Political turmoil amid healthy economic growth
Panama continued the path of solid economic growth during 2017 at 5.4%, which coincided with our projection published in February and later ratified in October. This GDP growth was primarily explained by the dynamics of the external-oriented activities (Panama Canal, ports, air transportation) and construction. The Colon Free Zone (which accounted for 12 percent of GDP in 2012) remained flat and now represents about 5 percent of GDP; manufacturing and agriculture remained stagnant. Activities directed to the internal sector such as commerce, realty, telecommunications, financial intermediation, and education also increased. Fisheries and domestic services decreased.
The leading sectors of the economy in 2017 were: transportation and communications, construction, mining, educational services, and financial intermediation. Although construction and “transportation and communications” explained 49% of GDP growth in 2017. Our estimation is that those two activities will not be as dynamic in 2018 as they were last year, according to preliminary data from the first two months of this year.
The current account showed a deficit of US$ 3.0 billion, 3.9% lower than the previous year or the equivalent of 4.9% of GDP. This is the result of a deficit in trade in goods of US$ 9.4 billion and a deficit in the income account of US$ 4.4 billion, with YoY increases of 7.1% and 1.0%, respectively. Foreign direct investment continued to be the main source of financing of the current account. FDI registered a balance of US$ 5.3 billion with a YoY growth of 1.8%. The percentage distribution of foreign direct investment, which in absolute terms had an increase of US$ 93.7 million, was constituted of 67.5% of reinvested earnings, 20.3% of other capital and 12.2% of equity.
The macro numbers were solid (compared with our Latin American peers); inflation was 0.9% (we estimate 1.5% for 2018); unemployment is up (6%), but new jobs are up 3 percent in 2017; and the fiscal situation is not pressing. However, the regional distribution of income per-capita is skewed in favor of the provinces in the area along the Panama Canal, in particular around the capital city and Colon. This distribution reflects the dynamics of the economy as a whole: international transportation is the engine, agri-business and agriculture are the cabooses.
The most worrying situation in Panama today is not the economy or the income distribution but the political turmoil between the three powers: executive, legislative and the Supreme Court.
Its economic effects are not felt yet in the macro figures, but we ought to monitor this tug-of-war which, if not solved in the near future, will prevent the advancement of any major reforms.
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