Country Risk Rating

A4
A somewhat shaky political and economic outlook and a relatively volatile business environment can affect corporate payment behavior. Corporate default probability is still acceptable on average. - Source: Coface

Business Climate Rating

A4
The business environment is acceptable. Corporate financial information is sometimes neither readily available nor sufficiently reliable. Debt collection is not always efficient and the institutional framework has shortcomings. Intercompany transactions may thus run into appreciable difficulties in the acceptable but occasionally unstable environments rated A4.

Strengths

  • Inter-oceanic canal and related infrastructure (ports, airports, roads, railways)
  • Fully dollarized economy; financial stability
  • Colón Free Zone, 2nd largest import-export platform in the world
  • Regional banking and financial center served by excellent telecommunications
  • Tourism potential

Weaknesses

  • Highly exposed to North and South American economic conditions
  • Low budget revenues (13% of GDP)
  • Gaps in education and vocational training
  • Large social and economic disparity between the canal area and the rest of the country
  • Corruption and cronyism; bureaucracy

Current Trends

Investment drives growth

Economic growth is expected to intensify in 2020 thanks to higher investment (44% of GDP), particularly private investment. In September 2019, the National Assembly passed a bill creating a public-private partnership (PPP) regime to govern infrastructure projects. This should facilitate the private investment needed to finance major engineering projects, thus contributing to job creation and vibrant consumption. The government has already announced its intention to launch tenders for 18 public infrastructure projects across the country for USD 445 million (0.67% of GDP). In addition, copper production from the Cobre Panama mine is expected to support growth. Activity in Panama’s banking sector, the financial center of the region, is expected to remain robust, as are the construction, logistics and communication sectors. However, the downturn in world trade caused by the continuing dispute between the United States and China poses a significant risk to maritime traffic in the Panama Canal and to the activity of the Colón Free Zone. The latter is likely to be further constrained by rising tensions with Colombia, which has imposed new tariffs on textiles. Inflation is expected to remain moderate due to low oil prices and the dollarized nature of the economy.

The twin deficits narrow

In October 2019, legislators voted to raise the budget deficit limit to 3.5% of GDP from 2.0% previously, after newly elected President Laurentino Cortizo argued that his administration had inherited a higher level of public debt. The government has proposed to reduce the budget deficit gradually to the previous target by 2022. Even so, it has presented a restrictive budget for 2020, which includes cuts in current spending and significant reductions in investment spending. The level of debt will remain contained but with a 78% external share, of which the interest is a burden on tax revenues (18%).

The current account deficit is expected to narrow in 2020 as the Cobre Panama copper mine enters full production. The trade deficit excluding re-export activity (17.7% of GDP) should improve accordingly, especially as imports of goods are expected to stabilize. The re-export balance (2.7% of GDP) is expected to deteriorate in line with difficult global economic conditions. The structural surplus in services (13.5% of GDP) will offset the deficit in income (7.5% of GDP), which is composed mainly of repatriated dividends. FDI (6.6% of GDP), consisting primarily of reinvested profits, will finance the current account deficit and safeguard the balboa’s dollar peg. Foreign exchange reserves held by the central bank are expected to remain low, at around 1.6 months of imports.

Constitutional reform, a priority for the new President

On May 5, 2019, Panama held a presidential election, which was won after the first round by Laurentino Cortizo of the center-left Democratic Revolutionary Party (PRD), who will serve a five-year term. He beat José Blandón of the Panameñista Party (PPAN), the right-wing party that was previously in power, which came fourth. With its ally, the Molirena party, the new government holds 38 of the 71 seats in the National Assembly. President Cortizo affirmed his commitment to implementing the recommendations of the action plan agreed with the Financial Action Task Force on Money Laundering (FATF) and to strengthening the country’s position as a major financial center in the region. On the economic front, he promised to create a group of private sector representatives to strengthen the agricultural sector and boost employment. He also promised free school meals. In July, the same month he took office, the President presented a proposal for constitutional reform that is widely seen as a central element in efforts to strengthen institutions, which have been discredited in recent years by corruption scandals.

As in other countries in the region, corruption scandals have erupted in recent years, causing public dissatisfaction. Controversies include the findings of Operation Car Wash, an investigation into Brazilian corruption (USD 59 million in bribes were paid to Panama between 2010 and 2014), and the Panama Papers scandal (April 2016). In 2018, the country adopted OECD reporting standards and finally criminalized tax evasion in early 2019, after being blacklisted several times. Nevertheless, after four years off the FATF’s grey list, Panama was put back on in June 2019.

Source:

Coface (02/2020)
Panama