Fiscal results follow the growth composition: Dynamic exports and investment, and stagnant private consumption
The Monthly Index of Economic Activity grew 4.1% during Q4 2017 and 5.2% from January to December compared to the same period in 2016. The main drivers were transportation and communications including canal, ports and air transportation; construction; mining; and water and electricity supply—most of them export-oriented activities.
Based on IMAE´s Q4 growth, we estimate real GDP growth for Q4 between 4.8% and 5.1%. This projection is consistent with our real GDP growth forecast for 2017 of 5.4%, which is based on higher private and public investment projects (in areas such as energy, ports, public transport) as well as exports (the expanded Canal, ports and air transportation), and lower private consumption (which affects retail commerce) and residential and non-residential construction.
After the 0.7% rise in 2016, and 0.9% last year, CPI growth is likely to accelerate once more starting this year considering WTI oil prices increasing by 20.5% YoY in January. Although CPI increased only by 0.4% during January, the pass-through of international prices to domestic inflation is likely to have an effect in the following months.
The primary position of the NFPS improved, from -0.1% of GDP in 2016 to 0.1% in 2017, the first time it turns positive since 2012. Thus, the overall balance also improved from -1.8% to -1.6%, still above the Fiscal and Social Responsibility Law (LRSF), which has a limit of -1.0% of GDP. However, as in the previous year, the adjustment was equal to the exact amount that was required to comply with the LRSF.
The increase in revenues from external service activities (non-tax revenue) offset the low growth of tax revenue (associated with domestic demand activities). This behavior follows growth dynamic for 2017: a buoyant external sector (Canal, ports, and air transportation) and private and public infrastructure investment, and stagnant private consumption. In fact, the Panama Canal transfers (a non-tax revenue) increase represented 75% of NFPS total revenue variation in 2017, in comparison with tax revenue (11%).
Total expenditure rose by 5.8% in 2017. Current expenditure increased 8.7% mainly due to a rise in the number of employees (4.0%) and payroll expenditure (15.5%) in the public sector. Capital expenditure decreased by 0.7%, which shows a concerning downward trend since 2012, even though large infrastructure investment projects such as the second Panama metro line are being executed. Since these projects are financed under a turnkey modality, they are not reflected in the fiscal balance until they are finished (the fiscal balance is cash-flow based). This liability, estimated at US$ 1.1 billion, is also not reflected in the public debt.
Public debt totaled US$ 23.4 billion in 2017, which accounts for 38.2% of GDP. This represents an increase of US$ 1.8 billion (8.2%) with respect to the balance registered at the end of December 2016. The Public debt to GDP ratio goes along with the LRSF that requires net public debt (which subtracts net assets of the Panama’s savings fund) to remain below 40% of GDP.
We will follow up on the tug-of-war between Varela and the legislators after the President´s defeat in his quest for appointing two Supreme Court judges. Recent Comptroller´s audits of transfers received from Central Government to legislators may have given Varela an upper hand in this infighting.
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