## Growth at Risk (GaR)

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### Context and recent performance
- Panama: fastest growing economy in Latin America over the last quarter century; average growth of about 6½ percent per annum over the last decade.
- Investment: highest investment ratio in the continent at an average of over 40 percent of GDP in the last decade.
- Short-term challenge: maintain adequate domestic demand as the construction cycle ends and large public works (Panama Canal expansion and airport) conclude.
- Long-term challenge: reinforce structural reforms to raise potential growth and reduce poverty and inequality, including strengthening education and public health services.
- Political constraint: government entered office in July 2014 and is in its last year with elections scheduled for May 2019 and a minority in the National Assembly.

### Recent developments (selected indicators and observations)
- Real GDP growth:
  - 2017: 5.4 percent
  - 2018 (estimated first half): 3¾ percent
  - 2018 (projection): 4.3 percent
- Labor market: unemployment rate increased by 0.2 percentage point to 5.8 percent in March 2018 from a year ago.
- Inflation:
  - End-2017: 0.5 percent (y/y)
  - September 2018: 0.8 percent (y/y) headline; core inflation around 0.7 percent (y/y).
- Fiscal position:
  - NFPS overall deficit: narrowed to 1.6 percent of GDP in 2017 (from 1.8 percent a year earlier).
  - Preliminary overall deficit in first half of 2018: 1.6 percent of GDP (compared to 0.2 percent of GDP last year).
  - Fiscal policy: slightly contractionary in 2017 and assessed to be supportive in 2018.
- Credit and financial conditions:
  - Credit to the private sector grew 5.4 percent (y/y) in July 2018, down from 8.6 percent at end-2016.
  - Lending for construction and mortgages account for about 44 percent of total credit to the private sector.
  - Banks’ funding costs have started to rise; banks have tightened credit supply in response to oversupply indications in property market and slower deposit growth.
- External sector:
  - Current account deficit: 8.0 percent of GDP in 2017 (similar to 2016); deterioration in 2018 due to higher oil prices.
  - REER: depreciated by 6.3 percent in 2017 and appreciated by 1.6 percent in the first nine months of 2018 (excluding Venezuela impact).
  - Current account financing: mostly by foreign direct investment (FDI), of which over ⅔ is driven by reinvested earnings of multinational firms.

### GaR model and key findings
- Financial conditions assessment:
  - Three indices: domestic price of risk (interest rates, asset returns and price volatility), leverage (credit aggregates and growth), and external conditions (global risk sentiment, commodity prices and growth in key trading partners).
  - Current assessment: price of risk remains broadly accommodative; leverage and external financial conditions are broadly neutral.
- GaR projections:
  - Severely adverse growth scenario (5 percent probability) for 2018: GaR model forecasts growth of 3.9 percent compared to the outlook.
  - Model estimate excludes an abrupt stoppage in construction during a strike, which is estimated to reduce growth by 1 percentage point for 2018.
  - On a 3-year horizon, severely adverse scenario impact: growth of 2.3 compared to the outlook of 5¾ percent growth for 2020.

### Outlook and medium-term projections (selected figures)
- Real GDP (annual percent change): 2015: 5.8; 2016: 5.0; 2017: 5.4; 2018: 4.3; 2019: 6.3; 2020: 5.8; 2021: 5.6; 2022: 5.5; 2023: 5.5.
- Output gap: 2015: -0.4; 2016: -0.3; 2017: -0.1; 2018: -1.2; 2019: -0.5; 2020: 0.1; 2021–2023: 0.0.
- CPI inflation (average): 2015: 0.1; 2016: 0.7; 2017: 0.9; 2018: 1.5; 2019: 2.0; 2020: 2.1; 2021–2023: 2.0.
- Credit to the private sector (annual percent change): 2015: 11.4; 2016: 8.4; 2017: 6.5; 2018: 5.0; 2019: 6.0; 2020: 7.1; 2021: 6.8; 2022: 6.8; 2023: 6.9.
- Fiscal accounts (NFPS, percent of GDP):
  - Overall balance, excluding ACP: 2015: -2.2; 2016: -1.8; 2017: -1.6; 2018: -2.0; 2019: -2.0; 2020: -1.7; 2021: -1.7; 2022: -1.5; 2023: -1.5.
  - Structural primary balance: 2015: -0.6; 2016: -0.1; 2017: 0.1; 2018: -0.1; 2019: -0.3; 2020: -0.1; 2021: -0.2; 2022: 0.0; 2023: 0.0.
  - NFPS gross debt: 2015: 37.2; 2016: 37.4; 2017: 37.8; 2018: 38.3; 2019: 37.3; 2020: 36.2; 2021: 35.2; 2022: 34.1; 2023: 33.2.
  - NFPS net debt: 2015: 34.6; 2016: 34.9; 2017: 35.5; 2018: 36.2; 2019: 35.3; 2020: 34.3; 2021: 33.5; 2022: 32.6; 2023: 31.7.
- External sector (percent of GDP):
  - Current account balance: 2015: -7.9; 2016: -8.0; 2017: -8.0; 2018: -9.0; 2019: -7.6; 2020: -6.2; 2021: -5.6; 2022: -5.4; 2023: -5.4.
  - Foreign direct investment: 2015: -7.3; 2016: -8.0; 2017: -7.5; 2018: -6.6; 2019: -5.8; 2020: -5.9; 2021: -6.0; 2022: -5.8; 2023: -5.8.
- Outlook notes:
  - Growth expected to rebound to 6.3 percent in 2019 due to recovery from the construction strike and expected opening of Minera Panamá.
  - Growth projected to converge to potential of about 5½ percent over the medium-term.
  - Inflation expected to gradually converge toward 2 percent over the medium-term.
  - NFPS overall deficit projected to increase to 2 percent of GDP in 2018-19 and gradually fall to around 1½ percent of GDP over the medium-term.
  - Public debt projected to decline to about 33 percent of GDP.

### Risks (balance of risks tilted to the downside)
- Domestic risks:
  - Setbacks in complying with GAFILAT recommendations (AML/CFT) → reputational risks, reduced access to external funding, higher financing costs, outflows from regional financial center.
  - Continued oversupply in property markets → price corrections and financial stability effects.
  - Delays in completing large mining project → lower export prospects.
  - Political uncertainty ahead of 2019 elections → deter private investment.
- External risks:
  - Sharp tightening of global financial conditions → higher domestic interest rates, increased debt service and refinancing risks.
  - Rising U.S. interest rates → appreciate U.S. dollar, REER appreciation pressures, erode competitiveness and exports.
  - Escalating trade tensions → slow world trade, reduce Panama Canal transits and associated fiscal revenue.
  - Weaker-than-expected global growth → weaken exports and dampen government revenue.

### Policy recommendations (macro and fiscal)
- Preserve fiscal discipline:
  - Maintain adherence to the amended Social and Fiscal Responsibility Law (SFRL) and reinforce the fiscal framework, including establishment of a fiscal council.
  - Staff welcomes SRFL amendments: proposed deficit limits on NFPS headline deficit at 2 percent of GDP in 2018-19, 1¾ percent in 2020-21, and 1½ percent of GDP after 2021.
  - Small fiscal impulse appropriate in 2018; gradual withdrawal as economy strengthens.
  - Urgent need to contain current expenditure growth to provide room for strategic public investment.
- Structural and administrative reforms:
  - Strengthen revenue administration and customs: priorities include human resources, ad hoc exemptions, control processes, data collection and management; review complex tax incentives and exemptions that erode the tax base.
  - Eliminate disconnect between execution and recording of turnkey and deferred payment investment projects; provide systematic data on projects.
- Given dollarization and no central bank, fiscal policy is the main macroeconomic stabilization instrument.

### Financial sector monitoring, macroprudential and crisis management recommendations
- Strengthen systemic risk assessment and risk-based supervision.
- Bolster frameworks for macroprudential policy and crisis management; develop macroprudential tools adapted to the dollarized economy.
- Finalize operational risk regulations (anticipated in second half of 2018).
- Consider introducing capital conservation buffer and additional capital requirements for D-SIBs; assessment indicates banks and D-SIBs appear able to adhere without raising capital or deleveraging (subject to caveat on market and operational risk charges).
- Liquidity coverage ratio (LCR) introduced in early 2018; plan for gradual annual phasing-in by January 2022 with staff recommending considering faster transition.
- Put in place robust crisis management and bank resolution frameworks, including adequate liquidity support and expanded resolution tools (bridge bank, purchase and assumption, asset management companies).
- Address critical gap: absence of mechanism to provide significant liquidity in systemic shock and absence of deposit insurance; authorities creating a liquidity fund as interim measure.
- Publish SBP financial stability report to enhance transparency and accountability.

### Asset quality, macro-financial feedbacks, and vulnerabilities (selected)
- VAR model findings:
  - Weaker macro environment → statistically significant increase in NPL ratio.
  - At peak, a 1 percentage point increase in the NPL ratio reduces credit growth by 1.5 percentage points and growth by 1.2 percentage points.
- Recent trends:
  - NPLs to total loans increased: series show values reaching 1.8 in some 2018 reports.
  - Provision coverage improved with IFRS9 adoption—improvement driven mainly by foreign banks; provisioning coverage of domestic banks broadly stable.
- Banking indicators (selected quarters/years preserved where presented):
  - Regulatory Capital to Risk-Weighted Assets: 17.1; 18.7; 15.7; 13.8; 15.3; 15.9; 16.6; 16.1; 16.0.
  - Return on Assets (ROA): 1.4; 1.3; 1.3; 1.3; 1.2; 1.4; 1.5; 1.5; 1.5; 1.5; 1.6.
  - Return on Equity (ROE): 14.1; 12.2; 12.4; 12.6; 12.0; 13.4; 13.6; 13.1; 13.5; 13.7; 13.7.
  - Leverage ratio (%): 10.1; 10.4; 10.6; 10.9; 10.5; 11.0; 11.3; 11.6; 11.4; 11.4; 11.5.
  - Deposit-to-loan ratio: 114.8; 115.6; 115.8; 112.5; 113.4; 112.6; 112.8; 110.2; 110.5; 109.3; 107.1.

### FinTech, financial integrity, and AML/CFT (Box 2 and related)
- FATF/GAFILAT assessments:
  - Assessments conducted from late 2016 to early 2018 (against 2012 standards using 2013 FATF methodology).
  - Technical compliance: Panama rated ‘Compliant’ in one-quarter of the 40 recommendations; ‘Largely Compliant’ in 22 recommendations.
  - Effectiveness: performance low in effectiveness and lags comparators; recent revisions not sufficiently tested.
- Supervisory capacity and priorities:
  - Intensified AML/CFT–focused onsite inspections since 2015, especially for DNFBPs identified high risk in 2017 National Risk Assessment.
  - Remaining gaps: availability of up-to-date beneficial ownership information and accounting records for Panamanian corporations established by resident agents; need to review Public Registry registration requirements and enforce actions on non-compliant resident agents.
  - Deficiencies ahead of next FATF plenary: criminalization of tax evasion (bring tax crimes into ML scope); availability of comprehensive AML statistics; regulation of remittance houses; timeliness of STRs.
  - Staff urged approval of draft legislation to criminalize tax evasion before National Assembly.
- Tax transparency and BEPS:
  - Global Forum provisionally upgraded Panama from ‘Non-compliant’ to ‘Largely Compliant’ under Fast Track Review in mid–2017; essential components from Phase 2 (November 2016) not revised.
  - Panama implemented CRS, with first exchanges in September 2018; signed MCAA in January 2018.
  - Authorities behind on some BEPS minimum standards (Action 5, Action 6, Action 13, Action 14) and subject to peer review.
  - Staff recommendation: advance tax transparency initiatives toward successful Global Forum assessment.
- Authorities’ actions and views:
  - AML/CFT and tax transparency are top priorities; legislative initiatives (including criminalization of tax evasion) expected.
  - Since 2013 AML/CFT framework revamped; opening a bank account in Panama described as extremely difficult due to strict due diligence.
  - Fund technical assistance instrumental in modernizing revenue administration and strengthening FIU.

### External position, reserve adequacy, and debt sustainability (selected)
- External position:
  - Current account deficit: 2017: -8.0 percent of GDP (same as 2016); projected to increase to -9.0 percent of GDP in 2018 then narrow to about -5 percent of GDP as new mine starts exports in 2019.
  - FDI in 2017: 7.5 percent of GDP (compared to 8.0 percent in 2016); reinvested earnings 5.1 percent of GDP in 2017 of total equity-related FDI flows of 5.2 percent of GDP.
  - External debt: fell to 144 percent of GDP in 2017 (from 155 percent in 2016); gross external debt projected to stabilize around 150 percent of GDP over the medium-term.
  - NIIP net liabilities: increased to 81.4 percent of GDP in 2017.
- External assessments:
  - External sustainability approach: if NIIP stabilized at 2017 level, implied IIP-stabilizing current account deficit: 6.2 percent of GDP; implied REER undervaluation: 2.5 percent.
  - Current account approach (EBA-Lite): actual current account: -8.0 percent of GDP; fitted current account: -1.0 percent of GDP; current account norm: -2.4 percent of GDP; residual (actual - fitted): -7.0 percent of GDP; current account gap: -5.6 percent of GDP; real exchange rate gap implied: 17.5 percent (REER overvaluation).
  - Staff preference: external sustainability approach due to large residual and uncertainties in CA approach.
- Reserve adequacy:
  - Panama fully dollarized and does not have a central bank.
  - Reported net international reserves are below standard reserve adequacy metrics and IMF risk-based metric for emerging markets.
  - Sovereign wealth fund U.S. dollar assets: just over 2 percent of GDP.
- Debt sustainability (NFPS):
  - 2017 NFPS gross debt: 37.8 percent of GDP (summary cites 38 percent of GDP).
  - Composition: 79 percent external (29.7 percent of GDP), 21 percent domestic (8.1 percent of GDP).
  - Baseline projection: public debt projected decline: cumulative 3.0 percent of GDP from 2017 to about 35 percent of GDP by 2023.
  - Stress tests: contingent liability shock (10 percent of banking system’s assets) and growth/interest shocks can raise public debt to 50-51 percent of GDP in 2019-20 under severe scenarios.

### Stress scenarios and contingent liability shock (SOEs)
- SOE contingent liability shock assumptions:
  - Liabilities of SOEs excluded from NFPS fall due in 2019; debt of three profitable entities about 3.5 percent of GDP.
  - Under this shock: public debt-to-GDP rises to 41 percent in 2019, then declines to 38 percent of GDP by 2023.
- Financial contingent liability shock key macro-fiscal assumptions:
  - Real GDP growth: 2018: 4.3%; 2019: 3.5%; 2020: 3.0%; 2021: 5.6%; 2022: 5.5%; 2023: 5.5%.
  - Inflation (GDP Deflator change): 2018: 1.5%; 2019: 1.3%; 2020: 1.5%; 2021: 2.0%; 2022: 2.0%; 2023: 2.0%.
  - Non-interest revenue-to-GDP: 2018: 20.0%; 2019: 20.1%; 2020: 20.1%; 2021: 19.9%; 2022: 19.6%; 2023: 19.3%.
  - Non-interest expenditure-to-GDP: 2018: 20.3%; 2019: 32.5%; 2020: 20.2%; 2021: 20.1%; 2022: 19.6%; 2023: 19.2%.
  - Primary Balance: 2018: -0.4%; 2019: -12.3%; 2020: -0.1%; 2021: -0.2%; 2022: 0.0%; 2023: 0.0%.
  - Interest rate shock (bpts) compared to baseline: 2018: 0; 2019: 298; 2020–2023: 0.
  - Nominal Exchange Rate (LCU/USD) average and end of period: 2018–2023: 1.00 each year.
- Observation: contingent liability event materially increases non-interest expenditure-to-GDP in 2019 to 32.5%, producing a primary balance of -12.3% in 2019.

### Implementation of past IMF policy advice and staff appraisal
- Authorities broadly aligned with IMF advice: enhance financial integrity (AML/CFT), tax transparency and exchange of tax information; strengthen fiscal framework (fiscal council, fiscal risk assessment/management); improve tax and customs administration; strengthen financial sector oversight, macroprudential policy and crisis management; align prudential regulations with Basel III.
- Progress:
  - Draft legislation replaced “adjusted-deficit” rule with a ceiling on NFPS headline deficit and adopted an expenditure rule; approved by National Assembly in October 2018.
  - Draft legislation to establish a fiscal council submitted and approved in October 2018.
  - Increased AML/CFT supervision intensity since 2015; automatic exchange under FATCA began September 2017; CRS first exchanges September 2018; MCAA signed January 2018.
  - Transition to IFRS9 completed; provisioning coverage improved.
  - Regulations on capital quality, risk-weighted assets, and provisions for market and operational risks adopted.
- Remaining priorities:
  - Make relevant tax crimes predicate offences to money laundering.
  - Finalize operational risk regulations and strengthened bank resolution framework.
  - Strengthen monitoring and management of fiscal risks and contingent liabilities.
  - Accelerate revenue administration and customs reform.
  - Continue to develop macroprudential policy tools and crisis preparedness.

*Source: Panama — IMF Staff Report (Growth at Risk section).*

### 1. Growth at Risk (GaR) ___________________________________________________________________________ 7

### 1. Growth at Risk (GaR)

### Context and recent performance
- Panama has been the fastest growing economy in Latin America over the last quarter of a century, with average growth of about 6½ percent per annum over the last decade.
- The economy has had the highest investment ratio in the continent at an average of over 40 percent of GDP in the last decade.
- Short-term challenge: maintain adequate domestic demand as the construction cycle ends and large public works (Panama Canal expansion and airport) conclude.
- Long-term challenge: reinforce structural reforms to raise potential growth and reduce poverty and inequality, including strengthening education and public health services.
- Political constraint: the government entered office in July 2014 and is in its last year with elections scheduled for May 2019 and a minority in the National Assembly.

### Recent developments (selected indicators and observations)
- Real GDP growth:
  - 2017: 5.4 percent (highest in Latin America)
  - 2018 (estimated first half): 3¾ percent
  - 2018 (projection): 4.3 percent
- Labor market: unemployment rate increased by 0.2 percentage point to 5.8 percent in March 2018 from a year ago.
- Inflation:
  - End-2017: 0.5 percent (y/y)
  - September 2018: 0.8 percent (y/y) headline; core inflation around 0.7 percent (y/y).
- Fiscal position:
  - NFPS overall deficit: narrowed to 1.6 percent of GDP in 2017 (from 1.8 percent a year earlier), within the Social and Fiscal Responsibility Law (SFRL) limits.
  - Preliminary overall deficit in first half of 2018: 1.6 percent of GDP (compared to 0.2 percent of GDP last year).
  - Fiscal policy: slightly contractionary in 2017 and assessed to be supportive in 2018.
- Credit and financial conditions:
  - Credit to the private sector grew 5.4 percent (y/y) in July 2018, down from 8.6 percent at end-2016.
  - Lending for construction and mortgages account for about 44 percent of total credit to the private sector.
  - Banks’ funding costs have started to rise; banks have tightened credit supply in response to oversupply indications in property market and slower deposit growth.
- External sector:
  - Current account deficit: 8.0 percent of GDP in 2017 (similar to 2016); deterioration in 2018 due to higher oil prices.
  - REER: depreciated by 6.3 percent in 2017 and appreciated by 1.6 percent in the first nine months of 2018 (excluding Venezuela impact).
  - Current account financing: mostly by foreign direct investment (FDI), of which over ⅔ is driven by reinvested earnings of multinational firms.

### Box: Growth at Risk (GaR) — key findings
- Financial conditions assessment:
  - Three financial conditions indices constructed: domestic price of risk (interest rates, asset returns and price volatility), leverage (credit aggregates and growth), and external conditions (global risk sentiment, commodity prices and growth in key trading partners).
  - Current assessment: price of risk remains broadly accommodative; leverage and external financial conditions are broadly neutral.
- GaR model projections:
  - Under a severely adverse growth scenario (one with 5 percent probability) for 2018, the GaR model forecasts growth of 3.9 percent compared to the outlook.
  - The estimate does not incorporate an abrupt stoppage in construction during a strike, which is estimated to reduce growth by 1 percentage point for 2018.
  - On a 3-year horizon, the impact of a severely adverse scenario would be: growth of 2.3 compared to the outlook of 5¾ percent growth for 2020.

### Outlook and medium-term projections (selected table figures preserved)
- Real GDP (annual percent change):
  - 2015: 5.8
  - 2016: 5.0
  - 2017: 5.4
  - 2018: 4.3
  - 2019: 6.3
  - 2020: 5.8
  - 2021: 5.6
  - 2022: 5.5
  - 2023: 5.5
- Output gap:
  - 2015: -0.4
  - 2016: -0.3
  - 2017: -0.1
  - 2018: -1.2
  - 2019: -0.5
  - 2020: 0.1
  - 2021–2023: 0.0
- CPI inflation (average):
  - 2015: 0.1
  - 2016: 0.7
  - 2017: 0.9
  - 2018: 1.5
  - 2019: 2.0
  - 2020: 2.1
  - 2021–2023: 2.0
- Credit to the private sector (annual percent change):
  - 2015: 11.4
  - 2016: 8.4
  - 2017: 6.5
  - 2018: 5.0
  - 2019: 6.0
  - 2020: 7.1
  - 2021: 6.8
  - 2022: 6.8
  - 2023: 6.9
- Fiscal accounts and public debt (percent of GDP, NFPS):
  - Overall balance, excluding ACP:
    - 2015: -2.2
    - 2016: -1.8
    - 2017: -1.6
    - 2018: -2.0
    - 2019: -2.0
    - 2020: -1.7
    - 2021: -1.7
    - 2022: -1.5
    - 2023: -1.5
  - Structural primary balance:
    - 2015: -0.6
    - 2016: -0.1
    - 2017: 0.1
    - 2018: -0.1
    - 2019: -0.3
    - 2020: -0.1
    - 2021: -0.2
    - 2022: 0.0
    - 2023: 0.0
  - NFPS gross debt:
    - 2015: 37.2
    - 2016: 37.4
    - 2017: 37.8
    - 2018: 38.3
    - 2019: 37.3
    - 2020: 36.2
    - 2021: 35.2
    - 2022: 34.1
    - 2023: 33.2
  - NFPS net debt:
    - 2015: 34.6
    - 2016: 34.9
    - 2017: 35.5
    - 2018: 36.2
    - 2019: 35.3
    - 2020: 34.3
    - 2021: 33.5
    - 2022: 32.6
    - 2023: 31.7
- External sector (percent of GDP):
  - Current account balance:
    - 2015: -7.9
    - 2016: -8.0
    - 2017: -8.0
    - 2018: -9.0
    - 2019: -7.6
    - 2020: -6.2
    - 2021: -5.6
    - 2022: -5.4
    - 2023: -5.4
  - Foreign direct investment:
    - 2015: -7.3
    - 2016: -8.0
    - 2017: -7.5
    - 2018: -6.6
    - 2019: -5.8
    - 2020: -5.9
    - 2021: -6.0
    - 2022: -5.8
    - 2023: -5.8
- Outlook notes:
  - Growth expected to rebound to 6.3 percent in 2019 due to recovery from the construction strike and expected opening of a large copper mine (Minera Panamá).
  - Growth projected to converge to potential of about 5½ percent over the medium-term.
  - Inflation expected to gradually converge toward 2 percent over the medium-term.
  - NFPS overall deficit projected to increase to 2 percent of GDP in 2018-19 and gradually fall to around 1½ percent of GDP over the medium-term.
  - Public debt projected to decline to about 33 percent of GDP (Annex IV).

### Risks (balance of risks tilted to the downside)
- Domestic risks:
  - Setbacks in complying with GAFILAT recommendations (AML/CFT) could cause reputational risks, reduced access to external funding, higher financing costs, and outflows from the regional financial center.
  - Continued oversupply in property markets could trigger price corrections and negatively affect financial stability.
  - Delays in completing the large mining project could lower export prospects.
  - Political uncertainty ahead of the 2019 elections could deter private investment.
- External risks:
  - Sharp tightening of global financial conditions would raise domestic interest rates, increase debt service and refinancing risks.
  - Rising U.S. interest rates could appreciate the U.S. dollar and exert REER appreciation pressures, eroding competitiveness and exports.
  - Escalating trade tensions could slow world trade, reducing Panama’s transits on the Panama Canal and associated fiscal revenue.
  - Weaker-than-expected global growth could weaken exports and dampen government revenue.

### Policy discussions and recommendations
- Preserve fiscal discipline: maintain adherence to the amended Social and Fiscal Responsibility Law and reinforce the fiscal framework, including establishment of a fiscal council.
- Strengthen financial integrity and tax transparency:
  - Continue efforts to address AML/CFT weaknesses identified by GAFILAT and implement the authorities’ Action Plan.
- Financial sector monitoring and safeguards:
  - Bolster systemic risk assessment and risk-based supervision.
  - Put in place robust frameworks for macroprudential policy and crisis management.
- Given a dollarized economy with no central bank, fiscal policy is the main macroeconomic stabilization instrument.

*Source: Panama — IMF Staff Report (Growth at Risk section).*

### Box 2. Compliance with FATF and Global Forum’s Standards

### Box 2. Compliance with FATF and Global Forum’s Standards

### FATF technical compliance and effectiveness
- Assessment period and methodology:
  - Latest assessments conducted from late 2016 to early 2018 (against the 2012 standards using the 2013 FATF methodology).
- Technical compliance:
  - Panama was rated ‘Compliant’ in one-quarter of the 40 recommendations, same as the median of the select group.
  - Panama was rated ‘Largely Compliant’ in 22 recommendations, better than the median.
- Effectiveness:
  - Panama’s performance is low in effectiveness and lags most comparators on the effectiveness of implementation.
  - Possible reason: most recent revisions to the AML/CFT framework have not been sufficiently tested.
- Comparator set:
  - Select group of 25 mostly offshore centers and regional peers (countries and jurisdictions listed in the source).

### AML/CFT supervision and implementation capacity
- Staff support and assessment:
  - Staff supports the authorities’ determination to strengthen the effectiveness of the AML/CFT supervisory framework.
  - Authorities’ supervisory capacity is being strengthened with more resources and training.
- Supervisory activity since 2015:
  - AML/CFT–focused onsite inspections have intensified across sectors since 2015, especially for designated nonfinancial businesses and professions (DNFBPs) identified as high risk in the 2017 National Risk Assessment, through implementation of risk-based approaches.
  - Greater AML/CFT awareness, including with training for DNFBPs, is yielding positive results.
- Remaining gaps and staff recommendations:
  - Enhance understanding of ML/FT risks.
  - Improve the financial intelligence unit’s capabilities.
  - Continue monitoring risks posed in highly vulnerable sectors (real estate, free zones, lawyers).
  - Further strengthen implementation capacity of supervisory agencies, considering the very high number of financial and non-financial intermediaries in Panama.
- Specific deficiencies GAFILAT identified:
  - Timely availability of up-to-date and accurate beneficial ownership information and accounting records of Panamanian corporations established by resident agents (lawyers) who were not properly supervised in the past.
  - Need to review registration requirements at the Public Registry and apply effective dissuasive action to non-compliant resident agents.
  - Challenging list of deficiencies to address before the next FATF plenary in February next year:
    - Criminalization of tax evasion (including bringing tax crimes in the scope of ML offences).
    - Availability of a comprehensive AML statistics.
    - Regulation of remittance houses.
    - Timeliness of suspicious transactions reporting (STRs).
  - Staff urged the authorities to approve the draft legislation to criminalize tax evasion that is before the National Assembly.
  - Effective implementation of the AML/CFT framework should remain a priority.

### Tax transparency, information exchange, and BEPS
- Global Forum assessment:
  - The Global Forum provisionally upgraded Panama’s overall rating from ‘Non-compliant’ to ‘Largely Compliant’ reflecting progress under its Fast Track Review Process in mid–2017.
  - The Global Forum has not revised the ratings of the essential individual components from the Phase 2 assessment conducted in November 2016.
  - Based on the full first round assessment, Panama’s framework for information exchange and its implementation is still considered not to meet standards pending a comprehensive assessment later this year.
- Recent actions and technical assistance:
  - With Fund technical assistance, authorities are modernizing revenue administration and, together with a stronger Financial Intelligence Unit, are now able to promptly provide tax information for domestic and foreign use.
  - Authorities have started to report tax information to the U.S. authorities (under FATCA).
  - Panama implemented the OECD’s Common Reporting Standard (CRS), with first exchanges taking place in September 2018.
  - Panama signed the OECD’s Multilateral Competent Authority Agreement (MCAA) in January 2018 for automatic exchange of financial account information, extending its information sharing network in the last quarter of 2018.
- BEPS implementation:
  - Authorities are behind in implementing some minimum standards on Base Erosion and Profit Shifting (BEPS).
  - Panama is subject to peer review on these four Minimum Standards: Action 5, Action 6, Action 13, and Action 14.
- Staff recommendation:
  - Authorities urged to further advance implementation of tax transparency initiatives towards a successful Global Forum’s assessment.

### Authorities’ views on AML/CFT and tax transparency
- Priority and actions:
  - AML/CFT and tax transparency are top priorities for the Panamanian authorities.
  - Authorities are preparing for the Global Forum and GAFILAT reviews.
  - They are optimistic that a number of legislative initiatives will be approved, including criminalization of tax evasion during the current legislative period of the National Assembly.
  - They emphasized that continued strengthening of AML/CFT is important to solidify Panama’s competitive position as a regional financial center.
- Progress noted by authorities:
  - Since 2013, the AML/CFT framework has been revamped; opening a bank account in Panama today is described by authorities as extremely difficult because of strict due diligence measures.
  - Technical assistance from the Fund has been and will remain valuable in advancing initiatives in these areas.

*Source: cr1911-panamabundle - Box 2. Compliance with FATF and Global Forum’s Standards*

### 1. As of June 2018, except for Dominican Republic (September 2017) and Brazil (March 2018).

### cr1911-panamabundle - 1. As of June 2018, except for Dominican Republic (September 2017) and Brazil (March 2018).

### Financial sector indicators (selected)
- Regulatory Capital to Risk-Weighted Assets: 17.1; 18.7; 15.7; 13.8; 15.3; 15.9; 16.6; 16.1; 16.0
- Capital to Assets Ratio: 10.0; 9.8; 7.4
- Liquid Assets to Total Assets Ratio: 10.2; 11.3; 11.1
- Return on Assets (ROA): 1.4; 1.3; 1.3; 1.3; 1.2; 1.4; 1.5; 1.5; 1.5; 1.5; 1.6
- Return on Equity (ROE): 14.1; 12.2; 12.4; 12.6; 12.0; 13.4; 13.6; 13.1; 13.5; 13.7; 13.7
- Nonperforming Loans (NPLs) to Total Loans Ratio: 1.0; 1.2; 1.1; 1.3; 1.3; 1.5; 1.5; 1.7; 1.4; 1.8; 1.8
- Provisions to Nonperforming Loans Ratio (provision coverage dynamics): 7.7; 12.6; 13.1
- NPL ratio change (%, annual): 8.7; 34.1; 16.3; 48.3; 23.9; 30.5; 39.3; 28.8; 14.3; 13.6; 23.9
- Deposit-to-loan ratio: 114.8; 115.6; 115.8; 112.5; 113.4; 112.6; 112.8; 110.2; 110.5; 109.3; 107.1
- Leverage ratio (%): 10.1; 10.4; 10.6; 10.9; 10.5; 11.0; 11.3; 11.6; 11.4; 11.4; 11.5
- Credit cycle indicators (quarterly series 2015Q4–2018Q2):
  - Change in credit / GDP ratio (pp, annual): 0.8; 1.0; 1.2; 1.1; 1.6; 1.3; 1.0; 0.1; 0.0; 0.1; 0.1
  - Growth of credit / GDP (%, annual): 1.0; 1.2; 1.5; 1.3; 2.0; 1.6; 1.2; 0.1; 0.0; 0.1; 0.1
  - Credit-to-GDP gap (st. dev): 0.0; 0.2; 0.4; 0.8; 0.2; -0.2; -0.6; -1.3; -1.9; -1.7; -1.4

### Asset quality, macro-financial feedbacks, and vulnerabilities
- Recent deterioration in asset quality follows robust credit growth during low global interest rates; risks include rising global interest rates, dominance of variable rates, and persistent oversupply in property markets.
- VAR estimates (model variables: NPLs/total loans, growth of credit to private sector, real GDP growth, inflation) findings:
  - A weaker macroeconomic environment leads to a statistically significant increase in the NPL ratio.
  - At its peak, a 1 percentage point increase in the NPL ratio reduces credit growth by 1.5 percentage points and growth by 1.2 percentage points.
- Policy-relevant observations:
  - Banks’ existing capital buffers help mitigate feedback between asset quality, credit, and growth.
  - Transition to IFRS9 improved aggregate provisioning coverage and reversed deterioration seen after 2014 dynamic provisioning; improvement driven almost entirely by foreign banks while provisioning coverage of domestic banks remained broadly stable.
  - Close monitoring and effective supervision are critical to prevent further deterioration of asset quality.

### Prudential regulation, supervision, and macroprudential oversight
- Progress and remaining priorities:
  - Definition of regulatory capital aligned to Basel III; capital charges on credit and market risk introduced, with market risk charges becoming effective in mid-2019.
  - Remaining priority: finalize regulations on operational risk (anticipated in second half of 2018).
  - SBP considering introducing a capital conservation buffer and additional capital requirements for D-SIBs; assessment indicates banks and D-SIBs appear able to adhere to additional buffers without raising capital or deleveraging (subject to caveat on market and operational risk charges).
  - Banks are in compliance with the new regulatory capital definition and the minimum leverage ratio requirement of 3 percent well before the phase-in end in 2019.
- Liquidity and supervision:
  - Introduction of the liquidity coverage ratio (LCR) in early 2018; authorities plan gradual annual phasing-in by January 2022 with full application to all banks; staff recommends considering faster transition.
  - Shift focus to strengthening risk-based supervision of banks and non-banks; securities supervision strengthened enabling full signatory status to IOSCO in 2017.
- Systemic risk oversight:
  - SBP leads systemic risk assessment; Financial Coordination Council (CCF) facilitates cooperation across supervisors.
  - Progress: new Memoranda of Understanding (MOUs) and joint inspections of financial conglomerates in 2017.
  - Recommendation: enhance CCF’s role in systemic risk assessment or consider moving toward more centralized supervisory structure over the medium-term to facilitate consolidated supervision and systemic risk assessment.
  - Publication of financial stability report prepared by the SBP would enhance transparency and accountability.
  - Development of a framework and tools for macroprudential policy remains imperative in the dollarized economy.

### Crisis management, resolution, and liquidity frameworks
- Critical gaps identified:
  - Absence of a mechanism to provide significant liquidity to the financial system in a systemic shock and absence of deposit insurance.
  - A draft law to strengthen the bank resolution framework is under consideration to expand resolution tools (bridge bank, purchase and assumption, asset management companies); approval would enable SBP to resolve institutions effectively and timely.
  - Crisis preparedness would be enhanced by elaboration of a crisis management plan.
- Authorities’ interim measures and views:
  - Authorities are creating a liquidity fund; National Bank reallocates liquidity through selected collateralized lending to commercial banks in the meantime.
  - Authorities consider deposit insurance unlikely in the near-term due to moral hazard and funding concerns.
  - National Bank developing a new real time gross settlement payment system platform, to be implemented beginning in 2019, to eliminate counterparty risk and mitigate systemic risk.

### FinTech, financial integrity, and AML/CFT
- FinTech:
  - Draft legislation under consideration to modernize the financial sector and support FinTech, including a regulatory sandbox.
  - Recommendation: place supervision of emerging financial products and technologies under appropriate supervisory agency with commensurate resources and ensure regulatory environment is consistent with strengthened financial integrity.
- AML/CFT and tax transparency priorities:
  - Effective implementation of AML/CFT remains a priority following favorable GAFILAT assessment.
  - Authorities should strengthen supervisory capacity for AML/CFT oversight using risk-based approaches given high number of financial and non-financial intermediaries.
  - Urgent actions: approve draft legislation to make tax crimes a predicate offense to money laundering; ensure availability of beneficial ownership and accounting records of Panamanian entities to avoid being listed as a non-cooperative jurisdiction.
  - Continue actions to share tax information under the OECD’s common reporting standard and the Multilateral Competent Authority Agreement; advance toward a successful Global Forum assessment against enhanced standards.

### Statistics, data gaps, and surveillance capacity
- Statistics broadly adequate for surveillance; authorities working to implement enhanced General Data Dissemination System and published an NSDP.
- Priorities to strengthen statistics:
  - Enhance independence, financial resources, and capacity of National Institute of Statistics.
  - Improve quality and timeliness of expenditure-side national accounts.
  - Increase frequency of labor market information, particularly on unemployment.
  - Address data gaps on housing prices, household and corporate indebtedness to better assess systemic risks.

### Staff appraisal, outlook, and policy recommendations
- Outlook:
  - Despite slowing in 2018, Panama expected to remain among the most dynamic economies in the region.
  - Near-term growth supported by construction, transport, logistics, and exports from a new copper mine.
  - Medium-term growth expected to moderate to potential absent sustained strong policy efforts; external imbalances expected to decline and remain broadly consistent with fundamentals; public debt expected to remain on a downward trajectory.
  - Key risks: setbacks in implementing remaining GAFILAT recommendations and tax transparency progress; sharper-than-expected tightening of global financial conditions; rising trade protectionism.
- Fiscal policy:
  - Sustained fiscal discipline required to keep public debt on downward trajectory.
  - Small fiscal impulse appropriate in 2018; gradual withdrawal of impulse necessary as economy strengthens.
  - Urgent need to contain current expenditure growth to provide room for strategic public investment.
  - Staff welcomes SRFL amendments simplifying and enhancing transparency: proposed deficit limits on NFPS headline deficit at 2 percent of GDP in 2018-19, 1¾ percent in 2020-21, and 1½ percent of GDP after 2021.
  - Staff agrees 2018 fiscal impulse should be accommodated with additional capital spending; law to establish a fiscal council approved by National Assembly.
- Structural and administrative reforms:
  - Continue to strengthen revenue administration and customs: priorities include human resources, ad hoc exemptions, control processes, data collection and management; review complex tax incentives and exemptions that erode the tax base.
  - Eliminate disconnect between execution and recording of turnkey and deferred payment investment projects; provide systematic data on projects.
- Financial sector recommendations (summary):
  - Strengthen coordination on systemic risk oversight and macroprudential policy via CCF or consider supervisory integration.
  - Publish SBP financial stability report.
  - Develop macroprudential framework and tools for the dollarized economy.
  - Finalize operational risk regulations and consider faster phasing-in of LCR than planned (full application by January 2022 is current plan).
  - Strengthen risk-based supervision of banks and non-banks.
  - Put in place robust crisis management and bank resolution frameworks, including adequate liquidity support and expanded resolution tools.
  - Manage FinTech development within an appropriate regulatory and supervisory framework to preserve financial stability.

*Source: IMF staff report content as provided in the supplied PDF excerpt.*

### 44.      A reinforcement of the structural reform agenda will be necessary to maintain high

### 44.      A reinforcement of the structural reform agenda will be necessary to maintain high

### Structural reform agenda and growth requirements
- "High sustained growth will require continued improvements in productivity and competitiveness, as well as a strengthening of policies related to education and public health services."
- "Improvements in total factor productivity will involve a substantial update in skills, training and quality of education, relaxation of regulations to facilitate attraction of foreign talent, and renewed efforts to further improve the investment climate."

### Social policy, poverty, and inequality
- "At the same time, it will be important to strengthen social policies to continue reducing poverty, improve income distribution and ensure inclusive growth over the medium-term."
- Evidence presented:
  - "Per capita income is the highest in Latin America..." (Figure caption)
  - "...but inequality remains high relative to regional peers." (Figure caption)
  - "Unemployment has fallen and remains comparable to regional peers." (Figure caption)
  - "Labor force participation rates are in line with regional peers." (Figure caption)
  - "Infant mortality is comparable to regional peers, but... ...life expectancy is higher than in most regional peers." (Figure caption)

### Staff procedural proposal
- "Staff propose that the next Article IV consultation take place on the standard 12-month cycle."

### Key statistics and figure annotations (preserved verbatim)
- Figure title: "Figure 1. Panama: Socio-Economic Indicators"
- Chart label: "PPP GDP per capita, 2017"
- Y-axis tick labels shown: 0, 5,000, 10,000, 15,000, 20,000, 25,000
- Country code string under PPP chart (preserved as in source): "PA NCHLURYMEXDOMCRIBRACOLPE RGT MSLVNICHND"
- GINI chart label and scale: "Panama: GINI Coefficient (Index; 0-100; Higher index = Higher income inequality)"
- GINI index tick labels shown: 40 42 44 46 48 50 52 54 56
- GINI country code string (preserved as in source): "URYSLVPERNICDOMMEXCRIGTMCHLHNDPANBRACOL"
- Years indicated on GINI chart: "2016" and "2010"
- Sources line (preserved): "Sources: WEO October 2018  database and Fund staff calculations."
- Note from figure (preserved): "1. Countries selected belong to group of LA6 (Brazil, Chile, Colombia, Mexico, Peru and Uruguay) and CAPDR (Costa Rica, Honduras, Nicaragua, El Salvador, Dominican Republic, Guatemala and Panama)."
- Additional figure note (preserved): "1/ Higher index = Higher income inequality. Note: In 2010 series, data for Nicaragua, Chile and Brazil corresponds to 2009 and for Guatemala to"

*Source: cr1911-panamabundle - 44.      A reinforcement of the structural reform agenda will be necessary to maintain high (IMF PDF).*

### 2006. In 2016 series, data for Nicaragua and Guatemala correspond to 2014 and for Brazil to 2015.

### Panama: cr1911-panamabundle - 2006. In 2016 series, data for Nicaragua and Guatemala correspond to 2014 and for Brazil to 2015.

### Real sector developments
- Economic activity has slowed, with construction activity affected in part by the strike in the sector in April/May 2018.
- Recent dynamics were driven by a prolonged boom in the construction sector together with strong consumption.
- Inflation remains subdued but has started to rise with international fuel prices.
- Aggregate employment growth has slowed, with divergent dynamics across economic sectors.
- Sectoral contributions to Real GDP annual growth rate (2013–2017): Construction, Transport/Storage & Communications, Financial Intermediaries, Wholesale/Retail & Repair of Vehicles, Other.
- Demand-side contributions to Real GDP annual growth rate (2013–2017): Private consumption, Public consumption, Private investment, Public investment, Net exports, Change in inventories.
- Employment growth contributions by sector (2012–2017): Agriculture, Manufacturing, Construction, Commerce, Services, Others (year-over-year, in percentage points).
- Selected headline figures:
  - Real GDP growth (1996 prices): 2013: 6.6; 2014: 6.0; 2015: 5.8; 2016: 5.0; 2017: 5.4; 2018: 4.3; projections through 2023: 6.3, 5.8, 5.6, 5.5, 5.5.
  - Consumer price index (average): 2013: 4.0; 2014: 2.6; 2015: 0.1; 2016: 0.7; 2017: 0.9; 2018: 1.5; projection 2019–2023: 2.0, 2.1, 2.0, 2.0, 2.0.
  - Output gap (% of potential): 2013: 0.0; 2014: -0.5; 2015: -0.4; 2016: -0.3; 2017: -0.1; 2018: -1.2; projection 2019: -0.5; 2020–2023: 0.1, 0.0, 0.0, 0.0.
  - Total unemployment rate (August, 2018): 6.0.

### External sector developments
- Current account deficit has remained stable despite rising oil prices.
- Rising oil prices contributed to a small increase in the merchandise trade deficit.
- The surplus on trade in services continued to grow, partly due to strong revenues from the expanded Panama Canal.
- High-frequency indicators: Colón Free Zone (CFZ) recovery continues, tourism is slowing, and the impact of the expanded canal on toll revenue is waning.
- External debt remains on a downward trajectory.
- Balance of payments headline figures (in percent of GDP, selected):
  - Current account: 2015: -7.9; 2016: -8.0; 2017: -8.0; 2018: -9.0; projections 2019–2023: -7.6, -6.2, -5.6, -5.4, -5.4.
  - Services, net: 2015: 13.0; 2016: 12.9; 2017: 14.0; 2018: 13.5; projections 2019–2023: 13.6, 13.9, 14.1, 14.3, 14.5.
  - Income, net: 2015: -8.8; 2016: -7.5; 2017: -8.3; 2018: -7.5; projections 2019–2023: -7.5, -7.4, -7.3, -7.4, -7.4.
  - Exports of goods and services (annual percent change): 2013: -1.5; 2014: -9.1; 2015: 7.9; 2016: 3.9; 2017: 9.6; 2018: 7.2; 2019 projection: 6.5; 2020 projection: 6.4.
  - Gross external debt (percent of GDP): 2013: 160.6; 2014: 155.1; 2015: 143.7; 2016: 150.7; 2017: 153.0; 2018: 153.3; projection 2019: 152.6; 2020: 151.3; 2023: 150.7.
- Memorandum items:
  - Gross international reserves (in millions of U.S. dollars, selected years): 2013: 414; 2014: 347; 2015: 453; 2016: 788; 2017: 396; 2018: 442; 2019: 324; 2020: 510; 2023: 432.
  - Net international investment position (in percent of GDP): 2013: -71.6; 2014: -76.2; 2015: -81.4; 2016: -94.4; 2017: -94.1; 2018: -92.6; projection 2019: -91.0; 2020: -89.6; 2023: -88.2.

### Macrofinancial developments
- Credit remains high despite decelerating credit growth. Household credit drove the increase in credit-to-GDP in recent years but is moderating.
- Deceleration in mortgage lending drives moderation in household credit growth; a large chunk of mortgage lending benefits from interest rate subsidies, with growth in subsidized mortgages for lower-cost housing offsetting a deceleration in non‑subsidized mortgage lending.
- Property market moderation reflected in lower lending for the construction sector across all segments; banks continue to reduce exposure to the Colon Free Zone, reducing commercial credit.
- Financial aggregates and banking system figures:
  - Private sector credit (12-month percent change): 2013: 12.1; 2014: 9.1; 2015: 11.4; 2016: 8.4; 2017: 6.5; 2018: 5.0; 2019 projection: 6.0.
  - Broad money (12-month percent change): 2013: 7.2; 2014: 8.2; 2015: 5.5; 2016: 4.1; 2017: 5.2; 2018: 5.3; 2019 projection: 6.7.
  - Banking system net foreign assets (US$ millions, 2013–2017): 2013: 5,928; 2014: 6,074; 2015: 5,021; 2016: 3,974; 2017: 1,752.
  - Credit to the private sector (US$ millions, 2013–2017): 2013: 36,548; 2014: 39,883; 2015: 44,439; 2016: 48,161; 2017: 51,310.
  - Total deposits (US$ millions, 2013–2017): 2013: 32,116; 2014: 34,719; 2015: 36,616; 2016: 38,264; 2017: 40,324.
  - Average commercial lending rate (1 yr): 2013: 6.8; 2014: 7.1; 2015: 7.5; 2016: 7.4; 2017: 8.0.
  - Mortgage interest rate (excluding preferential): 2013: 6.1; 2014: 5.9; 2015: 5.6; 2016: 5.5; 2017: 5.5.

### Fiscal developments
- Fiscal deficit narrowed further as non-tax revenue and canal transfers increased, offsetting a decline in tax revenue.
- Expenditure remained contained and NFPS debt remains stable below the ceiling set in the fiscal rule.
- Tax revenues stabilized but customs administration challenges continue to affect import taxes.
- Public investment has fallen with the completion of several large infrastructure projects.
- Non-Financial Public Sector (NFPS) balances and projections (in percent of GDP, selected):
  - NFPS primary balance: 2013: -? (table format—see Table 1 for full series); NFPS balance (2013–2017 charts): primary and overall show narrowing deficit trends.
  - NFPS debt (percent of GDP): 2013: 33.6; 2014: 35.6; 2015: 37.2; 2016: 37.4; 2017: 37.8; 2018: 38.3; projections 2019–2023: 37.3, 36.2, 35.2, 34.1, 33.2.
- Table highlights (Table 2 and Table 3 projections, in percent of GDP):
  - NFPS revenues: 2015: 19.6; 2016: 20.2; 2017: 20.1; 2018: 20.1; projections 2019–2023: 20.2, 20.2, 19.9, 19.7, 19.4.
  - NFPS expenditure: 2015: 21.9; 2016: 22.0; 2017: 21.7; 2018: 22.1; projections 2019–2023: 22.2, 21.9, 21.6, 21.2, 20.9.
  - Overall balance, excluding ACP (NFPS): 2015: -2.2; 2016: -1.8; 2017: -1.6; 2018: -2.0; projections 2019–2023: -2.0, -1.7, -1.7, -1.5, -1.5.
  - Central government revenues and expenditure (Table 3): Revenues and grants (2015–2018): 13.0, 13.2, 13.8, 13.4; Total expenditure (2015–2018): 17.0, 17.2, 16.9, 16.7; Overall balance (2015–2018): -4.0, -4.0, -3.1, -3.2; projections 2019–2023 overall balance: -3.4, -3.1, -3.0, -2.7, -2.7.

### Banking sector soundness
- Nonperforming loans (NPLs) remain low but have doubled in recent years.
  - NPLs as percent of total loans, banking system (end-of-period): 2013 Q4: 0.8; 2014 Q4: 0.9; 2015 Q4: 1.0; 2016 Q4: 1.3; 2017 Q4: 1.6; 2018 Q1–Q2–Q3–Q4: 1.5, 1.7, 1.5, 1.7; 2018 Q4 reported: 1.8.
- Provisioning coverage improved sharply in 2018 with the adoption of IFRS 9 provisioning requirements.
  - Ratio of provisions to NPLs, banking system (selected): 2013 Q4: 171.2; 2014 Q4: 90.9; 2015 Q4: 80.9; 2016 Q4: 82.7; 2017 Q4: 70.5; 2018 Q1–Q4: 78.9, 81.3, 94.6, 88.9 (series by quarter).
- Profitability has remained stable as rising funding costs were offset by higher returns on liquid assets; net income on average assets for the banking system: 2013–2018 range 1.4–1.6 (series by quarter).
- Net interest margins have remained broadly stable.
- Capital adequacy remains well in excess of regulatory minimum:
  - Ratio of capital to risk-weighted assets, banking system (annual/quarterly series): 2013: 14.8; 2014: 14.7; 2015: 14.8; 2016: 15.1; 2017: 15.3; 2018: 15.6; quarterly 2018: 16.0, 16.0, 15.7, 15.9.
- Liquidity has remained broadly stable:
  - Ratio of liquid assets to total assets, banking system (end-of-period, selected): 2013: 17.7; 2014: 19.5; 2015: 17.0; 2016: 16.7; 2017: 15.4; quarterly 2018: 15.0, 14.2, 13.7.
- Ownership: Foreign banks' share of domestic banking system assets: 2013: 49.1; 2014: 49.7; 2015: 49.0; 2016: 47.2; 2017: 46.5; 2018 quarterly: 45.6, 45.4, 45.3, 45.2.

### Key economic and social indicators (selected)
- Population (millions, 2016): 4.0.
- Population growth rate (percent, 2016): 1.6.
- Life expectancy at birth (years, 2016): 77.9.
- GDP per capita (US$, 2017): 15,317.7.
- Poverty line (percent, 2017): 20.7.
- Adult literacy rate (percent, 2010): 94.0.
- IMF Quota (SDR, million): 376.8.
- Public finances (selected, percent of GDP, Table 1):
  - Revenue and grants (2013–2018): 24.4, 22.7, 22.6, 22.6, 22.1, 22.2.
  - Expenditure (2013–2018): 28.4, 27.5, 25.9, 25.5, 24.1, 24.4.
  - Overall balance, including ACP (2013–2018): -4.1, -4.8, -3.3, -2.9, -2.1, -2.2.
  - Debt of Non-Financial Public Sector (percent of GDP, 2013–2018): 33.6, 35.6, 37.2, 37.4, 37.8, 38.3.

*Source: IMF staff calculations and national authorities as presented in cr1911-panamabundle - 2006. In 2016 series, data for Nicaragua and Guatemala correspond to 2014 and for Brazil to 2015.*

### Annex I. Implementation of Past IMF Policy Advice

### Annex I. Implementation of Past IMF Policy Advice

### Overview
- The authorities’ macroeconomic and financial policies over the last year have been broadly in line with past Fund advice.
- 2017 Article IV Directors emphasized: enhancing financial integrity (AML/CFT), tax transparency and exchange of tax information; strengthening the fiscal framework (fiscal council, fiscal risk assessment/management); improving tax and customs administration; and strengthening financial sector oversight, macroprudential policy and crisis management, including aligning prudential regulations with Basel III and improving coordination across supervisors.

### Financial Integrity and Tax Transparency
- Findings:
  - Authorities working on an action plan to address remaining gaps identified by GAFILAT in early 2018.
  - Intensity of AML/CFT supervision increased, especially for DNFBPs, aided by strengthened human, financial and ICT capacity.
  - Critical legal gap remains: a range of tax crimes are not predicate offences to money laundering.
  - Recent initiatives: launch of information exchange with the U.S. authorities (under FATCA) in September 2017.
  - Panama committed to adopt OECD multilateral frameworks (Common Reporting Standards (CRS) and Multilateral Competent Authority (MCAA)).
  - Tax administration capacity for information exchange strengthened via a reorganized unit under the Directorate of General Income (DGI) and increased staffing.
- Policy recommendations:
  - Make the relevant tax crimes predicate offences to money laundering.
  - Advance AML/CFT and tax transparency efforts in line with GAFILAT and OECD recommendations.

### Fiscal Policy
- Findings:
  - Fiscal consolidation has continued; fiscal policy anchored on the Social Fiscal Responsibility Law (SFRL).
  - Draft legislation replaced the “adjusted-deficit” rule with a ceiling on the NFPS headline deficit and adopted an expenditure rule; approved by the National Assembly in October 2018.
  - Draft legislation to establish a fiscal council was submitted and approved in October 2018.
  - Monitoring of fiscal risks and contingent liabilities is in early stages.
  - Pace of revenue administration reform, particularly customs, is short of expectations.
  - Important weaknesses in institutional capacity and governance remain unaddressed.
- Policy recommendations:
  - Strengthen monitoring and management of fiscal risks and contingent liabilities.
  - Accelerate revenue administration and customs reform.
  - Build institutional capacity and governance improvements.

### Financial Sector Reforms
- Findings:
  - Prudential regulation largely aligned to Basel III; remaining priority: align operational risk regulations with Basel III (expected completion in 2018).
  - Draft legislation under consideration to strengthen the bank resolution framework to expand resolution tools per IMF technical assistance.
  - Coordination across financial supervisors has strengthened; inspections of financial conglomerates occurred for the first time in 2017.
  - Systemic risk oversight remains mainly conducted by the SBP; the CCF’s role remains focused on coordination on prudential supervision.
- Policy recommendations:
  - Complete alignment of operational risk prudential regulations with Basel III.
  - Finalize and adopt strengthened bank resolution framework.
  - Continue to develop macroprudential policy and enhance crisis management and coordination across supervisors.

### Risk Assessment Matrix — Key Risks, Likelihood, Time Horizon, and Recommended Responses
- External Risks:
  - Rising protectionism and retreat from multilateralism
    - Relative Likelihood: High
    - Time Horizon: Short- to medium-term
    - Expected impact: Lower exports and growth, lower transits on the Panama Canal and associated fiscal revenue, increased financial market volatility, lower investment.
    - Recommended response: Continue efforts to diversify key export markets; advance structural reforms to improve productivity and strengthen competitiveness.
  - Sharp tightening of global financial conditions
    - Relative Likelihood: High
    - Time Horizon: Short- to medium-term
    - Expected impact: Higher sovereign financing costs and Panamanian interest rates, higher debt service and refinancing risks, appreciation pressure on the U.S. dollar and Panama's REER, eroding external competitiveness and exprots.
    - Recommended response: Deepen domestic financial markets; rebalance public sector financing to domestic sources; consolidate public finances; enhance crisis preparedness of Panama's regional financial center.
  - Weaker than expected global growth, especially if concentrated in the United States and/or China
    - Relative Likelihood: Medium
    - Time Horizon: Short- to medium-term
    - Expected impact: Immediate decline in output through lower exports and Panama Canal activity; dampened government canal revenue.
    - Recommended response: Advance structural reforms; allow current account to adjust through lower imports.
  - Sizable deviations from baseline energy prices
    - Relative Likelihood: Medium
    - Time Horizon: Short- to medium-term
    - Expected impact: Sharp rise in oil prices could deteriorate the trade balance and current account; sharp drop could improve current account.
    - Recommended response: Advance structural reforms to lower oil dependence; improve productivity and competitiveness.
  - Unsustainable macroeconomic policies
    - Relative Likelihood: Medium
    - Time Horizon: Short- to medium-term
    - Expected impact: Lower trade and related confidence effects.
    - Recommended response: Advance structural reforms to improve productivity and competitiveness.
- Domestic Risks:
  - Setbacks in strengthening AML/CFT or improving tax transparency
    - Relative Likelihood: Medium
    - Time Horizon: Short- to medium-term
    - Expected impact: Reputational damage, reduced external funding and access to international financial services, higher borrowing costs, increased scrutiny of Panamanian entities.
    - Recommended response: Advance AML/CFT and tax transparency efforts in line with recommendations from GAFILAT and OECD assessments.
  - Correction in residential/commercial property markets
    - Relative Likelihood: Medium
    - Time Horizon: Short- to medium-term
    - Expected impact: Sharp price reduction would reduce domestic demand, create negative macro-financial feedback, and increase non-performing loans.
    - Recommended response: Strengthen monitoring of systemic risk; develop macroprudential policy framework; strengthen financial sector crisis preparedness.
  - Relaxation of fiscal policy/deficit ceilings
    - Relative Likelihood: Low
    - Time Horizon: Medium-term
    - Expected impact: Larger borrowing and contribution to fiscal vulnerability; reduced market confidence.
    - Recommended response: Build fiscal buffers and commit to fiscal targets below the SFRL ceilings.

### External Stability Assessment — Background and Key Statistics
- Current Account:
  - The current account deficit remained at 8.0 percent of GDP in 2017 (same as 2016), down from a peak of 13.1 percent of GDP in 2014.
  - Drivers of the decline since the peak: higher private savings, lower oil import bill due to lower global commodity prices, and winding down of several large-scale construction projects; imports began to rise again in 2017 with the pick-up in global commodity prices.
  - Strong service exports, primarily from expanded Panama Canal revenue, helped stabilize the current account.
  - Colon Free Zone (CFZ) faced challenges (e.g., Venezuela, trade dispute with Colombia) but showed signs of stabilization in 2017.
  - Medium-term projection: current account deficit expected to increase temporarily to 9.0 percent of GDP in 2018 due to higher oil prices, then narrow to about 5 percent of GDP as a new mine starts exports in 2019; exports of the new mine expected to peak at just under 3 percent of GDP in 2021 when peak production occurs.
  - A recent Supreme Court ruling on the validity of Law 9 creates uncertainty on contract elements with the mining company and is a downward risk to exports.
- Real Effective Exchange Rate (REER):
  - REER depreciated by 6.3 percent in 2017 and appreciated by 1.6 percent in the first nine months of 2018.
  - Due to dollarization, Panama’s REER and NEER closely mirror U.S. dollar developments.
  - REER assessment is hampered by use of bilateral goods trade data while services account for about 70 percent of exports outside the CFZ.
- Capital and Financial Flows:
  - Current account deficit traditionally financed by FDI.
  - FDI inflows in 2017: 7.5 percent of GDP (compared to 8.0 percent in 2016).
  - FDI concentrated in equity instruments; reinvested earnings major component: reinvested earnings reached 5.1 percent of GDP in 2017 of total equity-related FDI flows of 5.2 percent of GDP.
  - Text states: "Over 2/3 percent of foreign entities’ profits (on aggregate) were reinvested into Panama in 2017."
  - Around a quarter of FDI originates in the United States; potential risk from changes to U.S. corporate tax rules that could encourage repatriation of profits, though no trend observed so far.
  - Portfolio inflows have been less important and remained relatively stable.
- External Balance Sheets:
  - NIIP net liabilities increased to 81.4 percent of GDP in 2017.
  - External debt fell to 144 percent of GDP in 2017 (from 155 percent in 2016).
  - External debt concentrated in private debt (~80 percent of total external debt), primarily related to Panama’s regional banking sector.
  - International banking sector external debt remains sizeable at 79 percent of GDP, accounting for 55 percent of total external debt.
  - FDI-related debt liabilities and government debt each account for 18 percent of external debt.
  - With FDI expected to continue financing the current account deficit, FDI debt-related liabilities projected to increase as a share of external debt (from about 18 percent in 2017 to about 33 percent by 2023).
  - Recent sovereign issuance: April 2018 government issued a 32-year international bond in the amount of US$1.2 billion with an interest rate of 4.5 percent, a spread of 150 basis points over 30-year U.S. Treasury bonds.
  - Gross external debt projected to stabilize around 150 percent of GDP over the medium-term.
- Assessment summary:
  - Panama’s external position broadly consistent with fundamentals and desired policy settings.
  - Panama remains highly competitive among LAC peers based on market-share and survey-based indicators.
  - External stability depends on continued financial stability and the global economic environment — especially global interest rates and world trade.
  - Policy priority: enhance resilience by reducing vulnerabilities and building policy buffers.

*Source: Annex I. Implementation of Past IMF Policy Advice (cr1911-panamabundle).*

### 10.      The external position is broadly consistent with fundamentals and desirable policy

### 10.      The external position is broadly consistent with fundamentals and desirable policy settings.

### External sustainability approach
- If Panama’s NIIP position is stabilized at its 2017 level as projected:
  - Implied IIP-stabilizing current account deficit: 6.2 percent of GDP
  - Implied REER undervaluation: 2.5 percent
- If the NIIP is reduced to 65 percent of GDP (broadly in line with its average level since 2000):
  - Implied IIP-stabilizing current account deficit: 4.9 percent of GDP
  - Conclusion: external position broadly consistent with fundamentals and desirable policy settings, with a small overvaluation of the REER
- If the NIIP converges to 65 percent over ten years (faster than twenty years):
  - Conclusion: external position is moderately weaker than fundamentals and desirable policy settings
- Staff preference: given uncertainties, staff prefers the external sustainability approach and assesses the real exchange rate to be broadly in line with fundamentals and desirable policy settings.

### Current account approach (EBA-Lite Current Account Panel Regression)
- Actual current account: -8.0 percent of GDP
- Fitted current account: -1.0 percent of GDP
- Current account norm = (fitted current account) - (policy gap components) as presented: -2.4 percent of GDP
- Residual (actual - fitted): -7.0 percent of GDP
- Current account gap (actual - current account norm): -5.6 percent of GDP
- Policy gap (sum of policy components h + i + j + k): 1.4 percent of GDP, composed of:
  - Fiscal policy: 1.0 percent of GDP
  - Change in GIR: 0.1 percent of GDP
  - Private credit to GDP: 0.3 percent of GDP
  - Capital control: 0.0 percent of GDP
- Assumed real exchange rate elasticity: -33.0 percent
- Real exchange rate gap under CA approach = (current account gap)/(real exchange rate elasticity): 17.5 percent (REER overvaluation)
- Note: the gap and estimated REER overvaluation are driven by a large residual (-7.0 percent of GDP) rather than deviations from desirable policies on a net basis; the overall policy gap is positive and driven primarily by more expansionary-than-desirable fiscal policy in the rest of the world.
- Panama’s fiscal policy remains guided by the SFRL deficit limits.
- Given the large residual and inherent uncertainties with the current account approach, staff prefers the external sustainability approach.

### Other competitiveness indicators
- Exports and services:
  - Panama’s exports have remained relatively stable as a share of world exports, reflecting gains in service exports.
  - Tourism exports account for about 15 percent of total exports or about a third of service exports.
  - Tourism had been gaining market share, but gains relative to LAC competitors have levelled off, likely reflecting past U.S. dollar appreciation impacts.
  - Renewed U.S. dollar appreciation would be expected to erode recent tourism gains.
  - Canal expansion has considerably boosted exports of transportation services and may offset tourism losses if Panama leverages canal expansion to develop the logistics industry.
- Logistics Performance Index:
  - Panama score: 3.28 (World Bank’s Logistics Performance Index, 2018)
  - Ranking: among the top-ranked upper-middle income countries and second-highest score in LAC (behind Chile)
  - Strengths: infrastructure and logistics components
  - Areas to strengthen: customs and timeliness
- Survey-based competitiveness (World Economic Forum Global Competitiveness Index, 2018):
  - Panama overall score: 61.03 (scale 0 to 100)
  - LAC average: 56.39
  - 2017 Panama score: 61.64 (2018 score deteriorated relative to 2017)
  - Panama’s subcomponent strengths: financial system, macroeconomic stability, health, infrastructure (2nd, 4th, 4th and 5th highest scores in LAC respectively)
  - Critical areas to strengthen: institutions, ICT adoption, skills, labor market, innovation capability; combat corruption; strengthen education, labor market efficiency, institutions
- World Bank Doing Business report (2018):
  - Panama distance to frontier: 65.27 out of 100
  - Improvement from 2017: 1.25
  - Areas to improve: tax discipline, contract enforcement, insolvency regimes

### Reserve adequacy assessment
- Context:
  - Panama is fully dollarized and does not have a central bank.
  - Officially reported reserves are the net foreign assets of Banco Nacional de Panama (the largest state-owned bank), which is the government’s bank and has a formal role in operating the payments system.
  - Reported net international reserves are below standard reserve adequacy metrics and the IMF’s risk-based metric for emerging markets.
- Supplemental resources:
  - Sovereign wealth fund U.S. dollar assets: just over 2 percent of GDP
  - Foreign currency deposits held in domestic banks exist, but speed of deployment for systemic liquidity shortages is unclear.
- Policy implication: building policy buffers and reducing vulnerabilities remain critical to maintaining external stability.

### Debt sustainability (Annex IV highlights)
- Public debt (non-financial public sector, NFPS):
  - 2017 level: 38 percent of GDP (Annex summary), detailed figure: 37.8 percent of GDP in 2017
  - Composition: 79 percent external (29.7 percent of GDP), 21 percent domestic (8.1 percent of GDP)
  - Short-term debt: 3.8 percent of total
  - Currency composition: nearly all debt is US dollar-denominated
- Macroeconomic assumptions:
  - 2018 projected deceleration: 4.3 percent growth
  - Near-term prospects: 6.3 percent growth for 2019 and 5.8 percent for 2020
  - Long-term convergence to potential growth: 5.5 percent
  - Inflation: expected around 2 percent
  - Overall NFPS deficit: projected to rise to 2 percent of GDP in 2018-19, then fall to 1½ percent of GDP over the medium-term
- Baseline projections:
  - Public debt projected decline: cumulative 3.0 percent of GDP from 2017 to about 35 percent of GDP by 2023
  - Drivers: negative interest rate/growth differential subtracts 3.5 percent of GDP from debt; projected primary deficit adds 1.0 percent of GDP
  - Gross external debt (public and private): projected to continue downward as current account strengthens
  - Gross financing needs: projected to rise to 11.2 percent of GDP in 2023 from 3.2 percent of GDP in 2017 (reflecting rebalancing towards short-to-medium debt and liquidation of maturing external bonds)
- Alternative scenarios:
  - Historical scenario (strong growth and small primary surplus): public debt-to-GDP ratio falls to 31.5 percent of GDP relative to baseline
  - Scenario with slightly weaker constant primary balance but same growth: results in a smaller decline in the public debt-to-GDP ratio (broadly similar reduction)
  - Heat map highlights external financing requirements and residency of debt holders as risks to debt profile
- Stress scenarios:
  - Applied shocks: financial contingent liability shock equivalent to 10 percent of banking system’s assets in 2019; one standard deviation shock to real GDP growth in 2019–20; interest rate increase by 25 basis points for each percent of GDP deterioration in the primary fiscal balance
  - Result: public debt jumps to 50-51 percent of GDP in 2019-20, then falls to 48 percent of GDP by 2023

*Source: IMF staff calculations and staff assessment as presented in the document.*

### 6.      Under another stress scenario, the analysis assumes a contingent liability shock of SOEs

### 6. Under another stress scenario, the analysis assumes a contingent liability shock of SOEs

### Stress scenario summary
- The contingent liability shock assumes liabilities of state-owned enterprises (SOEs) excluded from the NFPS fall due in 2019.
- The debt of the three entities, which are profitable, is about 3.5 percent of GDP.
- Under this shock, the public debt-to-GDP ratio:
  - rises to 41 percent in 2019,
  - gradually declines to 38 percent of GDP by 2023.

### Key macro-fiscal assumptions and projections (Financial Contingent Liability Shock)
- Real GDP growth:
  - 2018: 4.3%
  - 2019: 3.5%
  - 2020: 3.0%
  - 2021: 5.6%
  - 2022: 5.5%
  - 2023: 5.5%
- Inflation (GDP Deflator change):
  - 2018: 1.5%
  - 2019: 1.3%
  - 2020: 1.5%
  - 2021: 2.0%
  - 2022: 2.0%
  - 2023: 2.0%
- Non-interest revenue-to-GDP ratio:
  - 2018: 20.0%
  - 2019: 20.1%
  - 2020: 20.1%
  - 2021: 19.9%
  - 2022: 19.6%
  - 2023: 19.3%
- Non-interest expenditure-to-GDP ratio:
  - 2018: 20.3%
  - 2019: 32.5%
  - 2020: 20.2%
  - 2021: 20.1%
  - 2022: 19.6%
  - 2023: 19.2%
- Primary Balance:
  - 2018: -0.4%
  - 2019: -12.3%
  - 2020: -0.1%
  - 2021: -0.2%
  - 2022: 0.0%
  - 2023: 0.0%
- Nominal Exchange Rate -- average (LCU/USD):
  - 2018–2023: 1.00 (each year)
- Nominal Exchange Rate -- end of period (LCU/USD):
  - 2018–2023: 1.00 (each year)
- Interest rate shock (bpts) compared to baseline:
  - 2018: 0
  - 2019: 298
  - 2020: 0
  - 2021: 0
  - 2022: 0
  - 2023: 0

### Debt dynamics and related projections (selected indicators)
- Identified key result:
  - The contingent liability event in 2019 materially increases non-interest expenditure-to-GDP in 2019 to 32.5%, producing a primary balance of -12.3% in 2019.
- Public gross nominal debt (selected baseline context from figures):
  - Nominal gross public debt series show values around the high-30s percent of GDP across 2016–2019 and declining toward the high-30s by 2023 in baseline projections (figures present detailed year-by-year percentages in charts).
- Public gross financing needs and market indicators are presented in the DSA figures (charts and tables), with EMBIG (bp) and Y CDS (bp) referenced in the staff analysis.

### Observations from the DSA figures and risk assessment
- The stress test highlights that a one-time contingent liability realization of SOEs amounting to 3.5 percent of GDP in 2019:
  - Temporarily raises public debt-to-GDP to 41 percent in 2019,
  - Debt then follows a declining path to 38 percent of GDP by 2023.
- Interest rate shock in 2019 (298 bpts) is part of the stress specification and contributes to debt dynamics in that year.
- The DSA includes risk-assessment matrices and percentile bands for trajectories of gross nominal public debt and financing needs under alternative scenarios and historical shocks.

*Source: Panama Authorities and IMF staff estimates.*

### 1. The Panamanian authorities thank the new mission chief and his team for their

### 1. The Panamanian authorities thank the new mission chief and his team for their productive engagement and policy advice during a comprehensive staff visit in May and the Article IV consultation mission in September. The authorities broadly agree with the team’s assessment and policy recommendations.

### Recent economic developments
- 2017 GDP growth was 5.4 percent — the highest in the Latin American and the Caribbean region.
- 2018 growth projected at 4.5 percent, reduced by as much as one percentage point due to a labor strike in construction (April–May) that slashed construction activity by 40 percent and weak performance in some sectors.
- 2019 expected strong rebound with growth projected to hover above 6 percent, supported by:
  - a large public infrastructure investment program;
  - start of production at the copper mine Minera Panamá;
  - increases in transport and storage facilities, further utilization of expanded Canal capacity, and continued expansion of the Colon Free Trade Zone (ZLC).
- Labor market remains robust.
- Inflation expected to climb slightly to 1.2 percent at end-2018.

### Public investment and FDI
- Public investment budget in 2018 was over US$5.2 billion or about 8.0 percent of GDP; an equivalent amount allocated in the 2019 budget.
- Large infrastructure projects concluding in 2018–2019 total over US$ 4.4 billion, including:
  - the third bridge over the Panama Canal;
  - the city of Colon urban renewal;
  - the Interamerican Highway expansion;
  - Metro Line 2;
  - Tocumen Airport new terminal.
- Major project startups in 2019 include the fourth bridge over the Canal and Metro Line 3 monorail system, totaling about US$ 4.0 billion.
- FDI package about US$9.1 billion, including:
  - a liquefied natural gas electricity generation plant completed in August 2018;
  - a new plant to start construction in 2019;
  - expansion of port facilities for neopanamax ships and Minera Panamá expected to start exporting in early 2019.

### External sector and ratings
- Current account deficit projected to increase marginally in 2018 and remain relatively high into the medium term due to large public infrastructure investments and improved implementation rates.
- Steady flow of FDI expected to finance most of the current account deficit.
- Rating agency actions:
  - October 2017: Moody’s perspective improved to positive from stable.
  - February: Fitch reiterated Panama BBB with stable outlook.
  - July: Standard & Poor’s upgraded the outlook to positive.

### Fiscal stance and public financial management
- NFPS deficit declined to 1.6 percent of GDP in 2017.
- MEF estimated mid-year 2018 fiscal deficit remained at 1.6 percent of GDP.
- National Assembly approved increasing the 2018 fiscal deficit ceiling to 2.0 percent of GDP.
- The Social and Fiscal Responsibility Law (SFRL) provides for a more transparent fiscal rule; deficit ceiling to be reduced gradually to converge to 1.5 percent of GDP by 2022.
- September NFPS gross debt reached 38.1 percent of GDP; net debt (excluding the US$ 1.3 billion FAP balance) stood at 36.1 percent of GDP.
- In a general-elections year, the outgoing administration can only spend 50 percent of the operational budget (excluding investment outlays) so the incoming administration (taking office on July 1st) has sufficient budget to conclude the fiscal year.
- PCA transfer rule changes:
  - Transfers to FAP previously conditioned on PCA transfers to the treasury surpassing 3.5 percent of GDP;
  - Ceiling reduced to 2.5 percent of GDP for 2018 and 2019;
  - Will be further reduced to 2.25 percent of GDP after 2020.
- With the new rule, authorities expect inflows into FAP over the next few years.

### Legislative agenda
- Fiscal Council establishment approved (an IMF longstanding recommendation).
- Other initiatives in various stages: sanctions for fraud against public administration, criminalization of fiscal fraud, elimination of statute-of-limitation on fiscal fraud and corruption.
- Proposed fintech legislation awaits initial committee discussion.
- Approval of the bill criminalizing fiscal fraud (to be discussed in upcoming extraordinary legislative sessions) would help fulfill a key GAFILAT recommendation and reassert commitment to AML/CFT international rules.
- Authorities face challenges in garnering broad political support; extraordinary sessions in the last weeks of the year present a window of opportunity.

### Financial sector
- Banking system indicators:
  - Capital adequacy ratio (CAR) at 16.0 percent (statutory 8 percent).
  - Return on assets (ROA) at 1.5 percent.
  - Return on equity (ROE) at 13.3 percent.
  - Private sector credit expanded 5.4 percent year-on-year in July.
  - Personal consumption credit increased 8.9 percent, mainly housing mortgages, auto loans, and credit cards.
  - Non-performing loans (NPL) at 1.7 percent.
  - Local deposits in the banking system increased 1.6 percent in August (yoy).
- Progress on supervision and Basel III transition:
  - Regulations on capital quality, risk-weighted assets, and provisions for market and operational risks adopted.
  - Accounting standards transition to IFRS9 completed, improving provisioning coverage.
  - Financial Coordination Council (CCF) has strengthened supervision coordination.
  - Creation of a liquidity fund to reinforce crisis management and resolution frameworks is being considered.

### Transparency policy and AML/CFT regulations
- October 2017: Panama completed first automatic exchange of information with the United States under FATCA.
- Panama ratified OECD’s Multilateral Convention on Mutual Administrative Assistance in Tax Matters (MAC) and the Multilateral Competent Authority Agreement (MCAA).
- Panama found “largely compliant” with the Global Forum’s exchange of information on request based on CRS.
- January: country subscribed OECD’s BEPS convention.
- Authorities aware of need to upgrade administrative and legal framework to comply with BEPS’s four minimum standards, subject to peer monitoring and evaluation.
- Under new AML/CFT legislation, MEF’s Intendance of Supervision (IS) oversees DNFBP sectors and enforces reporting in five sectors: money transfer agents, casinos, law firms, real estate agents, and the ZLC.
- 2017 GAFILAT review found considerable progress in implementing FATF 40 technical recommendations since 2012; authorities committed to further strengthening GAFILAT recommendations and AML/CFT effectiveness.

### IMF technical assistance and engagement
- FAD and LEG fully engaged with Panama on targeted technical assistance during the current administration:
  - FAD supported the revenues office (DGI) to strengthen automatic exchange of tax information.
  - LEG provided technical assistance over the past two years to IS, FIU, SMV, and SSRP on AML/CFT regulations and supervision.
  - LEG assisted IS in enhancing institutional capacity to meet GAFILAT reporting requirements and regulations, targeting supervision of lawyers, notaries, real estate, and construction sectors (high-risk areas).
  - New sectors on the technical assistance agenda for 2019 include precious-metal dealers, armor-carriers, and used-car dealers.
- Authorities highly appreciate the Fund’s continued technical assistance.

*IMF staff visit and Article IV consultation summary as presented in the source document.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1911-panamabundle.pdf_