Shamed Panama Sees Its Flourishing Economy At Risk

The country has been a stellar performer in Latin America, but now a worldwide scandal about its massive offshore financial industry is putting Panama’s economic growth at risk.

Dubbed the Panama Papers, tens of millions of leaked documents of the law firm Mossack Fonseca showed earlier this year how some of the world’s most powerful people may have used offshore bank accounts and shell companies to hide their wealth or avoid taxes.

The backlash for Panama’s diversified economy could be significant, some economists say, with damage to its reputation perhaps moving above and beyond any direct impact on its flourishing financial industry.

Beating its neighbors, Panama expanded GDP at a rate of 6% for several years, thanks in part to an anticyclical spending spree that included the expansion of its famous Panama Canal. The International Monetary Fund sees the country’s GDP expanding 6.1% in 2016 and 6.4% in 2017, the highest rates in the Latin America and Caribbean region.

The $5.3 billion expansion of the Canal, a 50-mile waterway connecting the Atlantic and Pacific Oceans, will be completed this summer, and the investments, which so far have benefited the country’s economy, are soon to be wrapped up. The importance of the Canal still outweighs the offshore business.

“Financial services make a meaningful contribution to the economy, accounting for 7% of 2015 GDP, but Panama is more diversified than many other financial centers,” said rating Agency Fitch in a comment on the impact of the leaks on the country’s economy. “Logistic and free-trade-zone commerce in the Panama Canal ‘cluster’ represent around 20% of GDP and will benefit from the Canal expansion set to open soon.”

The rating agency said “the spotlight on Panama at a time of heightened international interest in financial transparency may rekindle reputational risks to its global integrated financial and service sectors.” This is clearly a concern for president Juan Carlos Varela. In an opinion piece in the New York Times, he said, “Despite their name, the Panama Papers are not mainly about Panama…. Panama does not deserve to be singled out on an issue that plagues so many countries.”