The Year of Living Dangerously: Slower growth, higher unemployment…and Odebrecht
Real GDP growth fell to 4.8% y/y in Q3 compared to its reported 5.2% growth during the previous quarter. We expect 2016 y/y GDP growth rate to be around 5% based on results up to Q3 (4.9%). We see no reason for a rebound in Q4, and indicators continue to suggest a growth rate below the 6% estimates of the Panamanian Government and international agencies. 2016 will be the fifth consecutive year of deceleration after posting 11.8% growth in 2011.
The economic structure of the country remains practically unchanged in Q3– with the construction, transportation and communications, commerce and realty and services to business representing around 15% of total GDP. The leading sectors was electricity, gas and water, which experienced the highest GDP growth in the quarter with 9.1%; followed by 7.9% in financial intermediation, 5.9% in private education and 5.8% in mining and the construction sector. Fishing was the only sector to report a negative GDP growth rate, with a decline of 7.2%. IMAE rose 4.4% in October 2016; almost at par with its 4.3% YTD value.
CPI inflation rose to 1.3% in November, but for the first time since September 2016 food prices were not the main cause of the increase (but don’t tell anybody in Panama). Up until November, the average inflation rate resulted in 0.7%, which is right on track with our projection for the year.
Unemployment reached 5.5% for 2016, the highest figure since 2010.
Current account data reflect a US$ 1.3 billion deficit in the third quarter (9.1% of GDP) – which adds to a total deficit of US$ 2.5 billion YTD (Jan-Sep), and 6.2% of GDP YTD. While foreign direct investment totaled $4.2 billion up to the third quarter, (15.3% of GDP).
Fiscal figures show a better performance of the overall non-financial public sector (NFPS) deficit by diminishing to US$911 up to September (2.2% as a percentage of GDP in 2016, compared to 2.6% in 2015). Next year NFPS unadjusted deficit is budgeted to US$2.654 billion (4.5% of GDP in 2017).
On the political front, the approval rate of president Varela continued its downward trend, from 52% in January to 40% in November. New general elections are scheduled for May 2018. Economic reforms that are required for the next two years include: a revamping of the pension program, completing the promised enactment of rules for improving the transparency of the financial sector, restructuring the Panama Savings Fund, a complete overhaul… and leading with the anti-trade Trump Policy. The proposed legislation for public contracting is still under legislative negotiation – after being vetoed by the President in June.
In many Latin-American countries, the “Odebrecht affair” became the news of December. The US Justice Department fined Odebrecht US$ 2.6 billion for using the country’s financial institutions as a conduit for bribery money. Close to US$ 800 million in bribes were transferred from Odebrecht to the personal accounts of government officials and politicians in several countries, mostly Latin-America. Altogether, the value of contracts in ongoing projects awarded to Odebrecht in Panama is close to US$ 750 million. On December 27th, the Varela Cabinet issued a statement urging prosecutors to investigate every contract that Odebrecht was involved with, stating that, unless a clear condemnation is exposed, the ongoing projects with the company would not be cancelled. However, the firm may not be included in any short list of contractors for large infrastructure projects.
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