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. 

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.