Speed bumps ahead…for a while
Real GDP expanded 4.58% in Q1, down from the 6.2% growth of Q1 2015, and far below the finance minister’s 5.7% growth projection. Electricity, gas and water supply, construction, mining, and social services were the fastest-growing sectors in Q1, according to these official figures, while agriculture, fishing, manufacturing and transportation/communications shrank. Q1 growth is in line with our projections, reflecting the weaker external sector conditions. Furthermore, these numbers do not account for the Q2 shocks (the Panama Papers revelations and the “Waked Affair”) that we believe will adversely, though modestly, dampen private consumption, employment and business confidence.
We project GDP growth will be 4.4% for 2016, and then rebound to 5.6% for 2017, and 5.9% for 2018. For 2016, we expect a slowdown of economic activity, due to a sharp fall in exports, and weaker private consumption growth. Private and public investment projects (in energy, ports, mining and public transportation) and exports (the expanded Canal and copper exports) will drive growth for 2017 and 2018. A rise in real local interest rates will limit private consumption expansion.
April economic indicators are in line with our projections, confirming the economic slowdown. Key sectors, such as ports, the Canal and the Colon Free Zone, continue to show negative numbers, while construction, air transportation and tourism show disappointing growth rates. Only fuel consumption and car sales, electricity, and some manufacturing activities have improved considerably from last year. We expect unemployment to rise to 6% by 2018 following the trend of last years. CPI inflation continues to increase at a moderate rate, by 0.3% in May y/y. We expect the CPI rise for 2016-2018 to stay at around 0.7% to 1.1%, depending on international oil and food price trends.
The unadjusted non-financial public sector deficit is on track to decline (to 1.7% of GDP by 2018), and we expect the adjusted deficit to remain within the limits of the Social Fiscal Responsibility Law for 2016-2018. The primary balance should reach a surplus of 0.1% of GDP by 2018. The debt to GDP ratio is expected to dip, from 39.5% to 38.3%. Canal payments to the central government will remain key to public finances (comprising 18% of fiscal revenue), especially after Canal expansion.
There’s nothing new to report on the political front. No presidential candidates have yet appeared on the scene for the 2019 general elections. The traditional political parties are internally divided. Former president Ricardo Martinelli is self-exiled in Miami, and corruption cases against him are piling up in the Panamanian judicial system.
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