## _cr09207

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---

### Background and near‑term outlook
- Strong domestic fundamentals helped contain the impact of the global financial crisis but the rapid deterioration in the global environment has weakened the economic outlook.
- Real GDP growth during 2004–08 averaged 8.8 percent.
- Growth in 2009–10 is projected to slow to 3–4 percent.
- Staff envisages real GDP growth will slow to 3–4 percent in 2009–10, and thereafter rise gradually to 7 percent.
- Inflation peaked at 10 percent in September 2008, fell to 3.7 percent by March 2009, and is projected to fall to about 3 percent by end–2009 and about 2.5 percent by 2010.

### Growth performance and sectoral developments
- Construction, transportation and communications supported real GDP growth above 9 percent in 2008; these sectors, together with financial services, are likely to be among the most adversely affected by the decline in global trade and the slowdown of credit in 2009.
- Construction sector specifics:
  - Annual construction growth reached 34 percent in Q2 2008.
  - Construction’s contribution to GDP growth: ½ percentage point in 2006 → nearly 1½ percentage points in 2008.
  - Construction’s contribution to total employment growth: 0.1 percentage points in 2002 → 1.6 percentage points in 2007 (accounting for one‑third of total employment growth, 4.8 percent); in 2008 contribution dropped to 1 percentage point.
  - Construction permits fell sharply in January 2009.
  - Mitigating factors: Panama Canal expansion (expected to pick up in late 2009), large increase in government infrastructure spending, increased funding for construction.
- Preliminary real GDP data indicate a significant slowdown in financial services in 2008 largely due to shortcomings in estimating the sector’s deflator; IMF STA mission (March 2009) recommended methodological modifications that would lead to a substantive upward revision in the sector’s and real GDP growth.

### Inflation
- Inflation timeline:
  - Peaked at 10 percent in September 2008.
  - Fell to 3.7 percent by March 2009.
  - Projected to fall to about 3 percent by end–2009 and about 2.5 percent by 2010 (above long‑term average of 2 percent).

### Political context
- Presidential elections scheduled for May 3, 2009.
- Polls indicated the opposition party (Cambio Democrático) candidate had made substantial gains on the ruling Partido Revolucionario Democrático candidate.
- Both parties have similar economic platforms; the opposition campaigned on important tax changes, including introduction of a flat tax.
- Subsequent note: Ricardo Martinelli (Cambio Democrático) won the May 3 presidential election; CD alliance won 42 of 71 seats; new administration to take office July 1 with policy orientation toward private‑sector led growth, foreign investment, revenue‑neutral tax reform aiming at a single income tax rate, and increased infrastructure investment.

### Banking and financial sector: structure, stress and policy responses
- Banking system composition:
  - 43 private domestically licensed banks and 2 state banks.
  - 30 offshore banks (not allowed to accept domestic deposits) and 15 representative offices.
- Regional role and risks:
  - As of end‑2008, total deposits from and credit to nonresidents represented 59 percent and 66 percent of GDP, respectively.
  - Offshore banks have deposits and credit from nonresidents equivalent to about 30 percent of Panama’s GDP (offshore banks not included in the domestic banking system totals).
  - Deposits are about 130 percent of GDP (excluding interbank deposits).
  - Nearly 60 percent of Panama’s banking system is foreign‑owned.
  - Nearly 30 percent of bank deposits (40 percent including interbank deposits) are owned by foreigners.
- Financial soundness and supervision:
  - Banks are well‑capitalized, liquid, subject to effective supervision, and have strong financial soundness indicators.
  - Capital adequacy ratio remained at 14 percent.
  - Nonperforming loans: 1.8 (2005), 1.4 (2006), 1.3 (2007), 1.4 (2008), 1.2 (2009), 1.4 (2010) (banking system NPL series reported).
  - Ratio of provisions to nonperforming loans (banking system): 116.2 (2005), 128.5 (2006), 141.7 (2007), 131.2 (2008), 141.5 (2009), 125.4 (Mar.), 104.8 (Dec.).
  - Banks increased liquidity ratios from about 58 percent in November 2008 to above 64 percent by mid‑April 2009 (system liquidity measures also reported as 62.7 at end‑March 2009).
- Recent crisis effects and policy measures:
  - After September 2008 banks experienced difficulties accessing foreign credit lines due to prohibitive pricing, correspondent bank restrictions, and parent bank funding instructions.
  - Bank deposits remained stable and credit growth bottomed out by end‑2008; private sector credit 12‑month percent change: 13.3 (2005), 12.9 (2006), 18.2 (2007), 14.6 (2008), 2.7 (2009), 9.0 (2010).
  - Banco Nacional de Panama (BNP) established a collateralized line of credit of US$400 million for banks affected by reduced access to foreign credit.
  - Government announced Financial Stimulus Program (PEF) in January totaling US$1.1 billion for on‑lending (funded by IDB US$500 million, CAF US$210 million, and BNP resources); availability delayed until April 2009.
  - Superintendency of Banks (SBP) took administrative control of Stanford Bank‑Panama in February following a deposit run; subsequent small deposit runs were quickly contained after SBP assurances.
- Stress tests and resilience:
  - Stress tests showed the banking system would remain adequately capitalized even under severe loan‑quality shocks; a few banks with high exposure to construction and household sectors could face distress but most would remain above minimum regulatory capital.
  - Mission commended SBP’s stepped‑up monitoring and timely interventions; cautioned against relaxing prudential framework except within a wider emergency support strategy.
- Policy recommendations to reduce uncertainty and facilitate credit:
  - Develop contingency plans for emergency liquidity support through a temporary facility with clear, transparent rules (collateral types and magnitude).
  - Clarify and publicize terms of the BNP collateralized credit line.
  - Establish effective liquidity support mechanisms (priority agreed by authorities) requiring additional external financing since BNP resources are not freely available.
  - Staff encourages accelerating plans to establish a safety net, creation of a contingent credit line, and close monitoring of PEF operations.

### Fiscal position, Social and Fiscal Responsibility Law (SFRL), and public finances
- Fiscal outcomes and drivers:
  - NFPS surplus (excluding Canal Authority, ACP) declined from 3.5 percent of GDP in 2007 to 0.4 percent of GDP in 2008 despite robust revenues.
  - Drivers of lower surplus: public investment increased from 5 percent to 7 percent of GDP; measures to mitigate higher food and oil prices equivalent to about 1 percent of GDP.
  - In dollar terms, capital expenditures of the nonfinancial public sector more than tripled since 2004, increasing by about 70 percent in 2008 alone.
  - Central government revenue declined reflecting lower transfers from the ACP.
- SFRL (Law No. 34) and fiscal rule:
  - Approved June 2008, effective January 2009.
  - Limits NFPS (excluding ACP) deficit at 1 percent of GDP.
  - Sets total public debt target (including debt held by the Social Security Agency but excluding Fiduciary Fund) of 40 percent by 2014.
  - Allows deviations in event of (i) natural disasters, (ii) national state of emergency, and (iii) an economic recession; deviations require National Assembly approval.
  - Built‑in countercyclical room: NFPS deficit can increase up to 3 percent of GDP where real GDP growth falls to one percent or less, and 2 percent in the following year.
  - Measures deficit on a cash basis using international accounting principles; requires new administrations to publish a medium‑term fiscal framework and a social strategy program within six months of assuming office.
- Debt and projections:
  - Public debt‑to‑GDP ratio declined to 39 percent by end‑2008 (SFRL definition: 49 percent at end‑2007 → 41 percent by end‑2008).
  - Fiduciary Fund held about US$890 million in Panamanian global bonds as of end‑2008 (not included in SFRL debt target).
  - Staff recommended adherence to SFRL deficit limits in 2009 to preserve credibility.
  - Mission noted overall fiscal balance (including ACP) projected to shift from surplus of 2.5 percent of GDP in 2008 to a deficit of 1 percent of GDP (an expansion of about 3½ percentage points); adjusting for cyclicality and one‑offs implies a fiscal impulse of about 1 percentage point in 2009.
  - To achieve 1 percent of GDP NFPS deficit target would require reducing total government expenditures by ½ percent of GDP relative to 2008 level.
  - 2009 budget deficit target: 1 percent of GDP (target stipulated in the SFRL).
  - Revenues projected to decline by 2 percentage points of GDP relative to 2008 due to slower growth and lower capital revenues.
  - Government placed US$323 million through reopening of bonds falling due in 2015 in March 2009, at a yield of 7.04 percent.
- Staff recommendations and scenarios:
  - Be prepared to act quickly within the SFRL if slowdown is stronger than envisaged; issue guidelines clarifying data and methodology to decide when fiscal stance should be relaxed.
  - Adopt a forward‑looking framework using preliminary growth estimates from previous two quarters and forecasts based on leading indicators; consider an independent body of experts to furnish growth forecasts.
  - Alternative scenario considered: output growth of 0 percent in 2009 and 1 percent in 2010 with a deficit in line with the SFRL; analysis showed higher fiscal deficit allowed by the SFRL would not pose major risks for debt sustainability and public debt‑to‑GDP would be reversed once Canal expansion borrowing completed.
  - Recommend higher government spending be geared to support domestic activity and protect the poor, prioritizing public spending on goods and services and maintaining existing social programs, including transfers to sub‑national government agencies facing financing constraints.

### Canal expansion, external financing, and external position
- Canal expansion:
  - Estimated cost: US$5.3 billion (other reference: Projected cost US$5.25 billion over 8 years).
  - External financing for the project of US$2.3 billion was secured in October 2008; JBIC and the European Investment Bank providing largest share with US$800 and US$500 million respectively.
  - Repayment terms for the total borrowing: 20‑year amortization, 10 years grace, average spread above LIBOR of 93 basis points.
  - Financing sources: largely revenue from operations (including toll increases) and borrowing by the Panama Canal Authority.
  - Project can boost real GDP growth by about 1 percent annually over seven‑year construction period (staff estimate).
  - Peak construction period: 2009–2012 with average investment over US$850 million per annum; expansion represented 2.2 percent of GDP in 2008 and should reach 3.5 percent of GDP in 2009.
- External current account and FDI:
  - External current account deficit deteriorated to 12½ percent in 2008 (7.3 percent of GDP in 2007).
  - Large current account deficit fully financed by ample foreign inflows, including FDI.
  - Foreign direct investment rose to US$2.4 billion (10.4 percent of GDP) in 2008; FDI projected to remain high at about 7 percent of GDP in 2009–10 (staff projection: FDI actual: 6.0 (1998–2006 avg), 9.2 (2007), 10.4 (2008), 7.2 (2009–14 proj.); FDI underlying level: 6.0).
  - Mission and staff assess Panama’s competitiveness has improved; REER remains below its equilibrium level and is estimated to be undervalued by about 5–10 percent.
  - Once Canal expansion is completed in 2014, current account deficit envisaged to decline below 6 percent of GDP.
- External debt and exposures:
  - Deposits from nonresidents and interbank credit lines account for more than 2/3 of Panama’s external debt; those deposits and credit lines represent close to 120 percent of GDP and are mostly on‑lent to nonresidents.
  - Excluding banks, Panama’s external debt as of December 2008 estimated at 50 percent of GDP, of which close to 80 percent is owned by the government and has an average maturity of 7 years.
  - Nonbank external debt has fallen in recent years and is expected to decline as a share of GDP over the medium term.

### Poverty, social indicators and social protection
- Poverty and unemployment:
  - Household expenditure survey (World Bank assisted): poverty declined from 37 percent in 2003 to 32 percent in 2008.
  - Extreme poverty fell from 17 percent in 2003 to 14 percent in 2008.
  - CEPAL (income‑based) finds an even larger decline in poverty and extreme poverty between 2001 and 2007.
  - Open unemployment rate: fell from 10.9 percent at end‑2003 to 4.2 percent in August 2008.
  - Graphical GINI‑related series listed values include: 32.4%, 14.2%, 36.8%, 37.3%, 16.6%, 18.8%.
- Social programs and protective measures:
  - Programs to protect purchasing power of low‑income groups and vulnerable households introduced up to mid‑2008.
  - “Consumers assistance program” (PAC): elimination of import duties on agricultural inputs, price support policies, low interest agricultural loans — helped achieve over 90 percent self‑sufficiency in rice in 2008‑09 crop season.
  - Cash‑transfer program “Red de Oportunidades”, school feeding programs, subsidies on cooking gas and electricity, low‑pension retiree adjustments included in 2009 budget.
  - Diesel subsidy for public transportation reduced due to lower fuel prices to improve subsidy targeting.
- Staff advised prioritizing public spending on goods and services and maintaining existing social programs during any targeted fiscal support.

### Macroeconomic projections and key indicators (selected)
- Real GDP (1996 prices): 7.2 (2005), 8.5 (2006), 11.5 (2007), 9.2 (2008), 3.0 (2009), 4.0 (2010).
- CPI (average): 2.9 (2005), 2.5 (2006), 4.2 (2007), 8.8 (2008), 3.7 (2009), 2.8 (2010).
- Private sector credit (12‑month percent change): 13.3 (2005), 12.9 (2006), 18.2 (2007), 14.6 (2008), 2.7 (2009), 9.0 (2010).
- Current account (percent of GDP): -4.9 (2005), -3.1 (2006), -7.3 (2007), -12.4 (2008), -9.6 (2009), -11.4 (2010).
- Direct foreign investment (percent of GDP): 6.2 (2005), 14.6 (2006), 9.8 (2007), 10.4 (2008), 6.5 (2009), 7.0 (2010).
- Gross domestic investment (percent of GDP): 18.4 (2005), 19.5 (2006), 23.5 (2007), 26.1 (2008), 26.5 (2009), 28.9 (2010).
- Revenues and public finances (percent of GDP): Revenue and grants 24.3 (2005), 26.8 (2006), 30.2 (2007), 29.3 (2008), 26.8 (2009), 26.3 (2010); Expenditure 25.9 (2005), 25.6 (2006), 25.4 (2007), 26.8 (2008), 27.7 (2009), 29.5 (2010).
- Public debt (percent of GDP): Total debt 58.3 (2005), 52.6 (2006), 46.4 (2007), 39.0 (2008), 36.9 (2009), 37.6 (2010).
- Medium‑term growth path (selected): Real GDP at market prices 3.0 (2009), 4.0 (2010), 6.5 (2011), 6.5 (2012), 7.0 (2013), 6.5 (2014).
- Debt sustainability indicators:
  - Baseline public sector debt path: 62.2 (2004), 58.3 (2005), 52.6 (2006), 46.4 (2007), 39.0 (2008), 36.9 (2009), 37.6 (2010), 33.8 (2014).
  - Gross financing need indicators (percent of GDP): 9.6 (2005), 10.6 (2006), 13.5 (2007), 1.5 (2008), 5.4 (2009), 4.1 (2010).

### External relations, multilateral financing and donor activity
- Panama secured external financing for Canal expansion: US$2.3 billion in October 2008 from multilaterals (major contributors JBIC US$800 million, European Investment Bank US$500 million).
- IDB and World Bank engagements:
  - IDB provided liquidity and growth support: US$500 million publicly‑guaranteed emergency loan to BN in support of on‑lending (approved April 15, 2009).
  - World Bank Country Partnership Strategy (FY2008–10) lending envelope US$390–465 million; active IBRD operations committed US$379.5 million with US$287.4 million undisbursed (as of March 16, 2009).
- Mission noted authorities secured external financing needed to finance 2009 deficit, including international market borrowing at relatively favorable terms.

### Data, statistics and technical assistance
- Data quality and availability:
  - Quarterly data available with a lag of about one quarter and subject to revisions.
  - Revised financial activity GDP estimates and related overall GDP revision to be published in October 2009 (per IMF STA mission March 2009).
  - New Household Income and Expenditure Survey conducted during 2007–08; National Institute of Statistics and Census updating CPI base, basket and weights.
  - Panama participates in GDDS since December 2000; metadata and DSBB plans need updating.
- Fund relations and TA:
  - As of February 28, 2009 Panama had no outstanding purchases or loans; latest precautionary SBA expired March 29, 2002.
  - Technical assistance: recent STA mission March 2009 (national accounts statistics); FAD and MCM missions on fiscal and financial sector issues in prior years.
  - Law 10 (effective January 2009) to provide National Institute of Statistics and Census greater administrative and resource autonomy.

*Italic: Source: _cr09207 (Staff Report for the 2009 Article IV Consultation — Informational Annex; May 6, 2009, and related sections of the provided IMF document).*

### 1.         Selected         Economic         Indicators ................................................................

### _cr09207 - 1.         Selected         Economic         Indicators ................................................................ 

### Background and near term outlook
- Strong domestic fundamentals helped contain the impact of the global financial crisis but the rapid deterioration in the global environment has weakened the economic outlook.
- Real GDP growth during 2004–08 averaged 8.8 percent.
- Growth in 2009–10 is projected to slow to 3–4 percent.

### Growth performance and sectoral developments
- Construction, transportation and communications sectors helped maintain real GDP growth above 9 percent in 2008, but these sectors, together with financial services, are likely to be among the most adversely affected by the decline in global trade and the slowdown of credit in 2009.
- Construction sector specifics (Box 1):
  - Annual construction growth reached 34 percent in Q2 2008.
  - Construction’s contribution to GDP growth rose from ½ percentage point in 2006 to nearly 1½ percentage points in 2008.
  - Construction’s contribution to total employment growth rose from 0.1 percentage points in 2002 to 1.6 percentage points in 2007, accounting for one-third of total employment growth (4.8 percent); in 2008 construction’s contribution to employment growth dropped to 1 percentage point.
  - Construction permits fell sharply in January 2009, signaling further slowdown ahead.
  - Mitigating factors: Panama Canal expansion (expected to pick up in late 2009), a large increase in government spending on infrastructure, and increased funding for construction.
- Preliminary real GDP data indicates a significant slowdown in financial services in 2008 largely due to shortcomings in estimating the sector’s deflator; an IMF STA mission visited in March 2009 recommended methodological modifications that would lead to a substantive upward revision in the sector’s and real GDP growth.

### Inflation
- Inflation peaked at 10 percent in September 2008.
- Inflation fell to 3.7 percent by March 2009.
- Inflation is projected to fall to about 3 percent by end–2009.

### Political context
- Presidential elections scheduled for May 3, 2009.
- Polls indicate the opposition party (Cambio Democrático) candidate has made substantial gains on the ruling Partido Revolucionario Democrático candidate.
- Both parties have similar economic platforms; the opposition is campaigning on important tax changes, including the introduction of a flat tax.

### Banking and financial sector
- Banking system composition:
  - 43 private domestically licensed banks and 2 state banks.
  - In addition, there are 30 offshore banks (not allowed to accept domestic deposits) and 15 representative offices.
- Financial soundness and supervision:
  - Banks are well-capitalized, liquid, subject to effective supervision, and have strong financial soundness indicators.
  - A new Banking Law became effective in August 2008; it strengthens consolidated supervision, extends supervision to financial conglomerates, improves the bank resolution framework, and enhances risk-adjusted capital requirements.
  - Agreement No. 8-2008 permits transfer of certain securities from “available for sale” to “held to maturity”.
- Regional role and risks (Box 2):
  - As of end-2008, total deposits from and credit to nonresidents represented 59 percent and 66 percent of GDP, respectively.
  - Domestic banking system does not include offshore banks, which have deposits and credit from nonresidents equivalent to about 30 percent of Panama’s GDP.
  - Rapid expansion increases vulnerability to developments in other countries of the region.
- Effects of the global financial crisis:
  - Following September 2008, Panamanian banks experienced difficulties accessing foreign credit lines due to prohibitive pricing, correspondent bank restrictions, and parent bank funding instructions.
  - Bank deposits remained stable and credit growth bottomed out by end-2008.
  - Banco Nacional de Panama (BNP) established a collateralized line of credit of US$400 million for banks affected by reduced access to foreign credit.
  - The government announced a Financial Stimulus Program (PEF) in January for a total of US$1.1 billion for on-lending for productive investment and working capital; funded by IDB (US$500 million), CAF (US$210 million), and BNP resources; availability of PEF resources delayed until April 2009.
  - In February, the Superintendency of Banks (SBP) took administrative control of Stanford Bank-Panama following a deposit run; subsequent small deposit runs were quickly contained after SBP assurances.

### Fiscal position and public finances
- NFPS surplus (excluding the Canal Authority, ACP) declined from 3.5 percent of GDP in 2007 to 0.4 percent of GDP in 2008 despite robust revenues.
- Drivers of lower surplus:
  - Public investment increased from 5 percent to 7 percent of GDP.
  - Measures to mitigate higher food and oil prices equivalent to about 1 percent of GDP.
- Panama Canal expansion estimated cost: US$5.3 billion.
- Public debt-to-GDP ratio declined to 39 percent by end-2008.
- Fiscal reforms:
  - Social and Fiscal Responsibility Law (SFRL) enacted in June 2008, which sets a ceiling on the fiscal deficit.
  - Government finalizing a Public-Private Partnership (PPP) law to provide legal framework for PPP projects.
- Central government revenue declined reflecting lower transfers from the ACP.
- In dollar terms, capital expenditures of the nonfinancial public sector more than tripled since 2004, increasing by about 70 percent in 2008 alone.

### External position and balance of payments
- External current account deficit deteriorated to 12½ percent in 2008 (7.3 percent of GDP in 2007).
- Large current account deficit was fully financed by ample foreign inflows, including FDI.
- Foreign direct investment rose to US$2.4 billion (10.4 percent of GDP) in 2008.
- Nominal and real effective exchange rates appreciated during 2008 in line with the U.S. dollar.
- Widening of the current account deficit in 2007–08 was mainly financed by FDI, which outpaced the growth of exports of goods and services.

### Financial indicators and markets
- Sovereign bond yield spreads widened but remained below the EMBI+ (Figure 3).
- Bank deposits growth slowed in 2008; credit stagnated by year end.
- As of end-2008, total deposits from and credit to nonresidents were significant shares of GDP (see Banking and regional role).

*Italic: Source: _cr09207 - 1.         Selected         Economic         Indicators ................................................................*

### 10. Significant decline in poverty. A recent household expenditure survey, conducted with the

### _cr09207 - 10. Significant decline in poverty. A recent household expenditure survey, conducted with the

### Poverty and social indicators
- Poverty rates from household expenditure survey (World Bank assisted): declined from 37 percent in 2003 to 32 percent in 2008.
- Extreme poverty from the same survey: fell from 17 percent in 2003 to 14 percent in 2008.
- A CEPAL study (income-based) finds an even larger decline in poverty and extreme poverty between 2001 and 2007.
- Open unemployment rate: fell from 10.9 percent at end-2003 to 4.2 percent in August of 2008.
- While inequality seems to have increased somewhat, indicators of extreme poverty, literacy and longevity are described as reasonably good compared to the rest of the region.
- Graphical figures and GINI-related series are reported in the source (national/urban/rural/indigenous regions), and listed values in the graphic include: 32.4%, 14.2%, 36.8%, 37.3%, 16.6%, 18.8%.

### Outlook and risks
- Growth projections and inflation:
  - Staff envisages real GDP growth will slow to 3–4 percent in 2009–10, and thereafter rise gradually to 7 percent.
  - Inflation is projected to fall to about 2.5 percent by 2010, above the long-term average of 2 percent.
- Sectoral impacts: communications and transportation, financial services, and the Colon Free Zone are likely to be most affected owing to strong external links; residential construction is also likely to slow significantly.
- Mitigating factors sustaining growth above regional average:
  - Panama Canal expansion moving into high gear in 2009–10; estimates show the project can boost real GDP growth by about 1 percent annually over the seven-year construction period.
  - Significant acceleration of government investment starting in second half of 2008 will help sustain construction activity.
  - FDI is projected to remain high at about 7 percent of GDP in 2009–10.
- Risks to outlook:
  - Depth and length of Panama’s slowdown depend on magnitude/duration of U.S. and regional recessions, shocks to confidence, and resilience of FDI.
  - A stronger-than-envisaged decline in credit growth could result in slower output growth.
  - Authorities indicated aggregate demand had held up and expected construction to be supported by higher government investment and pent-up housing demand.

### Canal expansion and public finance projections
- Canal expansion:
  - Projected cost: US$5.25 billion over 8 years.
  - External financing for the project of US$2.3 billion was secured in October 2008; JBIC and the European Investment Bank providing the largest share with US$800 and US$500 million respectively.
  - Repayment terms for the total amount of borrowing: 20-year amortization, and 10 years grace, with an average spread above LIBOR of 93 basis points.
  - Financing sources: largely revenue from operations (including toll increases) and borrowing by the Panama Canal Authority.
- Public finance highlights and projections:
  - 2009 budget deficit target: 1 percent of GDP (target stipulated in the SFRL).
  - Revenues projected to decline by 2 percentage points of GDP relative to 2008 due to slower growth and lower capital revenues.
  - Transfers to the government expected to remain about the 2008 level due to a planned increase in tariffs (of about 15 percent) and additional cost-saving measures.
  - Achieving the 1 percent of GDP NFPS deficit target would require reducing total government expenditures by ½ percent of GDP relative to their 2008 level.
  - Capital spending budget for 2009 is lower than the outturn for 2008.
  - Projected deficit for 2009 will be externally financed, including through placement of bonds in international markets and loans from the IDB and World Bank.
  - The government placed US$323 million through reopening of bonds falling due in 2015 in March 2009, at a yield of 7.04 percent.

### Social and Fiscal Responsibility Law (SFRL) and fiscal policy stance
- SFRL basics:
  - Approved June 2008 (Law No. 34), effective January 2009.
  - Limits the deficit of the nonfinancial public sector (NFPS), excluding the ACP, at 1 percent of GDP.
  - Sets a target for total public debt (including debt held by the Social Security Agency but excluding debt held by the Fiduciary Fund) of 40 percent by 2014.
  - Allows deviations from the fiscal rule in event of (i) natural disasters, (ii) national state of emergency, and (iii) an economic recession; deviations require National Assembly approval.
  - Built-in room for counter-cyclical policy: allows NFPS deficit to increase up to 3 percent of GDP where real GDP growth falls to one percent or less, and 2 percent in the following year.
  - Measures deficit on a cash basis using international accounting principles; requires new administrations to publish a medium term fiscal framework and a social strategy program within six months of assuming office.
- Debt ratio historical values (SFRL definition):
  - Debt-to-GDP ratio corresponding to SFRL definition was 49 percent of GDP at end-2007, which declined to 41 percent by end-2008.
  - Fiduciary Fund held about US$890 million in Panamanian global bonds as of end-2008 (not included in SFRL debt target definition).
- Staff recommendations and scenario analysis:
  - Staff recommended adherence to the SFRL deficit limits in 2009 to preserve policy credibility and market perceptions.
  - Noted that the overall fiscal balance (including the ACP) is projected to shift from a surplus of 2.5 percent of GDP in 2008 to a deficit of 1 percent of GDP (an expansion of about 3½ percentage points); adjusting for cyclicality and one-offs implies a fiscal impulse of about 1 percentage point in 2009.
  - Mission argued government should be prepared to act quickly within the SFRL if slowdown is stronger than envisaged; urged issuance of guidelines clarifying data and methodology to decide when fiscal stance should be relaxed.
  - Recommended adoption of a forward-looking framework using preliminary growth estimates from previous two quarters and forecasts based on leading indicators; suggested an independent body of experts could furnish independent growth forecasts.
  - Alternative scenario considered: output growth of 0 percent in 2009 and 1 percent in 2010 with a deficit in line with the SFRL; analysis showed the higher fiscal deficit allowed by the SFRL would not pose major risks for debt sustainability and public debt-to-GDP would be reversed once Canal expansion borrowing completed.
  - Mission recommended higher government spending be geared to support domestic activity and protect the poor, prioritizing public spending on goods and services and maintaining existing social programs, including transfers to sub-national government agencies facing financing constraints.

### Financial system risks and policy responses
- Banking sector vulnerabilities:
  - Nearly 60 percent of Panama’s banking system is foreign-owned.
  - Nearly 30 percent of bank deposits (40 percent including interbank deposits) are owned by foreigners.
  - Deposits are about 130 percent of GDP (excluding interbank deposits).
  - Absence of a central bank means no formal lender-of-last-resort institution; large banking system size exacerbates challenges in providing a credible safety net.
  - Banks face risk of deterioration in asset quality amid lower growth in Panama and the region.
- Recent bank behavior and liquidity:
  - Banks increased liquidity ratios from about 58 percent in November 2008 to above 64 percent by mid-April 2009.
  - Such self-insurance measures can reduce credit extension and exacerbate economic slowdown.
- Recommended actions to reduce uncertainty and facilitate credit:
  - Develop contingency plans to provide emergency liquidity support to deal with large or systemic liquidity shortages through a temporary facility, guided by clear and transparent rules (including collateral types and magnitude available to each bank).
  - Clarify and make public the terms of the collateralized credit line from the BNP; staff commended rapid creation but noted delays and uncertainty about its effectiveness.
  - Establishing effective liquidity support was agreed as a priority by authorities, but would require additional external financing since BNP resources are not freely available.
- Contextual operational note:
  - A large share of BNP’s foreign assets are the counterpart of deposits from the ACP and the Social Security System.

*Source: Panamanian authorities and the World Bank; IMF staff estimates and projections as presented in the source document.*

### 23. The mission emphasized that the weak growth outlook for the country and the region

### _cr09207 - 23. The mission emphasized that the weak growth outlook for the country and the region

### Banking sector: resilience, stress tests, and risks
- Mission findings:
  - Stress tests showed that the banking system would remain adequately capitalized even under severe shocks to loan quality.
  - A few banks with high exposure to the construction and household sectors could face some distress in the event of a severe economic downturn.
  - The tests suggest that most of those banks would stay above the minimum required regulatory capital even under those conditions.
- Supervisory actions and recommendations:
  - Mission commended the Superintendency of Banks for stepped-up monitoring of banks and noted the continued importance of timely interventions.
  - Mission welcomed the swift action on the Stanford Bank-Panama, which had prevented contagion to the rest of the banking system.
  - Mission cautioned authorities against a relaxation of the prudential framework (which should only be considered in the context of a wider strategy of emergency support).
  - Mission encouraged using the Financial Sector Assessment Program (FSAP) mission planned for 2009–10 to discuss these issues further.
- Further staff advice:
  - Staff encourages the authorities to accelerate plans to establish a safety net for banks, including through the creation of a contingent credit line.
  - Staff welcomes the credit facility under the Financial Stimulus Program (PEF), and encourages the authorities to monitor its operations to ensure its effective use.
  - Staff commends steps to augment liquidity and prompt intervention actions taken early in the year.

### Inclusion in tax-haven list and regulatory responses
- Challenge:
  - Inclusion of Panama in a list of tax havens poses additional challenges; banks were concerned that such designation could have adverse consequences for Panama’s financial industry.
- Authorities’ strategy and options under consideration:
  - Dialogue with the private sector to agree on a strategy to address Panama’s inclusion in the list.
  - Strategy could involve changes to financial industry regulations in line with an earlier agreement with the OECD that had been only partially implemented.
  - Other options being considered include:
    - Limitations to the use of bearer shares.
    - Modifications in bank secrecy regulations.
    - Permission to exchange tax information.
- Mission stance:
  - Mission strongly endorsed the authorities’ cooperative approach and noted authorities’ concern about the lack of a level playing field in this area.

### External competitiveness and current account dynamics
- Agreement and assessment:
  - Mission and authorities agreed that Panama’s external current account deficit will remain above its medium-term norm while the Canal expansion is underway.
  - Staff analysis suggests Panama’s competitiveness has improved (Box 4).
  - Underlying current account balance, adjusted for Canal expansion and high FDI, would remain broadly in line with the historical norm.
  - Once the Canal expansion is completed in 2014, the current account deficit is envisaged to decline below 6 percent of GDP, a level consistent with Panama’s investment needs and potential growth rate.
- Specific figures (from table):
  - Current account balance (actual): Average 1998–2006: -5.3; 2007: -7.3; 2008: -12.4; 2009–14 Projection: -9.0.
  - Panama Canal-related investment: 1998–2006: 0.0; 2007: 0.0; 2008: 0.3; 2009–14: 2.1.
  - FDI (above underlying level): 1998–2006: 0.0; 2007: 3.2; 2008: 4.4; 2009–14: 1.2.
  - FDI (actual): 1998–2006: 6.0; 2007: 9.2; 2008: 10.4; 2009–14: 7.2.
  - FDI (underlying level): 1998–2006: 6.0; 2007: 6.0; 2008: 6.0; 2009–14: 6.0.
  - Current account balance (adjusted): 1998–2006: -5.3; 2007: -4.1; 2008: -7.7; 2009–14: -5.6.
  - Imports (above underlying level) 1/: 1998–2006: -0.1; 2007: 1.0; 2008: 1.6; 2009–14: -0.1.
  - Non-oil imports (excluding Canal): 1998–2006: -17; 2007: -19.4; 2008: -20.7; 2009–14: -18.3.
  - Non-oil imports (adjusted for cyclical position): 1998–2006: -17; 2007: -18.4; 2008: -19.1; 2009–14: -18.5.
  - Underlying current account balance: 1998–2006: -5.4; 2007: -3.1; 2008: -6.1; 2009–14: -5.8.
  - Memorandum item: Output gap: 1998–2006: -0.2; 2007: 2.5; 2008: 4.0; 2009–14: -0.4.
  - Note: 1/ Assumes a propensity to import of 0.4.

### External debt structure and vulnerabilities
- Role of banking center and offshore banks:
  - Panama’s role as a regional banking center together with the offshore banks implies a high level of foreign debt.
  - Deposits from nonresidents and interbank credit lines account for more than 2/3 of Panama’s external debt.
  - Those bank deposits and credit lines, representing close to 120 percent of GDP, are mostly on-lent to nonresidents.
- Nonbank external debt:
  - Excluding banks, Panama’s external debt as of December 2008 is estimated at 50 percent of GDP, of which close to 80 percent is owned by the government and has an average maturity of 7 years.
  - Nonbank external debt has fallen in recent years and is expected to decline as a share of GDP over the medium term.

### Trade links and regional agreements
- Free trade agreement with the U.S.:
  - Panama ratified the agreement with the U.S. in July 2007, but ratification by the U.S. is pending.
- Regional trade progress:
  - Conclusion of trade agreements with all Central American countries.
  - Paved the way for Panama joining the framework agreement for the establishment of a Central America Customs Union.
  - Participation in discussions on an Association Agreement between the region and the EU.
  - Negotiations with Mexico and Canada on bilateral free-trade agreements are also underway.

### Competitiveness indicators and Box 4 findings
- REER and equilibrium:
  - REER, annual average (2000=100): 2005: 92.5; 2006: 92.1; 2007: 90.7; 2008: 89.8.
  - REER, end of period: 2005: 95.1; 2006: 90.7; 2007: 88.9; 2008: 93.9.
  - Equilibrium REER (2000=100): 2005: 100.6; 2006: 101.2; 2007: 101.3; 2008: 101.2.
  - Terms of Trade, goods and services (1996=100): 2005: 109.5; 2006: 109.4; 2007: 109.3; 2008: 106.5.
- Trade volume changes (selected):
  - Exports of goods (volume change; percent): 2005: 7.7; 2006: 8.0; 2007: 5.9; 2008: -5.9.
  - Exports of services (volume change; percent): 2005: 13.1; 2006: 15.6; 2007: 18.5; 2008: 10.9.
  - Imports of goods (volume change; percent): 2005: 10.0; 2006: 11.6; 2007: 33.3; 2008: 11.9.
  - Imports of services (volume change; percent): 2005: 17.4; 2006: -8.4; 2007: 15.5; 2008: 15.0.
- Box 4 summary:
  - Despite the slowdown in global trade, Panama remains competitive.
  - Panama capitalized on rapid expansion in global commerce; transport, communication, financial services, and tourism gained market share.
  - REER depreciated in line with the U.S. dollar and Panama’s low inflation; depreciation was partially reversed in the second half of 2008.
  - REER remains below its equilibrium level; staff estimates suggest the REER is undervalued by about 5–10 percent.
  - Panama’s REER has shown remarkable stability since the mid 1990s; the one-to-one link to the dollar does not seem to have adversely affected competitiveness relative to neighbors.

### Staff appraisal, outlook, and fiscal policy guidance
- Overall appraisal:
  - Panama is facing the global economic crisis from a position of strength: rapid growth, a strong and well regulated banking sector, a solid fiscal position, and the Canal expansion project.
  - Panama’s growth outlook for 2009 is less favorable than in recent years, but is expected to be stronger than in the rest of the region.
  - Downside risks are high.
- 2008 performance highlights:
  - Real GDP grew by more than 9 percent.
  - Inflation reached a 30-year high of 10 percent in August 2008, but decelerated thereafter.
  - External current account deficit widened to 12.5 percent of GDP.
- Fiscal policy recommendations:
  - Staff supports the government’s intention to adhere to the Social and Fiscal Responsibility law in 2009.
  - Staff considers that a fiscal deficit target of 1 percent of GDP for 2009 is appropriate.
  - Conservative revenue projections in the budget should allow attainment of the deficit target despite weaker growth outlook.
  - Given downside risks, staff encourages careful monitoring of revenue performance and preparedness to restrain expenditure if revenues are weaker than envisaged.
  - Staff commends authorities for securing external financing needed to finance the 2009 deficit, including borrowing from international markets at relatively favorable terms.
- Data and statistics:
  - Panama’s economic statistics and data provision are broadly adequate for surveillance.
  - Authorities are updating the CPI based on a new Household, Income, and Expenditure Survey and preparing to change the base year of national accounts.
  - Law 10, in effect since January 2009, will provide the National Institute of Statistics and Census greater administrative and resource autonomy.
  - Authorities welcomed STA technical assistance to address under-estimation of the real value added in the Financial Services; staff encourages implementation of proposed recommendations as soon as possible.

*Source: _cr09207 - 23. The mission emphasized that the weak growth outlook for the country and the region*

### 36. It is proposed that the next Article IV consultation with Panama takes place on the standard

### _cr09207 - 36. It is proposed that the next Article IV consultation with Panama takes place on the standard

### Consultation timing
- It is proposed that the next Article IV consultation with Panama takes place on the standard 12-month cycle.

### Macroeconomic performance and short-term projections
- Real GDP (1996 prices): 7.2 (2005), 8.5 (2006), 11.5 (2007), 9.2 (2008), 3.0 (2009), 4.0 (2010).
- Consumer price index (average): 2.9 (2005), 2.5 (2006), 4.2 (2007), 8.8 (2008), 3.7 (2009), 2.8 (2010).
- CPI (end of year): 3.4 (2005), 2.2 (2006), 6.4 (2007), 6.8 (2008), 3.2 (2009), 2.5 (2010).
- Domestic demand (at constant prices):
  - Public consumption: 4.1 (2005), 2.7 (2006), 7.5 (2007), 3.0 (2008), 2.6 (2009), 4.0 (2010).
  - Private consumption: 8.8 (2005), 4.9 (2006), 15.0 (2007), 13.1 (2008), 2.3 (2009), 2.6 (2010).
  - Public investment: -4.1 (2005), 17.2 (2006), 43.2 (2007), 57.9 (2008), 19.3 (2009), 24.2 (2010).
  - Private investment: 4.9 (2005), 12.6 (2006), 31.8 (2007), 4.6 (2008), 0.0 (2009), 8.5 (2010).

### Financial sector indicators
- Private sector credit (12-month percent change): 13.3 (2005), 12.9 (2006), 18.2 (2007), 14.6 (2008), 2.7 (2009), 9.0 (2010).
- Broad money (12-month percent change / M2): 8.5 (2005), 21.5 (2006), 15.9 (2007), 18.4 (2008), 8.8 (2009), 7.2 (2010).
- Average deposit rate (1 year): 3.2 (2005), 5.1 (2006), 4.6 (2007), 3.8 (2008).
- Average lending rate (1 year): 8.2 (2005), 8.6 (2006), 9.0 (2007), 8.5 (2008).
- Banking system asset quality (nonperforming loans as percent of total loans): 1.8 (2005), 1.4 (2006), 1.3 (2007), 1.4 (2008), 1.2 (2009), 1.4 (2010).
- Ratio of provisions to nonperforming loans (banking system): 116.2 (2005), 128.5 (2006), 141.7 (2007), 131.2 (2008), 141.5 (2009), 125.4 (Mar.), 104.8 (Dec.).
- Pretax return on average assets (banking system): 2.1 (2005), 1.7 (2006), 2.0 (2007), 2.5 (2008), 2.6 (2009), 2.4 (2010), 2.2 (2008).
- Liquidity measures:
  - Ratio of liquid assets to total deposits (banking system): 24.0 (2005), 27.0 (2006), 26.8 (2007), 26.4 (2008), 25.7 (2009), 23.9 (2010), 28.4 (2008 end).
  - Foreign banks' share of banking system assets: 42.0 (2005), 43.0 (2006), 57.6 (2007), 58.2 (2008), 57.7 (2009), 57.8 (2010), 57.5 (2008).

### External sector and balance of payments
- Current account (percent of GDP): -4.9 (2005), -3.1 (2006), -7.3 (2007), -12.4 (2008), -9.6 (2009), -11.4 (2010).
- Current account (in millions of U.S. dollars): -759 (2005), -535 (2006), -1,430 (2007), -2,863 (2008), -2,407 (2009), -3,051 (2010).
- Trade balance excluding Colón Free Zone (in millions of U.S. dollars): -1,892 (2005), -2,287 (2006), -3,642 (2007), -4,749 (2008), -4,767 (2009), -5,736 (2010).
- Exports, f.o.b. (in millions of U.S. dollars): 1,282 (2005), 1,466 (2006), 1,638 (2007), 1,656 (2008), 1,476 (2009), 1,606 (2010).
- Imports, f.o.b. (in millions of U.S. dollars): -3,174 (2005), -3,753 (2006), -5,280 (2007), -6,405 (2008), -6,243 (2009), -7,342 (2010).
- Services, net (in millions of U.S. dollars): 1,436 (2005), 2,210 (2006), 2,818 (2007), 3,262 (2008), 3,161 (2009), 3,583 (2010).
- Income, net (in millions of U.S. dollars): -1,125 (2005), -1,286 (2006), -1,318 (2007), -1,589 (2008), -1,414 (2009), -1,555 (2010).
- Direct foreign investment (percent of GDP): 6.2 (2005), 14.6 (2006), 9.8 (2007), 10.4 (2008), 6.5 (2009), 7.0 (2010).
- Net exports from Colón Free Zone (percent of GDP memorandum): 3.7 (2005), 3.4 (2006), 2.4 (2007), -0.1 (2008), 1.4 (2009), 1.4 (2010).

### Public finances and fiscal projections
- Gross domestic investment (percent of GDP): 18.4 (2005), 19.5 (2006), 23.5 (2007), 26.1 (2008), 26.5 (2009), 28.9 (2010).
- Gross national saving (percent of GDP): 13.4 (2005), 16.3 (2006), 16.2 (2007), 13.7 (2008), 16.8 (2009), 17.6 (2010).
- Revenue and grants (percent of GDP): 24.3 (2005), 26.8 (2006), 30.2 (2007), 29.3 (2008), 26.8 (2009), 26.3 (2010).
- Expenditure (percent of GDP): 25.9 (2005), 25.6 (2006), 25.4 (2007), 26.8 (2008), 27.7 (2009), 29.5 (2010).
- Current expenditure (percent of GDP): 21.9 (2005), 21.3 (2006), 19.7 (2007), 18.6 (2008), 18.4 (2009), 18.3 (2010).
- Capital expenditure (percent of GDP): 4.0 (2005), 4.3 (2006), 5.6 (2007), 8.2 (2008), 9.3 (2009), 11.1 (2010).
- Overall balance (percent of GDP): -1.6 (2005), 1.2 (2006), 4.8 (2007), 2.5 (2008), -0.9 (2009), -3.1 (2010).
- Overall balance, excluding ACP (percent of GDP): -2.6 (2005), 0.5 (2006), 3.5 (2007), 0.4 (2008), -1.0 (2009), -1.0 (2010).
- Panama Canal Authority (ACP):
  - Revenue (percent of GDP): 7.8 (2005), 8.7 (2006), 9.0 (2007), 8.7 (2008), 8.1 (2009), 7.5 (2010).
  - Transfers to the government (percent of GDP): 2.6 (2005), 3.5 (2006), 4.3 (2007), 3.0 (2008), 2.9 (2009), 2.7 (2010).
  - Overall balance (ACP, percent of GDP): 1.0 (2005), 0.7 (2006), 1.3 (2007), 2.1 (2008), 0.1 (2009), -2.2 (2010).
- Public sector primary balance (including ACP, percent of GDP): 3.4 (2005), 5.5 (2006), 8.3 (2007), 5.6 (2008), 2.2 (2009), -0.1 (2010).
- Public debt:
  - Total debt (percent of GDP): 58.3 (2005), 52.6 (2006), 46.4 (2007), 39.0 (2008), 36.9 (2009), 37.6 (2010).
  - External debt (percent of GDP): 45.5 (2005), 40.5 (2006), 38.0 (2007), 32.9 (2008), 32.2 (2009), 33.1 (2010).
  - Domestic debt (percent of GDP): 12.9 (2005), 12.1 (2006), 8.4 (2007), 6.1 (2008), 4.7 (2009), 4.5 (2010).
- Public sector debt-to-revenue ratio (percent): 270.5 (2005), 240.3 (2006), 196.0 (2007), 153.4 (2008), 133.1 (2009), 137.7 (2010).

### Debt flows and financing
- Gross external debt flows of the nonfinancial public sector (total disbursements, in millions of U.S. dollars): 466 (2005), 2,294 (2006), 670 (2007), 1,113 (2008), 603 (2009), 950 (2010).
- Total public external debt stock (in millions of U.S. dollars): 7,030 (2005), 6,933 (2006), 7,404 (2007), 7,586 (2008), 8,066 (2009), 8,884 (2010).
- External debt service (total, in millions of U.S. dollars): 746 (2005), 2,591 (2006), 704 (2007), 1,482 (2008), 688 (2009), 724 (2010).
- Debt service as percent of exports of goods and services: 27.1 (2005), 43.3 (2006), 10.0 (2007), 19.8 (2008), 9.3 (2009), 8.9 (2010).
- External amortization and interest breakdowns reported by creditor type (multilaterals, IBRD, IDB, IMF, others, global bonds, etc.) for 2005-2010.

### Medium-term projections (2009–2014) — key macro framework
- Real GDP at market prices: 3.0 (2009), 4.0 (2010), 6.5 (2011), 6.5 (2012), 7.0 (2013), 6.5 (2014).
- CPI (period average): 3.7 (2009), 2.8 (2010), 2.5 (2011), 2.5 (2012), 2.5 (2013), 2.5 (2014).
- National savings (percent of GDP): 16.2 (2007), 13.7 (2008), 16.8 (2009), 17.6 (2010), 17.4 (2011), 16.0 (2012), 16.5 (2013), 17.6 (2014).
- Gross domestic investment (percent of GDP): 23.5 (2007), 26.1 (2008), 26.5 (2009), 28.9 (2010), 27.3 (2011), 25.1 (2012), 23.9 (2013), 23.8 (2014).
- External savings (percent of GDP): -7.3 (2007), -12.4 (2008), -9.6 (2009), -11.4 (2010), -9.9 (2011), -9.1 (2012), -7.4 (2013), -6.2 (2014).
- Public debt (percent of GDP, nonfinancial public sector including ACP): 46.4 (2007), 39.0 (2008), 36.9 (2009), 37.6 (2010), 37.4 (2011), 37.3 (2012), 35.7 (2013), 33.8 (2014).
- Current account (in millions of U.S. dollars, medium-term): -2,863 (2008), -2,407 (2009), -3,051 (2010), -2,907 (2011), -2,959 (2012), -2,657 (2013), -2,450 (2014).
- Medium-term balance of payments projections include detailed line items for exports, imports, services, income, transfers, capital and financial accounts, and projected overall balances.

### Debt sustainability analysis highlights
- Baseline public sector debt path (percent of GDP): 62.2 (2004), 58.3 (2005), 52.6 (2006), 46.4 (2007), 39.0 (2008), 36.9 (2009), 37.6 (2010), continuing downward to 33.8 (2014).
- Identified debt-creating flows (percent of GDP): -1.4 (2005), -3.6 (2006), -6.9 (2007), -11.2 (2008), -9.8 (2009), -2.2 (2010).
- Primary deficit (percent of GDP): -0.3 (2005), -2.8 (2006), -5.5 (2007), -8.3 (2008), -5.6 (2009), -2.2 (2010).
- Automatic debt dynamics (percent of GDP contribution): -1.1 (2005), -0.7 (2006), -1.4 (2007), -2.9 (2008), -4.1 (2009), 0.0 (2010).
- Contribution from real interest rate (percent): 3.1 (2005), 3.4 (2006), 3.1 (2007), 2.5 (2008), -0.5 (2009), 1.1 (2010).
- Contribution from real GDP growth (percent): -4.1 (2005), -4.1 (2006), -4.5 (2007), -5.3 (2008), -3.6 (2009), -1.1 (2010).
- Residual, including asset changes (percent of GDP): 3.5 (2005), -0.3 (2006), 1.2 (2007), 5.0 (2008), 2.4 (2009), 0.1 (2010).
- Gross financing need indicators (percent of GDP): 9.6 (2005), 10.6 (2006), 13.5 (2007), 1.5 (2008), 5.4 (2009), 4.1 (2010).

### Key policy and structural considerations implied by the data
- Fiscal stance:
  - The overall balance excluding ACP shifts from surpluses in 2006–2007 (0.5, 3.5) to deficits in the projection period (-1.0 in 2009 and 2010), suggesting a need to monitor fiscal consolidation and ACP transfer dynamics.
  - Primary balance including ACP declines from 8.3 (2007) to 2.2 (2009) and -0.1 (2010), indicating reduced fiscal space and the importance of maintaining revenue measures and expenditure control.
- External vulnerabilities:
  - Large current account deficits (e.g., -12.4 percent of GDP in 2008) and high external debt stock in percent of exports and GDP at various points point to exposure to external shocks and the importance of sustaining FDI inflows.
- Banking sector resilience:
  - Low nonperforming loan ratios (around 1.2–1.8 percent) combined with high provision coverage (ratio of provisions to NPLs often above 100 percent) indicate capital buffers, but declines in some provisioning ratios toward end-period warrant monitoring.
- Public debt management:
  - Continued reliance on external financing and significant scheduled debt service (debt service as percent of exports: 27.1 to 43.3 in historical years) highlight the need for prudent debt management and careful sequencing of external borrowing.

*Source: Comptroller General; Superintendency of Banks; Ministry of Economy and Finance; Office of the Comptroller General; Fund staff estimates and projections (from Table 1 through Table 13 in the provided IMF document)._

### ANNEX I. SUMMARY OF ANNEXES

### ANNEX I. SUMMARY OF ANNEXES

### Fund Relations
- As of February 28, 2009, Panama did not have any outstanding purchases or loans.  
- The latest precautionary SBA expired on March 29, 2002.  
- The last Article IV consultation was completed by the Executive Board on July 27, 2008.  
- Technical assistance: wide-ranging TA over time, most recently on national accounts statistics to evaluate the compilation of valued added of financial services in March 2009.  
- Safeguards: last safeguards assessment completed on July 12, 2001, concluded that the National Bank of Panama external audit mechanism was at the time adequate.  
- Resident representative: None.

- Membership and financial position (As of February 28, 2009):
  - Joined March 14, 1946; Article VIII.
  - Quota: 206.60 SDR Million (100.00 percent of Quota).
  - Fund holdings of currency: 194.75 SDR Million (94.27 percent of Quota).
  - Reserve position in the Fund: 11.86 SDR Million (5.74 percent of Quota).
  - SDR Department:
    - Net cumulative allocation: 26.32 SDR Million (100.0 percent of Allocation).
    - Holdings: 0.45 SDR Million (1.70 percent of Allocation).
  - Outstanding Purchases and Loans: None (SDR Million; percent of Quota).
  - Projected obligations to the Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
    - Charges/interest: 0.11 (2009), 0.15 (2010), 0.15 (2011), 0.15 (2012), 0.15 (2013).
    - Total: 0.11 (2009), 0.15 (2010), 0.15 (2011), 0.15 (2012), 0.15 (2013).

- Financial arrangements (Type / Approval Date / Expiration Date / Amount Approved (SDR million) / Amount Drawn (SDR million)):
  - Stand-By: 06/30/00–03/29/02; 64.00; 0.00.
  - EFF: 12/10/97–06/20/00; 120.00; 40.00.
  - Stand-By: 11/29/95–03/31/97; 84.30; 84.30.

- Nonfinancial relations:
  - Exchange rate arrangement: Panama uses the U.S. dollar as the primary means of payment; balboa issued as coins only; exchange rate fixed at B 1 per U.S. dollar. Panama has accepted the obligations of Article VIII, Sections 2(a), 3, and 4.
  - Last Article IV consultation: The 2008 Article IV consultation was concluded on July 3, 2008. Panama is on the standard 12-month consultation cycle.
  - Technical Assistance (selected):
    - STA: March 2009 (National Accounts statistics mission); March 2007 (monetary and financial statistics reporting); December 2006 (fiscal data quality).
    - FAD: 2007–2009 (development of a medium-term expenditure frameworks within a regional context); October 2005 (fiscal ROSC assessment mission).
    - MCM: February 2008 (assessment of increased presence of foreign banks in Central America); October/November 2007 (assistance with drafting a revised Bank Law); May/June 2005 and November 2005 (assessment of financial sector supervision and regulation); May/June 2005 (Offshore Financial Sector Initiative follow-up).

### Relations with the World Bank
- World Bank Country Partnership Strategy (CPS):
  - CPS for Fiscal Years (FY) 2008–10 endorsed in October 2007.
  - Lending envelope: US$390–465 million over FY08–10, divided into three Development Policy Loans (DPLs), seven new poverty-focused investment projects, and one Technical Assistance (TA) loan.
  - Current portfolio: nine IBRD projects and one GEF donation under implementation, totaling US$379.5 million, of which about US$287 million are undisbursed.
  - Approved operations:
    - 2nd Competitiveness and Public Financial Management DPL: US$100 million (approved December 2008).
    - Health Equity and Performance Improvement Project: US$40 million (approved FY 2009).
    - Basic Education Quality Improvement Project: US$35 million (approved FY 2009).
    - Protecting the Poor under Global Uncertainty DPL: US$80 million (being considered for approval in April 2009).
  - Existing project portfolio listed includes: Social Protection Project; Water and Sanitation Project; Basic Education Project II; Public Policy Reform Technical Assistance Loan; Land Administration Project; Rural Productivity Project; Global Environment Facility Rural Productivity Project.

- Pipeline (expected FY 2010 Board presentation):
  - Sustainable Tourism Project: US$30 million.
  - Access to Land: US$45 million.
  - Rural Micro Finance Project: US$25 million.
  - Urban Transport Project: US$50 million.

- Analytical and technical support:
  - Draft Country Economic Memorandum including an Investment Climate Assessment prepared and presented to the government.
  - Country Environment Analysis delivered FY 2008.
  - For FY 2009, Bank to prepare a Poverty Assessment and an Urban Development for FY 2010.
  - Policy Notes prepared to support government transition; Fund staff contributed to two Policy Notes on inflation and financial sector stability.

- Panama: Financial Relations with the World Bank Group (In millions of U.S. dollars; As of March 16, 2009)
  - Active IBRD Operations — Commitment / Undisbursed:
    1. Basic Education II: 40.0 / 4.2
    2. Social Protection: 24.0 / 23.4
    3. 2nd Competitiveness and Public Financial Management DPL: 100.0 / 100.0
    4. Public Policy Reform TA: 15.2 / 4.2
    5. Land Administration: 47.9 / 10.9
    6. Rural Productivity: 39.4 / 35.1
    7. Water and Sanitation: 32.0 / 29.7
    8. GEF Rural Productivity: 6.0 / 4.9
    9. Health Equity and Performance Improvement: 40.0 / 40.0
    10. Basic Education Quality Improvement: 35.0 / 35.0
  - Total: 379.5 committed; 287.4 undisbursed.

- IBRD loan disbursements (Fiscal Year):
  - Number of projects and commitment amounts shown for years 2001–2008 (table provided in source). Specifics include commitment amount for 2008: 199.8 and total undisbursed balance for 2008: 118.7 (values presented in the source table).

### Relations with the Inter-American Development Bank (IDB)
- IDB country strategy for 2005–09: support sustainable economic growth and reduce poverty; objectives to boost competitiveness and develop human and productive capital; strategy includes strengthening governance and transparency.
- Policy dialogue planned with incoming government in May–June 2009 to elaborate new 2010–14 country strategy by end-2009.

- 2008 lending program to the sovereign — six new project loans approved totaling US$125.2 million:
  - Technological Transformation Program, phase I: US$19.7 million.
  - Housing Conditions Improvement Program: US$30 million.
  - Colon Province Sustainable Development: US$20 million.
  - Development Program for the Central Provinces: US$43 million.
  - ETESA Investment and Corporate Transformation Program I: US$12.5 million.
- IDB private-sector lending: loan to the Panama Canal Authority for US$400 million to help finance the expansion of the Canal; other private-sector outstanding stock: US$150 million (including four lines of credit under the Regional Trade Finance Facilitation Program (TFFP)).

- 2009 lending program to the sovereign envisages 3 project loans and 2 program loans amounting to US$700 million:
  - Support of IDAAN’s Investment Program: US$40 million.
  - Transportation Loan phase II: US$50 million.
  - National Tourism Program: US$10 million.
  - Support of the Consolidation of the Energy Sector I: US$100 million.
  - Liquidity and Growth Support Program (publicly-guaranteed emergency loan to the state-owned National Bank of Panama in support of on-lending to private firms for working capital, commercial credits and trade credits): US$500 million (approved by the Executive Board on April 15, 2009).

- Private sector approvals planned (amounts):
  - Line of credit to extract wood: US$22.7 million.
  - Lines of credit to banks: US$15 million to BBVA; two loans totaling US$13 million to BAC Panamá S.A.; US$8 million to Multibank, Inc. (the latter two loans are under the TFFP).

- Panama: Financial Relations with the Inter-American Development Bank (In millions of U.S. dollars; as of March 23, 2009)
  - Ongoing Operations — Disbursed / Undisbursed:
    - Agricultural-Rural Development: 23.1 / 50.9
    - Education: 40.3 / 17.8
    - Energy-Electricity: 3.1 / 69.4
    - Environment/Sustainable Development: 91.5 / 102.8
    - Health: 35 / 0
    - Reform and Modernization of the State/Business Climate: 19.3 / 103.8
    - Science and Technology/Competitiveness: 0 / 19.7
    - Social Development: 50 / 49.0
    - Tourism: - / -
    - Transportation: 43.8 / 63.2
    - Urban Development: 9 / 31
    - Water Supply and Sewerage: 16 / 29
  - Total: 331.1 disbursed; 536.6 undisbursed.
  - IDB loans approved since 1960 — Total Operations: 3,710.8; public and publicly guaranteed: 2,671.7; Cancellations: 457.7; Principal payments: 1,299.7; Debt outstanding: 1,006.7 (as of February 28, 2009).
  - Commitments 2008: 675.2 (of which public and publicly-guaranteed: 125.2).
  - New Commitments CY 2009: 100.0 (as of March 23, 2009).
  - Disbursements CY 2009: 36.6 (of which public and publicly-guaranteed: 16.5).

### Statistical Issues
- Overall assessment:
  - Panama’s economic statistics and data provisions have some shortcomings, but are broadly adequate for surveillance.
  - Substantial progress achieved in improving accuracy, timeliness, and publication of economic statistics. Data provided to the Fund are generally adequate for surveillance.
  - Need to improve coordination between the Comptroller General’s Office (responsible for official economic statistics) and other government entities, including the Ministry of Economy and Finance.
  - Panama has participated in the Fund’s General Data Dissemination System (GDDS) since December 2000. Metadata and plans on the DSBB need updating.

- Real sector:
  - National accounts revision completed in 2004 (based on the 1993 SNA); base year changed from 1982 to 1996.
  - Revised data available for 1996−2008 from the Comptroller General’s Office.
  - Quarterly GDP estimates introduced in 2005 beginning in 1996.
  - Current data released with a lag of approximately three months; index of monthly economic activity released with a lag of up to two months.
  - Data often subject to sizable revisions.
  - World Bank supporting project to change base year of national accounts to 2007 (initial phase).
  - IMF national accounts TA mission (March 2009) noted limited coverage of financial activity and overestimation of the deflator used to calculate financial services output at constant prices.
  - Revised financial activity GDP estimates and the related overall GDP revision will be published in October 2009.
  - New Household Income and Expenditure Survey conducted during 2007–08; National Institute of Statistics and Census updating base, basket, and weights of the CPI.
  - Household Income and Expenditure Survey provided new data on poverty levels (last estimated in 2003).

- Government finances:
  - Ministry of Finance compiles budget execution data for central government and nonfinancial public sector operations on a cash basis.
  - Monthly and quarterly data reported up to December 2008 for budgetary central government operations.
  - Need for further improvements: data consistency regarding transfers between public sector units; universal coverage of the investment program.
  - Since September 2004, the operational balance of the Panama Canal Authority (PCA) excluded from official definition of the nonfinancial public sector used for fiscal policy purposes.
  - PCA information available only in Annual Report on its website on a fiscal year basis; need to ensure consistent and timely PCA statistics on a calendar year basis.
  - Authorities received STA technical assistance to implement GFSM 2001; FAD fiscal ROSC mission took place in October 2005.
  - February 2004 STA mission reviewed coverage and methodology of fiscal data and suggested tentative timetable to migrate to GFSM 2001, but resource constraints prevented substantial progress.

- Monetary accounts:
  - Panama publishing financial sector data based on new standardized report forms (SRFs) for monetary statistics in the IFS Supplement since March 2007.
  - Participates in regional project for harmonizing monetary and financial statistics in Central America and the Dominican Republic.
  - Monthly data provision by National Bank of Panama and the Savings Bank (Caja de Ahorros) is regular and prompt.
  - Monthly data on domestic and international commercial and savings banks prepared by the Superintendency of Banks, posted on its website and reported to STA with a lag of one to two months.
  - State-owned development banks (Agricultural Development Bank and Mortgage Bank) are not regulated by the Superintendency of Banks and no data is reported to the Fund.

*Source: Staff Report for the 2009 Article IV Consultation — Informational Annex (Prepared by Western Hemisphere Department); May 6, 2009.*

### 8.      Quarterly data is available with a delay of about one quarter, and is subject to

### _cr09207 - 8.      Quarterly data is available with a delay of about one quarter, and is subject to

### Data availability and quality
- Quarterly data are available with a delay of about one quarter and are subject to revisions thereafter.
- Revised estimates in key trade and investment data may result in substantial revisions of the current account of the balance of payments.
- Data gaps:
  - Nonfinancial private sector debt: not yet available.
  - Transactions involving financial derivatives: not yet available.
  - These gaps result in large swings in errors and omissions.
- International Investment Position (IIP) data:
  - Quarterly IIP compiled since 2002.
  - Annual IIP data available since 1998.
- Most recent balance of payments and IIP data pertain to December 2008.
- Data quality assessments (as reported):
  - Methodological soundness and Accuracy and Reliability flags appear in the dataset table (assessments reflect whether international standards are observed: O, LO, LNO, NO).

### Key recent developments and macro outlook (IMF staff summary, June 1, 2009)
- Political:
  - Ricardo Martinelli (Cambio Democrático) won the May 3 presidential election; CD alliance won 42 of 71 seats in congress.
  - New administration scheduled to take office on July 1; expected policy orientation: private-sector led growth, foreign investment, revenue-neutral tax reform aiming at a single income tax rate, increased infrastructure investment.
- Real sector and activity indicators:
  - Staff projection: real GDP growth of 3 percent in 2009.
  - IMAE (monthly indicator of economic activity): increased by 2.9 percent (cyclically adjusted) in the first quarter of March 2009 compared to a year earlier.
  - First quarter indicators showing low double digit growth: tax revenue, social security contributions, bank credit, bank deposits.
  - Sectors with positive growth: transportation, communication, tourism, retail sales.
  - Sectors with declines in first quarter: Colon Free Zone, residential construction, nontraditional agriculture, auto sales.
- Inflation:
  - Staff projected end-2009 inflation: 3.2 percent.
  - Inflation in April: 3.7 percent (y/y), same as in March; monthly rate 0.4 percent driven by fuel and education price increases.
- Canal traffic and revenues:
  - First quarter 2009 vs. same period 2008:
    - Number of vessels declined by 1½ percent.
    - Cargo tonnage declined by 3.3 percent.
  - Total Canal revenues increased by nearly 12 percent (attributable to higher tariffs; tariffs further increased in May as scheduled).
- Fiscal stance:
  - First quarter nonfinancial public sector (NFPS) balance excluding Canal Authority (ACP): 0.6 percent of GDP (similar to 2008 outturn).
  - Fiscal target for 2009: overall fiscal deficit of 1 percent of GDP.
  - Tax revenues in first quarter 2009 were 13 percent higher than first quarter 2008; nontax revenues were significantly lower.
- Banking and external financing:
  - New government plans to cancel US$500 million IDB loan approved in April 2009 for on-lending to banks (banks indicated cost too high; do not foresee demand).
  - Preliminary data suggest correspondent bank credit lines returned to normal levels in recent weeks.

### Public Information Notice (PIN) — Executive Board conclusions (July 2, 2009)
- Background and 2008 performance:
  - Real GDP in 2008 grew by 9.2 percent (following an annual average growth of 8.8 percent in 2004-07).
  - Projected real growth in 2009: 3 percent.
  - Unemployment decline: from 10.9 percent at end-2003 to 4.2 percent in August 2008.
  - Inflation peaked at 10 percent in September 2008; fell to 3.7 percent in March 2009.
  - External current account deficit widened to 12.5 percent of GDP in 2008.
  - Public debt-to-GDP ratio declined to 39 percent by end-2008.
  - Panama Canal expansion estimated cost: US$5.3 billion (external financing secured on very favorable terms).
  - New Social and Fiscal Responsibility Law (SFRL) enacted June 2008; PPP draft law being finalized.
- Financial sector resilience:
  - Banking system: well-capitalized, highly liquid, strong financial soundness indicators.
  - No revealed exposure to complex structured assets (Superintendency of Banks assessments).
  - Access to foreign credit lines declined after September 2008 but then stabilized; deposits and credit broadly stable.
  - Banks increased liquidity holdings partly to self-insure.
- Executive Directors’ assessment and recommendations:
  - Panama faces global crisis from position of strength; commended fiscal consolidation, well-regulated banking sector, and Canal expansion project.
  - Noted widening external current account deficit and 2008 inflation rise were influenced by transitory factors (world food and fuel shock; slowdown of external demand).
  - Directors encouraged adherence to SFRL fiscal deficit target of 1 percent of GDP in 2009 to bolster credibility, while recommending rapid adoption of guidelines to modify the deficit target should growth decelerate more rapidly than envisaged.
  - Encouraged vigilance and further strengthening of the banking system given external vulnerabilities and absence of a lender of last resort.
  - Welcomed authorities’ interest in creating a mechanism for emergency liquidity support for transitory liquidity shortages.
  - Noted inclusion of Panama in an OECD list of tax havens presents additional challenges; encouraged constructive response and agreement on steps to normalize status.

### Panama authorities’ statement (Executive Director’s office, June 1, 2009)
- 2008 performance and 2009 outlook:
  - GDP growth in 2008: 9.2 percent.
  - First quarter 2009: Colon Free Zone activity down 4.3 percent; new car sales fell by 20 percent; tourism up 3.2 percent compared to 2008.
  - Authorities expect a soft-landing in 2009 with GDP growth above 3 percent due to Canal expansion, public works program estimated at 6 percent of GDP, and FDI at about 7 percent of GDP.
  - CEPAL projection for Panama 2009 growth: 4 percent.
  - WEO projection for Panama 2009 growth: 3 percent.
  - Inflation eased from 8.3 percent at end-2008 to 3.7 percent at end-March 2009.
  - Open unemployment down to 4.2 percent from 11 percent in 2004.
  - Poverty reductions reported by CEPAL: poverty fell from 37 percent to 29 percent; extreme poverty from 19 percent to 12 percent.
- Social and supply-side policies:
  - Continuation of policies to protect purchasing power of low-income groups and assist vulnerable households (programs introduced up to mid-2008).
  - “Consumers assistance program” (PAC): elimination of import duties on agricultural inputs, price support policies, low interest agricultural loans — helped achieve over 90 percent self-sufficiency in rice in 2008-09 crop season.
  - Cash-transfer program “Red de Oportunidades”, school feeding programs, subsidies on cooking gas and electricity, low-pension retiree adjustments included in 2009 budget.
  - Diesel subsidy for public transportation reduced due to lower fuel prices to improve subsidy targeting.

### Selected economic indicators (selected values from table)
- Real GDP (1996 prices) growth:
  - 2004: 7.5
  - 2005: 7.2
  - 2006: 8.5
  - 2007: 11.5
  - 2008: 9.2
  - 2009 (Proj.): 3.0
- Consumer price index (end of year):
  - 2004: 1.6
  - 2005: 3.4
  - 2006: 2.2
  - 2007: 6.4
  - 2008: 6.8
  - 2009 (Proj.): 3.2
- Unemployment (open):
  - 2004: 9.2
  - 2005: 7.6
  - 2006: 6.7
  - 2007: 4.7
  - 2008: 4.2
  - 2009: ...
- Broad money (annual percentage change):
  - 2004: 8.6
  - 2005: 8.5
  - 2006: 12.5
  - 2007: 15.9
  - 2008: 18.4
  - 2009 (Proj.): 8.8
- Private sector credit (annual percentage change):
  - 2004: 10.4
  - 2005: 13.3
  - 2006: 12.9
  - 2007: 18.2
  - 2008: 14.6
  - 2009 (Proj.): 2.7
- Current account (percent of GDP):
  - 2004: -7.5
  - 2005: -4.9
  - 2006: -3.1
  - 2007: -7.3
  - 2008: -12.4
  - 2009 (Proj.): -9.6
- Gross external debt (percent of GDP):
  - 2004: 47.6
  - 2005: 45.5
  - 2006: 40.5
  - 2007: 38.0
  - 2008: 32.9
  - 2009 (Proj.): 32.2
- Nonfinancial public sector balances (percent of GDP):
  - Balance, excluding Canal Authority:
    - 2004: -4.9
    - 2005: -2.6
    - 2006: 0.5
    - 2007: 3.5
    - 2008: 0.4
    - 2009 (Proj.): -1.0
  - Balance, Canal Authority:
    - 2004: 1.0
    - 2005: 1.0
    - 2006: 0.7
    - 2007: 1.3
    - 2008: 2.1
    - 2009 (Proj.): 0.1
  - Balance, including Canal Authority:
    - 2004: -3.9
    - 2005: -1.6
    - 2006: 1.2
    - 2007: 4.8
    - 2008: 2.5
    - 2009 (Proj.): -0.9
- Total public debt (percent of GDP):
  - 2004: 62.2
  - 2005: 58.3
  - 2006: 52.6
  - 2007: 46.4
  - 2008: 39.0
  - 2009 (Proj.): 36.9
- GDP, in millions of US$:
  - 2004: 14,179
  - 2005: 15,465
  - 2006: 17,134
  - 2007: 19,485
  - 2008: 23,088
  - 2009 (Proj.): 25,051

*Statement by the IMF Staff Representative on Panama; Public Information Notice No. 09/80; Statement by Paulo Nogueira Batista, Executive Director for Panama and Alfredo Maciá, Advisor to Executive Director (June 1, 2009).*

### 4. The sharp increase of food and fuel prices until mid-2008 exerted pressure on

### 4. The sharp increase of food and fuel prices until mid-2008 exerted pressure on

### External position and current account
- The sharp increase of food and fuel prices until mid-2008 exerted pressure on Panama’s external position.
- The 2008 surge of 26 percent in FDI and enhanced public works investments pushed up domestic demand.
- The combination widened the current account deficit to 12.5 percent GDP in 2008 from 9 percent in the previous year.
- This deficit was fully covered by FDI and other capital inflows.
- The Canal expansion has a high import-content and will continue to exert pressure on the current account in the medium term.

### Non-financial public sector (NFPS) fiscal performance
- The NFPS posted a surplus for a third consecutive year in 2008 despite increased expenditures on public works projects and vulnerable-group programs.
- The surplus was due to high tax revenues and a one-off inflow from cell phone concessions.
- The primary balance of the NFPS was 3.6 percent of GDP in 2008 and remained positive in the first quarter of 2009.
- NFPS total revenues increased 9.4 percent in relation to 2007, with:
  - tax revenues rising 16.5 percent, and
  - non-tax revenues rising 8.1 percent.
- The authorities maintained a prudent wage control policy:
  - The central government’s ratio of wages to current revenues declined from 43 percent in 2004 to 26 percent in 2008.
  - The ratio of interest payments to current revenues decreased from 29 percent in 2004 to 17 percent in 2008.
- Revenue projections for 2009 are on the conservative side, in line with Staff’s views.

### Fiscal framework and public debt
- The authorities are committed to a NFPS deficit of 1 percent of GDP for 2009, as called for in the new fiscal responsibility law (SFRL) approved in mid-2008.
- The new SFRL sets a cap of 50 percent on the commitment of operating expenditures to provide the incoming administration with adequate budget support until end-2009. This cap does not apply to public investments and debt interest payments.
- Net public debt of the NFPS has fallen from 62 percent of GDP in 2004 to 40.2 percent at end-2008.
- Rating developments:
  - Standard and Poors (S&P) rated the sovereign BB+ with a stable outlook.
  - Fitch Ratings ratified Panama’s long-term debt BB+ with a positive outlook.

### Investment activity and major projects
- Panama Canal expansion (PCA):
  - Peak construction period in 2009-2012, with an average investment of over US$850 million per annum.
  - In 2008, the expansion represented 2.2 percent of GDP, and should reach 3.5 percent of GDP in 2009.
  - The largest contract of over US$3 billion for the “locks construction” received three tenders in March 2009; technical and financial tenders are under evaluation for final selection by mid-2009.
  - PCA assured its full financing needs of US$2.3 billion last October 2008 from five multilateral organizations.
  - Revenues for FY2008-09 are expected to increase about 4 percent as new tariffs fall in place in May and October 2009. These revenue expectations should materialize in spite of an expected drop of 5 percent in tonnage for the period.
- Public investment projects in 2008-2009:
  - Tocumen International Airport (US$200 million) mostly concluded by end-2008.
  - Panama-Colon Highway (US$270 million) and Balboa Avenue coastal-extension (US$200 million) to be concluded in June 2009.
  - Bay of Panama sewage and drainage project of over US$500 million under construction, financed through multilaterals.
- Private sector and energy investments:
  - French Suez concluded two thermo-projects in 2008 and one hydro project will go on stream in 2009 for a total investment of US$650 million.
  - Energy regulatory authority informed investments of US$1.3 billion in hydro and US$520 million in thermo projects with S$970 million to be implemented during 2009.
  - Petroterminales’ oil pipeline and storage facilities, a US$500 million project, began construction in 2008.
- Telecoms, ports, tourism, and housing:
  - Digicel (Ireland) and Claro (Mexico) cellular concessions started operations in December 2008 and in April 2009 with investments of US$350 and US$150 million, respectively.
  - Expansion of ports: a total of US$760 million in investments expected during the 2008-2010 period.
  - Hotel construction estimated at US$200 million in 2009, according to the American Chamber of Commerce.
  - Construction sector expected to target demand for “middle and low-income housing” estimated at 140,000 units and to move away from high-rise condos that dominated 2007-08.
- Overall: the wide range of public investments sets the stage for private investments in 2009.

### Financial sector and liquidity measures
- Banking sector resilience:
  - The banking sector has remained fairly untouched by the sub-prime crisis; it continues to be profitable, highly liquid and well supervised.
  - The capital adequacy ratio remained at 14 percent.
  - Liquidity levels in the system increased from 58 percent in November 2008 to 62.7 at end-March 2009.
  - Non-performing loans (NPL) increased slightly from 1.1 percent at end-2007 to 1.3 percent at the end of the first quarter 2009, according to the Superintendency of Banks (SB).
- External pressures and policy response:
  - Given the strong presence of foreign banks, parent banks’ liquidity deterioration in 2008 forced partial tightening of credit access for trade and commerce.
  - Authorities activated a US$1.1 billion stimulus package (PEF) supported by IDB, CAF and Banco Nacional (Banconal).
  - The SB confirmed that banks are requesting access to PEF funds; foreign banks have started to ease access to their credit lines.
- Banking sector performance in Q1 2009 (according to SB report):
  - Foreign deposits have increased 30 percent.
  - Total new credits are up 7.3 percent in the first quarter 2009 compared to 2008.
  - Credit to industry, commerce and mortgages increased considerably.
  - Construction credit went up 13 percent.
  - Personal credit decreased 13 percent.

### Other policy considerations and government priorities
- Authorities are cognizant of risks from the continued world economic slowdown and have expressed interest in pursuing the establishment of a safety net to preserve confidence in the financial sector and enhance its capacity to withstand unforeseen liquidity stresses; the incoming administration will evaluate if circumstances warrant such a decision.
- Panama has taken a positive view to improving its cooperation on internationally agreed tax standards and other issues; this cooperation was agreed with the OECD in 2002. The authorities will share with the incoming administration their views on possible future actions in this area.
- Incoming administration (starting July 1st) priorities:
  - Sustain strong economic growth in the medium term supported by strong public investment programs, including construction of an inner-city Metro system, expansion of transport infrastructure, and continuation of the Panama Canal expansion.
  - Implement a new tax reform to introduce a flat-tax, simplify the tax system to curtail evasion, improve the effectiveness of tax collection, and maintain a strong fiscal stance.
  - Support and expand social programs.
  - Seek approval of the FTA with the United States as a crucial step to support growth and private investment opportunities in Panama.

*Source: IMF staff report content unit _cr09207 - 4. The sharp increase of food and fuel prices until mid-2008 exerted pressure on*

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