Panama

Fiscal consolidation is underway, but Panama’s public finances remain a key vulnerability. The non-financial public sector deficit is expected to narrow to 3.6% of GDP in 2026, yet debt is projected to get close to 70% of GDP by 2027. Interest payments consume a growing share of revenues, and reliance on short-term external loans has increased refinancing risks, with large maturities looming in 2027-2028. While Panama has avoided a spike in insolvencies, business failures remain elevated in sectors hit by the mine closure and could rise again in the event of canal disruptions. The government’s exclusion from international capital markets since early 2024 has heightened dependence on bank loans, some in foreign currencies, adding FX risk despite dollarization. Maintaining investment-grade status will require credible fiscal reforms and improved revenue collection, as rating downgrades could raise borrowing costs and pressure the financial system.

Panama’s political landscape remains fragile following the 2024 elections, with President Mulino’s administration reliant on a fragmented coalition, and increasing geopolitical pressure on the region. While passage of social security reform in 2025 was a key achievement on the local front, limited political capital constrains broader fiscal and pension reforms. Public distrust in institutions is high, as seen in recent mass protests over mining and environmental issues. The unresolved dispute over the Cobre Panamá mine and ongoing litigation with international investors add to uncertainty. Opposition parties show some willingness to cooperate, but legislative gridlock remains a risk. The government’s ability to advance its agenda will be tested by demands for improved public services, subsidy pressures and the need for fiscal consolidation. Climate change and social tensions, particularly around canal operations and indigenous rights, could further destabilize the political environment. The strategic importance of the canal and its significance in terms of trade and regional security have heightened as major global powers vie for influence. Increased diplomatic pressure from the US could complicate Panama's foreign policy and economic relations, adding another layer of complexity to its political challenges.