## 1panea2021001 ## Source details **Canonical URL:** [1panea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1panea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1panea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1panea2021001.pdf.json) --- ### Executive summary and context - Panama averaged growth of 6 percent over the last 25 years and reached high-income status in 2017 (World Bank classification). - The authorities used an RFI of SDR 376.8 million (100 percent of quota) approved April 15, 2020. - COVID-19 developments (as of December 17, 2020): - Confirmed cases: 203,295 - Fatalities: 3,481 - Expected macro outcome: - Real GDP: -9 percent in 2020; 4 percent in 2021 (staff projection). - Inflation: subdued. - Immediate priority: contain the pandemic, minimize human loss, and facilitate vaccination. ### Precautionary and Liquidity Line (PLL) request and staff assessment - Authorities requested a two-year PLL arrangement for 500 percent of quota (SDR 1.884 billion), to be treated as precautionary insurance. - Staff assessment highlights: - Panama qualifies under the PLL, performing strongly in 3 out of 5 qualification areas and not substantially underperforming in the other 2. - Panama meets exceptional access criteria and has adequate capacity to repay the Fund. - Informal Executive Board consultation held October 9, 2020. - PLL access and scheduling: - Total PLL access: SDR 1,884 million (500 percent of quota). - Scheduled availability: SDR 942 million (250 percent of quota) at approval; another SDR 942 million (250 percent of quota) at start of second year, subject to reviews. - Proposed arrangement duration: two years (January 19, 2021 to January 2023), exit expected November 2022. ### Outlook, projections, and high-frequency indicators - GDP growth (Est./Projection): 2019: 3.0; 2020: -9.0; 2021: 4.0; 2022: 5.0. - Selected macro framework (Est./Projection): - Inflation (%): 2019: -0.1; 2020: -0.5; 2021: 0.5; 2022: 2.0. - Credit growth (%): 2019: 2.4; 2020: -2.0; 2021: 2.0; 2022: 6.2. - Fiscal balance (Percent of GDP, NFPS): 2019: -3.1; 2020: -9.0; 2021: -7.4; 2022: -4.0. - Public debt (NFPS, percent of GDP): 2019: 41.0; 2020: 53.8; 2021: 59.4; 2022: 60.0. - Current account (percent of GDP): 2019: -5.4; 2020: -2.5; 2021: -6.0; 2022: -4.8. - High-frequency indicators (selected year-on-year growth, percent, Oct 2020 unless noted): - Canal traffic: -7.4 percent (trend Dec→Oct: 17.6, -5.2, -15.8, -9.7, -12.6, -9.6, -7.4). - Canal revenue: 16.9 percent. - Ports cargo movement: 14.2 percent. - Fuel sales: -29.7 percent. - New cars registered: -52.1 percent. - Electricity generation: -0.3 percent. - Electricity consumption: -7.9 percent. ### Hurricane Eta and Iota impact (November 2020) - Landfalls: Eta on November 5; Iota on November 17. - Human impact: - Death toll: 21 - Missing: 13 - Economic losses: US$15 million, mainly agricultural (bananas, rice, legumes, vegetables). - Government response: - Declared “Environmental Emergency”. - Allocated US$100 million for natural disaster risk alleviation. - Dispatched over 7 thousand tons of humanitarian aid. ### Fiscal position, financing needs, and scenarios - Fiscal stance and rule relaxation: - Fiscal deficit: estimated 9 percent of GDP in 2020. - National Assembly relaxed fiscal rule for 2020–23 with banded deficits: - 2020: between 9 and 10½ percent of GDP - 2021: between 7 and 7½ percent of GDP - 2022: 4 percent of GDP - 2023: 3 percent of GDP - From 2025: 1½ percent of GDP anchor - Plan to return to fiscal rule of 2 percent of GDP by 2024 (authorities’ plan) and a new anchor of 1.5 percent by 2025. - Financing needs (baseline vs adverse, percent of GDP and US$ amounts): - Baseline public sector financing needs (2021): US$6.7 billion; adverse: US$7.4 billion (Δ US$0.7 billion). - Financing needs (2022): baseline US$4.8 billion; adverse US$5.0 billion (Δ US$0.3 billion). - Staff estimates under adverse scenario: additional financing needs for 2021–22 could amount to US$2.6 billion or SDR 1.884 billion (500 percent of quota). - Fiscal scenario summary (in percent of GDP, Baseline / Adverse / Δ): - Revenues: 17.9 / 17.1 / -0.8 - Expenditure: 25.4 / 26.1 / 0.7 - Overall balance: -7.4 / -9.0 / -1.6 - Liquidity and buffers: - Government intends to maintain at least US$1,000 million (1½ percent of GDP) or about 1 month of spending in deposits at the National Bank of Panama (indicative target). - Central government deposits coverage (months of expenditure, selected): 2019: 2.8; 2020: 1.7; 2021: 1.6; 2022: 1.7; 2025: 1.5. ### Debt dynamics and Debt Sustainability Assessment (DSA) - NFPS gross debt (percent of GDP): 2015: 35.5; 2016: 34.8; 2017: 34.8; 2018: 36.9; 2019: 41.0; 2020: 53.8; 2021: 59.4; 2022: 60.0; 2025: 55.9. - Central government gross debt (percent of GDP): 2019: 46.4; 2020: 59.8; 2021: 65.1; 2022: 65.4; 2025: 60.3. - DSA baseline findings: - Public debt would peak at 60 percent of GDP in 2022 under baseline, declining below 56 percent of GDP by 2025. - Gross financing needs average 7.9 percent of GDP over the projection period. - A financial-sector contingent liability shock (transfers to banking system of 13 percent of GDP) would push debt and financing needs above DSA thresholds. - Adverse scenario (PLL drawdown) specifics: - PLL drawdowns assumed: US$1.3 billion in 2021 and US$1.3 billion in 2022 (each 250 percent of quota). - Gross debt could rise close to 67 percent of GDP in 2022 under adverse assumptions, then decline below 62 percent by 2025. - Financing needs in adverse scenario average US$6.2 billion a year in 2021–22; residual average needs US$2.2 billion a year covered by multilaterals/PLL. ### External sector and vulnerabilities - External debt (percent of GDP): 2019: 156.8; 2020: 194.1; 2021: 193.6; 2022: 191.6; 2025: 184.8. - Current account (percent of GDP): 2019: -5.4; 2020: -2.5; 2021: -6.0; 2022: -4.8. - External risks emphasized: - Potential second pandemic wave; global trade and capital flow disruptions affecting Canal and logistics sectors. - AML/CFT shortcomings and FATF listing risks may impair correspondent banking relations. - Cyberattacks and climate-related disasters threatening Canal activity, agriculture, and tourism. - External Economic Stress Index (ESI): - Baseline ESI average 2020/21: -0.5; adverse scenario average: -3.3; worst observed: -5 in June 2020. ### Financial sector soundness, supervision, and Fund for Economic Stimulus (FES) - Banking system soundness (end-2019 / selected): - NPLs: 2.0 percent (2019). - Capital adequacy ratio: 16.6 percent (2019); regulatory capital to RWA 16.5 percent (2019). - Provisioning: 102.3 percent of NPLs (2019). - Liquid assets to deposits: 57.0 percent (2019); average since 2009: 60 percent. - Identified weaknesses: - No lender of last resort (LOLR) and no deposit insurance. - Weaknesses in AML/CFT framework; Panama placed on FATF grey list June 2019. - Fund for Economic Stimulus (FES): - Design: trust fully owned by MEF, operated by BNP, supervised by SBP; tenure 2 years (extendable). - Initial funding: US$1 billion (MEF and BNP in equal amounts). - Liquidity program (repo facility): up to 6 months, interest rate 3.25 percent, collateralized by public bonds and banks’ high-quality portfolio; SBP turnaround 2 days, BNP disbursement within 4 days total. - Stimulus program: lending tenor up to 3 years, market interest rate; BNP had disbursed US$600 million to 23 banks (40 percent of banking sector). - An IDB joint facility: US$300 million for micro, small, and medium enterprises for two years. - Macroprudential and supervisory recommendations: - Increase provisioning beyond dynamic provisions; phase out pandemic measures with supervisory timeframe; risk-focused loan examinations; maintain official banks’ liquidity buffer target of 30 percent of collective deposits. ### Financial integrity (AML/CFT) and FATF action plan - FATF grey listing (June 2019) and action plan covering Immediate Outcomes IO-1, IO-3, IO-5, IO-7. - Timeline and commitments: - Authorities committed to implement reforms by January 2021 and exit grey list by June 2021; test dates postponed due to COVID-19 with last items scheduled for implementation by January 2021. - Roadmap sample actions and targets: - IO-1: Raise awareness of terrorist financing risks; Sep. 2020. - IO-3: Risk-based supervision and sanctions; Sep. 2020. - IO-5: Verify and update beneficial ownership information; Sep. 2020. - IO-7: Demonstrate ability to prosecute foreign tax crimes; Jan 2021. - Annex III action items include strengthening supervision of DNFBPs, identifying unlicensed money remitters, ensuring adequate beneficial ownership verification and access, strengthening FIU use in ML investigations, and demonstrating prosecutions involving foreign tax crimes. - Technical assistance: authorities recruited international AML/CFT experts; resources partially provided by the Inter-American Development Bank. ### Data adequacy, SDDS roadmap, and statistical reforms - Panama does not substantially underperform in data adequacy but some gaps remain (coverage, periodicity, timeliness). - Commitments and structural benchmarks: - Establish National Statistical Coordination Committee by May 2021 (structural benchmark). - Publish Data Template on International Reserves and Foreign Currency Liquidity on NSDP by September 2021 (structural benchmark). - Resume quarterly publication of Fiscal Operations of Central and General Government with detailed financing data by March 2022 (structural benchmark). - Rebase National Accounts to 2018 and adopt 2008 SNA by June 2022. - Target to subscribe to SDDS by 2022 given resource increases and implementation of roadmap. - Specific timeliness targets (selected): - Production index: improve from 55 days to 6 weeks by Q4-2021. - Deposit corporations survey: from 2 months to 1 month by Q4-2021. - Interest rates: from 50 days to 1 day by Q4-2021. - Official reserve assets: from 1 month to 1 week by Q4-2021. - Labor market data periodicity to quarterly by Q1-2022. ### Policy agenda and structural reforms - A. Fiscal re-anchoring and PFM: - Medium-term objective: deficit of 1.5 percent of GDP by 2025 (amend SFRL) and improvement in fiscal balance of 7½ percent of GDP over next 5 years (from -9 percent of GDP in 2020 to -1½ percent in 2025 in baseline projections). - Measures: strengthen tax and customs administration, review tax expenditures (estimated 3–4 percent of GDP in 2016), prioritize social spending (education, active labor market policies), improve procurement transparency, implement Treasury Single Account and electronic payments. - Quantitative indicative targets (national government deposits at BNP, in millions US$): 1,000 (end-March 2021), 1,000 (end-September 2021), 1,000 (end-March 2022). - B. Tax policy and revenue mobilization: - Tax revenue to GDP ratio: 8¼ percent in 2019. - VAT rate noted at 7 percent; tax expenditures concentrated in VAT, CIT, PIT. - Short-term focus: efficiency measures; postpone major tax increases until recovery. - C. Financial integrity: - Implement FATF action plan to exit grey list; possible conditionality at first PLL review depending on FATF assessment. - D. Financial stability and safety net: - Operationalize FES; create liquidity backstops; supervisory capacity strengthening, stress testing, and crisis preparedness. ### Fund liquidity, exposure, and risks to Fund - Fund liquidity effects and exposure: - FCC would decline by 1.2 percent on approval of proposed arrangement (FCC: December 17, 2020: SDR 152,315.0 million; on approval: SDR 150,431.0 million). - If full draw: GRA credit would peak at SDR 2,260.8 million (600 percent of quota); peak Fund exposure metrics: - About 5 percent of projected GDP. - 2½ percent of total external debt. - Nearly 39 percent of gross international reserves. - About 28 percent of government revenue. - Debt service to the Fund would peak at SDR 1,064.5 million (about 2 percent of GDP) in 2024 under full-draw scenario (tableed projections show debt service due on GRA credit rising to SDR 949.9 million in 2025 under another schedule). - Assessment of Fund risk: - Overall impact on Fund liquidity: moderate. - Staff view: Panama’s capacity to repay remains adequate under full draw assuming steady program implementation and continued market access. - Key risk drivers to Fund exposure: high external debt, high external debt service relative to exports (e.g., total external debt service almost 180 percent of exports in 2021), and AML/CFT reputational risks if FATF outcomes deteriorate. - Mitigants: government liquidity buffers, strong policy framework, market access history, safeguards assessment of Banco Nacional de Panama (completed September 2020 with recommendations). ### Staff recommendation and program intent - Staff recommends approval of the authorities’ request for a PLL arrangement for Panama with access at 500 percent of quota (SDR 1.884 billion). - The arrangement is expected to be precautionary; draws contemplated only under extreme adverse scenarios (e.g., significant pandemic intensification). - Authorities commit to program conditionality, structural benchmarks, technical assistance, and cooperating with the Fund for reviews on: - July 18, 2021 (first review), - January 18, 2022 (second review), - July 18, 2022 (third review). _Italic source: IMF staff report and government communication provided in PDF content unit 1panea2021001 (January 5, 2021 excerpts)._ ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Panama averaged growth of 6 percent over the last 25 years, described as the longest and fastest in Latin America. - The economy is service-based, highly integrated in the world economy, and exposed to extreme shocks from the COVID-19 pandemic. - Panama reached high-income status in 2017 (World Bank classification) and has the highest per capita income in Latin America. - Panama has had 20 Fund arrangements historically, with about ⅔ being precautionary; the authorities used an RFI of SDR 376.8 million (100 percent of quota) approved April 15, 2020. ### Recent Developments - Containment measures reduced mobility and economic activity; high population density around Panama City (about ½ of the country’s population) increased vulnerability to contagion and fatality. - As of December 17, 2020, confirmed COVID-19 cases: 203,295; fatalities: 3,481. - The authorities declared a National State of Emergency in mid-March 2020 and implemented mandatory quarantine, border controls, curfew, school closures, flight suspensions, cancellation of events, and shutdown of non-essential activities. Gradual reopening occurred May–October 2020; mandatory quarantine ended late October 2020 but curfew remained active. ### Outlook and Risks - The economy is expected to have contracted by 9 percent in 2020 and to grow by 4 percent in 2021. - Inflation has remained subdued. - The outlook is subject to an unusually high level of uncertainty given the pandemic. ### Precautionary and Liquidity Line (PLL) - Authorities request a two-year arrangement under the PLL for 500 percent of quota (SDR 1.884 billion), intended to be treated as precautionary insurance against extreme adverse pandemic-related risks. - Staff assessment: - Panama qualifies under the PLL, performing strongly in 3 out of the 5 qualification areas and not substantially underperforming in the other 2 areas. - Panama meets the criteria for exceptional access and its capacity to repay the Fund is adequate. - Process: An informal meeting to consult with the Executive Board on a possible PLL arrangement was held on October 9, 2020. ### Policy Agenda - Immediate priority: minimize loss of human lives and facilitate vaccination. - Fiscal stance: - Fiscal deficit expected to have widened to 9 percent of GDP in 2020 to meet sanitary and social needs. - Plan to gradually return to the fiscal rule of 2 percent of GDP by 2024. - PLL-period policy focus: - Facilitate a prompt exit from the FATF grey list. - Strengthen data adequacy. - Prepare the economy for the post-pandemic recovery. ### Fund Liquidity and Financing Needs - Staff estimates under an adverse scenario potential additional financing needs for 2021–22 could amount to some US$2.6 billion or SDR 1.884 billion (500 percent of quota). - The proposed PLL commitment would have a moderate impact on the Fund’s liquidity position. ### Social Outcomes (Box 1: Progress on Social Outcomes) - Poverty and inequality: - Extreme poverty rate (US$1.9/day, PPP) dropped by over 85 percent (from 12.4 percent in 2000 to 1.7 percent in 2018). - General poverty rate (US$5.5/day, PPP) declined from 35.4 percent in 2000 to 12.6 percent in 2018, and to 12.5 percent by 2019. - Gini coefficient declined from 56.8 to 49.2 between 2000 and 2018. - Education and health: - Government spending on education around 3¾ percent of GDP in 2019, below the LAC average; enrollment rates low (mostly in secondary education). - Health spending exceeds the regional average; healthcare robustness ranked above regional norm in the Global Health Security Index 2019. - Pandemic impact on poverty: - World Bank estimates: without government fiscal stimulus, the general poverty rate would have risen from 12.5 to 15.9 percent (increase of 3.4 percentage points); government measures expected to limit the increase in poverty headcount to 1.7 percentage points. - Government fiscal stimulus components included: - Food baskets and cash transfers via the "Panama Solidarity Plan". - Programs (Opportunity Banking, Guarantee Fund, Soft Loan program) jointly valued at US$235 million to support micro, small and medium-sized companies. - Suspension of payments for public services (electricity, phone and internet). - An electricity subsidy. - Expansion of the Housing Solidarity Fund providing US$10,000 toward a house down payment for families in need. - Development partner financing from the IDB and the World Bank to support containment and mitigation efforts. *Source: EXECUTIVE SUMMARY, January 5, 2021.* ### 5. The country was hit by hurricane Eta and tropical storm Iota in November 2020, ### 1panea2021001 - 5. The country was hit by hurricane Eta and tropical storm Iota in November 2020, ### Impact of Hurricane Eta and Tropical Storm Iota - 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. - Human impact: - Death toll: 21 - Missing: 13 - Economic losses: US$15 million, mainly in the agricultural sector (bananas, rice, legumes, and vegetables production severely curtailed). - Government response: - Declared a state of “Environmental Emergency”. - Allocated US$100 million to alleviate natural disaster risks. - Shelters and medical assistance provided by the Ministry of Health and the Social Security Fund. - Over 7 thousand tons of humanitarian aid (including water, food, and basic necessities) dispatched. ### 2020 Macroeconomic Performance and Key Indicators - Growth and activity: - GDP growth: 3 percent in 2019; Q1-2020 growth at ½ percent (y/y); Q2-2020 contraction of 38½ percent (y/y). - IMAE: fell by 30 percent in July 2020 (y/y) and about 29 percent in August (y/y). - Inflation: - Consumer prices fell by 1½ percent in June 2020 (y/y). - Inflation remains subdued with no discernible price pressures. - Fiscal position: - Fiscal deficit: 3 percent of GDP in 2019; estimated around 7 percent of GDP in the first 9 months of 2020. - National Assembly approved legislation relaxing the fiscal rule for 2020–23 to deficits: - 2020: between 9 and 10½ percent of GDP - 2021: between 7 and 7½ percent of GDP - 2022: 4 percent of GDP - 2023: 3 percent of GDP - Strengthening from 2025 onwards to a deficit of 1½ percent of GDP - Rationale: avoids significant pro-cyclical pressures while ensuring a steadily declining public debt path. - Financial sector: - Credit contracted by ¾ percent through August 2020 (y/y). - Superintendency of Banks released dynamic provisioning amounting to US$1.3 billion (about 2 percent of GDP). - Non-performing loans likely increased but magnitude difficult to assess due to repayment deferments. - External position: - External current account: broadly balanced in H1-2020 vs. deficit of 3.5 percent of GDP over the same period in 2019. - Improvement driven by sharper decline in imports than exports, supported by increased copper production. ### High-frequency Indicators (year-on-year growth, percent) - Canal traffic: October 2020: -7.4 percent (y/y); trend from Dec to Oct: 17.6, -5.2, -15.8, -9.7, -12.6, -9.6, -7.4 - Canal revenue: Oct 2020: 16.9 percent (y/y); trend: 8.0, 1.9, -11.0, -2.3, -2.0, 2.1, 6.9 - Ports cargo movement: Oct 2020: 14.2 percent (y/y); trend: 4.1, 38.7, -13.2, -3.4, 5.5, -13.3, 14.2 - Road revenue: steep declines (e.g., -38.2, -63.9 in early months) - Fuel sales: Oct 2020: -29.7 percent (y/y); trend: -4.3, -26.7, -48.5, -50.6, -48.6, -38.0, -29.7 - New cars registered: Oct 2020: -52.1 percent (y/y); trend: -24.4, -41.2, -83.0, -71.9, -65.2, -29.5, -52.1 - Electricity generation: Oct 2020: -0.3 percent (y/y); trend: 6.1, 10.0, -10.2, -7.7, -6.9, -5.1, -0.3 - Electricity consumption: Oct 2020: -7.9 percent (y/y); trend: 7.5, -3.2, -12.6, -18.5, -13.8, -10.5, -7.9 - Water consumption: Oct 2020: 0.3 percent (y/y); trend: 1.6, 0.2, 0.5, 0.0, 0.0, -0.6, 0.3 - Canal traffic deterioration: traffic fell by 7.4 percent in October 2020 (y/y), although revenues increased by almost 7 percent in the same period due to a new toll structure. - Ports cargo movement posted a 14 percent increase (y/y) in October 2020. ### Outlook and Risks - Growth projections: - Staff projects real GDP declined by 9 percent in 2020 (3 percent growth in 2019). - Projected recovery to 4 percent growth in 2021; 5 percent growth in 2022. - Economic cost relative to pre-pandemic path: pre-pandemic envisaged 4 percent growth in 2020 and 5 percent thereafter; latest estimates: -9 percent in 2020, 4 percent in 2021, 5 percent thereafter. - Macroeconomic framework (Est./Projection): - GDP growth: 2019: 3.0; 2020: -9.0; 2021: 4.0; 2022: 5.0 - Inflation (%): 2019: -0.1; 2020: -0.5; 2021: 0.5; 2022: 2.0 - Credit growth (%): 2019: 2.4; 2020: -2.0; 2021: 2.0; 2022: 6.2 - Fiscal balance (Percent of GDP): 2019: -3.1; 2020: -9.0; 2021: -7.4; 2022: -4.0 - Public debt (NFPS): 2019: 41.0; 2020: 53.8; 2021: 59.4; 2022: 60.0 - Current account: 2019: -5.4; 2020: -2.5; 2021: -6.0; 2022: -4.8 - External account dynamics: - Current account deficit estimated to have narrowed to 2.5 percent of GDP in 2020 (from 5.4 percent of GDP in 2019) due to contraction in imports, lower oil prices, and increased copper exports. - Current account expected to weaken in 2021 and 2022 as imports recover, returning close to historical levels. - Medium-term expectation: current account deficit to continue narrowing as tourism, trade, and Canal activity recover post-pandemic. - Fiscal outlook: - Fiscal deficit estimated at 9 percent of GDP in 2020 (from original budget target of 2¾ percent of GDP). - NFPS debt estimated to have risen from 41 percent of GDP in 2019 to almost 54 percent of GDP in 2020. - Additional financing covered with multilateral loans (including the RFI), additional bond placements, and limited recourse to the Savings Fund. - Fiscal position expected to improve in 2021 as tax collections recover and expenditure pressures ease. - Balance of Payments (In percent of GDP, Est./Projection): - Current Account: 2019: -5.4; 2020: -2.5; 2021: -6.0; 2022: -4.8 - Non-oil balance: 2019: -10.7; 2020: -7.5; 2021: -8.7; 2022: -8.6 - Oil balance: 2019: -3.8; 2020: -2.6; 2021: -2.8; 2022: -2.8 - Colon Free Zone: 2019: 2.7; 2020: 2.7; 2021: 2.1; 2022: 2.2 - Tourism: 2019: 4.7; 2020: 2.7; 2021: 3.7; 2022: 3.9 - Canal receipts: 2019: 4.8; 2020: 4.2; 2021: 4.5; 2022: 4.5 - Financial Account: 2019: 7.1; 2020: 2.5; 2021: 5.9; 2022: 4.8 - Foreign direct investment: 2019: 5.5; 2020: 4.1; 2021: 4.7; 2022: 4.9 - Portfolio Investment: 2019: 4.8; 2020: 3.7; 2021: 3.0; 2022: 4.0 ### Risks and Policy Considerations - Downside risks predominate: - Potential second wave of COVID-19 could exacerbate health and economic impacts and require additional budget reallocations toward health and social needs, supported by external financing. - Global trade and capital flow disruptions could negatively affect Canal and logistics sectors, deteriorating the balance of payments via pressures on the current account, FDI, portfolio inflows, and rollover of external debts. - Absent progress in improving AML/CFT framework, Panama's ongoing public listing by the FATF could adversely affect correspondent banking relations and key credit channels, especially if elevated to the list of high-risk jurisdictions. - Cyberattacks and more frequent/severe climate-related natural disasters pose additional downside risks to Canal activity, agriculture, and tourism. - Policy measures noted: - Reallocation of non-executed public investment projects toward extraordinary health and social spending to contain expenditure pressures from COVID-19 and hurricane ETA. - Use of multilateral loans, bond placements, and limited savings fund recourse to meet additional financing needs. - Fiscal rule adjustment for 2020–23 to accommodate pandemic-related deficits while strengthening the medium-term anchor from 2025 onward. *Source: IMF staff report (excerpts provided).* ### Annex II). ### 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. - FDI is the largest component of capital flows, accounting for 79 percent of the total, on average, during 2017–2019. - Deposits and other external liabilities in the banking sector alone account for 50 percent of total external liabilities. - 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 - 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 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 raised US$2½ billion in late March 2020 through global bond issuance with a 35-year maturity and 4½ percent yield (spread of 307 basis points against 30-year U.S. Treasury). - Panama placed another US$2½ billion in September 2020, including a new 12-year bond with a yield of 2¼ percent (spread of 158 basis points). - Investment grade status achieved in 2010; EMBI spread stood at 150 bps as of December 17, 2020 (emerging markets average 327 bps; region 400 bps). - Recent sovereign rating actions: - Standard & Poor’s rated the long-term debt at BBB in November 2020. - Fitch reaffirmed Panama sovereign rating at BBB during the last five years. - Moody's upgraded Panama’s foreign currency long-term rating from Baa2 to Baa1 in March 2019; later lowered the outlook from stable to negative citing the sharp economic contraction and large fiscal deficit for 2020. - Sovereign bond issuance table (selected entries; amounts and terms preserved as in source): - Sep 2014: 1.25 (US$ bn); Yield 4.00...; Global; Demand 6 - Mar 2015: 1.25 (US$ bn); Yield 3.75...; Global - Nov 2016: 1.25 (US$ bn); Yield 3.88...; Global - May 2017: 1.17 (US$ bn); Yield 4.50; Spread 150 bps; Maturity 2047; Global; Demand 4 - Apr 2018: 1.20 (US$ bn); Yield 4.50; Spread 150 bps; Maturity 2050; Global; Demand 3 - Oct 2018: 0.55 (US$ bn); Yield 4.95; Spread 155 bps; Maturity 2050; Global; Demand 2 - Apr 2019: 1.00 (US$ bn); Yield 3.75; Spread 140 bps; Maturity 2026; Local - July 2019: 1.25 (US$ bn); Yield 3.16; Spread 140 bps; Maturity 2030; Global; Demand 5 - July 2019: 0.75 (US$ bn); Yield 3.87; Spread 165 bps; Maturity 2060; Global; Demand 5 - Nov 2019: 1.00 (US$ bn); Yield 3.60; Spread 135 bps; Maturity 2053; Global - Nov 2019: 0.30 (US$ bn); Yield 2.83; Spread 105 bps; Maturity 2030; Global - Mar 2020: 2.50 (US$ bn); Yield 4.50; Spread 307 bps; Maturity 2056; Global; Demand 3 - Sep 2020: 1.25 (US$ bn); Yield 2.25; Spread 158 bps; Maturity 2032; Global; Demand 4 - Sep 2020: 1.00 (US$ bn); Yield 3.28; Spread 186 bps; Maturity 2060; Global; Demand 4 - Sep 2020: 0.33 (US$ bn); Yield 2.77; Spread 249 bps; Maturity 2026; Local ### Criterion 4. A comfortable reserve position - Panama is a fully dollarized economy since inception and does not have its own currency or central bank. - Standard ARA metric not applicable because of lack of authorities’ control over banks’ foreign exchange liquidity; assessment based on individual traditional metrics concludes 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. - Average coverage is 2.2 months of central government expenditure from 2009 to 2019. - Sovereign Wealth Fund of about 2 percent of GDP (in foreign assets abroad). - Banking sector liquidity reserve buffer: - Liquid assets in the banking sector cover 60 percent of deposits, on average, since the statutory liquidity requirement introduction in 2009. - As of end-2019, ratio stood at 57 percent, nearly double the minimum statutory requirement of 30 percent. - Short-term assets cover more than ⅔ of banks’ short-term external liabilities. - Reserves adequacy metrics (selected figures and projections preserved as in source): - Central Government liquidity coverage (months of expenditure): 2016 2.4; 2017 1.3; 2018 1.3; 2019 2.8; 2020 1.7; 2021 1.6; 2022 1.7; 2023 1.6; 2024 1.6; 2025 1.5. - Banks' statutory liquidity buffers (defined as ratio of liquid assets to net deposits; minimum statutory requirement 30%): 2016 62.8; 2017 60.0; 2018 59.4; 2019 57.0; 2020 59.4; 2021 58.9; 2022 58.3; 2023 57.7; 2024 57.0; 2025 56.4. - Short-term debt coverage (liquid assets up to 186 days relative to banks' short term debt): 2016 70.1; 2017 75.4; 2018 73.4; 2019 79.2; 2020 79.5; 2021 83.9; 2022 84.9; 2023 85.5; 2024 84.9; 2025 83.2. ### II. Fiscal Policy — Performance and outlook - Panama performs strongly in the fiscal policy area; fiscal position deteriorated in 2020 due to the COVID-19 pandemic, but fiscal management has been consistently prudent historically. - Public debt reduced from about 60 percent of GDP in 2005 to around 40 percent of GDP in 2019; debt remains sustainable with high probability. - The 2008 Social and Fiscal Responsibility Law (SFRL) anchors fiscal management; by 2019 based on medium-term anchors for NFPS deficit and gross debt of 2 and 40 percent of GDP respectively, and a growth rule for current expenditure. - SFRL includes an escape clause and a maximum period of 3 years for bringing the deficit back to the anchor; deviations limited, maximum being -1¼ percent of GDP in 2018. - NFPS financial assets by end-2019: over 10½ percent of GDP in bank deposits and 2 percent of GDP in holdings by the Savings Fund of Panama. - Net debt amounted to 28¼ percent of GDP in 2019 (third lowest in Latin America after Chile and Peru). - National Assembly relaxed fiscal targets for 2020–23 to accommodate shock, aiming to return to original anchor of 2 percent of GDP by 2024 and a new fiscal deficit anchor of 1½ percent of GDP in 2025 and thereafter. - Cyclically adjusted primary balance expected to improve by 3 percent of GDP between 2019 and 2025, bringing fiscal balance to -1½ percent of GDP by 2025. - Debt sustainability analysis: - Public debt would peak at 60 percent of GDP in 2022, declining thereafter below 56 percent of GDP by 2025. - Largest financing needs reached in 2020: US$6.9 billion (or 11.5 percent of GDP); most financed by external debt (US$6.6 billion). - External borrowing includes US$4.8 billion in global bonds and US$1.8 billion from multilaterals. - Public debt remains below 70 percent of GDP in all stress scenarios except the financial contingent liabilities one; from 2023 stays on a declining trend in all scenarios. - Identified weaknesses and corrective needs: - New government discovered unrecorded central government liabilities worth US$1.5 billion (2.3 percent of GDP) accumulated from 2014. - Preliminary breakdown by MEF: 0.6 percent of GDP considered floating debt; 0.6 percent of GDP related to unreported unpaid social contributions to social security (intra-NFPS arrears). True commercial arrears to private sector amounted to 1.2 percent of GDP. - Avoiding re-emergence of arrears will require measures in medium-term budgeting, execution control and reporting (authorities intend to implement during the PLL arrangement). ### III. Monetary Policy - Panama is dollarized since 1904 and has no central bank; monetary policy is effectively that of the U.S. - Low and stable inflation: inflation has remained below 2 percent over the last 5 years and in single digits since the Global Financial Crisis (2008). - Inflationary expectations are well-anchored and remain below 2 percent over the medium term. - Note: Panama may experience higher inflation in the future due to Balassa-Samuelson effects (productivity increases in the tradeable sector relative to the non-tradeable). ### IV. Financial Sector Soundness and Supervision - Panama does not substantially underperform in financial sector soundness and supervision; system supervised following modern best practices (Basel III). - Panama placed on the FATF grey list in June 2019, exposing potential money laundering risks and risks to correspondent banking relations. - Criterion 7 — Sound financial system and absence of solvency problems: - Banking system is stable, well capitalized, and solvent. Liquidity above regulatory norms. - About 80 percent of banks already meet the new liquidity coverage ratio (LCR) under Basel III; full enforcement by end-2021. - As of end-2019: deposits to loans ratio 77 percent; liquid assets constituted 57 percent of deposits. - Capital adequacy ratio 16.6 percent; provisioning 102.3 percent of nonperforming loans (banking system as a whole as of December 2019). - NPLs have not exceeded 3 percent in the last decade and were below 2 percent before the pandemic. - Stress-tests at end-2019 indicated the banking system was well-capitalized to withstand severe shocks. - Criterion 8 — Effective financial sector supervision: - Authorities implemented most recommendations from the 2011 FSSA: introduced RTGS, started stress tests, monitor real estate developments and a housing price index. - Regulatory update to transition to Basel III framework with LCR gradually increasing. *Source: Annex II).* ### 2020. The banks are well regulated and supervised in Panama under a modern regulatory ### 1panea2021001 - 2020. The banks are well regulated and supervised in Panama under a modern regulatory ### Financial system: strengths and vulnerabilities - Strengths: - Banks are well regulated and supervised in Panama under a modern regulatory framework. - International accounting standards are used (IFRS9 was adopted in 2019; see SIP 2020). - Weaknesses: - Lack of lender of last resort facilities (LOLR). - Absence of a deposit insurance scheme. - Weaknesses in the AML/CFT framework, including on AML/CFT supervision (see Section F, and Annex III). - Policy actions: - Authorities are setting up a liquidity fund (akin to a partial LOLR-type facility). - Authorities remain fully committed to implement an action plan with the FATF. ### Data adequacy and transparency - Overall assessment: - Panama does not substantially underperform in the data adequacy area. - Data provided to the Fund are broadly adequate for surveillance, but some weaknesses remain. - Data transparency could be further enhanced by subscribing to the Special Data Dissemination Standard (SDDS). - Recent developments: - Authorities signaled strong interest in statistical improvement and willingness to implement recommendations of the February 2020 Data ROSC mission, including setting an ambitious timetable for subscribing to the SDDS. - The 2020 Data ROSC mission concluded that Panama for the most part observes or largely observes international best practices and has made progress toward meeting SDDS requirements. - Panama started publishing key data through the National Summary Data Page (NSDP) in October 2018, a step towards SDDS. - Specific gaps: - 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. - Track record: - Panama has participated in the Enhanced General Data Dissemination System (e-GDDS) since 2000. ### Institutional strength and track record - Track record: - Panama continues to have a sustained track record of implementing very strong policies, including in response to previous significant shock episodes. - Key relevant core indicators were met in each of the five most recent years (staff assessment). - Institutional features: - Dollarized economy with institutional quality of economic policy centered on fiscal policy and underpinned by the fiscal and social responsibility law. - Large financial center with an effective prudential and modern regulatory framework following best international practices. - According to the 2019 Worldwide Governance Indicators, Panama outperforms the Latin American and Caribbean average in most dimensions. - Voice and accountability point estimate: 0.6 - Regulatory quality point estimate: 0.4 - Control of corruption point estimate: -0.6 - Rule of law point estimate: -0.1 - Government effectiveness point estimate: 0.1 ### Access, duration, and rationale for PLL (Precautionary and Liquidity Line) - Baseline financing capacity: - 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 rollover of obligations, borrowing from multilateral organizations, foreign direct investment, and placement of additional global bonds. - Adverse scenario vulnerability: - 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 could lead to significant disruptions to capital flows and deterioration in public finances. - Under the adverse scenario, 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. - Dislocations in the global capital market could result in further deterioration in FDI and pressures on 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). - Financing needs and PLL access: - Baseline public sector financing needs for 2021: US$6.7 billion (mostly financed by issuing medium and long-term (MLT) debt). - Adverse scenario public sector financing needs for 2021: US$7.4 billion (an increase of US$0.7 billion). - Staff estimates that 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, which could justify another 250 percent of quota under the PLL arrangement. - PLL Access recommended: 500 percent of quota (SDR 1.884 billion), available with two scheduled potential purchases of 250 percent of quota at the beginning of each of the two years of the arrangement. - External financing gap: - The external financing gap could widen by US$2.6 billion (over 4 percent of GDP) in 2021–22 under the adverse scenario. ### Fiscal scenarios — key figures (baseline vs adverse) - In percent of GDP (Baseline / Adverse / Δ): - Revenues: 17.9 / 17.1 / -0.8 - Tax revenues: 7.4 / 6.7 / -0.8 - Non-tax revenues: 10.5 / 10.4 / -0.1 - Expenditure: 25.4 / 26.1 / 0.7 - Current primary: 17.2 / 18.2 / 1.0 - Interest payments: 2.6 / 2.8 / 0.3 - Capital: 5.6 / 5.0 / -0.6 - Overall balance: -7.4 / -9.0 / -1.6 - In billions of U.S. dollars (2021 / 2022): - Financing needs: 6.7 / 7.4 / 0.7 (2021); 4.8 / 5.0 / 0.3 (2022) - Overall balance: -4.7 / -5.3 / -0.7 (2021); -2.7 / -3.0 / -0.3 (2022) - Liquidity Facility1/: 0.2 / 0.2 / 0.0 (2021); 0.1 / 0.1 / 0.0 (2022) - Amortizations: 1.9 / 1.9 / 0.0 (2021); 2.0 / 2.0 / 0.0 (2022) - Potential financing (selected items, 2021 / 2022): - IMF (PLL): 0.0 / 1.3 / 1.3 (2021); 0.0 / 1.3 / 1.3 (2022) - Other IFIs: 1.5 / 1.5 / 0.0 (2021); 0.7 / 0.7 / 0.0 (2022) - Government assets: 0.0 / 0.5 / 0.5 (2021); 0.0 / 0.5 / 0.5 (2022) - ST domestic bonds: 0.3 / 0.3 / 0.0 (2021 and 2022) - MLT bonds: 4.9 / 3.7 / -1.2 (2021); 3.7 / 2.1 / -1.6 (2022) - o/w Domestic: 1.2 / 0.7 / -0.5 (2021); 1.3 / 0.4 / -0.9 (2022) - o/w External: 3.7 / 3.0 / -0.7 (2021); 2.4 / 1.7 / -0.7 (2022) - Source: Fund staff estimates. - Note: 1/ From 2021, includes small amounts from capital subscriptions to multilateral institutions. ### Adverse scenario assumptions and impacts (Box 2) - Macroeconomic shock assumptions: - Global growth: additional decline by 3 percentage points relative to the baseline. - Panama real GDP growth (Memorandum): Baseline +4 / +5; Adverse +2 / +3. - Current account: - Exports projected to decline by an average of 18 percent relative to baseline projections in 2021 and 2022, driven by continuing decline in copper exports (copper accounts for 10 percent of total goods exports). - Copper prices assumed to decline by 15 percent (y/y) vis-à-vis their baseline in both years. - Foreign Direct Investment: - Net FDI assumed to be 15 percent weaker than the baseline in 2021 and 2022 (on top of a sizable decline under the baseline). - Debt rollover assumptions: - Rollover rates assumed: - ST private external debt: 66 / 66 / 66 (2021/2022 as presented) - MLT private external debt: 68 / 68 - MLT public external debt: 59 / 148 / 6? (table formatting in source shows mixed figures; rollover rates for public MLT debts are described as around 500 percent in 2021 and 2022 in text) - Textual assumption: rollover rates for public MLT debts are assumed to be around 500 percent in 2021 and 2022. - External financing needs and PLL drawdown logic: - Under extreme shocks persisting over the PLL duration (two years from January 2021 to January 2023), the bulk of financing needs would be fulfilled by credit facilities from multilateral organizations and government assets (FAP and cash deposit). - During the first year of the PLL, 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, a further financing need of around US$1.3 billion (equivalent to another 250 percent of quota) could be filled by drawing down the remaining PLL access upon completion of reviews. - Gross external financing needs under the adverse scenario (selected aggregates, in US$ billion): - Gross External Financing Needs: 16.8 (Baseline) / 17.1 (Adverse) / Δ 0.3 (2021); 13.9 / 14.1 / 0.2 (2022) - Financing gap (first and second year): - / 1.3 / 1.3 (both years, in US$ billion) - Memorandum: The PLL is a two-year arrangement; tables refer to 2021 and 2022 as indicative of the first and second years. ### Exceptional access criteria (Box 3) - Staff assessment: 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 that cannot be met within normal limits, given risks from a second pandemic wave, commodity price declines affecting copper exports, and capital flow reversals. - Criterion 2: Rigorous analysis indicates a high probability that public debt is sustainable in the medium term. - Baseline: public debt would peak at 60 percent of GDP in 2022 and decline thereafter to below 56 percent in 2025 with gradual fiscal consolidation. - Adverse scenario: debt would peak close to 67 percent of GDP in 2022 and decline thereafter. - 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. - Criterion 3: The member has prospects of gaining or regaining access to capital markets within a timeframe and on a scale enabling it to meet obligations to the Fund. - Recent bond issuance: US$2.575 billion in September 2020 and US$2.5 billion in March 2020; total of US$3.3 billion international sovereign bond issuance throughout 2019. - EMBI spread: 150 bps as of December 17, 2020 (compared with emerging markets average 327 bps and regional average 400 bps). - Criterion 4: The policy program and institutional/political capacity provide a reasonably strong prospect of success. - Panama has averaged 6 percent annual growth over the last 25 years. - Fully dollarized regime with benign inflation. - Independent SBP supervises and regulates the banking sector; public finances guided by an established fiscal rule. - Authorities committed to advancing structural fiscal reforms and addressing AML/CFT deficiencies identified by the FATF. *Source: IMF staff report (January 2021) provided in the PDF content unit 1panea2021001 - 2020.* ### 19. Duration of the PLL arrangement. The authorities have requested a two-year PLL ### 1panea2021001 - 19. Duration of the PLL arrangement. The authorities have requested a two-year PLL arrangement. ### Duration and Rationale for PLL Arrangement - Authorities have requested a two-year PLL arrangement. - Staff view: a two-year arrangement is appropriate because: - The COVID-19 pandemic, weaknesses in global trade, and volatile global financial conditions are unlikely to improve markedly in the near term. - A two-year period is necessary to address remaining vulnerabilities and strengthen macroeconomic buffers to allow for a successful exit should external circumstances warrant. - Exit timing: expected to take place at the end of the PLL arrangement in November 2022. ### Impact on Fund Financing and Risk Exposure - Fund liquidity and exposure: - Forward Commitment Capacity (FCC) would decline by 1.2 percent upon approval of the proposed arrangement. - If authorities make a purchase at approval, 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 fully drawn, Fund exposure to Panama would represent a small share of the Fund’s total credit outstanding. - Full-draw scenario and repayment capacity: - 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. - Mitigating factors: strong policy framework, Panama’s long history of market access, and excellent track record of meeting obligations to the Fund. - Safeguards: - First-time safeguards assessment of the Banco Nacional de Panama (BNP) completed in September 2020. - Assessment found strong institutional arrangements (governance, control environment, transparency, accountability). - Recommendations: enhance BNP’s investment practices; authorities should finalize the framework implementing the Fund for Economic Stimulus (decision-making and operational modalities). ### External Economic Stress Index (Box 4) — External Risks Summary - Construction: - Index based on four variables: (i) U.S. growth rate (proxy for FDI inflows), (ii) world exports (proxy for net exports in current account), (iii) change in the 10-year U.S. Treasury yield (proxy for portfolio liabilities risks), and (iv) volatility index VIX (proxy for other investments risks). - Index = weighted sum of standardized deviations of the above variables from their means; weights estimated using balance of payments and IIP data expressed as shares of GDP. - Weights: World Growth 0.31; US GDP growth 0.18; Change in 10-year Treasury yield 0.11; VIX 0.40. - Historical and projected values: - Baseline ESI is already very unfavorable, at a historically low level (reflects sharp contraction in U.S. GDP and world trade and increased market volatility in H1-2020, but assumes bounce back in Q3-2020). - On average, in 2020/21 the ESI is -0.5 in the baseline and -3.3 in the adverse scenario. - Worst value observed: -5 in June 2020. - Reference: average ESI of -0.5 in the 2008/2009 financial crisis, lowest value -1.9 in December 2008. ### Key Risks Highlighted - Protracted slower growth in main trading partners (particularly the U.S.), leading to weaker external demand and lower canal revenues, exports, tourism receipts, inward FDI, and remittances. - Unexpected worsening of the COVID-19 pandemic (possible “second wave”), risking lockdowns, protracted recession, capital flow disruption, pressures on public finances and balance of payments. - Accelerating de-globalization and intensified trade tensions, adversely affecting re-exports from free trade zone and canal revenues. - More volatile global financial conditions: higher borrowing costs, lower FDI and portfolio flows. - Absence of meaningful progress on AML/CFT: delays could adversely affect correspondent banking relations and key credit channels. - Unexpected natural disasters (e.g., Hurricane Eta): potential loss of lives, economic damages, trade disruption, exacerbating COVID-19 impacts. ### Exit Strategy - Access to the PLL is not expected to go beyond the 2-year period, provided current unprecedented risks recede. - Authorities intend the PLL to be precautionary; level of access provides insurance against extreme adverse risks, preserves investor confidence, and supports macroeconomic strategy. - Staff view: authorities’ policies are instrumental to reduce vulnerabilities and strengthen resilience to enable exit by November 2022. ### Policy Agenda — A. Adapting and Re-Anchoring Fiscal Policy - Short-term objective: accommodate pandemic implications on the budget while pursuing gradual consolidation over the medium term. - Fiscal consolidation anchor and projections: - Baseline projections assume improvement in fiscal balance of 7½ percent of GDP in the next 5 years: from a deficit of 9 percent of GDP in 2020 to a deficit of 1½ percent in 2025. - Consolidation drivers: gradual return of tax and non-tax revenue to historical averages (a gain of 3½ and 2 percent of GDP, respectively) and a decline in primary expenditure (about 2 percent of GDP). - Public liquidity buffers: - Government intends to maintain at least US$1,000 million (1½ percent of GDP) or about 1 month of spending in deposits at the National Bank of Panama (indicative target). - Authorities creating a working group supported by IMF staff to monitor fiscal policy. - Monitoring: Working group on Fiscal Policy composed of MEF, WHD, and FAD. ### Policy Agenda — Tax Policy and Revenue Mobilization - Tax revenue to GDP ratio: 8¼ percent in 2019 (almost half the average of comparable Latin American countries at around 16½ percent of GDP). - Tax expenditures: - Estimated between 3 and 4 percent of GDP in 2016. - Concentrated on VAT, CIT, and to a lesser extent PIT; mostly benefit highest deciles; can harm efficiency. - Recommendation: produce detailed tax expenditure reports to enhance transparency and enable reform roadmap. - VAT and other rates: - VAT rate noted at 7 percent (among the lowest in the world); could be adjusted in the medium-term to raise revenues. - Sequencing and short-term focus: - Sequence reforms according to counter-cyclical considerations; postpone tax policy measures until recovery is well underway. - Shorter-term actions: efficiency-raising measures with no adverse income effects (e.g., simplification of CIT, introduction of a VAT refund mechanism). - Strengthen technical capacity of tax authority via TA to raise collection while minimizing pro-cyclical pressures. ### Policy Agenda — Expenditure Prioritization and Social Needs - Social context: - Poverty decline from 35 percent in 2000 to 14 percent in 2017 (compared to 26 percent average in Latin America). - Rural and indigenous poverty remain high. - Public spending on education is one of the lowest in the region; education outcomes relatively poor. - COVID-19 support measures: - New programs (Vale Solidario, Bolsa Solidaria, Agua Solidaria) totaling close to US$300 million until mid-September. - Fondo Solidario de Vivienda strengthened with additional US$80 million. - Need to rebalance expenditure towards social spending, especially education and active labor market policies. ### Policy Agenda — Pension System Sustainability - Two defined benefit schemes face sustainability challenges: - First scheme (applicable to workers older than 35 in 2006) expected to deplete reserves in the next few years. - Defined benefit component of the mixed system (introduced in 2005) less pressing but reserves peak around 2055 then decline. - Defined contributions component of 2005 mixed system expected to be fully funded. ### Policy Agenda — B. Enhancing Financial Integrity (AML/CFT) - FATF status and action plan: - FATF placed Panama on its grey list in June 2019. - Panama agreed an action plan with FATF in June 2019 covering IO-1, IO-3, IO-5, IO-7. - Timeline expectations: implement necessary reforms by January 2021 and exit grey list by June 2021. - Implementation progress and timing: - Change of administration in July 2019 slowed implementation; Panama reaffirmed commitment and timetable at FATF meetings in Feb and June 2020. - Test dates postponed three months because of COVID-19; last items scheduled for implementation by January 2021. - FATF to assess progress at the February 2021 plenary meeting; conditionality could be established at first PLL review depending on outcomes. - Roadmap actions and timelines (selected): - IO-1: Raise awareness of terrorist financing risks; Sep. 2020. - IO-3: Risk-based supervision and sanctions; Sep. 2020. - IO-5: Ensure resident agents verify and update beneficial ownership information; Sep. 2020. - IO-7: Demonstrate ability to prosecute foreign tax crimes; Jan 2021. - Financial Integrity objective: Exit FATF grey list. Policy: Implement FATF action plan. ### Policy Agenda — C. Bolstering Financial Stability and Financial Safety Net - Financial system vulnerabilities: - Panama is a dollarized economy with no domestic monetary authority or lender of last resort (LOLR). - Under an adverse scenario, bank liquidity could dry up; corporations may face difficulties rolling over external liabilities and run down domestic deposits; correspondent banking interruptions could cause sudden reversals. - Financial system unlikely to withstand large-scale deposit withdrawal. - Authorities’ response: - Creating a Fund for Economic Stimulus (FES) to safeguard the financial system by providing timely liquidity and credit in times of financial stress (resembling a LOLR facility). *Source: IMF staff report excerpt as provided in the supplied content.* ### 33. The authorities believe that the introduction of the Fund for Economic Stimulus would ### 1panea2021001 - 33. The authorities believe that the introduction of the Fund for Economic Stimulus would ### Fund for Economic Stimulus (FES): objectives, design, and financing - Objective: safeguard stability in the banking system and enhance its resilience to external shocks; provide liquidity to banks and channel credit to support the economy during the COVID-19 pandemic. - Design: - Comprises two programs: (i) a liquidity program to support banks; and (ii) a stimulus program to channel additional resources as credit. - Designed by the MEF in consultation with the SBP, BNP, and Panama’s Banking Association. - Launched in early August 2020. - Structured as a trust, fully owned by the MEF, operated by BNP, supervised by SBP, with a tenure of 2 years but extendable. - Funding: - Initial funding set at US$1 billion (about 1½ percent of GDP), provided by the MEF and BNP in equal amounts. - Additional financing may come from public and private sources; the PLL could initially serve as a precautionary backstop for envisaged public funding. ### Liquidity program (LP): operational and governance features - Purpose: a revolving, short-term repo facility to assist solvent banks in meeting short-term liquidity demands in market dislocations. - Key operational parameters: - Up to 6 months maturity. - Interest rate fixed at 3.25 percent. - Collateralized by public bonds and banks’ high-quality portfolio. - Turnaround: SBP to provide financial soundness assessment with a turnaround of 2 days; BNP to assess collateral and disburse; whole process no more than 4 days from request to disbursement. - Access: banks submit online requests to SBP; SBP assesses solvency and whether need is market-wide (not bank-specific); if approved, SBP instructs BNP to execute. - Governance and safeguards: - Subject to highest governance and access standards. - BNP expected to act only as operator following strict instructions. - Program carefully monitored for prompt corrective action to avoid moral hazard and weakening of market discipline. - Authorities envisage this program to be used mainly by medium and smaller banks. ### Stimulus program (SP): structure and pipeline - Purpose: extend credit to support the economy through BNP’s existing credit facility model. - Context and available liquidity at BNP: - BNP historically intermediates government banker activities and social security assets (about 7 percent of GDP). - BNP currently has about US$800 million in excess liquidity. - US$600 million previously intermediated in earlier years; US$200 million still available. - Program parameters: - Provides access to the US$1 billion FES resources to complement money already available at BNP. - Lending tenor: up to 3 years at a market interest rate. - Collateralized with high-quality assets from the borrowing bank; BNP will assess credit worthiness and apply haircuts per its collateral framework. - Resources are first-come, first-serve across liquidity and stimulus windows (same US$1 billion funding). - BNP has disbursed US$600 million under its facility to 23 banks, representing 40 percent of the banking sector. - An IDB joint facility: initial amount of US$300 million earmarked for micro, small, and medium enterprises for two years. ### Macroprudential measures and supervisory actions - Recent pandemic-related measures: - Negotiated moratorium on a broad range of loan repayments. - Elimination of the minimum payment on credit cards and, in some cases, reductions in interest rates. - Supervisory guidance: - SBP advised banks to increase provisioning beyond dynamic provisions given elevated credit risk from restructured exposures (which may lead to increasing NPLs). - Adopt specific timeframe for phasing out pandemic measures, with supervisory action plan and close monitoring. - Risk-focused loan portfolio examinations recommended to assess credit exposures and capital buffers. - Liquidity buffers and supervisory capacity: - Official banks to lead by example and commit to maintain a liquidity buffer of at least 30 percent of their collective deposits (indicative target). - Staff supports the FES structure: funded by MEF, supervised by SBP, operated by BNP; any solvent bank may access funds using public debt instruments or high-quality loans as collateral. - Finding sufficient financing for the facilities is challenging but feasible incrementally. - Supervisory capacity enhancements recommended in macroprudential policy, systemic risk monitoring, and stress testing after an MCM diagnostic mission and staff training at SBP. - Further supervisory priorities: - Macroprudential policy calibration and stress testing. - Systemic risk monitoring. - Indirect AML/CFT risks and cybersecurity risks. - Crisis preparedness and resolution. - Creation of a working group supported by IMF staff to monitor macroprudential issues. ### Public Financial Management (PFM) improvements - Objective: avoid new domestic arrears and strengthen fiscal transparency and credibility. - Observations and recommendations: - Budget execution has generally performed well, but full and timely reporting and service of government commercial liabilities is essential. - Authorities working to upgrade legal rank of the Budget Law and toughen sanctions for committing unappropriated expenditure. - Staff recommends following best procurement practices: publish government procurement contracts online with names of winning companies and their beneficial owners; ensure ex-post audits of COVID-related expenditure. - Annex IV details PFM weaknesses including medium-term/strategic orientation of the budget, timely registration of commercial debt, and payment identification. - A forthcoming FAD technical assistance mission will identify challenges and potential legislative changes. - Working group composed of MEF, WHD and FAD to follow up on implementation. - Fiscal reporting: - Quarterly fiscal balances combine cash and accrual criteria, complicating interpretation. - MEF should adapt quarterly reports to GFSM 2014 format, publish above- and below-the-line operations together, capture changes in commercial debt and arrears. - Transition to full accrual will take time; interim publication of cash data alongside mixed system and comprehensive arrears reporting recommended. ### Data adequacy and SDDS roadmap - Commitment: authorities embraced 2020 Data ROSC recommendations and committed to statistical improvement, including subscription to the SDDS within two years. - Planned actions: - Update National Statistical Plan for 2020–24 and modernize INEC; increase INEC resources and establish National Statistical Coordination Committee. - Roadmap targets and timelines include: - Q4-2020: prepare modernization plan for INEC and update National Statistical Plan for 2020-24. - 2021-22: increase INEC budget and modernize main statistical programs; reconstitute National Statistical Council and establish National Statistical Coordination Committee. - Q4-2021: improve timeliness for multiple series (examples: production index from 55 days to 6 weeks; deposit corporations survey from 2 months to 1 month; interest rates from 50 days to 1 day; official reserve assets from 1 month to 1 week). - Q1-2022: improve periodicity for labor market data to quarterly; producer price index from quarterly to monthly; central government operations to monthly. - Q2-2022: restart compilation and improve coverage for central and general government operations; begin producing the reserves template. - Specific structural benchmarks under the PLL: - Establish a National Statistical Coordination Committee by May 2021 (structural benchmark) that meets twice a year with INEC as secretariat. - Publish the Data Template on International Reserves and Foreign Currency Liquidity on the NSDP by September 2021 (structural benchmark). - Resume quarterly publication on INEC website of Fiscal Operations of Central Government and General Government, adding detailed financing data by March 2022 (structural benchmark). - MEF to work with BNP to define suitable definitions of official reserve assets following BPM6 methodology given Panama’s fully dollarized economy without a central bank. - Resource needs: - Improving timeliness and periodicity requires more financial and human resources, investment in new computer equipment, creation of an innovation team (Chief Innovation Officer), and staff training especially in the BOP program. - Target: - With increased efforts and resources, Panama should meet SDDS requirements by 2022. ### Staff appraisal and broader assessments - PLL qualification assessment: - Panama qualifies under the PLL in 3 out of the 5 qualification areas (and the majority of the 9 qualification criteria) are met. - Areas needing improvement: data adequacy and the financial area related to money laundering risks. - Macroeconomic and fiscal observations: - External position and market access supported by improvements in current account, reinforced by copper exports from a large copper mine; expected increase in national savings; and easy access to international capital markets. - Investment grade sovereign credit rating since 2010 with some of the lowest spreads in emerging markets. - Public debt reduced from about 60 percent of GDP in 2005 to around 40 percent of GDP in 2019, supported by a fiscal rule introduced in 2008. - Dollarization has helped anchor inflation at low levels. - Financial system: - Financial system described as strong—with no bank liquidity or solvency issues—and well supervised following international best practices and Basel standards. - AML/CFT: - Panama is on the FATF grey list; staff encourages prompt implementation of the action plan agreed with FATF due for completion by January 2021 to exit the list. *Source: 1panea2021001 - 33.* ### 46. Staff recommends approval of the authorities’ request for a PLL arrangement for ### Staff recommends approval of the authorities’ request for a PLL arrangement for Panama ### Summary of recommendation - Staff recommends approval of the authorities’ request for a PLL arrangement for Panama. - Access at 500 percent of quota is considered appropriate. ### Purpose and rationale - The PLL arrangement would provide adequate insurance against external shocks. - Staff supports the authorities’ efforts to fortify economic fundamentals and policy frameworks, as well as safeguard financial stability. ### Expected use and scenarios - The PLL is expected to be precautionary, as a backstop for fiscal financing needs and for bank liquidity support in an adverse scenario. - A possible trigger for use is a further significant intensification of the global COVID-19 pandemic and its economic effects. ### Authorities’ commitments and cooperation - Staff welcomes the authorities’ commitment to continue cooperating with the Fund in addressing any balance of payments and fiscal imbalances. *1panea2021001 - 46.* ### 47. In staff’s view, Panama has sustainable debt with high probability and an adequate ### In staff’s view, Panama has sustainable debt with high probability and an adequate capacity to repay the Fund ### Debt sustainability and Fund support - Staff projects public debt to increase as a percent of GDP during the pandemic and then to follow a downward path. - The proposed PLL would be for SDR 1.884 billion (500 percent of quota), which is about 4½ percent of GDP. - If the proposed arrangement were to be fully drawn, Panama's capacity to repay the Fund would remain adequate assuming steady program implementation and continued market access. - The Fund’s risks from this PLL exposure will be limited given the authorities’ excellent track record of servicing their debt obligations. - The DSA shows debt to be sustainable with a sufficient buffer even after the impact of the pandemic, ensuring that Panama has the capacity to repay the Fund. ### Socio-economic indicators (key findings) - Per capita income: highest in Latin America (PPP GDP Per Capita, 2019; charted values by country). - GINI Index: inequality remains high relative to regional peers (charted GINI Index for 2010 and 2018). - Unemployment: increased but remains comparable to regional peers (Total unemployment rate (August, 2019) 7.1). - Labor force participation rates: in line with regional peers (Labor Force Participation, 2019; male/female/total). - Infant mortality and life expectancy: Infant mortality comparable to regional peers; Life expectancy higher than most regional peers (Life expectancy at birth (years, 2017) 78.1). ### Real sector developments (findings and projections) - 2019 drivers: Transport and communication supported economic activity in 2019; declining investment dragged economic growth down. - COVID-19 impact: The outbreak led to significant deterioration in economic activities; major sectors tumbled, despite resilience in canal operations. - Prices: Prices continued to decline, exacerbated by weak domestic demand. - Employment: Aggregate employment growth slowed, particularly in construction. - Real GDP (2007 prices), annual rates (Est. and Projections): - 2015 5.7 - 2016 5.0 - 2017 5.6 - 2018 3.6 - 2019 3.0 - 2020 -9.0 - 2021 4.0 - 2022 5.0 - 2023 5.0 - 2024 5.0 - 2025 5.0 - Consumer price index (average): 2019 0.8; 2020 -0.4; 2021 -0.8; 2022 0.2; 2023 1.1; 2024 2.0; 2025 2.0. - Output gap (% of potential): 2019 4.6; 2020 -5.5; 2021 -3.2; 2022 -1.1; 2023 0.0; 2024 0.0; 2025 0.0. ### Fiscal developments (findings and projections) - Fiscal deficit: The fiscal deficit remained stable in 2019 despite a fall in revenue due to cyclical and structural factors. - Revenue decline drivers: Low tax revenue explains most of the revenue decline; challenges in tax and customs administration and tax exceptions continue to affect tax and tariff collection. - Public investment: Public investment has fallen after completion of several large infrastructure projects. - Public debt: Public debt increased by over 6 percent of GDP in the past three years (referenced chart). - Selected fiscal aggregates (percent of GDP): - Revenue and grants (NFPS): 2019 20.8; 2020 17.6; 2021 20.3; 2022 21.8; 2023 22.5; 2024 22.7; 2025 22.9. - Expenditure (NFPS): 2019 23.4; 2020 26.1; 2021 27.3; 2022 25.4; 2023 25.0; 2024 24.3; 2025 24.0. - Overall balance, including ACP (NFPS): 2019 -2.6; 2020 -8.5; 2021 -7.0; 2022 -3.6; 2023 -2.5; 2024 -1.6; 2025 -1.1. - Central government (percent of GDP): - Revenues and grants: 2019 12.6; 2020 10.3; 2021 12.6; 2022 13.7; 2023 14.3; 2024 14.5; 2025 14.7. - Total expenditure: 2019 16.7; 2020 19.1; 2021 20.0; 2022 17.7; 2023 17.2; 2024 16.5; 2025 16.1. - Overall balance: 2019 -4.1; 2020 -8.9; 2021 -7.4; 2022 -4.0; 2023 -3.0; 2024 -2.0; 2025 -1.5. - Public gross fixed capital formation (percent of GDP) and evolution shown in charts (2013–2019). ### Public debt (levels and projections) - Non-Financial Public Sector gross debt (percent of GDP): - 2015 35.5 - 2016 34.8 - 2017 34.8 - 2018 36.9 - 2019 41.0 - 2020 53.8 - 2021 59.4 - 2022 60.0 - 2023 59.4 - 2024 57.9 - 2025 55.9 - Central Government gross debt (percent of GDP): - 2015 38.3 - 2016 38.5 - 2017 39.2 - 2018 41.9 - 2019 46.4 - 2020 59.8 - 2021 65.1 - 2022 65.4 - 2023 64.4 - 2024 62.6 - 2025 60.3 - Net debt (Central Government): 2019 40.4; 2020 53.7; 2021 58.9; 2022 59.5; 2023 58.6; 2024 56.7; 2025 54.4. ### Banking sector soundness (findings and indicators) - Nonperforming loans (NPLs) rising amid challenging operating conditions following the COVID-19 pandemic. - Non-performing Loans to total gross loans (end of period): 2019 2.0 (Table 6). - Provision coverage remains high; provisioning as percent of total nonperforming loans shown in charts. - Banks’ profitability declining; Return on Assets (Net income on average assets, in percent) trends downward in charts; Table 6 Return on assets 2019 1.8. - Net interest margins have narrowed slightly; Net Interest Margin (In percent) charted; Table 6 Interest margin to gross income 2019 47.6. - Capital adequacy: Regulatory capital to risk weighted assets 2019 16.5; Tier 1 capital to risk-weighted assets 2019 17.8 — well in excess of regulatory minimum. - Liquidity remains ample: Liquid assets to total assets 2019 12.8; Liquid assets to short-term liabilities 2019 37.0. - Summary accounts of the banking system (selected levels, end-period, in millions of balboa): - Net foreign assets 2019 2,547; 2020 7,758; 2025 projection 10,840. - Private sector credit 2019 54,901; 2020 53,803; 2025 projection 71,577. - Total deposits 2019 42,239; 2020 41,974; 2025 projection 60,750. ### Macrofinancial developments - Declining economic activity precipitated a fall in credit growth. - Credit to firms and households declined sharply; lending to major sectors tumbled, except mortgages. - Domestic interest rates continue to adjust in line with U.S. interest rates (U.S. LIBOR and domestic rates charted). - Sovereign spreads remain among the lowest in the region, underpinned by its investment grade rating (EMBIG Spreads chart). ### External sector developments (findings and projections) - Current account deficit improved in 2019, benefiting from copper exports while oil prices fell, reducing the merchandise trade deficit. - Services exports weakened slightly, driven by weak tourism; Panama Canal revenues continued to grow albeit at a slower rate. - External debt inched up slightly, reflecting strong FDI inflows and banking sector deposits. - COVID-19 impact: Triggered declines in CFZ, tourism and canal receipts in recent months (high-frequency export data). - Selected external aggregates (percent of GDP): - Current account balance: 2015 -9.0; 2016 -7.8; 2017 -5.9; 2018 -7.6; 2019 -5.4; 2020 -2.5; 2021 -6.0; 2022 -4.8; 2023 -3.9; 2024 -2.9; 2025 -2.5. - Panama Canal toll revenue (percent of GDP, RHS) charted (2010=100 index). - Gross external debt (percent of GDP): - 2015 161.3 - 2016 159.9 - 2017 149.6 - 2018 153.0 - 2019 156.8 - 2020 194.1 - 2021 193.6 - 2022 191.6 - 2023 188.8 - 2024 186.5 - 2025 184.8 ### Selected economic and social indicators (Table 1 highlights) - Population (millions, 2019) 4.2 - Poverty line (percent, 2017) 20.7 - Population growth rate (percent, 2019) 1.4 - Adult literacy rate (percent, 2018) 95.4 - Life expectancy at birth (years, 2017) 78.1 - GDP per capita (US$, 2019) 15,831 - Total unemployment rate (August, 2019) 7.1 - IMF Quota (SDR, million) 376.8 ### Fund credit and PLL schedule (Tables 9–10) - Indicators of Fund Credit (Table 9, in millions of SDR unless otherwise stated): - Existing and Prospective drawings (100% of Quota) 2020 376.8; 2021 942.0; 2022 942.0. - Outstanding stock (SDR): 2020 376.8; 2021 1,318.8; 2022 2,260.8; 2023 2,166.6; 2024 1,625.0; 2025 706.5; 2026 117.8. - Total charges: 2020 4.0; 2021 27.0; 2022 55.1; 2023 56.4; 2024 58.4; 2025 31.5; 2026 4.8. - Proposed Schedule of Reviews and Available Credit under the PLL Arrangement, 2021–22 (Table 10): - January 19, 2021 Approval of the PLL Arrangement: Millions of SDRs (cumulative) 942; Percent of Quota (cumulative) 250. - July 18, 2021 Completion of First Review: Millions of SDRs (cumulative) 942; Percent of Quota (cumulative) 250. - January 18, 2022 Completion of Second Review: Millions of SDRs (cumulative) 1,884; Percent of Quota (cumulative) 500. - July 18, 2022 Completion of Third Review: Millions of SDRs (cumulative) 1,884; Percent of Quota (cumulative) 500. - Total: Millions of SDRs 1,884; Percent of Quota 500. *Source: IMF staff calculations and tables in the Panama Selected Issues and Statistical Appendix (as provided).* ### Annex I. Public Debt Sustainability Assessment ### Annex I. Public Debt Sustainability Assessment ### Overview and historical context - Gross non-financial public sector (NFPS) debt fell from 61 percent of GDP in the mid-2000s to 35 percent of GDP by 2017. - Public debt rose to 41 percent of GDP between 2018 and 2019 due to higher deficits and slower GDP growth. - By end-2019: - almost 100 percent of public debt was denominated in U.S. dollars with medium or long-term amortization schedules; - around 85 percent of outstanding debt was held by non-residents; - global bonds were the primary instrument in this category at 26.3 percent of GDP; - multilateral creditors accounted for 9.1 percent of GDP. ### Baseline projections (public debt) - Under the baseline: - public debt will reach 61 percent of GDP in 2022, driven by COVID-related deterioration in the primary deficit and growth (-9 percent in 2020). - borrowing would peak in 2020 at US$6.9 billion (of which US$6.6 billion would be external debt: US$1.9 billion multilateral and US$4.7 billion global bonds). - debt is expected to decline below 56 percent of GDP by 2025, aided by: - improvement in the primary balance from a deficit of 6.9 percent to a 0.4 percent surplus; - improvement in the growth-interest rate differential. - gross financing needs will average 7.9 percent of GDP over the projection period. - Neither debt nor gross financing needs breach DSA thresholds in the baseline. - Key baseline series (selected years, in percent unless noted): - Nominal gross public debt: 2018: 36.5; 2019: 36.9; 2020: 41.0; 2021: 53.8; 2022: 59.4; 2023: 60.0; 2024: 59.4; 2025: 57.9; 205?: 55.9 (table sequence preserved). - Public gross financing needs: 2018: 6.8; 2019: 7.4; 2020: 6.4; 2021: 12.1; 2022: 10.4; 2023: 7.1; 2024: 5.7; 2025: 7.3; later: 4.6; 4.6; 5.9 (table sequence preserved). - Real GDP growth: 2018: 6.3; 2019: 3.6; 2020: 3.0; 2020 (shock): -9.0; 2021: 4.0; 2022–2025: 5.0 each year. - Effective interest rate (defined as interest payments divided by debt stock): shown as 2018–2025 values including 5.8, 5.3, 5.1, 5.3, 5.1, 4.9, 4.4, 4.2, 4.0, 3.9 in table. ### Risks, shocks, and stress-test results - Contingent liabilities shock (financial sector) that would breach distress thresholds: - realization of transfers to the banking system of 13 percent of GDP, or 10 percent of banking system assets (excluding claims on the government) at end-2019. - Under this shock, debt and gross financing needs would exceed indicative thresholds (70 and 15 percent of GDP respectively). - Other illustrative shocks and outcomes: - A two-period one-standard deviation shock on real GDP growth during 2021–22 would increase debt to 66 percent of GDP in 2022, then decline thereafter. - A combined persistent shock of 2 percent on real GDP growth, 2 percent on the revenue to GDP ratio, and 25 basis points on interest rates would increase public debt to 69 percent of GDP in 2022, then decline to 67 percent in 2025. - If the primary balance remained unadjusted at the 2020 projected level (-6.9 percent of GDP) over the medium term, public debt would increase monotonically and ultimately become unsustainable. - Adverse scenario (PLL drawdown) findings: - Scenario features lower GDP growth in 2021–22 (2 and 3 percent respectively) and higher primary deficits (6.4 and 2.2 percent of GDP in 2021 and 2022, vs. 5.1 and 1.8 in baseline). - Assumes interest rates on issuances 1 percent above baseline and triggers PLL drawdowns in 2021–22. - In 2021, a PLL drawdown of US$1.3 billion would be necessary given larger deficit and reduced medium- and long-term issuances (lower by US$1.2 billion vs. baseline); higher recourse to government assets by US$0.5 billion would partially offset needs. - In 2022, financing needs higher than baseline by US$0.3 billion; MLT bond financing lower by US$1.6 billion; recourse to government assets US$0.5 billion. - Gross debt would rise to close to 67 percent of GDP in 2022, then decline below 62 percent in 2025. - Financing needs in adverse scenario average US$6.2 billion a year in 2021–22, largely met by: - external bonds: US$2.5 billion a year on average; - domestic instruments: US$0.9 billion a year on average; - government assets: US$0.5 billion a year on average; - residual average needs US$2.2 billion a year on average covered by multilaterals, particularly the Fund through the PLL. - Stress-test scenarios summarized in figures: - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, and Adverse (PLL drawdown) scenario are presented with underlying assumptions and projected impacts on gross nominal public debt and financing needs (figures and series preserved in source). ### External debt sustainability (Annex II summary) - External debt dynamics: - External debt to GDP increased from 157 percent in 2019 to 194 percent in 2020 due to COVID-19 shock. - External debt is expected to decline gradually to 185 percent of GDP in 2025 under baseline recovery and current account improvement. - Public external debt was 23 percent of total external debt (36 percent of GDP) as of end-2019; projected to increase to 51 percent of GDP in 2022 due to higher fiscal deficits and decline to 48 percent of GDP by 2025 as deficit narrows. - If a standardized shock to growth materializes, external debt could increase to 195 percent of GDP. - Composition and drivers: - FDI debt and banking sector deposits/liabilities account for the bulk of external debt; public external debt remains a smaller share relative to these components. - Panama’s competitiveness: World Economic Forum Global Competitiveness Index indicates Panama outperforms the LAC average in every pillar (2019). - External DSA bound tests and indicators: - Baseline external debt series: 2019: 156.8; 2020: 194.1; 2021: 193.6; 2022: 191.6; 2023: 188.8; 2024: 186.5; 2025: 184.8 (Table A2.1). - External debt-to-exports ratio: 2019: 369.8; 2020: 575.0; projected 2021: 487.0; 2022: 469.0; 2023: 451.4; 2024: 439.1; 2025: 427.9. - Gross external financing need (in percent of GDP) series shown in Table A2.1 with baseline values including 2019: 68.8 and 2020: (value series preserved in table as complex formatting). ### Key numeric indicators and formulas preserved from source - Contingent liabilities shock magnitude: 13 percent of GDP or 10 percent of banking system assets (excluding government claims) at end-2019. - PLL drawdown amounts in adverse scenario: US$1.3 billion in 2021; financing needs averaging US$6.2 billion a year in 2021–22; external bond issuance average US$2.5 billion a year; domestic instruments average US$0.9 billion a year; government assets US$0.5 billion a year; residual US$2.2 billion a year from multilaterals/PLL. - Table A2.1 baseline external debt: 2015: 161.3; 2016: 159.9; 2017: 149.6; 2018: 153.0; 2019: 156.8; 2020: 194.1; 2021: 193.6; 2022: 191.6; 2023: 188.8; 2024: 186.5; 2025: 184.8. - Key macro assumptions (selected): - Real GDP growth (in percent): historical averages and projections include 2019: 3.0; 2020: -9.0; 2021: 4.0; 2022–2025: 5.0. - GDP deflator in US dollars (change in percent): 2020: -0.8; 2021: 0.2; 2022: 1.1; 2023–2025: 2.0 each year. - Nominal external interest rate (in percent): 2018–2025 series includes values like 3.1, 3.1, 0.3, 1.8, 1.7, 1.7, 1.6, 1.5 in table formatting. ### Policy-relevant conclusions - Under the baseline, public debt is projected to peak and then decline, with gross financing needs remaining moderate (average 7.9 percent of GDP). - Key vulnerability: high share of public debt denominated in U.S. dollars (almost 100 percent) and high share held by non-residents (around 85 percent), exposing Panama to external market volatility and contingent banking sector risks. - Fiscal policy stance matters critically: - A return to the government’s planned path for the primary balance (improvement to a 0.4 percent surplus by 2025) supports debt decline. - Failure to adjust the primary balance (staying at -6.9 percent of GDP) would lead to unsustainable public debt dynamics. - Multilateral support (including PLL resources) plays a significant role under adverse scenarios to cover residual financing needs. *Source: IMF staff, “Annex I. Public Debt Sustainability Assessment” and related Public and External DSA tables and figures, as provided in the source content.* ### Annex III. Financial Integrity ### Annex III. Financial Integrity ### Action plan and commitments - The authorities adopted an action plan supported by the FATF in response to the June 2019 grey listing. The plan includes the following commitments: - Strengthen their understanding of the national and sectoral ML/TF risks and improve national policies to mitigate these risks. - Proactively take action to identify unlicensed money remitters, and ensure effective, proportionate, and dissuasive sanctions again AML/CFT violations. More generally, supervision of designated nonfinancial businesses and professionals needs to improve. - Ensure adequate verification and update of beneficial ownership (BO) information, establish an effective mechanism to monitor the activities of offshore entities, assess existing risks of misuse of legal arrangements to define and implement specific measures to prevent the misuse of nominee shareholders and directors, and ensure timely access to adequate and accurate beneficial ownership information. - Ensure effective use of its Financial Intelligence Unit (FIU) for ML investigations, demonstrating their ability to investigate and prosecute ML involving foreign tax crimes and to provide constructive and timely international cooperation with such offences. ### Technical assistance and expert team - To achieve the commitments under the action plan, the authorities have recruited international AML/CFT experts. - The new technical team of senior experts, whose experience includes working for the FATF and for a regional FATF-style body, is tasked with: - (i) conducting a diagnostic of the current action plan and progress to date; and - (ii) reviewing the draft legislation(s) before presenting them to the National Assembly for debate and enactment. - Resources for the technical assistance are partially provided by the Inter-American Development Bank. ### FATF Immediate Outcomes (IOs) and Action Items (Table A3.1) - 1. Terrorism financing risk: (i) develop a comprehensive strategy for effectively disseminating the updated chapter’s contents to the private sector, focusing on high risk sectors that have demonstrated poor understanding of terrorist financing threats and vulnerabilities (as distinct from terrorism risks); and (ii) ensure that competent authorities possess the staffing, training and capacity required to investigate and prosecute terrorism financing cases should they arise. (IO-1) - 2. Risk understanding of use of cash in high risk sectors: (i) ensure that the assessment informs the risk assessment and mitigation measures of entities in high-risk sectors; and (ii) demonstrate there is effective supervision in that regard. - 3. Update the sectoral risk analysis of the concrete risks of the corporate sector: Use effective supervision to ensure that Designated Non-Financial Business and Professions (DNFBPs) understand their risks and have implemented appropriate mitigating measures. - 4. Identifying unlicensed money remitters: (i) demonstrate that the application of the amendment and existing authority are leading to identification and sanctioning (as appropriate) of unlicensed money remitters; and (ii) continue to demonstrate that Panama is proactively taking action to identify unlicensed money remitters and apply appropriate sanctions as necessary. - 5. Risk-based supervision for the DNFBP sector: (i) describe how the offsite/onsite examinations will be impacted by the sector-specific risk studies, once finalized; and (ii) report on the frequency of both offsite and onsite examinations and how that was based on the proper understanding of the AML/CFT risk of the DNFBP sector. (IO-3) - 6. Supervision manual and improved compliance of obliged entities: finalise this and demonstrate that the intendancy’s actions have an effect on improving compliance of entities. - 7. Sanctions being applied: (i) ensure that effective, proportionate, and dissuasive sanctions are being applied where there are violations; and (ii) continue to report that Panama is applying effective, proportionate, and dissuasive sanctions where FIs are found to have committed AML/CFT violations. - 8. Ensure that resident agents adequately verify and update beneficiary owner information: (i) demonstrate how Panama ensures that resident agents adequately verify and update BO information of legal entities and monitor their activities; (ii) establish and implement effective mechanisms to monitor the activities of offshore entities, including better understanding the volume of assets or funds the authorities manage, and adopt measures to avoid their abuse. - 9. Risk analysis to define and implement specific measures: (i) complete a comprehensive risk assessment of the sector; (ii) define and implement specific measures of control to prevent the misuse of nominee shareholders and directors; and (iii) adopt and implement measures to ensure timely access to adequate and accurate beneficial ownership information. (IO-5) - 10. Improve the monitoring of the corporate sector: (i) improve the monitoring of the corporate sector and implement effective supervision, including by implementing remedial actions and/or sanctions for breaches of ML/TF preventative measures; (ii) continue to increase the percentage of law firms subjected to off-site examination to improve coverage of the sector commensurate with risk; and (iii) demonstrate that Panama conducts examinations based on other factors beyond volume of services provided to ensure supervisory activity is commensurate with risk, and not simply volume of activity. - 11. Ensure that the “Practical Guide for Parallel Financial Investigations” is swiftly approved and used: demonstrate that it is being used by prosecutors to pursue parallel financial investigations. - 12. Increase the use of FIU products for ML investigations: (i) ensure that prosecutors make full use of UAF products in ML investigations; (ii) provide further update and details (related offence, number of ML investigation and related predicate offence) on cases opened on the basis of financial intelligence referred by authorities. (IO-7) - 13. Demonstrate the ability to investigate and prosecute ML having foreign tax crimes as a predicate offence and international cooperation: (i) continue updating the Joint Group on the progress and details of these cases; and (ii) provide case examples to show that the threshold for domestic tax offences of US$ 300,000 does not hinder effectiveness. - 14. Demonstrate that the exception from punishment provides an adequate deterrent effect and ensure that sanctions for tax crimes tax-based ML: demonstrate that this is working in practice, particularly where legal entities are involved. - 15. Continue to focus on ML investigation in relation to high risk areas: continue to pursue ML investigations in high-risk areas beyond trafficking and increase the number of ML investigations involving foreign predicates including seizing and/or confiscating proceeds of crime. ### Acronyms and institutional points - TF = Terrorism Financing; ML = Money Laundering; AML/CFT = Anti-Money Laundering and Counter Financing of Terrorism; CFT = Combating the Financing of Terrorism; DNFBP = Designated Non-Financial Businesses and Professions; BO = Beneficial Ownership; FIU = Financial Intelligence Unit; UAF = Panama's FIU (La Unidad de Análisis Financiero). *Source: FATF (as presented in Annex III. Financial Integrity).* ### 6. The immediate priority is to contain the spread of the novel coronavirus, minimize the ### 6. The immediate priority is to contain the spread of the novel coronavirus, minimize the human loss and support the consumption needs of the vulnerable population. Over the longer horizon, the objectives supported by the new arrangement would aim to speed up the pace of our public policy agenda to promote stronger, more inclusive growth while enhancing macroeconomic resilience and the robustness and integrity of the financial system. ### Immediate health and social priority - Contain the spread of the novel coronavirus, minimize human loss, and support consumption needs of the vulnerable population. - Maintain sound economic policies and respond appropriately to shocks that may arise. ### AML/CFT regime and FATF exit (financial integrity) - Objective: Enhance Panama’s financial integrity and exit the FATF list of jurisdictions with strategic deficiencies. - Committed actions: - Strengthen understanding of national terrorist financing risks and sectoral ML/TF risks and improve national policies to mitigate these risks. - Proactively identify unlicensed money remitters and ensure effective, proportionate, and dissuasive sanctions against AML/CFT violations; demonstrate supervision of designated nonfinancial businesses and professionals is risk-based. - Ensure adequate verification, update, and timely access to beneficial ownership information; establish mechanism to monitor activities of offshore entities; define and implement measures to prevent misuse of nominee shareholders and directors. - Increase use of the Financial Intelligence Unit for ML investigations, demonstrate ability to investigate and prosecute ML involving foreign tax crimes as predicate offense, and provide constructive and timely international cooperation. - Implementation support and priorities: - Panama is working with private advisors (including a former FATF Executive Secretary, a former GAFILAT Undersecretary, and a former FATF representative of the Canadian Government). - Develop an action plan for implementation of the Unified Registry centralizing information on legal persons including ultimate beneficial ownership in accordance with Law 129, 2020. - Take necessary actions to ensure beneficial ownership registry information is accurate and timely updated. ### Financial stability and liquidity support (Fund for Economic Stimulus) - Launched the Fund for Economic Stimulus with dual objectives: - Provide liquidity to banks in times of need. - Extend credit to support the economy. - Rationale: Panama is a fully dollarized economy with no central bank; a liquidity facility cushions the financial sector from unanticipated external shocks (including COVID-19) by providing relief to solvent banks during liquidity shortages. - Operational design: - Facility established as a trust with the Ministry of Economy and Finance acting as trustor and the National Bank of Panama as trustee. - Superintendent of Banks will issue a “non objection” prior to banks’ requests for temporary liquidity facilities. ### Public Financial Management (PFM) reforms - Requested Technical Assistance (TA) to reinforce PFM practices and to elaborate a work plan based on mission findings and recommendations. - Ultimate objectives: - Enhance estimation, update and disclosure of multi-annual costs of capital projects. - Assess effectiveness of procedures for registry and re-allocating budgetary appropriations across financial years. - Ensure timely recording and disclosure of commitments and accrued expenditure in budget execution reports and financial statements for all types of contracts. - Complete the Treasury Single Account and execute all payments by electronic means. - Procurement transparency commitment: - Follow best procurement practices, including regular online publication of government contracts, names of winning companies and their beneficial owners according to Public Procurement Law No. 22 of 2006, modified by Law 153 of May 8, 2020. ### Data adequacy and statistical infrastructure - Hosted an IMF mission to update ROSC in early 2020; will adopt recommendations in the National Statistics Plan 2020–24. - Key aims and structural benchmarks: - Modernize the National Institute of Statistics and Census (INEC) and increase INEC’s resources. - Establish a National Statistical Coordination Committee by May 2021 (structural benchmark); Committee will meet twice annually with INEC as secretariat. - Subscribe to IMF’s Special Data Dissemination Standard (SDDS) by 2022 by enhancing coverage, periodicity, and timeliness of data reporting. Specific actions: - Publish the Data Template on International Reserves and Foreign Currency Liquidity on the National Summary Data page (NSDP) with IMF assistance by September 2021 (structural benchmark). - Resume quarterly publication at INEC of Fiscal Operations of Central Government (CG) and General Government (GG), elaborated by the Ministry of Economy and Finance, adding detailed financing data by March 2022 (structural benchmark). - Publish metadata for SDDS related data categories on the National Summary Data Page (NDSP) and a draft Advance Release Calendar by December 2021. - Improve periodicity of labor market indicators (employment, unemployment and wages/earning) from semi-annual to quarterly by March 2022. - Rebase Panama National Accounts to 2018 and adopt the 2008 SNA conceptual framework by June 2022. ### Fiscal policy framework and medium-term objectives - Historical context: Reduced public debt from about 60 percent of GDP in 2005 to around 40 percent of GDP in 2019, supported by a fiscal rule introduced in 2008. - New medium-term fiscal objective: - Set a deficit objective of 1.5 percent of GDP by 2025 via amendment of the Law of Social Fiscal Responsibility. - Update Medium-Term Fiscal Framework by end of 2020 consistent with this new objective. - Measures to facilitate compliance: - Step up improvements of tax and customs administrations. - Implement improvements in the quality of public spending; review tax expenditures considering recent IMF technical assistance. - Gradually realign current spending with social needs, including investing more in education and prioritizing public investments with high social return while diversifying geographically. ### Liquidity and monitoring - Continue maintaining indicative targets on national government liquidity and official banks’ liquidity buffers based on clearly specified targets. - Monitor data necessary to verify regular compliance with these targets at end of each review period. ### Banking sector and regulatory strengthening - Panama’s banking sector characterized as stable, well-capitalized and solvent. - Continue strengthening financial sector policy framework consistent with Basel III prudential regulations and recommendations from the 2011 Financial Sector Stability Assessment. - Requesting IMF technical assistance to continue improving regulatory framework. ### IMF engagement, reviews, and compliance with Fund obligations - Will present relevant economic and policy information within the framework of this letter and the Fund’s Articles of Agreement. - Creating working groups with Fund staff to review advances ahead of semi-annual reviews expected to be completed by no later than: - July 18, 2021 - January 18, 2022 - July 18, 2022 - (Assumes approval of the PLL by the IMF Executive Board on January 19, 2021) - Will observe standard criteria on trade and exchange restrictions, bilateral payment agreements, multiple currency practices and non-accumulation of payment arrears on external debt in context of dollarization regime. ### Commitment and conditions - Policies contained are considered adequate for achieving goals supported by the PLL. - Committed to taking additional measures as necessary and to appreciating IMF technical support. - Continued strengthening of the economy’s resilience to position Panama for program objectives once exogenous COVID-19 risks have significantly declined. ### Quantitative indicative targets (selected) - Timing for targets: end-March 2021, end-September 2021, and end-March 2022. - National Government deposits (floor at BNP, measured in millions of U.S. dollars): - 1,000 (end-March 2021) - 1,000 (end-September 2021) - 1,000 (end-March 2022) - Official Banks' liquidity buffers (ratio, percent): - 30 (end-March 2021) - 30 (end-September 2021) - 30 (end-March 2022) - Definitions and computation: - National Government includes Central Government and other public institutions; Central Government defined per Law 34/2008 of Social Fiscal Responsibility Law and subsequent amendments. - National Government deposits at the BNP taken from BNP detailed balance sheet item “National Government Deposits” as submitted to the Fund. - Official banks’ liquidity buffers calculated as end-of-period ratio of liquid assets up to 186 days to total net deposits up to 186 days, expressed in percent and measured at end of last completed quarter. - Components of liquid assets up to 186 days include: (i) legal tender in Panama; (ii) deposits in banks in Panama; (iii) deposits in banks abroad; (iv) securities (including Treasury Bills issued by the state with maturities no longer than a year, liabilities of foreign private and government agencies with AAA long-term rating, and investment grade liabilities); (v) bank liabilities payable in Panama up to 186 days; (vi) flow of debenture payments payable up to 186 days; and (vii) other liquid assets, as authorized by the SBP. - Net deposits up to 186 days defined as sum of private deposits, bank deposits, and deposits of other financial institutions as per SBP liquidity report. - Note: Official banks comprise Banco Nacional de Panama and Caja de Ahorros. Official banks have maintained liquidity buffers significantly higher than the legal requirement and the indicative target; these buffers are expected to continue at those levels. ### Payments, arrears, and reviews timing - Government will continue paying all external obligations on time with no delays; policy has been to pay domestic obligations on a timely manner, including commercial loans, treasury bills, notes and bonds. - Payment arrears defined as external debt-service obligations (principal and interest) not paid when due on central government and central government-guaranteed debt. Overdue debt and debt-service obligations in dispute will not be considered external payment arrears. - Timing of reviews (assuming PLL approval on January 19, 2021): - First review completed by no later than July 18, 2021. - Second review completed by no later than January 18, 2022. - Third review completed by no later than July 18, 2022. ### Executive summary — Assessment of risks to the Fund and Fund liquidity position (from Technical Appendix) - Arrangement: two-year Precautionary and Liquidity Line (PLL) request. - Proposed access: SDR 1,884 million (500 percent of quota) — exceeds cumulative access limit under the GRA and would exceed annual access limits during each year of the arrangement. - Panama’s prior outstanding credit to the Fund: SDR 376.8 million (100 percent of quota) from May 2020 RFI purchase. - Key findings and issues: - The proposed PLL arrangement will have a moderate impact on Fund liquidity. Upon approval, the Fund’s Forward Commitment Capacity would decline by about 1.2 percent. - If Panama were to make the first purchase at approval of the PLL, the GRA credit concentration among the top five borrowers would decline slightly whereas the already high Fund exposure to countries in the Western Hemisphere would moderately increase. - If Panama were to draw on the proposed arrangement in full, Fund exposure to Panama would peak at 14.1 percent of the current level of the Fund’s precautionary balances. - Panama’s capacity to repay is adequate under an adverse scenario assuming it draws the proposed arrangement in full. - While risks to the program are tilted to the downside, overall risks to the Fund and the Fund’s liquidity position are moderate. - Risk mitigants include adequate government liquidity buffers, continued market access in a high-risk environment, strong macroeconomic policy framework, and sound institutions. - Document date: January 5, 2021. *Source: Government of Panama communication and IMF staff technical appendix excerpt.* ### 4. Exceptional Access Levels and Credit Concentration __________________________________________ 17 ### 4. Exceptional Access Levels and Credit Concentration ### INTRODUCTION - The note assesses the risks to the Fund arising from Panama’s request for a two-year arrangement under the Precautionary and Liquidity Line (PLL) and its effects on the Fund's liquidity, in accordance with the policy on exceptional access. - The arrangement would cover a 24-month period beginning January 19, 2021, with access in an amount up to SDR 1,884 million (500 percent of quota) available in two or more purchases. - Of this access, an amount equivalent to SDR 942 million (250 percent of quota) would be available in the first year of the arrangement and the balance of SDR 942 million (250 percent of quota) would be made available at the beginning of the second year, subject to the completion of the relevant six-monthly reviews. - The authorities have indicated that they intend to treat the arrangement as precautionary. ### BACKGROUND - Since 1965, the Fund has had 20 arrangements for Panama over a period of more than three decades. - The eight most recent of the 20 Fund arrangements, predominantly standby arrangements (SBAs), were in place over the period 1980 to the early 2000s. - The previous Fund arrangement for Panama was an SBA approved in June 2000, which the authorities treated as precautionary until it expired at end-March 2002. - Panama had no outstanding credit due to the Fund for the eleven years preceding the COVID-19 pandemic. - Prior to the COVID-19 global shock, Panama was the fastest growing economy in Latin America over the previous 25 years, with real GDP growth averaging 6 percent annually, though it weakened in the last two years. - Panama’s dollarized economy and a fiscal rule introduced in 2008 helped reduce public debt from about 60 percent of GDP in 2005 to an average of 36½ percent over the period 2009–17. - In May 2020, Panama purchased SDR 376.8 million (100 percent of quota) under the Rapid Financing Instrument (RFI) to cover emergency financing needs arising from the COVID-19 pandemic. - The proposed PLL arrangement, which the authorities intend to treat as precautionary, will help insure against extreme adverse risks; Panama does not have an actual balance of payments need. ### BACKGROUND—PUBLIC AND EXTERNAL DEBT - Panama’s public debt-to-GDP ratio: - Estimated 41 percent of GDP by end-2019. - Projected to increase to almost 54 percent of GDP by end-2020 under the baseline. - The 2020 public debt level would exceed the median of recent exceptional access cases by 7 percentage points of GDP. - Panama’s total external debt-to-GDP: - Increased from almost 150 percent in 2017 to 157 percent by end-2019. - Projected to increase to 194 percent of GDP at end-2020 under the baseline. - This level is nearly 136 percentage points of GDP above the median of recent exceptional access cases. - Composition of external debt: - Public sector external debt was 36 percent of GDP as of end-2019, about one-fifth of Panama’s external debt. - Public sector’s share of short-term external debt was less than a quarter of a percent at end-2019 (0.1 percent of GDP). - Short-term debt averaged just under 60 percent of GDP during 2017–19 and stood at 55 percent of GDP at end-2019, representing around 35 percent of total external debt. - External debt service: - Panama’s total external debt service for 2019 is estimated at around 68 percent of GDP and projected at 72 percent of GDP in 2020 under the baseline. - Public sector debt service obligations in 2019 were estimated at only 2⅓ percent of GDP out of the 68 percent of GDP total external debt service for 2019. - External debt service is more than twice as large as exports of goods and services and is the largest among recent exceptional access cases. - The high debt service ratio reflects the large share of banks’ external debt, including deposits against which the banking system as a whole holds a large reserve buffer. ### THE NEW PRECAUTIONARY LIQUIDITY LINE—RISKS AND IMPACT ON FUND'S FINANCES A. Risks to the Fund - Access under the proposed arrangement would exceed both annual and cumulative access limits and would be moderate on a number of indicators. - If Panama made the first scheduled first purchase: - Outstanding use of GRA resources would rise to SDR 1,318.8 million (350 percent of quota), taking into account 100 percent of quota from the May 2020 purchase under the RFI. - If Panama purchased the full amount available under the proposed PLL arrangement: - Credit outstanding would peak at SDR 2,260.8 million (600 percent of quota). - At 600 percent of quota, the peak level of access would be below both the median and average peak exposures of recent exceptional access cases. - In nominal terms, an overall access of SDR 2,260.8 million is far below the access of recent exceptional access programs. - If the full amount available under the proposed PLL arrangement were to be purchased under an adverse scenario, risks to Panama’s capacity to repay the Fund would be moderate. - Metrics of the Fund’s peak exposure to Panama would be modest compared with recent exceptional access cases: - Fund exposure would peak at 5 percent of projected GDP. - 2½ percent of total external debt. - Nearly 39 percent of gross international reserves. - About 28 percent of government revenue. - Each of the four metrics is below the corresponding median of recent exceptional access cases. - Metrics of peak debt service on GRA credit would be broadly comparable to or below the corresponding medians of recent exceptional access cases. - Projected payment obligations to the Fund would peak in 2025 at SDR 950 million. *Source: IMF staff assessment in chapter 4 of the Panama report.* ### 8.7 percent of projected government revenue. The peak of payment obligations to the Fund ### 8.7 percent of projected government revenue. The peak of payment obligations to the Fund ### Peak payment obligations and debt-service metrics - The peak of payment obligations to the Fund corresponds to: - 25½ percent of total public external debt service. - 13½ percent of gross international reserves. - about 4 percent of exports of goods and services. - Three of these metrics, compared with recent exceptional access cases, are below their corresponding medians (Table 3 and Figure 3b). - The peak total external debt service in percent of exports of goods and services would be the highest among recent exceptional cases: - Almost 180 percent in 2021 (179.9 percent in Table 3), second only to the previous maximum projected for Argentina’s 2018 SBA. - This high ratio is driven mostly by high external debt service of the private sector, notably banks, and by a projected COVID pandemic–related sharp contraction in exports in 2020. - This ratio is projected to decline gradually to about 115 percent at end-2026 (114.8 percent in Table 3). - Banking-system liquidity mitigants: - Liquid assets cover nearly 60 percent of deposits. - Minimum statutory requirement is 30 percent of deposits (the banking system’s liquid assets are twice the minimum statutory requirement). - Risk: rapid non-resident deposit withdrawal in an extreme shock could erode liquidity buffers and possibly trigger a government intervention that could negatively affect Panama’s capacity to repay the Fund. ### Capacity to repay and program drawdown assumptions - If the proposed arrangement were to be fully drawn: - Panama’s capacity to repay the Fund would remain adequate assuming steady program implementation and continued market access. - Table 3 peak and trajectory highlights (2020–26, selected): - GRA credit to Panama (SDR millions): 376.8 (2020), 1,318.8 (2021), 2,260.8 (2022), 2,166.6 (2023), 1,625.0 (2024), 706.5 (2025), 117.8 (2026). - (In percent of quota): (100.0), (350.0), (600.0), (575.0), (431.3), (187.5), (31.3). - Debt service due on GRA credit (SDR millions): 4.0 (2020), 27.0 (2021), 55.1 (2022), 150.6 (2023), 600.1 (2024), 949.9 (2025), 593.6 (2026). - Total external debt service (in percent of Exports of Goods and Services): 210.8 (2020), 179.9 (2021), 166.3 (2022), 149.1 (2023), 148.5 (2024), 134.5 (2025), 114.8 (2026). - Public external debt service (in percent of General Government Revenues): 31.1 (2020), 21.2 (2021), 16.9 (2022), 18.7 (2023), 32.0 (2024), 34.3 (2025), 25.3 (2026). - Debt service due on GRA credit (in percent of Total Public External Debt Service): 0.2 (2020), 1.8 (2021), 4.0 (2022), 8.7 (2023), 18.6 (2024), 25.4 (2025), 20.1 (2026). ### Enterprise risks, AML/CFT, and reputational considerations - Enterprise risks arising from the proposed arrangement are relatively low but would be modestly increased if fully drawn, against an already significant-risk COVID-19 context. - Key downside risks to the economic outlook include weaknesses on AML/CFT issues: - Panama’s ongoing public listing by the FATF could adversely affect correspondent banking relations and key credit channels if the FATF were to publicly consider elevating Panama to the list of high-risk jurisdictions (black list). - Potential failure to implement FATF-recommended actions while in a program could pose reputational risk to the Fund. - Possible countermeasures could weaken Panama’s capacity to repay the Fund if the country were to draw on the arrangement. - Mitigants and policy design: - Potential establishment of AML/CFT-related conditionality at the time of the first review under the PLL arrangement to ensure FATF action plan is fully implemented by the time of the second review. - Other mitigants: Panama’s adequate government liquidity buffers, strong macroeconomic policy framework and sound institutions, continued market access despite grey-listing, and track record of servicing debt to the Fund. ### Impact on the Fund’s liquidity and credit exposure - Overall impact: - The proposed PLL arrangement would have a moderate impact on the Fund’s liquidity and potential risk exposure. - Forward Commitment Capacity (FCC) impact: - FCC as of December 17, 2020: SDR 152,315.0 million. - FCC on approval (current FCC minus access under proposed arrangement): SDR 150,431.0 million. - Change in percent of current one-year FCC: -1.2. - Credit concentration and exposure effects: - If Panama makes the scheduled first purchase at approval, credit concentration among the five top borrowers (Panama not part of top five) would slightly decline: - Share of GRA credit to the top five borrowers would decline from 67.7 percent to 67.0 percent. - If Panama were to draw the arrangement in full: - Fund exposure to Panama would peak at SDR 2,260.8 million, equivalent to 14.1 percent of the current level of the Fund’s current precautionary balances. - This compares with a peak Fund exposure to Ecuador of 38 percent of current precautionary balances after approval of an Extended Fund Facility. - Charges and burden-sharing constraints: - If Panama were to accrue arrears on charges after full drawing: - GRA charges for Panama are projected at SDR 27 million for 2021 and peak at SDR 58½ million in 2024. - These charges would significantly exceed the limited capacity of the Fund’s burden sharing mechanism to absorb charges in arrears due to the low interest rate environment and borrowing by the Fund. - Panama’s annual GRA charges in percent of Fund's residual burden sharing capacity for 2020: 158.9 percent. - Fund's precautionary balances (end-FY 2020): 16,000 (SDR millions). - Fund's residual burden-sharing capacity: 24.5. ### Regional concentration and prudential considerations - Regional concentration effects: - On a credit outstanding basis, GRA credit share to Western Hemisphere countries would increase from 46.2 percent to 46.7 percent after Panama’s first purchase. - On a commitment basis (GRA outstanding credit and undrawn balances under active arrangements), exposure to the Western Hemisphere region would increase from 67½ percent to about 68 percent, including arrangements with Chile, Mexico, Colombia, Peru (FCL) and Ecuador (EFF). - Prudential assessment: - The proposed PLL arrangement would cover a 24-month period with access of SDR 1,884 million (500 percent of quota). - Approval would reduce the Fund’s FCC by about 1.2 percent; the Fund’s overall liquidity position is expected to remain adequate after approval but close monitoring is warranted given highly elevated global risks and uncertainty over future demand for Fund resources. ### Assessment of financial risks and mitigating factors - Financial risk characterization: - Financial risks associated with the proposed arrangement are moderate. - If Panama makes the first scheduled purchase at approval, GRA credit exposure to Panama would represent 1½ percent of total GRA credit outstanding. - Assuming full draw (500 percent of quota) and under an adverse scenario, indicators suggest moderate credit risk to the Fund; peak Fund exposure and debt service to the Fund would generally remain below or near medians of recent exceptional access cases. - Country-level risk factors: - Panama’s overall external debt and public external debt are on the high side. - The high peak overall debt service in percent of exports—highest among recent exceptional access cases—reflects mostly private-sector debt. - Mitigating factors: - Adequate government liquidity buffers. - Strong macroeconomic policy framework and sound institutions. - Continued market access despite grey-listing. - Track record of servicing debt to the Fund. - Authorities intend to treat the proposed PLL arrangement as precautionary. - Strong program implementation, including prompt AML/CFT reforms agreed with FATF, would further mitigate risks to the Fund. *Source: IMF staff report (excerpts provided in source content).* ### 1. On behalf of our Panamanian authorities, we thank Executive Directors and Management for ### 1panea2021001 - 1. On behalf of our Panamanian authorities, we thank Executive Directors and Management for ### Recent developments - Panama had been one of the fastest growing economies in the world for two decades until the COVID-19 pandemic. - The authorities are requesting a Precautionary and Liquidity Line (PLL) arrangement. - As of January 11, 2021, the pandemic in Panama registered 281,353 cases and 4,500 deceased. - The Panama Solidarity Plan has benefited more than 1.7 million Panamanians with food and cash transfers. - Social assistance programs will remain in place through mid-2021. - Economic reopening progressed steadily since September 2020 but a recent surge forced reinstatement of curfews and lockdowns during the holiday season and in early January. - The authorities expect a gradual acceleration of economic activity and increased labor market dynamism during 2021 as vaccination progresses; the first lot of 40 thousand vaccines is expected to be delivered later this month. - The index of economic activity (IMAE) registered a reduction of 17.0 percent for the period January-October 2020. - Unemployment reached 18.5 percent in August 2020, compared to 7.1 percent in 2019. - Inflation remained subdued in 2020 and is expected to stay low. - External position improved due to lower international oil prices and higher copper exports offsetting the fall in tourism receipts. - Growth for 2021 is expected to reach 4 percent, supported by an accommodative policy stance, tourism recovery, and resumption of several mega-projects. ### Fiscal policy and public financial management (PFM) - The overall fiscal deficit is expected to reach 9 percent in 2020 due to higher social expenditure and lower revenue collections from tax moratoriums and weak activity. - Debt-to-GDP ratio is expected to reach 53.8 percent in 2020, and 59.4 percent in 2021, from 41.0 percent in 2019. - Public debt is assessed as remaining sustainable and the government’s capacity to honor commitments adequate. - The National Assembly authorized easing the targets in the Social and Fiscal Responsibility Law (SFRL) to create further fiscal space. - Fiscal consolidation under the SFRL has been reset to gradually converge to a new (anchor) deficit of 1.5 percent of GDP by 2025. - Authorities commit to the SFRL as key for fiscal prudence, debt reduction and medium-term fiscal sustainability. - PFM reform priorities within the PLL context: - Implement a multi-annual budget framework. - Reinforce procurement practices. - Perform fiscal reporting on an accrual basis. - FAD technical assistance mission to provide a medium-term roadmap to enhance governance and transparency. ### Financial sector and market access - The financial sector is described as strong and well-capitalized under Basel III principles. - Non-performing loans (NPLs) remain stable at 2.0 percent. - Temporary increase in provisioning due to the loan moratorium is not expected to affect solvency and liquidity indicators. - Capital adequacy ratio (CAR) stood at 16.25 percent at end-September 2020, twice the regulatory standard. - System liquidity stood at 64.0 percent of total deposits at end-November. - Government operationalized a US$1.0 billion Fund for Economic Stimulus (FES) to provide liquidity to banks and credit assistance for recovery, buttressed by resources from the Rapid Financing Instrument (RFI) and Banco Nacional de Panama (BNP). - SBP requested multi-topic technical assistance from MCM to reinforce macroprudential policies, risk assessment, supervisory capacity and systemic risk monitoring. - Credit rating agencies reaffirmed Panama’s investment grade based on strong macroeconomic fundamentals and solid fiscal framework. - BNP issued a 10-year US$1.0 billion bond at an annual yield of 2.25 percent in August 2020. - The government issued a US$2.25 billion global bond in September 2020 in two tranches: - US$1.25 billion maturing in 2032 at 2.25 percent coupon. - US$1.0 billion maturing in 2060 carrying a 3.87 percent coupon. ### AML/CFT regulations and transparency; macroeconomic statistics - Strengthening of regulation and supervision of non-financial obligated subjects (NFBP) in line with the FATF action plan, including: - Criminalization of tax evasion. - Penalization of illegal money-remitters. - Creation of a single registry for offshore companies. - Financial Intelligence Unit’s investigative and prosecution capabilities have been strengthened. - Ministry of Economy and Finance (MEF) has reinforced AML/CFT technical staff to support implementation. - Authorities remain fully committed to achieving a delisting from FATF’s grey list as soon as feasible. - Quality and timeliness of macroeconomic statistics continue to improve; STA completed a ROSC assessment on INEC in May 2020. - Authorities plan modernization and restructuring of INEC and claim full ownership of the ROSC roadmap. - Structural benchmarks under the PLL include: - Creation of the National Statistics Coordination Committee. - Publication of the data template on international reserves. - Publication of fiscal operations of central and general government data on a quarterly basis. - Commitment to subscribe to SDDS standards by the completion of the PLL arrangement to enhance data coverage, periodicity and timeliness. ### Final remarks and program intent - Authorities view the PLL arrangement as critical to supporting the macroeconomic strategy to overcome COVID-19 impacts. - Access to the facility is intended as effective insurance to help Panama recover amid extreme uncertainty and to expedite macroeconomic policy strengthening and institutional reforms to meet international financial standards. - Authorities intend to treat the arrangement as precautionary and approach implementation with full commitment, ownership, and determination. - Should adverse conditions require drawing under the PLL, the country exhibits an adequate capacity to repay the Fund. *Source: 1panea2021001* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1panea2021001.pdf_