PANAMA

Panama is small open economy acting as a regional financial and logistical hub that benefits from the activity of the canal, the Colon free trade zone (CFZ) and a strong banking sector compared to peers. It has been the fastest-growing economy in Latin America in the past ten years, with +6% average real GDP growth. However, economic activity already started to slow down in 2018-2019 prior to the pandemic shock. The fully dollarized economy anchors inflation and limits transfer and convertibility risks, but limits the margin to manoeuver for monetary policy and renders the country reliant on USD flows.

Panama’s economic activity will rebound strongly from the steep Covid-19-led recession. We expect real GDP growth to rebound by +12.0% in 2021 from a marked contraction in 2020 (-17.9%), caused by an abrupt decline in canal activity, lower global trade and containment measures. The rebound in global activity and gradual re-opening of the economy, which will boost domestic demand, as well as the resumption of construction projects will drive the recovery. Inflation increased slightly in 2021, given higher energy and food prices, as well as higher US inflation, but we expect consumer prices to normalize.

The business environment compares favorably to peers. Panama ranks 86th in the 2020 Doing Business Survey. Despite a strong position in getting credit (25th), shortcomings remain in the areas of paying taxes (176th), enforcing contracts (141st) and resolving insolvencies (113th). Moreover, Panama remains under close scrutiny after it was added to the Financial Action Task Force’s (FATF) “grey list” of countries deemed to have strategic deficiencies in their anti-money laundering regimes in June 2019. Although this should not trigger any sanctions, it could still continue to harm Panama’s business environment.

As Cortizo and his coalition hold an absolute majority in congress (40 out of 71 representatives), they will be able to push forward his primary reform agenda, facing limited political hurdles once the pandemic is contained. This means investments in agriculture, tourism and export industries. However, social unrest risks are rising amid criticism of the government’s response to the pandemic, which increased unemployment.