POLISHING PANAMA
To succeed, Mulino needs to construct a narrative for a new economic era
Last Sunday, José Raúl Mulino of the conservative Realizing Goals (RM) party was elected president of Panama as the country struggles through a period of economic and social stress. Mulino moved from the vice-presidential slot to the top of the RM’s ticket after its presidential nominee, former president Ricardo Martinelli, was removed from the ballot mid-campaign. The Electoral Tribunal disqualified the popular Martinelli in March due to a money laundering conviction last year.
Martinelli’s robust political network swung behind Mulino along with popular sentiment that had grown sour on the incumbent Democratic Revolutionary Party (PRD). Falling economic growth, fiscal strain and public anger over corruption fed increasing discontent that propelled nostalgia for the high-growth good times of Martinelli’s presidency over a decade ago.
What is underneath?
Mulino, a veteran politician, promised a pro-business, pro-growth future that would be investor-friendly, socially conscious and environmentally responsible. It’s a very tall order given the domestic and international conditions he will inherit. But it tells the story of where Panama is today, and the challenge of where it needs to go next.
Outgoing President Laurentino Cortizo (PRD) had a rough time with the shifting elements underneath Panama’s previous economic successes. It once had growth and development indicators rivalling those of Eastern Europe by being a trusted dollarized haven for global capital and its advantageous exploitation of the Panama Canal. But high growth rates and rising living standards inevitably plateaued, unemployment rose and the Covid crisis depleted the country’s finances. Cortizo was not politically equipped to handle the rising social discontents of a middle income country that was hitting the economic wall on its current model.
Social unrest grew last year with widespread protests against the Cobre Panamá copper mining concession to First Quantum Minerals Ltd. of Canada, which involved a $6.2 billion investment into a mine that began production in 2019. The contract - rightly or wrongly - became a focus of public anger as being too generous to big business, a symbol of insider corruption and environmentally harmful to local populations. But the main conflict was legal, as the Panamanian courts ruled the contract was unconstitutional, closed down the mine and raised the specter of a contentious arbitration battle.
Sorting out the mine conflict is only one of Mulino’s many headaches. The world economy is changing. The free trade liberalism that helped buoy Panama’s investor-friendly model is being eclipsed by rising global trade barriers and conflicts between the western powers, China and Russia. Climate change is increasing droughts that are complicating Canal operations, and this is disrupting up to $270 billion per year in cargo transports.
Panama’s demographics are also changing. Typical of countries that develop to middle income status, the population is aging and people are having fewer children. That means less contributors to the pension system while more are taking funds out. The fiscal red light is flashing as a result and all the potential solutions are politically risky.
That means if Mulino is going to deliver on increased growth with social calm, he’ll need to innovate. The old model was running out of steam already, and the country needs to develop a broader set of economic engines beyond shipping and banking. (Mining could be one of them, but look what happened.) In the short term, Panama needs a boost in income to stabilize its fiscal situation and that can’t happen if investors lose confidence. It also has to tackle pensions before they bring down its fiscal viability.
Mulino can’t allow the disputes over the copper mine to fester on any side, not with the Canadian investors, the courts or the public. The mine contributed around 5% to the GDP before it was shuttered. During a recent radio interview, Mulino sent a soothing message to those still angry over the contract with First Quantum, saying there were no plans to reopen the mine and promised that future concessions of any kind would be different. But he knows that saying no to growth-driving investments on that scale will be a death knell over time.
Our take:
Mulino campaigned on a pledge to "make Panama shine brightly economically again”. He also can see the ruin that befell his predecessor who was pulled under the tide of changing times. He has serious challenges to overcome, and needs to lead an atomized legislature without a ruling majority.
He has two advantages that inform his strategic messaging going forward. For one, the Panamanian people embraced him because of the fond memories they have of life during Martinelli’s presidency. They also distrust party structures having too much power in government, giving a politically skillful leader room to bring disparate factions together on a common mission. He needs to be that leader. It won’t happen with a stale message.
In the end, Mulino’s success or failure will depend largely on the narrative he constructs around his presidency, and delivering on it. He can’t paper over anemic growth and he’ll be too fiscally constrained to spend his way into popularity. He may end up trying both of these, but both will ultimately fail.
If he wants to polish the shine back into Panama, Mulino has to take a step back and see the big picture of where the country fits into a changing world. He needs to tell the people that story and inspire them towards the next phase of their economic development, even if he doesn’t have the details worked out yet. Investors would likely be reassured, and if he can keep the public focused on their destination they may be willing to go along with him for the next four years.
There is no consecutive re-election in Panama, so Mulino won’t have to live with the consequences of his term. But he does have a unique opportunity to set the country on the right path, and that will benefit the RM and give the accidental president a legacy he didn’t expect.
What We’re Watching:
The floods from torrential rains that have devastated Porto Alegre in southern Brazil are unlike anything that has hit a major city in South America in recent memory. More than 100 have been killed and the highly developed city of 1.3 million people is cut off from the rest of the country without power, water, transport or food supplies. The scale of the disaster and the inability to effect a rapid rescue of the city’s population are likely to have significant political consequences for the government of President Lula da Silva and one of the young opposition leaders hoping to succeed him, Governor Eduardo Leite of Rio Grande do Sul, of which Porto Alegre is the capital. The shock of the unfolding humanitarian crisis will worsen over the coming days, and the economic impact is yet to be fully comprehended.