Country Risk and Macro Report: Panama's economy regaining strength

Friday, May 12, 2017

Panama continues to wrestle with the ever-widening corruption scandal surrounding Brazilian construction firm Odebrecht, with allegations of bribery reaching as high as President Juan Carlos Varela, as well as two previous administrations and many other officials.

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In March, the legislature opened a special commission to review infrastructure projects as the medium-term and long-term impact on the economy still yet unknown.

Nevertheless, the nation's economy is charging ahead at a brisk pace.

"Panama's economy has been the fastest growing in Latin America over the last two decades and is expected to remain among the most dynamic in the region, with stable and low inflation, sustainable public debt, a declining current account deficit, and a stable financial sector," said the IMF on May 4, in its assessment for the Central American nation.


Despite external uncertainty, the IMF has a favorable outlook moving forward, driven by the recently expanded Panama Canal "and the wide range of public and private investment projects." The multilateral lender forecasts Panama's GDP growth to reach 5.1% in 2017, moving to 5.5% in the medium term, after having slowed to 4.9% in 2016 against Latin America-wide economic challenges last year, largely tied to low oil prices.

The government's own estimate for GDP is somewhat more optimistic than the IMF's, projecting 5.9% GDP growth in 2017 and fluctuating between 6.1% and 6.3% through 2022. 


The IMF stressed that Panama must advance its fiscal transparency in order to sustain the nation's economic vibrancy, noting, "Financial sector oversight, macro-prudential policy, and crisis management should be strengthened to build resilience."


According to national statistics agency Inec, 12-month inflation reached 1.5% in March, down from 1.9% in February. While inflation has been higher since October 2016, it remains largely in control and seems on course to remain so moving forward.

The country's CPI finished last year at 1.5%, and IMF projects it to rise to 2.5% by the end of this year. The government is more optimistic as it predicts year-end inflation of 1.5% in 2017, rising to 1.8% in 2018 and 2.5% in 2019.



As Panama's balboa is pegged to the US dollar, its fate will in part depend on US monetary policy, which recently went on hold with further rate increases expected around June. The dollar may also be affected by upcoming developments on US tax and trade policies.

One of the highest impact changes would involve the introduction of a border adjustment tax (BAT) that some models predict would cause a rapid valuation of the dollar by as much as 25%. However, there was no mention of a BAT in the tax reform proposal of US President Donald Trump's administration in late April.


INEC's most recent employment data is for August 2016, showing unemployment at 5.5% with the labor force participation rate at 64.4%, and informal employment at 40.2%.

The International Labor Organization (ILO) put Panama's unemployment rate at 5.6% at the end of September 2016, noting the rising employment-to-population rate and higher labor participation rate for the country as factors that are contributing to increasing unemployment.


Panama is beginning to see the benefits of the major Panama Canal expansion completed last year with INEC reporting a 17.0% increase in tolls collected in January-February this year. Net tonnage rose 26.3% year-on-year in the period and there was a 3.7% rise in the number ships passing through the canal in the first two months.

The total value of goods moving through the Colón Free Trade Zone in January and February increased by 23.3% and rose 7.6% by weight.


With the economy largely built around transportation and services, the nation historically operates at a trade deficit.

The INEC's annual trade report for 2016 indicated a deficit of 10.1bn balboas, a 2.9% reduction over the same period in 2015, while the current account deficit shrank to 3.1bn balboas, 18.4% smaller than at year-end 2015.

Reporting on the first two months of 2017, INEC has stated the CIF value of goods imported to Panama rose 3.9% to 1.69bn balboas, while the FOB exports fell 2.1% in the same period to 94.4mn balboas, suggesting a trade deficit of 1.59bn in the period. Should that trend hold throughout 2017, the resulting deficit would be lower at around 9.56bn by year-end.


Panama's finance ministry estimates that central government revenue will increase 42.5% over the coming five years, from 8.44bn balboas this year to 12.1bn in 2022.

For this year's first quarter, INEC reported a drop in tax income of 1.4% year-on-year to 1.34bn balboas, as revenues from income tax and direct taxes fell.


Research firm Dichter & Neira released a poll on the government's performance on February 22, shortly after the public implication of Varela in the Odebrecht bribery scandal. The accusation has not, at least immediately, impacted the view of the president with 36% approving of the administration's leadership and 60% opposing – similar to January's poll result.

The public's belief in government transparency, however, remained at only 12%, the worst level reported by the firm in 27 years of polling, according to the report. D&N said that public opinion may well deteriorate further if the evidence ends up showing that several of the country's presidents were in fact involved with corruption.

Panama's next presidential election will not be held until 2019.