Country Report Panama March 2009

Summary

Victory in the May 2009 general elections, as now seems certain, for RicardoMartinelli of the Alianza por el Cambio, would mark a break from 20 years of alternating centre-left PRD and centre-right PP rule.
Rising crime rates, party infighting and corruption allegations appear to have all but ended the chances of the ruling PRD winning another term.
The Partido Panamenistas decision to join Alianza has made it likely that a Martinelli administration would hold a legislative majority, at least at the outset of his term, avoiding the risk of early legislative deadlock.
The fiscal accounts will undergo a sharp deterioration in 2009 as government income is hit by falling trade and a contraction in GDP, with little improvement in 2010 as sluggish growth continues to hold back revenue.
Recession in the US and regional markets, falling world trade and financial market stresses will result in Panamas economy contracting by 1.3% in 2009 and staging only a mild recovery in 2010, growing by 1.4%.
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 7.2% of GDP in 2009, before rising to 8.3% in 2010 as Canal-related capital imports increase.

A campaign financing scandal surrounding the PRD and a graphic example of the deteriorating security situation have further damaged the already dim prospects for the ruling party in the May 3rd elections.
Alianza plans to introduce a flat-rate tax as part of a fiscal reform that would impose an across-the-board tax of between 10% and 15%.regardless of income on individuals and businesses
After growing by 9.9% in January-September, GDP growth in Panama slowed to 7.3% year on year in the fourth quarter of 2008 as the effects of deteriorating external conditions began to be felt.
In an illustration of the impact that the seizure in international financial markets is having on Panama's banking sector, the financial services sector contracted by 7.7% in the fourth quarter.
Domestic export earnings fell by 26% in the fourth quarter of 2008; canal traffic and trade in the Colon free-trade zone contracted in January-February.