While GDP growth last year came in higher than expectations -- at 4.4% as against the EIU's projected 3.7% -- and thus almost double the 1996 rate, our forecast for 1998 and 1999 is now less bullish. We see 4% growth this year (rather than 4.7%) and a further drift down, to 3.7%, in 1999.
Investment will remain the major source of growth, with high levels of spending on transport infrastructure (notably ports and roads) linked to the Canal and the Colon Free Zone (CFZ) and the re-development of land and facilities that are being handed over by the US authorities under the provisions of the Torrijos-Carter treaties. But there are also downward pressures. The fallout from the Asian crisis in terms of activity at the CFZ is uncertain, in both duration and extent, but it will undoubtedly be negative. Particularly relevant is the knock-on effect on the volume of Latin American trade, which accounts for most of the transactions at the CFZ. Meanwhile although the severity of the climatic upset generated by the El Nino phenomenon is expected to abate in coming months, the drought it has brought to Panama has already hit some crops and forced restrictions on the draught of ships passing through the canal, which will dent revenues this year.
-- and the current account will go into deficit
The slight weakening in GDP growth will not dampen demand for imports, which will be driven by the strength of investment and stimulated by tariff cuts meeting World Trade Organisation requirements. Meanwhile, the pace of export growth will be slowed by reduced demand for CFZ goods and generally weaker prices for traditional domestic exports, the volume of some of which will fall this year because of drought. The trade gap is therefore projected to widen yet again, to just over $1bn in both years. While the surplus on invisibles should be held up by further improvement in tourist receipts and growth in the financial sector, the current account is expected to return to deficit this year, of $242m. The pick-up in revenues at the canal should allow a slight reduction in the deficit next year, despite a higher trade imbalance.
Forecast summary ($m unless otherwise indicated) 1996(a) 1997(a) 1998(b) 1999(b) Real GDP growth (%) 2.4 4.4 4.0 3.7 Consumer price inflation (year-end; %) 2.3 1.2 1.5 1.5 Merchandise exports fob© 5,889(d) 6,890(d) 7,412 7,930 Merchandise imports fob© 6,518(d) 7,794(d) 8,550 9,115 Current-account balance -60 -282(d) -370 -361 Exchange rate (year-end; B:$) 1.00 1.00 1.00 1.00 (a) Actual. (b) EIU forecasts. © Includes imports and re-exports from Colon Free Zone (CFZ). (d) EIU estimate.