Short-term boost, long-term bets: Panama Canal projects and the economic outlook
Panama’s economy posted strong 5.2% GDP growth in Q1 2025, driven primarily by the recovery of the Panama Canal and the expansion of Copa Airlines. The transportation sector alone contributed 56% of total growth, reflecting a rebound in toll revenues (+42.4% YoY) following the 2024 drought and the Canal’s return to full operational capacity. However, underlying domestic demand remains weak, with non-transport GDP growing just 2.5%. We expect growth to decelerate to 3.6% by year-end, as the rebound from Canal-related activity fades. Weak labor market dynamics and flat interest rates will likely limit domestic momentum.
Looking ahead, growth prospects hinge on the successful implementation of long-term infrastructure projects, particularly those led by the Panama Canal Authority. These include the Río Indio reservoir, a trans-isthmian LPG pipeline, and two new ports, representing over $5 billion in planned investment. If executed smoothly, these could push growth toward 5% by 2027. However, delays in the reopening of the copper mine, which is unlikely before mid-2026, pose downside risks, and in the absence of Panama Canal investments, medium-term growth could drift down to around 3.0%.
Panama’s current account remains stable, bolstered by Canal revenues, while FDI rose to 2.3% of GDP, primarily from the reinvested earnings of existing firms, notably in banking and the Colón Free Zone. This underscores investor confidence but also signals a continued struggle to attract new greenfield investment.
On the fiscal front, the government has floated a “functional” reform proposal that would not raise existing tax rates, with the first announced component focused on taxing digital services. While this measure could generate an estimated $70–100 million annually, according to the Vice Minister of Finance, we do not anticipate meaningful fiscal reform in 2025, as the government’s top priority remains the reopening of copper mining operations. Ongoing efforts to modernize tax administration—carried out with international support—may deliver modest revenue gains, but broader structural reforms appear unlikely in the short term.
Now read on...
Register to sample a report