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PANAMA
1. General trends
In 2011, the Panamanian economy grew by 10.6%, continuing the high growth rates it has seen in recent years. The expansion was driven mainly by public and private infrastructure megaprojects. Over the past 10 years, Panama has grown at an average annual rate of 7.3%.
Numerous sectors showed vigorous growth in 2011, in particular mining (18.4%), construction (18.2%), commerce (15.9%) and transport and communications (13.7%).By contrast, activity in the fishing sector slumped by 21.9% owing mainly to weather events.
High activity levels brought the jobless and open unemployment rates down sharply in 2011, to 4.5% and 2.9% respectively. However, the inflation rate measured by the variation in the consumer price index between December 2010 and December 2011 rose to 6.3%.
The non-financial public sector (NFPS) deficit expanded to 2.3% of GDP in 2011 (1.9% in 2010).
The current account deficit widened to 12.7% of GDP, compared with 10.8% in 2010. Foreign direct investmentinflows edged up to 9.1% of GDP, compared with 8.8% in 2010.
2. Economic policy
(a)Fiscal policy
The NFPS closed 2011 with a deficit of US$ 703 million, which was equivalent to 2.3% of GDP (compared with 1.9% in 2010). This result is in line with the Fiscal Responsibility Act, which established an upper limit of 3% for 2011. The upper limit was approved by Cabinet Council resolution No. 103 of June 2011 in order to meet spending requirements resulting from floods, an eventuality provided for under the Act. The government deficit was largely fuelled by higher central government capital spending (24.2%) on infrastructure works and —to a lesser extent—the expansion of current spending (8%). The primary balance posted a surplus of 0.1% of GDP, compared with the 0.8% surplus in 2010.
Tax revenue in 2011 totalled US$ 3.536 billion,14% more in nominal terms than in 2010and equivalent to 11.4% of GDP (11.6% in 2010).Tax receipts were up largely because of higher indirect tax revenue, which rose by 25% compared with the previous period. Direct tax revenue was up by 3.5%. Total NFPS expenditure rose by 14.6% compared with 2010. This increase stems from an expansion in central government expenditure, with current expenditure up by 12% and capital expenditure up by 20.6%.
NFPS capital expenditure on infrastructure projects amounted to US$ 2.698 billion, a 20.6% increase over the previous year. This sum represents 8.8% of GDP, compared with 8.4% in 2010. Current expenditure expanded by 12% in 2011 (accounting for 18.8% of GDP compared with 19.4% the previous year) as the current administration continued to promote various conditional social transfer programmes, including the universal scholarship programme, the “100 para los 70” programme, which provides US$ 100 per month to older persons who have no social pension, the Opportunities Network programme and household subsidies for electricity and liquefied petroleum gas.
In 2011, total public debt shrank to 41.8% of GDP, compared with 43.7% in 2010. As in recent years, the proportion of domestic public debt continued to grow while external debt continued to fall.
In June 2011 the “Market makers” programme was launched together with the first auction of treasury notes maturing in 2018. The main aim of the programme is to increase the liquidity and depth of the secondary public debt marketwhile substituting external sources of financing for internal sources, thereby helping to diversify the public debt portfolio and develop the domestic capital market.As at March 2012, treasury notes worth US$ 938 million had been issued under the programme.
In August 2011, Moody´s upgraded the country’s risk rating from stable to positive, withininvestment grade. This followed an identical move by Fitch Ratings.
(b)The international banking centre and credit policy
Domestic lending to December 2011 remained brisk. The domestic credit portfolio expanded by 17.3% in nominal terms compared with the previous period (13.3% the previous year), which helped to boost local GDP. The five most important sectors of the Panamanian economy accounted for 89.8% of the total domestic credit portfolio, which breaks down as follows: commerce (27.9%), mortgages (26.6%), personal consumption (19.7%), construction (9.7%) and industry (5.9%). The growth in domestic lending in 2011 was driven by the solid performance of these five sectors. The three largest sectors —commerce, mortgages and personal consumption— expanded in nominal terms by 24%, 7.3% and 9.5%, respectively, while industry and construction grew by 17.9% and 11.5% respectively.
Local and external credit portfolio quality indicators show that the banking centre in Panama is sound. The arrears rate of the local banking system was 2.7% in 2011, down from 3.4% in 2010. The external credit portfolio stood at 0.6% in 2011, compared with 0.8% in 2010.Another indicator of the solvency of the Panamanian banking system is the capital adequacy ratio (capital as a percentage of risk-weighted assets), which reached 15.6%, well above the 8% required by law.
Panamanian banks continue to be sound and profitable.Profits within the banking system amounted to US$ 1.314 billion to December 2011, which represents an increase of 23.1% over 2010. The return on equity was 15% to December 2011, compared with 14% in the previous period.
Real lending rates slipped by around 2.5 percentage points in 2011 compared with 2010, standing at 1.3% for credit to commerce and industry and 3.6% for housing. The real interest rates for three- and six-month deposits were negativeat -3.8% and -3.3% respectively. Real interest rates fell sharply compared with the rates recorded in 2010 mainly because of the abundant liquidity in the Panamanian financial system and the relatively high inflation that the country has posted in recent years.
(c)Trade policy and other policies
In 2011, the current administration continued its policy efforts geared to meeting the conditions for removing Panama from the list of tax havens. To that end, it implemented a programme for the conclusion of double taxation treaties, mainly with member countries of the Organization for Economic Cooperation and Development (OECD). In addition to the treaties signed in 2010 with Luxembourg, Mexico, the Netherlands, Portugal, Qatar, the Republic of Korea, Singapore and Spain, negotiations were under way in 2011 —albeit at different stages— with Bahrain, the Czech Republic, Israeland the United Arab Emirates.
In April 2011, the National Assembly of Panama adopted law No. 40 relating to the agreement on fiscal cooperation and the exchange of tax information and interpretive memoranda between Panama and the United States of America. The agreement establishes a legal framework for the exchange of information on the administration and application of the internal legislation of each country, information concerning the determination, assessment, enforcement and collection of taxes with respect to taxpayers, prosecution of tax offences and others. An important aspect of the agreement is that it attests to the Government of Panama’s commitment to eliminating corporations with bearer shares, which will enhance transparency and improve fiscal control.
The trade facilitation treaty, a second agreement with the Government of the United States, was ratified in October 2011 by the United States Congress and is likely to enter into force in late 2012 or early 2013. The treaty consolidates unilateral preferential access for Panamanian products in the United States market and establishes the more favourable conditions necessary to promote goods and services exports from Panama to the United States, its main trading partner.
3. The main variables
(a)Economic activity
The vigorous growth posted in 2011 reflects the robust performance of most economic sectors. The sectors that expanded the most were mining (18.4%), construction (18.2%), commerce (15.9%) and transport and communications (13.7%). Excluding the mining sector, which is a relatively minor sector in the Panamanian economy, the other three sectors accounted for a combined 45% of GDP. The construction and mining sectors expanded considerably as a result of the public infrastructure projects implemented under the government’s five-year plan. The projects include the expansion of the Panama Canal, the clean-up of the Bay of Panama, the extension of the coastal strip, the construction of the metro in Panama City, the expansion of the international airport and the building of roads and hydroelectric power plants. Wholesale and retail trade shot up in 2011, especially wholesale trade (25.1%), as a result of higher purchases of construction materials, machinery and equipment. Retail trade was up by 9.2% on the strength of sales of food, beverages and automobiles.
The transport sector —the largest economic sector— expanded by 13.7%. Operations in the transport and communications sector remained buoyant, mainly as a result of container traffic, air transport and ships sailing through the Panama Canal, as well as railway operations. Telecommunications grew principally as a result of rising mobile telephoneand Internet use. Other sectors enjoying vigorous growth were hotel and restaurant services, owing to the surge in tourist arrivals, leisure and entertainment services, and electricity and water production, which was due to the expansion of thermal energy and hydropower, among other factors. Continuing the trend observed in recent years, the fishing sector suffered a further slump (21.9%)owing to the decline in production of tuna and fish fillets.
The number of vessels crossing the canal in 2011 was 14,684, up by 3.2% from the 14,230 recorded in 2010. A total of 322.1 million net tons was transported in 2011, that is, 7.1% more than in 2010. This tonnage, together with the selective increase in the rates applicable to some of the traffic, resulted in a 16.7% nominal rise in toll income over the previous year.
(b)Prices, wages and employment
The rate of inflation measured as the variation in the consumer price index between December 2010 and December 2011 was 6.3%, compared with 4.9% the previous year. The categories with the steepest price rises were transport (12.5%), caused by the sharp rise in petroleum prices on international markets, food and beverages (5.9%) and clothing and footwear (5.7%).
The jobless and open unemployment rates fell considerably in 2011 to 4.5% and 2.9% respectively, compared with 6.5% and 4.7% the previous year. According to the quarterly survey of formal establishments with five or more employees, the economic sectors that recorded the sharpest increase in the number of employees were wholesale trade(7.9%) and retail trade (4.8%). According to the same survey, average wages went up by 9% in nominal terms. The largest gains were again in wholesale trade (up 13.5%) and retail trade (up 10.2%).
(c)The external sector
In 2011, the current account showed a deficit of US$ 3.892 billion, equivalent to 12.7% of GDP, compared with the 10.8% deficit the previous year. The wider deficit reflects the increase in the goods trade deficit from 17.1% of GDP in 2010 to 19.5% of GDP in 2011.
Exports break down into domestic exports (which accounted for 5.4% of total exports) and re-exports by companies operating in the Colón Free Zone (which made up 94.6% of total exports). Domestic exports were up by 8.3% over the previous year mainly as a result of a surge in exports of gold (66.1%), bananas (32.4%) and scrap iron (39.7%). Re-exports through the Colón Free Zone rose by 20.4% over the previous year.The main products sold werechemical industry goods(39.2%), textiles and manufactures(17.8%), electrical machinery (16.2%) and end-use goods (8.9%).
Domestic imports expanded by 24.9% in 2011 compared with the previous period. This result was triggered by the jump in the value of imported goods (mainly capital goods) to meet final demand —which shot up by 35.5%— and the depreciation of the dollar against the currencies of the country’s main supplier nations.
The wider goods trade deficit was partially offset by an increase in the balance of services surplus, which stood at US$ 3.775 billion in 2011, a 10.3% increase over the previous year. The main sources of this surplus were additional Panama Canal toll revenue (17.8%), container port services (23.3%) and the sale of non-resident tickets (14%). In addition, the arrival of 4.59 million visitors brought in an additional US$ 1.925 billion in foreign currency.
The income balance ran a deficit of US$ 1.799 billion (equivalent to 5.9% of GDP)owing mainly to the repatriation of US$ 2.094 billion in profits generated by local companies operating with capital from non-resident investors and the payment of US$ 596 million in interest on foreign debt.
The surplus on the capital and financial account shot up by 45.2% over the previous year to reach US$ 4.224 billion (13.8% of GDP). This surge was fuelled by increasing foreign direct investment inflows and non-resident depositsin and borrowing frombanks operating in Panama. Foreign direct investment inflows totalled US$ 2.790 billion (9.1% of GDP), an increase of 18.7% compared with the previous period.
4. General trends in the first quarter of 2012
Between January and March 2012, the monthly index of economy activity measured in terms of the original series went up by 9.2% (9.1% adjusted for trend and cycle). The sectors having the greatest impact on the economy were the same sectors that recorded strong growth in 2011. In 2012, the economy is expected to grow by 8% on the strength of high investment in infrastructure under the current administration.
In April 2012, France removed Panama from the list of tax havens. This followed the ratification of the double taxation treaty between the two countries in December 2011.
Year-on-year inflation measured by the variation in the consumer price index edged up to 6% in April 2012 following year-on-year price rises in several sectors, in particular food and beverages (7.9%) and transport (6.6%).
Further pressure will be brought to bear on the current account in 2012, because of a surge in capital goods imports for infrastructure projects to meet the demand of the buoyant economy and an increase in interest payments on the higher sovereign debt incurred in order to finance them. The fiscal deficit is expected to widen slowly, within the limits established by the Fiscal Responsibility Act.