Population 3.655 million
GDP 34.819 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
7.6 |
10.6 |
8.5 |
7.5 |
|
Inflation (yearly average) (%)
|
3.5 |
6 |
6 |
5 |
|
Budget balance (% GDP)
|
-2 |
-2.3 |
-2.8 |
-2.7 |
|
Current account balance (% GDP)
|
-10.8 |
-12.8 |
-12 |
-12.5 |
|
Public debt (% GDP)
|
42 |
41 |
39 |
39 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Strong growth
- Inter-oceanic canal
- Country’s currency: US dollar
- International banking centre and regional financial hub
- Colon, the second-largest free trade area after Hong Kong
- Tourism and mining potential
- Political stability and favourable business climate
WEAKNESSES
- Large trade deficit
- Dependence on foreign capital
- Institutional weaknesses: corruption, clientelism
- High poverty level (a third of the population)
- Sharp disparity between the Canal Zone and the rest of the country
- Infrastructure inadequacy (transport, education, health)
Risk assessment
Still lively growth driven by domestic demand
Growth will remain lively in 2013 as it is sustained by consumption and investment. The huge projects for enlarging and deepening the interoceanic canal are continuing for completion in late 2014 or early 2015. The Canal already carries 5% of world maritime traffic and a third of the trade between the Asia-Pacific region and the east coast of the United States. When the work is finished, the traffic will grow significantly and the Colon free-trade area’s role in redistributing products imported from Asia to the whole of the region will grow. Public investment in transport (Panama City metro and airport, roads, sewerage) is continuing. The knock–on effects of these works in terms of revenue on the population, at least those who live in direct contact, plus the surge in credit, boosts household spending. However, even if imported food and oil prices stabilise, low unemployment and strong demand for productive capacity will keep up inflationary pressures.
Limited fiscal revenues and heavy public investment
The Fiscal Responsibility Act adopted in 2008, fixing the maximum deficit at 1% of GDP, has been amended year after year to end at a ceiling of 2.9%, nearly reached in 2012. The government pleads heavy public investment. Indeed, investment spending constitutes a third of public spending and fiscal revenues have not kept pace, representing only 12% of GDP and affected by high levels of tax evasion. 40% of revenues from the operation of the Canal (7% of GDP) go towards the budget. It has not been possible to increase the contribution due to the economic crisis and modernisation works. From 2015, the deficit is expected to fall with the completion of the investment programme and the increase in Canal tolls. Management of these additional resources will be a big challenge. With this in view, a sovereign investment fund has been created. Public debt stands at 42% of GDP. Almost all of it is held by foreign lenders, 65% of them private. This figure does not take into account all current investments, since, in some cases, payment will be made only on completion. The implicit additional debt represents 10% of GDP. Fiscal policy plays a major role in controlling inflation because of dollarisation and the lack of a central bank.
Large current account deficit
There is a big trade deficit (amounting to 22% of GDP). Purchases of consumer goods are driven by vigorous domestic demand, those of intermediate products and capital goods by infrastructure works. In contrast, exports focused on bananas, rice, coffee and sugar are much lower. The revenue balance is also in deficit due to interest on debt and dividend repatriations by foreign companies. Conversely, the import–export business of the Colon free-trade area is in profit, as is the service balance thanks to canal toll charges and associated port and railway revenues as well as tourism income. Finally, the current account deficit is no more than 12% of GDP. This deficit is three quarters funded by foreign direct investments (FDI), of which the country is the number one regional recipient, and the remaining quarter by debt. A 2007 law aimed at attracting the regional head offices of multinational companies has been successful. Over time, the growth of canal revenues, the cessation of imports linked to the works and the growth of mining and tourism revenues are expected to reduce the deficit.
Institutional strength despite strong popular opposition
Despite his unpopularity, President Ricardo Martinelli from the centre-right Democratic Change party will have a large absolute majority in the Assembly until the end of his non-renewable term in May 2014. The opposition, represented by the Democratic Revolutionary Party and the Panameñista Party, is having difficulty in reorganising itself but has, however, a good chance of winning the next elections. A large part of the population, particularly the farming population, has received no benefits from the infrastructures and canal proceeds. Many are opposed to government action (privatisation of public telecommunications, electricity distribution and mining companies, reduction of subsidies, institutional reform…) and they are not afraid to take to the streets to show, sometimes violently, their discontent, often with successful results. The issue of corruption involving ministers and the partiality of justice adversely affect an otherwise satisfactory business environment.
