Meeting the New Challenges
The IMF’s Article IV report published on March 19th is in tune with our concerns and perspectives in regards to macroeconomic conditions: strong growth projections remain in place (around 5.9%-6% for 2016); the fiscal deficit in 2015 was 2.8% of GDP not the 2.0% that the MEF reported after the “adjustment”; a lower debt-to-GDP ratio (35%) could be achieved if overall deficit drops to 1.2% of GDP, although we are less optimistic about this project; and the new bond issue will meet all the requirements for external financing (including repayments).
In regards to the financial system, some small banks in Panama are operating without lines of credit by foreign banks and the IMF warns about the need for a temporary liquidity facility to address systemic shocks in the absence of a lender of last resort, private or official. This is not a new proposal, but given the current market conditions, we anticipate new regulations regarding liquidity standards, additional capital requirements and a contingency line of credit for the system as a whole, but not a deposit insurance.
OECD conditions (related mostly to tax evasion and financial cross-border information instead of money laundering) challenges Panama’s fiscal institutions and the nature of some banking services based on secrecy in all but a few cases. The consequences of Panama’s rejection of OECD pressures have not been evaluated, but certainly will touch on the financial system and Panamanian international law firms.
We do not foresee major changes in correspondent banks’ risk exposure in Panama in the near future and a consequent consolidation of the market into fewer banking firms of larger average size. Our conclusions about credit constraints and potential consolidation of the system remain valid regardless of the positive results of FATF. We discuss issues related to the financial system in detail below.
After rising by 7.9% on average in 2010-2014, real GDP continued its slight deceleration path by growing 5.8% in 2015. Although it was the lowest growth rate since 2010, macroeconomic conditions are favorable; the inflation rate, as measured by the CPI, is at its lowest rate in 12 years (1.2% in February 2016) and unemployment remains near its natural rate (5.1% in 2015). Sectors driving growth in 2015 in terms of contribution to GDP were construction (6.8%), commerce (4.9%), realty and services to business (6.1%), transportation and communications (4.7%) and financial intermediation (10.4%). These sectors continue to drive growth in 2015, although far from the double-digit growth seen in previous years.
The National Assembly ratified the “Colon Free Port Bill”, which extends the tax benefits of the Colon Free Zone to 16 streets of the city and nearby areas and allows limited retail trade. Representatives of the CFZ Association are still demanding reductions in taxes and fees, as well as the elimination of Colombia’s tariffs on textiles, apparel and footwear.
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