Abstract
This paper reassesses Panama's business model based on its abilityto attract international financial, business, and transportation services.
Spillovers from External Exposures to Panama1
Panama is a small and open economy with a high level of integration into the international trade and finance network. It is exposed to global and regional developments through important linkages in trade, particularly in services, FDI and finance related to its role as a regional banking center. This paper first documents Panama’s main external linkages and then provides a quantitative assessment of spillovers to Panama’s economy stemming from its integration into the global economy. Economic developments in partner economies are found to have an important impact on Panama’s economic performance. In particular, Colombia produces strong economic spillovers to Panama, with Colombian growth a key factor explaining Panama’s economic growth. Exchange rate appreciation, for instance due to a stronger U.S. dollar, is found to have a stronger impact on goods exports than overall service exports.
A. Panama’s External Linkages
1. Panama is among the most connected countries in Latin America. Considering together a broad range of different aspects of competitiveness, including trade, investment, information and people flows, the Global Connectedness Index suggests that Panama is the most connected country in Latin America. Out of 140 countries included in the index, Panama is ranked 47th.2 Panama’s position in the index reflects its important linkages in trade, particularly in services, FDI and finance, the latter related to its role as a regional banking center. This section examines in turn four aspects of Panama’s external linkages; trade, FDI, remittances, and finance.
Global Connectivity Index
(2013 rank; out of 140 countries)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: Ghemawat and Altman (2014).Global Connectivity Index
(2013 rank; out of 140 countries)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: Ghemawat and Altman (2014).Global Connectivity Index
(2013 rank; out of 140 countries)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: Ghemawat and Altman (2014).Trade
2. Panama is highly integrated through trade, primarily in services. While Panama runs a trade deficit in goods (of 16 percent of GDP in 2016) it runs a surplus in services (19 percent of GDP in 2016). Goods exports are small, at only 4.3 percent of GDP in 2016, down significantly from an average of almost 9 percent of GDP over the decade prior. This decline in exports is likely partly associated with a decline in competitiveness as Panama’s real effective exchange rate has appreciated, mirroring developments in the U.S. dollar given dollarization. Re-exports from the Colon Free Zone have also lost competitiveness, falling to about 17 percent of GDP in 2016 from a peak of 40 percent of GDP in 2011. Economic challenges in Venezuela and Puerto Rico and an ongoing trade dispute with Colombia have been key contributing factors to the decline in activity in the CFZ. Panama’s service exports, in contrast, have remained stable, reaching 26.5 percent of GDP in 2016, consistent with the average level experienced over the prior decade. The continued strength of Panama’s service exports, even while goods exports have been declining, suggest that, while Panama may have lost some competitiveness in goods exports, that its service exports remain competitive and may be less sensitive to movements in the exchange rate (see Section B for a quantitative analysis).
Panama: Nominal and Real Effective Exchange Rates
(Index: 2010=100; +appreciation)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INS and Fund staff calculations. Panama’s NEER and REER exclude Venezuela.Panama: Nominal and Real Effective Exchange Rates
(Index: 2010=100; +appreciation)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INS and Fund staff calculations. Panama’s NEER and REER exclude Venezuela.Panama: Nominal and Real Effective Exchange Rates
(Index: 2010=100; +appreciation)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INS and Fund staff calculations. Panama’s NEER and REER exclude Venezuela.
Panama: Merchandise Trade
(in percent of GDP)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: INEC.Panama: Merchandise Trade
(in percent of GDP)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: INEC.Panama: Merchandise Trade
(in percent of GDP)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: INEC.
Panama: Trade in Services
(net; in percent of GDP)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: INEC.Panama: Trade in Services
(net; in percent of GDP)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: INEC.Panama: Trade in Services
(net; in percent of GDP)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: INEC.3. The U.S. remains Panama’s most important trading partner, although Latin America is also an important destination for Panama’s exports. The U.S. accounts for about 20 percent of merchandise exports, about 70 percent of total cargo transiting the Panama Canal, 17 percent of tourists, and 4 percent of CFZ re-exports. With the U.S. economy undergoing a gradual recovery, U.S. developments have recently been supportive of Panamanian exports, this has helped to offset the negative impact of the challenges faced by some of Panama’s Latin American export markets. As a region, Latin America is the most important destination for Panama’s exports. The region accounts for 26 percent of merchandise exports, 60 percent of tourists and at least 65 percent of CFZ exports.3 As a result of its intraregional trade integration, Panama’s economic activity is sensitive to economic conditions in the region. For example, about three quarters of the decline in CFZ re-exports as a share of GDP since 2011 has been associated with regional developments.
Panama’s Trade Linkages
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Panama’s Trade Linkages
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Panama’s Trade Linkages
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
4. Panama’s business cycle is closely linked to world trade. The Panama Canal is an important source of export receipts (4.3 percent of GDP in 2016) for Panama as ships pay a fee to transit the Canal. The amount of cargo transiting the Canal and toll revenue ultimately depend on world trade, which is expected to grow 4 percent on average over 2017–18, according to the World Economic Outlook (January 2016). About 5 percent of world trade transits the Panama Canal with about a third of ships transiting on the U.S. East Coast – Asia route, making traffic particularly sensitive to trade between the U.S. and Asia. Indeed, the U.S. accounts for over 70 percent of total cargo flows through the canal (including both origin and destination flows) with China accounting for a further 20 percent. Growing trade between Asia and the East Coast of Latin America may increase the sensitivity of Canal revenues to trade between these regions. Routes between these regions saw the largest increase in tonnage in 2016 and ongoing efforts to strengthen trade integration between the regions should facilitate a continuation of this trend. Canal revenue is also sensitive to commodity prices that alter the relative price competitiveness of other shipping routes. Low oil prices, for example, enhance the relative competitiveness of the Cape Horn route, and contributed to the poor performance of Canal revenues in 2016 despite the opening of the expanded Canal.
The Panama Canal: Main Markets and Routes
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
The Panama Canal: Main Markets and Routes
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
The Panama Canal: Main Markets and Routes
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Foreign Direct Investment
5. The United States and Colombia are also the most important providers of foreign direct investment (FDI) to Panama. FDI, at 9.2 percent of GDP in 2016, is an important source of financing for the Panamanian economy. The United States provides about a quarter of this financing, with Colombia also accounting for just under a fifth of total FDI. FDI is primarily comprised of reinvested earnings of large multinational corporations operating in Panama. Thus, the stability of these inflows depends on the continued profitability of these firms and these inflows may be affected by taxation policies in these firms’ home countries. Along these lines, the new U.S. administration’s proposed changes to U.S. corporate tax rules could present a risk to these inflows if they encourage firms to relocate their operations in the U.S. At the same time, however, at the same time any decline in FDI receipts under the capital account is likely to be offset by a decline in outflows under the income account. FDI is well diversified across industries.
Panama: Top Ten Providers of Foriegn Direct Investment
(2015, in percent of total)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.Panama: Top Ten Providers of Foriegn Direct Investment
(2015, in percent of total)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.Panama: Top Ten Providers of Foriegn Direct Investment
(2015, in percent of total)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.
Panama: Foreign Direct Investment by Economic Activity
(2015; in percent of total)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.Panama: Foreign Direct Investment by Economic Activity
(2015; in percent of total)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.Panama: Foreign Direct Investment by Economic Activity
(2015; in percent of total)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.Remittances
6. Panama receives important remittances inflows, but these flows are unlikely to be a major transmission channel of international developments. In 2016, remittances amounted to 0.8 percent of GDP. The United States is by far the largest sender of remittances to Panama, accounting for about 35 percent of remittances. Otherwise, reflecting intra-regional patterns of migration, Panama also receives remittances from several neighboring countries in Latin America, with no single country dominating these flows. With a diverse set of countries sending remittances to Panama, remittances are unlikely to be a major transmission channel for international developments to Panama.
Panama: Remittances Received
(in percent of GDP)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.Panama: Remittances Received
(in percent of GDP)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.Panama: Remittances Received
(in percent of GDP)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.
Panama: Top Ten Countries Receive Remittances From
(2016; in percent of total)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.Panama: Top Ten Countries Receive Remittances From
(2016; in percent of total)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.Panama: Top Ten Countries Receive Remittances From
(2016; in percent of total)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: INEC; IMF staff calculations.Financial
7. Panama is an important regional banking center. Financial sector assets are sizeable at 238 percent of GDP as of end-2016. Banks dominate the system, representing about 90 percent of assets, with offshore banks holding about 16 percent of bank assets. Offshore banks are prohibited from accepting deposits and extending credit locally, but do participate in the interbank market. Insurers (2 percent of financial system assets) and broker-dealers (1.8 percent of financial system assets) are the next largest segments of the financial system with the remainder of financial system assets accounted for by credit unions (1.5 percent) and other smaller financial institutions (see Selected Issues Paper III). In this context, Panama’s financial system is primarily affected by international developments through its regional banking system.
8. Panama’s regional banking center is closely tied to Latin America, particularly Colombia, reflecting a strong presence of Latin American banks in Panama. Of the 55 onshore banks, only 20 are Panamanian (representing 53 percent of banking system assets), with 35 foreign banks operating in Panama.4 Foreign banks operating in Panama originate primarily from Latin America. Colombian banks, in particular, have an important presence in Panama: 4 of the top 15 banks by asset size in Panama are Colombian and these banks alone represent about 17 percent of onshore banks’ assets.
9. Reliance on foreign funding has increased. Since 2010, the share of onshore banks’ funding accounted for by foreign sources has risen from about 30 percent to 35 percent (as of December 2016). While the share of foreign deposits in total deposits has remained relatively stable, the increase has been almost entirely due to an increase in banks’ external borrowing, consistent with the low cost of external funds over this period. While banks continue to rely primarily on deposits as a source of funding, with deposits representing about three quarters of banks’ total liabilities, banks’ increased reliance on external borrowing as a funding source has increased banks’ exposure to developments in global interest rates. While there is no data available on the distribution of banks’ external borrowing by country, foreign deposits in banks, at about 23 percent of banks’ total liabilities, are primarily from Latin America. Deposits from Venezuela, Ecuador, Costa Rica, and Colombia are particularly important, combined representing about 40 percent of foreign deposits in the Panamanian onshore banking system. Deposits from other Latin American countries represent a further 18 percent of foreign deposits.
10. Onshore banks’ foreign assets are primarily concentrated in Latin America. Banks’ foreign assets as a share of total (net) assets decreased from about 45 percent at the beginning of 2010 to about 38 percent at end-2016, which has somewhat reduced their exposure to external developments. These assets are composed primarily of foreign lending (43 percent of net foreign assets as of end-2016), banks’ interbank deposits abroad (33 percent of foreign banks’ net foreign assets) and banks’ foreign investment (24 percent of banks’ net foreign assets). Foreign lending is mainly to Latin America with the distribution similar to that of banks’ foreign deposit base. Similarly, banks’ foreign investments are also concentrated within the region with an important exposure also to the United States.
11. Panama’s offshore financial center is an important segment of Panama’s regional banking center. As of end-2016, the sector consistent of 27 banks. Given the restrictions placed on the onshore banking operations of these banks, they are almost fully funded and conduct all their lending operations abroad. About 0.6 percent of their total liabilities and 1.3 percent of their assets are held in Panama, primarily due to their limited participation in the interbank market. As with Panama’s sizeable onshore sector, the offshore sector primarily serves regional customers in Latin America with the majority of banks’ deposits, their primary funding source, and lending to the region.
12. Broker-dealers also conduct important cross-border business. While broker-dealers account for a much smaller share of the financial system than banks, they also have important cross-border exposures. Of the 91 brokerage houses licensed in Panama, 26 are either banks with brokerage licenses or subsidiaries of banks while the remainder are independent. Only 33 percent of the capital base of brokerage houses is Panamanian, reflecting the importance of their international clientele. Only about 6 percent of brokerage houses transactions are conducted within Panama.
External Linkages of Panama’s Regional Banking Center
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
External Linkages of Panama’s Regional Banking Center
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
External Linkages of Panama’s Regional Banking Center
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
B. Spillovers from the U.S. and the Region
External linkages through trade, FDI flows, and the financial system expose Panama’s economy to spillovers from abroad. This section examines the importance of such spillovers from the U.S. and countries in the region. First, it looks at the importance of real linkages through several correlations between growth rates in these economies and Panama. Second, it presents regression results that identify the most important external factors for Panama’s (sectoral) economic growth. Third, it provides estimates on spillovers from foreign interest rates and the exchange rate.
13. Economic fluctuations in other countries have significant impact Panama’s economic activity. Output growth in Panama is strongly correlated with output growth in partner economies (text figure and Table 1). Moreover, pattern of correlation of Panama’s business cycle with partners’ countries’, suggests that business cycles in regional partners and the U.S. typically lead Panama’s business cycle. This finding is captured by the downward sloping correlations and suggests that growth developments in Panama are driven to a large extent by economic fluctuations abroad.
Business Cycle Comovement of Panama with Other Economies
Business Cycle Comovement of Panama with Other Economies
| Business Cycle Comovement of Panama with Other Economies (2000Q1–2016Q2) | |||||
|---|---|---|---|---|---|
| Cross-correlations of Panama’s GDP growth in period t with other economies’ GDP growth from period t-2 to t+2 | |||||
| Brazil | Colombia | Mexico | United States | Costa Rica | |
| t-2 | 0.33 | 0.75 | 0.55 | 0.26 | 0.55 |
| t-1 | 0.36 | 0.77 | 0.52 | 0.28 | 0.58 |
| t | 0.34 | 0.73 | 0.50 | 0.21 | 0.51 |
| t+1 | 0.26 | 0.61 | 0.40 | 0.08 | 0.43 |
| t+2 | 0.11 | 0.44 | 0.24 | −0.07 | 0.26 |
Business Cycle Comovement of Panama with Other Economies
| Business Cycle Comovement of Panama with Other Economies (2000Q1–2016Q2) | |||||
|---|---|---|---|---|---|
| Cross-correlations of Panama’s GDP growth in period t with other economies’ GDP growth from period t-2 to t+2 | |||||
| Brazil | Colombia | Mexico | United States | Costa Rica | |
| t-2 | 0.33 | 0.75 | 0.55 | 0.26 | 0.55 |
| t-1 | 0.36 | 0.77 | 0.52 | 0.28 | 0.58 |
| t | 0.34 | 0.73 | 0.50 | 0.21 | 0.51 |
| t+1 | 0.26 | 0.61 | 0.40 | 0.08 | 0.43 |
| t+2 | 0.11 | 0.44 | 0.24 | −0.07 | 0.26 |
14. Panama’s economic activity displays especially strong correlation with the Colombian economy. Consistent with Panama’s important trade and FDI connections, as well as the considerable presence of Colombian institutions in the banking sector, the comovement of Panama’s growth with Colombia’s is significantly stronger than with other countries. Colombia’s impact on Panama’s growth appears to be much stronger than the impact of the U.S. economy, which represents a key trade partner and source of FDI for Panama.
Output growth correlations
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO data base, INEC, and Fund staff calculations.Note: The charts show cross-correlations of Panama’s GDP growth in period t with other economies’ GDP growth from period t-2 to t+2Output growth correlations
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO data base, INEC, and Fund staff calculations.Note: The charts show cross-correlations of Panama’s GDP growth in period t with other economies’ GDP growth from period t-2 to t+2Output growth correlations
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO data base, INEC, and Fund staff calculations.Note: The charts show cross-correlations of Panama’s GDP growth in period t with other economies’ GDP growth from period t-2 to t+215. Panama’s stronger comovement with Colombia may partly capture the impact from the U.S. The comovement of Panama’s growth with Colombia’s appears to be stronger both in times of expansion as well as in times of economic slowdown. To some extent, these findings may reflect the fact that the Colombian economy already captures part of the impact of U.S. growth shocks on Panama. Similarly, some global shocks may be transmitted through the Colombian economy.
GDP growth
(percent YoY)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: WEO database and Fund staff calculations.GDP growth
(percent YoY)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: WEO database and Fund staff calculations.GDP growth
(percent YoY)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: WEO database and Fund staff calculations.
GDP growth
(percent, YoY)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: WEO database and Fund staff calculations.GDP growth
(percent, YoY)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: WEO database and Fund staff calculations.GDP growth
(percent, YoY)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: WEO database and Fund staff calculations.16. The services sector appears to be more exposed to external spillovers than other sectors The relative importance of services trade for Panama gets reflected in the services sector’s stronger comovement with partner economies compared to industry and construction (text figure). Spillovers from the U.S. economy are significantly more important for the services sector than for other sectors of the economy, which is consistent with the earlier-documented importance of the U.S. for Panama’s service exports, and particularly for Canal activity.
17. Spillovers from Colombia are stronger than spillovers from other countries for all three broad sectors of the Panamanian economy. In line with the findings for the overall economy, the correlation coefficients (text figure) suggest that Colombia’s dominance is not limited to specific sector of economic activity. In addition, growth fluctuations in Colombia generally seem to precede movements in Panama’s industry and construction, while the contemporaneous impact seems to be the strongest for the services sector.
Co-movement of Sectoral Economic Activity in Panama with Key Countries
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO database, INEC and Fund staff calculations.Co-movement of Sectoral Economic Activity in Panama with Key Countries
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO database, INEC and Fund staff calculations.Co-movement of Sectoral Economic Activity in Panama with Key Countries
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO database, INEC and Fund staff calculations.What External Factors Explain Panama’s Growth?
18. Colombia’s growth explains about two thirds of Panama’s growth fluctuations. We investigate the impact of external factors on Panama’s growth using regression analysis and the results suggest that Colombia’s growth is the dominant explanatory factor (Table 2). In addition, Colombia’s growth seems to have an amplifying effect on Panama, with an estimated elasticity of about 1½. Other factors that affect Panama’s growth include oil prices, global uncertainty measured by the VIX, and U.S. policy interest rates. U.S. growth is also an important factor, albeit it loses significance once Colombia’s growth is included in the estimations, suggesting that Colombia captures (partly) the effect of U.S. growth.
Regression Results: Impact of External Factors of Panama’s Growth
Regression Results: Impact of External Factors of Panama’s Growth
| panama | |
|---|---|
| Colombia growth | 0.479** (0.0347) |
| Colombia growth (lagged) | 0.509* (0.0508) |
| Colombia growth (second lag) | 0.816*** (0.000246) |
| Oil prices | 0.0266* (0.0510) |
| Oil prices (lagged) | −0.0232* (0.0952) |
| VIX | 0.0233 (0.519) |
| US Interest rates | −0.169 (0.236) |
| Constant | −1.261 (0.319) |
| Observations | 65 |
| R-squared | 0.723 |
Regression Results: Impact of External Factors of Panama’s Growth
| panama | |
|---|---|
| Colombia growth | 0.479** (0.0347) |
| Colombia growth (lagged) | 0.509* (0.0508) |
| Colombia growth (second lag) | 0.816*** (0.000246) |
| Oil prices | 0.0266* (0.0510) |
| Oil prices (lagged) | −0.0232* (0.0952) |
| VIX | 0.0233 (0.519) |
| US Interest rates | −0.169 (0.236) |
| Constant | −1.261 (0.319) |
| Observations | 65 |
| R-squared | 0.723 |
Contribution to economic growth
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: WEO database, Bloomberg, and Fund staff estimations.Contribution to economic growth
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: WEO database, Bloomberg, and Fund staff estimations.Contribution to economic growth
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: WEO database, Bloomberg, and Fund staff estimations.19. Colombia’s growth performance is a dominant factor for different sectors in the Panamanian economy. In particular, Colombia’s growth accounts for about two thirds of fluctuations in the services sector. To some extent, this effect captures other common factors, including U.S. growth, which turns insignificant when included in the same specification. Colombia’s growth remains the most important explanatory factor for industry and construction as well, though less so than in the case of services.5 In this context, interest rates in the U.S. seem to explain some parts of the variability in industry and construction in the period before the global financial crisis, while their impact on the services sector appears negligible.
Impact of External Factors on Sectoral Growth in Panama
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO database, IFS, Bloomberg, INEC, and Fund staff estimations.Impact of External Factors on Sectoral Growth in Panama
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO database, IFS, Bloomberg, INEC, and Fund staff estimations.Impact of External Factors on Sectoral Growth in Panama
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO database, IFS, Bloomberg, INEC, and Fund staff estimations.20. The services sector appears to be more sensitive to U.S. growth fluctuations than other sectors. U.S. growth is related to the performance of Panama’s services sector to a certain degree, though this relationship is not very strong.6 This is consistent with the key importance of the U.S. economy for Panama’s services exports. In particular, Canal traffic to/from destinations in the U.S. is significantly higher than traffic to/from any other country. Besides this direct effect, a positive shock to the U.S. economy contributes indirectly through higher regional and global growth, which result in more trade and Canal activity, as well as higher demand for logistics and related services.
21. Industry and construction in Panama do not seem to be affected by U.S. economic growth. In line with the weak linkages through goods trade described in earlier sections, industry fluctuations do show any noticeable relationship with U.S. growth. Similarly, as noted earlier, construction is more related to economic activity in the immediate region, particularly Colombia, than the U.S. Overall, the U.S. seems to affect these sectors only indirectly through the interest rate channel.
Spillovers through Interest Rates and Exchange Rates
22. Lending interest rates in Panama have been very stable over the past several years. Their trend appears to have been isolated from the rising interest rates in the U.S. and countries in the region in the mid-2000s, but also from the significant decline in interest rates during the initial phase of the global financial crisis. With ample liquidity buffers and primarily relying on domestic deposits for funding, Panamanian banks could isolate their lending rates from global interest rate trends.
Interest rates
(percent)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: International Finance Statistics.Interest rates
(percent)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: International Finance Statistics.Interest rates
(percent)
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Sources: International Finance Statistics.23. Colombian lending rates had a stronger impact than U.S. rates on Panamanian lending rates. Estimation results in Table 3 suggest that interest rate developments in both Colombia and the U.S. affected Panamanian lending rates. However, when included jointly, the effect of Colombian rates dominates, a finding that seems surprising in light of Panama’s full dollarization. In addition, these estimations suggest that an increase in Colombia’s lending rates by one percentage point is associated with an increase in Panama’s rates of about 30 basis points, roughly three times larger than the impact from U.S. rates. Colombian rates remain dominant when a time trend is included in the specification, though their impact is reduced by about a half.
Interest rate spillovers in Panama
Interest rate spillovers in Panama
| Panel A | |||
|---|---|---|---|
| Panama lending rate | |||
| US lending rate | 0.39*** (0.07) | 0.09 (0.06) | |
| Colombia lending rate | 0.35*** (0.03) | 0.31*** (0.04) | |
| Source: Fund staff estimates. | |||
| Note: *** p<0.01, ** p<0.05, * p<0.1; robust standard errors in parentheses. | |||
| Panel B | |||
| Panama lending rate | |||
| US lending rate | −0.04 (0.05) | −0.09** (0.04) | |
| Colombia lending rate | 0.12*** (0.03) | 0.14*** (0.03) | |
| Time trend | −0.07*** (0.01) | −0.05*** (0.00) | −0.05*** (0.01) |
Interest rate spillovers in Panama
| Panel A | |||
|---|---|---|---|
| Panama lending rate | |||
| US lending rate | 0.39*** (0.07) | 0.09 (0.06) | |
| Colombia lending rate | 0.35*** (0.03) | 0.31*** (0.04) | |
| Source: Fund staff estimates. | |||
| Note: *** p<0.01, ** p<0.05, * p<0.1; robust standard errors in parentheses. | |||
| Panel B | |||
| Panama lending rate | |||
| US lending rate | −0.04 (0.05) | −0.09** (0.04) | |
| Colombia lending rate | 0.12*** (0.03) | 0.14*** (0.03) | |
| Time trend | −0.07*** (0.01) | −0.05*** (0.00) | −0.05*** (0.01) |
Impact of U.S. Growth on Sectoral Growth in Panama
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO database, IFS, Bloomberg, INEC, and Fund staff estimations.Impact of U.S. Growth on Sectoral Growth in Panama
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO database, IFS, Bloomberg, INEC, and Fund staff estimations.Impact of U.S. Growth on Sectoral Growth in Panama
Citation: IMF Staff Country Reports 2017, 106; 10.5089/9781475597721.002.A002
Source: WEO database, IFS, Bloomberg, INEC, and Fund staff estimations.24. Given dollarization, changes in the value U.S. can directly affect external competitiveness. For instance, dollar appreciation relative to the currencies of Panama’s important trading partners, would put pressures on the real effective exchange rate, and in turn, would expose Panama to the risk of losing external competitiveness. The relevance of such a scenario critically depends on the sensitivity of exports to REER fluctuations.
25. Exchange rate changes affect goods exports, but do not have a significant impact on overall services exports. Estimations results in Table 4 show that REER appreciation has a significantly negative impact on goods exports as well as on re-exports from the Colon Free Zone.7 In contrast, REER fluctuations do not have a significant impact on Panama’s overall service exports, a finding that differs from empirical studies that detect a stronger impact of the REER on service exports than on goods imports for a global sample of countries (Eichengreen and Gupta, 2013).
Exchange Rate Developments and Export Performance
Exchange Rate Developments and Export Performance
| Goods exports | CFZ re-exports | Services exports | |
|---|---|---|---|
| REER | −1.52** (0.75) | −1.87** (0.84) | 0.15 (0.40) |
| REER (ex Venezuela) | −2.31** (0.73) | −2.10** (0.93) | 0.04 (0.42) |
Exchange Rate Developments and Export Performance
| Goods exports | CFZ re-exports | Services exports | |
|---|---|---|---|
| REER | −1.52** (0.75) | −1.87** (0.84) | 0.15 (0.40) |
| REER (ex Venezuela) | −2.31** (0.73) | −2.10** (0.93) | 0.04 (0.42) |
26. The weaker effect found for Panama may reflect the large heterogeneity of economic activities included in Panama’s services exports portfolio, which may have significantly different levels of sensitivity to the exchange rate. On one hand, services related to the Canal and the cluster gravitating around it may have low exchange rate sensitivity as there are limited alternatives for global transport that are isolated from the U.S. dollar exchange rate fluctuations. On the other hand, services such as tourism are likely to be more exchange rate-sensitive. Hence, the overall sensitivity of Panama’s export services to REER fluctuations would reflect the relative importance of these groups of services. If the tourism sector picks up faster than logistics services in the future, Panama’s overall exports are likely to become more exchange-rate sensitive.
C. Conclusions
27. Panama is a small and open economy with a high level of integration into the international trade and finance network. External linkages through trade, FDI flows, and the financial system expose Panama’s economy to spillovers from abroad. Economic developments in partner economies are found to have an important impact on Panama’s economic performance. In particular, Colombia produces strong economic spillovers to Panama, which are significantly more important than spillovers from the U.S. economy. In addition, Colombian growth is found to be a key factor explaining Panama’s economic growth. Panama is also exposed to financial spillovers, with its lending rates being more sensitive to Colombian than U.S. lending rates. Given dollarization, Panama’s exchange rate appreciates with a stronger U.S. dollar. Nonetheless, appreciation is found to have a stronger impact on goods exports than on overall services, Panama’s key export category.
References
Carlino, G. and R. DeFina (1998), “The Differential Regional Effects of Monetary Policy”, Review of Economics and Statistics, 80 (4), pp.572–587.
Carlino, G. and R. DeFina (1999), “The Differential Regional Effects of Monetary Policy: Evidence from the U.S. States”, Journal of Regional Science, 39 (2), pp.339–358.
Eichengreen, B. and P. Gupta (2013), “The Real Exchange Rate and Export Growth: Are Services Different?”, World Bank Policy Research Working Paper 6629.
Ghemawat, P., and St. Altman (2014). “DHL Global Connectedness Index 2014,” Deutsche Post DHL, November 2014
Prepared by Kimberly Beaton and Metodij Hadzi-Vaskov.
The index is calculated as of 2013. See Ghemawat and Altman (2014).
The decomposition of CFZ re-exports is not available for all re-export markets, with about 17 percent of re-exports categorized as to “other” markets. Of the CFZ export markets published by INEC for 2016Q4, Latin American economies accounted for over 65 percent of total CFZ re-exports.
Of the 20 Panamanian banks, two are state-owned (accounting for about 14 percent of onshore bank assets).
This is consistent with the evidence that construction and manufacturing are typically found to be more sensitive to interest rate changes because the demand for their products as well as their inputs in production rely relatively more on credit. For example, see Carlino and DeFina (1998) and Carlino and DeFina (1999) on the importance of the industry mix for the differential impact of monetary policy.
Regression results suggest that the impact of U.S. economic growth is statistically significant for Panama’s services sector and not significant for the other sectors.
This effect is slightly stronger when Venezuela is excluded from the calculation of the REER. Venezuela is excluded to avoid distortions of the REER as a result of the exceptionally high domestic inflation in Venezuela in recent years.
