IMF Survey : Panama: Growth to Remain Buoyant

IMF News, March 28, 2013

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Authors: Corinne Deléchat, Svetlana Vtyurina IMF Western Hemisphere Department March
Published: March 28, 2013

With average annual growth rates of 8.5 percent, Panama’s per capita GDP has more than doubled over the past decade.
Real GDP growth is estimated to have reached 10.7 percent in 2012.
Growth performance has been driven by a steady rise in public and private investment in a stable economic environment buttressed by prudent policies.
The Panama Canal expansion and large public infrastructure projects have buoyed the economy.
Macroeconomic stability anchored by full dollarization has favored the expansion of domestic services and activities centered around the Panama Canal and the Colón Free Zone.

Gross public debt declined from 66.2 percent of GDP in 2005 to 39.2 percent of GDP in 2012 following a successful fiscal consolidation.
Panama obtained its investment grade in 2010.
Following a recent upgrade by Moody’s, Panama is now among the highest rated emerging markets, on par with Brazil, Mexico, and Peru.
The financial system exhibited resilience amid recent global market turbulence due to the banking system’s diversified ownership structure, low reliance on wholesale funding, and high capital and liquidity ratios.

For 2013, the IMF expects real GDP growth to decline to 9 percent and to gradually converge to its potential rate of 6–6½ percent over the medium term as capital spending unwinds.
As a highly open economy, both financially and commercially, Panama is vulnerable to external shocks and is closely linked to both the U.S. business cycle as well as to world trade, through the Panama Canal.
External real and financial shocks, such as lower demand from the United States or a sudden stop in capital flows to Latin America, could have a significant impact on Panama’s output and credit growth.
Strong fundamentals and low vulnerabilities—including a reliance on stable services exports and relatively small and shallow capital markets—would mitigate the impact of external shocks.
The creation in 2012 of a Sovereign Wealth Fund to save the additional revenue from the expanded Panama Canal (starting in 2015) will enhance the economy’s resilience to shocks over the medium term.

New investment opportunities stemming from infrastructure development and the expanded Panama Canal, the recent approval of Free-Trade Agreements with the United States, the European Union, and Canada, as well as a large private mining project should help support growth over the medium term.
Poverty and inequality, although declining, remain fairly high compared with peer countries in the region.
There is a scarcity of skilled workers despite historically low unemployment; youth unemployment is high.
Further upgrades to public institutions and financial sector supervision and infrastructure will be required to ensure Panama’s successful transition to a modern service-based economy and a world-class financial center.
Improvements in public financial management are essential to ensure that the large public investments in infrastructure are of high quality.

Adopt a somewhat tighter fiscal stance to mitigate overheating risks and build fiscal buffers.
Boost human capital and maintain labor market flexibility to improve productivity and competitiveness.
Continue initiatives to increase school attendance, modernize curricula to align them with skills demand, enhance access to technology in the classroom, and increase the provision of vocational training in partnership with the private sector.
Raise tax revenue—which, at 12 percent of GDP, remains low compared with peers—to sustain an appropriate level of social and capital spending.
Strengthen tax and customs administration by continuing to improve tax education, strengthen controls, and further reduce tax evasion and exemptions.

Source: IMF Survey : Panama: Growth to Remain Buoyant (March 28, 2013).