Panama Maintains Economic Forecasts Despite Budget Withdrawals

By Kylie Madry and Elida Moreno

PANAMA CITY (Reuters) – Panama will maintain its economic forecasts for next year, despite the government retracting its budget proposal following congressional pushback, said Economy and Finance Minister Felipe Chapman in an interview on Friday.

"Our economic projections are not going to change," Chapman affirmed. "We'll keep working on a budget based on an estimate of… real gross domestic product growth of 3%."

The initial proposal aimed to cut spending by about 15%. Chapman noted he was unsure if the new budget would reflect a similar reduction.

Last week, Chapman returned to reconsider his approach after the congressional budget committee raised concerns, particularly regarding a forecast indicating a higher deficit than permitted under current regulations. A proposal to reform the fiscal and social responsibility law will be submitted on Monday, Chapman stated.

"That law does not take into account exogenous factors that could alter compliance capability," he remarked, citing the pandemic and a recent drought that has affected operations at the Panama Canal, a significant global trade route.

The reform will introduce flexibility, aiming to progressively decrease the deficit ceiling, he mentioned.

The government plans to introduce a five-year fiscal plan by year-end targeting a "soft landing."

Buy-in from Investors

Investors are showing increased confidence in Panama's debt reduction strategies, Chapman noted. The yield on one-year treasury bills averaged 6.07% in recent auctions, down 33 basis points from August and September.

During a recent trip to New York, Chapman met with ratings agencies, bondholders, and banks that proposed significant credit lines without solicitation. However, he did not elaborate further.

While Fitch downgraded Panama's sovereign rating to junk in March, the minister expressed optimism about ongoing dialogues with agencies.

Chapman mentioned external factors as his primary concern for Panama's economy, particularly the potential impact of continues drought.

Efforts are underway to mitigate future droughts affecting the Panama Canal, including a plan to dam the nearby Rio Indio as a long-term solution, although in the short term, it may pump water from Bayano Lake, which he acknowledged is not ideal.

The government is nearing an agreement with independent experts to assess the future of copper concentrate from the now-closed First Quantum copper mine. Panama’s Supreme Court had declared the mine’s contract unconstitutional last year amid environmental protests.

While the government remains open to allowing exports of already-mined copper, no specific timeline has been established. Any future agreements must consider public opinion, as a recent poll indicated two-thirds of Panamanians oppose restarting the mine's operations. Any potential deal would likely require higher royalty fees to gain citizen support, Chapman concluded.