Panamanian authorities did not hide their excitement when the first vessel passed through a third, brand new set of locks at the Panama Canal on June 26. “More than 100 years ago, the Panama Canal connected two oceans. Today, we connect the present and the future," Jorge L Quijano, CEO of the Panama Canal Authority, said during the inauguration on June 26. 

They had good reason to cheer. After years of delays and cost overruns, the locks were finally ready to accommodate new New Panamax freighters, which can carry up to three times the cargo of older and smaller Panamax ships. This will double the canal’s share of global trade to an estimated 6%, according to insurance firm Allianz, and secure Panama a massive revenue stream in years to come, with tolls as high as $1m for a single passage.

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The opening has also shifted some attention away from the damage the country's image suffered a few months earlier, when 11.5 million confidential files (the so-called Panama Papers) belonging to local legal firm Mossack Fonseca were leaked to the public, exposing the country’s long-standing weakness when it comes to financial transparency and anti-money laundering regulations. 

If the future of Panama as a financial centre at the heart of Central America now hangs in the balance, the enlarged canal should reassert its role as a major FDI destination.

A bumpy ride

Ten years after the US handed local authorities control of the Panama Canal in 1999, the Panamanian government set in motion the most ambitious endeavour in the country’s recent history when it put together a multi-billion-dollar contract with a consortium led by Spanish construction firm Sacyr for the development of a third set of locks able to increase three-fold the canal’s maximum capacity per passage to 12,600 20-foot equivalent units. A long series of problems has hindered the project since its outset, and it was eventually finished almost two years behind schedule at a cost of $5.25bn, although the consortium is reportedly asking for an extra $3.15bn in cost overruns. Besides, the project’s very technical foundations were thrown into question by documents revealed by Wikileaks and a 2016 investigation by the New York Times. The documents claimed, among other things, that the new locks are not suitable for dealing with Panama’s seismic risks.

That said, the project is a game-changer for Panama, at least on paper. The new locks can increase the value of transit volumes by as much as $1.25bn per day, bringing the overall value of goods passing through the canal to $540bn per year, according to Allianz. 

“The increase in canal transit, a dynamic service sector, and investments in the energy, mining and logistics sectors should help maintain vibrant growth,” the IMF wrote in June. Panama’s economic growth is now projected at 6.1% and 6.4% in 2016 and 2017, respectively, from 5.8% in 2015, the IMF estimates – no other Latin American country is expected to do better in the next two years. 

Investment boost

Growing trade and accelerating growth will also bring along new investment. “The expanded Panama Canal provides an excellent platform for increased FDI in the logistics and ancillary services sectors,” says Maurice Belanger, the executive director of the American Chamber of Commerce & Industry of Panama. 

The expansion of the Panama Canal has already driven a wave of investment across the Americas, as port cities from the US all the way down to Chile adjusted their berths to accommodate New Panamax freighters. In Panama alone, its effect on FDI has already been seen, with foreign investment jumping from 4.1% of GDP in 2009 to 11% of GDP in 2015. This is almost three times the Latin America average of 4.1%, according to the World Bank.

As the infrastructure investment phase comes to an end and vessels start passing through the new locks, services companies can strengthen their local presence to cater to the needs of growing trade flows. What is more, the enlarged canal will triple the country’s toll revenues to $3bn, local authorities estimate, freeing up extra resources to fund public and private investment programmes, such as a new metro line in Panama City as well as the restoration of the historic city of Colon.

“The beauty of the Panama Canal for investors into Panama is that you know that Panama will always have a steady stream of revenue and you are not the anchor... that revenue is not going to dry up,” says Philip Nichols, professor of legal studies and business ethics at Wharton University of Pennsylvania. 

Paper talk

The leak from Mossack Fonseca may unsettle investors, however. The revelations from the leak meant that Panama was labelled worldwide as a shady tax haven.

“[Panama was] about to lose the good investments because of keeping bad clients,” says Pascal Saint-Amans, director of the Centre for Tax Policy and Administration at the OECD. “The Panama Papers have clearly been a wake-up call, with the country understanding that if it did not change, there would be a risk that investments would disappear because of defensive measures taken against the country as well as the reputational impact.”

The scandal prompted the government to act and raise the bar of the financial sector’s regulatory framework. In July, it finally joined another 98 countries around the world as part as the OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

The overall impact of the Panama Papers revelations on FDI has yet to be revealed, however. Financial services have been the biggest magnet of FDI into Panama in terms of the number of projects announced since 2003, according to figures from greenfield investment monitor fDi Markets.

“Despite recent rumblings related to the so-called Panama Papers scandal, which appears to already be blowing over, [the] impact on future economic activity will, we think, only be limited; Panama’s fundamentals remain the most solid in the Central America and Caribbean space,” a JPMorgan report published in July said.     

The new locks at the Panama Canal represent “the beginning of a new era", according to Mr Quijano. Likewise, the Mossack Fonseca papers give the government a chance turn the page on the country’s past as disreputable offshore financial centre and inaugurate a new era for its financial industry.