President Juan Carlos Varela submitted on 2 January a formal request to the Electoral Tribunal for a public consultation on constitutional reforms to be included in the May general election.

• President Juan Carlos Varela faces continued policy paralysis during his last six months in office because of lack of support from opposition parties in the National Assembly.
• An opposition victory currently appears to be the most likely outcome of the upcoming May election, with the presidential candidates from Panama's two largest opposition parties leading in a December StratMark opinion poll.
• The main presidential candidates have demonstrated a broadly pro-business stance, and the electoral campaign will focus on boosting GDP growth and fighting corruption.

The Cabinet Council is due to debate President Juan Carlos Varela's proposal from 8 January, which will then be passed to the National Assembly for approval. Varela has proposed constitutional reforms since coming to power in 2014, but with no progress to date. This request is his final attempt to fulfil his campaign pledges before the 5 May election and 1 July change of government. The vote would enable the electorate to approve a constitutional reform process alongside voting for their new president, vice-president, legislators, and mayors for the next five-year period (2019-24). Panama's two main opposition parties, the centrist Revolutionary Democratic Party (Partido Revolucionario Democrático: PRD) and conservative Democratic Change (Cambio Democrático: CD), have opposed Varela's proposal and contend that any constitutional reforms should be a task for the next government.

The constitutional reform is one of many initiatives with which the Varela administration has been unable to make progress because of opposition from the PRD and the CD, which has intensified since mid-2018. The ruling Panameñista Party holds just 16 of the 71 seats in the National Assembly and therefore requires opposition support to advance its policy agenda. In December, extraordinary legislative sessions convened by Varela to pass priority legislation were poorly attended, even by members of his party, and failed to achieve approval of two initiatives intended to simplify Panama's tax system and make tax evasion a criminal offence. The lack of quorum at the Assembly also prevented the confirmation of two Supreme Court magistrate nominees that has been pending for two years. Reasons for the breakdown in co-operation between the government and the opposition include corruption accusations against Varela and his Panameñista party, preparations for the upcoming election, and the president's rising disapproval rating (currently at 83%, according to a local December poll) due to the slowing economy and perceptions of ineffectiveness.

Electoral outlook

Panama's two largest opposition parties, the PRD and the CD, are currently leading opinion polls for the election. The PRD, in particular, has benefited from the government's high disapproval ratings as well as persistent divisions and leadership rivalries within the CD. According to the December opinion poll, the PRD's presidential candidate, former agriculture minister and businessman Laurentino Cortizo, was the frontrunner, with 44.5% of voter intention, compared with closest rivals Rómulo Roux of the conservative CD, with 23.1%, and José Isabel Blandón of Panameñista, with 13.4%. The PRD was also reported to have 31.6% of support, compared with 21.7% for the CD and 12.6% for both Panameñista and the Popular Party (Partido Popular).

The next government will face the challenge of fighting corruption and boosting economic growth, which fell to 4.3% of GDP in 2018 from 5.3% in 2017, with rates ranging between 5% and 12% during the past decade. Cortizo's main proposals involve fighting corruption and achieving a greater separation of powers through constitutional reform, including banning those found guilty of corruption from public office, while strengthening key sectors such as tourism and logistics to boost investment. Roux has focused on proposals to reactivate the economy through job creation, income tax reductions, and repayment of more than USD1 billion in outstanding debts with state suppliers. Both would seek to review Varela's 2014 price control policy, which has long been criticized by the private sector, and the public contracting law to make bidding processes more competitive and transparent. Blandón - the current mayor of Panama district - has promised an immediate referendum on the formation of a constituent assembly, proposing constitutional reforms involving a new system for the selection of Supreme Court judges, and has advocated for increased decentralization and strengthening of the national agricultural and tourism industries.

All three main presidential candidates are likely to maintain a pro-business stance and support major projects, such as the fourth bridge over the Panama Canal and the third metro line, as well as continuing negotiations for the free-trade agreement with China. There are no indications to date of plans to make operational changes or tariff adjustments to the Panama Canal. Candidates with a less favorable stance towards business interests include left-wing Broad Front (Frente Amplio: FAD) candidate Saúl Méndez, representing union and indigenous groups, and independent candidate Ana Matilde Gómez, who is advocating the suspension of open-pit mining and environmental audits of existing projects. However, neither currently enjoys a high level of support (in the December poll, Gómez had 9.2% of voter intention and Méndez 1.7%).

Outlook and implications

The Varela administration's priorities for the remaining six months of its term include the approval of the pending proposals left unaddressed in December, the results of the Odebrecht bribery investigation due in the first quarter of 2019, the successful launch of the Cobre Panama copper project and awarding of the Line 3 metro project, as well as continued negotiations with China for a free-trade deal. However, Varela is likely to face continued policy paralysis in the National Assembly as the election approaches and the campaign period begins in March.

Relief from this policy paralysis following the election will depend on whether the new government is able to secure a legislative majority. However, as all three major parties have formed alliances or coalitions with others, and the CD in particular is experiencing major internal divisions, they are still likely to rely on some cross-party negotiation.

IHS Markit expects Panama to remain politically stable and maintain its pro-business tradition during the next government term. However, the continued failure by the Varela administration to pass the tax evasion law indicates a higher likelihood of Panama returning to the Financial Action Task Force (FATF)'s grey list in mid-2019, increasing pressure on the next administration. Any high-profile convictions made in the next four months as a result of the Odebrecht investigation would also be likely to boost support for government candidate Blandón.

Posted 10 January 2019 written by Johanna Marris, a researcher with the country risk team at IHS Markit