Country Report Panama June 2009

Summary

A new president, pro-business conservative and founder and leader of the Cambio Democratico (CD) party, Ricardo Martinelli, takes office from July 1st 2009 following a landslide victory in the May 3rd election.
Despite a strong mandate, the incoming president's ability to move ahead with his reform agenda will be tempered by the economic downturn.
With expectations high for rapid improvements in areas such as crime and corruption and the upholding of campaign pledges of public investment, we expect MrMartinelli's honeymoon period to prove short-lived.
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.
We have revised up our forecast for GDP growth following first-quarter data showing that, although growth decelerated sharply, it remained 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 7.4% of GDP in 2009, before rising to 8.4% in 2010 as Canal-related capital imports increase.

Some of Mr Martinelli's cabinet and other government appointments have met with criticism for a perceived lack of experience and appropriate qualifications in the appointees.
The Obama administration has abandoned attempts at a swift ratification of the free-trade agreement (FTA) with Panama, with the US Congress demanding improvements in tax information exchange and labour rights.
Fiscal rules limiting the size of the non-financial public sector (NFPS) deficit have been eased; instead of a 1% of GDP maximum, the deficit will be allowed to reach up to 3% of GDP in 2009.
Although growth remained positive in the first quarter, a number of indicators for key sectors that have supported growth in recent years continue to register ongoing rapid decelerations or contractions in activity.