Panama in Focus

(by Bank of America Global Research Sept. 2021 – charts excluded)

We remain constructive, despite the fiscal risks.

We continue having an optimistic view on Panama’s outlook – notwithstanding the large fiscal deficit and hesitancy in taking action on pension reform – mainly because we trust the growth engine of the economy. It is an engine that has more cylinders than the growth motors of other LatAm countries. In the short-term, growth is more important, and Panama has time before fiscal reforms become unavoidable.

The Long Way to Economic Recovery

Perhaps not the best moment to digest fiscal tightening

In this moment, the economy is not in good shape to digest fiscal tightening. Last year GDP contracted 17.9%, the second-worst contraction in all LatAm (after Venezuela), with scarring effects in the form of bankrupted firms and lost jobs. The latest reading on the unemployment rate is 18.5%, in a country where the unemployment rate averaged 5% in the ten years prior to COVID-19.

Seasonally adjusted GDP in 2Q21 similar to almost five years ago

GDP rebounded 40% in 2Q21, but the level is still depressed. Adjusting the data for seasonality, one can see that GDP in 2Q21 was roughly similar to the size the economy had in the last quarter of 2016. Almost five years ago. In fact, sequentially (quarter-over- quarter), GDP contracted in 2Q.

There is marked duality on economic sectors: tradables vs. non-tradables

With the exception of tourism, which remains very weak, economic activities linked to external demand are substantially overperforming those associated with the domestic market. The Canal, ports & logistics, exports (especially copper), and the Colon Free Zone have picked up a lot.

In contrast, most indicators related to domestic demand are either weak (eg, non- residential construction, credit, labor market) or recovering moderately (electricity, water, meat production, deposits, auto sales). With a few exceptions, such as imports, fuel sales, manufacturing of alcoholic beverages and residential construction.

We forecast growth of 9.5% in 2021, and around 5% potential thereafter

Our GDP growth forecasts for 2021 and 2022 are unchanged at 9.5% and 5%, respectively. We believe the pre-pandemic GDP level is not likely to be recovered until 2023. Nevertheless, we have high conviction that Panama will see robust economic expansions again in the coming years.

Recovering Panama’s pre-pandemic potential growth rate is important because it will be the main driver of reducing Panama’s debt ratio in the coming years (see analysis in EXD section) along with compliance with the new Fiscal Responsibility Law (FRL).

In our view, there are at least six good reasons to argue that potential growth will likely remain high in Panama:

i)          Most open economy to trade in LatAm

Panama’s trade openness – measured as exports plus imports of goods & services, divided by GDP – is above 100%, in real dollars. Arguably, the positive association between trade openness and fast GDP growth is one of the strongest empirical regularities in the economic literature.

ii)         High savings and investment ratios

The investment ratio (gross fixed investment to GDP) dropped to 26% in 2020, which is still high by pre-pandemic LatAm standards, and averaged 38% in the thirteen years prior to COVID-19, for which there is available national accounts data (with the current base year). It has been one of the highest in the world, for a long time, allowing Panama to accumulate a large capital stock.

iii)        Very high credit to GDP

Financial credit to GDP in Panama is close to 100% of GDP, among the highest in the region. This is another powerful empirical regularity. Countries that have high financial penetration are able to channel savings into investments more effectively.

If there is an entrepreneur that needs credit, a person that needs financing to study, or in general a profitable project opportunity that requires capital, the Panamanian economy will do a better job at satisfying this demand that LatAm peers. In Argentina, for example, credit to GDP is around 15%. In Mexico and Peru, it’s roughly 40%.

iv)        Maybe the most diversified economy in LatAm

Panama might be the most diversified economy in LatAm, together with Mexico. It is a country that predominantly exports services. In addition to the Canal, it has a large financial system and the second largest Free Trade Zone in the world (after Hong Kong), focused on re-exports, which is accounted as part of the commerce sector in the national accounts. It also gets significant revenues from the exports of ports & logistics services, tourism, and telecom.

In addition, the construction sector is sizable, mirroring high investment, but it has been shrinking. A new booming industry is metallic mining. We expect mining exports to be reach close to US$ 3bn (5% of GDP) from literally zero in 2018.

v)         High GDP per capita reduces scope for social protests

Although Chile is a fair counter example, countries with high GDP per capita like Panama

– the highest in LatAm, in fact – should be less fertile ground for social protests.

vi)        Stable politics and no imminent threat of populism

Since the end of the military government in the late 80s, only three parties have alternated power in Panama (PRD, PP and CD). The three of them are market friendly. Market-friendly politics are usually conducive to stronger business sentiment and investment.