As global trade slows, the trade hub slows too



  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

GDP USD65.05bn (World ranking 75, World Bank 2018)
Population 4.18mn (World ranking 127, World Bank 2018)
Form of state Presidential Republic
Head of Government Laurentino CORTIZO (president)
Next elections 2024, presidential and legislative
  • Trade hub based on the Panama Canal and the Colon free trade zone
  • Regional financial hub and international banking center
  • Strong economic growth and moderate fiscal deficit
  • Business environment above regional average
  • Usage of the USD as local currency
  • Stable political system
  • Young population (median age: 29.2 years in 2017)
  • Tourism potential
  • Vulnerability to external shocks (global trade and financial links)
  • Moderate to high debt ratios
  • Rule of law and control of corruption are below average
  • Disparity of income between the Canal zone and rest of country, where poverty levels are high
  • Informality of the job markets (estimates: up to 50% of workers)
  • Deficiencies in education and vocational training

Panama’s activity should moderate

Panama has been the fastest-growing economy in Latin America over the past two decades, benefiting from the activity of the canal, the Colon free trade zone (CFZ) and its role as an international banking center and regional financial hub. The country continues to play a relevant role as a logistics hub, scoring 3.28 on the 2018 World Bank Logistics Performance Index, among the top-ranked high-income countries. While keeping the toll income per thousand metric ton at a stable rate, the Canal’s recent expansion project boosted the transportation of merchandise to 459,000 metric tons (as of May 2019 over twelve months), up from 335,000 metric tons in 2016. Yet, GDP growth in Panama has moderated from its 2011-12 highs: in 2018, it grew at a rate below +5% (+3.9%) for the first time since the global financial crisis.

Q1 2019 GDP growth numbers were the weakest since 2009. The construction sector’s output decelerated, while the transport, storage and communication sector recorded a significant deceleration. The latter can be attributed to the intensification of trade tensions, to which Panama is particularly vulnerable as a trade hub whose economic openness relies on numerous free trade agreements. In 2020, Panama’s economy should slow further amid lower mining sector growth , fewer expected infrastructure projects, and subdued activity in the Canal due to weaker global trade growth. The amount of merchandise transiting the Canal and toll revenues are correlated with changes in trade flows. Therefore, Panama’s GDP growth is estimated to reach +4.1% in 2019 and +3.7% in 2020.

Panama’s budget operates within the framework of the Social and Fiscal Responsibility Law (SFRL), which sets a yearly fiscal deficit target. In addition, the Sovereign Wealth Fund (SWF) aims to work as a stabilization mechanism to remove the cyclical effect of the Canal contributions on fiscal accounts. The fiscal deficit should remain stable at -2% of GDP this year and fall to -1.7% of GDP next year; as a consequence, public debt should gradually decrease as a share of GDP (37.3% in 2020, back to its 2016 level).

Panama’s business climate quality ranks above regional peers. The World Bank ranks it 79th out 190 countries in its 2019 Doing Business survey. However, shortcomings remain in the areas of resolving insolvency, enforcing contracts, paying taxes and controlling corruption. In June 2019, The Financial Action Task Force (FATF) returned Panama to its “grey list” of countries deemed to have strategic deficiencies in their anti-money laundering regimes. This should not trigger any sanctions but is likely to damage Panama’s business environment - notably due to the negative reputational effect - and could encourage the new President Laurentino Cortizo to assign a high priority to pro-transparency and anti-money laundering reforms. If Cortizo boosts the independence of the Financial Intelligence Unit, it could lead the FATF to take Panama out of the grey list in 2020.

Banks remain profitable and well-capitalized. Liquidity remains above regulatory norms and steps are being taken to fully align prudential regulations with Basel III, which will enhance the resilience of Panama’s financial system. 

Solid external position but structural vulnerabilities remain

Foreign direct investment flows comfortably cover around 100% of the current account deficit. The latter should shrink from a high of -13.7% of GDP in 2014 to stabilize at around -5% of GDP in 2019 and 2020. This is partly driven by a decline in investment-related imports as several large-scale projects wind down. Panama benefits from stable financing, predominately from FDI in the form of logistics, mining and energy sector projects. It also benefits from easy access to international capital markets. The fallout of the 2016 offshore revelations and US sanctions on Panamanian entities remains limited thus far. The IMF estimates that legal services related to incorporations are estimated at only 0.7% of GDP. Moreover, Panama’s authorities are strengthening anti-money laundering procedures and the country remains attractive for multinationals.

The external debt-to-GDP ratio is high (165.4% in 2018) although it is projected to decrease. The fully dollarized economy makes Panama dependent on the US Fed’s monetary policy. A lower dollar going forward should benefit the country through the export channel and easier monetary and financial conditions. 

A new government: pro-business agenda, but mind short-term uncertainty due to the revision of awarded contracts

The new government of incoming President Cortizo took office in July 2019. Three main themes should be on his agenda: first, anti-corruption measures, which should be positive for medium-term economic prospects and the business environment. Yet, the revision of contracts for large-scale projects awarded during the previous president’s mandate could increase uncertainty in the short-term and act as a drag on investment. Two examples include the metro line 3 project in Panama City and the Fourth Bridge over the Panama Canal. The second priority is investment, mostly in agriculture, tourism and infrastructure. Lastly, the protection of national interests should rank high among the priorities as well. The new administration intends to restrict agricultural and industrial imports to protect local production by extending preferential treatment not only to domestic agricultural products over imports, but also industry in general.

What about governability? Cortizo and his coalition (38 out of 71 representatives) hold an absolute majority in the Congress, which means they should be able to push forward their reform agenda, facing limited political hurdles.  

Trade structure by destination/origin

(% of total)

Exports Rank Imports
United States 14%
19% China
Ecuador 8%
18% United States
Guatemala 7%
13% Japan
Costa Rica 6%
13% Singapore
Venezuela (Bolivian Rep.of) 5%
5% Colombia

Trade structure by product

(% of total)

Exports Rank Imports
Petroleum & related products 20%
18% Petroleum & related products
Other transport equipment 15%
17% Other transport equipment
Fish and preparations thereof 6
11% Organic chemicals
Vegetables and fruits 6%
5% Apparel & clothing accessories
Medicinal and pharma.products 5%
5% Road vehicles

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings