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
Investment as a driver of recovery
In 2020, Panama's economy contracted sharply due to the COVID-19 crisis. It was impacted by the decline in world trade, as transport, logistics and financial services activities account for 75% of GDP. Moreover, the state of emergency declared on 13 March led to the introduction of strict measures, including the closure of construction sites and free zones and a ban on international commercial flights. After being eased in May, health measures were reintroduced in June. Since September 2020, movement restrictions have depended on changes in the health situation. Companies, for their part, have resumed their activities following strict health protocols, while tourist activities gradually resumed from October 2020 onwards as international commercial flights were once again allowed. The recovery is gaining momentum as activity in the Panama Canal intensifies due to the resumption of world trade. Investment in infrastructure and transportation will be a feature of 2021. Panama has signed a USD 2.5 billion contract with a consortium led by a South Korean company for the construction of a third metro line in the capital. Construction is expected to last until 2025. The 2021 budget provides for a total of USD 7.7 billion in public investment, which will also go towards airport and road upgrades. As mainstays of the recovery in 2021, construction sites should stimulate employment and thus private consumption (50% of GDP). The government raised emergency funding of USD 100 million to help the victims of Hurricane Eta, which hit in November 2020. Losses in the agricultural sector because of the natural disaster are estimated at USD 11 million. Inflation is expected to remain moderate due to low oil prices and the dollarized economy.
Fiscal consolidation is slipping away
In October 2020, legislators voted to raise the budget deficit ceiling to 10.5% of GDP from the initial 2.0% in order to help address the economic consequences of COVID-19. This is not the first time the ceiling has been increased, which undermines government credibility. The government plans to gradually reduce the budget deficit to the 2.0% target by 2024 (instead of 2022). Regarding the 2021 budget, since President Laurentino Cortizo has ruled out any tax increases, tax revenues will be based on the strength of the recovery. On the expenditure side, capital spending is expected to increase in line with the public investments planned for 2021. The wider budget deficit means an increase in public debt, 80% of which is external, through the issuance of bonds on the market. The emergency multilateral financing of 2020 (IMF, IDB) is not expected to be repeated.
The current account deficit widened in 2020 amid reduced demand for transport services (canal) and tourism (29% and 18% of total exports, respectively), as well as re-exports (11% of GDP), and despite the fall in the oil bill. The deficit is expected to narrow in 2021 as world trade recovers, notwithstanding persistently muted tourism activity. The structural surplus in the balance of services (13% of GDP) and re-exports (2%) will offset the income deficit (7% of GDP), which mainly reflects repatriated dividends, but not the goods deficit (12%, copper and bananas in particular). FDI, consisting primarily of reinvested profits, will finance the current account deficit and maintain the balboa’s dollar peg. Market issuances will also help finance it. Foreign exchange reserves held by the central bank are expected to remain low, at about 1.3 months of imports.
The fight against corruption continues
Laurentino Cortizo of the center-left Democratic Revolutionary Party was elected in May 2019 for a five-year term. He has affirmed his commitment to implement the recommendations of the action plan agreed with the Financial Action Task Force on Money Laundering (FATF) and to strengthen the country's position as a major financial center in the region. Externally, the country will continue to maintain a strong relationship with the United States, while developing its ties with China. In July 2019, when he took office, President Cortizo presented a proposal for constitutional reform that is widely seen as central in the efforts to strengthen institutions that have been discredited in recent years by corruption scandals. Like in other countries in the region, corruption scandals have erupted in recent years, causing public dissatisfaction. The handling of the COVID-19 crisis led to the sacking of the health minister and two cabinet members after two corruption scandals, over the construction of a prefabricated hospital and the canceled purchase of respirators and sanitizing gel. In 2018, the country 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 2020, the Panamanian court system took a stand against corruption by indicting two former presidents, Ricardo Martinelli (2009-2014) and Juan Carlos Varela (2014-2019), for money laundering. Martinelli was accused in connection with the purchase of a publishing group using public funds, while Varela was charged with corruption in a case involving the Odebrecht construction company.