Panama: Risk Assessment
Country Risk Rating
Business Climate Rating
- Interoceanic canal and related infrastructure (ports, airports, roads, railway tracks)
- Fully dollarized economy and financial stability
- Colón Free Trade Zone, world’s second-largest import-export platform
- Regional banking and financial center served by excellent telecommunications
- Tourism potential
- High exposure to North and South American economies
- Deficiencies in education and vocational training
- Wide disparity between the canal zone and the rest of the country
- Corruption and nepotism; bureaucracy
An Acceleration Based on the New Canal's Activity
Panama has the most dynamic economy in Latin America and remains an attractive destination for financial and transport services. Growth should continue to be supported by local demand. Household consumption should remain dynamic due to the continuing and very favorable job market, the country’s first participation in the football World Cup, and the development of credit, in a context where inflation remains moderate. Nevertheless, this credit dynamic is expected to weaken due to the continued tightening of monetary policy related to the rise in US rates. The Panamanian banking system, acting as the effective financial sector for the region, should prove resilient. Private and public investment (45% of GDP) should perform well, although to a lesser extent than in the past (completion of the canal’s expansion) thanks to the activity generated by the construction of subway lines, a fourth bridge over the canal, the completion of the airport, and the development of a copper and gold mine. In addition, the canal’s activity should be favored by the resumption of foreign trade resulting from the economic recovery in Latin America, and world trade more generally. This should be accompanied by a development of financial, logistics, and tourism services.
Deficits Should Fall Thanks to the Canal's Expansion and the Recovery of World Trade
The public finance situation should continue to improve, remaining within the framework of meeting the budgetary targets defined by the by the budget and social responsibility law. The 2018 draft budget, presented in July 2017; shows a 7.9% increase compared to 2017, which represents an increase in revenues of 6.9% (related in particular to canal toll revenues) and expenses of 4.2%: almost 50% of the budget has been allocated to social programs, but significant investment expenditures are planned, particularly for the completion of lines 2 and 3 of the subway. Debt should thus remain moderate and continue to decrease.
The current account deficit should fall in 2018 due to the canal’s activity, boosted by its expansion and the recovery of world trade. Latin America’s strongest growth should promote exports, despite the moderate dynamism of the United States and the appreciation of the US dollar, the currency used in Panama. In addition, exports are set to further diversify with the opening of a new copper mine. Nevertheless, imports should remain significant taking into account the content of imported investments. FDI (consisting mainly of reinvested profits) should remain dynamic and finance the current account deficit, but would be vulnerable to a change in United States (US) corporate tax rules. The income balance will remain negative because of interest payments on debts held by foreign lenders and the outflow of dividends taken by foreign companies.
A Fragile Parliamentary Majority and Progress in Terms of Transparency Post-"Panama Papers"
President Juan Carlos Varela of the center-right Partido Panameñista (PP), in power since 1st July 2014, was obliged to reach an agreement with the center-left Partido Revolucionario Democrático (PRD) opposition party, and subsequently obtained a parliamentary majority with 49 seats out of 71. The president’s popularity is declining, and the next legislative and presidential elections will take place in May 2019 (outgoing presidents are ineligible for re-election). Income inequalities are very strong, and redistribution is hampered by the scarcity of budget incomes (9% of GDP).
From an external perspective, whereas the “Panama Papers” scandal of April 2016 sparked many international reactions to the Panamanian tax system, the reputation risk does not seem to have significantly affected the country’s attractiveness, given the significant number of multinationals that have set up their regional headquarters in the country in connection with the exempt status of multinational regional headquarters (MRH). The country has increased financial transparency and the fight against tax fraud, notably by signing the convention on mutual administrative assistance (MAA). As a result of this progress, Panama was removed from the OECD’s list of uncooperative countries in June 2017, and the country is now included in the category of countries that “largely meet the criteria” required by the organization. However, the standards of contract enforcement and insolvency management are not satisfactory according to the World Bank’s surveys.
Furthermore, Panama – one of the most competitive countries in Latin America – Panama has signed numerous free trade agreements (Peru, US, Canada, Colombia, EFTA area, Mexico) as well as the important EU-Central America association agreement. A materialization of the protectionist risk could nevertheless have a significant impact on the economy.