## _cr15237 ## Source details **Canonical URL:** [_cr15237](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15237.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15237.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15237.pdf.json) --- ### Fiscal framework, deficits, and public debt - Social and Fiscal Responsibility Law (SFRL) removes cyclical effects of Canal contributions; overall fiscal deficit can exceed SFRL ceilings to the extent Canal contributions are below 3.5 percent of GDP (if above, excess credited to the Sovereign Wealth Fund). - 2015 fiscal deficit expected at 3.8 percent of 1996-base GDP to accommodate past commitments on capital expenditures and projected weak revenue performance. - Total gross public sector debt (including Canal Authority debt) increased to about 46 percent of GDP in 2014, reversing the declining trend since 2005. - Under planned policies, total gross public debt projected to decline by about 5 percentage points of GDP by 2019. - Additional liabilities include unfunded pension liabilities, other outstanding public liabilities, and contingent liabilities linked to public companies. - 2014 fiscal operations of the non-financial public sector (millions of USD and percent of 2007-base GDP): - Revenues: 9,950 (2013) and 10,063 (2014) — change 1.1 - Current Revenues: 9,754 (2013) and 9,983 (2014) — change 2.4 - Tax revenues: 4,859 (2013) and 4,826 (2014) — change -0.7 - Capital Revenues: 183 (2013) and 78 (2014) — change -57.4 - Expenditures: 10,976 (2013) and 11,943 (2014) — change 8.8 - Current Expenditure: 6,961 (2013) and 7,779 (2014) — change 11.8 - Current Primary Expenditure: 6,138 (2013) and 6,940 (2014) — change 13.1 - Capital Expenditure: 4,014 (2013) and 4,160 (2014) — change 3.6 - Balance: -1,026 (2013) and -1,880 (2014) - Balance as % of 2007-base GDP: -2.4 (2013) and -4.1 (2014) ### Fiscal framework and deficit dynamics (from 2015) - From 2015, overall fiscal deficit will systematically exceed SFRL deficit ceilings under current projections while the adjusted overall fiscal deficit remains in compliance. - 2015 overall fiscal deficit budgeted at 3.7 percent of 2007-base GDP. - Canal contributions likely to fall short of 3.5 percent of GDP; overall fiscal deficit expected to exceed SFRL ceilings by 1–2 percent of GDP per year. - Overall fiscal deficit expected to exceed the adjusted overall fiscal deficit by a cumulative 6 percent of GDP over the next five years. - No resources expected to be transferred to the Sovereign Wealth Fund in the foreseeable future. ### Public debt, liabilities, and market issuance - Total public sector gross debt (including Canal-related debt): about 46 percent of 1996-base GDP in 2014. - Under five-year strategic plan, total public sector gross debt expected to decline by about 5 percentage points of GDP by 2019. - Broad potential public liabilities: - Unfunded pension liabilities ~US$10.7 billion or 24 percent of 2014 GDP. - Pending turnkey project obligations ~US$3 billion. - Contingent liabilities linked to public companies ~US$4 billion. - Issuances: - September 2014 and March 2015: two ten-year bonds, each for US$1.25 billion. - March 2015 bond priced at a spread of 178 basis points above ten-year U.S. Treasury bonds, effective interest rate 3.89 percent. ### External sector and financing - Current account deficit: 12 percent of GDP in 2014; remained elevated owing in part to strong investment-related imports; should moderate as investment projects wind down and exports increase. - Financing: buoyant foreign direct investment inflows expected to continue financing the current account deficit, including in mining, logistics and energy sectors. - Selected external and investment indicators: - Current account: -15.9 (2011), -9.8 (2012), -12.2 (2013), -12.0 (2014), -10.4 (2015), -10.0 (2016) - Foreign direct investment: 9.4 (2011), 9.1 (2012), 10.8 (2013), 9.9 (2014), 10.0 (2015), 9.8 (2016) - Gross domestic investment (percent of GDP): 27.2 (2011), 28.6 (2012), 30.0 (2013), 29.8 (2014), 29.3 (2015), 28.1 (2016) - Gross national saving (percent of GDP): 11.3 (2011), 18.8 (2012), 17.8 (2013), 17.8 (2014), 18.9 (2015), 18.1 (2016) - External public debt (including external debts of ACP): 37.7 (2011), 32.9 (2012), 33.1 (2013), 36.7 (2014), 36.5 (2015), 34.0 (2016) - GDP (millions of US$, current price, 1996-base): 31,320 (2011), 35,938 (2012), 40,393 (2013), 43,784 (2014), 47,478 (2015), 51,579 (2016) - Ongoing copper mining project expected to bring additional investments of about US$4½ billion in 2015–17. - By end-2014, Panama had signed thirteen Free Trade Agreements and three more under negotiation. ### Macroeconomic outlook and real sector - Growth slowing toward medium-term potential; expected to remain in the 6–7 percent range over the next 5 years. - Real GDP (1996 prices) annual percent change: 10.9 (2011), 10.8 (2012), 8.4 (2013), 6.2 (2014), 6.1 (2015), 6.4 (2016). - Inflation (CPI, average): 5.9 (2011), 5.7 (2012), 4.0 (2013), 2.6 (2014), 0.9 (2015), 2.0 (2016). - Headline inflation decelerated from 3.4 percent (yoy) in June 2014 to -0.4 percent in February 2015 due to price controls and lower oil prices. - Inflation projected at around 1 percent in 2015, considering January electricity tariff increase, slow oil price trajectory, and elimination of price controls in July. ### Pensions (Exclusively defined benefit portion of the pension system) - CSS runs four independent programs: disability/old age/death benefits; health and maternity care; professional risks; administration. - IVM main pension program reformed in 2005; includes: - Subsystem of exclusively defined benefit (old system). - Subsystem of mixed defined benefit and defined contribution (new system). - Coverage/eligibility transitions: - From 2008, new affiliates contribute to new system. - Workers earning less than US$500/month and workers older than 35 in 2008 remained in exclusively defined benefit scheme. - Workers below 35 and earning more than US$500/month had option to stay in old system or join new. - Surpluses in one subsystem cannot finance deficits in the other. - Fiscal and actuarial projections: - Unfunded pension liabilities in the exclusively defined benefit system estimated at almost US$11 billion. - Actuarial studies indicate cash losses from 2016 onward and reserves depleted in 2024. - Projected actuarial deficit by 2032: US$6½bn in NPV terms. - CSS estimates NPV of all future liabilities of this system could amount to US$10.7 billion in NPV terms; last associate expected to retire in 2048. - Defined benefit component of the new system expected to eventually become unsustainable. - Policy recommendations: - Urgent reforms required: options include raising retirement ages and unifying female and male retirement age with protective measures; consider further reduction in replacement rates. - Quantified labor impact: - Equalizing retirement age for women and men at 62 could increase active contributors to the exclusively defined benefit system by about 22,700, or 1.3 percent of the labor force based on current demographic structure. ### Financial integrity, AML/CFT, and banking sector - Authorities and FATF agreed on a plan to address Panama’s AML/CFT deficiencies to meet international standards; substantial progress includes passing new AML/CFT legislation. - Near-term risks: delays in enhancing financial transparency could make international transactions more difficult and increase due diligence by correspondent banks. - Banking system: remains stable, well capitalized and highly liquid; Directors advised strengthening bank supervision and risk monitoring. - Directors urged swift implementation of remaining 2011 FSAP recommendations, including: - Establish a well-designed liquidity facility for banks. - Improve monitoring of financial risks and macrofinancial linkages. - Further develop the macroprudential policy framework. ### Banking sector conditions (selected indicators and notes) - Overall credit to private sector remained about 90 percent of GDP in 2014; growth in line with nominal GDP. - Construction credit slowed; mortgage delinquencies ~4 percent in December 2014. - Mortgage delinquencies just below 5 percent in other references; nonperforming loan ratio noted below 2 percent in one section. - Bank performance: low credit risk, significant balance sheet buffers, robust asset quality. - Anecdotal evidence of overcapacity in commercial real estate; data on property sector poor. - Need for active macroprudential policies and additional data (commercial real estate prices, corporate leverage); suggested instruments: loan-to-value and debt-service-to-income ratios. - FSAP recommendations include temporary liquidity facility, upgraded legislation for non-bank intermediaries, and consideration of deposit insurance for small deposits. - As of 2013, assets of insurance companies, credit cooperatives, and finance companies accounted for 5 percent, 4.4 percent and 3 percent of GDP respectively. ### Risks to the outlook and mitigants - Key near-term risks: - Weaker global economy, weaker trade, abrupt surge in global financial market volatility, or an upward shift in U.S. interest rates. - Delays in tackling financial transparency shortcomings could increase costs of trade settlements, impede cross-border borrowing, and reduce FDIs. - Mitigants: - Strong fundamentals and room to implement a countercyclical fiscal response. ### Policy advice and recommendations (summary) - Finalize strengthening of AML/CFT framework to comply with international standards; implement the FATF action plan and timely regulations. - Strengthen the fiscal framework for the medium term and enhance fiscal buffers; revise Canal contribution threshold and adopt more comprehensive net debt definition in SFRL. - Enhance revenue mobilization via capacity building and administrative reforms at the DGI. - Reform the pension system to address unfunded pension liabilities and curb contingent liabilities. - Fully implement the Single Treasury Account and other public financial management initiatives (ISTMO roll-out: twenty-four central government agencies by end-2015; decentralized institutions by end-2016). - Continue to reduce electricity subsidies, improve targeting, and streamline current spending; January 2015 tariff increases between 6 and 25 percent for about one-fourth of consumers. - Implement remaining 2011 FSAP recommendations: temporary liquidity facility, improve monitoring of external and systemic risks, upgrade legislation on non-bank intermediaries, enhance macroprudential tools. - Improve productivity and human capital: education, healthcare, skills upgrading, youth employment, female labor force participation, and strengthened institutions. - Phase out price controls by mid-year taking advantage of benign inflation environment. - Improve quality and coverage of statistics; publish full 2007-base national accounts and address gaps in national accounts, government finance, financial sector, and balance of payments statistics. ### Executive Board assessment highlights - Directors commended Panama’s robust macroeconomic performance and continued solid economic growth. - Directors stressed enhancing the fiscal framework and fostering resilience through strengthened fiscal buffers while maintaining financial stability and sustaining strong and inclusive growth. - Directors called for expeditious resolution of remaining deficiencies in financial integrity and transparency frameworks to meet international standards. - Directors noted importance of reforming the pension system, curbing contingent liabilities, and completing public financial management reforms. ### Debt Sustainability Analysis (DSA) — baseline and stress test highlights - Public Sector DSA key nominal gross public debt (percent of GDP): 51.9 (2013); 41.7 (2014); 45.6 (2015); 47.3 (2016); 47.2 (2017); 45.2 (2018); 42.5 (2019); 40.5 (2020); 38.7 (2020, last column). - Public gross financing needs (percent of GDP): 1.4 (2013); 2.4 (2014); 5.9 (2015); 7.4 (2016); 6.6 (2017); 5.3 (2018); 7.2 (2019); 6.3 (2020); 8.1 (2020, last column). - Baseline real GDP growth (percent): 8.7 (2013); 8.4 (2014); 6.2 (2015); 6.1 (2016); 6.4 (2017); 6.7 (2018); 7.1 (2019); 6.3 (2020); 6.0 (2020, last column). - Effective interest rate (percent): 6.7 (2013); 5.4 (2014); 5.0 (2015); 4.7 (2016); 4.7 (2017); 4.7 (2018); 4.6 (2019); 4.6 (2020); 4.5 (2020, last column). - Stress tests: - Near-term financial contingent liability shock: public debt rises to 65½ percent of GDP in 2016–17, then resumes declining path. - Medium-term output and financial condition shock: GDP growth slows to 4 percent from 2016 onward and financing costs increase by 400 basis points; impact on public debt limited per report. ### External sector and external DSA (selected) - External debt (percent of GDP): 119.4 (2009); 113.2 (2010); 117.4 (2011); 111.6 (2012); 109.6 (2013); 112.8 (2014); 111.4 (2015); 109.2 (2016); 107.4 (2017); 105.2 (2018); 103.2 (2019); 101.4 (2020). - Debt-stabilizing non-interest current account: -10.2. - Gross external financing need (US$ bn): 7.9 (2009); 9.1 (2010); 12.7 (2011); 12.6 (2012); 15.0 (2013); 15.8 (2014); 16.0 (2015); 17.0 (2016); 16.4 (2017); 16.4 (2018); 17.3 (2019); 17.6 (2020). - External stress tests show combined shock scenarios raising external debt/GDP substantially (e.g., combined shock scenario values plotted with baseline averages noted). ### Trade policy and FTAs - Panama has 13 FTAs in force since 2003; agreements with the United States, Canada and European Union in effect during 2012–2013; EFTA FTA in 2014. - FTAs in effect include partner details and duty-free line shares (examples): - United States — In effect since October 31, 2012 — 73.32 — final reduction program ends 2031. - European Union — In effect since August 1, 2013 — 50.89 — final reduction program ends 2027. - Others listed with in-effect dates and percent duty-free and final reduction program end years. - FTAs under negotiation/concluded: Colombia (concluded September 20, 2013); Mexico (concluded April 3, 2014); Israel (second round March, 2015). - Trade and FDI shares with FTA partners (2013): - FTAs in force partners represented about 45 percent of trade in goods and about 40 percent of FDI inflows in 2013. - Exports and imports with FTA partners in 2013: about 70 and 40 percent, respectively. - Estimated effects: - Signing an FTA increases bilateral trade by 77 percent (empirical estimate). - FTA with U.S. expected to increase Panama’s total trade by about 18 percent; EU FTA by about 7 percent; Mexico and Colombia FTAs combined about 6 percent. ### Policy issues reiterated and public financial management - Staff projections and fiscal targets: - Staff’s nominal GDP projection (2007 base) for 2015 is 5 percent lower than the authorities’ five-year strategic plan projection. - Meeting authorities’ 2015 deficit limit of 3.7 percent of GDP likely requires adjustment of 0.2 percent of GDP from the Budget. - Additional adjustments totaling about 0.4 percent of GDP would be necessary to keep 2019 NFPS debt below authorities’ implicit target of 35 percent of GDP. - Authorities’ measures: - Unified taxation rate on alcoholic content expected to raise $38 million. - Plan to reduce special tax advantages and close loopholes to help fund increase in nominal pension payments. - ISTMO platform to centralize financial information; Single Treasury Account regulation approved fall 2014; phased unification of accounts by end-2015 and subsequent two years. ### Other issues: price controls, statistics, and AML/CFT - Price controls: - Staff encouraged exit strategy and phasing out price controls by mid-year; take advantage of declining international food and fuel prices. - Authorities maintained price controls on 22 food-basket products until July 2015; no supply shortages detected. - Statistics and data gaps: - Urgent need to publish full 2007-base national accounts and improve data reporting (national accounts, government finance, financial sector, balance of payments). - Official statistics may underestimate oil imports, service exports, and stocks of outward FDI and inward portfolio equity. - AML/CFT: - FATF identified Panama as having strategic AML/CFT deficiencies in 2014; action plan agreed with FATF. - New anti-money laundering law passed April 27, 2015; bearer shares registration requirement by December 2015 (previous transition to 2018), and option to convert bearer shares into nominative shares. - FATF recognition in February 2015 of progress on guidance and UAF capacity; FATF to review by end-June 2015. ### Staff appraisal and priorities - Strengthen financial integrity framework to align with international standards and continue AML/CFT implementation. - Strengthen fiscal framework and build fiscal buffers; refrain from changing SFRL ceilings; review Canal contribution threshold or consider alternative smoothing frameworks; lower and broaden net debt target definition. - Raise tax revenues and streamline current expenditures; speed up DGI capacity enhancement; reform pensions and improve subsidy targeting. - Fully implement 2011 FSAP recommendations: temporary liquidity facility, consider deposit insurance for small deposits, modernize nonbank financial sector legislation. - Enhance monitoring of idiosyncratic, systemic, and external risks; build macroprudential framework and tools. - Intensify efforts to improve education, healthcare, training, and institutions to raise productivity and ensure inclusive growth. - Phase out price controls by mid-year and use anti-trust measures to address noncompetitive retail behavior. - Significantly improve statistics: publish full 2007-base national accounts and improve timeliness, consistency, and coverage of macroeconomic and financial statistics. *International Monetary Fund staff report for the 2015 Article IV consultation (content unit: _cr15237).* ### 1.1 percent while current primary expenditures grew by 13 percent. Going forward, the fiscal ### _cr15237 - 1.1 percent while current primary expenditures grew by 13 percent. Going forward, the fiscal ### Fiscal framework, deficits, and public debt - The Social and Fiscal Responsibility Law (SFRL) envisages removing effects on government spending of cyclical fluctuations in Canal contributions; the overall fiscal deficit can exceed SFRL deficit ceilings up to the amount that budget contributions from the Canal are below 3.5 percent of GDP (if above, the difference would instead be credited to the Sovereign Wealth Fund). - The 2015 fiscal deficit is expected at 3.8 percent of 1996-base GDP to accommodate past commitments on capital expenditures and a projected weak revenue performance. - Total gross debt of the public sector (including the Canal Authority debt) increased to about 46 percent of GDP in 2014, reversing the declining trend seen since 2005. - Under planned policies, total gross public debt is projected to decline by about 5 percentage points of GDP by 2019. - Additional liabilities include unfunded pension liabilities, other outstanding public liabilities, and contingent liabilities linked to public companies. - 2014 fiscal developments (operations of the non-financial public sector, in millions of USD and percent of 2007-base GDP): - Revenues: 9,950 (2013) and 10,063 (2014) — change 1.1 - Current Revenues: 9,754 (2013) and 9,983 (2014) — change 2.4 - Tax revenues: 4,859 (2013) and 4,826 (2014) — change -0.7 - Capital Revenues: 183 (2013) and 78 (2014) — change -57.4 - Expenditures: 10,976 (2013) and 11,943 (2014) — change 8.8 - Current Expenditure: 6,961 (2013) and 7,779 (2014) — change 11.8 - Current Primary Expenditure: 6,138 (2013) and 6,940 (2014) — change 13.1 - Capital Expenditure: 4,014 (2013) and 4,160 (2014) — change 3.6 - Balance: -1,026 (2013) and -1,880 (2014) - Balance as % of 2007-base GDP: -2.4 (2013) and -4.1 (2014) ### External sector and financing - The current account deficit remained elevated in 2014, at 12 percent of GDP, owing in part to strong investment-related imports; should moderate over time as investment projects wind down and exports increase. - The current account deficit is expected to continue to be financed by buoyant foreign direct investment inflows (including in the mining, logistics and energy sectors). - Selected external and investment indicators (annual percent change or percent of GDP where indicated): - Current account: -15.9 (2011), -9.8 (2012), -12.2 (2013), -12.0 (2014), -10.4 (2015), -10.0 (2016) - Foreign direct investment: 9.4 (2011), 9.1 (2012), 10.8 (2013), 9.9 (2014), 10.0 (2015), 9.8 (2016) - Gross domestic investment (percent of GDP): 27.2 (2011), 28.6 (2012), 30.0 (2013), 29.8 (2014), 29.3 (2015), 28.1 (2016) - Gross national saving (percent of GDP): 11.3 (2011), 18.8 (2012), 17.8 (2013), 17.8 (2014), 18.9 (2015), 18.1 (2016) - External public debt (including external debts of ACP): 37.7 (2011), 32.9 (2012), 33.1 (2013), 36.7 (2014), 36.5 (2015), 34.0 (2016) - GDP (in millions of US$, current price, 1996-base): 31,320 (2011), 35,938 (2012), 40,393 (2013), 43,784 (2014), 47,478 (2015), 51,579 (2016) ### Macroeconomic outlook and real sector - Panama’s economic growth is slowing towards its medium-term potential and is expected to remain in the 6–7 percent range over the next 5 years. - Real GDP (1996 prices) annual percent change: 10.9 (2011), 10.8 (2012), 8.4 (2013), 6.2 (2014), 6.1 (2015), 6.4 (2016). - Inflation developments: - Consumer price index (average): 5.9 (2011), 5.7 (2012), 4.0 (2013), 2.6 (2014), 0.9 (2015), 2.0 (2016). - Headline inflation decelerated from 3.4 percent (yoy) in June 2014 to -0.4 percent in February 2015 due to price controls and lower oil prices. - Inflation projected at around 1 percent in 2015, considering a January increase in electricity tariffs, a slow upward trajectory for oil prices, and elimination of price controls in July. ### Financial integrity, AML/CFT, and banking sector - The authorities and the Financial Action Task Force (FATF) agreed on a plan to address deficiencies in Panama’s AML/CFT framework to bring it in line with the international standard. - Authorities have made substantial progress, including the passing of new AML/CFT legislation. - Near-term risks include possible delays in enhancing financial transparency; delays could make international transactions more difficult due to concerns over transparency and weaknesses of the AML/CFT framework, including increased due diligence by correspondent banks. - Banking system: Panama’s banking system remains stable, well capitalized and highly liquid; Directors advised continued efforts to strengthen bank supervision and risk monitoring. - Directors urged swift implementation of remaining 2011 FSAP recommendations, including establishing a well-designed liquidity facility for banks, improving monitoring of financial risks and macrofinancial linkages, and developing further the macroprudential policy framework. ### Risks, policy advice, and structural reforms - Key near-term risks: - Weaker global economy, weaker trade, abrupt surge in global financial market volatility, or an upward shift in U.S. interest rates could quickly affect the local financial system and economy. - Delays in concluding measures to tackle financial transparency shortcomings could significantly increase costs of trade settlements, impede cross-border borrowing, and reduce FDIs. - Policy advice and recommendations: - Finalize strengthening of the AML/CFT framework to comply with international standards. - Strengthen the fiscal framework for the medium term and enhance fiscal buffers to cope with risks and expected or potential liabilities. - Revise the threshold for canal contributions in line with average expected contributions and adopt a more comprehensive definition of net debt in the SFRL. - Enhance revenue mobilization through capacity building and administrative reforms. - Reform the pension system to address large unfunded pension liabilities and curb other contingent liabilities. - Fully implement the Single Treasury Account and other public financial management initiatives. - Continue efforts to reduce electricity subsidies, improve targeting of subsidies, and streamline current spending. - Implement remaining financial sector reforms from the 2011 FSAP: temporary liquidity facility for banks, improved monitoring of external and systemic risks, upgraded legislation on non-bank financial intermediaries, and enhanced macroprudential policy tools. - Improve productivity and human capital through enhanced public education and healthcare, skills upgrading, youth employment stimulation, increased female labor force participation, and strengthened institutions. - Take advantage of the benign inflation environment to phase out price controls. - Improve the quality and coverage of statistics to close data gaps relevant for macroeconomic policy and risk assessment. ### Executive Board assessment highlights - Directors commended Panama’s robust macroeconomic performance and continued solid economic growth. - Directors stressed enhancing the fiscal framework and fostering resilience through strengthened fiscal buffers while maintaining financial stability and sustaining strong and inclusive growth. - Directors called for expeditious resolution of remaining deficiencies in financial integrity and transparency frameworks to meet international standards. - Directors noted the importance of reforming the pension system, curbing contingent liabilities, and completing public financial management reforms. *International Monetary Fund staff report for the 2015 Article IV consultation.* ### 6. Starting in 2015, the current design of the fiscal framework implies that the overall ### _cr15237 - 6. Starting in 2015, the current design of the fiscal framework implies that the overall ### Fiscal framework and deficit dynamics - Starting in 2015, the current design of the fiscal framework implies that the overall fiscal deficit will systematically exceed the SFRL deficit ceilings (that apply to the adjusted fiscal deficit) under current projections, while the adjusted overall fiscal deficit specified by the framework would remain in compliance with the SFRL ceilings. - The Law establishing the Sovereign Wealth Fund (Fondo de Ahorro de Panama, FAP) revised the fiscal framework to remove the cyclical effect on government spending of the Canal contributions. - From 2015 onwards, the framework allows the overall fiscal deficit to exceed the SFRL deficit ceilings (that apply to the adjusted fiscal deficit) insofar as contributions from the Canal to the budget are below 3.5 percent of GDP. (If above 3.5 percent of GDP, the difference would instead be credited to the FAP.) - The 2015 overall fiscal deficit is budgeted at 3.7 percent of 2007-base GDP to accommodate past commitments on capital expenditures and a projected weak revenue performance. - Under projections, Canal contributions are likely to continue to fall short of the 3.5 percent of GDP threshold and, as a result, the overall fiscal deficit is expected to exceed the SFRL ceilings (that apply to the adjusted fiscal deficit) by 1–2 percent of GDP per year. - The overall fiscal deficit is expected to exceed the adjusted overall fiscal deficit by a cumulative 6 percent of GDP over the next five years. - No resources are expected to be transferred to the Sovereign Wealth Fund in the foreseeable future. ### Public debt, liabilities, and market issuance - Total public sector gross debt (including Canal-related debt) increased to about 46 percent of 1996-base GDP in 2014, reversing the declining trend seen since 2005. - Under the authorities’ five-year strategic plan, total public sector gross debt is expected to decline by about 5 percentage points of GDP by 2019. - Broad potential public liabilities: - Unfunded pension liabilities estimated at about US$10.7 billion or 24 percent of 2014 GDP. - Pending government obligations associated with turnkey projects currently about US$3 billion. - Contingent liabilities linked to public companies about US$4 billion. - Issuances: - In September 2014 and March 2015 Panama issued two ten-year bonds, each for US$1.25 billion. - Both issuances included strengthened pari passu clauses that expressly exclude the obligation to effect ratable payments. - The March 2015 bond includes an enhanced collective action clause and priced at a spread of 178 basis points above the ten-year U.S. Treasury bonds, with an effective interest rate of 3.89 percent. ### Five-year strategic plan - Authorities released a five-year strategic plan in January focused on social, economic, fiscal, and financial issues, designed in consultation with the private sector, within the fiscal constraints of the existing SFRL. - Goals include catalyzing investment and supporting growth in key sectors (logistic, agriculture, tourism, and mining), and promoting socio-economic developments by enhancing the education system, social programs, infrastructure, and labor markets. ### External sector and financing - The external current account deficit reached 12 percent of GDP in 2014, owing in part to strong investment-related imports. - The current account deficit should moderate over time to around 6 percent of GDP in 2019–20 as investment winds down and projects start generating exports. - Financing: - The deficit is expected to continue to be financed by buoyant foreign direct investment inflows (including in the mining, logistics, and energy sectors). - The ongoing copper mining project is expected to bring additional investments of about US$4½ billion in 2015–17. - Trade agreements: By end-2014, Panama had signed thirteen Free Trade Agreements and three more are under negotiation. ### Pensions — Box 1: Exclusively defined benefit portion of the pension system - The Social Security Agency (CSS) runs four independent programs: 1) disability, old age and death benefits; 2) health and maternity care; 3) professional risks; and 4) administration. - The main pension program (IVM) was reformed in 2005; the IVM accounts for more than one half of CSS revenues and expenditures. - Post-2005, IVM includes two subsystems: - Subsystem of exclusively defined benefit (old system). - Subsystem of mixed defined benefit and defined contribution (new system). - Coverage and eligibility transitions: - Starting in 2008, all new affiliates started to contribute to the new system. - For affiliates under the old system: workers earning less than US$500 a month as well as workers older than 35 years of age in 2008 continued in the exclusively defined benefit scheme. - Workers below 35 years of age and earning more than US$500 a month had the option of staying in the old system or contributing to the new system. - Surpluses in one subsystem cannot be used to finance deficits in the other. - Fiscal and actuarial projections: - The unfunded pension liabilities in the exclusively defined benefit system are estimated at almost US$11 billion. - Actuarial studies indicate cash losses from 2016 onward and reserves depleted in 2024. - Projected actuarial deficit by 2032 amounts to US$6½bn in NPV terms. - CSS estimates the NPV of all future liabilities of this system could amount to US$10.7 billion in NPV terms, given the last associate is expected to retire in 2048. - The defined benefit component of the new system is also expected to eventually become unsustainable. - Policy recommendations: - Urgent reforms required to ensure financial sustainability. - Options include raising retirement ages and unifying female and male retirement age, with protective measures for those unable to continue working. - Further reduction in replacement rates could be considered. - Quantified labor impact note: - By equalizing retirement age for women and men at 62, the number of active contributors to the exclusively defined benefit system could increase by about 22,700, or 1.3 percent of the labor force based on current demographic structure. ### Banking sector conditions and AML/CFT - Banking sector: - Overall credit to the private sector grew in line with nominal GDP in 2014 (remaining at about 90 percent of GDP) and is expected to continue to do so in the medium term. - Construction credit has slowed, converging to the lower growth rate of mortgage and consumer credit. - Growth in credit to commerce stalled in 2014 due to difficulties in the Colon Free Zone (ZLC). - Mortgage delinquencies about 4 percent in December 2014. - Bank performance indicators are sound with low credit risk, significant balance sheet buffers, and robust asset quality. - Anecdotal evidence of overcapacity in commercial real estate; data on the property sector is poor. - AML/CFT framework: - A 2012 assessment by Fund staff highlighted significant shortcomings; FATF publicly identified Panama among countries with strategic AML/CFT deficiencies. - Authorities and FATF agreed on a plan to address deficiencies and bring the framework in line with international standards by mid-2015. - Plan elements include strengthening laws and regulations, implementing measures to freeze terrorist assets, improving customer due diligence (CDD), strengthening the Financial Intelligence Unit (UAF), expanding suspicious reporting to all financial institutions and Designated Non-Financial Businesses and Professions (DNFBPs), and improving international cooperation. - In February, FATF recognized progress on issuing guidance about suspicious reporting, improving the UAF’s capacity, and issuing regulations on bearer shares, but noted Panama needs to complete its plan to address all identified deficiencies. - Staff observations: - Passing of a new anti-money laundering law in April 2015 is an important step. - Regulations implementing legislative changes need to be finalized in a timely fashion to avoid FATF calling for greater scrutiny of transactions linked to Panama. ### Risks to the outlook - Near-term risks: - Mostly relate to the global outlook given Panama’s exposure (around 5 percent of world trade passes through the Panama Canal). - Slower-than-expected global growth or weaker trade is a key downside risk. - An abrupt surge in global financial market volatility or an upward shift in global interest rates would feed quickly into the local financial system. - Transparency and financial integrity risks: - Inadequately tackling financial transparency shortcomings could raise transaction costs, hinder cross-border borrowing, and lead to a potential decline in FDI. - Conducting international transactions has become more difficult due to concerns over transparency and weaknesses in the AML/CFT framework, including increased due diligence by correspondent banks. - Mitigants: - Strong fundamentals and room to implement a countercyclical fiscal response would mitigate the impact of external shocks. ### Policy issues and recommendations - Immediate priorities: - Finalize the process of enhancing financial integrity. - Strengthen the medium-term fiscal framework and build fiscal buffers. - Continue enhancing monitoring, supervision, and regulation of the financial sector. - Boost productivity and competitiveness to ensure a smooth transition to a robust and inclusive medium-term growth path. - A. Strengthening Financial Integrity - Finalize the action plan agreed with the FATF (see the Risk Assessment Matrix in Annex II). - Continue adopting legislative amendments to expand the list of predicate offenses to money laundering (ML), enable freezing of terrorist assets, and strengthen preventative AML/CFT controls (particularly related to beneficial ownership). - Implement regulations in a timely fashion; complete the plan to address all identified deficiencies. - B. Strengthening the Fiscal Framework and Building Fiscal Buffers - Revamp the fiscal framework; refrain from changing the SFRL ceilings. - Review the fiscal framework considering updated projections of Canal contributions relative to GDP or consider alternative smoothing frameworks (such as cumulating all Canal contribution in the FAP and spending a smoothed disbursement from the fund). - Consider lowering the level and broadening the definition of the net debt target embedded in the SFRL to include other outstanding public liabilities and liquid public financial assets. - Any congressional approval of a deficit that temporarily exceeds the medium-term path should be accompanied by compensatory adjustments in future years. - Consider automatic remedial actions (e.g., to limit future spending in the years following a deficit overrun). - Put in place a more explicit and comprehensive accountability and transparency framework. - Develop a comprehensive strategy to manage public assets and liabilities, and undertake a public risk assessment of liabilities for which the government may be responsible. *Source: IMF staff report content provided in the input.* ### 18. Policy efforts should be bolstered to raise tax revenues and streamline current ### Policy efforts should be bolstered to raise tax revenues and streamline current expenditures. ### Fiscal policy: revenues, expenditures, and fiscal framework - Increase revenues by strengthening tax collection and reviewing tax policy; continue expanding capacity and enhancing efficiency at the newly established Dirección General de Ingresos (DGI). - Address unfunded pension liabilities through public funding and pension reform (for example by raising and unifying the retirement age, and by closing the gap between contributions and payouts). - Planned revision of electricity subsidies aligns with authorities’ objective of aligning tariffs with costs through the existing automatic adjustment framework; improve targeting of other subsidies. - Staff projection and fiscal targets: - Staff’s nominal GDP projection (with 2007 as the base year) for 2015 is 5 percent lower than the one in the five-year strategic plan. - Meeting the authorities’ deficit limit of 3.7 percent of GDP for 2015 is likely to require an adjustment of 0.2 percent of GDP from the Budget. - Additional adjustments totaling about 0.4 percent of GDP would be necessary to keep the 2019 Non Financial Public Sector (NFPS) debt below the authorities’ implicit target of 35 percent of GDP. - Authorities’ fiscal stance and measures: - Authorities unified the taxation rate on alcoholic content, with an expected tax revenue increase of $38 million. - Plan to reduce special tax advantages and close loopholes (such as those on preferred shares) to help fund an increase in nominal pension payments planned for this year (these payments are not indexed to inflation). - Authorities aware of optimism in GDP projections and committed to maintaining the deficit within five-year plan limits and 2019 NFPS debt below 35 percent of GDP. - The adjustment is likely to fall on capital expenditure in 2015 and on both capital and current expenditure in subsequent years. - Public financial management improvements: - Launch of ISTMO (Integración y Soluciones Tecnológicas del Modelo de Gestión Operativa) for centralized management of financial information to enhance transparency, efficiency, and cap budgetary allocations. - ISTMO should encompass twenty-four central government agencies by end-2015, and the decentralized institutions by end-2016. - Regulation related to the Single Treasury Account approved in the fall of 2014; implementation starting. - By end-2015, accounts of central government agencies in the first phase of ISTMO (representing about two thirds of total funds in those accounts) should be unified in the single account; other agencies included in subsequent two years. ### Electricity subsidies (Box 3): scope, 2014 developments, and investment plans - Two main electricity subsidies exist: - Tariff Stabilization Fund (FET), established in 2004, targeted at low-energy users and intended to cushion tariffs against movements in international oil prices. - Energy Compensation Fund (FACE), established in 2011, aims to stabilize tariffs for all users and to compensate three generation companies for forgone earnings due capacity constraints in transmission; in 2014 FACE represented about 75 percent of total electricity subsidies. - 2014 subsidy increase and estimates: - Total pre-tax subsidies are estimated to have reached US$320mn in 2014, or about 0.7 percent of GDP. - Post-tax subsidies are estimated to be about US$60mn higher on account of foregone tax revenues. - 2015 outlook and tariff action: - Tariffs increased in January 2015 by between 6 and 25 percent for about one-fourth of consumers. - Lower oil prices and the tariff increase expected to reduce the fiscal burden in 2015 relative to the 2015 budget projection (which projected electricity subsidies at about US$350mn). - Energy sector investment plans (2015–2019): - Government announced plans for US$5bn investments in the energy sector during 2015–2019, with ¼ expected to come from public sources. - Investments in generation expected to total US$3.2bn (US$1.3bn in hydro, US$0.9bn in coal, and US$1bn in gas). - Investments in transmission estimated at US$1.2bn, including US$0.5bn for the interconnection with Colombia, and US$0.2 and US$0.5bn for the third and fourth transmission lines, respectively. ### Financial system resilience and regulation - Banking sector soundness and vulnerabilities: - Banking system is well-capitalized and profitable; nonperforming loan ratio below 2 percent. - Capital buffers are well above the required Basel I minimum; profit margins are large; liquidity holdings remain ample. - Credit risk stress-tests indicate banks would be able to withstand significant real and financial shocks. - Need to enhance cross-border supervision and monitoring of idiosyncratic, systemic, and external risks; develop an indicator of core liquidity and analyses of the transmission of financial shocks. - Macrofinancial linkages and macroprudential policy: - Mortgage delinquencies stand at just below 5 percent of loans. - Household indebtedness is growing faster than the economy; signs of overcapacity in segments of the commercial real estate market. - Need for active macroprudential policies, additional data (commercial real estate prices, corporate leverage), and instruments such as loan-to-value and debt-service-to-income ratios. - FSAP recommendations and nonbank sector: - Need to create a facility for the provision of temporary liquidity to banks (may require temporary public financing). - Upgrade legislation on nonbank financial intermediaries (especially cooperatives and insurance companies, also trust funds and public accountants). - Consider a deposit insurance scheme for small deposits to protect the majority of depositors and mitigate run risk. - As of 2013, assets of insurance companies, credit cooperatives, and finance companies accounted for 5 percent, 4.4 percent and 3 percent of GDP respectively. - Authorities’ actions and views: - Efforts to adopt parts of Basel II/III, improve loan classification and provisioning, identify systemically important banks, monitor systemic risks, and improve the bank supervisor’s financial stability report. - Plan to revisit the accounting regulation for insurance companies in light of international standards. - Authorities do not perceive significant financial stability risks at present but share concerns about weakening correspondent bank relationships. ### Sustaining a sustainable and inclusive growth path - Human capital and productivity priorities: - Sustaining future growth requires steady improvements in training, education, healthcare, and institutions. - With public capital accumulation expected to decelerate, growth must rely more on raising productivity. - Important actions: improve quality of public education and healthcare; address skill mismatches through internship and training programs; promote greater female labor force participation (e.g. by increasing the flexibility of working arrangements); strengthen institutions. - For education, ensure two large increases in teachers’ salary planned over the next few years are adequately anchored to advancements in teachers’ qualifications. - External sector and current account: - Staff analysis suggests signs that the current account deficit is excessive, but it is expected to self-adjust as investment projects wind down and exports increase. - Current account is financed by FDI; external debt deemed sustainable and resilient to shocks. - No compelling evidence of a need for an adjustment in the real exchange rate. ### Other issues: price controls, statistics, and AML/CFT - Price controls and anti-trust: - Staff encouraged authorities to formulate an exit strategy for price controls and to phase out price controls by mid-year, taking advantage of declining international food and fuel prices. - Noncompetitive behavior of food retailers should be tackled through an anti-trust framework; authorities noted legal and constitutional constraints on foreign entrants in retail. - Statistics and data gaps: - Urgent need to publish the full 2007-base national accounts and improve data reporting for series relevant to macroeconomic monitoring and risk assessment (national accounts, government finance, financial sector, and balance of payment statistics), including timeliness and consistency. - Official statistics may severely underestimate oil imports and service exports as well as stocks of outward FDI and inward portfolio equity. - Gaps in financial sector data (real estate prices and corporate leverage) limit assessment of financial sector risks. - Authorities making progress towards SDDS subscription, but limited budgetary resources and weak inter-agency collaboration slow the process. - Financial integrity and AML/CFT: - After FATF identified Panama as having strategic AML/CFT deficiencies in 2014, correspondent banking relationships and international transactions became more challenging. - Authorities committed to implementing IMF AML/CFT recommendations and the FATF action plan; passing of a new anti-money laundering law in April 2015 is a crucial step. ### Staff appraisal: priorities and recommendations - Strengthen the financial integrity framework to align with international standards and continue AML/CFT implementation. - Strengthen the fiscal framework: - Refrain from changing the SFRL ceilings. - Review the threshold for the Canal contribution in the fiscal framework or consider alternative smoothing frameworks. - Consider lowering the level and broadening the definition of the net debt target embedded in the SFRL; broaden net debt to include other outstanding public liabilities and liquid public financial assets. - Put in place a more explicit accountability framework. - Devote policy efforts to raising tax revenues and streamlining current expenditures; speed up enhancement of DGI capacity and efficiency; reform pensions and improve subsidy targeting. - Fully implement the 2011 FSAP recommendations: - Create a temporary liquidity facility for banks; consider deposit insurance for small deposits; modernize legislation for the nonbank financial sector. - Enhance monitoring and assessment of idiosyncratic, systemic, and external risks; build a macroprudential policy framework and develop corresponding tools. - Intensify efforts to improve education, healthcare, training, and institutions to raise productivity and ensure inclusive growth. - Phase out price controls by mid-year and use anti-trust measures to address noncompetitive behavior in retail. - Significantly improve statistics: publish full 2007-base national accounts and improve timeliness, consistency, and coverage of macroeconomic and financial statistics. *Source: _cr15237 - 18. Policy efforts should be bolstered to raise tax revenues and streamline current expenditures.* ### 38. It is proposed that the next Article IV consultation takes place on the standard ### _cr15237 - 38. It is proposed that the next Article IV consultation takes place on the standard 12-month cycle. ### Article IV timing - It is proposed that the next Article IV consultation takes place on the standard 12-month cycle. ### Real sector developments (2009–15) - Real GDP growth: charted across 2010Q1–2014Q3 (percent change, yoy). - Monthly index of economic activity: shown alongside Real GDP growth. - Potential Output Growth and Output Gap: potential output growth (right-axis) and output gap series for 2010–2014 (percent). - Sector contributions to GDP: Construction; Transport, storage & communications; Financial intermediaries; Wholesale & retail trade; Other (percent change, yoy). - High-frequency indicators (percent change, yoy quarter avg.) include: Construction, ZLC (Zona Libre de Colon measured in gross metric tons), Transport ACP Containers, Electricity, New car sales. - Wages and Unemployment: unemployment rate and wages (percent change; unemployment rate). - Inflation: Panama CPI and US CPI (percent change, yoy). - Key interpretive notes from figures: - "Growth is slowing..." and "the output gap is closing." - "Growth is mainly driven by construction and transportation sectors..." - "Zona Libre de Colon (ZLC) ceased to contract." - "Unemployment stopped its decline, which should ease the pressure on wages..." - "...along with declining inflation due to lower oil prices and food price controls." ### Fiscal developments (2010–19) - Revenue (Central Government data referent): Direct tax revenue; Indirect tax revenue; Non-tax revenue (percent of GDP). - Tax revenue composition: Income tax (ind.); Income tax (corp.); Wealth tax; Foreign trade tax; Domestic trade tax (share of total, percent). - NFPS primary balance and NFPS balance presented (percent of GDP). - Expenditure breakdown: Capital expenditure; Current primary expenditure; Interest (percent of GDP). - Public debt: External and Domestic components including external debt for the Canal expansion (percent of GDP). - Gross financing needs (percent of GDP) with components for 2013–2019: Amortization; Interest payments; Primary deficit; Gross financing needs. - Key interpretive notes: - "...owing in part to a decline in tax revenues during the election year..." - "...amid quite stable reliance on income tax." - "Deficits rose in 2014..." - "...despite flat capital spending..." - "Public debt to GDP shifted upward against higher deficit ..." - "...but financing needs are expected to remain broadly stable." ### Financial sector developments (2005–15) - Nonresident credit and deposit growth (percent change, yoy) for banks with general licenses. - Resident credit and deposit growth (percent change, yoy). - Private credit growth rates by sector (percent change, yoy): Mortgage, Commerce, Construction, Consumer, Overall. - Credit to GDP by sector (percent). - Deposit and lending interest rates (percent average, monthly): Avg. corporate lending rate; Avg. personal lending rate; Avg. deposit rate. - Selected regional EMBI+ spreads for Panama and peers (percentage points). - Summary bullets from figures: - "Resident credit and deposit growth slowed somewhat..." - "Credit to commerce slowed significantly." - "Lending to commerce and mortgages has the largest shares of banks' loan portfolios." - "Average interest rates remain at low levels." - "Spreads on sovereign debt are in line with those of peer countries." - "...and nonresident credit and deposits have recovered following a sharp deceleration associated with the HSBC departure." - Bank soundness indicators (2013–14): - Capital Adequacy Ratio, 2013–14 (in percent of risk-weighted assets): Panama plotted among peers. - Capital to Total Asset Ratio, 2013–14 (in percent). - Return on Assets, 2013–14 (in percent). - Concluding note: "Most banks are well capitalized and profitable." ### External sector developments (2010–14) - Current Account Balance components (percent of GDP): Goods balance; Services balance; Private income: FDI; Private income: other; Public income. - Balance of Payments (US$, million): Current account balance; Financial account: net FDI; Financial account: other; Change in reserves; errors & omissions. - Exchange rates indices (100=2010): PAN REER; PAN NEER; US NEER. - Import composition (percent change): Capital goods; Consumption goods; Intermediate goods. - Foreign Direct Investment (percent of GDP): Panama vs Central America and Dom. Republic vs LA5 (Brazil, Chile, Colombia, Mexico, Peru). - Composition of FDI (US$, billion): Equity capital; Reinvested earnings; Other capital. - Key interpretive notes: - "The current account deficit remains elevated..." - "The REER has been appreciating due to persistent inflation and US$ movement." - "Import growth remains low." - "...but continues to be largely financed by FDI." - "Panama remains an attractive destination for FDI......often in the form of reinvested earnings." ### External linkages (1996–2014) - Business cycle co-movement: Panama, US, China (percentage deviation of real GDP from potential GDP). - Panama Canal Traffic (Tons of Cargo) and World Trade Volume indices (2000=100). - Foreign interbank deposits (onshore, in percent of total domestic deposits) over 2008Q4–2014Q4. - International contingent credit lines (including offshore, in percent of total deposits): used vs available (2012Q4–2014Q4). - Foreign exposure of Panama's International Banking Center (in percent of total assets): Interbank deposits in foreign banks; Financial assets acquired abroad; Credits granted to foreigners — onshore and offshore. - Regional breakdowns of foreign exposure and revocable international credit lines skewed toward advanced economies. - Key interpretive notes: - "Panama's business cycle tracks that of the U.S. and China..." - "...while world trade drives Panama Canal traffic." - "Foreign funding has increased after the sharp slowdown in 2009-10." - "Foreign exposures are significant, and credit lines are mainly with advanced economies." - "Banking sector exposures reflect Panama's role as a regional banking hub." - "FDI to Panama is well diversified geographically." ### Social and labor indicators (2003–14) - Education spending (2003–13 average, percent of GDP) and GDP per Capita, PPP (current international $, 2013). - PISA Score (2009) and GDP per Capita, PPP (current international $, 2009). - Gini coefficient change (2003 to 2011) and Poverty Headcount Ratio (2003 to 2012). - Global Competitiveness Ranking in selected categories (out of 144 countries): Judicial independence; Diversion of public funds; Irregular payments & bribes; HIV prevalence; Infant mortality; Tuberculosis prevalence; Education enrollment; Availability of scientists & engineers; Quality of the education system; Women in labor force; Flexibility of wage determination; Reliance on professional management. - Interpretive notes: - "Panama's high growth has reduced income inequality..." - "...and poverty." - "Education spending is low..." - "...and the quality of education has been lagging behind..." - "...while significant challenges in terms of institutional quality, health, education, and labor market efficiency remain." ### Selected fiscal and public sector tables (key figures preserved exactly as in source) - Table 2: Summary Operations of the Non-Financial Public Sector (In percent of GDP), selected entries: - Revenues: 2011 24.8; 2012 25.1; 2013 24.6; 2014 23.0; 2015 22.8; 2016 22.7 - Current revenue: 25.2; 25.0; 24.1; 22.8; 22.8; 22.7 - Tax revenue: 11.3; 12.4; 12.0; 11.0; 11.6; 11.8 - Nontax revenue of central government: 6.4; 5.5; 4.8; 4.8; 4.1; 4.0 - o/w: Panama Canal fees and dividends: 3.3; 2.7; 2.4; 2.3; 2.2; 1.9 - Overall balance, excluding ACP: -2.1; -1.5; -2.5; -4.3; -3.8; -3.7 - Overall balance, including ACP: -4.4; -3.2; -4.6; -6.6; -5.9; -4.4 - Memorandum: Primary balance (excluding ACP): -0.1; 0.0; -1.0; -2.5; -1.3; -0.7 - Table 3: Central Government (In percent of GDP), selected entries: - Revenues and grants: 2011 17.8; 2012 17.9; 2013 17.1; 2014 15.9; 2015 15.7; 2016 15.8 - Taxes: 11.3; 12.4; 12.0; 11.0; 11.6; 11.8 - Nontax revenue: 6.4; 5.5; 4.8; 4.8; 4.1; 4.0 - Panama Canal Authority: fees per ton 1/: 1.2; 0.9; 0.9; 0.9; 0.8; 0.7 - Total expenditure: 21.4; 21.6; 21.3; 20.9; 19.3; 18.7 - Current expenditure: 13.3; 12.6; 11.9; 12.6; 13.2; 13.0 - Capital: 8.0; 9.0; 9.4; 8.3; 6.0; 5.7 - Overall balance 3/: -3.6; -3.7; -4.2; -4.9; -3.6; -2.9 - Memorandum: GDP (in millions of US$): 31,320; 35,938; 40,393; 43,784; 47,478; 51,579 ### Monetary accounts and banking sector performance - Table 4 (selected monetary aggregates, end-period, in millions of US$): - Net foreign assets: 2011 7,259; 2012 5,847; 2013 5,830; 2014 6,055; 2015 6,771; 2016 7,563 - Net domestic assets: 19,115; 23,306; 26,145; 28,135; 30,777; 33,228 - Private sector credit: 28,553; 32,590; 36,543; 39,878; 43,022; 46,057 - Total deposits: 26,666; 29,501; 32,116; 34,719; 37,548; 40,791 - Demand deposits: 6,227; 7,067; 7,695; 8,213; 8,906; 9,675 - Time deposits: 13,864; 15,174; 16,485; 17,681; 19,073; 20,720 - Table 5 (Commercial Bank Performance Indicators, in percent, end-of-period, selected entries): - Nonperforming loans as percent of total loans (Banking system): 2011 1.3; 2012 1.3; 2013 1.1; 2014 1.4; Mar 1.2; June 1.1; Sept. 1.4; 2014 3.0 (note: dates presented in table) - Ratio of provisions to nonperforming loans (Banking system): 160.7; 178.2; 171.2; 172.5; 171.6; 113.2; 88.8 - Net income on average assets (Banking system): 1.7; 1.7; 1.4; 1.6; 1.5; 1.5; 1.5; 1.9 - Ratio of liquid assets to total assets (Banking system): 17.6; 16.9; 15.7; 17.4; 18.1; 18.5; 19.5; 18.9 - Ratio of capital to risk-weighted assets (Banking system): 15.5; 15.7; 14.8; 15.0; 14.9; 14.9; 14.7; 15.4 - Ratio of capital to total assets (Banking system): 11.2; 10.4; 9.8; 10.0; 10.0; 10.1; 10.6 - Foreign banks' share of domestic banking system assets: 53.3; 51.7; 49.1; 52.0; 51.7; 49.1; 49.8 ### Medium-term balance of payments (2011–20) — key figures (in millions of US$; percent of GDP memoranda) - Current account (US$ mn): 2011 -4,993; 2012 -3,528; 2013 -4,918; 2014 -5,257; 2015 -4,941; 2016 -5,174; 2017 -4,747; 2018 -4,089; 2019 -4,024; 2020 -4,248 - Trade balance excluding Colón Free Zone (US$ mn): -7,480; -6,938; -7,974; -8,973; -8,761; -9,288; -8,797; -8,420; -9,223; -9,871 - Exports f.o.b. (US$ mn): 3,145; 4,274; 3,898; 3,801; 3,547; 3,777; 4,709; 6,020; 6,543; 7,123 - Imports f.o.b. (US$ mn): -10,624; -11,212; -11,872; -12,774; -12,308; -13,065; -13,507; -14,440; -15,766; -16,994 - Services, net (US$ mn): 3,933; 4,696; 5,058; 6,001; 5,939; 6,521; 7,239; 7,857; 8,533; 9,297 - Financial account (US$ mn): 4,568; 3,272; 5,388; 6,950; 5,230; 5,494; 5,103; 4,494; 4,427; 4,670 - Memorandum: Current account (percent of GDP): -15.9; -9.8; -12.2; -12.0; -10.4; -10.0 - External public debt (percent of GDP): 37.7; 32.9; 33.1; 36.7; 36.5; 34.0; 31.5; 28.9; 26.7; 24.7 ### Vulnerability indicators (selected) - Financial indicators: - Broad money (12-month percent change): 9.3; 10.3; 8.6; 8.1; 8.2; 8.6 (Est. series as shown) - Private sector credit (12-month percent change): 16.8; 14.1; 12.1; 9.1; 7.9; 7.1 - Deposit rate (6-month; in percent) 1/: 1.9; 1.9; 1.8; ........ - External indicators: - Merchandise exports (12-month percent change): 29.4; 35.9; -8.8; -2.5; -6.7; 6.5 - Merchandise imports (12-month percent change): 42.3; 5.5; 5.9; 7.6; -3.7; 6.2 - Current account balance (in percent of GDP): -15.9; -9.8; -12.2; -12.0; -10.4; -10.0 - Capital and financial account balance: 14.6; 9.1; 13.3; 15.9; 11.0; 10.7 - Public sector external debt (in percent of GDP): 37.7; 32.9; 33.1; 36.7; 36.5; 34.0 - Gross international reserves (end-period, US$ mn): 2,733; 2,413; 3,144; 3,572; 3,874; 4,210 - Reserves in months of imports of goods and services: 2.0; 1.6; 2.0; 2.4 - Reserves in percent of broad money: 108; 101; 010; 010; 10 (as presented) - Reserves in percent of short-term external debt: 32; 26; 31; 35; 34; 37 ### Net International Investment Position (NIIP) (In percent of GDP) - Net international investment position: 2011 -73.7; 2012 -77.1; 2013 -83.4; 2014 -88.9; 2015 -92.4; 2016 -95.1 - Assets (percent of GDP): 165.4; 153.8; 145.0; 147.8; 146.3; 144.8 - Reserve assets: 12.2; 7.3; 7.5; 9.7; 9.5; 9.4 - Liabilities (percent of GDP): 239.1; 230.9; 228.4; 236.8; 238.8; 239.9 - Direct investment inward: 76.0; 76.6; 79.4; 86.3; 90.0; 92.9 *Source: IMF staff report content (figures and tables as presented in the provided content).* ### Annex I. Implementation of Past IMF Policy Advice ### Annex I. Implementation of Past IMF Policy Advice ### Overview of authorities' stance and Fund advice - Macroeconomic policies over the last year have been broadly in line with past Fund advice; some reforms delayed by the election and change in administration. - During the 2014 Article IV consultation, Directors emphasized: - Continued commitment to strong macroeconomic and financial policies and structural reforms to safeguard against external and domestic shocks and to support strong and sustainable growth. - The credibility of the fiscal framework needs to be strengthened and fiscal stance tightened to provide a cushion against external shocks. - Swift implementation of the remaining 2011 FSAP recommendations. - Stepping up efforts to strengthen the AML/CFT regime, including implementation of the recommendations of the AML/CFT assessment report. - Further enhancement of the quality of public education and upgrading skills of the labor force. ### Fiscal policy — findings and measures - Staff advice: Keep the fiscal deficit below the SFRL ceiling. - 2014 outcome: Fiscal deficit exceeded the SFRL ceiling mainly due to overspending of the previous administration and underperformance of revenues. - Fiscal framework update: - Going forward, the fiscal framework allows the fiscal deficit to exceed the SFRL ceilings up to the amount that budget contributions from the Canal are below 3.5 percent of GDP. - The authorities have started to review the current fiscal framework and taken measures to increase revenues. - A new platform for public sector financial information management (ISTMO) is being adopted; full implementation would facilitate upgrading public sector accounting standards and implementation of a Single Treasury Account. ### Financial sector reforms — progress - Continued implementation of 2011 FSAP recommendations: - Regulation on the Consolidated Supervision of Banking Groups issued in August 2014. - Steps taken to adopt international financial reporting standards and align capital regulation with the Basel III framework. - Banks required to take measures to identify the ultimate beneficiaries of their corporate clients. - The Financial Coordination Council is becoming more active in identifying and monitoring systemic risk. ### Transparency and AML/CFT - Authorities committed to implementing IMF AML/CFT recommendations and the action plan agreed with the FATF. - FATF recognition: In February 2015, the FATF recognized steps being taken to address deficiencies and indicated authorities should continue pressing ahead with their work agenda. - Legislative action: A new anti-money laundering law was passed by the National Assembly in April 2015. ### More inclusive growth and human capital - Social protection: Authorities are enhancing social protection programs and evaluating better targeting. - Education reforms: Deeper emphasis on computer and language skills and on the training of teachers. - Labor market: Vocational education improvements and initiation of a job market database encompassing both employment opportunities and potential job applicants to address skill mismatches and shortages. ### Panama — Risk Assessment Matrix (selected risks, likelihoods, impacts, and policy responses) - External risks highlighted (likelihood / impact / effect / policy response): - A surge in global financial market volatility: Likelihood H; Risk impact M/H. Effect: Reduction in capital inflows and/or increase in capital outflows, difficulty rolling over financing, freezing of foreign credit lines, increasing 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. - Persistent dollar strength: Likelihood H; Impact M. Effect: Real appreciation for Panama given dollarization; may reduce exports and impact banks’ exposure to exporters. Policy response: Current account to adjust automatically through lower imports; state to offer liquidity support if necessary. - Protracted slower growth in advanced and emerging economies: Likelihood H; Impact H. Effect: Reduction in exports and lower Canal receipts; severe impact in the Colon Free Zone. Policy response: Current account to adjust automatically; state to offer liquidity support if necessary. - Sharp growth slowdown in China: Likelihood M; Impact L. - Bond market stress from reassessment of sovereign risk in euro area: Likelihood M; Impact M. Effect: Higher financing costs and potential capital outflows. Policy response: Intensify monitoring and supervision; fiscal consolidation. - Bond market stress from reassessment of sovereign risk in United States: Likelihood L. - Domestic risks: - Delays in strengthening AML/CFT framework: Likelihood L; Impact H. Effect: Severe disruption in international transactions and higher costs, difficulty in cross-border borrowing, potential decline in FDI. Policy response: Enhance efforts to improve financial integrity and transparency and comply with international AML/CFT standards. - Further disruption to the Canal expansion: Likelihood L; Impact L. Effect: Negative effects on growth and employment short term; exports and revenues medium term. Policy response: Reduction in medium term fiscal expenditure plans. - Further relaxation of deficit targets: Likelihood L; Impact H. Effect: Larger borrowing and contribution to fiscal vulnerability; reduced market confidence. Policy response: Build fiscal buffer and commit to fiscal targets below the SFRL ceilings. ### Implementation of 2011 FSAP Recommendations (selected entries and status) - Banking Oversight: - Finalize and implement regulations on operational and interest rate risks: - The SBP issued a regulation on operational and market risk in December 2011 and has plans to introduce capital charges for these risks in 2016. - Enhance systemic risk monitoring and capacity to implement macroprudential policies: - A new credit regulation incorporating dynamic provisioning and accounting treatment of restructured loans was issued in May 2013. - The Financial Coordination Council was established and continues to strengthen its capacity to implement macroprudential policies. - A regulation on the Consolidated Supervision of Banking Groups was released in August 2014. - A draft law on Trust Funds was released in January 2015; legislation on Certified Public Accountants is pending but a register for external accountants is being established. - Develop capital adequacy and regulatory reporting standards for holding companies: - Regulation establishing a minimum capital requirement for bank holdings was issued in February 2015, while also aligning capital requirements for banks with Basel III rules. - Develop concentration limits and risk management requirements for interbank deposits: - No plans to develop such requirements; authorities noted the law allows introduction of such limits for individual banks as needed. - Enhance offsite supervision: - Off-site supervision was improved in 2012 through requirement for banks to report monthly performance and early warning indicators to the SBP. - SBP developed methodologies to identify systemically important banks and measure interconnectedness. - SBP initiated an upgrade of its Financial Stability Report (to be published on a semi-annual basis). - Regulate and effectively supervise cooperatives: - A draft law on cooperatives, upgrading regulation and strengthening supervision, continues to be developed. - Insurance Sector Oversight: - Approve draft Insurance Law with strengthened prudential requirements: - The law creating the Superintendencia of Insurance was adopted in 2012 (Ley 12-2012). - Strengthen disclosure of performance indicators and brokers’ commissions: - Not implemented. - Securities Market Oversight: - Strengthen budgetary position, supervisory and enforcement capabilities of the supervisor (National Securities Commission): - Law 67 (dated 1 September 2011) upgraded the Commission to a Superintendency (SMV), strengthening supervisory and enforcement capacity and budgetary position. Further strengthening of enforcement capacity is needed. - Payments and Securities Systems Oversight: - Create comprehensive payments system law guaranteeing payment finality: - No initiatives so far. - Adopt an RTGS or Hybrid Payments System: - No initiatives so far. - Financial Safety Nets: - Conclude studies and introduce a banks’ liquidity facility: - Ongoing. Authorities set up a steering group with private sector representation; a strategy developed with external consultants; stakeholders being consulted. - Establish a deposit insurance scheme: - 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; efforts to extend market making to global bonds. - Review and restructure or close public development banks and guarantee funds: - Medium-term recommendation. No initiatives so far. ### External Sector Assessment — key findings and metrics - Current account: - A number of methodologies suggest moderate signs of temporarily excessive current account deficit, but no indication of real exchange rate misalignment. - Panama’s current account (CA) deficit has been larger than the value explained by fundamentals and desirable policies since mid-2000s (apart from the sharp adjustment during the global crisis); the CA gap is now about 6 percent. - The ES methodology points to a somewhat smaller but still large CA imbalance. - Accounting for reduction in investment and increase in exports over the medium term, the deviation of the CA from fundamentals would be around 1 percent of GDP. - Strong and stable FDI inflows are expected to continue to finance the bulk of external CA deficits in the coming years; external debt is deemed sustainable and resilient to shocks. - Real Effective Exchange Rate (REER): - The REER does not appear misaligned overall. - REER depreciated substantially in the early 2000s and appreciated as inflation picked up; in 2014 the REER depreciated by 2 percent due to lower inflation in Panama’s trading partners (notably high inflation in Venezuela, which makes up 10 percent of total trade). - Excluding Venezuela, REER appreciated in 2014 by about 2 percent and the REER model points to a slight overvaluation (4 percent). - Competitiveness: - Panama remains the second most competitive economy in Latin America, after Chile. - Strengths in the Global Competitiveness Index: financial market development, infrastructure, goods market efficiency. - Main challenges: labor market efficiency, healthcare and primary education, institutions, higher education and training. - Panama is behind Colombia, Peru and Chile in the 2015 Doing Business report; strengths reported in “trading across border” and “access to credit”, weaknesses in “ease of paying taxes” and “resolving insolvency”. - Reserve adequacy: - Reserves appear low by standard reserves metrics, but these may be misleading for Panama: - Panama is fully dollarized and official reporting of reserves is close to the net foreign assets of the main public bank (Banco Nacional de Panama). - Panamanian banks have solid reserve buffers and access to contingent credit lines. - The government has access to other U.S. dollar assets (such as the Sovereign Wealth Fund, and deposits held in domestic banks). - Policy recommendation: Authorities need to build policy buffers and lessen vulnerabilities over the medium term, including by lowering net debt and establishing a liquidity facility for banks. ### External assessment numeric results (as presented) - MB Approach-12.0-5.7-6.3 - ES Approach-12.0-88.9-7.3-4.7 - MB Approach with MT CA/Y-6.6-5.7-0.9 - REER (INS measure)-4.1 - REER (relative to EBA countries)3.8 *Source: Annex I. Implementation of Past IMF Policy Advice (IMF country report content).* ### Annex V. Debt Sustainability Analysis (DSA) ### Annex V. Debt Sustainability Analysis (DSA) ### Panama: Public Sector DSA – Baseline Scenario (Key Indicators and Projections) - As of February 28, 2015. - Nominal gross public debt (in percent of GDP): - 2013: 51.9 - 2014: 41.7 - 2015: 45.6 - 2016: 47.3 - 2017: 47.2 - 2018: 45.2 - 2019: 42.5 - 2020: 40.5 - 2020 (last column): 38.7 - Public gross financing needs (in percent of GDP): - 2013: 1.4 - 2014: 2.4 - 2015: 5.9 - 2016: 7.4 - 2017: 6.6 - 2018: 5.3 - 2019: 7.2 - 2020: 6.3 - 2020 (last column): 8.1 - Real GDP growth (in percent): - 2013: 8.7 - 2014: 8.4 - 2015: 6.2 - 2016: 6.1 - 2017: 6.4 - 2018: 6.7 - 2019: 7.1 - 2020: 6.3 - 2020 (last column): 6.0 - Inflation (GDP deflator, in percent): - 2013: 3.1 - 2014: 3.7 - 2015: 2.1 - 2016: 2.2 - 2017: 2.1 - 2018: 2.0 - 2019: 2.0 - 2020: 2.0 - 2020 (last column): 2.0 - Nominal GDP growth (in percent): - 2013: 12.1 - 2014: 12.4 - 2015: 8.4 - 2016: 8.4 - 2017: 8.4 - 2018: 8.6 - 2019: 8.8 - 2020: 9.2 - 2020 (last column): 8.4 - Effective interest rate (in percent) [defined as interest payments divided by debt stock (excluding guarantees) at end of previous year]: - 2013: 6.7 - 2014: 5.4 - 2015: 5.0 - 2016: 4.7 - 2017: 4.7 - 2018: 4.7 - 2019: 4.6 - 2020: 4.6 - 2020 (last column): 4.5 - Sovereign spreads and ratings: - EMBIG (bp) 3/189 (value shown) - 5Y CDS (bp) 123 (value shown) - Moody's: Baa2 - S&P: BBB - Fitch: BBB ### Contribution to Changes in Public Debt (2013–2020) - Change in gross public sector debt (in percent of GDP): - 2013: -2.3 - 2014: -0.9 - 2015: 3.9 - 2016: 1.7 - 2017: 0.0 - 2018: -2.0 - 2019: -2.8 - 2020: -2.0 - Cumulative (2013–2020): -6.8 - Identified debt-creating flows (in percent of GDP): - 2013: -4.2 - 2014: -1.9 - 2015: 1.4 - 2016: -0.1 - 2017: -0.5 - 2018: -1.9 - 2019: -2.8 - 2020: -2.3 - Cumulative (2013–2020): -9.5 - Primary deficit (in percent of GDP): - 2013: -1.8 - 2014: 0.5 - 2015: 2.4 - 2016: 1.5 - 2017: 1.2 - 2018: -0.1 - 2019: -0.9 - 2020: -0.8 - Cumulative (2013–2020): -0.6 - Primary (noninterest) revenue and grants (in percent of GDP): - 2013: 24.3 - 2014: 24.6 - 2015: 22.9 - 2016: 22.8 - 2017: 22.7 - 2018: 23.4 - 2019: 23.6 - 2020: 23.2 - Cumulative (2013–2020): 23.0 (138.6 when summed as shown) - Primary (noninterest) expenditure (in percent of GDP): - 2013: 22.5 - 2014: 25.1 - 2015: 25.4 - 2016: 24.2 - 2017: 23.9 - 2018: 23.3 - 2019: 22.6 - 2020: 22.5 - Cumulative (2013–2020): 22.4 (138.9 when summed as shown) - Automatic debt dynamics (in percent of GDP): - 2013: -2.4 - 2014: -2.4 - 2015: -1.0 - 2016: -1.6 - 2017: -1.7 - 2018: -1.8 - 2019: -1.9 - 2020: -1.5 - Cumulative (2013–2020): -1.3 (total -9.8) - Interest rate/growth differential (in percent of GDP) (same values as automatic debt dynamics): - 2013: -2.4 - 2014: -2.4 - 2015: -1.0 - 2016: -1.6 - 2017: -1.7 - 2018: -1.8 - 2019: -1.9 - 2020: -1.5 - Cumulative (2013–2020): -1.3 (total -9.8) - Real interest rate contributions (in percent of GDP): - 2013: 1.8 - 2014: 0.8 - 2015: 1.3 - 2016: 1.0 - 2017: 1.1 - 2018: 1.1 - 2019: 1.0 - 2020: 1.0 - Cumulative (2013–2020): 0.9 (total 6.1) - Real GDP growth contributions (in percent of GDP): - 2013: -4.2 - 2014: -3.2 - 2015: -2.4 - 2016: -2.6 - 2017: -2.8 - 2018: -2.9 - 2019: -2.9 - 2020: -2.5 - Cumulative (2013–2020): -2.2 (total -15.9) - Exchange rate depreciation contribution: 0.0 for years shown. - Other identified debt-creating flows: 0.0 for years shown. - Residual, including asset changes (in percent of GDP): - 2013: 1.9 - 2014: 0.9 - 2015: 2.5 - 2016: 1.8 - 2017: 0.4 - 2018: -0.1 - 2019: 0.0 - 2020: 0.3 - Cumulative (2013–2020): 0.3 (total 2.7) ### Underlying Assumptions (Baseline and Alternative Scenarios) - Baseline scenario core assumptions (selected series): - Real GDP growth: 2015: 6.1; 2016: 6.4; 2017: 6.7; 2018: 7.1; 2019: 6.3; 2020: 6.0 - Inflation: 2.2, 2.1, 2.0, 2.0, 2.0, 2.0 (2015–2020) - Primary Balance: -1.5, -1.2, 0.1, 0.9, 0.8, 0.6 (2015–2020) - Effective interest rate: 4.7, 4.8, 4.8, 4.7, 4.7, 4.6 (2015–2020) - Historical scenario assumptions (from 2015 onward convert to 10-year (2004–2013) historical averages): - Real GDP growth: 2015–2020: 6.1, 8.5, 8.5, 8.5, 8.5, 8.5 - Inflation: 2.2, 2.1, 2.0, 2.0, 2.0, 2.0 - Primary Balance: -1.5, 1.4, 1.4, 1.4, 1.4, 1.4 - Effective interest rate: 4.7, 4.8, 4.8, 4.8, 4.8, 4.7 - Constant Primary Balance scenario: - Primary Balance fixed at -1.5 for 2015–2020. - Other variables as baseline. - Note: Gross financing needs in 2018 includes an expected amortization on existing debt in the amount of US$1.3 billion. ### Composition of Public Debt and Financing Needs (Selected Charts / Levels) - Gross nominal public debt (in percent of GDP) charted for 2013–2020 (baseline, historical, constant primary balance scenarios shown). - Public gross financing needs (in percent of GDP) charted for 2013–2020. - By maturity (in percent of GDP, 2004–2020): medium and long-term vs short-term composition shown. - By market (in percent of GDP, 2004–2020): domestic vs external composition shown. ### Panama Public DSA Stress Tests (Scenarios and Results) - Two stress tests conducted: 1. Near-term financial contingent liability shock: - Assumes a one-standard-deviation shock to GDP growth in 2016–17. - Assumes a public expenditures shock equal to 10 percent of banking system’s assets in 2016. - Assumes that for every 1 percentage of GDP increase in primary balance, financing costs increase by 25 basis points. - Result: Public debt increases to 65½ percent of GDP in 2016–17 in this scenario, but resumes a declining path afterwards. 2. Medium-term output and financial condition shock: - Assumes GDP growth slows to 4 percent from 2016 onward. - Financing costs increase by 400 basis points compared to baseline (similar to 2009 crisis). - Result: Impact on public debt is limited. - Selected scenario values (Baseline vs Combined Real GDP and Financial Condition Shock shown for 2015–2020): - Real GDP growth under Baseline: 6.1%, 6.4%, 6.7%, 7.1%, 6.3%, 6.0% (2015–2020) - Real GDP growth under Combined Shock: 4.0% (2016 onward shown as 4.0% for 2016–2020) - Inflation (GDP Deflator change) remains 2.2% in 2015 and ~2.0% thereafter across scenarios. - Non-interest revenue-to-GDP ratio (baseline): 22.8%, 22.7%, 23.4%, 23.6%, 23.2%, 23.0% (2015–2020) - Non-interest expenditure-to-GDP ratio (baseline): 24.2%, 23.9%, 23.3%, 22.6%, 22.5%, 22.4% (2015–2020) - Primary Balance (baseline): -1.5%, -1.2%, 0.1%, 0.9%, 0.8%, 0.6% (2015–2020) - Interest rate shock (bpts) compared to baseline under Combined Shock: 0, 400, 400, 400, 400, 400 (2015–2020) - Financial Contingent Liability Shock selected values (2015–2020): - Real GDP growth: 6.1%, 3.9%, 4.2%, 7.1%, 6.3%, 6.0% - Inflation (GDP Deflator change): 2.2%, 1.5%, 1.4%, 2.0%, 2.0%, 2.0% - Non-interest revenue-to-GDP ratio: 22.8%, 22.7%, 23.4%, 23.6%, 23.2%, 23.0% - Non-interest expenditure-to-GDP ratio: 24.2%, 40.6%, 23.3%, 22.6%, 22.5%, 22.4% - Primary Balance: -1.5%, -17.9%, 0.1%, 0.9%, 0.8%, 0.6% - Interest rate shock (bpts) compared to baseline: 0, 41700, 0, 0, 0, 0 (values shown) - Graphical summary notes: - Nominal Debt-to-GDP plotted for Baseline, Contingent Liability shock, and Combined Real GDP and Financial Condition Shock for 2015–2020. - Gross Financing Need-to-GDP plotted for Baseline and Combined Shock for 2015–2020. ### Panama: External Debt Sustainability Framework (2009–2020) - External debt (in percent of GDP) baseline series: - 2009: 119.4 - 2010: 113.2 - 2011: 117.4 - 2012: 111.6 - 2013: 109.6 - 2014: 112.8 - 2015: 111.4 - 2016: 109.2 - 2017: 107.4 - 2018: 105.2 - 2019: 103.2 - 2020: 101.4 - Debt-stabilizing non-interest current account: -10.2 (value shown). - Change in external debt (in percent of GDP): - 2009: -1.9 - 2010: -6.2 - 2011: 4.2 - 2012: -5.8 - 2013: -2.0 - 2014: 3.2 - 2015: -1.4 - 2016: -2.2 - 2017: -1.9 - 2018: -2.2 - 2019: -2.0 - 2020: -1.9 - Identified external debt-creating flows (4+8+9) (in percent of GDP): - 2009: -10.4 - 2010: -10.3 - 2011: -8.9 - 2012: -14.3 - 2013: -11.0 - 2014: -4.2 - 2015: -5.9 - 2016: -6.3 - 2017: -7.8 - 2018: -8.1 - 2019: -7.3 - 2020: -6.5 - Current account deficit, excluding interest payments (in percent of GDP): - 2009: -5.9 - 2010: 5.6 - 2011: 10.6 - 2012: 4.9 - 2013: 7.6 - 2014: 7.9 - 2015: 6.3 - 2016: 5.9 - 2017: 4.3 - 2018: 2.5 - 2019: 1.9 - 2020: 1.8 - Deficit in balance of goods and services (in percent of GDP): - 2009: -4.7 - 2010: 3.9 - 2011: 10.5 - 2012: 4.8 - 2013: 4.7 - 2014: 4.9 - 2015: 4.5 - 2016: 4.1 - 2017: 1.5 - 2018: -0.3 - 2019: -0.2 - 2020: -0.5 - Exports (in percent of GDP): 39.8, 33.8, 36.7, 39.2, 36.5, 35.5, 31.9, 31.7, 32.9, 34.0, 33.9, 33.9 (2009–2020) - Imports (in percent of GDP): 35.1, 37.7, 47.1, 44.0, 41.3, 40.4, 36.5, 35.8, 34.4, 33.7, 33.7, 33.5 (2009–2020) - Net non-debt creating capital inflows (negative) (in percent of GDP): - 2009: -5.2 - 2010: -8.9 - 2011: -9.4 - 2012: -9.1 - 2013: -10.8 - 2014: -9.9 - 2015: -10.0 - 2016: -9.8 - 2017: -9.6 - 2018: -7.8 - 2019: -7.2 - 2020: -6.7 - Automatic debt dynamics (in percent of GDP): - 2009: 0.8 - 2010: -7.0 - 2011: -10.1 - 2012: -10.2 - 2013: -7.7 - 2014: -2.1 - 2015: -2.2 - 2016: -2.4 - 2017: -2.6 - 2018: -2.8 - 2019: -2.0 - 2020: -1.6 - Contribution from nominal interest rate (in percent of GDP): 6.6, 5.8, 5.4, 4.9, 4.6, 4.1, 4.1, 4.1, 4.1, 4.1, 4.1, 4.1 (2009–2020) - Contribution from real GDP growth (in percent of GDP): -4.5, -7.9, -10.6, -10.9, -8.3, -6.3, -6.3, -6.6, -6.7, -7.0, -6.1, -5.7 (2009–2020) - Contribution from price and exchange rate changes (in percent of GDP): -1.4, -4.8, -4.8, -4.2, -4.0, -2.2, -2.4, -2.3, -2.1, -2.1, -2.1, -2.0 (2009–2020) - Residual, including change in gross foreign assets (in percent of GDP): 8.5, 4.1, 13.1, 8.5, 8.9, 9.6, 6.9, 6.4, 8.1, 8.0, 7.4, 6.7 (2009–2020) - External debt-to-exports ratio (in percent): 300.0, 335.0, 320.3, 284.5, 300.2, 318.0, 348.7, 344.6, 326.7, 309.0, 304.4, 298.8 (2009–2020) - Gross external financing need (in billions of US dollars): - Series shown: 7.9, 9.1, 12.7, 12.6, 15.0, 15.8, 16.0, 17.0, 16.4, 16.4, 17.3, 17.6 (2009–2020) - In percent of GDP: 32.7, 33.6, 40.7, 34.9, 37.1, 36.0, 33.6, 33.0, 29.2, 26.8, 26.0, 24.4 (2009–2020) - Scenario with key variables at their historical averages shows external debt declining to 71.6 (value shown) and an adjustment labeled -13.5. ### Key Macroeconomic Assumptions Underlying External Baseline (Selected) - Real GDP growth (in percent): 2009: 3.9; 2010: 7.5; 2011: 10.8; 2012: 10.7; 2013: 8.4; 2014: 6.2; 2015: 6.1; 2016: 6.4; 2017: 6.7; 2018: 7.1; 2019: 6.3; 2020: 6.0 - GDP deflator in US dollars (change in percent): 1.1, 4.2, 4.4, 3.7, 3.7, 2.1, 2.2, 2.1, 2.0, 2.0, 2.0, 2.0 (2009–2020) - Nominal external interest rate (in percent): 5.7, 5.4, 5.5, 4.8, 4.6, 4.1, 4.0, 4.0, 4.1, 4.2, 4.3, 4.3 (2009–2020) - Growth of exports (US dollar terms, in percent): 11.5, -5.0, 25.6, 22.8, 4.6, 5.3, -2.3, 7.8, 12.8, 13.2, 8.0, 8.2 (2009–2020) - Growth of imports (US dollar terms, in percent): -16.6, 20.3, 44.8, 7.1, 5.3, 6.1, -2.1, 6.6, 4.5, 7.1, 8.4, 7.4 (2009–2020) - Current account balance, excluding interest payments: 5.9, -5.6, -10.6, -4.9, -7.6, -7.9, -6.3, -5.9, -4.3, -2.5, -1.9, -1.8 (2009–2020) - Net non-debt creating capital inflows: 5.2, 8.9, 9.4, 9.1, 10.8, 9.9, 10.0, 9.8, 9.6, 7.8, 7.2, 6.7 (2009–2020) ### External Debt Sustainability: Bound Tests and Shock Scenarios - Shocks applied include permanent one-half standard deviation shocks to interest rate, growth rate, and current account balance; one-time real depreciation of 30 percent in 2015; permanent 1/4 standard deviation shocks in some combined scenarios. - Representative figures from bound tests (external debt in percent of GDP; baseline and scenarios): - Baseline projection average shown as 101 in boxes for several charts. - Historical scenario average shown as 72 in one chart. - Interest rate shock box: 104 (scenario) vs Baseline: 101. - Current account shock box: 116 (scenario) vs Baseline: 101. - Non-interest current account shock box: 114 (scenario) vs Baseline: 101. - Combined shock box: 159 (scenario) vs Baseline: 101. - Real depreciation shock (30% depreciation) shows larger debt path (values plotted; baseline 101). - Graphs show gross financing need under baseline (right scale) and scenario paths for 2010–2020p. *Source: IMF staff.* ### Annex VI. Existing and Forthcoming Free Trade Agreements ### Annex VI. Existing and Forthcoming Free Trade Agreements ### Overview of Panama’s FTA strategy and timeline - Panama has been actively promoting further integration to the world economy through Free Trade Agreements (FTAs). - A total of thirteen FTAs have come into force since the first one in 2003. - Agreements with the United States, Canada and the European Union came into effect during 2012 and 2013. - An FTA with the EFTA states (Iceland, Liechtenstein, Norway and Switzerland; jointly negotiated with Costa Rica) came into effect in 2014, and covers trade in goods, services, investment and government procurement. - EFTA states eliminated all custom duties on industrial products (including fish) immediately, whereas Panama will do so after a transitional period, with all trade in such goods to be duty free by 2029 at the latest. - Panama has now signed agreements with all four members of the Pacific Alliance. The FTAs with Mexico and Colombia are expected to come into effect in 2015. - Panama is an observant state in the Pacific Alliance, composed by Chile, Colombia, Mexico and Peru. Signing FTAs with all four members is a prerequisite for accession to the Alliance. ### FTAs in effect — partner, in effect since, % of duty-free lines, final reduction program ends - El Salvador — In effect since April 11, 2003 — 82.44 — 82.44 — 2013 - Taiwan Province of China — In effect since January 1, 2004 — 95.07 — 95.07 — 2013 - Singapore — In effect since July 24, 2006 — 76.18 — 97.42 — 2021 - Chile — In effect since March 7, 2008 — 74.30 — 97.30 — 2022 - Costa Rica — In effect since November 23, 2008 — 88.70 — 97.50 — 2026 - Honduras — In effect since January 8, 2009 — 8.10 — 87.20 — 2026 - Guatemala — In effect since June 20, 2009 — 84.89 — 97.39 — 2028 - Nicaragua — In effect since November 21, 2009 — 86.50 — 90.50 — 2024 - Peru — In effect since May 1, 2012 — 58.05 — 96.50 — 2029 - United States — In effect since October 31, 2012 — 73.32 — 99.97 — 2031 - Canada — In effect since April 1, 2013 — 75.70 — 98.80 — 2031 - European Union — In effect since August 1, 2013 — 50.89 — 94.62 — 2027 - EFTA (Iceland, Liechtenstein, Norway, Switzerland) — In effect since August 29 / September 5, 2014 — 59.51 / 59.51 / 59.46 / 59.48 — 93.24 / 93.24 / 93.27 / 93.29 — 2028 ### FTAs under negotiation (status) - Colombia — Concluded September 20, 2013 - Mexico — Concluded April 3, 2014 - Israel — Second round March, 2015 ### Trade and FDI shares with FTA partners (2013) - Partner countries with which an FTA is currently in force represented about 45 percent of trade in goods in 2013. - Partner countries with which an FTA is currently in force represented about 40 percent of FDI inflows in 2013. - More precisely, exports and imports with partners with FTAs currently in force amounted in 2013 to about 70 and 40 percent, respectively. - Colombia and Mexico combined represented around 2 percent of exports and 8 percent of imports in 2013. - FDI flows with Colombia and Mexico amounted to 14 percent of total FDI flows. ### Expected effects of recent and forthcoming FTAs - Conservative estimates indicate that, all else equal, signing an FTA increases bilateral trade by 77 percent. - Given their weights in bilateral trade: - The FTA with the U.S. is expected to increase Panama’s total trade by about 18 percent. - The FTA with the European Union is expected to increase Panama’s total trade by about 7 percent. - The FTAs with Mexico and Colombia would cause an increase in trade of about 6 percent. - The FTAs that have been signed with major partners are expected to support FDI flows over the medium term. ### Empirical basis and note - The 77 percent estimate is derived from the specification in Rose (2004, “Do We Really Know That the WTO Increases Trade?” American Economic Review, Vol. 94 No. 1, pp. 98-114). The specification including tariffs and fixed effects has a point estimate of 0.57 (s.e. of 0.18), which translates into an increase in trade of exp(0.57)-1, or 77 percent. *Source: Panama National Authorities, and WTO Trade Policy Review Panama 2014; Staff calculations as presented in Annex VI.* ### 1. The Panamanian authorities thank the IMF staff for their constructive assessment of ### The Panamanian authorities thank the IMF staff for their constructive assessment of ### Recent Economic Developments - Real GDP increased by 6.2 percent in 2014, compared to 8.4 percent in 2013. - Unemployment was 4.8 percent in 2014. - The Economic Commission for Latin America and the Caribbean projects Panama's economy will grow 7 percent in 2015. - Growth forecasts for the next five years: - Staff’s forecast: average 6.5 percent per year. - Administration’s projections in the 2016-2020 Medium Term Fiscal Framework (MTFF): average 6.7 percent per year. - Government five-year investment plan priorities: housing, education, water and sanitation, transportation, and security; to be developed alongside major infrastructure projects including the Canal expansion, the second line of Panama City’s metro, a new copper mine, and the fourth bridge over the Panama Canal (to be bid in the third quarter of 2015). - Gross domestic investment expected to remain close to 30 percent of GDP. - End-of-year consumer price inflation declined to 1.0 percent in 2014 from 3.7 in 2013. - Contributing factors: lower commodity prices (particularly oil) and a price control policy on 22 food-basket products. - The number of products under price controls will remain the same until July 2015; authorities report no detected supply shortages to date. - Current account deficit decreased slightly in 2014, to 12.0 percent of GDP. - Large deficit largely reflects infrastructure projects with high import content. - Capital account surplus composition is mostly associated with robust foreign direct investments. ### Fiscal Policy and Public Financial Management - After July 1, 2014, the Ministry of Economy and Finance (MEF) implemented a rigorous expenditures contention plan. - A moratorium law allowed late tax payments to be settled without interest and other surcharges until the end of 2014. - Combined fiscal impact of the two measures: over 1 percent of GDP. - National Assembly increased the SFRL ceiling for the non-financial public sector (NFPS) deficit from 2.7 to 4.1 percent of GDP in 2014; final NFPS deficit outturn was 3.4 percent of GDP according to MEF information. - From 2015, a provision in the law of Panama’s Sovereign Wealth Fund (Fondo de Ahorro de Panamá – FAP) takes effect: - Contributions to the National Treasury from the Panama Canal Authority (Autoridade del Canal de Panamá – ACP) in excess of 3.5 percent of GDP to be deposited in the FAP. - The fiscal deficit ceiling to be applied to the “adjusted NFPS deficit”, calculated as the overall fiscal deficit adjusted by the difference between ACP’s contributions and 3.5 percent of GDP. - Authorities budgeted the NFPS deficit for 2015 at 3.7 percent of GDP (using projected ACP contributions of 1.8 percent of GDP), instead of 2 percent as originally provided in the SFRL. - NFPS debt (excluding ACP debt) increased in 2014 to 39.5 percent of GDP, up from 36.8 percent in 2013. - Expected to return to a declining trend and reach the MTFF target of 34 percent of GDP by end-2020. - Credit rating agencies’ assessments: - Panama’s sovereign debt ratings: BBB according to Fitch and Standard and Poor's, and Baa2 according to Moody's, all with a stable outlook. - In March 2015 Panama issued a USD 1.25 billion ten-year bond priced at a spread of 178 basis points above ten-year U.S. Treasury bonds, corresponding to an effective interest rate of 3.89 percent per annum. - MEF is strengthening the re-established Dirección General de Ingresos (DGI): - Measures: increased budget, new hires, more intensive training, and improvements in information systems for tax information cross-referencing. - Public financial management improvements: - New centralized financial operations system to be fully operational by end-2015 in all central government agencies. - Implementation of the Single Treasury Account to be completed over the next two to three years. - Electricity subsidies: - Targeting revised to benefit homes and small businesses consuming less than 400 kWh per month. - Projected reduction in subsidies from USD 400 million in 2014 to USD 62 million in 2015. ### Financial sector - Banking system described as stable, well capitalized, and highly liquid. - Superintendence of Banks (Superintendencia de Bancos de Panamá – SBP) indicators improved at end-2014 versus end-2013 (see staff report Box 2 and Table 5 for details). - Capital adequacy ratio (CAR) stood at 14.8 percent, above the statutory 8 percent requirement. - According to the SBP: - Credit to the private sector increased 11.7 percent in 2014 (mainly to housing, domestic consumption, and construction). - Deposits increased 8 percent in 2014. - Regulatory and supervisory enhancements: - 2014 banking regulations issued on cross-border consolidated supervision. - January 2015 regulations on banks’ capital requirements following Basel III standards. - Banks and banking groups required to increase capital starting January 2016 and be fully compliant with Basel III by 2019. - SBP widened supervisory network to include leasing and factoring companies, financial cooperatives, fund-remittance companies, and debit and credit card companies. ### Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) - An Action Plan agreed with the Financial Action Task Force (FATF) to strengthen Panama’s AML/CFT framework will be reviewed by FATF by end-June 2015. - Key legal, institutional and legislative actions implemented: - An AML/CFT Policy Unit was created in the MEF in October (last October). - The unit issued policy guidelines and strengthened coordination among domestic AML institutions, including the Financial Intelligence Unit. - Budget allocations for the Financial Intelligence Unit tripled in 2015 to strengthen technical capabilities, response capacity, and international cooperation. - New penal code legislation approved in March (this year) classifies additional activities related to money laundering and financing of terrorism as crimes and improves conditions for judicial assistance and cooperation with foreign institutions. - New AML/CFT legislation approved by the National Assembly on April 27, 2015 to strengthen controls and reinforce domestic and international cooperation; creates the Intendance of Supervision and Regulations within the MEF to exert surveillance on sixteen sectors of business activities and professions subject to AML/CFT controls. - Bearer shares law changes (approved April 2015): - All common stocks must be registered with an authorized custodian by December 2015. - The former 2013 law had a transition period until 2018 for registration; the new law also allows converting bearer shares into nominative shares. - Authorities emphasize these measures as demonstrating determination to support Panama’s role as a banking center and to strengthen AML/CFT regulations and institutions. *Panamanian authorities’ statement to IMF staff (content unit: _cr15237).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15237.pdf_