Coface Group
Panama

Panama

Population 4.3 million
GDP per capita 14,664 US$
B
Country risk assessment
A4
Business Climate
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2020 2021 2022 (e) 2023 (f)
GDP growth (%) -17.9 15.3 10.0 5.0
Inflation (yearly average, %) -1.6 1.6 2.9 2.2
Budget balance (% GDP) -6.1 -4.2 -3.5 -2.7
Current account balance (% GDP) 2.3 -2.9 -4.1 -3.3
Public debt (% GDP) 65.6 58.4 56.0 54.9

(e): Estimate (f): Forecast

STRENGTHS

  • Inter-oceanic canal and related infrastructure (ports, airports, roads, railways) (10% of world maritime traffic, 16% of world transport capacity)
  • Colón Free Trade Zone; second-largest import-export platform in the world
  • Dollarised monetary and financial system, facilitating access to capital markets
  • Regional banking and financial centre served by an excellent telecommunications network
  • Tourism potential

WEAKNESSES

  • Highly exposed to North and South American economic conditions
  • Low tax revenues (13% of GDP)
  • Gaps in education and vocational training
  • Large socio-economic disparities between the Canal Zone and the rest of the country (Gini coefficient of 49.8)
  • No domestic central bank, monetary policy dependent on the US Federal Reserve
  • Panama Canal operation highly exposed to the effects of climate change (drought, rise in sea level)
  • Corruption, favouritism and clientelism
  • Majority of jobs are informal

RISK ASSESSMENT

The economy is expected to maintain resilient growth

In 2022, the economy continued its recovery from the deep recession caused by the Covid-19 pandemic, allowing GDP to exceed its pre-crisis level. The recovery of foreign trade (83% of GDP), exports of goods and services (Canal traffic, re-exports, financial services, copper and gold, tourism) have supported robust growth. Although growth will remain relatively robust in 2023, it is still expected to soften. While household consumption will continue to support activity, inflation will dent it. Support measures introduced in response to the social movements of the summer of 2022, and more particularly the probable continuation of subsidies for basic products (fuel and certain food products), will contain price rises and their impact on spending. Moreover, spending should also be supported by the continuing decline in unemployment despite the post-pandemic recovery in employment  still being incomplete. The rise in US, and therefore Panamanian, interest rates will slow new private investment. However, it should remain supportive of growth, as the country's role as a logistics hub and the free trade zones remain conducive to investment. The advantages and incentives for multinational companies put in place by the authorities to establish the country as a nearshoring centre in Latin America could encourage investment in the manufacturing sector. In addition, the government will continue to invest in infrastructure (8% of the budget for 2023) with, for example, projects for a fourth bridge over the canal and a third metro line in Panama City that will support the construction sector (USD 4 billion). The slowdown in world trade will reduce income from re-exports. Logistics services will suffer. However, these revenues will continue to be supported by the rise in mining exports as the production capacity of the Cobre mine, which produced copper and gold, increases.

 

Sustained fiscal consolidation, slight improvement in the current account

In 2022, the fiscal deficit continued to narrow. The doubling in 2016 of the capacity of the Panama Canal (contributing about 20% to government revenue), a fiscal consolidation programme and the gradual reduction of Covid-19-related aid have contributed to this. For 2023, despite the growing public debt burden (17% of the budget for 2023) amid rising interest rates (18% of public securities are issued at floating rates), the deficit trajectory should remain downward. The government will continue fiscal consolidation efforts with the objective of reaching a fiscal deficit of 1.5% of GDP in 2025. The reduction in public spending will focus on operating expenditure (49% of the 2023 budget), with a planned 10% reduction in the number of civil servants. At the same time, capital expenditure on infrastructure will remain a priority. However, concessions by the authorities following the major social unrest in the summer of 2022 will temper the reduction in spending. Social services are expected to receive 42% of the 2023 budget, with health services, education and social protection receiving 17%, 11% and 7% of the general budget, respectively. Budgetary consolidation efforts will be accompanied by an increase in public revenues, thanks to the renewal of the contract between the government and First Quantum Minerals (operator of the Cobre mine) which will be accompanied by an increase in the mining royalties collected (16% currently, compared to 2% previously). In addition, the authorities have committed to raising canal tolls. The deficit will continue to be financed mainly by external sources. External public debt, 84% of the stock, remains high, but the risk of over-indebtedness remains moderate. Financial assets and the sovereign wealth fund help keep net debt contained (53.8% in 2022). Access conditions to international markets are expected to remain favourable, despite the end of the "precautionary and liquidity line" agreement with the IMF (USD 2.7 billion) in January 2023. The debt-to-GDP ratio should continue to decline.

The current account deficit should narrow in 2023 after the rise in the import bill (particularly energy) deepened it in 2022. While the trade balance deficit will remain large, it should decrease, mainly thanks to mining exports. The repatriation of foreign investment income will continue to drag on the income account deficit. The improvement in the large services account surplus will help reduce the current account deficit, which is benefiting from the recovery of tourism and will compensate for a slight decrease in receipts associated with logistics services. Large FDI flows, including reinvested earnings, will finance the current account deficit. As a result of the post-pandemic recovery, the reduction in bank indebtedness will only slightly reduce private external debt. Foreign exchange reserves are expected to cover about 4 months of imports.

 

Anti-money laundering and social conflict management

Current President Laurentino Cortizo of the centre-left Democratic Revolutionary Party (PRD), was elected in May 2019 for a five-year term. Together with its centre-right coalition partner, Movimiento Liberal Republicanista, the PRD will hold 40 of the 71 seats until the next general election due on 5 May 2024. The coalition's priorities are fiscal consolidation, the fight against money laundering and corruption. The government faces public discontent, fuelled in particular by slow progress in the fight against clientelism and in the constitutional reforms promised by the coalition. Dissatisfaction has been intensified by fuel price hikes, which contributed to the outbreak of large-scale social movements in the summer of 2022. While the protests and strikes have subsided, confidence in the government has not improved (72.2% no-confidence sentiment at the end of summer 2022). Despite concessions in the general budget for 2023 and subsidies for energy and food products until October 2022, social tensions are running high, raising the risk of further social unrest.

While the country remains a privileged partner of the United States, it has moved closer to Beijing for trade purposes. In 2017, it broke diplomatic ties with Taiwan. However, its openness towards China remains cautious so as not to offend Washington. Since his election, President Cortizo has put the brakes on Chinese investment in the Panama Canal. The Panama Canal maintains its neutrality in the Russian-Ukrainian conflict. The refusal to close the Canal to Russian ships is motivated by commercial considerations.  

 

Last updated: April 2023

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