IMF: Panama will Grow 6% in 2019
Posted on 2019-01-11
IMF: Panama will Grow 6% in 2019
Posted on 2019-01-11
In the words of the International Monetary Fund (IMF), the Central American country’s economy is projected to remain among the most dynamic on the continent, as the outlook remains positive.
From the IMF statement:
On December 12, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation  with Panama.
Despite slowing in 2018, Panama is expected to remain among the most dynamic economies in the region with strong fundamentals. Growth is estimated at 3.7 percent in the first half of 2018 (compared to 5.4 percent a year ago), reflecting a sharp deceleration in key sectors including construction, which was affected by a prolonged strike in April/May. The unemployment rate increased marginally to 5.8 percent in March 2018 from a year ago, reflecting less dynamic activity. Inflation remains subdued at 0.8 percent (year on year) in September 2018, (compared to 0.5 percent in December 2017) despite supply shocks that have increased food and fuel prices. The overall deficit of the Non-Financial Public Sector (NFPS) reached 1.6 percent of GDP in the first half of 2018 (compared to deficit of 0.2 percent of GDP in the first semester of 2017), due to accelerated budget execution to support the economic weakening. The external current account deficit stood at 8.0 percent of GDP in 2017, as a significant increase in oil imports (fueled by higher international oil prices) was offset by strong service exports, driven partly by additional revenue from the expanded Panama Canal. Credit growth has decelerated as financial conditions have started to tighten.
The outlook remains positive, albeit set against heightened downside risks. Growth is projected at 4.3 percent in 2018, but to rebound to 6.3 percent in 2019 supported by the opening of a large mine (Minera Panamá) and a recovery in construction, and subsequently converge to its potential of 5½ percent over the medium term. Inflation is expected to average about 2 percent. The external current account deficit, mostly covered by FDI, is expected to reach 9 percent of GDP in 2019 and gradually decline to about 5½ percent of GDP over the medium term. Fiscal policy is expected to remain guided by the amended Fiscal Responsibility Law (FRL). The overall NFPS deficit is projected to increase to 2 percent of GDP in 2018–19 and gradually fall to 1½ percent of GDP over the medium-term, keeping public debt sustainable and below the FRL indicative of target of 40 percent of GDP. Key risks relate to setbacks in implementing the remaining Financial Action Task Force (FATF) recommendations and making continued progress on tax transparency, continued oversupply in the domestic property markets, delays in completing the large mining project (following the recent Supreme Court ruling which creates uncertainty about some elements of the contract), political uncertainty ahead of the upcoming elections; a sharper-than-expected tightening of global financial conditions, and rising trade protectionism.
Executive Directors commended Panama’s impressive growth performance and noted that macroeconomic fundamentals remain solid, with growth set for a rebound in the near term. Directors considered that, while the outlook remains positive, the balance of risks is tilted to the downside. Against this background, they called for sustained policy efforts to strengthen the AML/CFT framework and enhance tax transparency to preserve Panama’s competitive advantage as a regional financial center. They also recommended measures to enhance financial sector resilience and reforms to facilitate continued robust and inclusive growth.
Directors welcomed the recent good progress on technical compliance with FATF standards, bringing Panama on par with its peers, while underscoring the importance of effective implementation of the Anti Money Laundering/Combatting the Financing of Terrorism (AML/CFT) framework. In this context, they encouraged the authorities to continue strengthening supervisory capacity for AML/CFT oversight, including through risk–based approaches, and further addressing AML/CFT risks to which Panama is exposed. Directors emphasized the need to promptly address the remaining shortcomings in the AML/CFT framework, including making tax crimes a predicate offense to money laundering and ensuring the availability of timely and accurate beneficial ownership information of entities incorporated in Panama. In addition, the authorities should advance the implementation of tax transparency initiatives to ensure a successful Global Forum assessment against enhanced standards.
Directors were encouraged by the authorities’ continued commitment to a prudent fiscal stance and agreed on the importance of preserving the track record of fiscal discipline to keep the public debt?to?GDP ratio on a downward trajectory. They concurred that the revised deficit ceilings provide the budgetary space to accommodate additional capital spending, given the softening activity this year, but recommended a gradual withdrawal of the stimulus in the near term as growth gathers pace. Directors also saw scope for raising tax revenue through improvements in revenue administration to support key social expenditures. They welcomed modifications to the social fiscal responsibility law, which simplified and enhanced the transparency of the fiscal rule; and noted the approval of a law to establish a fiscal council, which further bolsters the fiscal framework.
Directors noted the stability of the financial system and the continued progress in financial sector reforms, including the alignment of prudential regulations with Basel III. They urged the authorities to strengthen risk?based supervision and reiterated the importance of putting in place robust frameworks for crisis management and bank resolution. In addition, Directors recommended measures to further strengthen macro?prudential policies and systemic risk oversight, including through improved inter?agency coordination.
Directors called for a reinforcement of the structural reform agenda to sustain high potential growth, while also reducing inequality. They agreed on the need to sustain productivity growth through reforms to improve skills and education quality, attract talent, and further improve the investment climate. Strengthening social policies to continue reducing poverty, improve income distribution, and ensure inclusive growth over the medium?term were also encouraged.