Panama

Panama is small open economy acting as a regional financial and logistical hub that benefits from the activity of the canal, the Colon free trade zone (CFZ) and a strong banking sector compared to peers. Before the pandemic, it was the fastest-growing economy in Latin America, with average real GDP growth at +6%. Panama fully recovered from the 2020 recession in 2022, but we expect GDP growth will slow sharply in 2024 (to 3.0% from nearly 6% in 2023), as the closure of First Quantum Minerals (FQM), the Canadian operator of Cobre Panamá (Central America’s largest copper mine) will weigh on exports and investment. It is uncertain whether the government and First Quantum Minerals (FQM), the Canadian operator of Cobre Panamá (Central America’s largest copper mine) will strike a new deal over the coming months or whether FQM will pursue international arbitration.

Panama’s economy and exports will take a hit and mining royalties of USD375m per year (backdated to 2022) will not be paid. This will complicate the fiscal and financing outlook, although it was not explicitly included in the 2024 budget. For the 2025-2028 outlook, we expect growth to exceed +4% as global trade recovers and the country’s export-driven economy (driven by its trade logistics and financial services) significantly outperforms regional and global trends. At the same time, fixed investment is expected to rise, boosted by major infrastructure projects such as the USD4.4bn expansion of the Panama City metro, a USD1.5bn bridge over the Panama Canal and a USD1.2bn gas-fired power plant in Gatún. However, climate change looms as a long-term challenge, with the potential to disrupt the Panama Canal (a vital conduit for 6% of global trade) through increasingly unpredictable water levels affecting operations.

Road blockades and supply-chain disruptions resulting from anti-mining protests in November lifted inflation to an estimated 3% at end-2023. Inflation will ease towards 2% over the 2024-28 forecast period, but there is a risk that an (increasingly likely) El Niño-related drought will hit local food supplies, driving up prices.

Panama’s business environment is notably competitive, evidenced by its rankings in key international surveys. The Heritage Foundation’s 2021 Index of Economic Freedom placed Panama 56th out of 185 countries, while the 2020 Doing Business Survey ranked it 86th. Despite this favorable status, the uncertainty surrounding the Cobre Panamá issue has introduced a degree of political unpredictability, contrasting with Panama’s reputation as a stable investment destination in Central America. The future of negotiations with First Quantum Minerals and potential new contract terms beneficial to the state remain uncertain, particularly in light of the upcoming general election and potential changes in administration.

Panama, traditionally stable by regional standards, is now grappling with political uncertainty ahead of a May 2024 general election. Recent opposition to a contract with First Quantum Minerals, concerning the significant Cobre Panamá copper mine, has ignited social unrest and protests, particularly over issues of environmental impact and economic inclusion. A Supreme Court ruling deeming the contract unconstitutional has intensified this uncertainty, prompting President Laurentino Cortizo to order the mine’s closure. While this move quelled immediate protests, the mine’s long-term future remains in limbo. This turmoil underscores deeper issues of perceived government corruption and ineffective promises from the main political parties to combat it and enhance constitutional transparency. Despite President Cortizo’s majority in the National Assembly, these compounding challenges suggest a complex political landscape and uncertainty as the next election approaches.