Journal Issue
Share
Article

Panama

Author(s):
International Monetary Fund
Published Date:
October 2010
Share
  • ShareShare
Show Summary Details

I. Recent Developments

1. Panama faced the global financial crisis of 2008 from a strong position. Fiscal consolidation and rapid economic growth during 2004-08 helped reduce public debt below 40 percent of GDP. Supported by tax and social security reforms, the fiscal policy framework was strengthened and became more resilient. Banks’ loan portfolio had expanded only moderately during the high-growth years, and the system was on a strong footing and subject to a sound regulatory framework. In addition, when the global crisis struck, the ambitious seven-year Canal expansion project was already underway, providing timely support to economic activity.

2. Economic growth slowed significantly in 2009, but remained positive and above the region’s average. Real GDP growth fell from 10¾ percent in 2008 to 2½ percent in 2009, driven by the global downturn and a slowdown in private construction, giving rise to a small negative output gap (Figure 1). Inflation declined to 2 percent (6¾ percent in 2008), reflecting the unwinding of global supply shocks and the slowdown of domestic demand. Economic activity rebounded strongly in the last quarter of 2009 and the recovery has continued in the first quarter of 2010 (Figure 2). Driven mainly by higher oil and food prices, inflation has risen in recent months, but remains low (about 3 percent in May, y/y).

Real GDP Growth

(Percent)

3. The external current account improved markedly. Official estimates indicate that the current account was close to zero in 2009 (after posting a deficit of 11½ percent in 2008), reflecting lower oil prices and very strong export receipts from the Colon Free Zone (CFZ). 1 Trade outside the CFZ, however, declined significantly, as in the rest of the region. Foreign direct investment flows also fell, but remained high by historical standards and compared to the rest of the region; portfolio inflows to the banking sector also declined. Both trade and private capital flows began to rebound in late 2009.

4. Panama’s large banking system weathered the global financial crisis well, reflecting a prudent stance and strong supervision. Private domestic and foreign banks were impacted somewhat differently by the crisis (Box 1). However, financial soundness indicators remained solid in both groups, with low NPL ratios (1.4 percent overall in March 2010) and strong capital levels (Figure 3). As in the rest of the region, bank profits declined, but have started to recover. Recent turmoil in European sovereign debt markets has not had any discernible impact on the banking system, in line with the relatively weak financial linkages with that region. Pro-active bank supervision contributed to maintaining the system on a strong footing. The Superintendency of Banks (SBP) stepped up its monitoring activities during the crisis and, since 2008, strongly and successfully encouraged banks to tighten lending standards in sectors that had been growing very strongly. These efforts were supplemented, in early 2009, by the creation of the financial stimulus program (FSP), aimed at providing resources to banks for on-lending to the private sector. In the event, however, banks made little use of those resources, mainly because their liquidity remained ample and the cost of FSP resources was relatively high.

Figure 1.Panama: Impact of the Global Crisis

1/ Excludes food and fuel.

Sources: National Authorities; Bloomberg; and Fund staff calculations.

Figure 2.Panama: The Make-Up of the Recovery, 2009-10

Sources: Haver Analytics; Bloomberg; EconData; National Authorities; and Fund staff calculations.

Figure 3.Panama: Comparative Financial Soundness Indicators

Sources: National Authorities;and Fund staff calculations.

Box 1.Performance of Domestic vs. Foreign Banks During the Crisis

While all banks in Panama were affected by the global financial crisis, private domestic and foreign banks fared differently on several counts. Loan quality and profitability of foreign banks were affected more severely than those of their domestic competitors. The NPL ratio declined in both groups of banks, aided by higher-than-usual write-offs. In general, foreign banks started recognizing delinquencies earlier than domestic banks, with their ratio of provisioning to loans peaking in 2008. Lower income from operations, mostly due to the weakness in loan origination, led to a drop in the return on assets of foreign banks in 2009, which now matches the lower but steady return of domestic banks.

Evolution of Key Financial Soundness Indicators, 2007–09(In percent, unless otherwise indicated)
IndicatorType of Bank200720082009
Share of System Assets 1/ 2/Private Domestic Banks29.329.531.9
Foreign Banks57.657.453.9
Return on AssetsPrivate Domestic Banks1.51.61.5
Foreign Banks2.12.71.4
NPL Ratio 1/Private Domestic Banks0.81.00.9
Foreign Banks1.51.71.5
Provisioning/Total LoansPrivate Domestic Banks0.30.50.6
Foreign Banks1.11.00.8
Liquidity Ratio 1/ 3/Private Domestic Banks33.732.337.4
Foreign Banks36.640.039.9
Credit GrowthPrivate Domestic Banks22.214.61.9
Foreign Banks20.011.0-2.0
Capital Adequacy Ratio 1/Private Domestic Banks15.215.717.1
Foreign Banks12.412.214.2
Flow of External FundingPrivate Domestic Banks132239-203
(In US$ million) 4/Foreign Banks2,1183,141-686
Flow of Domestic FundingPrivate Domestic Banks1,1752,1301,557
(In US$ million) 4/Foreign Banks3,2021,284-59
Source: Superintendency of Banks of Panama.

Year-end figures.

Shares do not add up to 100 because public banks are excluded.

Sum of liquid assets and traded securities in percent of deposits.

Excludes the effects of the foreign acquisition of a domestic bank in 2007 and 2009.

Source: Superintendency of Banks of Panama.

Year-end figures.

Shares do not add up to 100 because public banks are excluded.

Sum of liquid assets and traded securities in percent of deposits.

Excludes the effects of the foreign acquisition of a domestic bank in 2007 and 2009.

In late 2008, many foreign banks adopted a more cautious approach to lending. Credit by foreign banks declined by 2 percent in 2009, while credit by private domestic banks rose by a similar magnitude. The credit contraction at foreign banks seems to also reflect lower external funding, notably from reduced credit lines. By contrast, domestic banks easily compensated the loss of external funding through continued high access to domestic sources.

Liquidity increased in both groups during the crisis. Foreign banks, however, started to increase their liquidity holdings earlier than domestic banks.

5. Growth of bank credit decelerated significantly in 2009, but has begun to pick up. The slowdown reflected both weaker domestic demand and tighter lending standards, and was more pronounced for foreign banks (Box 1). Deposit growth remained solid, contributing to the buildup of very high levels of liquidity. Growth of bank lending began to recover in the first quarter of 2010, although at a gradual pace. The lax monetary conditions in the U. S. had some effect on Panama’s monetary conditions—although with a lag—helping support economic activity during the global crisis (Box 2).

6. Fiscal policy helped support domestic demand (Figure 4). The previous government took advantage of Panama’s relatively strong fiscal position, and, with support from congress and the incoming administration,2 raised the deficit ceiling in the social and fiscal responsibility law (SFRL) to maintain an expansionary fiscal stance during 2009.3 In the event, the overall fiscal deficit was substantially below the modified SFRL ceiling, but the fiscal stimulus (in cyclically-adjusted terms and excluding the Panama Canal Authority) was in the order of ¾ percentage points of GDP.

Structural Primary Balance and Fiscal Impulse, NFPS

(Percent of GDP)

7. In its first year in office, the new government has put in place two substantive tax reforms (Box 3). The reforms seek to raise tax revenue collections and improve the efficiency of the tax system, with the additional revenue to be used to finance higher capital spending. The first reform, approved in September 2009, broadened the tax base and raised dividend taxation, and is expected to yield 1¼ percent of GDP in revenue. The second reform, passed last March, raised the value-added tax, lowered personal and corporate income tax rates, and eliminated loopholes; altogether, the changes are expected to increase revenue by 1 percent of GDP.

Box 2.Monetary Conditions in Panama During the Global Crisis

As a fully-dollarized economy, Panama cannot conduct an independent monetary policy. However, in principle, changes in monetary conditions in the U.S. should be transmitted to Panama and affect the domestic economy. Depending on the degree of business-cycle synchronization between the two economies, the monetary stance imported by Panama from the U.S. may or may not be appropriate for its economy.

Changes in nominal lending rates in Panama tend to follow those in the U.S. However, as shown in the chart, it takes several quarters for interest rate changes in the U.S. to be transmitted to Panama. Moreover, the relation seems to be asymmetrical. While the increases in rates before the global crisis were of similar magnitudes in both countries, the decline in rates was more modest in Panama following the crisis. One possible explanation for the asymmetry is that the lack of a lender of last resort induced Panamanian banks to adopt relatively more conservative lending standards during the financial crisis. Sustained relatively high deposit rates also likely limited the scope for decreasing lending rates.

Panama ConsumerCredit Rates (1-year) vs US Rates

Given lags in real business cycles and in the transmission of interest rate changes, monetary conditions in Panama were broadly appropriate during the global crisis. To gauge the appropriateness of de facto monetary conditions, we present nominal lending rates relative to a baseline level when the monetary policy stance is neutral, i.e. when the economy is operating at full potential.1 During the crisis, monetary conditions in Panama began to ease when the output gap peaked in mid-2008, and continued on an easing trend as the gap closed and eventually turned negative in 2009. This suggests a broadly appropriate de facto monetary stance, especially since changes in interest rates affect the real economy only with a lag. In contrast, the tightening of monetary conditions in Panama in late 2005 seems, in retrospective, to have been somewhat premature.

1The real interest rate is arguably the more important variable for economic activity. However, the focus is here on nominal rates, since the relationship between these across countries is independent of inflation. The latter affected the two economies differently in recent years, because of the impact of commodity price inflation.

Figure 4.Panama: Fiscal Sector Developments, 2005-09

1/ Data refers to the Central Government.

2/ Excludes Panama Canal Authority

Sources: National Authorities; and Fund staff calculations.

Box 3.Recent Tax Reform

In its first year in office, the government of President Martinelli has enacted two far-reaching tax reforms. With these reforms, Panama’s tax system has increased its reliance on indirect taxes, reduced income tax rates while broadening the tax base, improved dividend taxation, and is modernizing its tax administration. The reforms are expected to increase government revenue by 2¼ percent of GDP on a permanent basis.

The first tax reform, approved in September 2009, broadened the tax base, changed tax rates on specific sectors, increased license fees and enhanced tax administration. The changes made the Colón Free Zone, casinos, maritime transportation, and oil trade subject to a more comprehensive corporate and dividend taxation treatment, while taxing profits from some foreign operations. In addition, the reform levied taxes on real estate transactions—including capital gains on the sale of property—and brought bank commissions under VAT coverage.

Table 1:September 2009 tax reform projected revenue(In percent of GDP)
Corporate and dividends taxation0.3
Property taxation reform0.2
Increased license fees0.2
VAT to bank commissions0.2
Others0.3
Total1.2
Source: Authorities’ estimates.
Source: Authorities’ estimates.

The second tax reform lowered personal and corporate income tax rates, raised the VAT rate, and made additional improvements to tax administration. The rates of personal income tax (PIT) were lowered from 20-27 percent to 15-25 percent and the exempted income threshold level was raised from 1.1 to 1.4 times income per capita. The rate of the corporate income tax (CIT) was lowered from 30 percent to 25 percent over two years, and over 4 years for some sectors (telecommunications, banking, electricity, insurance and casinos). Most personal expenditure deductions were eliminated and the corporate expenditure calculation method was modified, notably for the financial sector. The minimum alternative tax rate was also lowered while the standard rate of the VAT was increased from 5 percent to 7 percent. Operational and financial autonomy was granted to the tax administration unit, and a specialized tax court was created.

Table 2:March 2010 tax reform package projected revenue
Percent of GDP
20102011
Income tax reform
PIT tax rate reduction to 15-25 percent from 20-27 percent-0.4-0.4
Higher exempted income threshold-0.1-0.1
Personal deductions are eliminated / minimized0.30.3
CIT reduction to 25 percent-0.1-0.2
New method to calculate expense deductions0.30.3
Other0.10.1
Consumption taxation
VAT rate increase from 5 to 7 percent0.40.8
VAT coverage net expansion0.10.2
Other0.10.1
Total0.61.0
Source: Authorities’ estimates.
Source: Authorities’ estimates.

Income tax rates in Panama are now below international levels. The PIT rate is slightly below the regional average and substantially lower than the OECD average. The top CIT rate is also somewhat lower than the regional average and broadly similar to the OECD average.

8. Panama’s sovereign credit rating was raised to investment grade. Earlier this year, the three main credit-rating agencies raised Panama’s sovereign debt classification by one notch to BBB-, citing the strengthening of the public finances, prospects for further declines in public debt, and a very favorable growth outlook.

9. The authorities have made substantial progress towards Panama’s removal from the OECD grey list of tax havens. In the last year, the government has concluded negotiations for 9 of the 12 double taxation treaties required for removal from the grey list. The authorities expect to complete the remaining agreements before end-2010, and adopt the changes to domestic legislation needed to implement them.

II. Macroeconomic Outlook and Risks

10. Economic growth is expected to pick up rapidly: Staff projects real GDP growth of 4.8 percent in 2010, supported by an improved global environment and a large increase in public investment, notably from the Canal expansion project. Growth is projected to rise to 6½ percent by 2012, as the Canal expansion works peak and private demand recovers fully. The recent upgrade to investment grade is expected to have favorable effects on confidence and private investment.4 Output growth is then expected to hover around 6 percent, broadly in line with current potential growth estimates by staff (estimates that are somewhat lower than those prior to the global crisis (Box 4)). Completion of the expansion of the Canal in 2014 is expected to have a permanent positive effect on potential growth.

Text Table 1.Panama: Medium-Term Outlook
Prel.Proj
20082009201020112012201320142015
(Annual percent change)
Production and prices
Real GDP10.72.44.86.36.56.26.26.5
Consumer price index (end of year)6.81.93.02.72.52.52.52.5
(In percent of GDP)
Public finances
NFPS primary balance (excl.PCA)3.51.82.01.72.02.32.32.5
NFPS overall balance (excl. PCA)0.4-1.0-0.9-0.9-0.5-0.10.30.5
NFPS structural primary balance (excl. PCA)2.82.12.42.02.32.62.52.5
NFPS overall balance2.5-0.5-2.0-2.0-2.1-1.10.21.1
Total public debt 1/38.839.440.438.837.435.231.928.5
External sector
Current account-11.60.0-7.9-8.0-8.5-7.7-5.9-4.5
Foreign direct investment10.47.27.77.98.08.08.18.1
Sources: National Authorities; and Fund staff calculations.

Consolidates the Social Security Agency debt and excludes debt held by the Fiduciary Fund.

Sources: National Authorities; and Fund staff calculations.

Consolidates the Social Security Agency debt and excludes debt held by the Fiduciary Fund.

Box 4.Potential Growth and Output Gap in Panama

The evidence suggests that Panama’s potential growth increased in recent years. Results from three different methodologies to calculate potential growth suggest a significant difference in Panama’s potential growth rates in the period 2003-09 compared to earlier years.1 On average, Panama’s potential GDP growth seems to have increased from 3¾ percent per year during 1996-2002 to about 7½ per year in recent years.

Panama. Estimates of Potential Growth, percent per year
1996Q1-2009Q41996Q1-2003Q12003Q1-2009Q4
Linear detrending5.753.697.77
Hodrick and Prescott5.853.987.71
Baxter and King5.813.377.44
Christiano and Fitzgerald5.823.487.34
Beveridge-Nelson5.823.977.55
Average5.813.707.56
Source: IMF staff calculations.
Source: IMF staff calculations.

Statistical tests identify 2003 as a structural break point in the GDP time series. The recent acceleration of potential growth reflects to a great extent a large increase (6 percentage points of GDP during 2003-08) in domestic investment, with strong contributions from public and foreign direct investment. Productivity growth is also estimated to have risen, although more modestly. At the sectoral level, the higher growth appears to have been driven by the outwardly-oriented services sector (the Canal and various activities linked to it), which benefited greatly from the strong surge in global growth and trade during 2003–07.

Output gap measures derived from these estimates suggest that the excess demand pressures of 2008 abated in 2009. The estimated output gap reached 3½ percent of potential GDP in 2008, but disappeared in early 2009 as the effects of the global crisis reached Panama. For 2009 as a whole, the output gap was about -1 percent of GDP.

Lower global trend growth is likely to have an adverse effect on Panama’s potential growth. While there is considerable uncertainty about magnitudes, most baseline scenarios assume global potential growth to be lower in the coming years. Estimates from a multivariate analysis suggest that a fall in global growth of 1 percentage point would tend to decrease Panama’s growth by a similar magnitude.

1The univariate techniques used to calculate permanent output were: (i) piece-wise linear de-trending; (ii) filters that isolate high-frequency from low-frequency components (HP-filter, the Baxter and King filter, and the Christiano and Fitzgerald filter); and (iii) the Beveridge and Nelson decomposition. These techniques were applied to quarterly data for 1996-2009, and to staff projections for 2010-11 to correct for end-of-period bias.

11. The external current account is projected to weaken, while inflation would remain subdued. The current account deficit is projected to peak at 8½ percent of GDP in 2012 with the Canal works. Thereafter, as the project winds down and the expanded Canal becomes operational, the deficit is expected to decline significantly. With a very large proportion of spending from the project falling on imports, domestic demand pressures are expected to remain contained. Inflation is projected to rise temporarily in 2010—in line with global inflation and higher oil prices—but is expected to stabilize thereafter at 2½ percent per year.

12. The fiscal deficit in 2010 is projected to remain well below the SFRL ceiling. The deficit target in the 2010 budget (1.9 percent of GDP, excluding the Panama Canal Authority) is likely to be overperformed by a significant margin. Revenues are projected to grow strongly following the recent tax reforms, while the ambitious capital spending plans contained in the budget are not likely to be completed due to implementation constraints. Staff projects an overall fiscal deficit of 0.9 percent of GDP for 2010, broadly unchanged from 2009.5 For 2011, the authorities’ newly-adopted medium-term fiscal framework (MTFF) envisages an overall deficit of 1¼ percent of GDP, consistent with higher capital spending. Fiscal consolidation is expected to continue over the medium term at a faster pace than contemplated in the SFRL, resulting in a decline of public debt below 30 percent of GDP by 2015.

13. Risks to the outlook are broadly balanced. Downside risks to growth stem from a less favorable external environment or a more sluggish recovery of credit. Domestic growth is particularly sensitive to changes in global economic conditions.6 Upside risks arise from stronger private (domestic and foreign) investment, on account of positive spillovers from higher public expenditure on infrastructure, as well as from the favorable effects of the upgrade in the sovereign credit rating. On the fiscal side, revenue could turn out higher than projected, given ongoing efforts to strengthen tax administration.

III. Policy Discussions

A. Fiscal Policy

14. There was agreement that a modest withdrawal of fiscal stimulus in 2010 was appropriate. Staff projects a slight strengthening of the primary balance in cyclically-adjusted terms in 2010 (Text Table 1). Although there is still scope for a small positive impulse, given the negative output gap and good access to financing, implementation constraints to investment are likely to be binding. Given the strength of the recovery, it was agreed that the additional impulse was not essential and the projected fiscal stance was broadly appropriate. There was also agreement that maintaining a low overall deficit would help further strengthen fiscal credibility.

15. Staff supported the authorities’ recent tax reforms. The reforms bolster the credibility of Panama’s fiscal framework, will allow higher levels of capital spending, and are economically sound, including by shifting from income to consumption taxation. Staff supported the authorities’ ongoing efforts to strengthen tax administration, and encouraged them to take similar steps in the area of customs. The authorities expressed an interest in receiving Fund technical assistance in both areas.

Text Table 2.Corporate and Personal Income Tax Rates Top Tax Rates for OECD Countries, Latin America and Central America 2008
CITPIT
Panama 1/25.025.0
Latin America Average 2/27.527.7
Central America Average 2/28.527.7
OECD average24.536.7
Sources: www.bus.umich.edu/OTPR/otpr/OTPRdataV3.asp (The World Tax Database of the University of Michigan); KPMG (2008) database; Summer: (2008) PriceWaterhouseCoopers and IBFD (2008).

After the March 2010 tax reform at end of 4 year adjustment period.

Excludes Panama.

Sources: www.bus.umich.edu/OTPR/otpr/OTPRdataV3.asp (The World Tax Database of the University of Michigan); KPMG (2008) database; Summer: (2008) PriceWaterhouseCoopers and IBFD (2008).

After the March 2010 tax reform at end of 4 year adjustment period.

Excludes Panama.

16. The fiscal consolidation envisaged over the medium term is ambitious but feasible. The decline in public debt targeted in the MTFF would provide substantial additional scope for adopting a countercyclical fiscal stance. The staff noted that, given assumptions on revenue growth and economic growth, the MTFF targets seemed conservative. To bolster fiscal credibility further, staff advised the authorities to adhere to the MTFF targets and allocate any overperformance to a faster reduction of public debt.

Overall Balance and Structural Primary Balance , NFPS Authorities projections

(Percent of GDP)

17. Staff encouraged the authorities to strengthen their MTFF. In particular, it recommended that the MTFF spells out in more detail the underlying macroeconomic framework and incorporates explicitly the key components of the nonfinancial public sector, including the social security system. The MTFF would also benefit from quantification and discussion of tax expenditures and a more thorough discussion of contingent liabilities. The authorities noted that they are working on enhancing the framework in some of these aspects, including by quantifying tax expenditures more comprehensively and including them in budget documents.

18. Staff welcomed the government’s plans to increase infrastructure investment and restrain current spending. The authorities expect that higher public investment will help boost private-sector led growth. The mission noted the importance of phasing in carefully the additional spending planned for the outer years of the MTFF to ensure consistency with SFRL requirements, avoid excessive demand pressures, and ensure an efficient execution. Staff supported the authorities’ ongoing efforts to put in place a legal framework for public-private partnerships to help support their investment program.

B. Financial Sector

19. It was agreed that Panama’s banking system showed strong resilience during the global financial crisis. The on-shore and off-shore segments of the system managed to preserve strong financial soundness indicators. In the case of the on-shore segment, a strong regulatory framework and banks’ own conservative practices were important factors supporting such resilience. Looking ahead, stress tests conducted by the mission showed that capital levels in the banking system would remain adequate under sizeable shocks to economic activity and thus asset quality.

20. Staff noted that the slowdown in the construction sector had not had a significant impact on banks’ balance sheets Following a period of rapid expansion, the construction sector slowed down sharply in 2009 and the prices of some properties fell. The effects on banks’ balance sheets were, however, negligible. Banks’ decision to effectively limit loan-to-value ratios and set high presale requirements played a key role in containing exposure to the sector and in protecting their balance sheets. It was agreed, however, that remaining exposure to the sector warrants close monitoring.

21. The mission encouraged the authorities to move forward with plans for the gradual introduction of risk-based supervision. Staff and the authorities agreed that this step would help further enhance bank monitoring. The mission noted that risk-based supervision would be suitable for Panama, given the special features of its banking sector (e.g., substantial banks’ cross-border linkages, credit concentration, and relatively high indebtedness of the private sector). The authorities have begun taking some preparatory steps, including improved auditing.

22. Staff supported plans to broaden the financial sector regulation perimeter. Some nonbank deposit-taking institutions (e. g., cooperatives) are currently not regulated by the Superintendency of Banks (SBP). Although the sector is small relative to the banking system and does not pose systemic risk, it was agreed that bringing all deposit-taking institutions under the umbrella of the SBP was a good practice which would limit risks going forward. The mission also welcomed the authorities’ preparations to introduce Basel II regulatory requirements, as well as their plans to strengthen the regulatory framework for pensions and the insurance sector and to enhance the governance structure of the securities commission.

23. The authorities concurred with the staff recommendation to explore the possibility of establishing a formal safety net. There was agreement that the current arrangement under which banks self-insure against shocks by holding liquid assets had worked well, but had non-negligible costs. The authorities expressed concern, however, that a formal safety net would create moral hazard. Staff argued that a formal safety net could be designed to contain moral hazard while reducing individual bank liquidity needs, with positive effects on the supply of credit and interest rates. Staff also suggested exploring the possibility of establishing a limited insurance scheme for deposits at on-shore banks, financed with risk-based bank contributions.7 The scheme could cover a small fraction of total deposits, but nonetheless insure the vast majority of the system’s accounts. The authorities also indicated that they would like to explore possible arrangements for emergency liquidity support. They expressed interest in receiving Fund technical assistance in these areas.

C. External Sector

24. The real exchange rate is in line with fundamentals (Box 5). Panama’s real effective exchange rate remained broadly unchanged in 2009, with the strengthening of the U.S. dollar offset by lower domestic inflation. The mission’s estimates for 2009—which are based on a country-specific model of the equilibrium exchange rate and the macro-balance approach—point to a very small (less than 5 percent) overvaluation of Panama’s real exchange rate.

25. Efforts to furthe strengthen trade links with the rest of the world have continued. In May 2010, Panama signed free trade agreements (FTAs) with Canada and the European Union, while negotiations on a deal with Colombia are ongoing. The agreement with the U. S. (concluded in mid-2007), however, is awaiting approval by the U. S. Congress. The authorities expect that the implementation of FTAs will provide solid support to economic growth over the medium term by improving access to key markets and strengthening the competitiveness of the domestic economy.

IV. Staff Appraisal

26. Supported by strong fundamentals, Panama weathered the global financial crisis of 2008 well. Although growth slowed down significantly in 2009, it remained positive and well above the region’s average. A rapid recovery is expected, with growth projected to rise to 5-6 percent in 2010-11. The banking system showed strong resilience to the crisis and remains on a strong footing, with very low NPLs and high levels of capitalization. Effective supervision and prudent lending behavior were instrumental in limiting exposure to the sectors most affected by the slowdown.

Box 5.Exchange Rate Assessment

Panama’s real effective exchange rate depreciated in the years leading up to the financial crisis, driven by the weakening of the U.S. dollar. This trend was reverted slightly in 2009, mirroring again movements in the U.S. dollar, which offset the large decline in domestic inflation that took place in Panama.

Real Effective Exchange Rate (REER) vs. Equilibrium Real Exchange Rates (ERER)

Sources: Panamanian authorities, and Fund staff estimates.

Model-based estimates suggest that Panama’s real exchange rate was close to its equilibrium level in 2009. Staff used two approaches to assess the level of the real effective exchange rate. The first approach is based on a reduced-form equation of the equilibrium real exchange rate.1 This approach shows that the real effective exchange rate was broadly in line with fundamentals (overvaluation of about 1 percent) in 2009. An alternative assessment based on the macroeconomic balance approach estimates the difference between the current account balance projected over the medium term at prevailing exchange rates and an estimated current account balance norm. With a norm of -5 percent of GDP, this approach points to an overvaluation of about 3 percent during 2009.

1The estimates are based on a vector error correction (VEC) model using annual data for 1980-2009. The fundamentals comprise productivity differentials, terms of trade, trade openness, net foreign liabilities, and the current account balance.

27. Fiscal policy helped contain the impact of the adverse external conditions. A relatively strong fiscal position allowed Panama to use fiscal policy to mitigate the effects of lower external demand in 2009. Prudent fiscal management and the economy’s momentum, however, did not make it necessary to fully use the scope provided by the modified SFRL to support activity. The strong growth prospects for 2010 make it appropriate to start withdrawing fiscal stimulus.

28. The fiscal consolidation envisaged in the government’s medium-term framework is appropriately ambitious. The significant decline in the public-debt ratio contemplated in the government’s MTFF would create substantial additional space for using fiscal policy to offset the impact of exogenous shocks, which takes on added importance in Panama given its monetary regime. Staff encourages the authorities to adhere to the MTFF targets and use any overperformance to reduce public debt faster.

29. Staff welcomes the sound tax reforms adopted in the last year. The reforms are expected to increase revenues significantly and bolster the credibility of the fiscal framework. By shifting taxation from income to consumption and reducing microeconomic distortions, the reforms would also help support long-run economic growth. Staff considers it important to continue moving forward with tax administration reforms, and broaden them to include customs. The Fund stands ready to provide technical assistance to support these efforts.

30. Plans to broaden the financial sector regulation perimeter and introduce risk-based supervision are welcomed. Nonbank deposit-taking institutions currently not regulated by the SBP should be brought under its umbrella. Staff considers that risk-based supervision would be advantageous for Panama, and help further strengthening bank monitoring. The authorities’ preparations to introduce Basel II regulatory requirements and plans to strengthen the regulatory framework for pensions and the insurance sector are also welcomed.

31. There is scope to strengthen the financial safety net. Bank self-insurance against shocks has worked well thus far, but it has risks and costs. Staff is of the view that a formal safety net would lower risks and reduce the need for individual banks to maintain high liquid balances, which are economically costly. The authorities’ interest in exploring the possibility of establishing arrangements for emergency liquidity support and a deposit insurance system are welcomed. The Fund stands ready to provide technical assistance in these areas.

32. It is recommended that the next Article IV consultation be held on the 12-month cycle.

Table 1.Panama: Selected Economic Indicators
I. Social and Demographic Indicators
Population (2008, millions)3.4Percent of population below
Population growth rate (percent a year)1.6poverty line (2008)32.4
Life expectancy at birth (years)75.4Adult literacy rate (in percent)91.9
Under 5 mortality rate (per 1000 live births)23.1GDP per capita (USD)7,268
Sources: Comptroller General; World Bank Developments Indicators, and Fund staff estimates.

Excludes the Colon Free Zone.

Panama Canal Authority (ACP).

II. Economic Indicators, 2006-11
Prel.Proj.
200620072008200920102011
(percent change)
Production and prices
Real GDP (1996 prices)8.512.110.72.44.86.3
Consumer price index (end of year)2.26.46.81.93.02.7
Domestic demand (at constant prices)
Public consumption3.14.12.62.58.07.5
Private consumption4.40.96.71.45.14.4
Public investment17.243.258.317.222.319.9
Private investment12.637.714.2-15.67.37.8
Financial sector
Private sector credit12.918.214.60.89.110.2
Broad money21.515.918.513.410.010.2
Average lending rate (1 year)8.69.08.57.5
External trade 1/
Merchandise exports14.311.75.2-27.119.89.3
Merchandise imports18.240.718.9-15.222.714.9
(percent of GDP)
Saving-investment balance
Gross domestic investment19.524.127.424.826.728.2
Public sector4.35.68.29.210.812.1
Private sector15.218.619.215.615.916.1
Gross national saving16.316.915.824.818.720.2
Public sector5.39.19.68.48.29.9
Private sector11.17.86.216.310.610.3
Public finances
Revenue and grants26.829.729.227.427.829.0
Expenditure25.625.026.727.929.830.9
o/w Capital4.35.68.29.210.812.1
Overall balance1.24.82.5-0.5-2.0-2.0
Overall balance, excluding ACP 2/0.53.40.4-1.0-0.9-0.9
External sector
Current account-3.1-7.2-11.60.0-7.9-8.0
Net exports from Colon Free Zone3.42.30.08.23.33.2
Foreign direct investment14.69.610.47.27.77.9
Total public debt52.645.638.839.440.438.8
o/w External debt40.537.432.736.538.535.3
Memorandum items:
GDP (in millions of US$)17,13719,79423,18424,71126,68929,282
Sources: Comptroller General; World Bank Developments Indicators, and Fund staff estimates.

Excludes the Colon Free Zone.

Panama Canal Authority (ACP).

Sources: Comptroller General; World Bank Developments Indicators, and Fund staff estimates.

Excludes the Colon Free Zone.

Panama Canal Authority (ACP).

Table 2.Panama: Summary Operations of the Nonfinancial Public Sector 1/(In percent of GDP)
Prel.Proj.
200620072008200920102011
Revenues24.927.825.924.825.326.4
Current revenue24.726.424.524.424.626.2
Tax revenue10.310.610.510.711.712.5
Nontax revenue of central government7.77.96.76.35.86.3
o/w: Panama Canal fees and dividends3.54.33.03.22.83.4
Social security agency5.25.65.75.65.55.8
Public enterprise operating balance0.70.81.20.90.90.9
Other 2/0.81.50.41.00.60.6
Capital revenue0.21.31.10.30.60.3
Expenditure24.424.325.525.826.227.3
Current primary expenditure17.016.015.415.816.116.2
Central government8.88.28.28.38.38.4
Rest of the general government8.37.87.27.57.87.8
Social security agency7.37.06.56.87.17.1
Decentralized agencies0.90.80.70.70.70.7
Interest4.33.43.12.92.92.6
Capital3.14.97.07.17.28.5
Overall balance, excluding ACP0.53.40.4-1.0-0.9-0.9
Panama Canal Authority (ACP)
Revenue8.78.98.77.97.68.2
Current expenditure3.32.62.42.22.22.3
Transfers to the government3.54.33.03.22.83.4
Interest payments0.00.00.00.00.10.0
Capital expenditure1.20.61.22.13.63.6
Overall balance0.71.32.10.5-1.1-1.1
Overall balance, including ACP1.24.82.5-0.5-2.0-2.0
Net financing, excluding ACP-0.5-3.4-0.41.00.90.9
External0.12.40.76.40.7-0.9
Domestic-0.5-5.9-1.1-5.30.21.8
Memorandum items:
Savings (including ACP)5.39.19.68.48.29.9
Primary balance (including ACP)5.58.25.62.41.00.6
Primary balance (excluding ACP)4.86.93.51.82.01.7
Public debt52.645.638.839.440.438.8
GDP (in millions of US$)17,13719,79423,18424,71126,68929,282
Sources: Comptroller General; Ministry of Economy and Finance; and Fund staff estimates and projections.

Official presentation excludes the operations of the ACP which reverted to Panama on December 31, 1999.

Includes the balances of the nonconsolidated public sector and revenue of the decentralized agencies.

Sources: Comptroller General; Ministry of Economy and Finance; and Fund staff estimates and projections.

Official presentation excludes the operations of the ACP which reverted to Panama on December 31, 1999.

Includes the balances of the nonconsolidated public sector and revenue of the decentralized agencies.

Table 3.Panama: Summary Operations of the Central Government(In percent of GDP)
Prel.Proj.
200620072008200920102011
Revenues and grants18.619.219.718.018.919.7
Current revenue18.518.918.217.718.319.6
Taxes10.310.610.510.711.712.5
Direct taxes5.75.55.45.75.55.4
Income tax5.15.04.95.14.74.6
Tax on wealth0.50.60.50.60.80.8
Indirect taxes4.65.05.15.06.27.0
Import tax1.61.41.81.61.91.9
ITBMS1.92.62.32.33.03.6
Petroleum products0.50.50.40.50.50.5
Other tax on domestic transactions0.60.70.70.70.91.1
Nontax revenue8.28.47.77.06.67.1
Dividends3.43.72.92.72.32.9
Of which: Panama Canal Authority2.02.51.51.81.42.0
Panama Canal Authority: fees per ton 1/1.61.81.51.41.41.4
Transfers from decentralized agencies1.31.21.81.61.61.6
Other1.31.71.51.41.31.2
Capital revenue0.10.11.10.20.40.1
Grants0.00.20.40.00.00.0
Total expenditure18.418.019.419.520.021.1
Current15.914.013.813.313.713.4
Wages and salaries4.74.44.14.14.14.1
Goods and services1.81.51.81.71.71.8
Pensions2.11.71.91.61.91.9
Transfers to public and private entities3.03.02.93.03.03.0
Interest4.23.43.12.82.92.6
Domestic1.00.40.40.30.20.1
External3.23.02.72.52.82.5
Capital2.54.05.66.26.37.6
Savings 2/2.65.14.84.54.76.1
Overall balance0.21.20.3-1.4-1.1-1.4
Financing (net)-0.2-1.2-0.31.41.21.4
External0.54.70.66.40.7-0.9
Domestic-0.7-5.9-0.8-4.90.52.3
Memorandum items:
Primary balance4.44.63.41.41.81.2
GDP (in millions of US$)17,13719,79423,18424,71126,68929,282
Sources: Comptroller General; Ministry of Economy and Finance; and Fund staff estimates and projections.

Includes public service fees.

Revenues and grants less current expenditure.

Sources: Comptroller General; Ministry of Economy and Finance; and Fund staff estimates and projections.

Includes public service fees.

Revenues and grants less current expenditure.

Table 4.Panama: Monetary Accounts 1/
Prel.Proj.
200620072008200920102011
(In millions of U.S. dollars at end-period)
Net foreign assets4,1135,2576,0428,6148,5668,364
Short-term foreign assets, net4,1315,2726,0508,6198,5718,369
National Bank of Panama1,4212,0282,6953,3883,4883,788
Rest of banking system2,7103,2443,3555,2315,0834,581
Long-term foreign liabilities18148555
National Bank of Panama18148555
Net domestic assets10,69411,91115,06114,73216,79819,587
Public sector (net credit)-1,442-2,435-2,465-2,860-1,322-340
Central government (net credit)134-314-456-176-127-59
Rest of the public sector (net credit)-1,577-2,121-2,009-2,684-1,195-281
Private sector credit15,68118,54021,24521,40723,36225,726
Private capital and surplus-3,917-5,578-6,419-5,573-6,103-6,726
Other assets (net)3721,3832,7001,758861927
Liabilities to private sector14,80717,16720,33523,06325,36427,951
Total deposits14,73917,10020,27422,96825,25927,836
Demand deposits2,6153,0423,7625,1755,5896,132
Time deposits9,28310,53612,16512,94013,97615,334
Savings deposits2,8403,5224,3474,8535,6956,371
Bonds68676195104115
(12-month change in relation to liabilities to the private

sector at the beginning of the period)
Net foreign assets9.87.74.612.6-0.2-0.8
Net domestic assets11.78.218.4-1.69.011.0
Public sector credit (net)-1.6-6.7-0.2-1.96.73.9
Private sector credit14.719.315.80.88.59.3
Private capital and surplus3.111.24.9-4.22.32.5
Other assets (net)1.76.87.7-4.6-3.90.3
Liabilities to the private sector21.515.918.513.410.010.2
(12-month percent change)
Memorandum items:
M2 2/21.515.918.513.410.010.2
Private sector credit12.918.214.60.89.110.1
(In percent of GDP)
Total deposits86.086.487.492.994.695.1
Private sector credit91.593.791.686.687.587.9
Sources: Superintendency of Banks; National Bank of Panama; Savings Bank; and Fund staff estimates and projections.

Domestic banking system only; comprises general license banks; does not include offshore banks; deposits from and credit to nonresidents reported in the net foreign assets.

M2 consists of bank deposits only; estimates of U.S. currency in circulation are not available.

Sources: Superintendency of Banks; National Bank of Panama; Savings Bank; and Fund staff estimates and projections.

Domestic banking system only; comprises general license banks; does not include offshore banks; deposits from and credit to nonresidents reported in the net foreign assets.

M2 consists of bank deposits only; estimates of U.S. currency in circulation are not available.

Table 5.Panama: Commercial Bank Performance Indicators 1/(In percent; end-of-period)
20092010
20072008Jun.Dec.Mar.
Asset quality
Nonperforming loans as percent of total loans
Banking system1.31.61.41.41.4
Domestic banks1.51.71.51.31.3
Foreign banks1.21.71.31.51.5
Ratio of provisions to nonperforming loans
Banking system141.7104.8116.3120.0122.4
Domestic banks147.8120.2125.2150.3153.2
Foreign banks136.093.5109.099.6100.5
Profitability
Pretax return on average assets
Banking system2.02.21.71.41.5
Domestic banks1.92.91.41.41.5
Foreign banks2.02.72.01.41.6
Liquidity
Ratio of liquid assets to total deposits
Banking system23.428.425.928.426.4
Domestic banks26.125.925.827.625.9
Foreign banks27.330.626.029.326.8
Ratio of liquid assets plus marketable
securities to total deposits 2/
Banking system40.943.041.142.942.1
Domestic banks39.539.039.439.939.3
Foreign banks41.946.242.445.744.6
Capital adequacy ratios
Ratio of capital to risk-weighted assets
Banking system14.514.815.616.416.6
Domestic banks18.817.818.418.819.6
Foreign banks12.013.014.015.315.3
Ownership
Foreign banks’ share of domestic banking system assets60.958.355.454.753.6
Sources: Superintendency of Banks; and Fund staff estimates.

Domestic banking system only, comprises general license banks; does not include offshore banks.

Liquid assets, as defined in Article 48 of the Banking Law, also include marketable short-term securities.

Sources: Superintendency of Banks; and Fund staff estimates.

Domestic banking system only, comprises general license banks; does not include offshore banks.

Liquid assets, as defined in Article 48 of the Banking Law, also include marketable short-term securities.

Table 6.Panama: Medium-Term Macroeconomic Framework
Prel.Proj.
200720082009201020112012201320142015
(Percent change)
Economic growth and prices
Real GDP at market prices12.110.72.44.86.36.56.26.26.5
GDP deflator3.05.84.13.03.23.23.23.23.2
CPI (period average)4.28.82.43.32.82.62.52.52.5
CPI (end of period)6.46.81.93.02.72.52.52.52.5
(Percent of GDP)
Savings and investment
National savings16.915.824.818.720.219.820.021.122.1
Public sector9.19.68.48.29.99.59.69.710.1
Private sector7.86.216.310.610.310.310.511.312.0
Gross domestic investment24.127.424.826.728.228.327.826.926.6
Public sector5.68.29.210.812.111.811.09.89.3
Of which: Canal Expansion0.70.63.03.03.12.41.30.8
Private sector18.619.215.615.916.116.516.817.117.3
External savings-7.2-11.60.0-7.9-8.0-8.5-7.7-5.9-4.5
Nonfinancial public sector, excluding ACP
Revenue27.825.924.825.326.426.426.726.626.8
Revenue, excluding ACP transfers23.522.921.622.423.023.023.223.223.2
Expenditure24.325.525.826.227.327.026.726.426.3
Primary balance6.93.51.82.01.72.02.32.32.5
Overall balance3.40.4-1.0-0.9-0.9-0.5-0.10.30.5
Net external financing2.40.76.40.7-0.90.80.50.8-0.6
Net domestic financing-5.9-1.1-5.30.21.8-0.2-0.4-1.00.2
Panama Canal Authority (ACP)
Revenue8.98.77.97.68.28.07.97.98.3
Current expenditure2.62.42.22.22.32.42.52.62.7
Transfers to the government4.33.03.22.83.43.43.43.43.6
Interest payments0.00.00.00.10.00.10.20.20.2
Capital expenditure0.61.22.13.63.63.62.91.81.2
Overall balance1.32.10.5-1.1-1.1-1.6-1.00.00.6
Nonfinancial public sector, including ACP
Overall balance4.82.5-0.5-2.0-2.0-2.1-1.10.21.1
Total public debt45.638.839.440.438.837.435.231.928.5
o/w: ACP0.00.00.01.12.13.54.23.93.5
External
Exports, f.o.b., excluding Colón Free Zone8.37.45.15.65.65.75.86.06.1
Imports, f.o.b., excluding Colón Free Zone-26.7-27.1-21.5-24.5-25.6-26.5-26.3-24.7-23.9
Net exports of Colón Free Zone2.30.08.23.33.23.33.43.43.4
Current account balance-7.2-11.60.0-7.9-8.0-8.5-7.7-5.9-4.5
Foreign Direct Investment9.610.47.27.77.98.08.08.18.1
(In millions of U.S. dollars)
Memorandum items:
Nominal GDP19,79423,18424,71126,68929,28232,16435,26638,67642,537
External Debt (excluding banks, percent of GDP)52.646.752.553.850.549.648.246.042.5
External Debt (including banks, percent of GDP) 1/176.6167.9163.3164.6161.3160.6159.4157.4154.2
Structural primary balance, excluding ACP6.72.82.12.42.02.32.62.52.5
Sources: Office of the Comptroller General; Ministry of Economy and Finance; and Fund staff estimates and projections.

Includes offshore banks.

Sources: Office of the Comptroller General; Ministry of Economy and Finance; and Fund staff estimates and projections.

Includes offshore banks.

Table 7.Panama: Medium-Term Balance of Payments
Prel.Proj.
200720082009201020112012201320142015
(In millions of U.S. dollars)
Current account-1,430-2,687-12-2,121-2,356-2,721-2,717-2,264-1,905
Trade balance excluding Colón Free Zone-3,642-4,554-4,064-5,024-5,857-6,677-7,195-7,249-7,554
Exports , f.o.b.1,6381,7241,2571,5061,6461,8382,0632,3162,609
Imports , f.o.b.-5,280-6,277-5,321-6,530-7,503-8,516-9,258-9,565-10,164
Of which: related to canal expansion-8-96-106-601-661-752-644-375-240
Net exports from Colón Free Zone45982,0388709391,0661,2101,3321,467
Re-exports, f.o.b.7,7008,5999,64810,46511,18012,04613,01114,05515,192
Imports , f.o.b.-7,241-8,592-7,610-9,594-10,241-10,980-11,801-12,722-13,725
Services, net2,8183,2053,2723,6704,2704,7355,3506,0106,847
Travel, net8781,0421,1451,3361,5371,8182,1692,5542,991
Transportation, net1,3961,5541,8111,9832,3432,4792,6902,9193,268
Other services544609317350391438491537588
Income, net-1,318-1,583-1,468-1,864-1,957-2,119-2,383-2,687-3,026
Private sector-877-1,103-934-1,164-1,263-1,403-1,559-1,704-1,898
Public sector-442-480-535-700-695-716-824-982-1,129
Of which: NFPS interest-598-622-620-699-700-688-765-902-1,047
Of which: related to Canal Expansion-12-37-68-91-92
Current transfers, net253238210227249274300329362
Capital and financial account3,4163,0018812,2212,6563,0213,0172,5642,205
Financial account3,3732,9458582,1982,6332,9982,9942,5412,182
Public sector7362421,56848149741538303-281
Nonfinancial public sector7442491,57548856748545310-274
National Bank of Panama-9-7-7-7-7-7-7-7-7
Other net flows000000000
Private sector, medium and long-term1,4581,4887071,9091,9752,2262,5032,5982,675
Direct investment1,9072,4021,7732,0602,3152,5602,8263,1213,456
Portfolio investment-1,125-484-873-619-847-878-909-1,153-1,460
Loans676-429-192469507545585630679
Short-term flows1,1791,214-1,418-19360931-46-360-212
Errors and omissions-1,107357-176000000
Overall balance617672693100300300300300300
Financing-617-672-693-100-300-300-300-300-300
Net foreign assets of the BNP-607-667-693-100-300-300-300-300-300
Memorandum items:(In percent of GDP)
Merchandise exports8.37.45.15.65.65.75.86.06.1
Merchandise imports-26.7-27.1-21.5-24.5-25.6-26.5-26.3-24.7-23.9
Net exports from Colón Free Zone2.30.08.23.33.23.33.43.43.4
Current account-7.2-11.60.0-7.9-8.0-8.5-7.7-5.9-4.5
Of which: related to Canal Expansion-0.4-0.4-2.3-2.3-2.5-2.0-1.2-0.8
Direct foreign investment9.610.47.27.77.98.08.08.18.1
External public debt37.432.736.538.535.334.432.930.827.4
Sources: Office of the Comptroller General; and Fund staff estimates and projections.
Sources: Office of the Comptroller General; and Fund staff estimates and projections.
Table 8.Panama: Debt of the Nonfinancial Public Sector
Prel.Proj.
20062007200820092010
(In millions of U.S. dollars)
External debt 1/6,9337,4047,5869,01810,266
Multilaterals1,1831,2351,3501,5941,783
IBRD188217271435450
IDB8838919481,0281,095
Others111127130130237
Bilateral and guaranteed suppliers237224210219227
Commercial banks86170219217
Global bonds5,5055,9385,8566,9867,746
ACP 2/0000293
Domestic debt 3/2,0811,6311,419708508
Private creditors1,313994828518318
Public financial institutions768636591190190
Total Public Debt9,0149,0349,0059,72610,774
(In percent of GDP)
Total52.645.638.839.440.4
External40.537.432.736.538.5
Domestic12.18.26.12.91.9
Memorandum items:
Held by Fiduciary Fund (In percent of GDP)5.04.43.84.41.2
Held by Social Security Agency (In percent of GDP)3.42.82.30.01.0
GDP (in millions of U.S. dollars)17,13719,79423,18424,71126,689
Sources: Comptroller General; Ministry of Economy and Finance; and Fund staff estimates and projections.

Excludes assets held by the Fiduciary Fund.

Reflects disbursements from multilateral development banks and JBIC for the Panama Canal expansion.

Excludes government debt held by the Social Security Agency.

Sources: Comptroller General; Ministry of Economy and Finance; and Fund staff estimates and projections.

Excludes assets held by the Fiduciary Fund.

Reflects disbursements from multilateral development banks and JBIC for the Panama Canal expansion.

Excludes government debt held by the Social Security Agency.

Table 9.Panama: Vulnerability Indicators
Prel.
20052006200720082009
Financial indicators
Broad money (12-month percent change)8.521.515.918.513.4
Private sector credit (12-month percent change)13.312.918.214.60.8
Deposit rate (6-month; in percent) 1/3.25.14.63.53.6
External indicators
Merchandise exports (12-month percent change)11.914.311.75.2-27.1
Merchandise imports (12-month percent change)14.318.240.718.9-15.2
Current account balance (in percent of GDP)-4.9-3.1-7.2-11.60.0
Capital and financial account balance15.00.915.912.93.6
Of which: direct investment6.214.69.610.47.2
Public sector external debt45.540.537.432.736.5
In percent of exports of goods and services 2/138.5115.9105.4100.4103.3
External interest payments (in percent of
Exports of goods and services) 2/10.38.27.57.46.4
External amortization payments (in percent of
Exports of goods and services) 2/19.735.12.512.32.4
REER, percent change (depreciation -) 3/6.6-4.6-2.03.2-5.0
Gross international reserves at end of period
In millions of U.S. dollars 4/1,2361,4402,0442,7103,406
In months of imports of goods and services3.03.23.33.65.4
In percent of broad money10.19.711.913.314.8
In percent of short-term external debt 5/119.1817.8539.91285.42694.2
(In millions of U.S. dollars)
Memorandum items:
Nominal GDP15,46517,13719,79423,18424,711
Exports of goods and services 2/5,0765,9797,0227,5578,732
Sources: Ministry of Economy and Finance; and Fund staff estimates and projections.

One-year average for the banking system, comprising of general license banks, excluding offshore banks.

Includes net exports of the Colón Free Zone.

Data for end of period.

Corresponds to gross foreign assets of the National Bank of Panama (a publicly-owned commercial bank).

Short-term public external debt includes amortization in the following year. Excludes global bonds debt exchange operations.

Sources: Ministry of Economy and Finance; and Fund staff estimates and projections.

One-year average for the banking system, comprising of general license banks, excluding offshore banks.

Includes net exports of the Colón Free Zone.

Data for end of period.

Corresponds to gross foreign assets of the National Bank of Panama (a publicly-owned commercial bank).

Short-term public external debt includes amortization in the following year. Excludes global bonds debt exchange operations.

Table 10.Panama: Public Sector Debt Sustainability Framework, 2006–2015(In percent of GDP, unless otherwise indicated)
Projections
2006200720082009201020112012201320142015Debt-stabilizing primary balance 9/
1Baseline: Public sector debt 1/52.645.638.839.440.438.837.435.231.928.5-0.6
o/w foreign-currency denominated40.537.432.736.538.535.334.432.930.827.4
2Change in public sector debt-6.1-7.0-6.80.51.0-1.6-1.4-2.2-3.3-3.4
3Identified debt-creating flows (4+7+12)-6.9-11.8-9.2-1.9-0.9-1.6-1.4-2.2-3.3-4.0
4Primary deficit-5.5-8.2-5.6-2.4-1.0-0.6-0.6-1.5-2.5-3.3
5Revenue and grants26.829.729.227.427.829.028.728.728.628.8
6Primary (noninterest) expenditure21.321.623.625.026.828.328.127.226.125.6
7Automatic debt dynamics 2/-1.4-3.6-3.60.50.1-1.0-0.8-0.7-0.8-0.7
8Contribution from interest rate/growth differential 3/-1.4-3.6-3.60.50.1-1.0-0.8-0.7-0.8-0.7
9Of which contribution from real interest rate3.11.90.61.31.81.41.51.51.21.2
10Of which contribution from real GDP growth-4.5-5.5-4.2-0.9-1.8-2.3-2.3-2.1-2.0-1.9
11Contribution from exchange rate depreciation 4/0.00.00.00.0
12Other identified debt-creating flows0.00.00.00.00.00.00.00.00.00.0
13Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.0
14Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.0
15Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.0
16Residual, including asset changes (2-3) 5/0.84.92.42.41.90.00.00.00.00.6
Public sector debt-to-revenue ratio 1/196.0153.4133.1143.8145.1133.8130.4122.5111.699.0
Gross financing need 6/14.8-0.83.27.74.74.84.12.61.03.6
In billions of U.S. dollars2539.0-156.7733.51899.510-Year10-Year1241.2 1405.81319.6913.3379.6 1533.5
Scenario with key variables at their historical averages 7/40.436.733.129.525.923.0-0.1
Scenario with no policy change (constant primary balance) in 2010–2015HistoricalStandard40.438.436.635.033.232.1-0.7
Key Macroeconomic and Fiscal Assumptions Underlying BaselineAverageDeviation
Real GDP growth (in percent)8.512.110.72.45.83.94.86.36.56.26.26.5
Average nominal interest rate on public debt (in percent) 8/8.17.58.07.87.50.48.27.17.57.77.17.6
Average real interest rate (nominal rate minus change in GDP deflator, in p6.04.52.23.75.41.65.23.94.44.53.94.3
Nominal appreciation (increase in US dollar value of local currency, in perc0.00.00.00.00.00.0
Inflation rate (GDP deflator, in percent)2.13.05.84.12.11.93.03.23.23.23.23.2
Growth of real primary spending (deflated by GDP deflator, in percent)8.013.221.38.57.26.112.612.25.53.11.74.4
Primary deficit-5.5-8.2-5.6-2.4-3.42.5-1.0-0.6-0.6-1.5-2.5-3.3

Nonfinancial public sector, includes ACP.

Derived as

times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Nonfinancial public sector, includes ACP.

Derived as

times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currency denominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Figure 5.Panama: Public Debt Sustainability: Bound Tests 1/

(Public debt in percent of GDP)

Sources: International Monetary Fund, country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent o ne-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten -year historical average for the variable is also shown.

2/ Permanent ¼ standard deviation shocks applied to real interest rate, growth rate, and primary balance.

3/ A 10 percent of GDP shock to contingent liabilities occurs in 2010.

Annex I. Summary of Annexes

The full annexes of this report may be viewed on the Fund’s intranet and on the secure extranet for Executive Directors and member-country officials.

Fund relations

As of April 30, 2010, Panama did not have any outstanding purchases or loans. The latest precautionary SBA expired on March 29, 2002. The last Article IV consultation was completed by the Executive Board on June 1, 2009. Panama has received TA from the Fund in recent years, including on national accounts statistics in March 2009. The last safeguards assessment was completed on July 12, 2001, and concluded that the National Bank of Panama’s external-audit mechanism was adequate at the time. There is no resident representative.

Relations with the World Bank

The Country Partnership Strategy (CPS) for Fiscal Year (FY) 2008–10 was approved in October 2007 and consists of a mix of analytical and advisory assistance, development policy loans, and investment operations. A new CPS for FY 2011–14 is being prepared and is expected to be discussed by the Board later this year.

Relations with the Inter-American Development Bank

For 2010, the Bank is working on four loans in the areas of urban transportation (US$600 million), road infrastructure (US$70 million), water and sanitation (US$40 million), and education (US$30 million). The IDB is expected to finish the country strategy for the 2010–14 period later this year.

Statistical Issues

Panama’s economic statistics and data provisions have some shortcomings, but are broadly adequate for surveillance.

Official estimates show that the value of net exports from the CFZ rose by 8 percentage points of GDP in 2009. Most of the increase is accounted for by a temporary surge in exports of medical products, related mainly to the A/H1N1 flu pandemic.

Presidential elections were held in May 2009 and President Martinelli (the candidate from the opposition) took office in July.

Specifically, in June 2009 the SFRL deficit ceiling was raised from 1 percent of GDP to 2½ percent of GDP during times of global and domestic recessions. The modification allows a gradual return to the original deficit ceiling of 1 percent of GDP after four years.

Chapter 1 of the accompanying Selected Issues Paper discusses the benefits that accrue from having investment grade.

The SFRL deficit ceiling for 2010 is 2½ percent of GDP. The 2009 SFRL reform contained a carry-over provision stating that if the fiscal outturn is below the deficit ceiling in the first year of the recession, the ceiling for the following year may increase by up to 0.5 percent of GDP.

Staff’s empirical analysis finds a strong relationship between U.S. and domestic growth, and a more moderate effect on growth from changes in domestic credit (see Chapter 2 of the Selected Issues Paper).

The deposit insurance scheme adopted by Hong Kong in the mid-1990s contained similar features.

Other Resources Citing This Publication