Panama’s Key Trade And Financial Hub Status Makes It Well-Placed To Absorb Exogenous Shocks

• Panama’s dual function as a regional finance hub and a critical chokepoint in global merchandise trade means the economy will continue to channel foreign currency transactions and financial flows that comfortably exceed the size of its overall output.
• While seemingly excessive by other Emerging Market standards, Panama’s external accounts reflect its central role in trade and finance in the Western Hemisphere and are unlikely to be destabilising in the foreseeable future. Key to this are stable financial institutions, transparent governance, a dollarized economy, and the geographic location of the Panama Canal.
• Following a sharp widening of the current account deficit in late 2023 due to an abrupt drop in Canal activity, Fitch Solutions expects the deficit to widen again to 4.8% of GDP in 2024, up from 4.5% in 2023, before narrowing to 3.4% in 2025.
• That said, Panama’s external position will remain vulnerable to climatic changes, as well as external cyclical downturns, de-globalisation, and the challenges posed by coordinated crackdowns on tax havens in the longer term.
• Nevertheless, Panama has proven highly resilient in the face of such challenges in previous years and its high capacity to borrow externally and attract large quantities of foreign direct inflows (FDI) means the economy is well placed to continue adapting to changing climatic conditions.

(Source: Fitch Solutions)