World Economy

Panama Economy Robust

Panama Economy RobustPanama Economy Robust

Panama’s diversified, service-based economy will continue to support its sovereign credit quality despite the leaks from law firm Mossack Fonseca, which have generated scrutiny of the country’s offshore financial services industry, Fitch Ratings says.

But the full implications for Panama’s financial center are unclear, and the possibility of indiscriminate reputational damage presents downside risks to investment and growth, IIFL reported.

Strong and stable macroeconomic performance supports Panama’s sovereign rating, which we affirmed at ‘BBB’/Stable in February. We forecast real GDP growth of 6.1% this year and 6.4% next year.

Financial services make a meaningful contribution to the economy, accounting for 7% of 2015 GDP, but Panama is more diversified than many other financial centers. Logistics and free-trade-zone commerce in the Panama Canal “cluster” represent around 20% of GDP and will benefit from the Canal expansion set to open soon. Tourism is a large and dynamic sector, while mining and electricity generation are emerging as important growth drivers.

Robust private investment in Panama has been largely financed via foreign direct investment, reflecting solid economic fundamentals, and local bank lending funded by local deposits. Real estate development has been an important investment driver in the past decade, supported in part by foreign purchases of high-end properties. This market has cooled, but broader construction activity remains well supported by public works and other private projects.

 Reputational Risks

Nevertheless, the spotlight on Panama at a time of heightened international interest in financial transparency may rekindle reputational risks to its globally integrated financial and service sectors.

Transparency concerns have been a recurring risk in the past. For example, Panama’s inclusion on the Financial Action Task Force’s “grey list” in 2014 created difficulties for smaller banks in maintaining correspondent banking relationships. Panama was on the OECD’s grey list until 2011, and has been included at various times on unilateral lists maintained by individual countries (notably Colombia, a key economic partner, for a short period in 2014).

It is not yet clear if the Mossack Fonseca revelations threaten to reverse recent progress in mitigating this reputational risk. The FATF cited Panama’s “significant progress” in enacting anti-money-laundering legislation when it removed Panama from its grey list earlier this year.

The most visible consequence of the Mossack Fonseca revelations so far has been France’s decision to put Panama back on its list of non-cooperative states and territories.