Mixed messages from the IMF Article IV. The copper mine at Donoso faces an uncertain road ahead. Moody's credit review in November will determine the investment grade status of the sovereign rating.
The IMF's latest Article IV report shows that Panama’s economic outlook remains cautiously optimistic. Growth is projected around 4%, potentially reaching 5% if large infrastructure projects move forward. A key IMF warning is the need to increase foreign direct investment and external financing to return to the historical 40% investment-to-GDP target. However, fiscal adjustments planned for 2025–2026 focus heavily on cutting public investment, posing risks to growth. Additionally, the declining share of labor income since 2017 reflects deepening social inequality, which could hinder future initiatives.
On the political front, pension reform is not resulting in major social unrest, and there is limited progress in draft bills seeking to reverse it. President Mulino’s constitutional reform proposal also remains undefined, while a citizens' initiative is underway to call elections for a Constituent Assembly in 2027. Meanwhile, the housing interest subsidy program continues to face structural challenges. Chronic underpayments have generated floating debt of over $500 million, prompting extraordinary treasury operations in 2023 and 2024 that were not recorded in the NFPS deficit. Although the recent legal changes, backed by the private sector, could help revive mortgage lending for homes priced below $120,000, the program’s sustainability remains uncertain and banks are cautious.
Several large infrastructure projects are underway, including the Río Indio multipurpose reservoir for the Canal, two new container terminals, an LPG pipeline, the Panama-David railway, the Fourth Bridge, Metro Line 3, and new ports in Colón and Chiriquí. These projects are vital to sustaining medium-term growth and reducing future debt and deficit pressures, although some face environmental, political, or financing challenges. The Panama-David Railway carries high fiscal and operational risks with unclear returns. We are not bullish about this undertaking.
President Mulino aims to reopen the Donoso copper mine under a state-owned enterprise model but is facing legal and constitutional barriers. The Supreme Court’s 2023 ruling declared the previous mining law unconstitutional and requires any new concession to go through public bidding. Current law also prohibits mining projects under public-private partnerships. Despite optimism from the administration and markets, restarting production by next year will require overcoming significant legal and political hurdles, and the Supreme Court and National Assembly are potential flashpoints.
Now read on...
Register to sample a report