BMI View: An announcement by Spanish developer Groupo WISA to construct a US$360mn shopping centre housing a Ritz Carlton hotel in Panama supports our positive outlook for the country's residential and non-residential construction industry. We had previously stated that we see significant room for major developers to increase their operations in the country. This is due to strong GDP growth, a booming export sector and a strong consumer story. Although Panama's construction real growth is forecast to reach 11.4% in 2013, we believe this could be a sign of overinvestment and that such a high growth is unlikely to be sustained once the government's large-scale infrastructure spending programme has run its course.
Under the new project, which is named SOHO, Groupo WISA will construct over 120 new stores over 40,000 square metres (m 2). Current plans suggest that SOHO will house Panama's largest casino (5,000 square foot [sq ft], to be operated by Spanish gaming group Groupo Casa) and erect two high-end office blocks. The new build will also see the Ritz Carlton group jump on a bandwagon of market leaders currently constructing new hotel space in Panama, including the Trump Tower, Hard Rock Hotel, Waldorf Astoria, Hilton Tower and Ramada.
|Panama - Visitors - By Nationality, 2011 (LHS) / Total Number, 2011-2012 (RHS)|
We believe the project will meet strong demand, despite the upsurge in leisure development , and that Panama's residential and non-residential sector will continue to be buoyed by the country's attractive tax laws and tourism promotion schemes. Panama's Law No. 9, implemented in 1987, has long attracted wealthy retirees to the country. The law also promotes government tourism investment in 'Tourism Zones', which are subject to numerous exemptions from tax on income, real estate and import duties for construction sector inputs.
The country's economy has long been driven by private foreign consumption and has experienced a huge surge in migration from wealthy Venezuelans looking to invest in assets outside of Hugo Chavez's regime. However, growth in the infrastructure space has also been driven by the Panamanian government, which has instigated a significant programme of infrastructure spending, bumping up the deficit ceiling multiple times ( see our online service, June 29, 'Fiscal Deficits Rising In 2012 And 2013').
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|Panama - BMI's Construction Industry Forecast|
As such, according to Panama's Ministry of Economy and Finance, the country's construction sector has grown incrementally over the past few years. Over H112, the value of investments in the construction sector rose 45.3% year-on-year (y-o-y), reaching a sum of US$918.4mn. According to the ministry, 38.2% of investment flowed into residential projects, but a larger proportion flowed into the non-residential sector. The regions of La Chorrera, Arraiján, David and Panama City are receiving the lion's share of new developments, with the majority of non-residential builds consisting of new shopping centres and office space. In July 2012, new permits for buildings were up 140% y-o-y, boding well for construction activity over 2013. Cement output is also on the rise, rising 9.6% y-o-y over the same period. According to the Panamanian Credit Association, June 2012 closed with a 3.1% increase in outstanding mortgages.
However, as our country risk team notes, although Panama's headline growth is currently projected to be higher than any other Latin American country, the quality is weaker. With the country's mega-infrastructure projects coming to an end, we anticipate a steady deceleration in construction sector growth over the coming decade. Our forecasts show that construction real growth will fall from 11.4% in 2013 to just over 6% by 2021.
The Panama Canal expansion project is set to be completed in mid-2015 and, although the government has initiated a number of other large-scale infrastructure projects, including expanding the Tocumen Airport and constructing a Panama City metro, none of these will prompt the same double-digit growth we have seen in recent years. As the country's wealth structure will likely remain skewed towards the wealthy in the absence of structural investment into other sectors, we also note the limited potential for expansion offered by consumer-driven builds over the long-run ( see our online service, 20 November, 'Stronger Growth In Panama, Stronger Quality Growth In Costa Rica').