Panama’s economy could contract 17% in 2020


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In 2020, Panama’s economy could suffer a 17% contraction because of the Covid-19 pandemic.

The impact of the export activities of goods and services would have a mixed behavior and not as pronounced as the internal economic activities.

The activities most impacted in 2020 would be construction and mines and quarries, with contractions of 29.3% and 28.1% respectively.

Hotels and restaurants would fall by 20.1% in 2020 due to the closure of airports and the cessation of the arrival of tourists.

The transport, storage and communications sector would contract by 18.7% in 2020, due to the closure of the airport, the drop in ship transits through the Panama Canal, the restriction of mobility of people imposed by the Panamanian government.

Wholesale and retail trade would drop by 14.8% in 2020, also due to people restrictions, which started in March and would last until December 2020. Consequently, electricity supply would drop by 16.3% in 2020.

Many people would be in suspension of their employment contracts and others would be fired, so the country’s unemployment rate could be 30% in August 2020. As a result, employees could not pay their mortgage, car, personal and credit cards, for which the financial intermediation sector could suffer a contraction of 13.3% in 2020. However, the liquidity of the banks was 61% as of July 10, 2020, this being a robust percentage of liquidity, although under these circumstances the smaller banks could have some difficulties.

The evolution of the pandemic has forced health officials to quarantine 2 million people during the second quarter of 2020. These measures quarantine was accompanied by the closure mandatory in many economic activities, such as shopping malls and shops selling clothing, footwear, appliances, and electronic devices. Likewise, it was forced to close the construction activity and related activities, the mining of copper ore. Public and private schools also had to close. Real estate, business and legal services activities were also affected.

On the other hand, when the mobility of 2 million people was restricted, the demand for gasoline plummeted, and it even forced some fuel sales stations to temporarily close. The mobility restriction also severely impacted the demand for commercial electrical energy.

Air transport of passengers in transit and tourists closed completely, leaving only freight and humanitarian flights. All activities related to tourism, such as hotels, restaurants, travel agencies, tour operators, and tourist transport, ceased operations.

Transits through the Panama Canal grew in the first quarter of 2020 but contracted in double digits in the second quarter and continued this trend in the third quarter. The Colon Free Zone continued its downward trend. However, container transshipment ports showed double-digit growth, due to a regional relocation of containers that has been occurring since August last year.

The evolution of the pandemic

With quarantine measures in the second quarter of 2020, the number of deaths remained between 4 and 5 per day. However, the number of infected persons grew during this time at a faster rate than the number of infected persons detected positive by test (called in health statistics as “confirmed cases”).

During the first quarter we estimate that 2 million people were quarantined. But towards the end of the second quarter the health authorities began to remove from the quarantine a certain amount of population and economic activities, leaving only 1.3 million people in quarantine. Due of this, the infections in the population shot up exponentially and detections by trial continued one linear trend contrary to the exponential trend of daily infections, which led to a significant increase in the percentage of positive tests, from 18% on 1 May 2020 to 43% on July 13. As a result, deaths increased to 30 per day on July 11.

Assumptions of the economic projection

We estimated the number of infected people in the population at 99 thousand people as of July 12, 2020 and that they would double within 30 days in the current scenario. Due to this, the number of daily deaths would go from 30 per day on July 11 to 50 per day on July 31, 2020.

Given these projections of mortality we anticipate that health authorities promptly establish a new quarantine could return to confinement 2 million people or more. We assume that this new quarantine would last 60 days so that the number of deaths per day can drop to 12 per day and there is no rebound that cannot be supported by current health resources.

In this scenario, we anticipate that there will be confinement in the third quarter of 2020. We assume that the removal of the confinement would begin gradually on October 1, 2020, and by December 1 there would be no more person confinement.

The end of the pandemic will occur in the first quarter of 2021, leaving a balance of 5,284 people died and 29% of the population would be infected with the virus.

The collapse of the economy in the second quarter of 2020

Panama’s economy could have contracted around 30% in the second quarter of 2020, after having grown only 0.4% in the first quarter. The huge contraction in the second quarter was due to quarantine measures taken by the Panamanian government.

On March 9, the mobility of people was -0.7%, but with quarantines it fell dramatically to -81% on March 31, 2020. This drop in mobility of people remained at -81% on April 30. This dramatic drop in mobility was because 2 million of people were quarantined. What these figures indicate is that, due to quarantine measures, people stopped moving to their jobs, shops, and entertainment venues.

Then there was a relaxation of quarantine measures and mobility had dropped to -67% by May 31. Since the last week of June and the first two weeks of July, the contraction in mobility has remained at -60%. Specifically, the Panamanian government divided economic activities into several blocks of activities and released the first two blocks from quarantine. We estimate that currently 1.3 million people are in quarantine, compared to 2 million people in quarantine during the month of April.

The government measures entailed to the closure of airports, gridlock arrival of passengers in transit and tourist arrivals; the total closure of hotels and restaurants; the total closure of shopping centers; the stoppage of mass transportation (metro, metro bus, corridors and taxis); the prohibition on the sale of alcoholic beverages; the total closure of the construction and its related activities (production of cement, ready-mix concrete, extraction of sand and stone); the total stoppage of the production of copper ore for export; the stoppage of car sales; the interruption of public and private education activities.

Although other economic sectors were not paralyzed by quarantine, they also suffered a sharp contraction in the second quarter. In this sense, there is a significant reduction in the sales of fuel stations, the contraction in the demand for energy from industrial and commercial activities; the contraction of the transits of ships through the Panama Canal; the fall of re-exports from the Colon Free Zone.

Few activities managed to have growth during the second quarter, among which are the container transshipment ports and the Panama railway.

The official figures that have been published show a huge negative impact, because of the suspension of economic activities and the quarantine measures. These figures, together with the quarantines that we are forecasting for the second quarter, are a clear sign that the economy of Panama will suffer a double-digit contraction in 2020 (17% according to our projection) .

Given the observed results for the first half of the year, everything indicates that exceeds by a huge margin the forecasts for Panama made by the International Monetary Fund (IMF) , World Bank and Economic Commission for Latin America and the Caribbean (ECLAC), whose consensus was -2% in 2020 .

Specifically, it is observed that in the first quarter GDP grew just 0.4% due to the fact that some sectors were already having negative results, such as tourism, the Colon Free Zone, the sale of cars, the production of cement and ready-mix concrete , the extraction of sand and stone, the slowdown in bank credit . The Panama Canal, the movement of containers, the export of bananas and the export of copper ore prevented the economy from contracting in the first quarter.

However, in April, the Monthly Economic Activity Index (IMAE) contracted enormously by 34.7%, because of the closure of many economic activities and the quarantine measures adopted by the government that led to the restriction of the mobility of persons. The IMAE has not yet been published for the months of May and June, but the situation did not change much in that period because also most of the activities that were closed in April remained equally closed in the following months.

The Panama Canal had a double-digit contraction during the months of April and May 2020. Transits decreased 15% and 20% in April and May, respectively. However, revenue grew 5% during April, and contracted 9.5% in May. This different behavior of income with respect to transits is because the Canal collects tolls based on the use of cargo capacity. Also, because in general the Canal administration increases tolls year by year. The Panama Canal’s share of GDP is 5%, and 68% in non-tax revenue, so the contraction will have a huge impact on government revenue.

Both air transport activity and Tocumen Airport itself contracted by more than 90% in the second quarter of 2020. Passenger and tourist traffic through Tocumen Airport stopped completely during the entire second quarter of 20-20. The only flights during that period have been those for humanitarian purposes.

Passenger transport through the metro lines contracted 89.3% and 92.1% in the months of April and May 2020, respectively, due to the mobility restrictions on people imposed by the government. Likewise, for the same reason the movement of cars on the North and South highways fell 85% and 77.8% in the months of April and May 2020, respectively.

Gas station sales contracted by 63.5% and 57.4% in April and May 2020, respectively, because of restrictions on people’s mobility and the suspension of many economic activities.

Auto trade fell 97.4% and 97.6% in the months of April and May 2020 respectively, because of the government’s measures to suspend this activity.

Hotel activity suffered a 100% contraction in the period from April to June, due to the government’s order for complete suspension, but some have been used by health authorities to isolate people infected with Covid-19.

The closing of the restaurants was only partial because it could continue with the deliveries of home orders and the attention through auto fast. However, most restaurants are not prepared to work that way.

The energy consumption of commercial activities decreased dramatically by 27.2% and 43.5%, in April and May respectively due to the cessation of activities in shopping centers and offices.

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