Country Report Panama September 2009

Outlook for 2009-10

• The newly elected president, Ricardo Martinelli, will struggle to fulfil high popular expectations given the untested nature of his congressional support base, and the financial constraints imposed by an economic downturn.
• A two-part fiscal reform will help mitigate a sharp fall in revenue, but the government will still struggle to fulfil campaign pledges of a sharp increase in spending within the constraints of the fiscal responsibility law.
• Banking liquidity appears to have remained adequate, but banks will remain conservative in credit provision and will prefer to raise interest rates to boost profitability, even though this strategy could boost non-performing loans.
• 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 1.2% in 2009, rising to 2.4% in 2010.
• After falling to 1.9% in July, inflation will pick up marginally towards the end of 2009, partly reflecting a higher base of comparison. But at 2.3% at end-2009 and 2.7% at end-2010, price pressures will remain relatively muted.
• In spite of a rebound in total export earnings, a sharp increase in Canal-related capital imports will contribute to a doubling of the current-account deficit to around 14% of GDP in 2010.

Monthly review

• The first comprehensive opinion poll conducted on the Martinelli administration has indicated firm levels of public support. However, the poll has highlighted the public's extremely high expectations of the government.
• The government has sought to demonstrate that it is following through on campaign promises to address corruption, with the arrest of a former education minister on charges of embezzlement.
• The government has submitted the first part of a two-stage fiscal reform bill to the National Assembly. After first reading modifications, some measures were watered down, but if passed it will still provide a boost to tax income.
• The possible reintroduction of income tax in the ZLC has drawn strong objections from firms operating in the zone, which have accused the government of measures that damage the business climate.
• The banking sector has weathered the international financial crisis relatively well, but profitability indicators have deteriorated in recent months.
• First-half results have indicated that ZLC trade is not faring as badly as expected, with trade flows picking up in June.

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52