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 and we expect growth to start to normalize at a rate of +4% over 2023-2027. Private consumption and investment will support economic growth, but household incomes were hit hard by the pandemic. Unemployment reached around 8% in 2021-22, higher than the 2015-19 average of 6%, which will make private consumption growth weaker than in the past. Services will remain a pillar of the economy, but the key logistics sector will face challenges from lingering global supply-chain disruptions and the expected sharp global trade slowdown in 2023 before recovering in 2024.

In the short term, the government will focus on dealing with the cost-of-living crisis that has been aggravated by the surge in oil and food prices following Russia's invasion of Ukraine. After peaking at 4.4% in 2022, inflation is expected to reach 3% in 2023 and 2% from 2024 onwards. The government is planning to stimulate infrastructure development and attract more foreign direct investment (FDI) to bolster long-term growth. Panama will remain attractive to investors, given its role as a regional trade hub and its openness to foreign capital. We expect that Panama's FDI/GDP ratio will rise after tumbling in 2020-21, but will take time to reach pre-pandemic levels.

Panama's business environment compares favorably to that of its peers. The Heritage Foundation’s Index of Economic Freedom 2021 survey assigns the country rank 56 out of 185 countries. Panama also ranks 86th in the 2020 Doing Business Survey. But despite a strong position in getting credit (25th), shortcomings remain in the areas of paying taxes (176th), enforcing contracts (141st) and resolving insolvencies (113th). Moreover, Panama remains under close scrutiny after it was added to the Financial Action Task Force’s (FATF) “grey list” of countries deemed to have strategic deficiencies in their anti-money laundering regimes in October 2022. Although this should not trigger any sanctions, it could still continue to harm Panama’s business environment.

Although there have been sporadic protests in the past, Panama has been fairly stable by regional standards. However, there are significant pockets of poverty and exclusion in rural and indigenous areas. Protests broke out in 2022 amid surging inflation and voter disillusionment could still provoke renewed unrest. The social unrest has amplified long-standing dissatisfaction stemming from perceptions of corruption in government and the privileges of the political elite. The three main political parties who were in power since 2009 have long promised to combat corruption and reform the constitution and failed to deliver. However, President Cortizo’s does have a majority in the National Assembly (40 out of 71 representatives), which supports his position and ability to govern.