Growth beat expectations in 2025, but labor market slack, debt management complexity, and oil price risk cloud the outlook
Panama's economy grew by 4.4% in 2025, above expectations, supported by a solid fourth quarter and particularly strong performance in transportation, commerce, and construction. Even so, the annual result remained heavily influenced by the hydrological recovery of the Canal. Excluding transportation, growth was much closer to 3.0%, pointing to a more moderate pace in the rest of the economy.
Labor market data were weaker than headline GDP growth would normally suggest. Employment did increase in 2025, but unemployment also rose because labor force growth outpaced job creation. Between October 2024 and September 2025, the labor force expanded by more than 45,000 people, while employment increased by roughly 27,500 jobs, concentrated in the private sector and strongest among larger firms. As a result, the unemployment rate climbed from 9.7% to 10.4%.
Recent activity indicators remained supportive at the start of 2026. The IMAE pointed to average year-to-date growth of 4.1%, while autos, beer, concrete, lending, Canal toll revenues, tourism spending, and electricity generation all posted positive readings. However, the recovery was not uniform: higher-end residential sales fell 15.6% year on year through February, likely reflecting the transition to the new mortgage-subsidy regime and the expiration of the 2% transfer-tax exemption for new-home sales from January 2026. If weakness persists, it could eventually weigh on construction, Panama's second-largest sector, at roughly 13% of GDP.
At the same time, sovereign debt management has become more active and more diversified. Panama has increasingly combined eurobond issuance with bank loans in euros, Swiss francs, and yen, using refinancing operations and liability-management transactions to reduce near-term rollover pressure and broaden funding options. The strategy improves flexibility, although it also adds some operational complexity.
The main macro risk is now external. The Iran shock has pushed oil prices sharply higher, producing the strongest domestic fuel adjustment since the Ukraine episode and materially worsening the inflation outlook for 2026. Higher oil prices could also reduce activity at Petroterminal de Panama (PTP), trimming government dividend income and creating a small second-round fiscal drag. In other words, Panama enters the year with decent growth inertia, but with a less benign price environment than previously assumed. Another emerging issue is the ethanol bill approved in a first debate: by mandating a 10% ethanol blend while prioritizing domestic supply, it could require meaningful downstream infrastructure investment and, absent competitive local production, operate as an implicit subsidy to producers, financed by gasoline consumers.
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