Trend shift: External sector and investment projects will set the new growth dynamic
GDP expanded 5.4% in Q2 due to lower dynamism in wholesale and retail commerce after an impressive 6.2% growth in Q1. GDP grew 5.8% in H1, which presents a shift from the downward trend that started in 2012 (when the works of the Panama Canal expansion as well as several public investment projects were finished). We expect GDP growth to be lower in H2 considering that the expanded Canal started operations in June 2016.
The current account deficit decreased to $933.3 million in H1 2017 (3.2% of GDP) compared to $1,179.7 million (4.4% of GDP) in the same period last year. Trade balance increased 14.3% in H1 2017, while FDI grew by 5.8% during the same period (66.5% of the FDI was reinvested profits).
After reaching its lowest point in 2015 since 2009, inflation continues to accelerate at a moderate pace. CPI reached a y/y rate of 0.7% in August and 1.1% from January to August, y/y. We estimate that the annual average of the CPI for 2017-2018 will be around 1.2-1.5% depending of the tendency of the international prices of oil and food.
Following the dynamic of 2016 (which we consider “a transitional year”), our projections for 2017-2018 reflect an upward trend. We forecast GDP to grow in 2017 and 2018 at 5.4% and 5.6% respectively. We expect an acceleration of economic activity due to a rise in exports, a steady expansion in gross capital formation amidst a weak acceleration of private consumption. Services and copper exports and private and public investment projects such as a two natural gas plants, two metro lines, the fourth bridge across the Canal Panama, and several other transport-related projects will drive the economy in 2017 and 2018. Although a rise in interest rates will constrain the role of private consumption, aggregate demand will increase at an average rate of 4.8%. These positive numbers are consistent with Moody’s outlook change from stable to positive, reaffirming the Baa2 rating.
Unemployment numbers will maintain their upward trend that started in 2014. For 2017, we assume total and open unemployment to reach 5.7% and 4.5% due to a shift of the main drivers of job creation, i.e., from non-skill labor intensive activities (commerce) to skill labor intensive activities (logistics). As of 2018, we project total and open unemployment to reach 5.9% and 4.7%, because the expected growth of the overall economy will still be below the 6% economic potential.
As the period of lower local interest rates ended in 2017, we expect more moderate increases as the FED shifts to a tighter monetary policy. New regulations regarding liquidity standards and additional capital requirements will add pressure to banks to adjust local interest rates.
The unadjusted non-financial public sector deficit will reach 2.4% in 2017 and 2.0% of GDP in 2018. The adjusted deficit will remain within the limits of the Social Fiscal Responsibility Law for 2017-2018, as it happened in the past three years. The debt to GDP ratio will decrease to 39.0% by the end of 2017 and 38.4% in 2018.
The reduction in trade deficit in 2016 (from 7.9% to 7.4 as a % of GDP compared to 2015) was due to a drop in imports (-4.4%), although exports declined by 5.0%. For 2017 and 2018, we expect a rally in both exports and imports due to the rebound in CFZ activity, the expanded Canal, ports, and airline sector. As exports pick up in 2018, due to copper exports and the logistic cluster activity, we project the commercial deficit in real terms to be the lowest as a percentage of GDP since 2009.
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