Growth is Strong but Uneven; Reforms are Unlikely
Our medium-term projections of 5.2%-5.4% growth are based on the projected growth of logistics activities linked to the Panama Canal (new transshipment ports, processing plants and roll-on roll-off facilities), on the development of high-income tourist facilities, and on the expansion of the energy sector. Activity follows the recent pattern: high growth is explained by trade in services and construction, while household consumption is growing slowly.
The banking system continues to grow, although more slowly. The main concerns are rising bad loans, squeezed margins, and the effects of future regulation (regulatory capital, liquidity, and provisions). We argue that a consolidation in the banking system will take place soon, that the “international” label attached to the system no longer applies, and that regulations in 2018 will hurt smaller banks. One of the main concerns of rating agencies and international financial institutions is the increasing proportion of bad loans. In April, past-due credit reached close to 2%, the highest ratio since the 2008 financial crisis. The strategy of some large banks has been to shift from corporate to personal finance (including mortgages). This seemed logical when Panama was enjoying full employment, which isn’t likely to be the case in the years ahead.
An unsubstantiated pronouncement on July 27 by a Brazilian lawyer formerly associated with Odebrecht, that President Juan Carlos Varela may have received funds from the scandal-ridden construction multinational, created turmoil on social networks, in the media, and among political commentators. The official response so far has been that these accusations have no substance, and that the judicial system is the proper venue for any investigations. We will follow the aftermath of this event closely, as we consider it relevant for our economic risk assessment, although the accusations have not yet been proven.
An unpopular government facing an election in less than two years won’t embark on deep structural reforms, since any results would take time to generate. Given the president’s preference for promising direct subsidies, we anticipate more of that strategy for the next year. We also believe Varela – a Catholic activist – hopes that Pope Francis’ planned visit to Panama in January 2019, to lead the Catholic Church’s World Youth Day (expected to bring more than a quarter of a million young people to Panama) will boost Varela’s popularity in the run-up to the May 2019 elections.
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