Economic Analysis
Panama

Panama

Population 4,1 million
GDP per capita 15,089 US$
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2016 2017 2018(e) 2019(f)
GDP growth (%) 5.0 5.4 4.2 6.0
Inflation (yearly average, %) 0.7 0.9 2.0 2.4
Budget balance* (% GDP) -1.8 -1.6 -1.4 -1.3
Current account balance (% GDP) -5.5 -4.9 -7.0 -6.1
Public debt* (% GDP) 37.4 37.8 37.4 35.0

(e): Estimate. (f): Forecast. *Transfers from the Panama Canal authority included.

STRENGTHS

  • Inter-oceanic canal and related infrastructure (ports, airports, roads, railways)
  • Total dollarisation of the economy; financial stability
  • Colón Free Zone: 2nd largest import-export platform in the world
  • Regional banking and financial centre served by excellent telecommunications
  • Tourist potential

WEAKNESSES

  • Strong exposure to North and South American economic conditions
  • Low budget revenues (20% of GDP)
  • Gaps in education and vocational training
  • Strong social and economic disparity between the canal area and the rest of the country
  • Corruption and clientelism, bureaucracy

RISK ASSESSMENT

Canal activity is the source of economic momentum

Growth stalled in 2018 due to lower domestic demand, as well as major strikes by Panama Canal workers and in the construction sector. In 2019, the economy is expected to recover with the strongest growth in Latin America. Thanks to its expansion in 2016, the canal’s activity should continue to grow, despite the slowdown in growth in both the United States and China – the two main users of the canal. Trade tensions between these two countries could also limit maritime infrastructure activity. In addition, the commissioning of the Cobre Panama copper mine, scheduled for 2019, should boost growth. Panama’s banking system, the financial centre of the region, is expected to remain strong. Investment, both public and private (44% of GDP in 2017), will also contribute to the rebound in activity, and will focus on the continuation of major infrastructure projects, such as the building of new metro lines in the capital and a fourth bridge over the canal, as well as the construction of other road infrastructure.

Inflation, although on the rise, is expected to remain limited by modest domestic demand growth, as well as monetary policy tightening linked to the rise in US rates, as the Panamanian economy is dollarised. Nevertheless, as was the case 2018, price increases will continue to weigh on household consumption.

 

No significant change in twin deficits, despite the strength of the canal and investment

With a small government deficit, government accounts are overall expected to remain unchanged in 2019. While the increase in Panama Canal activity will lead to an increase in transfers from the Panama Canal Authority to the country’s budget (10% of revenues in 2017), and economic growth will increase VAT revenues, investment in infrastructure projects will continue to weigh on spending. In addition, as the legislative and presidential elections in May approach, spending may exceed the amount announced in the 2019 draft budget. The stabilisation of the low government deficit should help Panama to maintain its moderate government debt.

At the same time, external accounts are expected to perform better than in the previous year, with a slight reduction in the current account deficit. The increasing activity of the canal should boost the balance of services surplus related to maritime transport. Tourism will also increase this surplus. However, imports will remain high, due to high oil prices and the high import content of investments. The income balance will also weigh on the current account deficit, as its deficit is mainly due to the repatriation of dividends by foreign companies. The inflow of FDI (9% of GDP in 2017), mainly made up of reinvested profits, will finance the current account deficit.

 

A year of legislative and presidential elections

Presidential and legislative elections will be held in the country in May 2019. President Juan Carlos Varela – a member of the Partido Panamañista (PP) party, which is facing a decline in popularity – will not be able to run again. Faced with this electoral deadline, three main political parties have emerged from the political scene: the PP, (which seems to be suffering from the growing unpopularity of the president), the centre-left party Partido Revolucionario Democrático (PRD), and the centre-right party Cambio Democrático. Even if the candidate of one of the latter two parties is able to win the presidential elections, he or she will probably have to form parliamentary coalition to hold a parliamentary majority – as did President Varela.

With regard to its external relations, Panama is trying to maintain and develop economic links in order to maintain its attractiveness. In 2018, Panama concluded bilateral free trade agreements with South Korea and Israel. Such agreements should stimulate FDI inflows and export growth prospects. In addition, the government has launched a diplomatic and commercial strategy: the “Falcon Strategy”, which aims to strengthen Panama’s role as a global platform. In particular, this initiative aims to connect Southeast Asia, the Middle East, and Africa to the continent via Panama. However, American-Panamanian relations could suffer from the country’s rapprochement with China. After officially recognising it in 2017, the two countries signed about 20 bilateral agreements focusing on sectors such as tourism, agriculture, and transport.

Since the Panama Papers scandal in 2016, the country has reinforced its financial transparency and the fight against tax fraud. It has thus signed the Convention on Mutual Administrative Assistance in Tax Matters, drawn up by the Council of Europe and the OECD. In addition, the country was removed from the European Union’s black list of tax havens in 2018.

 

Last update: February 2019

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