Panama as Seen by the IMF in August 2015

Economic growth of 6% to 7% is foreseen in the medium term, driven by the economic recovery in the United States and the expansion of the canal.

Thursday, August 20, 2015

From a press release issued by the IMF:

On June 10, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Panama.

Panama’s economic performance is expected to remain strong. Real GDP slowed to 6.2 percent
in 2014, reflecting a slower pace of public investment, continued weakness in Colon Free Zone
activity, and delays in the Canal expansion. Growth is expected to remain stable in 2015. Lower oil prices and the U.S. recovery will be positive forces but these will be offset by U.S. dollar appreciation and some lags in new public investment. Over the medium term, the expanded
Canal and the new copper mine should help maintain growth at 6-7 percent. Inflation moderated
to 2.6 percent in 2014 as a result of lower oil prices and price controls on certain food items.
Inflation is expected at around 1 percent in 2015, taking into consideration the January increase
in electricity tariffs, and assuming a slow upward trajectory for oil prices and the elimination of
price controls in July.

The 2014 fiscal deficit reached 4.3 percent of 1996-base GDP. Revenues increased by
1.1 percent while current primary expenditures grew by 13 percent. Going forward, the fiscal
framework envisaged in the Social and Fiscal Responsibility Law (SFRL) aims at removing the
effects on government spending of cyclical fluctuations in Canal contributions. Accordingly, the
overall fiscal deficit can exceed the SFRL deficit ceilings up to the amount that budget
contributions from the Canal are below 3.5 percent of GDP (if above, the difference would
instead be credited to the Sovereign Wealth Fund). In line with the framework, the 2015 fiscal
deficit is expected at 3.8 percent of 1996-base GDP in order to accommodate past commitments
on capital expenditures as well as a projected weak revenue performance. Total gross debt of the
public sector (including the Canal Authority debt) increased to about 46 percent of GDP in 2014,
reversing the declining trend seen since 2005. Nonetheless, public debt is projected as
sustainable. Under the planned policies, total gross public debt is projected to decline by about
5 percentage points of GDP by 2019. However, additional liabilities encompass unfunded pension liabilities, other outstanding public liabilities, and the contingent liabilities linked to
public companies.

The current account deficit remained elevated in 2014, at 12 percent of GDP, owing in part to
strong investment-related imports, but should moderate over time as investment projects wind
down and exports increase. This deficit is expected to continue to be financed by buoyant foreign
direct investment inflows (including in the mining, logistics and energy sectors).
The authorities and the Financial Action Task Force (FATF) agreed on a plan to address the
deficiencies related to Panama’s Anti-Money Laundering and Combating the Financing of
Terrorism (AML/CFT) framework, to bring the framework in line with the international
standard. The authorities have made substantial progress, including the passing of new
AML/CFT legislation.

Near-term risks mostly relate to a weaker global economy or to possible delays in enhancing
financial transparency. Slower-than-expected global growth and weaker trade represent
downside risks. An abrupt surge in global financial market volatility or an upward shift in U.S.
interest rates would feed quickly into the local financial system, with spillover effects on the
local economy. However, strong fundamentals and the room to implement a countercyclical
fiscal response would mitigate the impact of such external shocks. The potential negative impact
from delays in concluding the measures to tackle financial transparency shortcomings could be
significant. Conducting international transactions has become somewhat more difficult due to
concerns over transparency and weaknesses of the AML/CFT framework, including through
increased due diligence by correspondent banks. Delaying reforms to financial integrity and
transparency could have negative implications for the economy through higher costs of trade
settlements, difficulty in obtaining cross-border borrowing and potential decline in FDIs.

Executive Directors commended Panama’s robust macroeconomic performance and continued
solid economic growth. Noting Panama’s exposure to external shocks in global growth, trade,
and financial markets, Directors stressed the importance of enhancing the fiscal framework and
fostering resilience through strengthened fiscal buffers, while maintaining financial stability and
sustaining strong and inclusive growth.

Directors encouraged the authorities to strengthen the fiscal framework for the medium term.
They advised revising the threshold for canal contributions in line with average expected
contributions, while adopting a more comprehensive definition of net debt in the Social and
Fiscal Responsibility Law (SFRL). Directors also recommended continued efforts to enhance
revenue mobilization through capacity building and administrative reforms. They welcomed the
progress in reducing electricity subsidies, and encouraged further efforts to improve the targeting
of subsidies and streamline current spending.

Directors underscored the importance of reforming the pension system to address large unfunded
liabilities, while curbing other contingent liabilities. They looked forward to full implementation
of the Single Treasury Account and progress on other initiatives to improve public financial

Directors commended the authorities for the progress in enhancing the financial integrity and
transparency frameworks, including the recent passage of AML/CFT legislation and ongoing
implementation of the action plan agreed with the Financial Action Task Force (FATF). They
called for expeditious resolution of the remaining deficiencies to bring the financial integrity and
transparency frameworks fully in line with the international standard.

Directors noted that Panama’s banking system remains stable, well capitalized and highly liquid,
but advised continued efforts to strengthen bank supervision and risk monitoring. They
encouraged swift implementation of the remaining 2011 FSAP recommendations, and called for
further progress on a well-designed liquidity facility for banks. Directors also recommended
better monitoring of financial risks and macrofinancial linkages, and further development of the
macroprudential policy framework.

Directors agreed that improvements in productivity and human capital are key to sustainable,
equitable, and inclusive growth. This will require efforts to further enhance the quality of public
education and healthcare, upgrade skills, stimulate youth employment and female labor force
participation, and strengthen institutions. They also recommended that the authorities take
advantage of the current benign inflation environment to phase out price controls.
Directors encouraged the authorities to improve the quality and coverage of statistics, which
would help close gaps in data that are relevant for conducting sound macroeconomic policy and
risk assessment.

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