## _cr14157 ## Source details **Canonical URL:** [_cr14157](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14157.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14157.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14157.pdf.json) --- ### Recent economic performance and implementation highlights - Growth and drivers - Growth averaged about 8.5 percent over the past decade. - Real GDP grew at around 11 percent in 2011–12; Real GDP growth declined to 8.4 percent in 2013. - Exports well diversified: services account for the bulk of exports; tourism and air travel account for as much as the Canal. - National accounts revision - Authorities began releasing preliminary revised national accounts in March 2014; upward revision to nominal GDP is between 5 and 8 percent depending on the year. - Staff Report based on the 1996-base national accounts statistics (officially available at the time of the staff mission). - Inflation and wages - Average headline inflation declined to 3.3 percent (yoy) in March 2014 from the 2012 average of 5.7 percent. - Core inflation decreased from 5.1 percent to 3.5 percent over the same horizon. - Public and private wage inflation increased to 11.6 percent and 9.3 percent in 2012, from 4.5 percent and 4 percent respectively in 2011. - December 2013 minimum wage increase of 13 to 27 percent depending on job: - Zone 1: raised 27 percent from US$490 to US$624. - Zone 2: raised 13 percent from US$432 to US$488. - Beneficiaries: about 270,000 workers (about ¼ of the working population). - February 2014 government announced wage increase of up to 50 percent for school teachers (about 3 percent of the labor force). - Fiscal developments - 2013 fiscal deficit was 3 percent of GDP (or 2.9 percent when using the new GDP statistics), within the revised ceiling allowed under the Social and Fiscal Responsibility Law (SFRL). - Drivers of increase from 2012 deficit (1.5 percent of GDP): strong public investment program. - Revenue excluding grants of the Non-Financial Public Sector increased by 9.9 percent. - Current expenditures grew by 9.6 percent. - Capital expenditures grew by 30.2 percent. - Cyclically adjusted 2013 primary balance as a percent of GDP is estimated to have deteriorated by 1 percentage point. - 2013 SFRL deficit ceiling raised to 3.1 percent from 2.7 percent (after approval of a supplementary budget); subsequent ceilings decline from 2.7 percent of GDP in 2014 to 0.5 percent in 2018. - Public debt and markets - Public debt to GDP (including external debt contracted for the Canal expansion) fell from about 66 percent in 2005 to about 41 percent in 2013. - Panama issued a US$750 million 40-year global bond with a coupon rate of 4.3 percent on April 22, 2013. - Sovereign spreads rose by about 45 basis points from April 2013 to March 2014. - In November 2013 authorities bought back US$583.6 million of the US$962 million global bond maturing in March 2015 and replaced it with global and domestic bonds with longer maturity. - Domestic share of new debt issuances rose from less than 10 percent in 2009 to about a quarter in 2013. ### External sector and financing - Current account and external position - Current account deficit worsened to 11.9 percent of GDP in 2013. - Current account deficit projected to remain close to 11 percent of GDP in 2014 and 2015, improve in 2016 when Canal expansion should be completed. - Large negative international investment position (about 71 percent of GDP in 2012) corresponds mainly to a large inward FDI position. - Banking sector assets and liabilities (including currency and deposits) amount to about 100 percent of GDP. - Foreign direct investment (FDI) - Buoyant FDI inflows projected to continue financing most of the current account deficit. - Copper mining project expected to bring about US$6½ billion over 2013–17, of which about US$1½ billion was already invested in 2013. ### Financial sector and supervision - Banking sector soundness and dynamics - Most local banks have a traditional business model; generally well capitalized, profitable, and liquid. - Overall credit to the private sector has grown in line with nominal GDP. - Loan composition: real estate and commerce each account for about 25 percent of total credit. - Credit growth to commerce slowed from 23 percent in 2012 to about 3 percent in 2013; credit to construction, mining, real estate, and consumers remained robust. - Household debt about 40 percent of GDP. - Supervision and regulatory reforms - Regulatory framework being enhanced in line with FSAP recommendations. - Authorities applying risk-based supervision to most banks; expect to complete coverage by mid-2014. - SBP adopted a regulation on credit risk management (Acuerdo No. 4, May 18 2013). - SBP enhancing countercyclical capacity of the dynamic provisioning component (effective by end-2014). - Insurance Law enhances independence and enforcement capacity of the Superintendency of Insurance (SSRP). - Intervention in a brokerage company revealed weaknesses in enforcement for capital markets. - January 2014: SBP required banks to increase provisioning for exposures to Venezuela (through ZLC) by about 1–1.3 percent of total capital. ### Signs of overheating and competitiveness concerns - Indicators of possible overheating: strong domestic demand, robust credit growth, negative structural primary balance, positive output gap, tight labor market, appreciating real exchange rate, persistent higher inflation than trading partners, and large current account deficit. - Risk that inflation may become entrenched in wage dynamics given recent minimum wage and public teachers’ remuneration increases. - Interest rates historically low; rate increases could help tame overheating risks. ### Main risks and policy responses (Risk Assessment Matrix summary) - External risks - Surges in global financial market volatility (related to UMP exit) — Risk level: HM/H - Impact: Reduction in capital inflows/increase in capital outflows; difficulty rolling over financing; freeze of foreign credit lines; rise in spreads and domestic rates. - Policy response: State to provide fiscal and liquidity support. Deficit financing more tilted to domestic market. Current account to adjust automatically through lower imports. - Sharp slowdown in China or protracted slower growth in advanced and emerging economies — Risk level: MH - Impact: Reduction in exports and Canal receipts; lower growth contribution from ZLC; knock-on impact on credit to ZLC. - Policy response: Current account to adjust automatically through lower imports. State to offer liquidity support if necessary. - Protracted failure in the United States to agree on a credible medium-term fiscal plan — Risk level: LH - Impact: Decline in Canal, ports, and ZLC activity; freeze in U.S. credit lines; knock-on effects on credit and non-canal activity. - Policy response: Current account to adjust automatically through lower imports. State to provide fiscal and liquidity support. Strengthen financial safety net. - Persistent payment difficulties in Venezuela for imports from the ZLC — Risk level: HL/M - Impact: Decline in ZLC activity with knock-on effects on the financial sector and the rest of the real sector. - Policy response: Intensify monitoring and supervision. Impose high provisioning when necessary. - Domestic risks - Resilience of inflation — Risk level: M M - Impact: Secondary round inflationary pressures affecting wage dynamics and hurting competitiveness. - Policy response: Tighter fiscal policy. - Further disruption to the Canal expansion — Risk level: LH - Impact: Negative effects on growth and employment short term; on exports and revenues medium term. - Policy response: Alternative Canal expansion plans. Reduction in medium term fiscal expenditure plans. - Further relaxation of deficit targets — Risk level: MM - Impact: Larger borrowing and contribution to overheating. Reduced market confidence. - Policy response: Build fiscal buffer and commit to fiscal targets below the FSRL ceilings. ### Outlook - Growth projection - Real GDP growth expected to moderate but remain healthy at above 7 percent in 2014. - Growth should gradually converge to a medium-term potential of about 6 percent as capital spending unwinds and fiscal consolidation continues along the SFRL path. - Current account and financing outlook - Current account deficit projected to remain close to 11 percent of GDP in 2014 and 2015; improvement expected in 2016 after Canal expansion completion. - FDI expected to continue financing most of the current account deficit. - Vulnerability to global developments - Normalization of U.S. monetary policy could expose vulnerabilities through rising interest rates and capital outflows. - Authorities consider risks manageable if normalization is gradual, noting public debt maturities: about 11 years for total debt and 13 years for external debt. - Protracted slowdown in trading partners would significantly affect Canal revenues. - Persistent tensions in Venezuela would continue to negatively affect the ZLC but may also induce capital inflows. ### Debt sustainability and Canal transfers - Under fiscal deficit path matching declining SFRL ceilings and growth converging to potential, public debt projected to decline to about 32 percent of GDP in the medium term. - Starting in 2015, Canal transfers usable for current fiscal expenditure capped at 3.5 percent of GDP; Sovereign Wealth Fund (Fondo de Ahorro de Panama, FAP) absorbs any excess. - Law 38 2012 instituted the FAP and endowed it with assets of the Fondo Fiduciario (about US$1.3bn). - Conditions for FAP transfers: - State of emergency: FAP can cover costs exceeding 0.5 percent of GDP if FAP assets are above 2 percent of GDP. - Economic slowdown (from 2015): defined as growth less than 2 percent for two consecutive quarters; FAP can contribute if assets above 2 percent of GDP. - Debt repayment: government may use FAP assets to repay sovereign debt up to 0.5 percent of GDP per year if FAP assets are above 5 percent of GDP. - DSA results: - Debt remains sustainable under a simultaneous interest rate and growth shock similar to 2008–09, but more persistent. - If a 2008–09–type temporary shock is coupled with a banking crisis requiring fiscal intervention of about 17 percent of GDP, debt will rise but remain sustainable. ### Panama Canal expansion: risks and outlook - ACP and GUPC dispute over US$1.6 billion cost overrun on a US$3.2 billion contract; expansion activity slowed and halted for two weeks in February 2014; agreement reached in late February 2014. - Project completion now expected by end-2015. - ACP confident work can be completed with small additional delays and costs if further tensions arise. - Once finished, Canal traffic should increase significantly due to New-Panamax ships and LNG transport. - Long-term risk: possible construction of a canal in Nicaragua could increase competition for ACP. ### Fiscal policy: stance and reforms - Staff recommended targeting fiscal deficit below revised SFRL ceiling to: - Rein in domestic inflationary pressures and prevent entrenchment in wage dynamics. - Leave room for maneuver in case of serious external deterioration. - Build public assets potentially valuable for financing a liquidity facility. - Reduce risk of revising/exceeding the ceiling and eroding credibility. - 2014 budget deficit corresponds to about 3 percent of the 2014 unrevised GDP projection; may require small adjustments to remain within SFRL ceiling (2.7 percent) on revised GDP basis. - Agreed fiscal reform agenda: - Creation of a Single Treasury Account. - Establishment of a Medium-Term Expenditure Framework. - Publication of the first debt strategy plan in spring 2014. - Enhanced joint management strategy for public assets and liabilities (sovereign wealth fund, public debt management, fiscal tightening path, funding of liquidity facility, management of public enterprises’ liabilities, use of contingent instruments). ### Bolstering financial system resilience - As of end-2013: - Onshore banks reported about US$32 billion in foreign assets (79 percent of GDP). - Onshore banks reported US$26 billion in foreign liabilities (64 percent of GDP). - Foreign-owned (Panamanian) banks account for about 80 percent of foreign deposits and about 85 percent of foreign lending. - Anecdotal evidence: housing prices may have doubled in the last five years; some signs of oversupply in tourism and high-end real estate segments. - Key recommendations: - Introduce a formal financial safety net (Panama lacks lender of last resort and deposit insurance). - Proposed liquidity facility should have an explicit funding plan, avoid conflicts of interest, and set adequate liquidity and solvency standards for eligibility. - Proposal envisages possible Banco Nacional de Panama (BNP) board involvement; staff urged avoiding conflicts of interest. - Maintain momentum in financial sector reforms to enhance transparency: - Law in 2013 provides for custody of bearer shares; coming into force in 2015 with a three-year transition ending in 2018 for prior shares. - Publish and implement recommendations from the 2014 IMF AML/CFT assessment report. - Authorities requested TA from IADB, the Fund, and U.S. Treasury to support implementation. - Potential impacts of FATF and Global Forum compliance: limited if efforts stepped up; risks include decline in foreign deposits and insurance premiums and temporary effects on legal and accounting services. - Build capacity for systemic risk monitoring and macroprudential policies; finalize legislation/regulations on cooperatives, conglomerates, trust funds, public accountants, capital adequacy, and reporting standards for holding companies. - Promote development of interbank market. - Deposit insurance: a scheme capped at US$10,000 would protect about 90 percent of depositors (2011 FSAP estimate) with a relatively small potential loss (5 percent of deposits); authorities concerned about moral hazard. ### Social policies, human capital, and labor market - Poverty and inequality - Poverty rate fell from 36.8 percent in 2003 to 27.6 percent in 2011. - Income growth of households in the bottom 40 percent reached 8.9 percent between 2003 and 2011; Panama’s average household income growth was 6.6 percent. - Gini coefficient dropped from 0.56 in 2003 to 0.53 in 2011. - Poverty still affects about one-quarter of the population; higher incidence in rural areas. - Social programs and recent actions - Increased cash transfer to the elderly from 100 to 120 dollars a month ("120 a los 70"). - Launched "Angel Guardian" program for citizens with severe disabilities. - Other programs: adult illiteracy, community empowerment, crime prevention, child development, and job training. - Human capital and labor market policy priorities - Improve quality of public education, vocational training (particularly in rural areas), and access to secondary and tertiary education. - Stimulate female labor force participation (childcare access, flexible working hours) to relax capacity constraints and enhance productivity. - School dropouts declined from 5.1 percent in 2009; source text notes school enrollment (especially middle and high school) increased and mentions "3.1 percent in 2012" in related context. ### Data reporting standards and gaps - Staff urged authorities to progress toward SDDS subscription and close data gaps. - Main remaining obstacles: lack of budgetary allocations and inadequate coordination among government agencies. - Data series needing improvement: breakdown of quarterly GDP; Government Finance Statistics; outward FDI flows and stocks; portfolio equity flows and stocks. - Recent studies suggest SDDS subscription may lower sovereign spreads by up to 20 to 50 basis points (empirical note from source). ### Staff Appraisal — Baseline outlook and key risks - Baseline: favorable outlook with moderate risks; growth moderating in 2013 but expected to remain strong; inflation moderating yet higher than trading partners. - Near-term risks: overheating pressures, U.S. monetary normalization, protracted slowdown in trading partners, payment difficulties in Venezuela, Canal expansion delays. - Mitigating factors: strong fundamentals and ability to implement countercyclical fiscal policies. ### Fiscal policy recommendations (summary) - Keep fiscal deficits below SFRL ceilings to: - Contain overheating pressures and build fiscal buffers. - Rein in domestic inflationary pressures and prevent wage entrenchment. - Leave room for shocks and build public savings to help finance a liquidity facility. - Avoid further revision to SFRL ceilings to preserve credibility. - Continue fiscal reform agenda: complete Single Treasury Account; complete Medium-Term Expenditure Framework; develop comprehensive strategy for public assets and liabilities management. ### Financial sector and stability recommendations (summary) - Create an adequately financed and well-designed liquidity facility to absorb liquidity shocks. - Improve capacity for systemic risk monitoring, macroprudential policy, and supervision of banks and nonbank financial institutions. - Implement remaining 2011 FSAP recommendations swiftly. - Intensify efforts to enhance financial transparency and implement AML/CFT recommendations. ### Implementation of past IMF policy advice (Box 1 — summary) - Fiscal policy - 2013 deficit (3 percent of GDP) within ceiling after supplementary budget for October 2012 floods. - Revenue collection improved via ANIP and Large Taxpayers’ Unit. - Plans to publish Medium-Term Debt Management Strategy in 2014. - Progress on Single Treasury Account and Medium-Term Expenditure Framework. - Financial sector reforms - Progress on 2011 FSAP recommendations; PALET liquidity facility plan being finalized. - Law 47 (August 6, 2013) adopted custody regime for bearer shares. - IMF Detailed Assessment Report on AML/CFT published February 2014. - Financial Coordination Committee established; credit risk regulation issued May 2013 incorporating dynamic provisioning. - More inclusive growth - Enhanced social protection programs; increased cash transfers to elderly. - Education reforms: modernizing curriculum, enhancing teacher training, private sector engagement to address skill mismatches. ### Box 5 — Forecasting Panama’s EMBI Spread and Interest Rates (key points) - Model uses country-specific financial/political risks, U.S. 10-year nominal yield, and U.S. market volatility (MOVE and VIX); monthly data Jan 2000–Dec 2013. - Sensitivities - 100 bps increase in U.S. nominal rates → Panama spread rise of about 24 bps (Case I) and 45 bps (Case II). - One-standard-deviation volatility increase (30 points MOVE or 9 points VIX) → spread rise by 60 bps (Case I) or 70 bps (Case II). - Decline in financial risk by one standard deviation → spread reduction of 69 bps (Case I) and 52 bps (Case II). - Decline in political risk by one standard deviation → spread reduction of 45 bps (Case I) and 43 bps (Case II). - Medium-term projection - Panama’s spread expected to increase by about 125 to 175 bps; expected spread levels around 325 bps (Case I) or 375 bps (Case II). - Domestic bank rate pass-through - A 100 bps increase in the U.S. one-month nominal T-bill associated with less than 50 bps increase in deposit rate. - One-year lending rates rise by between 26 and 40 bps if U.S. one-year nominal T-bill increases by 100 bps. - Implication: normalization of U.S. monetary policy and uncertainty expected to put upward pressure on sovereign spreads; domestic bank rates less responsive and in U.S. dollars, so primary transmission is via sovereign financing costs and global volatility. ### Box 7 — Female Labor Force Participation (FLFP) (key findings) - Population shares: women constitute a little more than half of the population; FLFP rose from 35.4 in 2001 to 39.7 in 2013. - Labor market representation: only around one-third of labor market participants are women. - Unemployment duration: probability of longer-than-one-year unemployment is 30 percent for females versus 19 percent for males. - Education: over 40 percent of working females have university degrees versus 24 percent for males; Panamanian girls have higher PISA scores than boys in averages. - Policy levers: increase flexible working arrangements; improve access to child and elderly care; remove labor market distortions to boost FLFP. ### Annex I — Implementation of 2011 FSAP recommendations (selected) - Banking oversight: regulation on operational risks adopted 2011; dynamic provisioning regulation issued May 18, 2013; draft regulation on holding companies ongoing to be adopted by April 2014. - Insurance sector: Insurance Law adopted in 2012. - Securities market: Law 67 (1 September 2011) upgraded Commission to Superintendency (SMV). - Payments and securities systems: no initiatives yet on comprehensive payments law or RTGS adoption. - Financial safety nets: no policy initiatives so far on deposit insurance; liquidity facility studies ongoing. - Capital market development: efforts to extend market making to global bonds ongoing. - Systemic risk monitoring: Financial Coordination Council established; SBP initiated Financial Stability Report series. ### Annex III — Investment and Growth (key findings) - Growth decomposition (Cobb-Douglas): α estimated at 0.37 over 1991–2012. - Education and labor - Average years of schooling (15+) increased from 7.6 in 1990 to 9.6 in 2010. - Tertiary enrollment doubled from 22.7 percent in 1991 to 45.7 percent in 2010. - TFP and capital - TFP’s contribution almost one quarter of growth in last decade. - Investment as percent of GDP: - 1980-2013: 18.9 - 1980-1990: 11.2 - 1991-2013: 22.7 - 1991-2001: 21.9 - 2002-2013: 23.4 - 2007-2013: 26.8 - Public investment averages: 2.4 percent of GDP in 1980s; 3.4 percent in 1990s; more than 9 percent in 2007–13. - VAR results - 1 percent increase in public investment raises GDP by 0.1 percent on impact and about 0.2 percent after two years. - 1 percent increase in public investment raises private investment by about 0.4 percent on impact and about 0.6 percent after one to two years (indicating crowding-in). ### Data and reporting progress; gaps and recommendations - Rebasing work: "Preparation started in the second half of 2010 and rebased data should be published in the first quarter of 2014." - Government finance statistics: need improved timeliness/consistency of transfers between public sector units; universal coverage of public enterprises; better ACP flow statistics on a calendar year basis. - Monetary and financial statistics: Panama reports monetary data using SRFs; started reporting FSIs to STA quarterly in February 2014 with data from 2005. - Balance of payments and external sector: weaknesses in trade flow measurement (Colon Free Zone); outward FDI of nonfinancial private sector under-collected; surveys underway. - Data gaps limiting systemic risk analysis: real estate prices, loan write-offs, loan-to-value ratios, leverage indicators. - SDDS and dissemination: Panama participating in GDDS since December 2000; action plan toward SDDS exists; SDDS subscription could lower sovereign spreads by up to 20 to 50 basis points (empirical note). ### Executive Board Assessment and recommendations (summary) - Commend robust macroeconomic performance and public investment; note signs of domestic overheating and elevated current account deficit. - Fiscal policy: tighten to rein in inflationary pressures and provide cushion against external shocks; target deficit below SFRL ceiling. - Financial sector: monitor external positions, credit growth, leverage and liquidity; implement remaining FSAP recommendations; develop liquidity facility; enhance AML/CFT and transparency. - Structural and social: continue reforms to maintain external stability and competitiveness, reduce poverty, and enhance human capital; stimulate female labor force participation. - Data: resume efforts toward SDDS subscription to close critical data gaps. *Source: IMF staff report excerpt — "RECENT DEVELOPMENTS", "MACROECONOMIC OUTLOOK AND RISKS", Annexes, and Boxes (pages 3–9 and related sections of the supplied chapter).* ### 1. Implementation of Past IMF Policy Advice ____________________________________________________ 18 ### 1. Implementation of Past IMF Policy Advice ### Recent economic performance and implementation highlights - Growth and drivers - Growth averaged about 8.5 percent over the past decade, the highest in Latin America. - Real GDP grew at around 11 percent in 2011–12, driven by strong private demand, an ambitious public investment program, and the Canal expansion project. - Real GDP growth declined to 8.4 percent in 2013, reflecting mainly a decline in Colon Free Zone (Zona Libre de Colon, ZLC) activity and in Canal traffic. - Exports remain well diversified: services account for the bulk of exports; tourism and air travel account for as much as the Canal. - National accounts revision - Authorities began releasing preliminary revised national accounts in March 2014; upward revision to nominal GDP is between 5 and 8 percent depending on the year. - The Staff Report is based on the 1996-base national accounts statistics (officially available at the time of the staff mission). - Inflation and wages - Average headline inflation declined to 3.3 percent (yoy) in March 2014 from the 2012 average of 5.7 percent. - Core inflation decreased from 5.1 percent to 3.5 percent over the same horizon. - Public and private wage inflation increased to 11.6 percent and 9.3 percent in 2012, from 4.5 percent and 4 percent respectively in 2011. - In December 2013 the authorities announced a minimum wage increase of 13 to 27 percent depending on the type of job. - Monthly minimum wage in Zone 1 raised 27 percent from US$490 to US$624. - Monthly minimum wage in Zone 2 raised 13 percent from US$432 to US$488. - The new minimum wage should benefit about 270,000 workers, who constitute about ¼ of the working population. - In February 2014 the government announced a wage increase of up to 50 percent for school teachers (about 3 percent of the labor force). - Fiscal developments - The 2013 fiscal deficit was 3 percent of GDP (or 2.9 percent when using the new GDP statistics), within the revised ceiling allowed under the Social and Fiscal Responsibility Law (SFRL). - The increase from the 2012 deficit to GDP ratio (1.5 percent) was driven by a strong public investment program: - Revenue excluding grants of the Non-Financial Public Sector increased by 9.9 percent. - Current expenditures grew by 9.6 percent. - Capital expenditures grew by 30.2 percent. - Cyclically adjusted 2013 primary balance as a percent of GDP is estimated to have deteriorated by 1 percentage point. - The 2013 SFRL deficit ceiling was raised to 3.1 percent from 2.7 percent (after approval of a supplementary budget). For subsequent years the ceiling declines from 2.7 percent of GDP in 2014 to 0.5 percent in 2018. - Public debt and markets - Ratio of public debt to GDP (including external debt contracted for the Canal expansion) fell from about 66 percent in 2005 to about 41 percent in 2013. - Panama issued a US$750 million 40-year global bond with a coupon rate of 4.3 percent on April 22, 2013. - Sovereign spreads rose by about 45 basis points from April 2013 to March 2014. - In November 2013 authorities bought back US$583.6 million of the US$962 million global bond maturing in March 2015 and replaced it with global and domestic bonds with longer maturity. - Domestic share of new debt issuances rose from less than 10 percent in 2009 to about a quarter in 2013. ### External sector and financing - Current account and external position - The current account deficit worsened to 11.9 percent of GDP in 2013, reflecting slowdown in exports (particularly Canal and related services) and an increase in FDI reinvested earnings. - The current account deficit is projected to remain high (close to 11 percent of GDP) in 2014 and 2015, and improve in 2016 when the Canal expansion should be completed. - The large negative international investment position (about 71 percent of GDP in 2012) corresponds mainly to a large inward FDI position. - Banking sector assets and liabilities (including currency and deposits) amount to about 100 percent of GDP. - Foreign direct investment (FDI) - Buoyant FDI inflows are projected to continue to finance most of the current account deficit. - The copper mining project is expected to bring about US$6½ billion over 2013–17, of which about US$1½ billion was already invested in 2013. ### Financial sector and supervision - Banking sector soundness and dynamics - Most local banks have a traditional business model with limited wholesale funding and are well capitalized, profitable, and liquid. - Overall credit to the private sector has grown in line with nominal GDP in recent years. - Loan portfolio composition: loans to real estate and commerce each account for about 25 percent of total credit. - Growth in credit to commerce slowed from 23 percent in 2012 to about 3 percent in 2013 due to difficulties in the ZLC. - Growth in credit to construction, mining, real estate, and consumers continued to be robust. - Household debt is about 40 percent of GDP. - Supervision and regulatory reforms - Regulatory framework is being enhanced in line with FSAP recommendations (see Annex I). - Authorities applying risk-based supervision to most banks; expect to complete coverage by mid-2014. - SBP adopted a regulation on credit risk management (Acuerdo No. 4, May 18 2013). - SBP is working to enhance the countercyclical capacity of the dynamic provisioning component, which will become effective by end-2014. - Recently approved Insurance Law enhances independence and enforcement capacity of the Superintendency of Insurance (SSRP); SSRP is building analytical capacity and upgrading regulations. - Intervention in a brokerage company revealed critical weaknesses in enforcement of the regulatory framework for capital markets. - In January 2014 the Superintendency of Banks (SBP) required banks to increase provisioning for exposures to Venezuela (through ZLC) by about 1–1.3 percent of total capital. ### Signs of overheating and competitiveness concerns - Signs and drivers - Indicators pointing to possible overheating: strong domestic demand, robust credit growth, negative structural primary balance, positive output gap, tight labor market, an appreciating real exchange rate, persistent higher inflation than trading partners, and a large current account deficit. - Positive relation between inflation and the economic cycle has been evident since the mid-2000s. - Risks that inflation may become entrenched in wage dynamics, particularly given recent minimum wage and public teachers’ remuneration increases. - Interest rates are historically low; an increase in interest rates could help tame overheating risks. ### Main risks and policy responses (Risk Assessment Matrix summary) - External risks - Surges in global financial market volatility (related to UMP exit) — Risk level: HM/H - Impact: Reduction in capital inflows/increase in capital outflows; difficulty rolling over financing; freeze of foreign credit lines; rise in spreads and domestic rates. - Policy response: State to provide fiscal and liquidity support. Deficit financing more tilted to domestic market. Current account to adjust automatically through lower imports. - Sharp slowdown in China or protracted slower growth in advanced and emerging economies — Risk level: MH - Impact: Reduction in exports and Canal receipts; lower growth contribution from ZLC; knock-on impact on credit to ZLC. - Policy response: Current account to adjust automatically through lower imports. State to offer liquidity support if necessary. - Protracted failure in the United States to agree on a credible medium-term fiscal plan — Risk level: LH - Impact: Decline in Canal, ports, and ZLC activity; freeze in U.S. credit lines; knock-on effects on credit and non-canal activity. - Policy response: Current account to adjust automatically through lower imports. State to provide fiscal and liquidity support. Strengthen financial safety net. - Persistent payment difficulties in Venezuela for imports from the ZLC — Risk level: HL/M - Impact: Decline in ZLC activity with knock-on effects on the financial sector and the rest of the real sector. - Policy response: Intensify monitoring and supervision. Impose high provisioning when necessary. - Domestic risks - Resilience of inflation — Risk level: M M - Impact: Secondary round inflationary pressures affecting wage dynamics and hurting competitiveness. - Policy response: Tighter fiscal policy. - Further disruption to the Canal expansion — Risk level: LH - Impact: Negative effects on growth and employment in the short term and on exports and revenues in the medium term. - Policy response: Alternative Canal expansion plans. Reduction in medium term fiscal expenditure plans. - Further relaxation of deficit targets — Risk level: MM - Impact: Larger borrowing and contribution to overheating. Reduced market confidence. - Policy response: Build fiscal buffer and commit to fiscal targets below the FSRL ceilings. ### Outlook - Growth projection - Real GDP growth is expected to moderate but remain healthy at above 7 percent in 2014, owing to robust private investment. - Growth should gradually converge to a medium-term potential of about 6 percent as capital spending unwinds and fiscal consolidation continues along the SFRL path. - Current account and financing outlook - Current account deficit projected to remain close to 11 percent of GDP in 2014 and 2015, with improvement expected in 2016 after Canal expansion completion. - FDI expected to continue financing most of the current account deficit. - Vulnerability to global developments - Normalization of U.S. monetary policy could expose vulnerabilities through rising interest rates and capital outflows. - Authorities consider risks manageable if normalization is gradual, noting long public debt maturities (about 11 years for total debt and 13 years for external debt) and limited responsiveness of domestic bank rates to U.S. interest rates. - A protracted slowdown in trading partners would significantly affect Panama’s exports, particularly Canal revenues. - Persistent tensions in Venezuela would continue to negatively affect the ZLC but may also induce capital inflows. *Source: IMF staff report excerpt — "RECENT DEVELOPMENTS" and "MACROECONOMIC OUTLOOK AND RISKS" (pages 3–9 of the provided chapter).* ### 13. Public debt is deemed sustainable even in the presence of significant shocks. ### 13. Public debt is deemed sustainable even in the presence of significant shocks. ### Debt sustainability and Canal transfers - Assuming the fiscal deficit path matches the declining SFRL ceilings path and economic growth converges towards its potential, public debt is projected to decline to about 32 percent of GDP in the medium term. - Additional relaxations of the SFRL ceilings would erode the credibility of the SFRL framework and investors’ confidence. - Starting in 2015, the amount of Canal transfers that can be used for current period fiscal expenditure will be capped at 3.5 percent of GDP, with the Sovereign Wealth Fund (Fondo de Ahorro de Panama, FAP) absorbing any excess in total Canal transfers. - The government will be able to use FAP’s assets to run countercyclical fiscal policy in the event of economic downturns or natural disasters, and to reduce debt. - Law 38 2012 instituted the FAP and endowed it with the assets of the Fondo Fiduciario (about US$1.3bn). - Conditions for transfers from FAP to the National Treasury include: - If a state of emergency is declared by the Cabinet, FAP can be called to cover associated cost exceeding 0.5 percent of GDP as long as FAP assets are above 2 percent of GDP. - In the occurrence of an economic slowdown (from 2015 onwards), defined as growth less than 2 percent for two consecutive quarters, FAP can be asked to contribute as long as FAP assets are above 2 percent of GDP. - The government may decide to use FAP assets to repay sovereign debt for up to 0.5 percent of GDP per year, as long as FAP assets are above 5 percent of GDP. - Canal transfers historically comprise a large portion of nontax revenue, have been fairly stable (Chart 8), and are expected to increase significantly in 2016. - The debt sustainability analysis (DSA) indicates: - Debt would remain sustainable in the occurrence of a simultaneous interest rate and growth shock similar to the one occurred in 2008–09, but more persistent. - Should a temporary shock similar to 2008–09 be coupled with a banking crisis that required fiscal intervention of about 17 percent of GDP, debt will rise but still remain sustainable. ### Panama Canal expansion: risks and outlook - The Panama Canal Authority (ACP) and the Grupo Unidos por el Canal (GUPC) entered a dispute over a US$1.6 billion cost overrun claimed by GUPC on a US$3.2 billion contract. - Expansion activity slowed and halted for two weeks in February 2014; an agreement was reached in late February 2014. - Project completion is now expected by end-2015. - ACP is confident work can be completed with small additional delays and costs if additional tensions arise. - Once expansion is finished, Canal traffic should increase significantly due to transit of larger (New-Panamax) ships and transportation of Liquefied Natural Gas. - Over the long term, possible construction of a canal in Nicaragua could increase competition for ACP. ### Fiscal policy: stance and reforms - Staff recommended targeting a fiscal deficit below the revised SFRL ceiling to: - Rein in domestic inflationary pressures and prevent entrenchment in wage dynamics. - Leave room for maneuver in case of serious external deterioration. - Build up public assets potentially valuable for financing a liquidity facility. - Reduce the risk of revising or exceeding the ceiling and eroding credibility of fiscal rules and investors’ confidence. - The 2014 fiscal deficit presented in the budget corresponds to about 3 percent of the 2014 unrevised GDP projection and may require small adjustments to remain within the SFRL ceiling (2.7 percent) on the basis of revised GDP. - Authorities indicated they managed to keep the fiscal balance below the SFRL ceilings in recent years, expect substantial underspending in 2014 vis-à-vis the budget due to election and transition, and are committed to adjusting expenditures if necessary. - Agreed fiscal reform agenda to strengthen budgeting and public financial management includes: - Creation of a Single Treasury Account. - Establishment of a Medium-Term Expenditure Framework. - Publication of the first debt strategy plan in spring 2014. - Enhanced joint management strategy for public assets and liabilities to guide decisions on sovereign wealth fund, public debt management, fiscal tightening path, funding of the financial liquidity facility, management of public enterprises’ liabilities, and use of contingent instruments (e.g., catastrophic insurance). - Authorities are confident tax evasion has been declining owing to stronger fiscal institutions, including the recently created independent revenue agency (Autoridad Nacional de Ingresos Publicos, ANIP). The Large Taxpayers’ Unit is operational and being enhanced. ### Bolstering financial system resilience - Staff called for enhanced monitoring of risks from large gross external positions, rapidly rising real estate prices, and leverage/liquidity positions of banks and enterprises. - As of end-2013: - Onshore banks reported about US$32 billion in foreign assets (79 percent of GDP). - Onshore banks reported US$26 billion in foreign liabilities (64 percent of GDP). - Foreign-owned (Panamanian) banks account for about 80 percent of foreign deposits and about 85 percent of foreign lending. - Anecdotal evidence suggests housing prices may have doubled in the last five years, with some signs of oversupply in tourism and high-end real estate segments. - Authorities see no tangible systemic financial sector risks at present but acknowledged need for more information on foreign exposures and real estate prices. - Mission urged swift implementation of remaining recommendations of the 2011 FSAP and the 2014 IMF Detailed Assessment Report on AML/CFT. - Key recommendations and discussion points: - Introducing a formal financial safety net: - Panama currently has neither a lender of last resort facility nor a deposit insurance scheme. - Proposal for a liquidity facility should have: (i) a tangible and explicit funding plan (gradual build up of assets from public and ideally private sources); (ii) fiduciary and management choices that avoid conflicts of interest and ensure level playing field; (iii) adequate liquidity and solvency standards for eligibility. - Proposal envisages possible Banco Nacional de Panama (BNP) board involvement; staff urged avoiding conflicts of interest. - Maintaining momentum in financial sector reforms to enhance financial and corporate transparency: - Law issued in 2013 provides for custody of bearer shares; law will come into force in 2015 with a three-year transition period ending in 2018 for shares issued prior to the law. - Publication of the 2014 IMF AML/CFT assessment report is a positive step. - Authorities requested technical assistance from the IADB, the Fund, and the U.S. Treasury to support economic impact assessment, implementation of recommendations, and enhancement of the Financial Intelligence Unit. - Potential economic impacts of FATF and Global Forum compliance include: limited impact if authorities step up efforts; risk of decline in foreign deposits and insurance premiums; temporary effects on legal and accounting services; and, in a highly unlikely scenario, international sanctions that could hinder access to international capital markets. - Building capacity to monitor systemic risks and conduct macroprudential policies, and enhancing supervision: - SBP has identified systemically important banks and initiated a Financial Stability Report series. - Coordination improved via a council of supervisors (FCC). - No single institution has overall mandate to monitor systemic risks; data gaps exist (e.g., real estate prices, loan-to-value ratios, corporate sector financial conditions). - Staff welcomed introduction of dynamic provisioning and urged enhancing its countercyclical capacity. - Finalize and adopt draft legislation/regulations on cooperatives, conglomerates, trust funds, public accountants, capital adequacy and regulatory reporting standards for holding companies. - Promote development of the interbank market. - Deposit insurance scheme considerations: - A deposit insurance capped at US$10,000 would offer protection to the majority of depositors (estimated at about 90 percent in the 2011 FSAP) while entailing a relatively small potential loss (5 percent of deposits). - Authorities are adverse to deposit insurance fearing moral hazard and reduced market monitoring of banks’ behavior. ### Ensuring a smooth transition to medium-term growth and social policies - Current account: - Staff analysis suggests moderate signs of an excessive current account deficit. - Widening current account deficit is associated with a strong-but-temporary investment agenda and is expected to continue being financed mainly by FDI. - Net of gross foreign asset accumulations, external debt to GDP would decline in all the risk scenarios envisaged. - Social and institutional reforms: - Reduction in poverty and income inequality has been sizable in recent years. - Poverty and inequality statistics: - Poverty rate fell from 36.8 percent in 2003 to 27.6 percent in 2011. - Between 2003 and 2011, income growth of households in the bottom 40 percent reached 8.9 percent, compared with an average for Latin American countries of 4.8 percent, and with Panama’s average household income growth of 6.6 percent. - The Gini coefficient dropped from 0.56 in 2003 to 0.53 in 2011. - Recent social policy actions: - Increased cash transfer to the elderly from 100 to 120 dollars a month (120 a los 70). - Launched a program for citizens with severe disabilities (Angel Guardian). - Other social programs address poverty, adult illiteracy, community empowerment, crime prevention, child development, and job training. - Nonetheless, poverty still affects about one-quarter of the population, with higher incidence in rural areas. - Institutional reforms (judicial system, anti-corruption) are necessary to address shortcomings. - Human capital and labor market: - In 2007–13 high-growth period, capital accumulation contributed to more than a third of GDP growth, with the remaining contribution resulting equally from labor and total factor productivity. - Public investment is likely to decelerate; sustainable growth will need greater contributions from other factors. - Staff emphasized measures to improve quality of public education, vocational training (particularly in rural areas), and better access to secondary and tertiary education to enhance human capital, job mobility, reduce skill mismatches, and youth unemployment. - Stimulating female labor force participation (e.g., wider access to childcare, flexible working hours) could relax capacity constraints and enhance average productivity given comparatively high education levels among women. - Authorities noted no legal restrictions to female labor force participation and recent enhancements in education programs (soft skills, foreign languages), improved teacher training, and deeper dialogue between teachers and firms to address skill mismatches. - School dropouts declined from 5.1 percent in 2009 to [text truncated in source]. *Source: _cr14157 - 13. Public debt is deemed sustainable even in the presence of significant shocks.* ### 3.1 percent in 2012, and school enrollment (especially for middle and high school) increased. ### _cr14157 - 3.1 percent in 2012, and school enrollment (especially for middle and high school) increased. ### Data Reporting Standards - Staff urged the authorities to progress swiftly toward SDDS subscription and to close data gaps that hinder effective macroeconomic policy management. - Improvements in timeliness, coverage, and quality of macro-statistics data would help improve the capacity of policy-making and boost investor confidence. - Since the 2011 SDDS TA mission from the Fund, partial progress has been made towards SDDS subscription. - Main remaining obstacles: - Lack of budgetary allocations. - Inadequate coordination among the relevant government agencies. - Data series highlighted as particularly important for macroeconomic monitoring and needing improvement: - Breakdown of quarterly GDP. - Government Finance Statistics. - Outward FDI flows and stocks. - Portfolio equity flows and stocks. - Authorities indicated priorities: - Revision of national account statistics. - Enhancement of foreign direct investment data. - Empirical note from source material: - Recent studies suggest that subscription to SDDS may lower sovereign spreads by up to 20 to 50 basis points. ### Staff Appraisal — Baseline Outlook and Key Risks - Baseline outlook: - Outlook described as favorable, with moderate risks. - Panama’s economic growth started to moderate in 2013, but is expected to remain strong over the medium term as it continues to enhance its regional and global logistics role. - Inflation is moderating due to deceleration of international food and oil prices, but remains higher than in major trading partners owing in part to strong domestic demand. - The 2014 fiscal deficit is expected to remain within the revised SFRL ceilings, taking into account the expected upward revision to GDP. - The current account deficit is expected to remain elevated, reflecting high public and private investment, but buoyant FDI inflows are projected to continue to finance most of the deficit. - Near-term risks: - Overheating pressures from strong domestic demand; resilient inflationary pressures may feed into wage dynamics, possibly reducing competitiveness. - External risks from normalization—and surrounding uncertainty—of U.S. monetary policy (higher interest rates and capital outflows). - Protracted economic slowdown in trading partners and persistent payment difficulties in Venezuela. - Additional significant delays in the Canal expansion would have an adverse impact on output and employment in the short term, and on exports and fiscal revenues in the medium term. - Mitigating factors: - Strong fundamentals and the ability to implement countercyclical fiscal policies would help mitigate external shocks. ### Fiscal Policy Recommendations - Keep fiscal deficits below the SFRL ceilings to: - Help contain overheating pressures. - Build fiscal policy buffers. - Rein in domestic inflationary pressures and prevent entrenchment in wage dynamics. - Leave room for policy maneuver to cope with shocks and build public savings to help finance the liquidity facility. - Avoid further revision to the SFRL ceilings, which erode the credibility of the SFRL and investors’ confidence. - The significant revision of nominal GDP offers an opportunity to remain well below the ceiling in 2014 by maintaining the moderate fiscal tightening embedded in the nominal deficit path. - Continue the fiscal reform agenda to strengthen budgeting and public financial management: - Complete the Single Treasury Account. - Complete the Medium-Term Expenditure Framework. - Develop a comprehensive strategy for public assets and liabilities management to guide: - Public debt management. - Role of the sovereign wealth fund. - Path for fiscal tightening. - Funding of the financial liquidity facility. - Management of public enterprises’ liabilities. - Use of contingent instruments (such as catastrophic insurance). ### Financial Sector and Financial Stability - Banking system assessment: - The banking system remains generally healthy; bank performance indicators are sound. - Authorities have moved proactively to contain risks related to exposures to Venezuela. - Authorities should continue to monitor closely credit growth, leverage, and external positions, and take additional measures if needed. - Recommendations for banking sector resilience: - Create an adequately financed and well designed liquidity facility to absorb liquidity shocks. - Improve capacity for: - Monitoring systemic risks (including through collecting necessary data and frequently updating stress tests). - Conducting macroprudential policies. - Supervising both banks and nonbank financial institutions. - Implement remaining recommendations of the 2011 FSAP swiftly. - Intensify efforts towards enhancing financial transparency: - Law providing for custody of bearer shares and publication of the IMF AML/CFT reports are important steps. - Accelerate implementation of the recommendations in the AML/CFT assessment. ### Medium-Term Reforms and Social Policies - Medium-term priorities: - Maintain external stability and competitiveness by containing inflationary pressures, preventing further appreciation of the real exchange rate, and monitoring the buildup of external liabilities. - Promote inclusiveness and fairness; continue social and institutional reforms to enhance poverty reduction and improve distribution of income and economic opportunities. - Enhance human capital and productivity: - Further improve quality of public education. - Stimulate female labor force participation. - Enhance availability of vocational training. - Labor reallocation and social safety nets: - Implement measures to support the rapid reallocation of labor from construction to other economic sectors (such as logistics services) once large infrastructure projects, including the Canal expansion, are completed. - Measures should include skills upgrading and deployment of social safety nets to accommodate the transition. - Data and consultation recommendations: - Authorities should resume efforts toward subscription to the Special Data Dissemination Standard (SDDS) and close gaps in data critical for conducting sound macroeconomic policy. - Staff recommends that the next Article IV consultation takes place on the standard 12-month cycle. ### Implementation of Past IMF Policy Advice (Box 1 — Summary) - Fiscal policy: - The 2013 deficit (at 3 percent of GDP) was within the ceiling, when accounting for the supplementary budget to cover reconstruction costs associated with the October 2012 floods. - Fiscal deficit ceilings under the Social and Fiscal Responsibility Law remain on a declining path. - Revenue collection improved via creation of an independent revenue agency and the Large Tax Payers’ Unit. - Plans to publish a Medium-Term Debt Management Strategy in 2014. - Progress on Single Treasury Account and establishment of a Medium-Term Expenditure Framework. - Financial sector reforms: - Further progress in implementing 2011 FSAP recommendations since 2012. - Plan to establish a liquidity facility (PALET) is being finalized. - Law 47 of August 6, 2013 adopted a custody regime applicable to bearer shares. - The IMF Detailed Assessment Report on Anti-Money Laundering and Combating Financing of Terrorism was published in February 2014. - Establishment of the Financial Coordination Committee and measures against emerging risks. - Regulation on credit risks issued in May 2013 incorporated a dynamic provisioning mechanism. - Laws on Trust Funds, Cooperatives, and on Certified Public Accountants have been drafted. - More inclusive growth: - Authorities are enhancing social protection programs and evaluating how to better target them. - Cash transfers to the elderly have been increased. - Education reforms include modernizing the curriculum, enhancing training of teachers, and involving the private sector to address skill mismatches and youth unemployment. *Source: IMF staff report contained in the supplied PDF content.* ### Box 5. Forecasting Panama’s EMBI Spread and Interest Rates ### Box 5. Forecasting Panama’s EMBI Spread and Interest Rates ### Model specification and data - Panama’s EMBI spread is modeled using country-specific financial and political risks, the U.S. 10-year nominal yield, and U.S. market volatility. - Two volatility measures are used: - Case I: Merrill Option Volatility Expectations index (MOVE). - Case II: Chicago Board Options Market VIX index (VIX). - The model uses monthly data from January 2000 to December 2013 and indexes for financial and political risks from the International Country Risk Guide (ICRG). - The model is based on the analysis in the Global Financial Stability Report (GFSR), April 2014. ### Key empirical findings for sovereign spread - Sensitivity to U.S. 10-year nominal yield: - A 100 basis points (bps) increase in U.S. nominal rates is associated with a rise in Panama’s spread of about 24 bps in Case I, and 45 bps in Case II. - Sensitivity to volatility: - An one-standard-deviation increase of the volatility index—30 points for MOVE or 9 points for VIX—would raise the spread by 60 bps in Case I or 70 bps in Case II. - Sensitivity to domestic financial and political risk (higher index values indicate lower risks): - A decline in financial risk by one standard deviation is associated with a spread reduction of 69 bps in Case I and 52 bps in Case II. - A decline in political risk by one standard deviation is associated with a spread reduction of 45 bps in Case I and 43 bps in Case II. - Goodness of fit: - R square = 0.70 (Case I) and R square = 0.72 (Case II). - Sample sizes: N = 168 (Case I) and N = 171 (Case II). ### Medium-term projections for the EMBI spread - Drivers assumed in the projection: - Domestic financial risks and political risks remain at their current level. - The U.S. 10-year nominal yield projection is based on the IMF WEO database and increases by about 250 bps from end December 2013 to Q4 2019. - MOVE and VIX are assumed to gradually increase, converging to their respective long run mean according to an estimated mean-reverting process. - Projected change in Panama’s spread: - In the medium term, Panama’s spread is expected to increase by about 125 to 175 bps. - Expected spread levels: around 325 bps (Case I) or 375 bps (Case II). ### Domestic bank deposit and lending rate pass-through - Deposit rates (mostly applied to the majority of Panamanian deposits): - A 100 bps increase in the U.S. one-month nominal treasury bill rate is associated with less than 50 bps increase in the corresponding deposit rate. - Lending rates (one-year maturity): - One-year lending rates tend to rise by between 26 and 40 bps if the U.S. one-year nominal treasury bill rate increases by 100 bps. - Compared with sovereign rates: - Domestic bank rates are less responsive than sovereign rates because (i) the estimated effects are for nominal rates rather than for spreads, and (ii) domestic bank rates are also in U.S. dollars (no exchange rate adjustment). - Volatility effects: - Domestic bank rates also increase with global financial market volatility (VIX serves as a proxy). ### Domestic rates regression summary (panel relating domestic rates to U.S. rates of same maturity) - Coefficients and statistics as reported (four domestic-rate specifications: Deposit, One Month, Commercial, Industrial, Personal — table entries shown in source): - VIX coefficients: 0.05**, 0.03**, 0.03**, 0.07** - US rates coefficients: 0.47**, 0.27**, 0.40**, 0.26** - Constant terms: 0.77**, 6.96**, 6.85**, 8.65** - R Square: 0.52, 0.50, 0.52, 0.42 - N: 149, 142, 142, 142 ### Interpretation and policy implications (implicit in analysis) - Normalization of U.S. monetary policy and uncertainty about its pace are expected to put upward pressure on Panama’s sovereign spread in the medium term. - Because domestic bank rates are less responsive to U.S. rate increases than sovereign spreads, and are denominated in U.S. dollars, monetary/financial conditions in Panama will be affected primarily through sovereign financing costs and global volatility rather than exchange-rate pass-through. - Managing domestic demand and monitoring vulnerabilities arising from higher sovereign spreads and global volatility are important, given the projected increase in spreads. *Source: Box 5. Forecasting Panama’s EMBI Spread and Interest Rates (IMF staff calculations; ICRG; Bloomberg; GFSR analysis).* ### Box 7. Panama: Female Labor Force Participation (FLFP) ### Box 7. Panama: Female Labor Force Participation (FLFP) ### Summary findings - Panamanian women constitute a little more than half of the population: Share in the population (*)51.5 48.5 - Women appear under-represented in the labor market: Only around one-third of labor market participants are women. - FLFP trend: FLFP rose from 35.4 in 2001 to 39.7 in 2013. - Unemployment duration: Probability of longer-than-one-year unemployment is 30 percent for females versus 19 percent for males. - Education and skills: - Over 40 percent of the working females have university degrees, while the corresponding ratio for male is only 24 percent. - The most recent internationally standard PISA test scores (averaged among math, reading, and science) indicate that compared to peer countries Panamanian girls enjoy higher test scores than boys. - Implication: Women’s limited participation in the labor market is not a reflection of weaker qualifications and lack of education. - Economic case: Increasing FLFP could relieve capacity constraints (with unemployment at historically low levels) by enlarging the total labor force and may raise average labor productivity by introducing relatively well educated women into the pool of workers. - Poverty link: Regional World Bank studies find evidence that higher FLFP significantly helps reduce poverty in Latin America and the Caribbean. ### Labor market and demographic statistics (as presented) - Labor Market Statistics - Share of economically active persons (*)39.7 60.3 - of which (share relative to own sex): - Government (*)27.8 17.3 - Private sector (*)56.4 79.7 - Others (*)15.8 2.9 - Share of inactive population, relative to own sex: - Student (*)21.1 45.9 - Retired or pensioned (*)11.6 30.4 - Household worker (*)58.4 4.1 - Others (*)7.7 19.3 - Share of unemployed persons, relative to own sex (**)4.9 4.2 - Of which, less than 1 year (**)70.4 81.5 - Of which, more than 1 year (**)29.6 18.5 - Education Indicators - Share of economically active persons with university degree, relative to own sex (**)40.5 23.8 - Notes on sources in table: (*) National Authorities 2013 August survey and IMF staff calculation. (**) National Authorities 2011 survey. ### Identified obstacles and policy levers - No legal barriers to FLFP, but common obstacles exist: - Child and elderly care responsibilities constrain women from seeking formal employment; female employment in Panama is relatively higher in the public sector which provides more access to child care. - Over half of economically inactive females are classified as housewives or working for the household, compared to only 4 percent for inactive males. - Policy measures with evidence of effectiveness: - Increase flexibility of working arrangements (for example, flexible hours). - Remove labor market distortions in general to boost female labor market participation. - Improve access to child and elderly care to facilitate women's entry into the formal labor market. *Source: National Authorities; and IMF staff calculations.* ### Annex I. Implementation of 2011 FSAP Recommendations ### Annex I. Implementation of 2011 FSAP Recommendations ### Banking Oversight - Implemented/ongoing. - "A regulation on operational risks was adopted 2011. The SBP staff was trained." - "A draft regulation on interest rate risks will be submitted to the SBP Board after the Basel Committee publishes its guidance on this topic." - "A regulation on dynamic provisioning was issued on May 18, 2013." - "Develop capital adequacy and regulatory reporting standards for holding companies." — Ongoing. "A draft regulation is being prepared with technical assistance from CAPTAC-DR, to be adopted by April 2014." - "Develop concentration limits and risk management requirements for interbank deposits." — "No plans to develop such requirements. The authorities noted that the law allows them to introduce such limits and requirements for individual banks as needed, and they have used this clause in practice." - "Enhance offsite supervision to develop a view on macroprudential and systemic risk trends." — Ongoing. "The SBP has identified systemically important banks and initiated a Financial Stability Report series." - "Conclude studies and introduce a banks’ liquidity facility." — Ongoing. "The authorities are getting TA from the CAPTAC-DR." ### Insurance Sector Oversight - "Approve draft Insurance Law with strengthened prudential requirements." — Implemented. "The law was adopted in 2012." - "Strengthen disclosure of performance indicators and brokers’ commissions." — "No initiatives so far." ### Securities Market Oversight - "Strengthen the budgetary position, and the supervisory and enforcement capabilities of the supervisor (National Securities Commission)." — "Law 67 (dated 1 September 2011) upgraded the Commission to a Superintendency (SMV), strengthening its supervisory and enforcement capacity as well as its budgetary position. The SMV is seeking to further strengthen its enforcement capacity." - "Draft law of Certified Public Accountants is being prepared." - "Draft law on Trust Funds is being prepared." ### Payments and Securities Systems Oversight - "Create a comprehensive payments system law guaranteeing payment finality." — "No initiatives so far." - "Adopt a Real Time Gross Settlement or Hybrid Payments System" — "Medium-term recommendation. No initiatives so far. The authorities are considering to increase the number of netting operations per day, in line with the FSAP recommendation." ### Financial Safety Nets - "Establish a deposit insurance scheme." — "No policy initiatives so far." - "Review and restructure or close public development banks and guarantee funds." — "Medium-term recommendation. No initiatives so far." ### Capital Market Development - "Build a single yield curve across domestic and global bonds by dual listing and extending market making to global bonds." — Ongoing. "The authorities have been making efforts to extend market making to global bonds." ### Enhance systemic risk monitoring and the capacity to implement macro-prudential policies - "The Financial Coordination Council was established and has taken measures against emerging risks." - "Enhance systemic risk monitoring and the capacity to implement macro-prudential policies" — listed as a recommendation; implementation noted above via offsite supervision and Financial Coordination Council actions. *Source: IMF staff (content as provided in the supplied PDF).* ### Annex III. Investment and Growth ### Annex III. Investment and Growth ### Growth decomposition findings - A growth decomposition exercise suggests that the recent growth spur was due to capital accumulation and improvements in productivity. - Assuming a Cobb-Douglas production function Yt = At Kt^α Lt^(1−α), α is estimated at 0.37 (via an OLS regression over the 1991-2012 period). ### Labor and education - Labor contribution to output growth has been relatively stable. - Employment increased steadily over the past decades. - Education indicators improved substantially: - Average years of schooling of the population of 15 years and older increased from 7.6 in 1990 to 9.6 years in 2010. - Enrollment in tertiary education accelerated and doubled from 22.7 percent in 1991 to 45.7 percent in 2010. - As unemployment reduction reached its limits, labor contribution slowed down in recent years. - When calculating labor input, the number of employees in the economy is adjusted by the education attainment represented by the average years of schooling obtained from Barro and Lee Education Attainment Dataset. ### Total factor productivity (TFP) and structural reforms - Total factor productivity (TFP) did not contribute to growth until 2004; TFP registered negative contribution in 1980 and 1990s. - Beginning in the 1990s, and especially in the 2000s, authorities adopted an economic strategy aiming at: - reducing public sector indebtedness, - removing impediments to productivity growth, - stimulating private sector investment, - enhancing public sector capacity. - Reforms included significant efforts in privatization, trade and market liberalization, and financial regulation and supervision. - As a consequence, in the last decade, TFP’s contribution accounted for almost one quarter of growth. - Panama ranked 40 out of 144 countries in the 2012/13 World Economic Forum Global Competitive Index, and ranked second in Latin America (after Chile). - Panama improved its ranking in the Ease of Doing Business index from 65 in 2008 to 61 in 2013. ### Capital and investment: evolution and shares - Capital contribution to growth increased over time; the evolution of capital stock reflected: - lack of investor confidence in the 1980s, - recovery in the 1990s, - acceleration of investment growth since mid-2000s. - The corresponding share of contribution to growth from capital was about 40 percent in 1980–2013. - Investment as percent of GDP by period: - 1980-2013: 18.9 - 1980-1990: 11.2 - 1991-2013: 22.7 - 1991-2001: 21.9 - 2002-2013: 23.4 - 2007-2013: 26.8 - Public investment increased: - from an average of 2.4 percent of GDP in the 1980s - to 3.4 percent in the 1990s - to more than 9 percent in 2007–13. - Public investment plans for 2009–14 included new highways, airports, roads, ports, urban infrastructure, sewage systems, healthcare facilities and a new subway system. - A third set of locks is being built to enable the transit of post-Panamax containerships through the Canal, which would double the transit capacity. ### Public and private investment contributions to growth (table of real growth and input contributions) - Table Panama: Real Growth and Input Contributions (%) - Periods: 1980-2013 | 1980-1990 | 1991-2013 | 1991-2001 | 2002-2013 | 2007-2013 - GDP: 5.0 | 2.3 | 6.3 | 4.7 | 7.7 | 9.0 - Capital: 1.9 | 0.6 | 2.6 | 2.7 | 2.6 | 3.4 - Public: 0.5 | 0.2 | 0.7 | 0.4 | 1.0 | 1.5 - Private: 1.3 | 0.1 | 1.9 | 2.2 | 1.6 | 2.0 - Labor: 3.2 | 3.2 | 3.2 | 3.0 | 3.4 | 2.8 - TFP: -0.2 | -1.5 | 0.4 | -1.0 | 1.7 | 2.8 - Investment as % of GDP: 18.9 | 11.2 | 22.7 | 21.9 | 23.4 | 26.8 ### Public investment impact and VAR results - Staff estimated a structural VAR model with real GDP, real private investment, and real public investment over the 1992–2012 period. - VAR model results: - An increase in public investment by 1 percent would raise GDP by 0.1 percent on impact and by about 0.2 percent after two years. - A 1 percent increase of public investment raises private investment by about 0.4 percent on impact and by about 0.6 percent after one to two years (indicating “crowding-in” private investment). - These results are consistent with literature: Bom and Lighart (2013) report average output elasticity of public capital of 0.1 for public investment and 0.2 for core public investment (roads, railways, airports, utilities). ### Complementarities and sectoral impacts - Evidence of complementarities between public investment and private investment: - Public investment in large transportation projects improved connectivity between logistics centers and fostered private investment in tourism and higher value-added agricultural exports. - Public investment aimed at developing new industries and services around logistics hubs, such as light manufacturing and value-added warehousing. - Investment in education and hospitals expected to improve social conditions and human capital over the medium term. *Source: Annex III. Investment and Growth, Panama: Staff Report for the 2014 Article IV Consultation — Informational Annex.* ### 2007. Preparation started in the second half of 2010 and rebased data should be published in the first ### _cr14157 - 2007. Preparation started in the second half of 2010 and rebased data should be published in the first ### National accounts: progress, methodology, and remaining gaps - Rebasing work: "Preparation started in the second half of 2010 and rebased data should be published in the first quarter of 2014." - IMF technical assistance mission (2010-11) findings: - Slow progress in expanding coverage of financial activity. - Overestimation of the deflator used to calculate the financial services output at constant prices. - Improvements during 2011-2012: - Compilation of financial intermediation services indirectly measured (FISIM) on a monthly basis following the 2008 System of National Accounts (2008 SNA). - Broadened coverage of household output, employment, compensation of employees, and mixed income in informal activities for 2007-2008 due to progress in employment matrices compilation. - Quarterly and monthly indicators: - Quarterly GDP data and the monthly economic activity index benefited from use of monthly VAT records as source data. - Correct application of the proportional Denton method for aligning quarterly data to annual data reduced revisions. - Use of ARIMA X-12 for seasonal adjustment of quarterly series. - Price indices: IMF technical assistance provided to develop updated producer, export, and import price indices. ### Government finance statistics: coverage, accounting, and reforms needed - Key issues: - Need to improve timeliness and consistency of data related to transfers between public sector units. - Coverage of public enterprises should be universal. - Panama Canal Authority (ACP): - Since September 2004, the operational balance of the ACP was excluded from the official definition of the nonfinancial public sector (NFPS) used for fiscal policy purposes. - ACP information available only in the Annual Report posted on its website on a fiscal year basis; need for consistent and timely flow of ACP statistics on a calendar year basis. - Exclusions from NFPS (2011): - Three public enterprises excluded from NFPS accounts and public debt: Tocumen International Airport, ETESA (an electricity distribution company), and ENA (the National Highway company). - Need to compile and disseminate information on these entities in a timely fashion. - Savings Fund of Panama (FAP): - 2012 decree mandated reporting of deferred payment schemes (e.g. turnkey projects) in budget documentation. - August 2012 CAPTAC report emphasized need to increase information and analysis of turnkey projects’ impact on fiscal sustainability. - Technical assistance and reforms: - STA assistance to implement Government Finance Statistics Manual 2001 (GFSM 2001). - FAD ROSC mission in October 2005. - FAD provided technical assistance in public accounting (2011–2013) including implementation of government accounting reforms and practical application of IPSAS. - Financial accounting system not prepared to support accrual recording; further work needed to achieve compliance with international best practices. - Reporting: - Panama does not report fiscal data to STA for publication in the International Financial Statistics or the Government Finance Statistics Yearbook. ### Monetary and financial statistics: reporting, harmonization, and data gaps - Reporting: - Panama regularly reports monetary data for depository corporations using the standardized report forms (SRFs) for publication in the International Financial Statistics. - Regional harmonization: - Participation in a CAPTAC-supported regional project to harmonize monetary and financial statistics in Central America and the Dominican Republic. - Second stage expanded institutional coverage to other depository corporations and all other financial corporations (OFCs). - Authorities recently submitted test SRF data for OFCs; STA is reviewing. - Financial Soundness Indicators: - Panama started to report FSIs to STA on a regular (quarterly) basis in February 2014 with data beginning on 2005. - Data gaps limiting systemic risk analysis: - Authorities do not collect adequate data on real estate prices, loan write-offs, loan-to-value ratios, and leverage indicators for households and corporate. ### Balance of payments and external sector statistics - Trade flows and measurement: - Weaknesses in foreign trade flows calculations, particularly those 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 trade data available with a delay of about one quarter and are subject to subsequent revisions. - Revised estimates in key trade and investment data may result in substantial revisions of the current account. - Outward FDI and IIP: - Data on outward FDI and repatriation of profit and dividends are collected only from the financial private sector. - Current account deficit and the International Investment Position (IIP) are likely being overestimated due to lack of coverage of outward FDI of the nonfinancial private sector. - A survey is being conducted to collect data on outward FDI of nonfinancial private sector. - IIP and reserves: - Quarterly IIP data compiled since 2002; annual data available since 1998. - Definition of international reserves is being revised with STA TA to ensure reserve assets reported by the National Bank of Panama are consistent with those published by the Contraloria and meet criteria in the international reserves template. - STA recommends Contraloria should be the only agency in charge of compiling and disseminating international reserves data. - Surveys conducted: - Authorities are conducting Coordinated Direct Investment Survey (CDIS) and Coordinated Portfolio Investment Survey (CPIS) to improve external sector data quality in context of CAPTAC RHPESS. ### Data standards, dissemination, and quality assessments - GDDS and SDDS: - Panama has participated in the Fund’s General Data Dissemination System (GDDS) since December 2000, but metadata need updating. - Following SDDS assessment missions by STA in April 2011 and November 2013, authorities have a work program aimed at meeting requirements for Panama’s subscription to the SDDS. - An action plan has been prepared and followed up by subsequent CAPTAC missions. - Data ROSC: - A data ROSC was published in October 2006. - Table of Common Indicators Required for Surveillance (as of April 4, 2014): coverage, frequency, and data quality assessments included for multiple series (selected rows shown in the source): - Reserve/Base Money: latest observation 12/2014; date received 4/2014; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Broad Money: latest observation 1/2014; date received 4/2014; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - National Bank of Panama Balance Sheet: latest observation 1/2014; date received 4/2014; Frequency of Data M; Frequency of Reporting M; Frequency of Publication A. - Consolidated Balance Sheet of the Banking System: latest observation 1/2014; date received 4/2014; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Interest Rates: latest observation 1/2014; date received 3/2014; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M. - Consumer Price Index: latest observation 2/2014; date received 3/2014; Frequency of Data M; Frequency of Reporting M; Frequency of Publication 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: latest observation 12/2013; date received 2/2014; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Data Quality–Methodological Soundness: LO, LNO, LO, O; Data Quality–Accuracy and Reliability: O, LO, LO, LO, LO. - External Current Account Balance: latest observation 12/2013; date received 2/2014; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Data Quality–Methodological Soundness: LO, LO, O, LO; Data Quality–Accuracy and Reliability: LO, O LO, LO, LNO. - GDP/GNP: latest observation Q3/2013; date received 1/2014; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q; Data Quality–Methodological Soundness: O, O, O, LO; Data Quality–Accuracy and Reliability: LO, LO, LNO, LO, LNO. - International Investment Position: latest observation 2013; date received 6/2013; Frequency of Data A; Frequency of Reporting A; Frequency of Publication A. - Footnotes in table clarify frequency codes (D, W, M, Q, A, I, NA) and data ROSC-based assessments: O, LO, LNO, NO. ### IMF Press Release summary (May 19, 2014) — Article IV consultation conclusions and outlook - Article IV conclusion: - IMF Executive Board concluded the 2014 Article IV consultation with Panama on May 9, 2014. - Growth and macro performance: - Real GDP growth averaged about 8.5 percent over the past decade. - Growth exceeded 10 percent in 2011–12; slowed to 8.4 percent in 2013 due mainly to decline in Colon Free Zone activity and Canal traffic. - Growth expected to remain strong over the medium term. - Inflation moderating but remains resilient and higher than in major trading partners. - Authorities revising national accounts statistics; Staff Report based on 1996-base national accounts. - Fiscal stance: - 2013 fiscal deficit was 3 percent of GDP, below SFRL ceiling. - 2014 fiscal deficit expected to remain within the SFRL ceiling (2.7 percent of GDP), taking into account expected upward revision to GDP. - Strong growth and fiscal discipline contributed to a declining path of public debt. - Efforts to smooth amortization profile and develop domestic capital market. - External sector and financial stability: - Current account deficit remains elevated but financed mainly by foreign direct investment. - Banking system generally healthy; authorities moved proactively to contain risks related to exposures to Venezuela. - Risks: - Baseline outlook favorable with moderate risks. - External risks: normalization of U.S. monetary policy, protracted slowdown in trading partners, persistent payment difficulties in Venezuela. - Domestic risks: overheating from strong domestic demand; resilient inflationary pressures could feed into wage dynamics. - Delays in Canal expansion would negatively affect output, employment, exports, and fiscal revenues. - Strong fundamentals and countercyclical fiscal policy capacity can help mitigate shocks. ### Executive Board Assessment and recommendations - Commendations and concerns: - Directors commended robust macroeconomic performance supported by policy reforms and public investment. - Noted signs of domestic overheating and elevated current account deficit; changes in global conditions could pose risks. - Fiscal policy recommendations: - Fiscal policy could be tightened to rein in inflationary pressures and provide a cushion against external shocks. - Targeting a fiscal deficit below the SFRL ceiling recommended to strengthen credibility of SFRL and investor confidence. - Continue fiscal reforms to strengthen budgeting and public financial management, including completion of Single Treasury Account and establishment of a Medium Term Expenditure Framework. - Financial sector recommendations: - Close monitoring of external positions, credit growth, leverage, and liquidity positions of banks. - Swift implementation of remaining 2011 Financial Sector Assessment Program recommendations. - Develop a well-designed liquidity facility for banks and build capacity to monitor systemic risks and conduct macroprudential policies. - Enhance supervision of banks and nonbank financial institutions. - Structural and social recommendations: - Enhance corporate and financial transparency; strengthen AML/CFT regime and implement AML/CFT assessment recommendations. - Continue structural reforms to maintain external stability and competitiveness, reduce poverty, address income inequality, and enhance human capital and productivity. - Improve quality of public education, increase vocational training availability, upgrade skills, and stimulate female labor force participation. - Consider measures to support reallocation of labor from construction to other sectors after major infrastructure projects complete. - Data dissemination: - Directors encouraged authorities to resume efforts toward subscription to the Special Data Dissemination Standard (SDDS) to close critical data gaps. ### Selected economic indicators (as presented in source; Est. = estimated, Proj. = projected) - Real economy (Annual percent change): - Nominal GDP: 2009 5.0; 2010 12.0; 2011 15.8; 2012 14.7; 2013 12.7; 2014 11.1 - Real GDP (1996 prices): 2009 3.9; 2010 7.5; 2011 10.9; 2012 10.8; 2013 8.4; 2014 7.2 - Consumer price index (average): 2009 2.4; 2010 3.5; 2011 5.9; 2012 5.7; 2013 4.0; 2014 3.8 - Consumer price index (end-of-year): 2009 1.9; 2010 4.9; 2011 6.3; 2012 4.6; 2013 3.7; 2014 3.6 - Money and credit: - Private sector credit: 2009 1.3; 2010 13.6; 2011 16.8; 2012 14.1; 2013 12.6; 2014 11.3 - Broad money: 2009 9.4; 2010 11.6; 2011 7.8; 2012 10.4; 2013 8.8; 2014 11.1 - Average deposit rate (1-year): 2009 2.8; 2010 2.9; 2011 2.1; 2012 2.2; 2013 2.1 - Average lending rate (1-year): 2009 7.5; 2010 7.5; 2011 6.9; 2012 7.2; 2013 7.2 - Saving and investment (Percent of GDP): - Gross domestic investment: 2009 25.6; 2010 25.5; 2011 27.2; 2012 28.6; 2013 30.0; 2014 29.8 - Gross national saving: 2009 24.9; 2010 14.2; 2011 11.3; 2012 18.0; 2013 18.1; 2014 19.0 - Nonfinancial public sector (Percent of GDP): - Revenue and grants: 2009 30.3; 2010 29.5; 2011 29.0; 2012 28.9; 2013 28.0; 2014 27.8 - Expenditure: 2009 29.2; 2010 33.0; 2011 33.4; 2012 32.2; 2013 33.0; 2014 32.7 - Current, including interest: 2009 21.3; 2010 21.0; 2011 20.6; 2012 20.1; 2013 19.4; 2014 19.9 - Capital: 2009 7.9; 2010 12.0; 2011 12.8; 2012 12.1; 2013 13.6; 2014 12.8 - Overall balance: 2009 1.0; 2010 -3.5; 2011 -4.4; 2012 -3.3; 2013 -5.0; 2014 -4.8 - Overall balance, excluding ACP: 2009 -1.0; 2010 -1.8; 2011 -2.1; 2012 -1.5; 2013 -3.0; 2014 -3.0 - External sector (Percent of GDP): - Current account: 2009 -0.7; 2010 -11.4; 2011 -15.9; 2012 -10.6; 2013 -11.9; 2014 -10.8 - Foreign direct investment: 2009 5.2; 2010 8.9; 2011 9.4; 2012 8.8; 2013 10.8; 2014 9.1 - Real effective exchange rate (depreciation -): 2009 1.9; 2010 -2.3; 2011 1.7; 2012 3.9; 2013 5.3 - External public debt (including external debts of ACP): 2009 42.0; 2010 39.7; 2011 37.7; 2012 32.9; 2013 32.3; 2014 32.4 - Memorandum: - GDP (in millions of US$): 2009 24,163; 2010 27,053; 2011 31,320; 2012 35,938; 2013 40,490; 2014 44,986 - Sources noted in table: Comptroller General; Superintendency of Banks; and Fund staff estimates. - Footnotes: - 1/ Includes Panama Canal Authority (ACP). - 2/ Including external debts of ACP. *Source: _cr14157 - 2007. Preparation started in the second half of 2010 and rebased data should be published in the first quarter of 2014 (IMF PDF excerpt).* ### 1. The Panamanian authorities thank the IMF staff for their assistance and advice. ### The Panamanian authorities thank the IMF staff for their assistance and advice. ### Economic activity and labor market - Real GDP growth in 2013 was 8.4 percent. - Growth drivers: Panama Canal expansion works, large public infrastructure investments, high foreign direct investments (FDI), and strong domestic demand. - Growth projected to moderate in 2014 to around 7.0 percent of GDP, according to the national budget. - Total unemployment estimated at 4.1 percent in August 2013 (INEC). ### Inflation and external sector - CPI inflation declined from 4.6 percent at end-2012 to 3.7 percent at end-2013, favored by lower import prices of fuel and commodities. - Current account deficit reached almost 11.3 percent of GDP in 2013, over a percentage point higher than in 2012. - Main drivers of the current account deficit: imports of capital goods associated with large public and private investment projects and Panama Canal expansion. - Large FDI inflows continued to finance the bulk of the current account deficit. ### Fiscal policy, public investment, and public debt - End-2013 non-financial public sector (NFPS) fiscal deficit stood at 3 percent of GDP, below the 3.1 percent ceiling established in the fiscal responsibility law (Ley de Responsabilidad Social Fiscal – LRSF). - In mid-2013 the fiscal deficit ceiling was changed from 2.8 percent to 3.1 percent of GDP to cover costs from floods of end-2012 (state of national emergency). - MEF projects a fiscal deficit of 2.7 percent of GDP for 2014, in line with the limit in the LRSF. - Public debt to GDP ratio (excluding the external debt of the Panama Canal Authority) fell to 36.8 percent at end-2013, from 37.6 percent in 2012 and 42.3 percent in 2009. - Downward trend of public debt attributed to prudent fiscal policies and Panama’s investment grade fundamentals. ### Tax administration and revenues - The National Authority for Public Revenue (Autoridad Nacional de Ingresos Públicos – ANIP) was created in April 2013, replacing the General Revenue Office (Dirección General de Ingresos – DGI). - Establishment of ANIP brought strengthened oversight, enhanced tax collection, and reduction in tax evasion. - Based on MEF’s year-end estimates, NFPS total revenue increased 9.9 percent in 2013 compared to 2012. ### Public expenditure composition - Expenditures increased 16.4 percent in 2013 compared to 2012, mostly to support large public infrastructure investments. - Share of capital expenditure increased from 31.8 percent in 2009 to 44.4 percent in 2013. ### Banking system performance and stability - Superintendence of Banks (Superintendencia de Bancos de Panamá – SBP) indicators show the banking system is well capitalized and liquid. - Capital adequacy ratio for the system as a whole was 14.8 percent. - Comparable LA5 ratio recorded at 15.6 percent. - Non-performing loans are minimal, slightly above one percent of total loans. - Private credit continues to strongly support real estate, construction, consumption and mining activities. ### Financial sector reforms, supervision, and AML/CFT - Progress on implementation of the 2011 FSAP recommendations: SBP implementing risk-based supervision and strengthening offsite supervision. - Financial Coordination Council (FCC) coordinating with financial market institutions to monitor potential systemic risks. - Authorities prioritized drafting a new law on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT), strengthening the Financial Intelligence Unit (FIU), and developing the framework for a liquidity facility. - Technical assistance (TA) from the Fund and the Inter-American Development Bank (IDB) is underway to review AML/CFT legislation. - US Treasury Department assisting Panama in strengthening the FIU to match best practices of transparency for financial services. - All legislation related to the above actions should be in place by end-2015. ### Corporate and financial transparency; tax treaties - Authorities committed to improving corporate and financial transparency. - Significant support to move forward with amendments to law 47 of August, 2013 to accelerate implementation of bearer-shares registration. - Network of double taxation agreements (DTA) expanded to encompass 18 countries with which Panama has signed a DTA to date. - Negotiations in progress with Taiwan and Vietnam and about to start with Hong Kong. - Treaties for the exchange of fiscal information finalized with Germany and in progress with Japan and Australia. ### Authorities' assessment of the staff report and AML/CFT emphasis - Authorities consider the staff report does not fully recognize Panama’s progress and places undue emphasis on AML/CFT issues. - They argue this emphasis may not be in accordance with the Fund’s policy on the treatment of AML/CFT in surveillance, noting those issues “should be discussed in the context of surveillance when they undermine a member’s balance of payments and domestic stability, or the effective operation of the international monetary system”. - The authorities note the second condition does not apply given the size of Panama’s economy and see no evidence that AML/CFT issues undermine the country’s balance of payments and domestic stability. - Authorities state they have reaffirmed and confirmed by actions their commitment to prevent money laundering and the financing of terrorism. - Panama has undergone a comprehensive evaluation on AML/CFT and has authorized publication of the Detailed Assessment Report (DAR) and the Report on Observance of Standards and Codes (ROSC) in February. *Source: _cr14157 - 1. The Panamanian authorities thank the IMF staff for their assistance and advice.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14157.pdf_