Panama: Growth to Remain Buoyant

Panama is fastest-growing country in Latin America

Risks stem mainly from unsettled external environment

Further reforms needed to transition to sustainable, inclusive growth

In its latest assessment of the Panamanian economy, the IMF said Panama’s economy continues to grow strongly, buoyed by the Panama Canal expansion and large public infrastructure projects. Real GDP growth is estimated to have reached 10.7 percent in 2012, the report said.

Macroeconomic stability anchored by full dollarization has favored the expansion of domestic services and activities centered around the Panama Canal and the Colón Free Zone. A successful fiscal consolidation brought gross public debt from 66.2 percent of GDP in 2005 to 39.2 percent of GDP in 2012.

Together with strong growth and a sound financial sector, this has led to Panama obtaining its investment grade in 2010. Following a recent upgrade by Moody’s, Panama is now among the highest rated emerging markets, on par with Brazil, Mexico, and Peru.

The IMF also welcomed the resilience of Panama’s financial system in light of recent global market turbulence, which can be explained by the banking system’s diversified ownership structure, low reliance on wholesale funding, as well as high capital and liquidity ratios.

Building greater resilience to shocks

For 2013, the IMF expects real GDP growth to decline to 9 percent and to gradually converge to its potential rate of 6–6½ percent over the medium term as capital spending unwinds. In light of Panama’s impressive growth performance, the IMF noted that a somewhat tighter fiscal stance would be desirable to mitigate overheating risks and build fiscal buffers.

As it is a highly open economy, both financially and commercially, Panama is vulnerable to external shocks. The country is closely linked to both the U.S. business cycle as well as to world trade, through the Panama Canal.

Panama is also an important regional banking hub, and linkages between the financial sector and the real economy are significant due to the size of the banking sector. IMF analysis indicates that external real and financial shocks, such as lower demand from the United States or a sudden stop in capital flows to Latin America, could have a significant impact on Panama’s output and credit growth.

However, strong fundamentals and low vulnerabilities, including a reliance on stable services exports and relatively small and shallow capital markets would mitigate the impact of external...