of all that the area has to offer from a tourism and business perspective.

Regarding education, the Government allocated  $1 million towards implementing  aggressive scholarship programs.

With regard to Social Program investments,  $12 million (representing 13.6% of the total cost) will go towards the completion of  60 housing  projects.

Well…60 housing projects? Really? I am all for development and modernization and especially all for social development, but 60 housing projects in a province (or an area) that represents only 1/15 of Panama’s population sounds a bit of a pipe dream to me.

Anyhow, it looks as though Martinelli’s government is taking some steps in decentralizing Panama and start developing rural areas with long-term rewards in mind.

Petaquilla Minerals Ltd., the Vancouver Canada based gold mining company, has signed an engagement letter, pursuant to which it will work with a leading financial institution to execute a US$70 million gold linked facility, under which they would be required to deliver 91,710 ounces of gold over a five year term.

The terms of this facility are outlined in an indicative financing term sheet, which includes other price participation terms that enable Petaquilla to participate in gold prices up to US$1,250 per ounce for the committed ounces.

The transaction is subject to structuring and underwriting fees totaling 4% of the facility amount. No other upfront fees, warrants or interest are to be paid to the financial institution during the term of the facility. This transaction is subject to technical, legal and financial due diligence and the execution of final, legally binding transaction documentation.

The IRR of the facility is 8.5%, assuming that gold prices stay within the agreed limits of the price cap.

The term-sheet includes an “optional early termination” clause whereby Petaquilla has the option to early repay the outstanding balance of the gold facility in the event gold prices move upwards and beyond the level of US$1,250 per ounce. This optional early termination clause is subject to a 5% premium payment calculated on the early repayment amount.

The terms of the engagement letter incorporate the possibility of a simultaneous or subsequent participation of one or several leading Panamanian banks which have expressed their interest in funding up to US$35 million of the total US$70 million financing requirement.

In such event, the gold facility would then be reduced by the amount equivalent to the Panamanian banks’ participation. No early termination premium of 5% is to be payable in case the Panamanian banks’ participation is to occur subsequent to the closing of the initial US$70 million facility.

The amount of 91,710 ounces that would be committed to the gold facility represents approximately 8.5% of Petaquilla’s total gold resources or 4.2% if the facility is to be reduced to US$35 million as a result of the above mentioned participation by Panamanian banks.

The proceeds of the facility will be used principally to redeem all of Petaquilla’s outstanding senior secured notes, in the combined amount of US$69.6 million in principal, plus any accrued interest up to the date of redemption. These senior secured notes would otherwise mature at various dates during the next 12 months.

The five year term of the gold facility, coupled with an attractive embedded cost of capital, will substantially strengthen the financial profile of the Company, providing additional liquidity to further develop its production capabilities and exploration potential.

This gold facility will enhance Petaquilla’s balance-sheet, by reducing the financial risk implicit in the outstanding high-yield senior secured notes, while extending the repayment of the credit facility to five years.

Petaquilla further announced that it will now focus its efforts on the very promising exploration potential of its Oro del Norte concession, where it has initiated a drilling program aimed at confirming the prospective gold grades identified during the early superficial rock sampling and trenching stages, while also advancing the Molejon heap leach project, which will add approximately 150,000 ounces, over the life of mine, to the existing process operation, and completing the spin out of its infrastructure affiliate, Petaquilla Infrastructure Ltd.

Petaquilla Minerals Ltd. is a gold producer operating its gold processing plant at its 100% owned Molejon Gold Project in Panama. Anticipated throughput for the project during the first year of commercial production is estimated to be 2200 tonnes per day. Commercial production commenced January 8, 2010. The Molejon mine site is located in the south central area of the company’s 100% owned 842-square kilometre concession lands, a region known historically for gold content.

A number of existing trade agreements, especially the Central America Free Trade Agreement (CAFTA) are a nightmare for importers and exporters alike.

I already posted on why CAFTA will be detrimental to Panama. let’s now examine why CAFTA is not what its name implies from the US point of view.

Importers are burdened with regulations that are restrictive and expensive to implement, while exporters can’t sell their goods in the United States unless they comply with the regulations and other stipulations.

Economists categorically state that there are no “truly free” free trade agreements. All free trade agreements are managed trade agreements. Underlying economic theory demands that supply and demand is not restricted by government market intervention. Fundamentally, managed trade is protectionist trade.

Better yet, to accurately reflect their true nature, all of them [free trade agreements] should be called Managed Trade because on each page within every agreement are quotas, stipulations, and byzantine clauses that rival the federal tax code.

On the other hand, importing from countries not governed by free trade agreements with the United States is cheaper and easier, as they are not governed by costly and unwieldy regulations and the United States operates under an open door trade policy.

Rules on tariff liberalization, place of origin, restrictive standards and controls, consumer protection requirements, custom duties, labor standards, and intellectual property rights make some free trade agreements nightmarish.

Trade conflicts, non-tariff barriers, and dumping do not disappear; they often go underground, which makes detection and cooperation more difficult.

To benefit from CAFTA, importers must comply with specific custom regulations and provide detailed information that is extremely time consuming to put together and often difficult to ascertain.

The importer must conduct regular factory visits to their foreign suppliers’ manufacturing locations to make sure that the goods for which they claim trade preferences are legitimately entitled to them.

During the four years ending in 2008, imports from Central America to the United States rose by only 10 percent from roughly $13 billion dollars, while exports to the region from the United States soared by 48 percent to slightly above $24 billion.

Not only CAFTA, but any trade agreement is beneficial to the corporate world, as it is not only easier to outsource jobs, but cheaper to import products and save a great deal on import duties, affecting the corporate bottom line positively.

The corporate world envisioned that “CAFTA would lower the cost of importing from the five countries of Central America as well as the Dominican Republic,” according to the KW report.

However, CAFTA and many other trade agreements have a glitch. Any U.S. corporation, no matter where it is based, can sue the government of a CAFTA country outside U.S. jurisdiction, if any regulation would put a dent into its operations or attack its interests in the region.

“The fundamental problem is that, on many issues, CAFTA would give multinational corporations more power than our [Costa Rica] government,” according to a 2007 article on the Economic Policy Institute Web site by Ottón Solís.

Current CAFTA members include Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua.

No matter how you slice and dice it there is not enough electrical energy in Panama to satisfy the growing demand. especially during a long and dry spell like the one Panama is going through this year due to El Nino.

Recognizing the problem, the Martinelli administration is moving in fast approving some $3,9 billion (!) for the execution and completion of  22 new power generation projects during the next four years.

These projects will generate approximately 1,061 Megawatts (MW). This is a much needed capacity increase since currently Panama’s power generation ability runs at approximately 1,208 MW, a number very close to the current demand that reaches 1,153 MW.

The biggest chunk of that investment money will go to hydroelectric projects ($1,7 billion). Also two wind parks will be constructed ($1 billion) while $1,2 billion will go to thermal generation projects.

According to information released by the Authority for Public Services (ASEP), there are 19 hydroelectric projects currently in construction with installed capacity of 723.60 MW, 2 wind projects (330 MW) and a thermal one in its final licensing stage (8 MW).

Presently, the most ambitious hydro-electric project  is a $600 million one in Changuinola (Bocas del Torro). This project is at 60 % completion rate and it is scheduled to start operations in May, 2011 with a generating capacity of  223.00 MW.

The French authorities have prepared their own list of countries considered to be “tax havens“ consisting of  18 “accused”, between them Costa Rica, Guatemala and Panama.

The list came forward yesterday by the newspaper Le Figaro, and will be valid until January 1, 201. The list will serve as a reference point to all French companies operating in these countries, who will charged with higher taxes.

In the list , presented by the newspaper and confirmed by official sources , no European country is listed. Instead there is an extensive coverage on Anguilla, Belize, Brunei, Dominica, Granada, Guatemala, Islands Cook, Island Marshall, Liberia, Nauru, Niue, Panama, Philippines, Saint-Kitts-et-Nevis, Saint Lucia and San Vicente and Granada.

The inclusion of Panama in the list came despite a bilateral agreement to avoid double taxation, for which Paris showed its satisfaction for Panama’s efforts on the subject of fiscal transparency.

There is a strong Central American and Caribbean “representation” on the list, and, curiously enough,  nor Chile or Uruguay were included, which they had been mentioned in the past as countries that do not provide enough cooperation on the subject of fiscal information exchange.

The list does not also include Andorra, which signed an information exchange agreement in fiscal matters with France last September.This was one of the steps taken  by the Principate to leave the Organization for the Cooperation and the Economic Development (OCDE) “tax haven” list.

Switzerland, which last Friday agreed to resume the process of ratification of fiscal information exchange with France, is not on the list either.

According to  Le Figaro,  French companies operating in the countries included on the list will receive a harder fiscal treatment, by means of  50 % (!) taxation on all income generated from businesses within those countries (ouch!). The measurements, according to the source, will begin to be applied from March 1 on.

This ,of-course, is really bad news for Panama since there is a large number of French companies operating within its territory.

Vive La France!

The 1 % deficit registered in 2009 for Panama’s economy ,placed  the country in a “fast-track” way to achieve “investment grade” status from qualified risk agencies around the world.

Having attained this rating, the country might resort to other financing sources, new investors would be attracted and the development that the Martinelli administration has proposed  would be more feasible.

This is another piece of good news for Panama amidst the global economic turn around that is slowly starting to emerge.  Better investment rating would attract more investors willing to bring their money and developmental know-how into Panama.

However, I’ve said it before, here and on other blogs, that all these fancy ratings and theoretical assessments will not mean anything unless they are followed by meaningful, well-though and well laid-out plans and systems of long term cultural, economic and business shifts.

The adverse impact of  El Niño requires the application of urgent measurements towards  saving energy and decreasing consumption. This poses a big challenge for the Panamanian economy.

Meteorologists warn that El Niño will clasp its claws  on the country at least until the middle of 2010.

In the forefront of  the proposals that Panamanian authorities consider is the application of a change is in the climate controls of all state and  public institutions.

According to the Secretary of the Treasury and Finance, Alberto Vallarino, a staggered timetable  might be applied to avoid the use of  massive  air conditioning and lighting units needed for these spaces.

Further more, the National Authority For Public Services (ASEP) decreed that all signs and advertising panels that use night-time commercial lighting will have to be extinguished between 01.00 AM to 06.00 AM.

While, in places dedicated to gambling games like the casinos, the exterior lights  will be out from 05.00 AM to 06:00 PM.

ASEP has mobilized operatives to control this disposition, with orders for steep fines for all violators.

In parallel to these measures, power generation has now increased before the water volumes in all reservoirs decrease due to El Niño.

The National Strategy for the Coverage of Risks of Hydrocarbons awarded investment bank JP Morgan Chase Bank  the 26.9 million dollars insurance policy to mitigate the price rise of crude oil used in the generation of electricity in 2010 .

In 2009, the Panamanian Government hired a similar insurance for 15.8 million dollars with Morgan Stanley Capital Group so that the  fuel adjustment clause in the consumer remained in zero, when the crude oil was exceeding  50 dollars a barrel.

For 2010, the Department of Economy and Finance (MEF), the National Authority For Public Services and the Department of Energy negotiated a contract on a price of 70 dollars a barrel of crude oil.

JP Morgan, who bid an offer less costly than that of Morgan Stanley Capital Group and Cardinal Barclays, will cover the price difference  of 2,650 ,000 crude oil barrels, should the cost per barrel be more than 70 dollars.

With this move, the Panamanian government will ensure power bill price protection for all consumers in in times of upward crude oil cost tendencies.

Personally I am more concerned about the rationing of electricity that is scheduled for 2010 due to lack of power generating resources caused by the El Nino effect than paying a few extra bucks in the event of crude oil price surge.

After a difficult 2009 for the business sector, Panama’s micro, small and medium businesses (MIPYMES)  are getting ready to face the new economic obstacles of next year.

Although the Martinelli administration has not clearly and decisively defined the minimum wage in the country yet, small businesses around Panama are afraid that the final outcome will strongly effect their day-to-day activities.

By having their minimum wage increased, Panamanians will gain more money and, consequently,  retail and other businesses will have to increase prices in order to  be able to support profitability, otherwise unemployment will increase even more.

Small businesses are not the only ones who will face this new economic reality. Panama’s Social Security Program (Caja de Seguro Social, CSS) will find itself struggling to keep up with additional work load and new protocols.

Another overlooked but determinant factor is the $ 350, Tasa Unica or Franchise Fee  that will most definitely cause increase in “informal employment”.

The Numbers

MIPYMES  earnings  have diminished between 4 % and 6 % at national level in 2009, with the most  affected sectors being agriculture and fishing.Nevertheless, interest in new commerce ventures by entrepreneurs is holding steady, fueled by mostly Venezuelan and Colombian money “injections”.

In parallel, President Ricardo Martinelli is continuing to make good on his campaign proposals with  Law 31 that regulates the “Authority of the Micro, Small and Medium Companies (AMPYME)”, a law was prepared and constructed with the participation of all the sectors involved.

As of  December 15 the number of newly registered companies in Panama was 7,935, 373 more than in 2008.

Amongst other provisions, Law 31  aims to regulate funds for business managerial promotions, increase the number of business loan guarantees  from 1,399 to 2,700,  and create  the micro credit fund business development  conduits  like cooperatives and NGOs.

In conclusion, there are some challenging times ahead for small and medium businesses in Panama but there are also some promising programs and initiatives in store that, if handled properly, will help cultivate a better small business culture for Panama.

Panama will continue in the group of the most dynamic economies of the region next year and will register a growth of 4.5 % in its Gross Domestic Product (GDP), according to projections  published yesterday by the Economic Commission for Latin America and the Caribbean Sea (Cepal).

Panama’s growth will be fueled by the “recovery of the world commerce and the continued building  of major infrastructure projects such as  the Panama Canal Expansion and the Cinta Costera.

Further growth could be materialized should  some of the promised Martinelli projects get under way like the construction of the Panama City Metro, another international airport and social housing projects.

Meanwhile,the economic upturn and the fiscal reforms implemented recently will lower the deficit  and keep inflation in low levels.

For the closing of this year,  Cepal foresees a 2.5 % growth rate GDP, which is half a percentage less than the government’s estimation.

Cepal also expects a  4.1 % growth for Latin America ,as a region, in 2010.

If CEPAL’s estimated are correct, it looks as though Panama may be in a great position to attract new investments in 2010.