Country Report Panama September 2008

Outlook for 2008-09

• With national elections in May 2009 attention will increasingly focus on the campaign to determine the next government, which is due to take office in September 2009.
• Despite public concerns about inflation, crime and shortcomings in public services, the Economist Intelligence Unit expects the centre-left Partido Revolucionario Democratico (PRD) to win a historic second term in 2009.
• Although we have revised up our growth forecasts for 2008, to 8.4%, from 7.4%, following a stronger than expected first-half performance, full-year growth will still weaken progressively during 2008 and 2009.
• We expect the impact of slowing global growth to be more keenly felt in 2009 in weakening demand for Panama's all-important transport-oriented services exports, resulting in growth slowing to 6.4%.
• With oil and other commodity prices beginning to ease, inflation is set to peak at end-2008, before slowing to 8.9% at end-2009 as commodity prices fall further and domestic demand eases.
• With growth slowing and investment related import spending weighing on the external accounts, the current-account deficit will widen to 11.9% of GDP in 2008, before stabilising at 12% in 2009 as import prices ease.

Monthly review

• The former minister of housing, Balbina Herrera Arauz, narrowly defeated Juan Carlos Navarro, the mayor of the capital, Panama City, in the ruling PRD's September 7th primary elections.
• Although Ricardo Martinelli has similar approval ratings to Ms Herrera, polemical exchanges between him and the other main opposition candidate, Juan Carlos Varela, have dimmed prospects for a unified opposition alliance.
• In spite of sharp growth in capital spending, non-recurrent capital income helped the non-financial public sector (NFPS) record a first-half fiscal surplus for the second consecutive year in 2008.
• GDP growth accelerated to 10.1% in the second quarter, from 8.9% in the first quarter. However, first-half growth of 9.8% still represented a marked slowdown compared with the first half of 2007.
• Financial intermediation has continued to show the effects of deteriorating external conditions, posting growth of 4% in the second half, compared with average growth in excess of 17% over the past two years.