Panama: Upcoming El Niño underscores the Panama Canal’s role as a critical chokepoint in the Americas

Event

Since August, amid dry conditions, the Panama Canal Authority has slightly reduced the number of vessels transiting the Canal daily as well as the permitted draft of vessels. These are precautionary measures, as a ‘supersized’ El Niño phenomenon is building up, which typically reduces rainfall in the country.

Impact

El Niño poses a threat to traffic in the Panama Canal, as it typically lowers water levels in the Gatún and Alajuela lakes, the two main artificial water reservoirs supplying water to the Canal’s lock system. During the 2023–24 El Niño event, the Panama Canal Authority was forced to almost halve daily transits. That said, Panama enters the 2026–27 El Niño cycle from a stronger starting position than in 2023, as unusually heavy rainfall has left both Gatún and Alajuela lakes close to their maximum levels, providing a material buffer. However, this El Niño is forecast to be the strongest on record, placing the Canal in unprecedented territory. Hence, very low water levels cannot be excluded, potentially severely hampering transit during the second half of 2027. Given that about a quarter of public revenues and more than a third of current account revenues depend on Canal revenues, the economy is likely to be affected.

Low water levels will have consequences outside Panama as well. The Panama Canal carries just 5% of global maritime trade. This is less than some other chokepoints, such as the Strait of Malacca or the Red Sea, but given that the Panama Canal is the only navigable corridor connecting the Pacific Ocean with the Atlantic Ocean in the Americas, making it a critical chokepoint. There is no alternative maritime route through the Americas. The only option is to sail around the southern tip of South America, a journey that is nearly twice as long. The Canal is geographically located at the only narrow point where the Americas can be crossed efficiently by sea, making alternative shipping routes (as often contemplated in Mexico and Nicaragua) difficult. Moreover, its importance is growing with the Middle East conflict, which is leading to worldwide changes in trade flows. The number of ships carrying fuel through the Canal has doubled, as countries are turning to US energy exports – though this still represents only 1% of the volume of fuel passing through the Strait of Hormuz before the conflict. The rerouting is expected to persist even after regional tensions in the Middle East ease, as firms have diversified their supply chains. In addition, the Canal is an important transit route for the US. It allows the US Navy to shift ships between the Atlantic and the Pacific and about 70% of cargo transit is US-related, highlighting its economic and geopolitical importance, especially for the US. Looking ahead, Panama will remain critical in the geopolitical powerplay between the US and China, as recently illustrated by the handover of the port operation concession for the terminals at both entrances to the Panama Canal from Chinese to European hands.

Analyst: Jolyn Debuysscher – J.Debuysscher@credendo.com