Panama / Economic Studies - Coface

Page 1 of 2

HOME ECONOMIC STUDIES PANAMA

POPULATION

3.9 MILLION

A4

A4

COUNTRY RISK
ASSESSMENT

BUSINESS
CLIMATE

GDP PER CAPITA

11,146 US$

SYNTHESIS

MAJOR MACRO ECONOMIC INDICATORS

2013

2014

2015 (f)

2016 (f)

GDP growth (%)

6.6

6.1

5.8

6.1

Inflation (yearly average) (%)

4.0

2.6

1.0

2.0

Budget balance (% GDP)*

-2.5

-4.3

-3.8

-3.7

Current account balance (% GDP)

-12.2

-12.0

-9.5

-9.5

Public debt (% GDP)

41.7

45.6

47.3

47.2

(e) Estimate (f) forecast

* excluding Panama Canal Authority

STRENGTHS

WEAKNESSES

Interoceanic canal
Total dollarization of the economy and financial
stability
Coln free-trade zone, worlds 2nd-largest importexport platform
Regional banking and financial centre

Exposure to North and South American economic

conditions
Shortcomings in infrastructure (transport, power,
education, health)
Huge disparity between the Canal zone and the
rest of the country
Corruption and political patronage

RISK ASSESSMENT
Infrastructure investment as the main growth driver

http://www.coface.com/Economic-Studies-and-Country-Risks/Panama

7/14/2016

Panama / Economic Studies - Coface

Page 2 of 2

Panama's economic growth is the strongest in South America. The slight downturn in growth in 2015 is mainly
explained by a smaller contribution from investments following completion of major works. Nonetheless, in 2016, new
infrastructure projects are set to support growth: construction of a second metro line (started in October 2015), a third
bridge across the Panama Canal and the renovation of the Coln free trade zone. Moreover, enlargement work on the
Panama Canal, begun in 2007, is somewhat delayed. Initially scheduled for October 2014, to coincide with the Canal's
100th anniversary, it is not likely to open until April 2016. While the initial works obstructed the Canal, activity has
accelerated since early 2015. Industry and agriculture suffer from a lack of investment. In order to encourage
productivity in the agricultural sector, in April 2015 the government imposed import duties on 37 food products. On the
services side, Panama benefits from a competitive banking sector, a veritable regional financial centre, whose assets
represented 185% of GDP in 2014. Furthermore, household consumption is likely to remain strong in a context of full
employment supported by the impact of investments.
Meanwhile, deflationary pressures in 2015 were maintained due to the oil price slump and also to the appreciation of
the balboa (fixed exchange rate against the dollar) against the currencies of its regional trading partners. In 2016,
greater stability of the balboa and more dynamic domestic demand will give some support to inflation.
Ongoing difficulties with raising tax revenue
The reduction in the budget deficit in 2015 is chiefly explained by the decline in public infrastructure spending and the
cut in electricity subsidies adopted in January 2015 (0.7% of GDP in 2014). But the fall in State revenues, equivalent to
3.4% of GDP between du 2013 and 2015, limits government finances. The recent free trade agreements (Peru and the
United States in 2012, Canada and the European Union in 2013) are affecting tax revenue derived from import duties.
Moreover, tax receipts stagnated in 2015, which, relative to the country's fast pace of growth, reflects the weakness of
tax collection. In this context, the budget balance and the public debt should stabilise in 2016 as activity accelerates.
Structurally high current account deficit set to stabilise in 2016
The trade deficit is expected to grow slightly due to the rise in imports linked to the development of domestic demand.
Nonetheless, it will remain substantial; with a poorly diversified economy, Panama effectively remains dependent on
imports for most of its consumer and capital goods. Apart from the free trade zone of Coln, which enjoys a trade
surplus of 1.4% of GDP, the country imported goods equivalent to 16 times its exports in 2014. The negative impact of
the balboa's appreciation against the currencies of its main trading partners on export competitiveness is limited
because of the high import intensity and the dominant position of the United States as the country's main client and
provider. The balance of services and of revenues is likely to improve, thanks to Canal toll fees, port income and
associated railway income, as well as tourism income. The large current account deficit will, however, continue to be
financed by foreign direct investments (10% of GDP in 2015).
A weak parliamentary majority
With only 16 of the 71 seats in the unicameral parliament, President Juan Carlos Varela from the centre right Partido
Panamaista Party (PP), in power since 1 July 2014, has had to conclude a governability pact with the 26 MPs of the
centre-left Partido Revolucionario Democrtico (PRD) Party. The government is committed to continuing the social
policies in place since the early 1990s. Poverty is, therefore, noticeably declining, even though 22% of the population
was living below the poverty threshold in 2014 (38% in 2006). The business climate continues to be constrained by red
tape, especially in cases involving disputes or the resolution of insolvency procedures. Combatting corruption was one
of the main themes of the PP's campaign. Four former ministers in the administration of ex-President Ricardo
Martinelli, himself facing charges, are now being prosecuted for corruption, while six others are under house arrest and
three former high officials are wanted by Interpol. Nevertheless, no new measures have been passed since the PP
came to power. This campaign thus looks more like a political vendetta than a real desire to eradicate corruption in the
country.
Last update: January 2016

http://www.coface.com/Economic-Studies-and-Country-Risks/Panama

7/14/2016