Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Shipping volume discussing topics including sources of finance, compliance initiatives and foreign court decisions within key jurisdictions worldwide.
1 What is the current state of the shipping industry in your country?
It would be an understatement to say that 2020 was an annus horribilis for Panama. The overall economic damage caused by the covid-19 pandemic had no parallel in recent memory – and that includes the dreadful 1980s, a decade marked by dictatorship, economic sanctions, and the overwhelming pessimism characteristic of Latin America’s ‘Lost Decade’.
Latin America was one of the worst affected regions by the covid-19 pandemic. According to the World Bank, regional GDP contracted by 6.7 per cent. Panama’s GDP contracted by 17.9 per cent in 2020 – one of the worst results in the region. Foreign direct investment fell by an astonishing 86.4 per cent in 2020 (US$588.7 million versus US$4.32 billion in 2019), while the country’s debt-to-GDP ratio went from 46.4 per cent in 2019 to a worrying 69.8 per cent in 2020. This was a 23-point increase in a year, whereas the average for comparable economies was about 13 points, according to Moody’s. In fact, citing ‘very material’ deterioration in the country’s fiscal strength due to an ‘unusually large’ impact of the pandemic relative to its rating peers, Moody’s downgraded Panama’s long-term rating from Baa1 to Baa2. Likewise, S&P has downgraded Panama’s credit rating, from BBB+ to BBB. In the case of both Moody’s and S&P, Panama’s rating still has a little room to spare, before falling into junk terrain. Not so in the case of Fitch, which downgraded the country’s credit rating from BBB to BBB- (just a notch above speculative, but still investment grade). Unemployment spiked from 7.1 per cent in 2019 (the worst figure in more than a decade, prior to 2020) to a whopping 18.5 per cent, according to official data. This dismal unemployment statistic even surpassed the 16.3 per cent rate recorded in the last year of Noriega’s regime, when Panama was embargoed and eventually invaded by the US. Clearly, 2020 was an abominable year for Panama.
Even so, Panama’s shipping sector once again proved its amazing resilience in 2020. As usual, the Panama Canal led the way, with the merchant marine growing, and the port system having another record year, even as the bunkering sector slowed down somewhat as compared with 2019. Yet stormy seas lie ahead for Panama, as the conflict between its two biggest commercial partners – the US and China – intensifies. There is no end in sight to the confrontation between these two global behemoths. Beijing remains increasingly assertive, and the new Biden team seems willing to take an even tougher stand than the previous Trump administration when it comes to dealing with China. Add the present and future potential pandemics to this hornet’s nest of risks, and the grand global restructuring of the worlds’ supply chain looks more certain than it ever did, just a year or so ago. Amid the topsy-turviness, Panama has an opportunity to leverage its insuperable strategic location and take advantage of these rapidly developing trends.
2 What are the prevailing shipping market trends affecting your country? What has been the impact of the covid-19 pandemic?
Covid-19 hit Panama hard. Indeed, Panama was one of the worst performing countries in the region in 2020 (the worst, if you exclude Venezuela). It is hard to pinpoint the exact reason for this, but the very strict restrictions imposed by the government in response to the health crisis likely played a significant role. The result was the most severe GDP contraction probably in the country’s republican history, even surpassing the 1988 debacle when the Noriega regime was in its final throes. Panama’s location and its open economy rendered it perhaps more vulnerable to a global pandemic than its regional peers, yet the sheer size of the downturn as compared to the rest of the region (Latin America and the Caribbean contracted by 7 per cent in 2020, according to the IMF) is not easily explainable by these factors alone. This takes us back to the government’s response. According to a top local economist, at the start of the pandemic the government made the crucial decision to de facto pass all decisionmaking to the health authorities, which translated into a complete shutdown of almost two-thirds of the country’s economy. Paradoxically, according to this economist, it was the country’s strong globalised orientation that prevented a worse downfall. Here is where the maritime sector came through in 2020.
Copper concentrate exports from the Donoso mine (operated by First Quantum) have grown strongly in the past year, leading a surge in Panamanian exports of 14.7 per cent compared to 2019. With copper prices in the increase due to strong Chinese demand, this commodity became the top Panamanian export in 2020. In fact, about 60 per cent of production in 2020 went to China, which, incidentally, surpassed the US as the main destination for Panamanian exports. Since First Quantum began production in June 2019, over 60 shipments have been made, and close to 70 per cent of them have transited the Panama Canal. Indeed, copper exports and the Panama Canal are expected to be key drivers of country’s economic recovery in 2021, generally expected to be at around 9 per cent GDP growth.
Bunkering took a slight hit in 2020 as compared to the previous year. Some 6,625 vessels were attended in 2020, as opposed to 7,634 in 2019. And whereas in 2019 a total of 5,352,596 metric tons of bunker fuels were sold to vessels, in 2020 that figure came down to 4,744,412 metric tons, according to official data. This 11 per cent drop – disappointing as it may seem – is perhaps due to extraordinary sales in 2019, rather than to any other particular factor affecting the local bunkering industry. Possibly in 2019, Panamanian bunker suppliers benefited from a rush to stock up on bunkers, before IMO 2020 limits came into effect. Indeed, 2020 compares quite favourably with 2018, when only 6,046 vessels were served, and 4,551,630 metric tons of fuel were sold.
Despite the challenges posed by the pandemic, in 2020 Panama once again showed it is one of the region’s logistical powerhouses. The country posted a solid LSCI rating of 50 – the best in the region in 2020. Furthermore, Panama’s national port system (composed of five major container terminals) once again broke its previous yearly record, with a throughput of 7,734,024 TEUs in 2020 versus 7,346,859 TEUs in 2019 – a 5 per cent increase. In fact, 2020 marked the third year in a row that the country’s ports exceeded the 7 million TEU landmark in throughput. As of June 2021, container movements were up compared with the same period in 2020. This points to another record-breaking year in 2021.
Pandemic and all, the Panamanian merchant marine pushed ahead with the strongest growth numbers in years. The registry had some 235 million registered gross tons in 2020, growing over 4 per cent as compared with the previous year. As at April 2021, the registry had some 8,652 vessels in its books, accounting for 236,5 million gross tons – an increase of 1.6 per cent and 2.58 per cent, respectively. This includes over 100 newly built vessels choosing to register in Panama, in the first four months of 2021. Among the new entries to the registry are the HL GREEN and the HL ECO, the first LNG powered bulk carriers, operated by South Korea’s H-Line Shipping. Panama remains strongly positioned as the world’s number one ship registry. About 16 per cent of the world’s fleet flies the Panamanian flag.
The Panama Canal spearheaded the maritime sector in 2020. As reliable now as it was when it first opened for business over 100 years ago, the Panama Canal once again delivered, both to the world’s shipping community and to the country as well. This was no small task. As Aristides Royo – chairman of the board of directors of the Panama Canal Authority (ACP) – pointed out ‘2020 was a year of intense work, a true turning point in the face of . . . climate change, a trade war between two of our main customers (China and the United States of America) and the … Coronavirus (COVID-19) pandemic.’ That hard work paid off, as the Panama Canal once again broke previous performance records. In 2020, the Panama Canal registered transits for a total of 475.2 million tons PC/UMS (Panama Canal Universal Measurement System), as compared to 469.6 million tons PC/UMS in 2019. This was in spite of fewer total vessel transits. Total revenues increased by 2.7 per cent compared to the previous year (US$3.4 billion versus US$3.2 billion). Net income performance went significantly up, with EBITDA registering an 11 per cent increase in 2020. Net dividends to the National Treasury grew as well – US$1.82 billion versus US$1.768 billion. This represents a 2 per cent increase year on year – less than the yearly increase recorded from 2018 to 2019, yet a record-breaking figure once again. Challenges ahead for the Panama Canal are securing a steady water supply for its operation and the evolving nature of globalised commerce, particularly in the context of the US/China relationships. The two largest economies are, by far, the biggest users of the Panama Canal, and so the way the tensions between them evolve will likely have an impact on the waterway. Evidently, how this plays out is completely beyond the ACP’s control. Regarding water, however, the ACP is taking proactive steps – immediately, by establishing for the first time a water usage surcharge for transits and by requesting bids for new water management system, that would guarantee adequate supply of this key resource in the future.
To sum up, the impact of covid-19 has been twofold. On the one hand, the pandemic landed the Panamanian economy in a place not seen since the gloomy 1980s. As stated by Moody’s, the pandemic had an ‘unusually large’ impact on the country. The silver lining here is that this ‘unusually large’ impact seems to be for the most part the result of governmental policy in response to an unprecedented emergency, rather than to structural weaknesses in the country’s economy. On the other hand, however, the pandemic underscored the amazing resilience of Panama’s maritime sector – which managed to thrive through the midst of the worst global health crisis in a century.
3 Are there any recent domestic or international political or legislative developments that may have an impact on your country’s shipping market?
This year will mark the third anniversary of the establishment of formal diplomatic relations between Panama and China. The 2020 US election pointed towards a drastic reversal of the Trump administration’s foreign policy. The hope was that tensions between Panama’s two main commercial partners would gradually ease. What has transpired since tends to suggest that the world’s largest economies will be unable to escape Thucydides’ Trap. There is just no end in sight to what is clearly shaping up to be a geopolitical adversarial relationship, as opposed to a mere commercial competitive one. This is gravely concerning to Panama, because of the nature of its economy and the importance of both China and the US to it. At the same time, the fracas between these global behemoths, plus the trauma caused by the pandemic, is bound to incentivise the reshaping of global supply lines. This creates new opportunities for Panama to monetise its strategic geographical location, as companies engage in nearshoring in order to better manage supply chain risks.
Covid-19 wreaked havoc on the Panamanian economy. All three major rating agencies downgraded the country. The government’s fiscal deficit went from 3.1 per cent of GDP in 2019 to 10.1 per cent of 2020. The sharp economic decline naturally decimated government revenues. It also impacted the country’s pension system, which is headed for bankruptcy unless difficult and unpopular reforms are made soon. With a Debt-to-GPD ratio poised to surpass 70 per cent in 2021 – the highest in nearly 20 years – and a potential rise in interest rates, the cash strapped government will face considerable difficulties in moving ahead with its agenda, particularly with much needed infrastructure investment. It was infrastructure – notably the Panama Canal expansion – which underpinned the robust growth in the 10 years between 2005 and 2014, when unemployment steadily decreased from 9.8 per cent to a historic low of 4.1 per cent. Indeed, infrastructure development will be key to the country’s recovery in the years ahead, according to Moody’s. Retail commerce and construction accounted to about 40 per cent of GDP in 2019. Covid-19 obliterated these. With unemployment at 18.5 per cent, how the government handles the pandemic and its social and economic consequences is the greatest political challenge in the immediate future.
4 What are the key regulatory and compliance issues for your country’s shipping market? What’s coming up in the near future?
The Panamanian registry not only remains the world’s foremost open registry, but showed increased vitality in 2020. Particularly encouraging is the fact that an important number of newly built vessels (some incorporating non-traditional propulsion technologies) have chosen the Panamanian flag. This is clear sign of confidence in the Panamanian registry’s well-earned reputation, as well as in its quality standards and improved customer service.
In spite of this, the country as a whole continues to be included on what many believe are unjust discriminatory lists. Fair or not, this is a challenge that must be confronted head on, seeking to harmonise the need to address legitimate international concerns about possible abuses of Panama’s services platform with the nature of the country’s open and globalised economy. Thus, the task ahead is to find a sensible balance between attending reasonable international demands for improved transparency and maintaining sound economic policy objectives that work for the Panamanian people. Clearly, these are not mutually exclusive goals. All the same, after one of the worst years on record, the last thing Panama’s battered economy needs presently are further regulations.
5 What are the shipping industry’s current sources of finance? How do you predict they will develop, and what are the advantages and challenges to financing a vessel in your country?
As in years past, Asian and European financial institutions stand out as the biggest credit providers for users of the Panamanian flag registry. There was a sharp increase in the number of security instruments recorded in the vessels registry from 2019 to 2020 – a 27 per cent spike. Last year’s trends – with a lot of refinancing going on – suggested such an increase, but the entry into the ship registry of a considerable number of newly built vessels very likely played a role as well. Purchases of newly built vessels are usually leveraged, and this naturally entails the granting of a naval mortgage as part of the security package required by lenders. Hong Kong lease companies have also continued to provide a source of finance for the acquisition or operation of Panama-flagged vessels.
6 Have there been any recent significant domestic or foreign court decisions or arbitration awards that impact on your country’s shipping market?
The 2009 amendments to the Code of Maritime Procedure (CMP) incorporated a provision, expressly permitting in rem sister ship arrest, whenever the substantive law applicable to the dispute permitted this. An example where this provision may be operative could be a case where section 21(4)(ii) of the UK’s Senior Courts Act 1981 applies. So, how exactly would this work out in practice? In the case of Ricardo Isaias Villatoro Reyes v M/V ‘Sea Gem’ (MAT/06.06.2020). the Maritime Appeals Tribunal (MAT) clarified how it would not work out. In that case, plaintiffs had filed an in rem action against the M/V Sea Gem. However, the plaintiffs requested the arrest of the M/V Amanda S, based on Colombian substantive law and, more specifically, article 42 of Decision 487 of 7 December 2000 of the Andean Community. Article 42 in question contains a similar rule to that stated in section 21(4)(ii) of the Senior Courts Act 1981. Counsel for the in rem defendants filed a nullity motion, the lower court rejected this, but the MAT then reversed, ruling that indeed the case should be dismissed. The appellants argued, in essence, that plaintiffs named one vessel as defendants (the Sea Gem) but then arrested a different vessel (the Amanda S). This contravened the CMP, as the vessel itself is the only proper defendant in an in rem case, such that service of process can only be effected by arresting the particular vessel named as a defendant in the complaint. The MAT agreed, and found that the lower court lacked jurisdiction, as it never served process on the proper defendant – that is, the M/V Sea Gem. The MAT’s reasoning makes it quite apparent that a different result would have ensued if plaintiffs had simply amended their complaint and named the M/V Amanda S as in rem defendants, all other things being equal.
7 What is the outlook for your country’s shipping market? Which sectors are likely to grow, and which not?
Unquestionably, 2020 was a particularly difficult year for Panama. Nevertheless, as things begin to normalise, there are grounds to feel optimistic about the immediate future. Panamanian ports will keep busy. The Panama Canal – the very heart of the country’s shipping sector – marches ahead, against all odds. What is more, copper production is now in full gear, and demand for the mineral is growing exponentially. Indeed, as the world moves faster than ever towards a green economy, copper exports are poised to become one of the main drivers of the Panamanian economy. If the country can keep its finances straight and its politics stable – as it will probably be the case – Panama can look ahead to a 9 per cent to 10 per cent GDP rebound in 2021, and perhaps maintain a steady 5 per cent GDP yearly growth in the foreseeable future.
The Inside Track
What are the particular skills that clients are looking for in an effective shipping lawyer?
Despite the severe disruptions caused by covid-19, maritime lawyers were able to perform seamlessly. Resilience and resourcefulness are now indispensable in the post covid-19 world. Nevertheless, the pandemic has also underscored the importance of traditional lawyer virtues, such as analytical prowess, perceptiveness, creativity and communicative dexterity.
What are the key considerations for clients and their lawyers when arranging finance for a shipping transaction?
If anything, 2020 has shown that the traditional naval mortgage will not go out of fashion anytime soon. In times of uncertainty, creditors put a special premium on the track record and reliability of the legal system of the nation where their collateral is registered. Panama is able to offer a solid and trustworthy array of security instruments – in addition to the traditional mortgage – which has proven appealing with many non-traditional credit providers. Panama’s flexible legal system and adroit practitioners have proven ready and able to adapt to new market trends.
What are the most interesting and challenging cases you have dealt with in the past year?
An interesting ruling that came out in late 2020 was on the topic of the standard of proof required to obtain a summary judgment. This was one of several cases emanating from the OW Bunker collapse. In Sea Debt Management, SA v M/V ‘Maartje Theadora’ (MAT/22.12.2020), the question visited by the MAT was whether language used in obiter dictum in a prior decision by the MAT in that very case dismissing a special summary defence could serve as the basis for a successful motion for summary judgment. The lower court judge issued a summary judgment for plaintiffs, and defendants appealed. On appeal, the MAT reversed the lower court’s decision. The MAT made it clear that the fact that the defendants were unable to meet their burden of proof to succeed in a special summary defence did not relieve the plaintiffs from carrying their particular burden of proof necessary to demonstrate all of the elements of their cause of action. Accordingly, the MAT mandated that the case go to trial.
Get Vaccinated and stay safe!!
