## _cr1283

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---

### Recent developments
- Real GDP growth averaged 8 percent over the past five years.
- Real GDP growth: 7.5 percent in 2010; 10.5 percent during January-September 2011.
- Panama’s sovereign debt rating: “one notch above investment grade, on par with Brazil and Mexico.”
- Panama taken off the OECD’s “grey list” in July 2011 upon signing 12 double taxation treaties (first stage of peer review still in process).
- Government investment program (cumulative 2009–14): expected to reach 50 percent of 2010 GDP (US$13.6 billion, excluding the US$5.3 billion Panama Canal expansion) by 2014.
- Tax reforms enacted in 2009-10 expected to increase tax revenue by about 1.4 percent of GDP by 2013.
- Panama Canal activity: Canal traffic growth 8.1 percent during January-September 2011; toll revenue growth 20 percent (January-September, cumulative, compared to the same period in 2010).
- Inflation:
  - Headline inflation rose from 2.4 percent in 2009 to 6.3 percent at end-2011 (y/y).
  - Core inflation reached 4.1 percent in 2011.
- Policy measures to alleviate price increases: price threshold for most demanded grade of gasoline (tax adjustment mechanism); additional gasoline and electricity subsidies announced November 2011.
- Labor and wages: 19 percent increase in the minimum wage in 2010; total unemployment 4.5 percent in August 2011.
- Fiscal balances:
  - NFPS deficit: 1.9 percent of GDP in 2010; targeted about 2 percent in 2011.
  - Actual NFPS deficit rose to 3½ percent of GDP at end-September 2011 due to higher capital spending execution and disappointing tax collection.
  - Record-high Panama Canal dividend transfers: US$1,043 billion or 3.3 percent of GDP.
  - Investment execution ratio increased to about 86 percent in 2011 (previously about 70 percent).
  - In cyclically-adjusted terms, projected deterioration of the primary balance about 2.2 percentage points of GDP during 2010–11.
- Financial sector:
  - Financial soundness indicators remained robust; very low and stable NPL ratio.
  - Bank credit growth: 17 percent (as of end-October 2011).
  - Deposit growth slowed from 11 percent in 2010 to about 8 percent in 2011.
  - Deposit interest rates declining; lending rates broadly stable.
- External sector:
  - Current account deficit: -10.7 percent of GDP in 2010; projected to peak at -13 percent in 2011.
  - FDI flows grew by 17 percent (y/y) in nominal terms by end-September 2011 and finance the bulk of the deficit.

### Macroeconomic outlook and risks
- Drivers and expectations:
  - Canal expansion and large public investment program (peak in 2011–12) will sustain domestic demand.
  - US-Panama FTA ratified by U.S. Congress in October 2011; expected to come into effect in second quarter of 2012.
  - Economic growth projected to slow gradually starting in 2012 toward medium-term potential of about 5–6 percent.
  - Real GDP growth expected to moderate to about 7–7½ percent in 2012.
- Vulnerabilities and risks:
  - Growth vulnerable to a sharp global slowdown affecting demand in emerging Asia and the Americas; China and U.S. trade account for between 60 and 70 percent of Canal traffic.
  - Imported inflation expected to decelerate as commodity prices stabilize but uncertainty remains.
  - Strong domestic demand and a 17 percent minimum wage increase effective January 2012 may exert pressure on core inflation.
  - 2012 budget envisages NFPS deficit of 2 percent of GDP by year-end, aiming for gradual return to 1 percent ceiling in SFRL.
  - Limited fiscal space; untargeted subsidy increases would need offsets in other spending.
  - Public debt vulnerabilities expected to remain low due to prudent liability management.
  - Current account deficit projected to start declining in 2012 and stabilize at about 8 percent of GDP by 2017.
  - FDI expected to remain buoyant but vulnerable to sentiment shifts in originating countries (about 40 percent of FDI from the U.S. and Spain).
  - US$5.3 billion Canal expansion is financed by ACP’s own resources and loans from multilateral institutions; works fully pre-financed.

### Key findings from specific assessments
- U.S.-Panama Free-Trade Agreement (expected effects):
  - Short-term: decline in Panama’s tariff revenues (about 1.5 percent of GDP).
  - 2010 bilateral trade: Total U.S. exports to Panama US$2½ billion; Panama’s exports to the U.S. US$211 million.
  - Medium-term: bilateral trade and investment flows expected to expand; Panama likely to offset short-term costs.
  - Potential sectoral impacts:
    - Increased imports will increase product variety; effects on domestic prices uncertain due to price stickiness.
    - Agricultural sector may need strategy to shift toward non-traditional/higher value-added crops, requiring investments in seeds, fertilizers and training.
    - Services sector and light manufacturing expected to benefit; possible relocation of multinational firms to Panama.
- FSAP findings and reform priorities:
  - Stress tests: credit risks relatively low; market and sovereign risks negligible; banks highly liquid overall but systemic liquidity declining.
  - Interbank contagion and cross-border risks: contagion to onshore banks limited to a few medium-sized banks; high liquidity concentration in certain international banks a concern.
  - Regulatory and infrastructure shortcomings; key recommendations:
    - Strengthen risk-based supervision, adopt regulation on operational and market risks, set concentration limits for interbank deposits.
    - Strengthen cross-border supervision: establish holding company capital standard, consolidated regulatory reporting, expand supervisory perimeter to include securities, insurance, and foreign exchange houses supervisors.
    - Develop institutional framework for macroprudential policy and instruments; improve off-site supervision and close data gaps (e.g., housing prices, household and corporate debt).
    - Establish financial safety net for emergency liquidity assistance, notably by pooling a fraction of banks’ liquidity holdings.
    - Improve information sharing across agencies and broaden financial oversight perimeter (including cooperatives); amend draft insurance law.
    - Develop domestic financial markets: capital market development strategy, framework for repo operations, upgrade payments system (payment finality law, real-time gross settlement, law facilitating electronic presentation of checks).

### Policy implications and priorities
- Near-term priority: keep fiscal policy firmly anchored while building buffers and strengthening crisis-prevention tools.
- Medium-term priorities:
  - Strengthen the fiscal framework to enhance efficiency of public spending and improve revenue management.
  - Upgrade financial supervision and infrastructure to meet international best practices.
  - Implement structural policies to improve competitiveness and foster sustainable growth.

### Pace of fiscal consolidation and macroeconomic stance
- Authorities’ medium-term budget framework envisages a pace of fiscal consolidation that is "broadly appropriate."
- Envisaged path for the NFPS deficit would imply a "broadly neutral fiscal stance in 2012–13."
- Risks and pressures:
  - Output is "now at capacity" and there was a "stronger-than-anticipated fiscal impulse in 2011."
  - Large public infrastructure projects and the forthcoming minimum wage increase would likely put further pressures on prices and the external current account.
  - In the absence of a monetary policy, "over-performing on fiscal objectives could help dampen inflationary pressures while creating additional fiscal space."
- Authorities’ view: public investment program expanding productive capacity mitigates overheating risks; flexible labor markets would help alleviate skilled labor shortages; a faster fiscal tightening could be contractionary given the deteriorating global outlook.

### Fiscal framework and SFRL (Social and Fiscal Responsibility Law)
- Recommendation: "Fiscal policy should remain firmly anchored on a strengthened SFRL."
- Staff concern: continued activation of the SFRL’s escape clauses "risks eroding its value as a fiscal anchor."
- Authorities’ response: SFRL waivers "had been activated only twice in strict application of the law" for unforeseen shocks; both times the actual deficit closed "well under the admissible limit."
- Agreement: "Beyond 2014, the authorities and staff agreed that the SFRL would have to be modified, along with the creation of a SWF, to anchor the overall surpluses implied by the baseline projections given higher Canal transfers."

### Crisis prevention tools, supervision, and macro-prudential policy
- Supervisory and data gaps:
  - Supervisory authorities’ capacity to monitor systemic risk hampered by institutional and policy framework and data gaps.
- Recommendations:
  - Implement enabling legislation for the council of supervisors to oversee the whole financial system.
  - Build capacity of individual supervisory agencies.
  - SBP should "continue to strengthen its analysis of macro-financial linkages."
- Macro-prudential instruments:
  - Can help prevent credit-related asset price bubbles (Annex I).
  - Voluntary exposure limits have been effective so far in avoiding excessive bank leverage in real estate lending.
  - Staff recommended systematic monitoring of property markets, including a reliable housing price index and indicators such as household and corporate leverage ratios.
- Authorities’ view: rising property prices were "fueled by effective demand, not credit expansion"; banks’ conservative loan-to value ratios with additional caps "effectively transferred most of the risk to developers and buyers"; agreed on need to develop a housing price index and were "open to consider macro-prudential tools if the need arose."

### Liquidity provision, lender of last resort (LOLR), and deposit insurance
- Panama lacks a central bank; therefore no traditional LOLR or mechanism to mitigate systemic liquidity shortages.
- Banks hold high levels of liquidity beyond the prudential requirement of "30 percent of short-term deposits."
- Using the statutory definition, liquidity coverage "stands at 63 percent of short-term liabilities." Excluding loan obligations and securities and dividing by deposits of all maturities lowers the ratio to "about 20 percent at end-September 2011."
- Past crisis responses:
  - Superintendency set up daily bank-by-bank reporting on short-term liquidity in October 2008 and enacted temporary regulatory changes.
  - State bank (BNP) established a collateralized line of credit for "US$400 million."
  - January 2009 government set up a liquidity fund (PEF) for a total of "US$1.1 billion (5 percent of total deposits)"; the PEF disbursed "less than US$100 million" before closing at end-2010.
- Recommendations and plans:
  - Plans to establish a fund to respond to possible bank liquidity shortages are "welcome."
  - Creation of a domestic liquidity fund would help address opportunity costs and improve the state's ability to preserve financial system stability.
  - Limited public resources could be used in the start-up phase; staff stressed pooling part of liquid reserves currently held by banks to address idiosyncratic, temporary liquidity shortfalls would be efficient and help reduce moral hazard.
  - Consider completing the safety net by "introducing a deposit insurance scheme and strengthening the bank resolution process."
- Box 4 international experience and proposals:
  - El Salvador: proposed liquidity fund funded by pooling "3 percent of deposits" and an LOLR to gradually provide coverage for up to "8 percent of total deposits" (over the next four years).
  - Panama: liquidity facility should provide coverage only to on-shore general license banks with temporary liquidity problems and should not require on-lending. International experience suggests resources equivalent to "about 10 percent of total on-shore deposits (approximately US$3 billion)." Funding options include contributions from the state and pooling part of banks’ existing assets, replicating centralized reserve requirements. Standardization and availability of more liquid collateral will be required.

### Measures to strengthen fiscal framework and public financial management
- Public investment and contingent liabilities:
  - Undertaking the ambitious public investment program within SFRL limits poses significant fiscal management challenges.
  - Staff cautioned against exclusion of a growing number of public enterprises from public sector balance and public debt definitions subject to SFRL limits.
  - Three entities were excluded from fiscal accounts since 2010; two had "relatively small debts of 1.5 percent of GDP as of end-2010."
  - The highway company plans to borrow "US$1.07 billion during 2011–12," not state-guaranteed and backed by future toll revenue.
  - Turnkey arrangements commitments amounted to "about US$2 billion as of mid-2011."
  - Staff advised close monitoring of contingent liabilities and incorporation into public debt accounting.
- Social spending and subsidies:
  - Improving targeting of subsidies and expanding conditional cash transfer programs are cost-effective.
  - Subsidies on fuel, water and electricity cost "more than 1 percent of GDP" and are "largely regressive."
  - Authorities plan to gradually reduce the electricity subsidy for households consuming less than "500 KWH."
    - The threshold is planned to be reduced by "50KWH every two quarters starting in second quarter of 2012 until it reaches 300KWH."
    - This is estimated to generate "US$30 million in annual savings."
  - Plans to introduce means-tested pre-paid gas payment cards.
- Public financial management reforms:
  - Roadmap encouraged to: strengthen medium-term expenditure and budget frameworks; establish a Single Treasury Account; enhance quality and coverage of government finance statistics in line with "the move to the 2001 GFSM classification."
  - Given limited institutional capacity, authorities agreed to develop a prioritized action plan.

### Revenue mobilization and tax administration
- Stronger revenue collection would create additional fiscal space for social programs and infrastructure.
- Recent progress from two tax reforms was welcomed; Panama continues to have "one of the lowest tax ratios in the region."
- Foregone income related to tax evasion is estimated at "about 5 percent of 2011 revenue."
- Staff encouraged:
  - Quick initiation of operations of the Large Taxpayer Unit.
  - Strengthening fiscal controls.
  - Preparing estimates of tax expenditures and including them in budget documents.
- Authorities’ measures:
  - Introduction of fiscal cash registers in most retailers to tackle tax avoidance and fraud.
  - Tightening controls on incoming goods in the Colon Free Zone.
  - Progress in registering and valuing land at market prices.

### Sovereign Wealth Fund (SWF) and Canal revenue management
- Authorities plan to create a SWF to save part of additional resources expected from the Panama Canal expansion.
- Agreement with staff that the SWF should be integrated into the budget framework, requiring modification of the SFRL; authorities intend to propose changes to the National Assembly in 2012.
- Rationale: improve control over Canal resources, create a buffer for stabilization purposes and potentially for coverage of future pension liabilities.
- Box 5 long-term scenarios and simulation outcomes:
  - All scenarios assume compliance with the SFRL one percent of GDP overall fiscal deficit limit until 2015.
  - Staff baseline scenario:
    - Once canal revenue starts to expand in 2015, expenditure is assumed to increase in line with nominal GDP growth, resulting in gradually rising overall fiscal surpluses.
    - Baseline estimates are consistent with setting a target for the non-canal fiscal balance at "about -3 percent of GDP."
    - Under the baseline, accumulated resources of the SWF would amount to "about 8 percent of GDP by 2025."
  - Scenario 1:
    - Assumes overall fiscal balance posts deficits of "one percent of GDP until 2025."
    - With higher Canal revenues, implies an additional "5 percent increase in nominal government spending starting in 2015 relative to the baseline." This would crowd out private demand and none of additional revenue would be saved.
  - Scenario 2:
    - Assumes a yearly increase in canal dividends of "25 percent starting from 2015," and the fiscal balance path as in baseline.
    - Expenditure in 2015 would be about "3 percent higher than in the baseline scenario" and also crowd out private demand.
- SWF design recommendations:
  - Main objective should be macroeconomic stabilization and/or coverage of future pension liabilities.
  - It should invest resources abroad.
  - It should operate as a financing fund and "not have the capacity to spend."
  - There should be "no earmarking of transfers."

### Building a world-class financial center: oversight and infrastructure
- Panama is an important regional hub for banking services but needs to upgrade oversight and financial infrastructure to compete globally.
- Key FSAP-identified priorities:
  - Bring financial system oversight more closely in line with international best practices.
  - Upgrade all non-bank segments of the financial system (insurance, equity, capital markets).
- Supervisory recommendations:
  - Strengthen risk-based and consolidated cross-border supervision.
  - Extend the perimeter of supervision to large nonbank deposit-taking institutions.
  - Adopt capital adequacy standards at the holding company level and set related-party exposure and concentration limits for regional groups.
  - Expand supervisory sphere to include securities, insurance, and foreign exchange houses supervisors.
  - Regulate operational and market risks and set concentration limits for interbank deposits.
- Authorities’ actions:
  - Authorities welcomed FSAP recommendations and the SBP is preparing a reform action plan.
  - The Ministry of Commerce is working on measures to strengthen supervision of cooperatives.

### Real estate market developments and macroprudential policy (Annex I)
- Market dynamics:
  - Real estate market “highly dynamic” linked to strong growth and low unemployment.
  - Share of construction and mortgage lending in bank portfolios rose to 28.5 percent by end-2008.
  - 2009 slowdown; starting in 2010 construction activity rebounded strongly with a shift to lower-value housing and commercial/industrial real estate.
  - Prices of prime residential and industrial real estate are rising rapidly, though text notes “no clear evidence of a property market bubble (partly due to data gaps).”
  - Signs of excess supply in commercial segment:
    - Prices of office space declining by about 10 percent during 2010-11.
    - Share of pre-sold commercial units to be finished in 2012 running at a low 50 percent.
- Banking practices:
  - Banks managed exposures conservatively via self-imposed lending limits; such measures may be insufficient for aggregate outcomes.
- Macroprudential instruments and recommendations:
  - Common instruments: limits on loan-to-value (LTV) and debt-to-income or debt-service-to-income ratios.
  - Recommendation: step up data collection to calculate price indices and market indicators; compile household and corporate indebtedness; be ready to enforce LTV or debt service limits; embed countercyclical macroprudential tools in an institutional framework.

### Relations with the World Bank, IDB activity, and statistical issues (Annex 2)
- World Bank program and project timings listed for 2011–2016 (titles and provisional timings reported).
- IDB — key operations and flows (As of December 31, 2011 — millions of U.S. dollars):
  - Disbursements (2007–2011): 74.9; 126.8; 216.8; 302.2; 190.4
  - Repayments (2007–2011): 81; 89.4; 91.4; 92.9; 107.7
  - Net Lending (2007–2011): -6.1; 37.4; 125.4; 209.3; 82.7
  - Interests and Charges (2007–2011): 44.1; 45.9; 45.4; 49.7; 51.9
  - Net Transfer (2007–2011): -51.8; -8.5; 77; 158.9; 30.8
- IDB operations by sector — Approved, Disbursed, Undisbursed (US$ millions): Sanitation Approved 234.0 — Disbursed 82.2 — Undisbursed 151.8; …; Total — Approved 974.1 — Disbursed 439.5 — Undisbursed 534.6.
- Statistical issues — progress and weaknesses:
  - Improvements in accuracy, timeliness, publication of economic statistics; data generally adequate for surveillance.
  - Need to address methodological weaknesses in foreign trade calculations and improve consistency between national accounts and external sector.
  - Work program envisages Panama could become an SDDS participant by 2013.
  - National accounts, CPI, and government finance statistics require further methodological work and coverage improvements (e.g., ACP calendar-year data, inclusion of excluded public enterprises).
  - Monetary statistics: standardized report forms published since March 2007; regional harmonization project participation.
  - Balance of payments: weaknesses in foreign trade flow calculations, particularly Colon Free Zone; quarterly IIP compiled since 2002; annual since 1998.
- Table of common indicators: selected data dates and frequency noted (e.g., International Reserve Assets latest observation 10/2011; Broad Money 10/2011).

### Staff appraisal, Executive Board views, and medium-term projections
- Staff appraisal:
  - Panama’s economy resilient; strengths: logistics and banking hub position, political stability, steady fiscal consolidation, prudent liability management.
  - Overall vulnerabilities low; outlook favorable with broadly-balanced risks.
  - Public investment program and Canal expansion expected to drive demand and growth in 2012.
  - Stress tests confirm banking sector soundness; some liquidity risks warrant vigilance.
- Executive Directors’ views:
  - Commended resilience, strong fundamentals, prudent policies.
  - Neutral fiscal stance in 2012–13 broadly appropriate; many saw merit in a somewhat tighter stance to rebuild buffers.
  - Supported SWF plan to save Canal revenues, noting need to modify SFRL.
  - Welcomed plans for liquidity fund while aiming to avoid moral hazard; saw scope for macroprudential tools.
  - Urged upgrading financial sector supervision and AML/CFT assessment completion by end-2012.
- Selected macro projections (2008–17 snapshots):
  - Real GDP (market prices) growth: 10.1, 3.2, 7.5, 10.0, 7.5, 7.0, 6.3, 6.2, 5.5, 5.4 (2008–2017).
  - CPI (period average): 8.8, 2.4, 3.5, 5.9, 5.5, 5.0, 4.5, 4.0, 4.0, 4.0 (2008–2017).
  - Current account balance (percent of GDP): -10.9, -0.7, -10.7, -13.0, -12.6, -12.5, -12.2, -10.7, -9.0, -8.5 (2008–2017).
  - Foreign Direct Investment (percent of GDP): 9.3, 5.2, 8.8, 8.8, 8.9, 9.1, 9.2, 9.2, 9.2, 9.4 (2008–2017).
  - Baseline public sector debt path (percent of GDP): 41.1, 43.5, 40.5, 36.8, 35.2, 35.5, 33.6, 31.2, 28.7, 27.0 (2008–2017).
  - Gross international reserves (end of period, US$ millions): 2,710 (2008), 3,424 (2009), 2,975 (2010), 2,275 (2011).
  - Reserves in months of imports of goods and services: 3.2, 4.8, 3.3, 1.9 (2008–2011).

### Real sector, fiscal and financial indicators (selected historical figures)
- Real and nominal GDP (selected):
  - Nominal GDP: 2008 16.2; 2009 5.0; 2010 10.0; 2011 18.6 (Proj.)
  - Real GDP (1996 prices): 2008 10.1; 2009 3.2; 2010 7.5; 2011 10.0 (Proj.)
- Inflation:
  - CPI (average): 2008 8.8; 2009 2.4; 2010 3.5; 2011 5.9 (Proj.)
  - CPI (end-of-year): 2008 6.8; 2009 1.9; 2010 4.9; 2011 6.3 (Proj.)
- Money and credit:
  - Private sector credit: 2008 14.6; 2009 1.3; 2010 13.6; 2011 17.8
  - Broad money: 2008 18.5; 2009 9.4; 2010 11.6; 2011 8.9
- Nonfinancial public sector (percent of GDP):
  - Revenue and grants: 2008 34.9; 2009 33.5; 2010 33.3; 2011 33.4
  - Expenditure: 2008 32.4; 2009 33.9; 2010 36.7; 2011 38.9
  - Capital: 2008 8.2; 2009 9.4; 2010 11.9; 2011 15.2
  - Overall balance: 2008 2.5; 2009 -0.4; 2010 -3.4; 2011 -5.5
  - Overall balance, excluding ACP: 2008 0.4; 2009 -1.0; 2010 -1.9; 2011 -2.3
- External sector (percent of GDP):
  - Current account: 2008 -10.9; 2009 -0.7; 2010 -10.7; 2011 -13.0
  - Capital and financial account: 2008 10.5; 2009 1.4; 2010 9.8; 2011 10.8
- Memorandum: GDP (in millions of US$): 2008 23,002; 2009 24,163; 2010 26,590; 2011 31,532

### Staff recommendation and authorities’ perspectives
- Staff recommends the next Article IV consultation takes place on the standard 12-month cycle.
- Authorities welcome constructive dialogue with staff and value Fund technical assistance in drafting SWF and PPP legislation; both drafts expected to reach Congress by mid-2012.
- Authorities’ growth and fiscal outlook:
  - Economic activity surged by about 10.5 percent in 2011 compared to 7.5 percent in 2010.
  - Output growth projected to remain close to 7 percent in 2012.
  - Public investment (including ACP) increased by almost 40 percent at constant prices in 2011, after 34 percent in 2010.
  - Open unemployment in 2011 fell to 2.9 percent compared to 4.7 percent in 2010, and 5.2 percent in 2009.
  - Average CPI inflation reached 5.9 percent in 2011 compared to 3.5 percent in 2010; CPI inflation expected to moderate to about 5 percent in 2012.
  - Current account deficit projected to exceed 12 percent of GDP in 2011 compared to 10.7 percent in 2010.
  - FDI has averaged nearly 9 percent of GDP in the last two years.
- Authorities welcomed FSAP completion and prioritize strengthening risk-based and consolidated cross-border supervision and non-bank supervision; Superintendency committed to strengthening bank resolution and systemic risk monitoring.

*Source: PANAMA 2011 ARTICLE IV REPORT — Selected excerpts from the chapter “Selected Economic and Social Indicators” and related sections (document id: _cr1283).*

### 1.  Selected Economic and Social Indicators _____________________________________________________ 28

### 1.  Selected Economic and Social Indicators

### Recent developments
- Real GDP growth averaged 8 percent over the past five years.
- Real GDP growth: 7.5 percent in 2010; 10.5 percent during January-September 2011.
- Panama’s sovereign debt rating: “one notch above investment grade, on par with Brazil and Mexico.”
- Panama was taken off the OECD’s “grey list” in July 2011 upon signing 12 double taxation treaties (first stage of peer review still in process).
- Government investment program (cumulative 2009–14): expected to reach 50 percent of 2010 GDP (US$13.6 billion, excluding the US$5.3 billion Panama Canal expansion) by 2014.
- Tax reforms enacted in 2009-10 expected to increase tax revenue by about 1.4 percent of GDP by 2013.
- Panama Canal activity: Canal traffic growth 8.1 percent during January-September 2011; toll revenue growth 20 percent (January-September, cumulative, compared to the same period in 2010).
- Inflation:
  - Headline inflation rose from 2.4 percent in 2009 to 6.3 percent at end-2011 (y/y).
  - Core inflation reached 4.1 percent in 2011.
- Policy measures to alleviate price increases: price threshold for most demanded grade of gasoline (tax adjustment mechanism); additional gasoline and electricity subsidies announced November 2011.
- Labor and wages: 19 percent increase in the minimum wage in 2010; total unemployment 4.5 percent in August 2011.
- Fiscal balances:
  - NFPS deficit: 1.9 percent of GDP in 2010; targeted about 2 percent in 2011.
  - Actual NFPS deficit rose to 3½ percent of GDP at end-September 2011 due to higher capital spending execution and disappointing tax collection.
  - Record-high Panama Canal dividend transfers: US$1,043 billion or 3.3 percent of GDP.
  - Investment execution ratio increased to about 86 percent in 2011 (previously about 70 percent).
  - In cyclically-adjusted terms, projected deterioration of the primary balance about 2.2 percentage points of GDP during 2010–11.
- Financial sector:
  - Financial soundness indicators remained robust; very low and stable NPL ratio.
  - Bank credit growth: 17 percent (as of end-October 2011).
  - Deposit growth slowed from 11 percent in 2010 to about 8 percent in 2011.
  - Deposit interest rates declining; lending rates broadly stable.
- External sector:
  - Current account deficit: -10.7 percent of GDP in 2010; projected to peak at -13 percent in 2011.
  - FDI flows grew by 17 percent (y/y) in nominal terms by end-September 2011 and finance the bulk of the deficit.

### Macroeconomic outlook and risks
- Drivers:
  - Canal expansion and large public investment program (peak in 2011–12) will sustain domestic demand.
  - US-Panama FTA ratified by U.S. Congress in October 2011; expected to come into effect in second quarter of 2012.
- Growth projections and vulnerabilities:
  - Economic growth projected to slow gradually starting in 2012 toward medium-term potential of about 5–6 percent.
  - Real GDP growth expected to moderate to about 7–7½ percent in 2012.
  - Growth vulnerable to a sharp global slowdown affecting demand in emerging Asia and the Americas; China and U.S. trade account for between 60 and 70 percent of Canal traffic.
- Inflation risks:
  - Imported inflation expected to decelerate as commodity prices stabilize but uncertainty remains.
  - Strong domestic demand and a 17 percent minimum wage increase effective January 2012 may exert pressure on core inflation.
- Fiscal outlook:
  - 2012 budget envisages NFPS deficit of 2 percent of GDP by year-end, aiming for gradual return to 1 percent ceiling in SFRL.
  - Limited fiscal space; untargeted subsidy increases would need offsets in other spending.
  - Public debt vulnerabilities expected to remain low due to prudent liability management.
- External balances:
  - Current account deficit projected to start declining in 2012 and stabilize at about 8 percent of GDP by 2017.
  - FDI expected to remain buoyant but vulnerable to sentiment shifts in originating countries (about 40 percent of FDI from the U.S. and Spain).
  - US$5.3 billion Canal expansion is financed by ACP’s own resources and loans from multilateral institutions; works fully pre-financed.
- Banking sector resilience and risks:
  - Diversified ownership, high reliance on deposit funding, and low exposure to European banks limit near-term spillovers.
  - Stress tests (FSAP) indicate high capitalization would cushion credit risks; some onshore banks vulnerable to short-term liquidity pressures; liquidity concentration in a few international banks is a concern.
  - Drying up of foreign credit lines could affect domestic lending and real activity, increase interest rates, squeeze bank margins, and raise credit risk (most loans carry floating rates; household indebtedness is rising).

### Key findings from specific assessments and policy implications
- U.S.-Panama Free-Trade Agreement (Box 1) — expected effects:
  - Short-term: decline in Panama’s tariff revenues (about 1.5 percent of GDP).
  - 2010 bilateral trade: Total U.S. exports to Panama US$2½ billion; Panama’s exports to the U.S. US$211 million.
  - Medium-term: bilateral trade and investment flows expected to expand; Panama likely to offset short-term costs.
  - Potential sectoral impacts and adjustments:
    - Increased imports will increase product variety; effects on domestic prices uncertain due to price stickiness.
    - Agricultural sector may need strategy to shift toward non-traditional/higher value-added crops, requiring investments in seeds, fertilizers and training.
    - Services sector and light manufacturing expected to benefit; possible relocation of multinational firms to Panama.
- Financial Sector Assessment Program (FSAP) findings and reform priorities (Box 3):
  - Stress tests: credit risks relatively low; market and sovereign risks negligible; banks highly liquid overall but systemic liquidity declining.
  - Interbank contagion and cross-border risks: contagion to onshore banks limited to a few medium-sized banks; high liquidity concentration in certain international banks a concern.
  - Regulatory and infrastructure shortcomings; key recommendations:
    - Strengthen risk-based supervision, adopt regulation on operational and market risks, set concentration limits for interbank deposits.
    - Strengthen cross-border supervision: establish holding company capital standard, consolidated regulatory reporting, expand supervisory perimeter to include securities, insurance, and foreign exchange houses supervisors.
    - Develop institutional framework for macroprudential policy and instruments; improve off-site supervision and close data gaps (e.g., housing prices, household and corporate debt).
    - Establish financial safety net for emergency liquidity assistance, notably by pooling a fraction of banks’ liquidity holdings.
    - Improve information sharing across agencies and broaden financial oversight perimeter (including cooperatives); amend draft insurance law.
    - Develop domestic financial markets: capital market development strategy, framework for repo operations, upgrade payments system (payment finality law, real-time gross settlement, law facilitating electronic presentation of checks).

### Policy discussions and priorities
- Near-term priority: keep fiscal policy firmly anchored while building buffers and strengthening crisis-prevention tools.
- Medium-term priorities:
  - Strengthen the fiscal framework to enhance efficiency of public spending and improve revenue management.
  - Upgrade financial supervision and infrastructure to meet international best practices.
  - Implement structural policies to improve competitiveness and foster sustainable growth.

*Source: PANAMA 2011 ARTICLE IV REPORT — Selected excerpts from the chapter “Selected Economic and Social Indicators”*

### 10.      The pace of fiscal consolidation

### _cr1283 - 10.      The pace of fiscal consolidation

### Pace of fiscal consolidation and macroeconomic stance
- The authorities’ medium-term budget framework envisages a pace of fiscal consolidation that is "broadly appropriate."
- The envisaged path for the NFPS deficit would imply a "broadly neutral fiscal stance in 2012–13."
- Risks and pressures:
  - Output is "now at capacity" and there was a "stronger-than-anticipated fiscal impulse in 2011."
  - Implementation of large public infrastructure projects and the forthcoming minimum wage increase would likely put further pressures on prices and the external current account.
  - In the absence of a monetary policy, "over-performing on fiscal objectives could help dampen inflationary pressures while creating additional fiscal space."
- Authorities’ views:
  - Public investment program expanding productive capacity mitigates overheating risks.
  - Flexible labor markets would help alleviate skilled labor shortages.
  - A faster fiscal tightening could be contractionary and "would not be appropriate given the deteriorating global outlook."

### Fiscal framework and the SFRL
- Recommendation:
  - "Fiscal policy should remain firmly anchored on a strengthened SFRL."
- Staff concerns:
  - Continued activation of the SFRL’s escape clauses "risks eroding its value as a fiscal anchor."
- Authorities’ response:
  - SFRL waivers "had been activated only twice in strict application of the law" for unforeseen shocks; both times the actual deficit closed "well under the admissible limit."
  - "Beyond 2014, the authorities and staff agreed that the SFRL would have to be modified, along with the creation of a SWF, to anchor the overall surpluses implied by the baseline projections given higher Canal transfers."

### Crisis prevention tools, supervision, and macro-prudential policy
- Financial sector vulnerabilities are "low" in the near term, but the FSAP highlighted gaps:
  - Supervisory authorities’ capacity to monitor systemic risk is hampered by the current institutional and policy framework and data gaps.
- Recommendations:
  - Implement enabling legislation to allow the newly-established council of supervisors to effectively oversee the whole financial system.
  - Build up capacity of individual supervisory agencies.
  - In the near term, the SBP should "continue to strengthen its analysis of macro-financial linkages."
- Macro-prudential instruments:
  - Can help prevent credit-related asset price bubbles (Annex I).
  - Voluntary exposure limits have been effective so far in avoiding excessive bank leverage in real estate lending.
  - Staff recommended systematic monitoring of property markets, including through a reliable housing price index and indicators such as household and corporate leverage ratios.
- Authorities’ views:
  - Rising property prices were "fueled by effective demand, not credit expansion" and they "did not see evidence of asset price bubbles."
  - Banks’ conservative loan-to value ratios with additional caps on maximum loan size "effectively transferred most of the risk to developers and buyers."
  - Agreed on the need to develop a housing price index and were "open to consider macro-prudential tools if the need arose."

### Liquidity provision, lender of last resort (LOLR), and deposit insurance
- Situation:
  - Panama does not have a central bank and thus lacks a traditional lender of last resort and a mechanism to mitigate systemic liquidity shortages.
  - Banks hold high levels of liquidity beyond the prudential requirement of "30 percent of short-term deposits."
  - Using the statutory definition, liquidity coverage "stands at 63 percent of short-term liabilities." Excluding loan obligations and securities and dividing by deposits of all maturities lowers the ratio to "about 20 percent at end-September 2011."
- Past response and experience:
  - During 2008-09, the Superintendency of Banks set up daily bank-by-bank reporting on short-term liquidity in October 2008 and enacted temporary regulatory changes.
  - The state bank (BNP) established a collateralized line of credit for "US$400 million."
  - In January 2009, the government set up a liquidity fund (PEF) for a total of "US$1.1 billion (5 percent of total deposits)"; the PEF disbursed "less than US$100 million" before closing at end-2010.
- Recommendations and plans:
  - Plans to establish a fund to respond to possible bank liquidity shortages are "welcome."
  - Creation of a domestic liquidity fund would help address opportunity costs and improve the state's ability to preserve financial system stability.
  - Limited public resources could be used in the start-up phase, but staff stressed pooling part of the liquid reserves currently held by banks to address idiosyncratic, temporary liquidity shortfalls would be efficient and help reduce moral hazard.
  - Consider completing the safety net by "introducing a deposit insurance scheme and strengthening the bank resolution process."
- Box 4 summary (El Salvador and Panama experiences and proposals):
  - International experience suggests permanent liquidity facilities are desirable in fully dollarized economies.
  - In El Salvador: proposed liquidity fund funded by pooling "3 percent of deposits" and an LOLR to gradually provide coverage for up to "8 percent of total deposits" (over the next four years).
  - In Panama: the liquidity facility should provide coverage only to on-shore general license banks with temporary liquidity problems and should not require on-lending. International experience suggests resources equivalent to "about 10 percent of total on-shore deposits (approximately US$3 billion)." Funding options include contributions from the state and pooling part of banks’ existing assets, replicating centralized reserve requirements. Standardization and availability of more liquid collateral will be required.

### Measures to strengthen the fiscal framework and public financial management
- Public investment and contingent liabilities:
  - Undertaking the ambitious public investment program within SFRL limits poses significant fiscal management challenges.
  - Staff cautioned against exclusion of a growing number of public enterprises from public sector balance and public debt definitions subject to SFRL limits.
  - Three entities were excluded from fiscal accounts since 2010; two had "relatively small debts of 1.5 percent of GDP as of end-2010."
  - The highway company plans to borrow "US$1.07 billion during 2011–12," not state-guaranteed and backed by future toll revenue.
  - Turnkey arrangements commitments amounted to "about US$2 billion as of mid-2011."
  - Staff advised close monitoring of contingent liabilities and incorporation into public debt accounting.
- Social spending and subsidies:
  - Improving targeting of subsidies and expanding conditional cash transfer programs are cost-effective.
  - Subsidies on fuel, water and electricity cost "more than 1 percent of GDP" and are "largely regressive."
  - Authorities plan to gradually reduce the electricity subsidy for households consuming less than "500 KWH."
    - The threshold is planned to be reduced by "50KWH every two quarters starting in second quarter of 2012 until it reaches 300KWH."
    - This is estimated to generate "US$30 million in annual savings."
  - Plans to introduce means-tested pre-paid gas payment cards.
- Public financial management reforms:
  - Staff encouraged development of a roadmap to strengthen public financial management, including:
    - Strengthening medium-term expenditure and budget frameworks.
    - Establishing a Single Treasury Account.
    - Enhancing quality and coverage of government finance statistics in line with "the move to the 2001 GFSM classification."
  - Given limited institutional capacity, authorities agreed to develop a prioritized action plan.

### Revenue mobilization and tax administration
- Stronger revenue collection would create additional fiscal space for social programs and infrastructure.
- Recent progress from two tax reforms was welcomed; Panama continues to have "one of the lowest tax ratios in the region."
- Foregone income related to tax evasion is estimated at "about 5 percent of 2011 revenue."
- Staff encouraged:
  - Quick initiation of operations of the Large Taxpayer Unit.
  - Strengthening fiscal controls.
  - Preparing estimates of tax expenditures and including them in budget documents.
- Authorities’ measures:
  - Introduction of fiscal cash registers in most retailers to tackle tax avoidance and fraud.
  - Tightening controls on incoming goods in the Colon Free Zone.
  - Progress in registering and valuing land at market prices.

### Sovereign Wealth Fund (SWF) and Canal revenue management
- Authorities plan to create a SWF to save part of additional resources expected from the Panama Canal expansion.
- Agreement with staff that the SWF should be integrated into the budget framework, requiring modification of the SFRL; authorities intend to propose changes to the National Assembly in 2012.
- Rationale: improve control over Canal resources, create a buffer for stabilization purposes and potentially for coverage of future pension liabilities.
- Box 5: Long-term scenarios and key simulation outcomes
  - All scenarios assume compliance with the SFRL one percent of GDP overall fiscal deficit limit until 2015.
  - Staff baseline scenario:
    - Once canal revenue starts to expand in 2015, expenditure is assumed to increase in line with nominal GDP growth, resulting in gradually rising overall fiscal surpluses.
    - Baseline estimates are consistent with setting a target for the non-canal fiscal balance at "about -3 percent of GDP."
    - Under the baseline, accumulated resources of the SWF would amount to "about 8 percent of GDP by 2025."
  - Scenario 1:
    - Assumes overall fiscal balance posts deficits of "one percent of GDP until 2025."
    - With higher Canal revenues, implies an additional "5 percent increase in nominal government spending starting in 2015 relative to the baseline." This would crowd out private demand and none of additional revenue would be saved.
  - Scenario 2:
    - Assumes a yearly increase in canal dividends of "25 percent starting from 2015," and the fiscal balance path as in baseline.
    - Expenditure in 2015 would be about "3 percent higher than in the baseline scenario" and also crowd out private demand.
- SWF design recommendations:
  - Main objective should be macroeconomic stabilization and/or coverage of future pension liabilities.
  - It should invest resources abroad.
  - It should operate as a financing fund and "not have the capacity to spend."
  - There should be "no earmarking of transfers."

### Building a world-class financial center: oversight and infrastructure
- Panama is an important regional hub for banking services but needs to upgrade oversight and financial infrastructure to compete globally.
- Key FSAP-identified priorities:
  - Bring financial system oversight more closely in line with international best practices.
  - Upgrade all non-bank segments of the financial system (insurance, equity, capital markets).
- Supervisory recommendations:
  - Strengthen risk-based and consolidated cross-border supervision.
  - Extend the perimeter of supervision to large nonbank deposit-taking institutions.
  - Adopt capital adequacy standards at the holding company level and set related-party exposure and concentration limits for regional groups.
  - Expand supervisory sphere to include securities, insurance, and foreign exchange houses supervisors.
  - Regulate operational and market risks and set concentration limits for interbank deposits.
- Authorities’ actions:
  - Authorities welcomed FSAP recommendations and the SBP is preparing a reform action plan.
  - The Ministry of Commerce is working on measures to strengthen supervision of cooperatives.

*Italic: Source — _cr1283 - 10.      The pace of fiscal consolidation (extracted from the provided chapter).*

### 20.      Recent and planned legal reforms

### _cr1283 - 20.      Recent and planned legal reforms

### Insurance and securities market oversight
- The FSAP found that both insurance and securities market oversight fell short of minimum international standards, which could create reputational risks.
- Recent and planned legal reforms aim to increase the autonomy and resources of sector regulators.
- Staff called for further strengthening prudential regulation, particularly regarding:
  - the determination of solvency margins;
  - regulating the investment of capital.
- The capacity of insurance and capital market supervisors should be enhanced.

### Capital markets development
- Recent steps to develop domestic capital markets were welcomed.
- Establishment of a market maker program has included:
  - re-launching of domestic debt placements;
  - creation of custodian arrangements to enhance connectivity with international markets.
- These measures have already increased the volume of secondary market transactions.
- Further upgrades in payment systems infrastructure would benefit these advances.

### AML/CFT
- Maintaining a strong AML/CFT regime in line with international standards is essential to support further development of Panama’s financial sector.
- Authorities committed to completing an AML/CFT assessment as part of the FSAP process by end-2012.

### Competitiveness and growth trends
- Panama’s competitiveness has improved in recent years.
- The trend real effective exchange rate (REER) has depreciated since 2009, although rising domestic inflation has mitigated the fall.
- Export growth has been strong, and Panama remains an attractive destination for FDI.
- Econometric estimates based on the standard CGER methodologies do not suggest a significant exchange rate misalignment, but competitiveness could deteriorate if inflation remains significantly above that of trading partners.
- Survey-based indicators highlight Panama’s strengths: political stability, infrastructure, and financial development.

### Impact of FTA with the U.S. and logistics
- The recently-approved FTA with the U.S. is expected to boost Panama’s status as a regional logistics hub.
- Simplified procedures and taxation regimes should attract further investments in services and light manufacturing, leveraging the expansion of the Canal and ports facilities.
- Authorities established a logistics secretariat to remove remaining bottlenecks.
- Promotion of non-traditional exports would be necessary for the agricultural sector to benefit from the FTA.

### Human capital, social indicators, and labor market
- Some key indicators of social progress and educational achievement are low relative to Panama’s improvements in real per capita income and compared with peers.
- Authorities cited a recent study showing poverty and inequality had declined significantly; reference to World Bank’s 2011 study using 2008 data (Panama Poverty Assessment, Report No. 62955 – PA).
- A strategy to enhance human capital through labor market and education reforms was considered necessary.
- Youth unemployment was 14.9 percent in 2011, coexisting with very low total unemployment, indicating growing skill mismatches.
- Authorities noted recent programs:
  - cash transfers for all school children improving enrollment and reducing drop-out rates;
  - joint efforts with the private sector to increase vocational and on-the-job training.

### Staff appraisal — macro-financial stance and vulnerabilities
- Panama’s economy has shown impressive resilience to external turbulence; strengths include strategic position as a logistics and banking hub, political stability, steady fiscal consolidation, and prudent liability management.
- Overall vulnerabilities are low and the outlook is favorable, with broadly-balanced risks.
- The large-scale public investment program and the Panama Canal expansion are expected to continue driving demand and growth in 2012.
- Stress tests confirm banking sector soundness, though some liquidity risks warrant heightened vigilance.
- A large external shock affecting global trade and liquidity could cause serious disruptions.

### Policy recommendations and medium-term priorities
- Near term:
  - Focus on building buffers and strengthening crisis-prevention tools.
  - With output at capacity, the neutral fiscal stance envisaged for 2012 is broadly appropriate; a tighter fiscal stance would be preferable to help rebuild buffers and contain second-round inflation pressures.
  - Strengthen capacity to analyze macro-financial linkages and monitor systemic risk by improving the regulatory framework and closing data gaps.
  - Consider macro-prudential tools to manage rapid credit growth in some sectors in the absence of monetary policy.
  - Establish a fund to respond to temporary liquidity shortages to bolster financial system stability.
- Medium term:
  - Strengthen the fiscal framework and enhance the effectiveness of spending, including plans to better target subsidies.
  - Strengthen tax administration, notably through the establishment of a large taxpayer unit.
  - Creation of a Sovereign Wealth Fund to save part of the additional revenue from the expanded Panama Canal would be useful to contain spending pressures and create buffers.
  - Bring financial sector oversight in line with best international practices; upgrade all non-bank segments in line with FSAP recommendations.
  - Enact enabling legislation to allow the new council of supervisors to operate as an effective supervisor of the whole system.
  - Further enhance risk-based and consolidated banking supervision.
  - Continue efforts to strengthen oversight of non-bank financial institutions to mitigate reputational risks.
  - Sustain growth by managing the public investment program to avoid supply bottlenecks and obtain best value for money from new infrastructure.
  - As the public investment program and Canal expansion taper off, drive growth through productivity gains by improving education quality and removing skill mismatches via vocational and on-the-job training.

*Source: _cr1283 - 20.      Recent and planned legal reforms*

### 31.      Staff recommends that the next

### _cr1283 - 31.      Staff recommends that the next

### Article IV consultation timing
- Staff recommends that the next Article IV consultation takes place on the standard 12-month cycle.

### Real sector developments (2007–11)
- Economic activity rebounded strongly starting in 2009.
- Construction and transportation remained the key growth drivers.
- The output gap is likely to have closed in 2011.
- Unemployment remains low.
- Average wage growth has receded but public sector wages are on the rise.
- Activity slowed somewhat in Q3, but output growth in 2011 will remain strong.
- Leading Indicators, 2011 (year-on-year quarter average, percent): Construction, ZLC (goods, '000 metric tons), Transport ACP ('000 large tons), Containers (TEU), Electricity consumption ('000 kwh), New car sales — all reported as positive yoy changes in 2011Q1–2011Q3 (figure summary).

### Inflation
- Headline and core inflation continue rising.
- Inflation (yoy change, percent) series shown for Core, Headline, Non-tradables, Core excl. water, elec. and gas.

### Fiscal developments (2007–11)
- Total spending continued to rise, especially capital expenditure.
- Despite recent deficits, public debt levels have been declining.
- Tax revenue increased following the 2009-10 tax reforms.
- Financing needs: amortization on MLT public sector debt and gross financing need (percent of GDP) shown with amortization peaking in 2015.
- Government capital expenditure (percent of GDP) remains higher in Panama relative to CA excl. Panama peers for 2007–2010.

Key fiscal figures (Table 1 / Table 3 / Table 2 highlights)
- Revenue and grants: 26.1, 25.4, 25.9, 26.7, 27.0 (percent of GDP) for 2008–2012 (various tables).
- Current revenue: 24.7, 24.9, 25.2, 25.7, 26.0 (percent of GDP).
- Tax revenue: 10.6, 10.9, 11.6, 11.9, 12.1 (percent of GDP).
- Primary balance (including ACP): 5.6, 2.5, -0.6, -3.0, -1.7 (percent of GDP) for 2008–2012 (Table 2).
- Overall balance, including ACP: 2.5, -0.4, -3.4, -5.5, -4.2 (percent of GDP) for 2008–2012 (Table 2).

### Banking system and financial sector
- Capital levels look strong and broadly in line with regional levels.
- Private sector credit to GDP remains the highest in the region; credit growth is moderate.
- Profits are at par with the region.
- The NPL ratio is one of the lowest; provisions are in line with the region.
- Nonresident credit and deposit growth slowed sharply in 2009 and are still below pre-crisis levels.
- Following the crisis, credit to residents increased rapidly, while resident deposits remained resilient.
- Average interest rates and spreads remained stable despite strong competition and ample liquidity.
- Spreads on sovereign debt fell to normal after a brief spike.

Key banking indicators (selected)
- Regulatory capital to risk-weighted assets (In percent): shown for 2005–2010 (figure).
- Claims on non-financial private sector (In percent of GDP): shown for 2005–2010 (figure).
- Real credit growth to non-financial private sector (In percent): average during 2005-2009 and 2010 shown.
- Nonperforming loans to total loans (In percent): one of the lowest in region (figure 3).
- Commercial bank performance (end-of-period): Nonperforming loans as percent of total loans (banking system) 1.6, 1.4, 1.1, 1.1, 1.0, 0.9 for Dec.2008–Sept.2011; Ratio of provisions to nonperforming loans 104.8, 120.0, 139.6, 131.9, 140.2, 141.4; Pretax return on average assets 2.2, 1.4, 1.7, 2.1, 2.5, 2.6 (Dec.2008–Sept.2011).

### External sector and FDI
- Import growth has been strong, reflecting spending on capital goods.
- Export growth has rebounded.
- Equity participation and reinvested earnings comprise the bulk of FDI.
- FDI origin: mostly from the U.S.; shares of Mexico and Spain are rising.
- The external current account widened owing to imports related to the Panama Canal expansion and the public investment program, but it is largely financed by FDI and is expected to return gradually to its norm.

Key external figures (Table 6 / Table 7 highlights)
- Current account (US$ millions): -2,513 (2008), -179 (2009), -2,848 (2010), -4,094 (2011), -4,385 (2012 projection).
- Current account (percent of GDP): -10.9, -0.7, -10.7, -13.0, -12.6 (2008–2012).
- Direct foreign investment (US$ millions): 2,147 (2008), 1,259 (2009), 2,350 (2010), 2,780 (2011), 3,128 (2012).
- Composition of FDI (US dollar million): Other FDI, Reinvested Earnings, Equity Participation — total FDI shown for 2007–2011 with totals in figure.

### Social and development indicators
- Panama's high growth has increased significantly its real GDP per capita.
- The reduction in inequality has been somewhat less significant (Gini coefficient changes shown for 2000–2008).
- Education spending is broadly in line with peers and more advanced countries, but the returns on these expenditures do not seem high.
- Selected social indicators (2008–2010 summary):
  - Population (millions, 2010 census): 3.4
  - Poverty line (percent, 2008): 32.4
  - Population growth rate (percent a year): 1.6
  - Adult literacy rate (percent): 94.5
  - Life expectancy at birth (years): 75.4
  - GDP per capita (USD, 2010): 7,820
  - Total unemployment: 4.5

### Debt dynamics and public debt sustainability
- Baseline public sector debt path (percent of GDP) shows decline: 41.1, 43.5, 40.5, 36.8, 35.2, 35.5, 33.6, 31.2, 28.7, 27.0 (2008–2017 baseline projections; Table 12).
- Change in public sector debt: -6.9, 2.4, -3.0, -3.7, -1.6, 0.3, -1.9, -2.4, -2.5, -1.7 (2008–2017).
- Identified debt-creating flows and primary deficits: Primary deficit series includes -5.6, -2.5, 0.9, -2.9, 2.8, 3.2, 1.7, 1.4, -1.2, -2.7, -4.3, -5.0 (presented across tables and scenarios).
- Public sector debt-to-revenue ratio: 139.8, 155.0, 145.8, 129.1, 120.6, 123.2, 118.2, 108.3, 94.6, 87.3 (2008–2017 sequence in Table 12).
- Gross financing need: 3.2, 7.6, 7.4, 8.6, 5.9, 6.4, 1.4, 3.2, -2.1, -2.8 (percent of GDP; Table 12).

Public debt composition (Table 8 highlights)
- Total public debt (US$ millions): 9,460 (2008), 10,508 (2009), 10,762 (2010), 11,589 (2011 projection), 12,283 (2012 projection).
- Total public debt (percent of GDP): 41.1, 43.5, 40.5, 36.8, 35.1 (2008–2012).
- External public debt (percent of GDP): 35.7, 40.1, 36.0, 31.8, 29.2 (2008–2012).
- Domestic public debt (percent of GDP): 5.5, 3.4, 4.5, 5.0, 5.9 (2008–2012).

### Vulnerability indicators and reserves
- Broad money (12-month percent change): 18.5, 9.4, 11.6, 8.9 (2008–2011).
- Private sector credit (12-month percent change): 14.6, 1.3, 13.6, 17.8 (2008–2011).
- Gross international reserves (end of period, US$ millions): 2,710 (2008), 3,424 (2009), 2,975 (2010), 2,275 (2011).
- Reserves in months of imports of goods and services: 3.2, 4.8, 3.3, 1.9 (2008–2011).
- REER percent change (depreciation -): -1.3, 2.0, -2.1 for 2008–2010 (Table 9 series).

### Medium-term macro framework (2008–17 projections)
- Real GDP (market prices) growth: 10.1, 3.2, 7.5, 10.0, 7.5, 7.0, 6.3, 6.2, 5.5, 5.4 (2008–2017).
- CPI (period average): 8.8, 2.4, 3.5, 5.9, 5.5, 5.0, 4.5, 4.0, 4.0, 4.0 (2008–2017).
- National savings (percent of GDP): 16.7, 24.9, 15.3, 16.0, 15.4, 15.1, 16.0, 17.3, 19.0, 19.5 (2008–2017).
- Gross domestic investment (percent of GDP): 27.6, 25.6, 26.0, 29.0, 28.0, 27.7, 28.2, 28.0, 27.9, 28.0 (2008–2017).
- Current account balance (percent of GDP): -10.9, -0.7, -10.7, -13.0, -12.6, -12.5, -12.2, -10.7, -9.0, -8.5 (2008–2017).
- Foreign Direct Investment (percent of GDP): 9.3, 5.2, 8.8, 8.8, 8.9, 9.1, 9.2, 9.2, 9.2, 9.4 (2008–2017).

### Key policy-relevant observations and implications (drawn from presented data)
- Maintain Article IV consultations on a 12-month cycle per staff recommendation.
- Fiscal stance: total spending rise and capital expenditure increase support growth but have widened deficits; continued focus on revenue mobilization (tax reforms increased tax revenue) and prudent expenditure management is implied by primary balance and debt trajectories.
- Debt dynamics: baseline path shows declining public sector debt-to-GDP but identified gross financing needs and sensitivity tests (Figure 7 and debt sustainability tables) require continued monitoring of contingent liabilities, amortization peaks (notably in 2015), and financing composition.
- External financing: the current account deficit is largely financed by FDI; continued attraction and stability of FDI flows is critical to financing external deficits associated with Canal expansion and public investment.
- Financial stability: banking system indicators (low NPLs, adequate provisioning, stable profitability, strong capital ratios) point to resilience, but large nonresident flows and the sensitivity of deposits/credit growth warrant monitoring.

*Source: PANAMA 2011 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND*

### ANNEX I. REAL ESTATE MARKET DEVELOPMENTS AND

### ANNEX I. REAL ESTATE MARKET DEVELOPMENTS AND MACROPRUDENTIAL POLICY

### Real estate market dynamics and recent history
- Panama’s real estate market has been “highly dynamic” in recent years, in line with strong economic growth and low unemployment. 1/
- Prior to the global financial crisis there was “very rapid construction growth,” but the sector achieved a soft landing during the economic slowdown of 2008–09.
- Investment in luxury residential properties was sustained by safe-haven inflows from the region, which substituted in part for lower demand from advanced economies.
- The share of construction and mortgage lending in bank portfolios rose to 28.5 percent by end-2008.
- 2009 saw a sharp slowdown in housing activity and overall credit growth; starting in 2010 construction activity rebounded strongly.
- New constructions shifted to lower-value housing for the domestic market and, increasingly, to commercial and industrial real estate propelled by Panama’s ambitious public investment program.
- Market participants indicate that prices of prime residential and industrial real estate are rising rapidly, though the text notes “no clear evidence of a property market bubble (partly due to data gaps).”
- Signs of excess supply in the commercial segment are emerging:
  - Prices of office space declining by about 10 percent during 2010-11.
  - The share of pre-sold commercial units to be finished in 2012 running at a low 50 percent.
  - Anecdotal evidence that developers have started to rent unsold units to meet demand from middle and high-level expatriate staff of multinational companies.
- Going forward, softer economic activity and lower safe-haven investments may reduce demand and increase inventories of finished units.
- Footnote: Prepared by T. Wezel. 1/

### Banking sector practices and risk management
- Banks “managed their exposures to the construction sector quite conservatively, mainly through self-imposed lending limits.”
- Self-imposed restrictions by banks on clients’ leverage and general exposure limits are noted as insufficient to deliver desirable aggregate outcomes in a dynamic macro-financial environment.

### Macroprudential policy role and instruments
- In the absence of monetary policy tools, macroprudential policy can play an important role in managing demand and safeguarding sound credit expansion.
- Macroprudential instruments identified as commonly used:
  - Limits on the loan-to-value (LTV) ratio.
  - Limits on the relation between debt or debt service to household income (debt-to-income or debt-service-to-income ratios).
- Other economies with hard pegs and a macro-critical housing sector (e.g. Hong Kong SAR and Singapore) are cited as actively and successfully using such instruments, sometimes adjusting limits as market dynamics change. 2

### Data gaps, FSAP recommendation, and policy recommendations
- Panama’s macroprudential policy framework is described as “at an incipient stage.”
- Important data gaps and institutional weaknesses noted:
  - Property market developments are monitored through periodic surveys of construction activity, but information on market prices and other property market indicators is not collected.
  - Data on household or corporate indebtedness is not compiled for prudential purposes.
- Key FSAP recommendation:
  - Step up data collection to allow calculation of price indices and other market indicators on an ongoing basis.
- Additional recommended actions:
  - Make information on the credit burden of households available.
  - Be ready to enforce limits on loan-to-value or debt (service) to income ratios, should developments in certain market segments warrant such actions.
  - Embed the use of countercyclical macroprudential tools in an institutional framework for macroprudential policy.
- Footnotes/reference: 2 Wong, E., T. Fong, K. Li and H. Choi, “Loan-to-Value Ratio as a Macro-Prudential Tool – Hong Kong’s Experience and Cross-Country Evidence”, Hong Kong Monetary Authority Working Paper 01/2011.

*Source: ANNEX I. REAL ESTATE MARKET DEVELOPMENTS AND MACROPRUDENTIAL POLICY (Prepared by T. Wezel).*

### ANNEX 2. RELATIONS WITH THE WORLD BANK-

### ANNEX 2. RELATIONS WITH THE WORLD BANK- UNDER JMAP

### Bank Work Program — Title Products, Provisional Timing of Missions, Expected Delivery Date
- First Programmatic Management and Efficiency of Expenditures DPL — November 2011 — December 2011
- Implementation of Panama Maritime Strategy — October 2011 — September 2016
- Enhanced Public Sector Efficiency Technical Assistance Loan — November 2011 — April 2012
- Metro Water and Sanitation Improvement Project — October 2011 — September 2015
- Health Equity and Performance Improvement Project — December 2011 — June 2013
- Social Protection Project — November 2011 — June 2012
- Water Supply and Sanitation in Low-Income Communities — October 2011 — May- 2012
- Rural Productivity Project — November 2011 — January 2013
- Rural Productivity Project (GEF) — October 2011 — June 2013

### Inter-American Development Bank (IDB) — Key Operations and Flows (As of December 31, 2011 — millions of U.S. dollars)
- Disbursements (2007–2011): 74.9; 126.8; 216.8; 302.2; 190.4
- Repayments (2007–2011): 81; 89.4; 91.4; 92.9; 107.7
- Net Lending (2007–2011): -6.1; 37.4; 125.4; 209.3; 82.7
- Interests and Charges (2007–2011): 44.1; 45.9; 45.4; 49.7; 51.9
- Subscriptions and Contributions (2007–2011): 1.6; 30.7; 0
- Net Transfer (2007–2011): -51.8; -8.5; 77; 158.9; 30.8
- Source: IBD.

Operations by sector — Approved, Disbursed, Undisbursed Amounts (millions of U.S. dollars)
- Sanitation — Approved 234.0 — Disbursed 82.2 — Undisbursed 151.8
- Education — Approved 88.1 — Disbursed 58.1 — Undisbursed 30.0
- Urban Dev. And Housing — Approved 30.0 — Disbursed 6.5 — Undisbursed 23.5
- Energy — Approved 42.5 — Disbursed 15.7 — Undisbursed 26.8
- State Modernization — Approved 100.4 — Disbursed 27.0 — Undisbursed 73.5
- Science and Technology — Approved 19.7 — Disbursed 8.8 — Undisbursed 10.9
- Integration and trade — Approved 4.7 — Disbursed 4.1 — Undisbursed 0.6
- Social Investment — Approved 20.2 — Disbursed 9.3 — Undisbursed 10.8
- Capital and financial — Approved 56.3 — Disbursed 16.3 — Undisbursed 40.2
- Transportation — Approved 140.0 — Disbursed 53.3 — Undisbursed 86.7
- Environmental and rural Dev. — Approved 68.1 — Disbursed 44.6 — Undisbursed 23.6
- Health — Approved 50.0 — Disbursed 0.0 — Undisbursed 50.0
- Disaster Prevention — Approved 120.0 — Disbursed 113.9 — Undisbursed 6.1
- Total — Approved 974.1 — Disbursed 439.5 — Undisbursed 534.6
- Source: IDB.

IDB activity in 2011 (text highlights)
- In 2011, the IDB disbursed US$181.47 millions, of which US$100 million correspond to budget support from the “Program of Reducing Vulnerability to Natural Disasters and Climate Change”.
- The Bank approved US$220 million for four sectors: an emergency loan for the flooding (US$20 million), health sector (US$50 million), fiscal management (US$50 million), and natural disasters and climate changes (US$100 million).

### Statistical Issues — Progress, Remaining Weaknesses, and Technical Assistance
- General
  - Progress achieved in improving accuracy, timeliness, and publication of economic statistics.
  - Data provided to the Fund are generally adequate for surveillance.
  - Need to address methodological weaknesses in foreign trade calculations and improve consistency between national accounts and the external sector accounts.
  - Panama has participated in the Fund’s General Data Dissemination System (GDDS) since December 2000; DSBB metadata and plans need updating.
  - Following an SDDS assessment mission in April 2011, authorities agreed on a work program aimed at meeting SDDS requirements; the work program envisages that Panama could become an SDDS participant by 2013.

- Real Sector
  - National accounts 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 project to change the base year of the national accounts to 2007 started in second half of 2010 and should be completed in early 2012.
  - Population census conducted in May 2010; results published in 2011.
  - IMF national accounts TA mission (2010–11) noted slow progress in expanding coverage of financial activity and overestimation of the deflator used to calculate financial services output at constant prices.
  - A new Household Income and Expenditure Survey was conducted during 2007–08; the National Institute of Statistics and Census the base, basket, and weights of the CPI.

- Government Finances
  - Ministry of Finance compiles budget execution data for the central government and nonfinancial public sector operations on a cash basis; monthly and quarterly data reported up to November 2011 for the budgetary central government operations (www.mef.gob.pa).
  - Further efforts needed to improve quality of fiscal data: improve consistency of transfers between public sector units and universal coverage of public enterprises.
  - Since September 2004, the operational balance of the Panama Canal Authority (ACP) was excluded from the official definition of the nonfinancial public sector used for fiscal policy purposes; ACP information available only in the Annual Report on a fiscal year basis (www.pancanal.com).
  - Need to ensure a consistent and timely flow of ACP statistics on a calendar year basis.
  - In 2011, three public enterprises were excluded from NFPS accounts and public debt; necessary to timely compile and disseminate information on these entities.
  - Authorities receiving technical assistance from STA/CAPTAC to implement GFSM 2001; FAD conducted an ROSC mission in October 2005.
  - Authorities cannot elaborate fiscal statistics in accordance with GFSM 2001 without prior reform of public accounting and adopting accrual accounting under IPSAS.
  - In 2011, FAD assessed progress in implementing a Single Treasury Account and improving government accountability and internal audit; important steps taken but further work needed for compliance with international best practices.

- Monetary Accounts
  - Panama has been publishing financial sector data based on new standardized report forms (SRFs) for monetary statistics in the International Financial Standards Supplement since March 2007.
  - Participates in a regional project for harmonizing monetary and financial statistics in Central America and the Dominican Republic, supported by CAPTAC.
  - Provision of monthly data 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 (www.superbancos.gob.pa) 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 are reported to the Fund.

- Balance of Payments
  - Weaknesses in foreign trade flow calculations, particularly involving the Colon Free Zone, need to be addressed.
  - Substantial changes in composition of trade flows over the last decade render current methodology to estimate volume indices obsolete.
  - Quarterly data available with a delay of about one quarter and subject to revisions thereafter.
  - Revised estimates in key trade and investment data may result in substantial revisions of the current account.
  - Data not yet available on nonfinancial private sector debt and transactions involving financial derivatives, resulting in large swings in errors and omissions.
  - Quarterly International Investment Position (IIP) data compiled since 2002; annual data available since 1998.

### Table of Common Indicators Required for Surveillance (As of November 30, 2011) — Selected Notes
- Exchange Rates — Fixed — Date of latest observation: NA — Date received: NA — Frequency of data: NA
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of latest observation: 10/2011 — Date received: 11/2011 — Frequency: M / M / A
- Reserve/Base Money — NA entries; Data Quality–Methodological Soundness: NA, O, NA, LO; Data Quality–Accuracy and Reliability: LO, O, O, O, NA
- Broad Money — Date of latest observation: 10/2011 — Date received: 11/2011 — Frequency: M / M / M
- National Bank of Panama Balance Sheet — 10/2011 — 11/2011 — M / M / A
- Consolidated Balance Sheet of the Banking System — 10/2011 — 11/2011 — M / M / M
- Interest Rates — 10/2010 — 11/2011 — M / M / M
- Consumer Price Index — Date of latest observation: 11/2010 — Date received: 12/2011 — Frequency: M / M / M; Data Quality–Methodological Soundness: O, LNO, LO, LO; Data Quality–Accuracy and Reliability: LO. LO. LO. O, LO
- Revenue, Expenditure, Balance and Composition of Financing — General Government — Date of latest observation: 9/2011 — Date received: 11/2011 — Frequency: Q / Q / Q; Data Quality–Methodological Soundness: LO, LNO, LO, O; Data Quality–Accuracy and Reliability: O, LO, LO, LO, LO
- Revenue, Expenditure, Balance and Composition of Financing — Central Government — 9/2011 — 11/2011 — Q / Q / Q
- Stocks of Central Government and Central Government-Guaranteed Debt — 10/2011 — 11/2011 — M / M / M
- External Current Account Balance — 9/2011 — 12/2011 — Q / Q / Q; Data Quality–Methodological Soundness: LO, LO, O, LO; Data Quality–Accuracy and Reliability: LO, O LO, LO, LNO
- Exports and Imports of Goods and Services — 9/2011 — 12/2011 — M / M / M
- GDP/GNP — Q2/2011 — 6/2011 — Q / Q / Q; Data Quality–Methodological Soundness: O, O, O, LO; Data Quality–Accuracy and Reliability: LO, LO, LNO, LO, LNO
- Gross External Debt — 10/2011 — 11/2011 — M / M / M
- International Investment Position — 2010 — 6/2011 — A / A / A

### IMF Executive Board Assessment and Macroeconomic Summary (Selected Findings and Projections)
- Background and recent performance
  - Panama’s economy rebounded quickly following the 2008–09 global crisis.
  - Following the 2009 slowdown, output grew by 7½ percent in 2010, and may grow by 10 percent for the year in 2011.
  - Inflation in 2011 projected to be above 6 percent.
  - Fiscal stance moderately expansionary in 2010–11, adding to domestic demand pressures.
  - Widening external current account deficit driven by strong capital goods imports related to the canal expansion; FDI flows have also increased.
  - Bank credit to the private sector in 2010–11 grew at rates slightly above nominal GDP.
  - FSAP (September 2011) confirmed the financial system is sound and would remain adequately capitalized under challenging external conditions.

- Outlook and risks
  - Macroeconomic outlook favorable, with broadly balanced risks.
  - Panama Canal expansion and large public investment program expected to sustain domestic demand.
  - Risks of overheating from strong domestic demand, tight labor markets and inflation may be offset by easing uncertainties in world commodity markets.
  - Key medium-term challenges: strengthen the fiscal framework, upgrade financial sector supervision and infrastructure, and improve quality of education and training.

- Executive Directors’ views and recommendations
  - Commended Panama’s resilience, strong fundamentals, and prudent policies.
  - Considered envisaged neutral fiscal stance in 2012–13 broadly appropriate; many saw merit in a somewhat tighter fiscal stance to rebuild buffers more rapidly and contain possible overheating.
  - Underscored importance of strengthening fiscal framework to enhance spending efficiency and improve public finance and liability management in light of public investment program.
  - Welcomed authorities’ efforts to strengthen revenue collection and better target subsidies.
  - Supported plan to create a Sovereign Wealth Fund to save additional revenue from the expanded Panama Canal, noting modification of the Social and Fiscal Responsibility Law will be needed to anchor surpluses.
  - Welcomed resilience of financial system and supported efforts to strengthen crisis prevention and institutional and policy frameworks.
  - Saw merit in establishing a fund to respond to temporary liquidity shortages while aiming to avoid moral hazard; saw scope for macroprudential tools to manage rapid credit growth.
  - Urged upgrading financial sector supervision and infrastructure, enhancing risk-based and consolidated banking supervision and oversight of non-bank segments.
  - Welcomed commitment to complete an AML/CFT assessment by end 2012.
  - Noted improved competitiveness, expected benefits from recently approved Free Trade Agreement with the United States, and stressed continued improvements to business environment, labor market, human capital, and access to basic services to foster inclusive growth.

### Selected Economic Indicators (2008–2011; projections noted)
- Real economy (Annual percent change)
  - Nominal GDP: 2008 16.2; 2009 5.0; 2010 10.0; 2011 18.6 (Proj.)
  - Real GDP (1996 prices): 2008 10.1; 2009 3.2; 2010 7.5; 2011 10.0 (Proj.)
  - Consumer price index (average): 2008 8.8; 2009 2.4; 2010 3.5; 2011 5.9 (Proj.)
  - Consumer price index (end-of-year): 2008 6.8; 2009 1.9; 2010 4.9; 2011 6.3 (Proj.)

- Money and credit
  - Private sector credit: 2008 14.6; 2009 1.3; 2010 13.6; 2011 17.8
  - Broad money: 2008 18.5; 2009 9.4; 2010 11.6; 2011 8.9
  - Average deposit rate (1-year): 2008 3.5; 2009 3.5; 2010 3.5; 2011 ...
  - Average lending rate (1-year): 2008 8.5; 2009 7.5; 2010 7.5; 2011 ...

- Saving and investment (Percent of GDP)
  - Gross domestic investment: 2008 27.6; 2009 25.6; 2010 26.0; 2011 29.0
  - Gross national saving: 2008 16.7; 2009 24.9; 2010 15.3; 2011 16.0

- Nonfinancial public sector (Percent of GDP)
  - Revenue and grants: 2008 34.9; 2009 33.5; 2010 33.3; 2011 33.4
  - Expenditure: 2008 32.4; 2009 33.9; 2010 36.7; 2011 38.9
  - Current, including interest: 2008 24.1; 2009 24.5; 2010 24.8; 2011 23.7
  - Capital: 2008 8.2; 2009 9.4; 2010 11.9; 2011 15.2
  - Overall balance: 2008 2.5; 2009 -0.4; 2010 -3.4; 2011 -5.5
  - Overall balance, excluding ACP: 2008 0.4; 2009 -1.0; 2010 -1.9; 2011 -2.3

- External sector (Percent of GDP)
  - Current account: 2008 -10.9; 2009 -0.7; 2010 -10.7; 2011 -13.0
  - Capital and financial account: 2008 10.5; 2009 1.4; 2010 9.8; 2011 10.8
  - Real effective exchange rate (depreciation -): 2008 -1.3; 2009 2.0; 2010 -2.1; 2011 ...
  - External public debt: 2008 35.7; 2009 40.1; 2010 36.0; 2011 31.8

- Memorandum
  - GDP (in millions of US$): 2008 23,002; 2009 24,163; 2010 26,590; 2011 31,532

*Source: _cr1283 - ANNEX 2. RELATIONS WITH THE WORLD BANK-*

### 1. Our authorities welcome the constructive dialogue with staff in preparation of the Article

### _cr1283 - 1. Our authorities welcome the constructive dialogue with staff in preparation of the Article

### Dialogue with Fund and legislative developments
- Authorities welcome the constructive dialogue with staff in preparation of the Article IV consultation and the FSAP.
- Authorities value the Fund’s technical assistance in the drafting of the sovereign wealth fund and the public-private partnership legislation.
- Both drafts of legislation should reach Congress by mid-2012.

### Growth performance and outlook
- Economic activity surged by about 10.5 percent in 2011 compared to 7.5 percent in 2010.
- Output growth is projected to remain close to 7 percent in 2012.
- Authorities expect that high growth will continue in the medium term despite global uncertainties.

### Investment performance
- Public investment (including investment by the Panama Canal Authority) increased by almost 40 percent at constant prices in 2011, after having expanded by 34 percent in 2010.
- Private investment contracted in 2009 and 2010, but recovered markedly in 2011.
- The gross domestic rate of investment has reached 29 percent.

### Sectoral composition and labor markets
- Growth remained broad-based: commerce, transportation, construction, communications, storage and mining were the most dynamic sectors.
- Open unemployment in 2011 fell to 2.9 percent compared to 4.7 percent in 2010, and 5.2 percent in 2009.
- Youth unemployment remains a concern, affecting mainly women.

### Inflation, current account, and FDI
- Average CPI inflation reached 5.9 percent in 2011 compared to 3.5 percent in 2010.
- CPI inflation is expected to moderate to about 5 percent in 2012.
- The current account deficit is projected to exceed 12 percent of GDP in 2011 compared to 10.7 percent in 2010.
- In the last two years, FDI has averaged nearly 9 percent of GDP.

### Fiscal developments and shocks
- Panama faced massive flooding nationwide at end-2010 with damages to agriculture and infrastructure costing over US$150 million.
- A national emergency allowed, under the Social and Fiscal Responsibility Law (SFRL), the fiscal deficit ceiling to be increased to 3 percent GDP in 2011.
- The final fiscal result is likely to have remained well below the revised SFRL ceiling.

### Revenues and fiscal space
- Revenues of the non financial public sector (NFPS) strengthened in 2011.
- Total revenues increased by 13 percent relative to 2010.
- Tax revenues increased 11.5 percent reflecting the full impact of previous tax reforms and the VAT increase of 2 percent in mid-2010.
- This revenue performance and prudent spending created fiscal space for the public investment program and poverty-related programs.

### Public investment implementation and major projects
- Rate of project implementation exceeded 85 percent in 2011 from 77 percent in 2009.
- Work on the new Metro system began in 2011.
- The Panama Canal expansion is at its peak and is on target to conclude in 2014.
- The inner city highway system and the construction of new airports and hospitals will accelerate in 2012.
- FDI has flowed mainly into the expansion of ports, tourism, electricity transmission and energy infrastructure.

### International tax agreements and ratings
- Panama was excluded from the OECD grey list as of last July 2011 after signing 11 double-taxation agreements (DTAs) and a tax information and exchange agreement (TIEA) with the United States.
- Last October 2011, authorities delivered to OECD’s Global Forum a report on the new laws to regulate the exchange of information for tax purposes.
- In December 2011, France’s National Assembly approved the DTA with Panama.
- The country intends to sign DTA agreements with other nations.
- In mid-2011, Fitch Ratings raised Panama credit rating to BBB from BBB-.
- Moody’s and Standard & Poor’s placed the country in “positive watch” for a possible upgrade in 2012.
- Last October, the United States Congress ratified the Free Trade Agreement with Panama.

### Financial sector assessment and supervision
- Authorities welcomed the completion of the FSAP.
- The assessment reaffirms the banking sector’s strong liquidity, profitability, and high capitalization.
- Credit risks are low.
- Interbank contagion and cross-border risks to onshore banks are considered limited though close monitoring is warranted.
- Authorities prioritize strengthening risk-based and consolidated cross-border supervision as well as non-bank supervision.
- The Superintendence of Banks is committed to strengthening bank resolution and monitoring of systemic risks.
- Authorities concur that the pending AML/CFT assessment should be implemented this year by IMF staff.

### Social programs, poverty, and human development
- President Martinelli’s administration continues to assign priority to targeted-income support programs aimed at reducing poverty and improving income distribution.
- ECLAC reports poverty levels fell from 33.4 percent of total population in 2009 to 29.8 percent in 2010.
- Panama ranks 58 among 187 countries in the United Nations Human Development index.
- Panama ranks 1st in Central America and 9th in Latin America.
- Government intends to continue expanding targeted-income support programs and to intensify technical training to improve competitiveness and help lift untrained adults out of poverty.

*IMF staff summary as presented in the source content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr1283.pdf_