The Panamanian economy faces divergent growth prospects, with more moderate projections from CAF (2%) and more optimistic ones from ECLAC (4.2%). In this crucial election year, the country is facing substantial challenges, including the drought in the Panama CanalThe threat of losing its investment grade rating and the situation of the Social Security Fund. Despite these challenges, Panama continues to stand out as a regional leader, backed by competitive advantages that consolidate it as a preferred destination for investors in Latin America.
Uncertainty raises fundamental questions about the economic outlook in 2024. What will be the critical challenges and opportunities that the canal nation will need to address, carefully considering its strengths and weaknesses?
Challenges: Fiscal Situation and Investment Grade
Panamanian public finances have captured attention for their evident deterioration. In September 2023, the fiscal deficit exceeded the legal limit, standing at 4,75%, and public debt increased by 52% since December 2019, reaching 58% of GDP. The Panama Canal, a key source of revenue, faces a drop of up to $700 million in 2024 due to the interoceanic drought linked to the "El Niño" phenomenon.
The Social Security Fund faces pressure due to the imminent depletion of the reserves of the Defined Benefit Subsystem program, requiring extraordinary contributions for 285 thousand pensioners. In addition, the closure of Minera Panamá, which represented 5% of the GDP and contributed $375 million to the national treasury, intensifies the situation after the Supreme Court of Justice declared the contract-law unconstitutional, following protests and a national strike.
These elements have led rating agencies to downgrade the country's outlook and to seriously contemplate the loss of the country's investment grade. The concern has prompted investors to dump Panamanian bonds due to the anticipation of higher risk, reflected in a 9.4% decline in the price of the 10-year bond (Panama, 34') over the last six months.
Opportunities: Strong Companies and Drivers
Despite all of the above, Fitch Ratings, an influential credit rating agency, sees strength in Panamanian companies despite the risk of losing government investment grade. According to the rating agency, the companies will maintain stable ratings thanks to "low levels of leverage and sound operations", suggesting that they could hold up in an unfavorable economic environment.
In addition, key sectors that have driven the country's development, such as construction, logistics and commerce, continue to experience growth. According to data from the National Institute of Statistics and Census (INEC) up to the third quarter of 2023, these sectors grew by 19.3%, 10.8% and 8.7%, respectively and are in line with post-pandemic average figures.
Also noteworthy is the removal of Panama from the list of the Financial Action Task Force (FATF) in October 2023, for complying with international regulations against money laundering and terrorist financing. Although they remain on some lists for these issues, such as the gray list of the European Union, this represents a significant advance, opening opportunities for direct and fresh foreign investment, helping to boost the economy.
Another promising prospect for the Panamanian economy is the collaboration with the United States in the exploration of the global semiconductor ecosystem, announced in July 2023 by the U.S. State Department. Panama joins a global strategic plan, along with countries such as Costa Rica, the Philippines and Indonesia, for the manufacturing and diversification of this currently crucial technology. Although this is in the early stages, it is still interesting for the isthmus.
Elections: Always a chance for change
Panama is preparing for its seventh electoral process since the restoration of democracy in 1990, with the participation of 10 candidates in a presidential election marked by evident polarization. It is envisioned that the next president could govern with slightly more than 25% of popular support, as measured by the vote. This scenario is also reflected in the legislative elections, especially with the increase of independent candidates, which could anticipate a diversified assembly, adding uncertainty to governance.
Despite these dynamics, Panama's enviable political stability compared to its regional neighbors is noteworthy. In addition, the economic-legal structure of the country would not undergo significant changes, as campaign proposals focus on cross-cutting issues such as waste management, water, education, employment and cost of living. However, the possibility of a parallel or original constituent assembly is envisioned by some candidates.
On the other hand, Panama ranked 108th out of 180 in Transparency International's Corruption Perceptions Index, with a score of 35/100, placing it at similar levels to countries such as Sierra Leone and Nepal. This suggests potential structural challenges in terms of the strength of Panamanian institutions.
It should also be noted that the next government will have to face the various economic challenges through creative solutions capable of generating the necessary balance for the country.
Let's recap
- Economic GrowthProjections from 2% to 4.2%, affected by electoral challenges, drought in the Canal and the situation of the Social Security Fund.
- Fiscal Challenges: Deficit of 4,75%, public debt at 58% of GDP, impact of drought and closure of Minera Panama.
- Business ResilienceFitch: Companies with low levels of leverage and growth in key sectors, according to Fitch.
- Investment Opportunities: Improved international perception following FATF delisting and semiconductor collaboration with the U.S.
- Electoral Polarization: Elections marked by diversity and political stability, but with corruption challenges.
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