Panama

MAJOR MACRO ECONOMIC INDICATORS

(e): Estimate (f): Forecast

RISK ASSESSMENT

Growth affected by gloomy mining prospects

The recovery following the deep recession caused by the Covid-19 pandemic slowed in 2023. However, economic activity remained robust despite the emergence of social unrest and blockades in the second half of the year. Activity was supported by the construction sector and exports of goods and services, i.e., canal traffic, re-exportation, financial services, copper and gold, and tourism. For 2024, growth is expected to further decelerate due to the mining sector crisis. The Supreme Court of Justice ruled on 28 November 2023 that the concession contract signed with First Quantum Minerals (FQM) allowing the Cobre mine to be operated was unconstitutional. The renewal of rights for the Canadian giant for a duration of 20 years had been approved on 20 October, marking the beginning of a historic wave of protests. Panama experienced over a month of almost daily demonstrations, strikes and roadblocks that disrupted transportation and city supplies. This mine had previously contributed approximately 5% to the GDP and 75% to the country's goods exports, accounting for about 1.5% of global copper production and employing nearly 2% of Panama's workforce. The Canadian company stated that it had initiated an arbitration process before the International Court of Arbitration at the end of November. The government announced its intention to begin the process of the mine's permanent closure in mid-December. For now, it is unlikely that the mine will reopen especially given the approaching elections in May 2024 and prevailing hostility towards mining operations. Private consumption (48% of GDP) will be a driver of growth as household purchasing power benefits from the return to moderate inflation. The likely maintenance of subsidies for basic goods (fuel and certain food products) ahead of the May 2024 elections will further contain inflationary pressures. However, factors such as El Niño-related drought and the resurgence of social unrest remain potential sources of inflationary pressure. Investment will be buoyant as public infrastructure construction accelerates. Projects include concentrating on the expansion of the Panama City metro and the construction of a fourth bridge over the Panama Canal. The logistics sector could benefit from an uptick in global trade but will remain subject to challenging weather conditions. The effects of climate change, combined with the presence of the El Niño phenomenon, have directly impacted freshwater levels in the canal's reservoirs that feed its locks. October was marked by particularly dry conditions, with rainfall 41% below normal. Authorities are implementing traffic regulation measures, which could continue to weigh on activity in 2024 if the drought persists. Last, the tourism sector (10.6% of GDP in 2019) remained robust in 2023, recording a number of arrivals that exceeded that of 2019 (January-September period). However, the expected slowdown in the US economy, representing about 30% of arrivals, poses a downside risk.

Weakening of fiscal and external positions

After being impacted by the default of mining royalties in 2023, the public deficit is expected to ease in 2024. However, it is unlikely to reach the 2% of GDP level set by social and fiscal responsibility legislation. Public finances will be under pressure given Panama’s weakened economic growth and the forthcoming May 2024 general elections. An acceleration in the implementation of tax reforms that notably aim at overhauling the pension system and reducing subsidies is unlikely. The potential increase in canal tolls risks being offset by reduced traffic. Additionally, with the cessation of operations at the Cobre mine, public accounts will be deprived of a significant source of revenue. The mining royalties specified in the contract were set at USD 375 million annually or approximately 0.5% of GDP. The 2024 budget anticipates increased public spending that will focus on investments in education, heavier debt servicing and infrastructure development. The trajectory of public debt (84% of which is external, and 63% owed to private external creditors) that was previously on a descending and sustainable path will be tested by the fragility of the budgetary position. The government will maintain favourable access conditions to international markets, facilitated by the dollarisation of its economy.
Panama's external position slightly weakened in 2023. While copper exports helped reduce the trade deficit (around 5% of GDP in 2023), the persistently high oil bill limited this reduction. The surplus in services was penalised by challenging weather conditions affecting the logistics sector. In 2024, the current account deficit is expected to widen further. The outlook for copper exports is dimmer owing to the suspension of extraction activities at the Cobre mine. While climate constraints are expected to ease in the second half, they could still impact logistic services. Tourism might also be affected, with a potential reduction in the number of cruise ships docking in Panama, contributing 25% to arrivals. The current account deficit would still be financed by FDI inflows. The country's role as a logistics hub, financial center, and its free trade zones remain conducive to investment. The business climate will also benefit from the country's removal from the FATF grey list on 27 October 2023, marking a significant step in the fight against money laundering and terrorism. However, the instability caused by social unrest could potentially tarnish the country's reputation among foreign investors.

The political and social climate is fragile as the election approaches

The current President, Laurentino Cortizo Cohen, of the center-left Democratic Revolutionary Party (PRD), was elected in May 2019 for a single five-year term. With his center-right coalition partner, Movimiento Liberal Republicanista, the PRD holds 40 out of 71 seats. The coalition’s priorities are budgetary discipline, the fight against money laundering and corruption. The government is facing public discontent, fuelled in particular by slow progress in combating cronyism and keeping promises to enact constitutional reforms. In the run-up to the general elections set for May 2024, approval of the administration of Laurentino Cortizo has eroded, paving the way for an opposition victory. Panamanians will go to the polls in a particularly tense political and social climate, marked by protests over the cancellation of a mining contract. Opponents contested the legality of the new contract, deeming the conditions overly favorable for the Canadian operator. Above all, the opposition protested against harmful effects of extraction on the environment. At the same time, the historic drought hindering maritime traffic has intensified concerns over environmental issues, which is expected to form the linchpin of electoral debate in 2024. At the end of 2023, the government finalised a transaction with the Panama Canal Authority involving the sale of 25,000 hectares of land and seabed. This initiative aims to develop a logistical and biological corridor, the main objective of which is to preserve the canal basin.
Relations with the US, a key trading partner, remain strong. A partnership aimed at developing semiconductor production in Panama was concluded in July 2023. At the same time, the country maintains its ties with Beijing, having severed diplomatic relations with Taiwan in 2017. However, President Cortizo's government has been more cautious about its openness to China. Since his election, the President has stalled a number of Chinese investment projects involving infrastructure and logistics.

Last updated: January 2024