Following a surprise election victory on 4 May, current vice-president Juan Carlos Varela is Panama’s new president-elect. Representing the right-of-centre Panameñista Party (PP), Varela gained 39% of the vote, 8% more than José Domingo Arias of the ruling conservative party Democratic Change (CD) and 11% more than Juan Carlos Navarro of the left-of-centre Democratic Revolutionary Party (PRD). Despite being vice- president, Varela has fiercely opposed to the rule of outgoing President Ricardo Martinelli, among other things condemning alleged corruption in the administration and the incumbent’s increasingly authoritarian ways. In this light, the push by Martinelli – himself barred from running for a second term – to make his wife the vice-presidential contender on the Arias ticket was considered by many voters as an attempt to cling to power. This perception along with prevailing high levels of poverty, inequality and crime made for less electoral support for the CD than Panama’s phenomenal macroeconomic track record – GDP growth averaged 9.4% over the last four years and the unemployment rate stood at a record low of 4.3% at end- 2013 – had led to expect.
Impact on country risk
President-elect Varela will take office for a five-year term on 1 July. A key goal for the new administration will be to deliver on the campaign promises of ‘ending’ corruption and furthering social inclusion. Yet since the PP did not win a legislative majority, making quick headway on these fronts will prove complicated, in turn increasing the likelihood of protests. Regarding the economy, Varela has pledged to continue the business-friendly stance that has spurred growth and lured foreign investors to Panama. Furthermore, international trade will benefit from the prospective incorporation of Panama into the Pacific Alliance, a regional free trade bloc built around Mexico, Colombia, Peru and Chile. Considering macroeconomic challenges, the available room for countercyclical fiscal policies may help to address the overheating risk. Inflation has indeed been relatively high in Panama and the likelihood of a self-reinforcing cycle has increased in recent months as rising prices prompted strikes to demand higher wages in various sectors of the economy. In this context, it remains to be seen to what extent Varela will resort to price controls on food and basic goods – another campaign promise – in order to appease the population. If significant price controls were to be instated, this would negatively affect Panama’s commercial risk. Where the medium term is concerned, the nearing completion of main investment projects makes that Panama needs to move towards a new growth model. Investment in sub-par education will be crucial to boost productivity and competitiveness.
Analyst: Sebastian Vanderlinden, email@example.com