Panama's Current Account Deficit To Widen Further, But Macro Risks Remain Contained

• Fitch Solutions forecasts that Panama’s current account deficit will widen from 4.2% of GDP in 2022 to 5.0% in 2023, before narrowing slightly to around 4.0% in 2024.
• The deterioration in Panama’s external position last year (from 3.2% to 4.2%) mostly reflected a weakness in goods trade linked to the run-up in commodity prices. While commodities pulled back somewhat over H123, food and energy prices in particular remain well above their 2015-2019 averages.
• Meanwhile, drought conditions have resulted in around a 10% decline in the number of ships passing through the Panama Canal, with the risk of more stringent measures being introduced later this year.
• This will weigh heavily on services exports, which account for around 40% of total exports. An easing of this drought should help the current account deficit fall to around 4.0% of GDP in 2024.
• While Panama’s external accounts will continue to compare poorly to peers in the Central American region, Fitch believes that risks to macro stability are contained. Panama has long-run large current account deficits – averaging 6.8% of GDP between 2015 and 2019 – reflecting its status as both an offshore financial centre and a regional hub for foreign direct investments (FDI).
• Persistently strong inward capital flows have consistently led to a large financial account surplus, the root cause of the wide current account deficit. While this year’s deficit will to a greater degree reflect weakness in exports, Fitch anticipates that it will be more than offset by inward capital flows linked to the fact that 1) Panama is expected to come off the Financial Action Task Force’s grey list later this year and 2) the government aggressively targeting near-shoring related FDI.

(Source: Fitch Solutions)