International ratings agency, Fitch says economic growth in Panama will slow this year to five per cent from the earlier projected 10.8 per cent.

Growth has remained robust at 9.0 per cent but is slowing down. The growth so far has been supported by the strength in construction linked to a ramp-up in public investment, ongoing recovery in the tourism industry and resilience in consumer-facing services.

This has helped to compensate for weakness in the mining sector linked to a since-resolved dispute between the government and the operators of the important Cobre Panamá copper mine, which drove an 11.6 per cent year-over-year decline in exports in the first, second and third quarter in value terms.

Fitch reports that domestic demand should continue to drive growth this year, supported by loose fiscal policy ahead of next year’s elections and easing inflation. However, on the flip side, the ongoing drought which may be exacerbated by the El Niño weather phenomenon is the single largest downside threat to Fitch’s forecast.

The El Niño weather phenomenon is a warming of the ocean surface, or above-average sea surface temperatures, in the central and eastern tropical Pacific Ocean. The drought has already led to the introduction of some restrictions on the weight of ships that can pass through the canal, which accounts for roughly 20 per cent of Panama’s service exports, per the OECD (Organization for Economic Cooperation and Development).

Ships move through the Panama Canal via a lock system, which uses water from several freshwater reservoirs to float the massive cargo vessels overland. Drought affects the water levels of these reservoirs and by extension ships traversing the key global trade route.

Persistent drought could also create some energy challenges, given that hydroelectricity accounts for roughly 70 per cent of the country’s electricity needs.