Growth accelerates into Q3 as external risks rise; the policy agenda broadens
Panama entered the second half of 2026 with considerably more strength than expected earlier in the year. Real GDP expanded 6.4% year on year in Q2, up from 4.8% in Q1, while the IMAE accelerated further, reaching 8.5% in July after expanding 8.2% in June. However, growth remains uneven across the economy: transportation, commerce and externally driven activities are leading the expansion, while construction, financial services and other more domestically oriented sectors are expanding at a more moderate pace.
The macroeconomic risk profile has also changed. Higher fuel prices are beginning to raise transportation costs, while the U.S. Federal Reserve increased the federal funds target range by 25 basis points to 3.75%-4.00% on September 16. For a dollarized economy, tighter U.S. financial conditions will eventually feed into domestic funding and lending costs. The current expansion therefore entered the second half of the year from a stronger-than-expected starting point, but against a less supportive external environment, consistent with the risks highlighted in our previous report.
Fiscal performance through July showed improvement. The NFPS deficit narrowed to $2.64 billion, or an estimated 4.8% of January–July GDP, from $2.96 billion or 5.6% a year earlier, while the primary deficit also declined. The improvement reflected higher Social Security revenues following the pension reform (+14.1%), capital revenues from land sales to the Canal, and a 1.8% decline in capital expenditure. The figures nevertheless require context—nearly 45% of annual Central Government revenues are typically received in Q4, particularly Canal transfers and public-enterprise dividends. The Canal is also taking on a larger fiscal role: its FY2027 budget projects revenues of $5.56 billion, 6.7% above FY2026, while direct Treasury contributions rise almost 13% to $3.61 billion (3.6% of projected GDP, compared with 3.3% last year).
Two developments will be especially important for 2027. The government’s review of Cobre Panama is moving into a more substantive technical phase, although no reopening decision has been made. MEF Minister Felipe Chapman stated the latter would be announced in the upcoming weeks, not in December as previously suggested. At the same time, the Canal is budgeting larger transfers while preparing for challenging hydrological conditions, including the possibility of a strong El Niño event. Together, these issues will help determine whether stronger growth can be sustained while fiscal consolidation continues.
September also marked a shift toward a broader and more simultaneous reform agenda. After initially concentrating political capital on Social Security and Cobre Panama, the government is now advancing several initiatives in parallel, spanning public-private partnerships, electricity, tourism, banking regulation and investment-related immigration rules, while pension-related benefits are also under discussion. The agenda combines measures intended to mobilize private investment and support economic activity with others focused on consumer protection and household finances. The timing may allow the administration to advance reforms before the next electoral cycle becomes more prominent, and ahead of a potential reopening of the copper mine.
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