Panama: Request for an Arrangement Under the Precautionary and Liquidity Line—Press Release; Staff Report; and Statement by the Executive Director for Panama

1. After over two decades of record high growth, Panama’s economy weakened in the two years prior to the pandemic and contracted sharply in 2020. 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 (and one of the longest and fastest in the world). The high-growth episode was supported by an investment boom, which included the expansion of the Panama Canal and the construction of one of the largest copper mines in the world. Panama reached high-income status in 2017, according to the World Bank classification methodology, and enjoys the highest per capita income in Latin America.1 Social outcomes also improved significantly over this period (Box 1). However, the economy is facing an unprecedented shock.

Abstract

1. After over two decades of record high growth, Panama’s economy weakened in the two years prior to the pandemic and contracted sharply in 2020. 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 (and one of the longest and fastest in the world). The high-growth episode was supported by an investment boom, which included the expansion of the Panama Canal and the construction of one of the largest copper mines in the world. Panama reached high-income status in 2017, according to the World Bank classification methodology, and enjoys the highest per capita income in Latin America.1 Social outcomes also improved significantly over this period (Box 1). However, the economy is facing an unprecedented shock.

Context

1. After over two decades of record high growth, Panama’s economy weakened in the two years prior to the pandemic and contracted sharply in 2020. 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 (and one of the longest and fastest in the world). The high-growth episode was supported by an investment boom, which included the expansion of the Panama Canal and the construction of one of the largest copper mines in the world. Panama reached high-income status in 2017, according to the World Bank classification methodology, and enjoys the highest per capita income in Latin America.1 Social outcomes also improved significantly over this period (Box 1). However, the economy is facing an unprecedented shock.

Real PPP GDP Per Capita

(In PPP international dollars)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: World Economic Outlook and IMF staff calculations.

2. Panama has had 20 Fund arrangements in its history, with about ⅔ being precautionary. The authorities have used IMF-supported programs in the past to advance reform agendas that are responsible for the successful economic performance of the last quarter of a century. The most notable examples were the four most recent arrangements which covered a decade 1992–2002. The authorities consider that these arrangements supported a reform agenda that led to higher growth, provided insurance against external risks, helped strengthen fiscal and external buffers in a challenging external environment, and sent positive signals to market participants. Importantly, Fund-supported programs anchored Panama’s reform agenda to reinforce expenditure controls and strengthen revenue collection, privatize enterprises and contract out services to the private sector, enhance financial supervision and measures to combat money laundering, as well as reduce poverty via targeted transfer programs. Following the global COVID-19 shock and the disruption it has created in the Panamanian economy, deteriorating the balance of payments and public finances, the authorities requested financial support under the Rapid Financing Instrument (RFI) in the amount of SDR 376.8 million, equivalent to 100 percent of quota, which was approved by the Executive Board on April 15, 2020.

Recent Fund Arrangements (1992–2002)1

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Between 1965 and 1985, Panama had 16 Stand-By Arrangements (SBA) with the Fund with duration ranging between 8 and 21 months (averaging 13 months).

Intended to be treated as precautionary and accompanied by EFF cancelation.

Original SBA (69.8 million SDR) was augmented in March 1996 by 14.5 million SDR to finance debt and debt-service reduction (DDSR) operations.

3. Considering the still elevated external risks from the COVID-19 pandemic, the authorities are requesting a PLL arrangement following the RFI support. Given the significant downside risks in the external environment, including due to a second wave of the pandemic, the authorities believe now that an arrangement under the Precautionary Liquidity Line (PLL) would be useful in sending a strong signal to markets about their policies, providing important insurance against these risks as well as supporting their intention to strengthen the economy’s resilience and foster higher and more inclusive growth.

Recent Developments

4. Despite strong containment measures, Panama has been severely affected by the COVID-19 pandemic. These measures significantly reduced mobility and negatively affected economic activity. High population density around Panama City (about ½ of the country’s population) made the country very vulnerable to the virus contagion and fatality.2 Panama has one of the highest COVID fatality rates in the world, despite a relatively robust healthcare system, a comparatively low share of informal employment, and decisive response measures. To contain the spread of the virus, the authorities declared a National State of Emergency in mid-March 2020, implemented a mandatory quarantine, border controls, introduced a curfew, closed schools, suspended commercial flights, cancelled events, and shut down all non-essential activities. The gradual reopening of the economy started in May-June 2020, but an acceleration of cases in the second phase prompted some tightening measures. In August-October 2020, the authorities gradually reactivated construction, free-trade zones, shopping and restaurants, air travel, and tourism sights. Mandatory quarantine ended in late October 2020, but the curfew remains active.

Impact of COVID-19 Shock in Panama: Contagion and Fatality

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Sources: Johns Hopkins University CSSE, World Economic Outlook, and IMF staff calculations.1/ Data as of December 17, 2020.

Progress on Social Outcomes

Progress on poverty and inequality reduction was significant before the pandemic. Panama saw a remarkable reduction in poverty headcounts and a rise of the middle class. The extreme poverty rate (at US$1.9/day, PPP) dropped by over 85 percent (from 12.4 percent in 2000 to 1.7 percent in 2018), while the general poverty rate (at US$5.5/day, PPP) was slashed by about ⅔ (from 35.4 percent to 12.6 percent over the same period, and to 12.5 percent by 2019)—both at a much faster pace than elsewhere in the region. Income inequality was reduced substantially between 2000 and 2018, with the Gini coefficient declining from 56.8 to 49.2, also faster than in the region as a whole. Meanwhile, the United Nations Human Development Index, which measures average achievement in key dimensions of human development (namely a long and healthy life, being knowledgeable and having a decent standard of living), improved substantially and remains above regional norms. Moreover, average income growth of the bottom 40 percent of earners has been faster than that of an average citizen. However, as elsewhere, rural poverty is high and particularly elevated in the comarcas: territories inhabited by indigenous peoples, where it is difficult to provide services.

Poverty Headcount Ratio

(Percent of population, PPP 2011)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: World Development Indicators.

GINI Index 1/

(From 0 to 100, where 0= perfect equality)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: World Development Indicators and IMF staff calculations.1/ LAC average was calculated using available data in the World Bank database. Data for the closest available years was used when unavailable for the years 1990 and 2018.

Human Development Index, 1990–2018

(0–1, where higher value indicates higher human development)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: UN Human Development Report 2019 database.

Progress in other social areas has been mixed. Panama’s health spending exceeds the regional average and the efficiency and robustness of its healthcare system is ranked above the regional norm in the Global Health Security Index 2019. However, the country still has a yawning educational gap that needs to be tackled to improve social outcomes and secure long-term competitiveness. Government spending on education amounted to around 3¾ percent of GDP in 2019, below the LAC average, while enrollment rates remained low (mostly in secondary education). In addition, Panama’s results in the 2018 Program for International Student Assessment (PISA) demonstrate significant deficiencies in reading, mathematics and science, which are unchanged since 2009.

Public Sector Social Spending

(Percent of GDP, latest available value)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Sources: National authorities, IMF FAD Expenditure Assessment Tool and IMF staff calculations.

Poverty rates are projected to rise due to the global pandemic, as elsewhere in the world, but policy measures are in place to protect the vulnerable population. According to World Bank estimates, had the government not enacted fiscal stimulus, the general poverty rate would have risen from 12.5 to 15.9 percent of the population, an increase of 3.4 percentage points. Instead, the government’s measures are expected to limit the increase in poverty headcount to just 1.7 percentage points. The government’s fiscal stimulus package included: (i) delivery of food baskets and cash transfers to low-income individuals, affected workers and small business owners through the “Panama Solidarity Plan”; (ii) programs (such as Opportunity Banking, Guarantee Fund, and the Soft Loan program) jointly valued at US$235 million, aimed at supporting the micro, small and medium-sized companies in restarting operations and continuing to employ workers; (iii) a suspension of payments for public services (electricity, phone and internet); (iv) an electricity subsidy; and (v) an expansion of the Housing Solidarity Fund program which provides US$10,000 towards a house down payment to families in need. In addition, development partners such as the IDB and the World Bank mobilized loans aimed at supporting the Panamanian authorities in their effort to contain the COVID-19 pandemic and mitigate its impact on vulnerable households and short-term adverse effects on the economy.

5. The country was hit by hurricane Eta and tropical storm Iota in November 2020, resulting in loss of human lives and damage to agricultural production. Hurricane Eta landed in Panama on November 5 and Iota on November 17 causing floods and landslides that affected a large part of the country’s agricultural production. The death toll stood at 21 while another 13 people went missing. Economic losses were estimated at US$15 million, mainly in the agricultural sector as the production of bananas, rice, legumes, and vegetables was severely curtailed. The authorities declared a state of “Environmental Emergency” and allocated US$100 million to alleviate natural disaster risks. Shelters and medical assistance were provided by the Ministry of Health and the Social Security Fund, with over 7 thousand tons of humanitarian aid (including water, food, and basic necessities) dispatched to the affected population.

6. Economic indicators point to significant weaknesses in 2020. This was mostly due to the measures to contain virus contagion which induced a widespread economic shutdown.

  • The economy contracted. Following a moderation of growth to 3 percent in 2019, the economy virtually stagnated in Q1–2020 (growing only at ½ percent, y/y), and contracted sharply in Q2–2020 (declining 38½ percent, y/y). The index of economic activity (IMAE) fell by 30 percent in July 2020 (y/y), and about 29 percent in August (y/y).

  • Inflation remains subdued. There are no discernible price pressures. Following relative price stability in 2019, consumer prices have fallen by 1½ percent in June 2020 (y/y). Prices are expected to have remained soft in recent months.

  • The fiscal position deteriorated markedly. The fiscal deficit stood at 3 percent of GDP in 2019 and is estimated to have reached around 7 percent of GDP in the first 9 months of 2020 as tax revenues suffered due to tax deferrals and lower GDP growth while expenditure pressures emerged from the health and social areas due to the COVID-19 pandemic. In response to the difficult fiscal situation, and at the request of the government, the National Assembly approved in late October 2020 legislation relaxing the fiscal rule for 2020–23 (to a deficit between 9 and 10½ percent of GDP in 2020, between 7 and 7½ percent in 2021, 4 percent in 2022 and 3 percent in 2023), while strengthening the rule for 2025 and onwards (to a deficit of 1½ percent of GDP). The ranges in the deficits for 2020–21 reflect uncertainties on nominal GDP projections, as the deficit in dollar terms is fixed in the amended 2020 budget and the 2021 budget. The new path towards the medium-term anchor seems appropriate, as it avoids significant pro-cyclical pressures while ensuring a steadily declining public debt path.

  • Financial conditions remain stable. Despite generalized loan repayment deferments agreed between the government and the banking community for the second half of 2020 and mandated by the government for the first half of 2021, banks remain liquid. Deposits have increased modestly, and credit has contracted slightly by ¾ percent through August 2020 (y/y). Non-performing loans have likely increased but it is difficult to assess their magnitude given the repayment deferments. The Superintendency of Banks (SBP) released dynamic provisioning amounting to US$1.3 billion (about 2 percent of GDP) to ease banks financial position.

  • The external position improved. The external current account was broadly balanced in the first half of 2020, compared to a deficit of 3.5 percent of GDP over the same period in 2019. The sharp recession and lower oil prices have led to a stronger decline in imports compared to exports, which were supported by increased copper production.

Fiscal Rule

(In percent of GDP)

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SFRL=Social Fiscal Responsibility Law

7. High-frequency indicators corroborate that reduced mobility and containment measures caused a sharp economic contraction. Mobility indicators have partially recovered lately but remained significantly below the pre- pandemic levels. Reduced mobility, suspended activities, and other containment measures have significantly reduced demand, especially in construction, commerce, restaurants, and hotels. High-frequency indicators point to a significant decline in domestic demand for cars, fuel, toll road use, and electricity generation in March-October 2020. Canal activity deteriorated, with traffic falling by 7.4 percent in October 2020 (y/y), although revenues in the same period increased by almost 7 percent, supported by a new toll structure. Ports cargo movement posted a 14 percent increase (y/y) in October 2020.

Economic Indicators

(Year-on-year growth, percent)

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Source: INEC and IMF staff calculations.

Outlook and Risks

8. The COVID-19 pandemic has deteriorated the outlook significantly. Suppression of economic activity, exacerbated by the decline of global growth and trade, will widen the negative output gap in 2020–21, while the negative external outlook will affect Canal traffic and revenues. Staff projects that real GDP declined by 9 percent in 2020 (3 percent growth in 2019) and is expected to recover to 4 percent growth in 2021 as economic activities return to normality, which implies a sizable cumulative output loss compared to the pre-pandemic outlook.3 Prices will remain soft. Weaker economic activity will lower credit growth. Suspension of labor contracts (to allow renegotiation of wages) is unlikely to prevent an increase in unemployment, which may cause late payments on personal bank loans.

Macroeconomic Framework

(Percent of GDP unless otherwise indicated)

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Source: Fund staff calculations.

9. The external position improved temporarily in 2020 due to the economic downturn but is expected to return to its pre-pandemic level in 2021 as imports recover. The external current account deficit is estimated to have narrowed to 2.5 percent of GDP in 2020 (from 5.4 percent of GDP in 2019) on the back of a sharp contraction in imports, lower oil prices, and increased copper exports.4 The current account is expected to weaken in 2021 and 2022, close to its historical level, as the anticipated recovery in the domestic economy will lead to stronger growth in imports. However, over the medium-term, the current account deficit will continue to narrow as tourism, trade, and Canal activity recover post-pandemic.

Balance of Payments

(In percent of GDP)

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Source: INEC and Fund staff estimates.

10. The fiscal outlook has also been adversely affected by the pandemic. Containment costs, higher public expenditures to provide relief to the unemployed and informal workers as well as weak revenues is estimated to have increased the fiscal deficit to 9 percent of GDP in 2020 (from the original budget target of 2¾ percent of GDP), thereby surpassing the limit established under the Social and Fiscal Responsibility Law (SFRL). Expenditure pressures stemming from COVID-19 and hurricane ETA were partly contained by reallocating non-executed public investment projects towards extraordinary health and social spending needs. The additional financing needs were covered with multilateral loans (including the RFI), additional bond placements, and limited recourse to the Savings Fund. NFPS debt is estimated to have risen from 41 percent of GDP in 2019 to almost 54 percent of GDP in 2020. The fiscal position is expected to improve in 2021 as tax collections recover with the economy and expenditure pressures ease.

Fiscal Accounts

(In percent of GDP)

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Source: MEF and Fund staff estimates.

11. The balance of risks remains tilted to the downside. The economic outlook continues to be subjected 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, with a second wave of the pandemic exacerbating risks to human lives and the economy. To prevent social tensions, which could disrupt economic activity, and polarize society, 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 health and social needs, supported by additional external financing. Moreover, a worsening of the COVID-19 pandemic could lead to a more severe disruption of global trade and capital flows, accelerating de-globalization, oversupply and volatility in the oil market, and intensified geopolitical tensions and security risks, negatively impacting activity of canal and logistics sectors, and further deteriorating Panama’s balance of payments as a result of additional pressures on the current account, foreign direct investment, portfolio inflows, and the rollover of external debts (Box 2). This would require additional resources to address the resulting increase in gross external financing 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. Similarly, absent meaningful progress in improving its AML/CFT framework, Panama’s ongoing public listing by the FATF could have a potential adverse effect on correspondent banking relations and possible key credit channels, particularly if the FATF were to publicly consider elevating Panama to the list of high-risk jurisdictions (also referred to as the black list), subject to a call for action. In addition, cyberattacks can bring significant disruptions to digital infrastructure, while more frequent and severe climate-change related natural disasters can adversely affect Canal activity, agriculture and tourism. The upside risks from faster-than-expected recovery from the pandemic are low, given that COVID-19 contagion in Panama is one of the worst in the region.

Precautionary and Liquidity Line Issues

A. Assessment of PLL Qualification

12. Panama is eligible for the PLL arrangement as it meets the necessary qualification criteria. In particular, staff assesses Panama to perform strongly in 3 out of the 5 qualification areas (external, fiscal and monetary), and not to substantially underperform in the other 2 areas (financial and data). In the 2020 Article IV Consultation (completed on a lapse-of-time basis on March 24, 2020) the Executive Board supported the generally positive assessment of Panama’s policies and frameworks. During the Board meeting on the Rapid Financing Instrument (completed on April 15, 2020), the Executive Board also supported Panama’s policy response to the pandemic.

I. External Position and Market Access. Panama performs strongly in the external and market access area. While the current account deficit has been large in the past, it has been the reflection of relatively large investment rates (around 40 percent of GDP, on average, over the last decade) and historically high growth over the last quarter of a century (the highest in Latin America). Indeed, gross FDI inflows have financed 105 percent of the current account deficit, on average, over the past decade. Panama has enjoyed investment grade status over the last decade and continuously placed sovereign bonds in international capital markets at spreads comparable to other investment grade sovereigns and significantly lower than most other Latin American countries.

  • Criterion 1. Sustainable external position. The external balance assessment conducted during the 2020 Article IV is in line with the Precautionary And Liquidity Line Operational Guidance Note (2018).5 In particular, the external position was assessed to be moderately weaker than fundamentals and desirable policy settings. The current account is estimated to improve steadily over the medium term, underpinned by a rebound in canal traffic, tourism, and re-exports from the free zone as the world economy recovers, as well as higher exports from the new copper mine. Moreover, Panama remains competitive vis-à-vis peers (see Annex II).

  • Criterion 2. Capital account position dominated by private flows. The bulk of Panama’s external debt is owed to private creditors, with public debt averaging only 19 percent of total debt over the past 3 years. Private capital flows constitute the largest share of the capital account, amounting to 69 percent, on average, between 2017 and 2019, while FDI is the largest component of capital flows, accounting for 79 percent of the total, on average, during this period. Deposits and other external liabilities in the banking sector alone account for 50 percent of total external liabilities, reflecting Panama’s position as the region’s financial hub and the dominance of its large (private) financial sector. The net international investment position (NIIP) is projected to improve over the medium term—due to higher net exports (particularly from the free trade zone), canal receipts, and tourism, as well as higher exports from the new copper mine—premised on a strong recovery in the medium term post-COVID-19.

  • Criterion 3. Track record of steady sovereign access to capital markets at favorable terms. Panama has a long track record of tapping international capital markets on favorable conditions. Sovereign global bond issuances in the last 5 years amounted to 2,160 percent of Panama’s quota, far exceeding the minimum threshold of 50 percent for the market access criterion. Panama has also placed bonds every year in the last decade, exceeding the minimum of placing sovereign bonds in 3 out of the last 5 years. Despite the onset of the COVID-19 pandemic, Panama managed to raise US$2½ billion in late March 2020 through global bond issuance in the international capital market, with a 35-year maturity and 4½ percent yield (spread of 307 basis points against 30-year U.S. Treasury). Subsequently, Panama placed another US$2½ billion in September 2020 in international capital markets, through a combination of instruments, including a new 12-year bond with a yield of 2¼ percent (spread of 158 basis points against the relevant U.S. bond). Panama achieved investment grade status a decade ago (2010) and has enjoyed low borrowing costs for many years. Its EMBI spread stood at 150 bps as of December 17, 2020, which was low relative to the average in emerging markets (327 bps) and the region (400 bps). These tight spreads reflect favorable credit ratings from the leading rating agencies.

  • Standard & Poor’s rated the long-term debt at BBB in November 2020.

  • Fitch reaffirmed Panama sovereign rating at BBB during the last five years.

  • Moody’s upgraded Panama’s foreign currency long-term rating from Baa2 to Baa1 in March 2019.

EMBIG Spreads

(In basis points)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: Bloomberg.

International rating agencies cited Panama’s strong economic growth, increasing economic diversification, and moderate net general government debt burden as reasons that underpinned their ratings decision, taking into account the country’s vulnerability to sharp swings in global economic conditions, an underdeveloped but growing domestic capital market, and developing political institutions. More recently, Moody’s has lowered the outlook from stable to negative citing the sharp economic contraction and large fiscal deficit for 2020.

  • Criterion 4. A comfortable reserve position. Panama is a fully dollarized economy since inception and does not have its own currency or central bank.6 Given that fiscal and banking sector liquidity needs drive the need for foreign currency reserves, the assessment of the reserve position qualification criterion needs to be based on individual traditional metrics— namely the adequacy of liquidity buffers to cover the external financial obligations of the government and banking sector—in line with the recommendations in IMF Guidance Note (2016).

Sovereign Bond Issuances

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Source: Panamanian authorities.

Computed as spread against relevant U.S. treasury yields.

The standard ARA metric does not work for Panama because of lack of control by the authorities over banks’ foreign exchange liquidity.7 Instead an assessment is made based on individual traditional metrics, reaching the conclusion that liquid reserves are adequate in the banking sector and government.

  • Fiscal liquidity reserve buffer. Central government deposits at commercial banks are above the recommended benchmark of 1 month of expenditure.8 The average coverage is 2.2 months of central government expenditure from 2009 to 2019, which is broadly in line with or higher than in other dollarized economies. Moreover, Panama has a Sovereign Wealth Fund of about 2 percent of GDP (in foreign assets abroad), which could be considered adequate to cover the financial needs of a relatively lean government with small deficits during normal times.

  • Banking sector liquidity reserve buffer. Liquid assets in the banking sector are high, covering 60 percent of deposits, on average, since the introduction of the statutory liquidity requirement in 2009.9 As of end-2019, this ratio stood at 57 percent, nearly double the minimum statutory requirement of 30 percent. In other dollarized jurisdictions such as Kosovo and El Salvador, the minimum requirements are set at 10 percent and 21.6 percent, respectively. In addition, the short-term assets cover more than ⅔ of banks’ short-term external liabilities, reinforcing the high level of liquidity buffer in the banking sector as a result of stringent legal requirements and conservative banking practices.

Government Deposits

(Share of GDP)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: IMF staff calculations.

Reserves Adequacy Metrics NIR Coverage

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Sources: National authorities and IMF staff calculations.

Refers to Central Government deposits at financial institutions, expressed in months of expenditure (fiscal reserve buffer). Wiegand (2013) proposed a minimum of one month of government expenditure for dollarized countries.

Defined as the ratio of liquid assets to net deposits. The minimum statutory requirement is 30 percent.

Computed as banks’ liquidity buffers (defined as liquid assets up to 186 days) relative to banks’ short term debt.

Banks’ Statutory Liquidity Reserves

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: Superintendency of Banks and national authorities.

II. Fiscal Policy. Panama performs strongly in the fiscal policy area. While the fiscal position deteriorated in 2020 due to the COVID-19 pandemic, fiscal management has been consistently prudent in the past. The authorities managed to reduce public debt from about 60 percent of GDP in 2005 to around 40 percent of GDP in 2019, and debt remains sustainable with high probability. They introduced a fiscal rule in 2008 and their sovereign bonds reached investment grade in 2010, with some of the lowest spreads in emerging markets.

  • Criterion 5. Sound public finances, including a sustainable public debt position with high probability and sound fiscal framework. The 2008 Social and Fiscal Responsibility Law (SFRL) set up the framework to anchor fiscal management This framework has been modified in the past and by 2019 was based on medium-term anchors for NFPS deficit and gross debt of 2 and 40 percent of GDP respectively, as well as a growth rule for current expenditure.10 The SFRL includes an escape clause for emergency situations and economic slowdowns and establishes a maximum period of 3 years for bringing the deficit back to the anchor. Deviations from the medium-term anchor in the previous decade have been limited, the maximum one being -1¼ percent of GDP in 2018. The fiscal rule has facilitated the decline in NFPS gross debt from 60 to 41 percent of GDP over the last two decades. Furthermore, NFPS financial assets were sizeable by the end of 2019, with over 10½ percent of GDP in bank deposits and 2 percent of GDP in holdings by the Savings Fund of Panama. These assets provide a sizeable cushion for the government in difficult times and increase its margin for addressing adverse shocks. As a result, net debt amounted to 28¼ percent of GDP in 2019, the third lowest in Latin America (after Chile and Peru). Relatedly, sovereign ratings of Panama rank third in the region, after the same countries, while sovereign spreads on Panama’s bonds are similar to those of Chile and Peru.

    Amidst the COVID-19 outbreak, the National Assembly approved a relaxation of the fiscal targets for 2020–23 to accommodate the shock, with a view to return to the original anchor of 2 percent of GDP by 2024 and then adhering to a new fiscal deficit anchor of 1½ percent of GDP in 2025 and thereafter. This provided needed fiscal support in 2020, which will be gradually withdrawn thereafter to avoid an excessively contractionary impulse to the economy at a time when the output gap remains negative.11 This will be made possible by the temporary nature of the increase in health and social spending in 2020, as well as the gradual return of the tax to GDP ratio to its pre-crisis historical average values (above 9 percent of GDP).12 The cyclically adjusted primary balance is expected to improve by 3 percent of GDP between 2019 and 2025, which will bring the fiscal balance to -1½ percent of GDP by 2025.

    Debt is assessed to be sustainable with high probability under the baseline scenario, as it also was in the 2020 Article IV Consultation and the RFI staff reports. The debt sustainability analysis shows that public debt would peak at 60 percent of GDP in 2022, declining thereafter below 56 percent of GDP by 2025 (see Annex I). 13 Accordingly, the largest financing needs were reached in 2020, with US$6.9 billion (or 11.5 percent of GDP). Most of this amount was financed by external debt (US$ 6.6 billion).14 Moreover, public debt can be expected to remain below 70 percent of GDP in all stress scenarios but the financial contingent liabilities one, and from 2023 stays on a declining trend in all of them. Debt would also be sustainable with a high probability in the adverse scenario described in Annex I.

    Despite relatively sound fiscal institutions, there is room for improvement in some areas of public financial management The new government (that took over in July 2019) discovered unrecorded central government liabilities worth US$1.5 billion (2.3 percent of GDP), accumulated from 2014.15 Based on a preliminary breakdown carried out by the Ministry of Finance (MEF) (see Section H and Annex IV), 0.6 percent of GDP of this could be considered floating debt (i.e. either commercial credit not yet due, or refinanced), and another 0.6 percent of GDP was related to unreported unpaid social contributions to the social security fund (i.e., intra-NFPS arrears). Thus, true commercial arrears to the private sector amounted to 1.2 percent of GDP. Avoiding the re-emergence of arrears in the future will require a number of measures (including in the areas of medium-term budgeting, execution control and reporting, see Section H for more details), which the authorities intend to implement during the PLL arrangement.

Fiscal Balance 1/

(Share of GDP)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: MEF and IMF staff calculations.1/ The fiscal anchor was set at -2 percent of GDP in 2019, but had different values before that date.

Public Gross and Net Debt, 2019

(Share of GDP)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: MEF and IMF staff calculations.

Public Debt

(Share of GDP)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: MEF and IMF staff calculations.

III. Monetary Policy. Panama performs strongly in the monetary policy area. While Panama adopted the U.S. dollar as its currency in 1904 when it was not an optimal currency area, with time Panama has integrated with the world economy and its business cycle is more in sync with that of the U.S., making monetary policy in the U.S. more adequate for Panama and anchoring inflation at low and stable levels.

  • Criterion 6. Low and stable inflation, in the context of a sound monetary and exchange rate policy framework. Panama is a dollarized economy without independent monetary policy. This has led to stable and low single-digit inflation in Panama. In fact, inflation has remained below 2 percent over the last 5 years and in single digits since the Global Financial Crisis (2008). Panama has no central bank. The dollarization regime has been in place for over a century and there is no expectation of a change in regime. Inflationary expectations are well-anchored and remain below 2 percent over the medium term.16

Inflation: Actual and Expectation

(Percent change (y/y), average)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Sources: INEC, EIU and IMF staff calculations.1/ Based on the Economist Intelligence Unit (EIU).

IV. Financial Sector Soundness and Supervision. Panama does not substantially underperform in the financial sector soundness and supervision area. Panama has a sound financial system that is supervised following modern best practices (i.e., Basel III). However, the financial system is exposed to potential money laundering risks as Panama was placed on the FATF grey list in June 2019, which puts at risk correspondent banking relations and possible key credit channels. The authorities feel that the current COVID-19 shock is an opportune time to develop instruments to strengthen financial stability (including liquidity and credit stimulus facilities for banks, which are being implemented and could be perfected during the PLL arrangement) and take decisive measures to exit the FATF grey list.

  • Criterion 7. Sound financial system and the absence of solvency problems that may threaten systemic stability. Panama’s banking system is stable, well capitalized, and solvent. Liquidity remains above prevailing regulatory norms, and about 80 percent of banks already meet the new liquidity coverage ratio (LCR) under Basel III, which will be fully enforced by the end of 2021. As of end-2019, the ratio of deposits to loans stood at 77 percent according to the FSI database, and liquid assets constituted 57 percent of deposits.17 There is no evidence of solvency or recapitalization needs. Capital adequacy ratio and provisioning remained strong, at 16.6 percent and 102.3 percent of nonperforming loans, respectively, for the banking system as a whole as of December 2019. Although credit growth has decelerated, the credit gap remains moderate. Panama has a high level of financial deepening and the credit to GDP ratio is the highest in Latin America. Aggregate asset quality indicators suggest that credit dynamics continue to evolve in line with fundamentals, with low and well-provisioned NPLs relative to Panama’s peers. NPLs ratios have not exceeded 3 percent in Panama in the last decade, and were below 2 percent before the pandemic. Stress-tests conducted by the SBP indicated, that at the end of 2019, the banking system was well-capitalized to withstand severe shocks to domestic output and interest rates. While Panama has been placed on the FATF grey list in June 2019 due to serious AML/CFT weaknesses, the authorities committed to an action plan with the FATF whose implementation would prevent adverse effects on the financial system, including through pressures on correspondent banking relationships.

  • Criterion 8. Effective financial sector supervision. Panama’s authorities have implemented most of the recommendations from the last Financial Sector Stability Assessment (FSSA), conducted in 2011. In particular, they introduced the real-time gross settlement system (RTGS), started to implement stress tests and monitor real estate developments and a housing price index. The authorities also updated the regulatory system to transition to the Basel III framework, with the liquidity coverage ratio (LCR) gradually increasing through 2020. The banks are well regulated and supervised in Panama under a modern regulatory framework and use international accounting standards (IFRS9 was adopted in 2019; see SIP 2020). At the same time, weaknesses in the financial system include: (i) lack of lender of last resort facilities (LOLR); (ii) absence of a deposit insurance scheme; and (iii) weaknesses in the AML/CFT framework, including on AML/CFT supervision (see Section F, and Annex III). The authorities are setting up a liquidity fund (akin to a partial LOLR-type facility) and remain fully committed to implement an action plan with the FATF.

V. Data Adequacy. Panama does not substantially underperform in the data adequacy area. While data provided to the Fund are broadly adequate for surveillance, some weaknesses remain, and data transparency could be further enhanced by subscribing to the Special Data Dissemination Standard (SDDS). The authorities have recently signaled strong interest in statistical improvement, indicating a willingness to implement the recommendations of a recent Data ROSC mission, including setting an ambitious timetable for subscribing to the SDDS—a requirement for this core area. The assessment of the February 2020 Data ROSC mission was that for the most part, Panama observes or largely observes international best practices and has made progress toward meeting the SDDS requirements.

  • Criterion 9. Data transparency and integrity. Data provision, quality, and transparency are broadly adequate, but coverage, periodicity, and timeliness of some data series need improvement. Panama’s metadata are regularly updated on the Dissemination Standards Bulletin Board (DSBB). The authorities asked for a formal assessment of their macroeconomic statistics as part of the Report on the Observance of Standards and Codes (ROSC) in 2006, 2014, and (most recently) in February 2020.18 Since the first ROSC in 2006, the authorities demonstrated a commitment to the implementation of recommendations, passing new statistical legislation, creating the National Institute of Statistics and Census (INEC) and enhancing statistical compilation and dissemination practices, supported by Fund technical assistance. Panama has participated in the Enhanced General Data Dissemination System (e-GDDS) since 2000, and started publishing key data through the National Summary Data Page (NSDP) in October 2018, a step towards SDDS.19 The 2020 data ROSC update concluded that Panama has a well-developed macroeconomic statistical system and the government recognizes the importance of good statistics for policy and investment decisions, and that for the most part Panama observes or largely observes international best practices and has made progress toward meeting the SDDS requirements. In particular, to subscribe to SDDS, Panama has to improve data coverage, periodicity and timeliness (see the text chart). Improving coverage is needed in 4 out of 19 data categories (central and general government operations, interest rates, and reserves); periodicity and timeliness are desired for 12 data categories across sectors. The authorities are transparent about their plans for improvement, with some to be addressed in the context of the PLL (see Section I).

Compliance with SDDS: Coverage, Periodicity, Timeliness

(Number of data categories by sector)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: ROSC 2020 TA report and IMF staff calculations.

13. Track record. Panama continues to have a sustained track record of implementing very strong policies, including in response to previous significant shock episodes, owing to its strong fiscal framework and a dollarized economy. According to staffs assessment, key relevant core indicators were met in each of the five most recent years. The authorities remain committed to maintaining strong policies in the future.

14. Institutional strength. As a dollarized economy, Panama’s institutional quality of economic policy is centered on fiscal policy and underpinned by the fiscal and social responsibility law, providing a fiscal anchor. As a large financial center, Panama’s institutional strength relies on an effective prudential and modern regulatory framework following best international practices, allowing effective adjustment to shocks, including during the Global Financial Crisis. According to the 2019 Worldwide Governance Indicators, which report on six dimensions of governance, Panama outperforms the Latin American and Caribbean average in most dimensions.20 Voice and accountability as well as regulatory quality in Panama are high at a point estimate of 0.6 and 0.4 respectively. Areas where governance could be improved include Panama’s control of corruption with a point estimate of -0.6, the rule of law with a point estimate of -0.1, and government effectiveness with a point estimate of 0.1.

Worldwide Governance Indicators, 2019

(Estimates range from -2.5 (weakest) to 2.5 (strongest))

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: The Worldwide Governance Indicators and IMF staff calculations.

B. Access and Duration

15. Panama is able to finance its external financing needs in the baseline scenario. Gross external financing requirements for Panama are estimated at around US$17 billion in 2021, financed by a rollover of obligations, borrowing from multilateral organizations, foreign direct investment, and the placement of additional global bonds in international capital markets.

16. However, the balance of payments remains highly vulnerable to external shocks in the adverse scenario, justifying support under the PLL arrangement. A “second wave” of the pandemic outbreak could lead to significant disruptions to capital flows and deterioration in public finances in Panama. Under this scenario, the country’s macroeconomic outlook would deteriorate further (Box 2). The current account deficit could increase by US$0.3 billion (0.5 percent of GDP) in 2021, driven by a decline in exports, particularly copper. At the same time, dislocations in the global capital market could result in a further deterioration in FDI, and put pressures on the rollover of external private debts (which could trigger the use of US$1 billion in the liquidity in program for banks under the Fund for Economic Stimulus, see Section G).

17. Higher budgetary financing needs and limited debt roll-over might trigger the use of the PLL in the adverse scenario. In the baseline scenario, public sector financing needs would amount to US$6.7 billion in 2021, mostly financed by issuing medium and long-term (MLT) debt. However, staff estimates that financing needs would rise in the adverse scenario to US$7.4 billion. In that scenario, the additional US$0.7 billion in financing needs for 2021 and reduced access to international sovereign debt markets could justify the use of PLL resources (amounting to 250 percent of quota). In 2022, staff assumes higher financing needs by US$0.3 billion under the adverse scenario, together with lower access to international capital markets, which could justify another 250 percent of quota under the PLL arrangement, despite the use of government financial assets.

Fiscal Scenarios

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Source: Fund staff estimates.

From 2021, includes small amounts from capital subscriptions to multilateral institutions.

18. PLL Access. Staff estimates that a PLL for 500 percent of quota (SDR 1.884 billion) is justified given the severity of the shocks under the adverse scenario, which would generate large balance of payments and fiscal financing gaps. The external financing gap could widen by US$2.6 billion (over 4 percent of GDP) in 2021–22, particularly if external market financing becomes less favorable, which is consistent with a total access level of 500 percent of quota, and falls under the exceptional access policy.21 Panama meets the criteria for exceptional access (Box 3). The proposed access would be available with two scheduled potential purchases of 250 percent of quota, available at the beginning of each of the two years of the arrangement.

Access Considerations Under an Adverse Scenario

Key assumptions on current account, foreign direct investment, and external debt rollover rates in the adverse scenario are informed by past shocks faced by Panama and shocks adopted by other FCL and PLL arrangements. This configuration is also consistent with an adverse external scenario in which global growth is expected to register a significant additional decline by 3 percentage points relative to the baseline while financial volatility in emerging markets is further accentuated. A gradual, moderate economic recovery is assumed for 2021 and 2022 in the adverse scenario, in tandem with the recovery in the global economy, but at a weaker pace than the baseline, by 2 percentage points.

Current account. Under the adverse scenario, exports are projected to decline by an average of 18 percent relative to the baseline projections in 2021 and 2022, driven by a continuing decline in copper exports, which account for 10 percent of total goods exports. In this scenario, copper prices are assumed to decline by 15 percent (y/y) vis-à-vis their baseline in both years, triggered by a prolonged weaker-than-expected global economic recovery. This assumption is close to ⅔ of the decline in copper prices seen during the Global Financial Crisis (GFC). It is worth noting that the shock to exports and copper prices are also in line with recent FCL arrangements (Chile and Peru).

Foreign Direct Investment. While inward FDI to Panama had proven resilient in the past, it had also experienced large contractions, particularly in times of heightened global uncertainties. As such, in the adverse scenario, net FDI is assumed to be 15 percent weaker than the baseline in 2021 and 2022 to account for heightened uncertainty, tepid global capital flows, and potential regional spillovers (this is on top of a sizable decline under the baseline scenario). This corresponds to two thirds of the magnitude of the decline in FDI observed during the 2002 Argentinian financial crisis and is in line with recent FCL arrangements (Peru and Mexico), as well as the exceptionally large contraction in world growth assumed in the adverse WEO scenario.

Debt rollover. With an investment grade sovereign credit rating, external financing had been forthcoming, especially for the public sector in the past, underpinning the historical rollover rates above 100 percent. For the public sector, there has not been any short-term (ST) external debt. The authorities had successfully issued a total of US$5 billion in global bonds as of September 2020 and solicited financing from multilateral organizations, including the IMF, World Bank, IDB and the Development Bank of Latin America (CAF). The significant net placements of bonds will continue in 2021 and 2022, in line with past trends as the authorities had been very successful in terming out the maturity profile of public debts. As such, the rollover rates for public MLT debts are assumed to be around 500 percent in 2021 and 2022, which also reflects an already high fiscal deficit under the baseline scenario (that required a much higher rollover rate) and an even higher fiscal deficit under the adverse scenario to meet increased health-related spending to tackle the pandemic.

Assumptions Underlying the Illustrative Adverse Scenarios

(In percent change vis-à-vis baseline, unless otherwise indicated)

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Source: Fund staff estimates.

Net FDI

(In percent change, (y/y))

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: National authorities and IMF staff calculations.

This is in line with other recent FCL arrangements, where public MLT rollover rates exceed 200 percent (see figure below with distributions of historical shocks to emerging markets). Moreover, low global interest rates are favorable for public bond issuance. For private sector external debts (ST and MLT), rollover rates of between 66 to 68 percent are assumed, reflecting their historical rollover rates seen during 2008 (GFC) and 2013 (U.S. taper tantrum) to account for tail risks in the event of disruptions in global financing flows.

External financing needs. Under these extreme shocks in the adverse scenario, which are assumed to persist over the PLL duration of two years from January 2021 to January 2023, the bulk of the financing needs would be fulfilled by credit facilities from multilateral organizations (under “public MLT disbursements”) and government assets (FAP and cash deposit). Unlike other countries, Panama does not have a central bank and holdings of international reserves. During the first year of the PLL arrangement, the remaining financing gap, estimated at US$1.3 billion, could be financed by drawing down part of the PLL equivalent to 250 percent of quota. In the second year, under the adverse scenario, Panama’s economic recovery would remain sluggish, at 2 percentage points below baseline growth, while external conditions would remain challenging. Under this adverse scenario, the improvement in the BOP would be tepid, prompting a further financing need of around US$1.3 billion (equivalent to another 250 percent of quota) in the second year, which could be filled by drawing down the remaining PLL access that would become available upon completion of the first and second reviews.

Gross External Financing Needs under the Adverse Scenario1/

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Source: Fund staff estimates.

The PLL is a two-year arrangement. In this table, 2021 and 2022 are indicatives of the first year and second year of the arrangement.

Includes external bonds and disbursements from IMF and other IFIs.

FCL/PLL Cases Compared with Distribution of Historical Shocks to Emerging Markets1

(Probability Density)

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: IMF staff calculations.1/ Kernel density distributions of the variables are estimated from past exogenous stress episodes for emerging markets. FCL-PLL arrangements shocks parameters are then placed in these empirical distributions. For Panama, the represented shocks correspond to the ones in 2020.

Exceptional Access Criteria

The PLL arrangement would involve exceptional access. Staff’s assessment is that Panama meets each of the four substantive criteria for exceptional access:

Criterion 1. The member is experiencing or has the potential to experience exceptional balance of payments pressures on the current or capital account, resulting in a need for Fund financing that cannot be met within the normal limits. Following the RFI disbursement in 2020, Panama does not face a remaining actual balance of payments need. However, in the near term, it is exposed to the risk of a second wave of a global outbreak of the COVID-19 pandemic, resulting in a protracted period of recession or anemic growth in advanced countries and other trading partners, large decline in global commodity prices which affect copper exports, and surges in global financial market volatility. These could curtail export growth, including tourism and canal traffic; undermine copper production; and lead to reversals in capital flows. Staff is of the view that the materialization of such a stress scenario gives rise to a potential balance of payments need beyond normal access limits.

Criterion 2. A rigorous and systematic analysis indicates that there is a high probability that the members public debt is sustainable in the medium term. In the baseline scenario, public debt would peak at 60 percent of GDP in 2022 and decline thereafter to below 56 percent in 2025 with gradual fiscal consolidation. Public debt and gross financing needs thresholds (70 and 15 percent of GDP respectively) would be exceeded only if a financial sector contingent liability shock materialized. In the adverse scenario, the debt would also reach its peak in 2022 (close to 67 percent of GDP) and follow a declining path from that year onwards. There are sufficient safeguards for Fund resources in the baseline and adverse scenarios as Panama would continue to have access to capital markets.

Criterion 3. The member has prospects of gaining or regaining access to capital markets within a timeframe and on a scale that would enable the member to meet its obligations falling due to the Fund. Panama has successfully tapped into international capital markets recently, including the successful issuance of two tranches of sovereign bonds in 2020 (US$2.575 billion in September and US$2.5 billion in March; and a total of US$3.3 billion international sovereign bond issuance throughout 2019. Each issuance benefited from low spreads and long maturities (10 to 35 years) reflecting the confidence placed in Panama by international capital markets. Moreover, Panama has maintained its investment grade status since 2010 and has enjoyed low borrowing costs for many years. Its EMBI spread stood at 150 bps as of December 17, 2020, which was low relative to the average in emerging markets (327 bps) and the region (400 bps), reflecting favorable credit ratings from the leading international rating agencies, and the absence of notable effect of the FATF listing on sovereign spreads.

Criterion 4. The policy program (and institutional and political capacity to deliver it) provides a reasonably strong prospect of successs. Panama is the fastest growing economy in Latin America, expanding at 6 percent annually, on average, over the last 25 years. Despite its strong growth, inflation remained benign, anchored on a fully dollarized regime since its inception. The authorities’ track record of sound macroeconomic policies is supported by solid institutions, including an independent SBP which supervises and regulates the banking sector, while the management of public finances is guided by an established fiscal rule. Prudent macroeconomic management and sound financial sector policies and oversight underpinned the country’ resilience observed during the 2008 Global Financial Crisis, reinforcing confidence in continued sound policies and stability over the longer term. The authorities are also committed to advancing structural fiscal reforms to facilitate a return to their fiscal anchor once the pandemic recedes, and to address the strategic AML/CFT deficiencies identified by the FATF.

External Economic Stress Index

The external economic stress index is based on four major variables which capture external risks for Panama. The variables include: (i) the U.S. growth rate (a proxy for the risks to FDI inflows); (ii) world exports (a proxy for net exports in the current account); (iii) the change in the 10-year U.S. Treasury yield (a proxy for risks to the portfolio liabilities in the financial account), and (iv) the volatility index VIX (a proxy for the risks to other investments in the financial account). The index is calculated as a weighted sum of standardized deviations of the above variables from their means. The weights are estimated using balance of payments and international investment position data, all expressed as shares of GDP. The weight on U.S. growth rate corresponds to the net FDI inflows. The weight on world growth corresponds to the net exports of goods and services. The weight on the VIX corresponds to the stock the other investment in the financial account. The weight on the U.S. Treasury government bond corresponds to the sum of portfolio liabilities in the financial account.

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Baseline ESI is already very unfavorable, at a historically low level. This reflects the sharp contraction of U.S. GDP and world trade and increased volatility in financial markets in the first half of 2020, although it assumes a bounce back in the U.S. and world GDP in Q3–2020. The adverse scenario reflects external risks from the prolonged COVID-19 effects without the recovery of the U.S. and world GDP in Q3–2020, before the start of the second wave of the pandemic, which causes growth to slow down again, and with persistent market volatility. On average, in 2020/21 the ESI is – 0.5 in the baseline and -3.3 in the adverse scenario, with the worst value of -5 in June 2020, compared to the average of -0.5 in 2008/2009 financial crisis, with the lowest value of -1.9 in December 2008.

External Stress Index: Historical and Projections

Citation: IMF Staff Country Reports 2021, 030; 10.5089/9781513568294.002.A002

Source: Authorities and IMF staff calculations.

19. Duration of the PLL arrangement. The authorities have requested a two-year PLL arrangement. Staff believes that a two-year arrangement would be appropriate, given that: (i) the COVID-19 pandemic, weaknesses in global trade, and more broadly volatile global financial conditions are unlikely to improve markedly in the near term; and (ii) a two-year period is necessary to address remaining vulnerabilities and further strengthen macroeconomic buffers that would allow for a successful exit should external circumstances warrant.

C. Impact on Fund Financing, Risks and Safeguards

20. The proposed PLL arrangement would have a moderate impact on the Fund’s liquidity and potential risk exposure. The Fund’s liquidity position as measured by the Forward Commitment Capacity (FCC) would decline by 1.2 percent upon approval of the proposed arrangement Should the authorities make a purchase of the amount available at the approval of the PLL arrangement, GRA credit to Panama would be equivalent to about 1.5 percent of current GRA credit outstanding (as of mid-December 2020) or 8 percent of the Fund’s end-FY2020 precautionary balances. Even if the arrangement were to be fully drawn, Fund exposure to Panama would represent a small share of the Fund’s total credit outstanding.

21. If the proposed arrangement were to be fully drawn, capacity to repay the Fund would be adequate and risks to the Fund moderate. The authorities have indicated that they intend to treat the proposed arrangement as precautionary. In a scenario of full disbursement by end-December 2022, Fund credit outstanding would peak at 600 percent of quota (about 5.3 percent of GDP). Debt service to the Fund would peak at SDR 1,064.5 million (about 2 percent of GDP) in 2024 (Table 9). Several factors would mitigate risks to the Fund, including the strong policy framework, Panama’s long history of market access, and its excellent track record of meeting its obligations to the Fund.

Table 1.

Panama: Selected Economic and Social Indicators, 2015–25

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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)

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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)

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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.