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. However, as for most South American countries, the Covid-19 pandemic took a heavy toll on Panama’s economy in 2020. The related crisis heavily impacted the construction sector, the manufacturing sector, tourism, hotels, restaurants and personal services, as well as private consumption. In order to fight the pandemic, the government secured credit lines from the IMF, the Inter-American development bank and the World Bank to support and invest in employment, health, small and medium companies, agriculture and security.
Affected by the sanitary situation, the decrease of global trade and new environmental policies for maritime freight, the canal’s activity abruptly slowed in 2020. However, with a reported 475.1 million tons of cargo transit (CP-SUAB, volume measure of the Universal Vessel Tonnage System of the Panama Canal), the canal still recorded a 1% volume increase compared to 2019, mostly due to the increase in liquefied petroleum gas and bulk carrier transit. Boosted by its expansion project, the canal should come back to pre-pandemic growth rates by 2021.
More generally, Panama’s GDP is expected to decrease by -7.7% in 2020 before recovering in 2021 to +6.9% as Covid-19 restrictions are eased, infrastructure projects and mining operations ramp up and global trade recovers.
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. However, the fiscal deficit for 2020 is expected to reach -9% before narrowing to -7% in 2021 and -4% in 2022. As a result, the country’s public debt will increase from 41% in 2019 to 54% in 2020 and 58% in 2021.
The World Bank decreased Panama’s ranking from 79th to 86th in its 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.
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.