Panama: Risk Assessment
Country Risk Rating
Business Climate Rating
- Inter-oceanic canal and related infrastructure (ports, airports, roads, railways)
- Fully dollarized economy, financial stability
- Colón Free Zone, second-largest import-export platform in the world
- Regional banking and financial center served by excellent telecommunications
- Tourism potential
- 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
Economic growth will remain robust
The GDP growth rate should continue outpacing the regional average, but the economy will only recover to the pre-pandemic level by 2023 because of the profound 2020 collapse. In 2022, tourism (which accounted for 15% of GDP before the COVID-19 shock) will rebound, boosted by the progress made in dealing with the COVID-19 health crisis at local and global levels. Meanwhile, activity in the Panama Canal will rise as world trade remains robust, benefiting transport, logistics, and financial services (75% of GDP). This conjecture is also expected to bode well for investment in infrastructure and transportation. In July 2021, President Laurentino Cortizo announced USD 12 billion (22% of GDP) in public investments, which encompass projects such as the extension of line 1 of the capital’s Metro, the construction of line 3, and a tunnel under the Panama Canal, and power transmission lines. Moreover, he has also bet on public-private partnerships. Overall, the canal’s vigorous activity and a heated construction sector will contribute to the ongoing recovery of the job market and, thus, to household consumption (65% of GDP). Furthermore, mining and quarrying (4% of GDP) is also expected to register a bright expansion, driven by rising production at the Cobre Panamá. This large open-pit copper mine was operated in 2019 and is owned by the Canadian company First Quantum Minerals.
Slow fiscal consolidation, mild improvement in the external account shortfall
The budget deficit will continue to narrow in 2022, driven mainly by the ongoing economic resumption and the Panama Canal traffic (equivalent to roughly 20% of government revenue) that will underpin the rise in tax intakes. However, the fiscal shortfall will remain above the pre-pandemic level as the government maintains high public expenditure (notably infrastructure investments).
Although the government has defended fiscal consolidation during the first ruling months, its poor popularity (the approval rate stood at 28% in October 2021) and the social side effects of COVID-19 will probably prevent it. In response to the COVID-19 crisis, the Fiscal Social Responsibility Law has been modified to accommodate wider deficits.
Public debt is majorly external (83%) through the issuance of bonds on the market. Although global borrowing costs are expected to increase this year somewhat, Panama´s dollarized economy and bright economic growth outlook will keep its financing costs low. In January 2021, the IMF approved a USD 2.7 billion credit line to address the COVID-19 pandemic. The two-year arrangement under the Precautionary and Liquidity Line (PLL) serves as “insurance against extreme external shocks.”
After a one-year interlude, the current account switched back into deficit in 2021, driven by the substantial widening of the primary income deficit (due to higher repatriated foreign investment income). This offset the rise in the services surplus amid higher demand for transport services (canal). The trade balance deficit also narrowed somewhat due to the substantial increase in non-agriculture exports (climbing domestic copper production) and re-exports (11% of GDP). Both prevailed over the rise in imports linked to the resumption of economic activity and higher international oil prices. In 2022, the current account shortfall should marginally improve, notably driven by a full tourism recovery. FDI, consisting primarily of reinvested profits, will finance the current account deficit and maintain the balboa’s dollar peg. Market issuances will also help fund it. The central bank’s foreign exchange reserves are expected to remain at about five months of imports.
The fight against money laundering continues
Laurentino Cortizo of the center-left Democratic Revolutionary Party (PRD) was elected in May 2019 for a five-year term. With its coalition partner, the center-right Movimiento Liberal Republicano Nacionalista party, PRD holds 40 out of 71 seats in the National Assembly. Mr. Cortizo has affirmed his commitment to implement the recommendations of the action plan agreed upon with the Financial Action Task Force on Money Laundering (FATF) and to strengthen the country’s position as a regional financial center. In 2018, the government adopted OECD reporting standards and finally criminalized tax evasion in early 2019 after being blacklisted several times. However, in June 2019, the FATF put the country back on its grey list after a four-year absence. In November 2021, the President sanctioned a law on international fiscal transparency and anti-money-laundering to adjust local legal norms to international standards. Still, in the same month, the governments of Panama, Costa Rica, and the Dominican Republic demanded U.S. assistance to curb the rising flow of migrants. The latter crosses the dangerous jungles from Colombia to Panama on their way to the U.S. In the first nine months of 2021, the country registered over 91,000 migrants who entered Colombia (mostly from Haiti and Cuba).