Country Report Panama February 2009

Outlook for 2009-10

• A victory, as now seems all but certain, by Ricardo Martinelli of the small CD party, would mark a break from 20 years of alternating centre-left PRD and centre-right PP rule.
• Rising crime rates, party infighting and growing uncertainty over the economy appear to have all but ended the chances of the ruling PRD of winning an historic second term in the May 2009 elections.
• The PP's decision to join the alliance of parties formed by Mr Martinelli, the Alianza por el Cambio, has made it likely that a Martinelli administration would hold a legislative majority, avoiding the risk of legislative deadlock.
• The fiscal accounts will undergo a sharp deterioration in 2009 as government income is hit by falling trade and GDP growth, with little improvement in 2010 as sluggish growth continues to hold back revenue.
• After downward revisions to our US and global forecasts we now expect Panama’s economy to contract by 1.3% in 2009 (down from growth of 3.4%) and stage only a mild recovery in 2010, growing by 1.4% (down from 4.1%)
• After ending 2008 at an estimated 6.8%, inflation will slow sharply in 2009, ending the year at 2.1% as oil and other commodity prices ease, rising to 2.7% at end-2010 as demand and commodity prices stage a modest recovery.
• With consumer demand and commodity prices falling, the current-account deficit will narrow to around 7.1% of GDP in 2009, before rising to 9.2% in 2010 as Canal-related capital imports increase.

Monthly review

• The May 3rd 2009 elections look set to mark a historic break from the two-party rule which has dominated modern politics in Panama, with Mr Martinelli over 20 points ahead of the PRD's candidate, Balbina Herrera.
• The decision by the PP candidate, Juan Carlos Varela, to abandon his presidential bid in favour of running as Mr Martinelli's vice-president has raised the likelihood of Alianza por el Cambio winning a legislative majority.
• Despite recording a fiscal surplus for the third consecutive year in 2008, fiscal performance deteriorated towards the end of the year as economic slowdown began to hit revenue growth and spending continued to increase sharply.
• The government has announced the creation of a US$1.1bn contingency fund for banks and other financial institutions facing a rupture in credit lines with foreign banks.
• The thee pillars of economic growth—transport, banking and construction—all showed signs of stress in the final quarter of 2008 alongside falling demand.

Source: Country Report