The Perfect Storm: The Panama Papers, The Waked Affair and The Economic Slowdown
In our last report, we discussed the potential implications of the Panama Papers (part I of the Mossack & Fonseca documents leak). We argued that the expected slowdown of international legal services in Panama was equivalent to a “permanent demand shock to the service sector, that will affect the structure of the Panamanian economy, but not in a significant percentage of GDP.” We suggested, though, that the failure to cooperate with the OECD as it pursued automatic exchange of tax information with Panama would damage Panama’s long-term growth. International lawyers based in Panama disagreed, and the Juan Carlos Varela government (initially) failed to make a full commitment to improve tax transparency. Varela later relented, and Panama has agreed to fully cooperate with the OECD.
There have been two more developments over the past month: first, the Panama Papers (part II) went viral. New names appeared on the ICIJ web page, most of them corporations with unknown ultimate beneficiaries registered in jurisdictions outside of Panama.The media impact of this new information rapidly faded, though, due to a lack of substance and surprise.
Second, one of the most powerful entrepreneurs in Panama, Abdul Waked (and his nephew Nidal) were indicted by the U.S. Office of Foreign Assets Control on charges of international money laundering. Balboa Bank, a small bank that holds just 0.5 percent of assets (and where Nidal owned close to 30% of equity) was intervened by Panama’s Superintendency of Banks.
Even before these events, the economy was slowing, due to the negative international environment. Key sectors, such as ports, the Canal, the Colon Free Zone and construction presented their worst numbers in years. Only tourist visits, electricity consumption and some manufacturing activities improved from last year. Given this environment, we will revise downwards our earlier projections of 5.9%: we see 2016 economic activity coming in at closer to 4.5%.
For 2017 and 2018, new large infrastructure projects, and the beginning of the operation of the expanded Canal, should lead to the resumption of growth.
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