The "rebound effect" versus the "hysteresis effect": The projections for the economy in 2021 are betting on the former, but we analyze the latter

PANAMA - Report 01 Jun 2021 by Alex Diamond and Marco Fernandez

The IMF projects 12% real growth for the year, based on three factors: the vaccination rollout, the private investment recovery, and the "rebound effect" after a 17.9 percent drop in economic activity in 2020. Rating agencies and other international analysts are also projecting double-digit growth for 2021. Our projections are less rosy. In this report, we examine why.

The balance of risks is tilted downwards. The speed of the vaccination process may accelerate families' consumption as new activities continue to reopen. However, the end of the amnesty on payments of bank loans, utilities, and telecommunication services at the end of June will put pressure on the liquidity of firms and individuals, as they will start negotiations to restructure their debts.

The IMF's Concluding Statement for the Article IV Consultation Mission published on May 17 presents projections and warnings about the economy for the medium term. We evaluate in this report the bases for their forecast and the medium-term risks.

The news to follow during June is the advance of the third phase of the dialogue about the pension plan, the efforts of the government to exit the FATF grey list, and the possible effects on the banks' provisions at the end of the moratorium in July. We discuss all of these and give our policy forecast on these issues in our report.

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