Panama: Request for Purchase under the Rapid Financing Instrument—Press Release; Staff Report; and Statement by the Executive Director for Panama
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International Monetary Fund. Western Hemisphere Dept.
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Publication Date:
01 May 2020
eISBN:
9781513542768
Language:
English
Keywords:
ISCR; CR; financing; Executive Board discussion; deficit; authorities project real GDP; authority; urgent balance of payments; IMF emergency support; balance of payments gap; response to the outbreak; Panama's response; COVID-19; Current account; Global; Central America; Western Hemisphere; summary balance of payments; spending needs; higher-than-budgeted deficit; authorities containment measure; external shock
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Request for Purchase under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Panama

Abstract

Request for Purchase under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Panama

Background

1. After two decades of record high growth, Panama’s economy weakened in the last two years. Panama experienced an unprecedented economic expansion with average annual growth of 6 percent in the last 25 years, the longest and fastest in Latin America. The high growth episode was supported by an investment boom, which included the expansion of the Panama Canal. However, growth slowed in 2019 amid declining productivity and weaknesses in construction and commerce.

Recent Developments

2. The COVID-19 pandemic comes at a time of macroeconomic weakness. The authorities have declared a National Emergency and a mandatory curfew.

  • Economic growth had moderated to 3 percent in 2019. The economic activity index for January 2020 was below 3 percent. Activity now appears poised to weaken significantly in 2020.

  • The fiscal deficit was contained at about 3 percent of GDP in 2019. Revenue shortfalls led to expenditure tightening. The fiscal rule was modified in 2019.

  • The financial system ended 2019 strong but vulnerable to lower economic activity. The banking system is well capitalized. Credit growth moderated sharply but NPLs remain low.

  • The current account improved in 2019. The current account deficit fell to 5.2 percent of GDP in 2019 (from 7.9 percent of GDP the year before), driven by a surge in copper exports.

Impact of COVID-19

3. The COVID-19 pandemic is severely affecting Panama’s economy. As of April 6, the number of confirmed cases stood at 2,100 with 55 fatalities. To contain the local spread of the virus, the authorities declared a National State of Emergency, and implemented various measures, such as border controls, a curfew, school closures, suspension of all commercial international flights, cancellation of events, and shutdowns of communal areas and non-essential stores. These measures significantly reduce demand, especially in such sectors as commerce, restaurants, and hotels. Suppression of local economic activity, exacerbated by the decline of global growth and trade, will widen a negative output gap in 2020–21, and negatively affect Canal traffic and its revenues. Lower economic activity will likely lead to a shortfall of budget revenues, while there will be higher public expenditures to provide relief to the population. Weaker economic activity also may lead to the displacement of labor and higher unemployment, which may cause late payments on banking loans. The government has extended deadlines for tax payments. The Ministry of Economy and Finance has advanced budgetary allocations to speed up COVID-19-related spending.

Impact of COVID-19 1/

(Percent of GDP unless otherwise indicated)

article image
Source: Fund staff calculations.

Pre-COVID projections are as of January 2020.

4. The authorities have implemented several measures to mitigate the negative economic impact of the COVID-19 outbreak. The government has extended deadlines for tax payments, and is reallocating spending to priority areas. The Ministry of Economy and Finance provided the Ministry of Health and other entities with the funds for the necessary healthcare spending.1 The authorities began to adjust state-controlled fuel prices more frequently to pass through the lower oil price to customers, plan to negotiate a 5 percent reduction of the electricity distribution tariffs, and approved purchases of the emergency food supplies. At least 14 banks announced relief measures for the households and companies affected by the COVID-19 outbreak, including grace periods of 3–4 months for loan payments, elimination of the minimum payment on credit cards, and reductions in interest rates.

Figure 1.
Figure 1.

Economic Activity: Output Gap and Panama Canal

Citation: IMF Staff Country Reports 2020, 147; 10.5089/9781513542768.002.A001

Source: INEC and IMF staff calculations.

5. The unanticipated global shock from the pandemic has changed the outlook especially in the immediate term. The urgent balance of payments needs in 2020 emanate from increased healthcare spending needs, deterioration in trade activities in the free trade zone and tourism, and a decline in capital inflows, although the historic decline in oil prices offsets some of these pressures. With annual growth in major advanced economies being revised down sharply, staff’s preliminary estimates suggest that Panama’s real GDP could contract by 2 percent in 2020 (from 5 percent expected before this shock), while the current account deficit could widen to 6.8 percent of GDP in 2020 (from 5.2 percent of GDP in 2019). Containment costs and pressures on revenues may increase the fiscal deficit to 6¼ percent of GDP in 2020 (from the target of 2¾ percent of GDP), thereby surpassing the limit established under the Social and Fiscal Responsibility Law (SFRL).

6. The shock will also have a large balance of payments impact. The impact of the COVID-19 shock on the balance of payments (BOP) can be analyzed by comparing current BOP projections for this year with those made back in January (before the shock was known). Under this metric, the BOP impact of the shock for 2020 could amount to US$3.7 billion (5.7 percent of GDP) despite some relief coming from lower oil prices. The BOP gap is driven by deterioration in: (i) foreign direct investment (FDI), US$2.3 billion; (ii) the current account, US$0.8 billion; and (iii) portfolio investment, US$0.7 billion.2 The deterioration in the current account is mostly due to lower tourism as improvements due to lower oil prices are offset by declines in the Colon Free Zone and lower receipts from reduced traffic in the Panama Canal.

Balance of Payments: COVID-19 Impact 1/

(In billions of U.S. dollars)

article image
Source: Fund staff estimates

Pre-COVID projections are as of January 2020.

7. Despite the sharp deceleration in 2020, medium-term prospects for Panama’s growth remain robust. The pandemic-related setback is expected to be temporary. A meaningful recovery is projected for 2021, supported by construction, logistics, and exports from the new copper mine. Against the backdrop of a stable macroeconomic environment, growth is expected to converge back to its potential of 5 percent from 2022 onwards.

Risks to the Outlook

8. The main risk to the outlook arises from a greater-than-expected severity of the epidemic. The economic outlook is subject to an unusual degree of uncertainty related to the impact of COVID-19 on the global economy and Panama. Staff projections assume that the spread of the disease will be contained at moderate levels and activity will resume relatively rapidly as the health crisis begins to wane. However, the situation could evolve along a more negative trajectory. Should this occur, additional measures to strengthen domestic health services and provide support to vulnerable populations would be needed. These would be partially covered by further reallocation of the budget toward helath and social needs, supported by additional external financing. In addition, the risk of experiencing large FDI and portfolio flow reversals could exacerbate Panama’s BOP needs. A deeper or more protracted shock could further weaken aggregate demand, lower tax revenues and amplify spending needs, widen the current account deficit, and consequently lower GDP growth prolonging the economic recovery.

Policy Discussions

9. The authorities have developed a plan to deal with the health and social emergency. The Pan American Health Organization (PAHO) used the country as an example to follow in Latin America for its response to the COVID-19 pandemic, as Panama’s government responded to the threat in a timely manner, built a support team, and mobilized resources. The authorities are enforcing social distancing and maintaining a “sanitary fence” with checkpoints outside Panama City and Colon. The Ministry of Public Health is increasing the number of hospital beds and using additional budgetary support to import medicines and medical equipment. On social spending, the authorities have strengthened the program “Panama Solidario” aimed at providing US$100 per month to poor families that depend on informal jobs. In addition, the government suspended payments for public services for low-income residents for four months and expanded budget support to municipalities to address local healthcare needs.

10. The National Assembly temporarily allowed the government to request a higher deficit than the SFRL limits for 2020 amid a national emergency declaration. While the SFRL contains escape clauses with caps, a new legislation gives the government authorization to present to the National Assembly a modification to the SFRL limit for 2020 (even beyond the caps in the escape clauses) in response to the pandemic. For 2020, the fiscal deficit can be above the SFRL limits, but those limits will become binding again starting in 2021. Under these conditions, it would be appropriate to use the automatic stabilizers and not to take compensatory measures as tax collections deteriorate in the face of an impending economic slowdown. There will also be a need to increase spending on health and the social safety net. For other types of expenditures, a relatively neutral policy would be adequate (i.e., following the 2020 budget), although some reallocation of spending might be necessary. Preliminarily and in collaboration with the authorities, staff estimates that fiscal revenues could deteriorate by about 1¾ percent of GDP and that the additional health and social spending could amount to 1½ percent of GDP, increasing the deficit by 3½ percent of GDP (some US$2.1 billion).

Fiscal Accounts: COVID-19 Impact 1/

article image
Source: Fund staff estimates

Pre-COVID projections are as of January 2020.

11. The authorities are approaching other multilateral institutions to cover external and fiscal financing needs. While the 2020 budget was expected to be fully financed, additional budget financing of 3½ percent of GDP needs to be identified. To this end, the authorities have approached both the World Bank and the Interamerican Development Bank (IDB), negotiations are advanced in securing the financing from these international financial institutions.

12. Macroprudential policies should be used to enhance the liquidity position of banks. The absence of a lender of last resort make banks vulnerable to liquidity squeezes at times of economic distress. While banks hold relatively high levels of liquid assets in normal times (around 55–60 percent of deposits), their funding is partly dependent on external sources that could dry up in a crisis situation. To ensure adequate liquidity, the authorities appropriately have released (temporarily) the banks’ dynamic provisioning, potentially injecting some US$1.3 billion of additional liquidity in the system (about 2 percent of GDP). The authorities should enhance liquidity monitoring, requiring banks to report deposit flows and expected outflows.

13. Building liquidity buffers remains critical to maintaining financial and external stability. Staff urges the authorities to consider the introduction of an emergency liquidity facility, which could be operated by the BNP. Any solvent bank would have access to the liquidity fund, using public debt instruments as collateral. Finding financing for the creation of the liquidity facility will be a challenge but can be done incrementally over time.

Rapid Financing Instrument Issues

14. The RFI is the appropriate instrument to support Panama at this juncture. Panama’s qualification is based on urgent balance of payments need arising from the global COVID-19 pandemic shock which, if not addressed, would result in immediate and severe economic disruption. The urgent need for financial assistance and the authorities’ focus on containing the pandemic and immediate recovery efforts, make engagement and discussions of a multiyear program infeasible at this juncture. Moreover, the rapid IMF involvement will play also a catalytic role in securing external financing from other sources and help preserve market access.

15. Staff considers access of 100 percent of quota under the RFI to be appropriate. The annual access of 100 percent of quota (SDR 376.8 million or about US$500 million) would provide relief to the temporary external and fiscal needs of the country. It is expected that the RFI resources will be used by the Treasury to provide financing for pandemic-related spending.

16. A safeguards assessment of Banco Nacional de Panama will be needed. The authorities should commit to undergo a safeguards assessment that would need to be completed before Executive Board approval of any subsequent arrangement to which the safeguards policy applies, and to provide Fund staff with the necessary Banco Nacional de Panama’s audit reports and authorize the external auditor of the bank to hold discussions with staff. In their Letter of Intent, the authorities confirm that the Ministry of Economy and Finance will be the governmental counterpart executing the timely servicing of the financial obligations to the IMF, in line with existing legal arrangements for public debt.

17. Panama is assessed as having sustainable debt and adequate capacity to repay the Fund. The RFI resources would be the first time in decades that Panama uses Fund resources, and it only represents 0.8 percent of GDP. The Fund’s risks from this RFI exposure will be minimal given the authorities’ excellent track record of servicing their debt obligations. The DSA (Annex I) shows debt to be sustainable with a sufficient buffer even after the impact of the pandemic. Moreover, Panama has the capacity to repay the Fund, with scheduled repayments of the RFI at no point in excess of 2 percent of exports or 8 percent of reserves. Panama’s sovereign credit has “investment” grade ratings from the main international credit rating agencies.

Authorities’ Views

18. The authorities indicated that a higher-than-budgeted deficit will be warranted in view of the unprecedented nature of the COVID-19 shock and its adverse impact on the vulnerable segments of the population. In anticipation of large fiscal outlays required to support healthcare and social-support spending, they promptly tried to secure additional financing and passed legislature that will allow the government to request the authorization of a higher deficit in response to the pandemic for the 2020 budget envelope to expand fiscal space. They indicated that all government spending that they could reallocate, including operating and capital expenditures, will be used to focus on the immediate priorities such as expanding medical capacity and the Panama Solidario social program to support the poor and the unemployed. The authorities are also in the process of negotiating financial support from other multilateral institutions.

19. The authorities concurred that the financial system is stable and reflected strong and sound financial conditions prior to the COVID-19 crisis but remains vulnerable. They indicated that banks have accumulated sufficient dynamic provisioning, which could be used to absorb losses from a potential increase in nonperforming loans following weakening economic conditions. They concurred with the need to adhere to the Basel framework and guidelines on loan restructuring. The authorities also agreed that due to the unpredictability of the length of the global pandemic they will be structuring a facility to strengthen and enhance banking system liquidity.

Staff Appraisal

20. The short-term outlook has weakened considerably, and the uncertainty is high. Staff welcomes the authorities containment measures and increased healthcare spending to mitigate the impact from the COVID-19 pandemic and contain the spread of the virus. Suppressed local economic activity, exacerbated by weak global activity and trade, will create fiscal and BOP financing gaps. In the medium term, the economy is expected to return to its potential growth of

5 percent with inflation at 2 percent. Key risks to the outlook stem from a more severe and protracted recession, weaker-than-expected global growth, and deglobalization trends.

21. Staff agrees with the temporary relaxation of fiscal deficit limits and the reorientation of fiscal policy to short-term priorities to mitigate the impact of the pandemic. To ensure that public debt-to-GDP ratios remain sustainable and on a declining path, staff supports the return to the gradual adjustment envisaged under the SFRL once the pandemic recedes.

22. Staff reiterates the need to recalibrate macroprudential policies to maintain a stable financial system. Weak economic conditions could exacerbate pressures on banks’ asset quality and liquidity. To mitigate this impact, staff supports the authorities’ measures that have allowed banks to use the accumulated dynamic provisioning to absorb the impact of credit losses; and restructure loans, including by introducing grace periods on loan payments for affected borrowers. Liquidity buffers should also be used, if needed. The SBP should continually monitor the situation and adjust its policy response accordingly.

23. Against this background, staff supports the authorities’ request for a purchase under the RFI in the amount of SDR 376.8 million (100 percent of quota). Staff support is based on the severity of the COVID-19 outbreak, urgent BOP needs, and the authorities’ existing policies to mitigate this external shock which include engaging the World Bank and IDB to address budgetary needs. To ensure that public debt-to-GDP ratios remain sustainable and on a clear downward path, staff welcomes the authorities’ commitment to returning to a gradual adjustment under the SFRL once the pandemic recedes.

Table 1.

Panama: Selected Economic and Social Indicators, 2015–25

article image
Sources: Comptroller General; Superintendency of Banks; and IMF staff calculations.

Includes Panama Canal Authority (ACP). Includes Staff adjustment to account for the accrual of previously unrecorded expenditure for 2015–18.

Non-Financial Public Sector according to the definition in Law 31 of 2011.

Includes debt of public enterprises outside the national definition of NFPS (ENA, ETESA, and AITSA) and non-consolidated agencies.

Table 2.

Panama: Summary Operations of the Non-Financial Public Sector, 2015–251

(In percent of GDP)

article image
Sources: Comptroller General; Ministry of Economy and Finance; and IMF staff calculations.

Official presentation excludes the operations of the ACP as it is not part of the NFPS.

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

Different from Table 3 as it excludes the transfers to other agencies.

Staff adjustment to account for the accrual of previously unrecorded expenditure for 2015–18.

For 2015 – 2017, includes spending allowed under Article 34 of Law 38 of 2012.

Includes staff adjustment for net financing through the change in obligations related to unrecorded expenditure for 2015–2019. For 2019, also accounts for deposits accumulated in prefinancing operations.

Primary balance adjusted for the output gap.

Table 3.

Panama: Summary Operations of the Central Government, 2015–251

(In percent of GDP)

article image
Sources: Comptroller General; Ministry of Economy and Finance; and IMF staff calculations.

Includes public service fees.

Staff adjustment to account for the accrual of previously unrecorded expenditure for 2015–18.

Current revenues and grants less current expenditure.

For 2015 – 2017, includes spending allowed under Article 34 of Law 38 of 2012.

Includes staff adjustment for net financing through the change in obligations related to unrecorded expenditure for 2015–2019. For 2019, also accounts for deposits accumulated in prefinancing operations.

Table 4.

Panama: Summary Balance of Payments, 2015–25

(In percent of GDP; unless otherwise stated)

article image
Sources: INEC; and IMF staff calculations.
Table 5.

Panama: Indicators of Fund Credit, 2020–25

(In millions of SDRs, unless otherwise specified)

article image
Source: Fund staff estimates.

Annex I. Public Debt Sustainability Assessment (DSA)

Bottom line: Sustainable.

Baseline

article image

Stress Tests

article image

Assumptions

article image

Coverage and Contingent Liabilities

article image
Figure 1.
Figure 1.

Panama: Public Sector DSA – Baseline Scenario

(In percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2020, 147; 10.5089/9781513542768.002.A001

Appendix I. Letter of Intent

Panama City, Panama

April 7, 2020

Ms. Kristalina Georgieva

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Ms. Georgieva,

1. On March 13, 2020, the Government of Panama announced a “State of Emergency” to prevent the spread of the global COVID-19 pandemic. As of April 6, 2,100 cases have been confirmed, with 55 deaths and 14 recovered. Given the severity of this outbreak, our government decided to close borders, including the docking of cruises, ships, and commercial vessels. All inbound and outbound commercial international flights have been suspended, with the exception of cargo and humanitarian flights. An executive decree was also issued by the President, introducing a total quarantine and prohibiting residents from all outdoor activity. All stores across the country will remain closed except for supermarkets, pharmacies, and medical centers.

2. This adverse development has severely affected our economy. Our preliminary projections suggest that real GDP growth in 2020 could decline to -2 percent—down from a pre-pandemic projection of over 4 percent—owing to significant deterioration in international trade that affects canal traffic and activities in the free trade zone, losses of agriculture production and tourism earnings, and disruptions to transport, communications and financial services. To prevent a further downward spiral in our economy and well-being of our citizens, our government has undertaken various stimulus measures which, among others, include:

  • Extension of tax amnesty (from its expiration in February) and the deadline for tax returns (from March to June).

  • Moratorium in the payment of public services, such as water and electricity, for a period of 90 days.

  • Creation of a "Panama Solidarity Plan" with an initial fund of US$428 million to support health care and social spending to mitigate economic effects in vulnerable sectors.

  • Expansion of healthcare spending in light of emerging pandemic-related needs.

The Superintendence of Banks also authorized the release of US$1.3 billion in commercial banks’ dynamic provisioning, allowing banks to refinance loans, grant grace periods to affected borrowers, and reduce interest rates.

3. Our fiscal situation has changed, requiring reallocation of budgetary resources to critical spending in disease containment and eradication (including medical supplies, equipment, and facilities) and increased social assistance to the most vulnerable. The fiscal deficit is projected to rise to 6.25 percent of GDP in 2020—over 3 percentage points of GDP higher than earlier projected. The increase in imports, particularly for medical supplies and equipment, along with an anticipated significant weakening of tourism, exports and canal revenue, and slowdown in FDIs and portfolio investment, will put tremendous strain on our balance of payments.

4. Against this background, and in the face of the urgent BOP need, the Government of Panama requests emergency financing from the IMF under the Rapid Financing Instrument (RFI) in the amount of SDR 376.8 million, equivalent to 100 percent of quota. This IMF assistance will help meet the urgent balance of payments needs in 2020 that are associated with an increased health spending needs, deterioration in trade activities in the free trade zone and tourism, and a decline in capital inflows. We are confident that, with the support of the international community, including the World Bank and Inter-American Development Bank, these needs will be fully financed during this year.

5. The Government of Panama values its cooperation with the IMF. We are committed to ensuring continued macroeconomic stability and will avoid any measures or policies that would exacerbate balance of payments difficulties. We do not intend to impose new or intensify existing restrictions on the making of payments and transfers for current international transactions, trade restrictions for balance of payments purposes, or multiple currency practices, or to enter into bilateral payments agreements which are inconsistent with Article VIII of the Fund’s Articles of Agreement.

6. Even as we contemplate an increase in public spending to carry out emergency pandemic response, we are aware of the need to contain fiscal imbalances that could jeopardize macroeconomic stability once the emergency is over. Specifically, to ensure that public debt-to-GDP ratios remain sustainable and on a clear downward path, we are committed to returning to a gradual adjustment envisaged under the Social and Fiscal Responsibility Law (SFRL) once the pandemic recedes. Beyond the medium-term fiscal consolidation outlined above, we are committed to strengthening our public financial management to ensure effective oversight over the entire public sector.

7. In line with IMF safeguards policy, we commit to undergoing a safeguards assessment in connection with the RFI. We will provide IMF staff with Banco Nacional de Panama’s most recently completed external audit reports and authorizing our external auditors to hold discussions with IMF staff. Given that financing from the IMF will be disbursed for budget support The Ministry of Economy and Finance will be the governmental counterpart executing the timely servicing of financial obligations to the IMF, in line with existing legal arrangements for public debt.

8. We authorize the IMF to publish this Letter of Intent and the staff report for the request for disbursement under the RFI.

Sincerely yours,

/s/

Hector Alexander

Minister of Economy and Finance
1

The Ministry of Economy and Finance released US$50 million to buy health and hygiene supplies, and advanced US$9 million to the Ministry of Health and US$1.3 million to other entities to carry out prevention measures.

2

The post-COVID projections are based on the following assumptions: compared to 2019, canal receipts and net reexports from Colon Free Zone are projected to fall by around 20 percent, respectively, while tourism is assumed to decline close to 50 percent due to adverse global economic conditions. Net FDI inflows are assumed to fall by 30 percent due to the weaker economic outlook in source countries, while a shock similar to average levels seen during the Global Financial Crisis is applied to net portfolio inflows (a decline of 95 percent from the net inflows in 2019) to capture a scenario of severe deterioration in global portfolio flows.

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Cover IMF Staff Country Reports
Panama: Request for Purchase under the Rapid Financing Instrument-Press Release; Staff Report; and Statement by the Executive Director for Panama
Author:
International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2020: Issue 147
Publisher:
International Monetary Fund
ISBN:
9781513542768
ISSN:
1934-7685
Pages:
24
DOI:
https://doi.org/10.5089/9781513542768.002
  • Figure 1.
    View in gallery
    Figure 1.

    Economic Activity: Output Gap and Panama Canal

  • Figure 1.
    View in gallery
    Figure 1.

    Panama: Public Sector DSA – Baseline Scenario

    (In percent of GDP unless otherwise indicated)

Figure 1.

Economic Activity: Output Gap and Panama Canal
Figure 1.

Panama: Public Sector DSA – Baseline Scenario

(In percent of GDP unless otherwise indicated)