Country Report Panama July 2009

Summary

A pro-business conservative, and founder and leader of the Cambio Democratico (CD) party, Ricardo Martinelli, was sworn in as president on July 1st 2009 following a landslide victory in the May 3rd election.
Despite a strong mandate, Mr Martinelli's ability to move ahead with his reform agenda will be hampered by the economic downturn.
Economic downturn and a projected real (inflation-adjusted) decline in fiscal revenue will complicate the Martinelli administration's ability to introduce a policy agenda including tax reform and countercyclical investment spending.
The fiscal accounts will undergo a sharp deterioration in 2009 as government income is hit by falling trade and a sharp slowdown in GDP growth, with little improvement in 2010 as sluggish growth continues to hold back revenue.
First-quarter data showing growth of 2.5% support the Economist Intelligence Unit's forecast for GDP growth to decelerate sharply in 2009 but remain positive. We expect GDP growth of 1.4% in 2009, rising to 1.9% in 2010.
After ending 2008 at 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 9.6% of GDP in 2009, before rising to 12.2% in 2010 as Canal-related capital imports increase.

A new legislature was sworn in on July 1st, and is notable for the number of new faces: almost two-thirds of the new assembly are either first-timers or legislators returning after several years outside elected office.
Legislation approved by the outgoing legislature relaxes the fiscal constraints on the Martinelli government, allowing it to run a non-financial public-sector (NFPS) deficit of a maximum of 3% of GDP under certain circumstances.
GDP growth slowed to 2.5% in the first quarter of 2009, less than one-quarter of the average for quarterly growth rates posted over the past two years, and the slowest quarterly rate of expansion since 2003.
In a sign of the impact on domestic demand of growing uncertainty over the direction of the economy being felt by consumers, commercial activity, accounting for almost 12% of GDP, shrank by 10% in the first quarter.
Despite the international financial crisis, first-quarter capital flows into Panama were not derailed by difficult capital market conditions, with the surplus on the capital and financial account registering a 43% increase.

Source: Country Report