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Panama's National Debt and Budgets

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Panama debt continues upward surge

Like Panama's high rises, debt continues to grow

PANAMA’S Non-Financial Public Sector (NFPS) debt increased by $1.037 billion in a single month, according to the latest report from the Public Credit Department of the Ministry of Economy and Finance (MEF).
According to the report, in April 2017 the debt totaled $21,922.8 billion and, a month later, it amounted to $22,959.5 billion .
In May 2017, external public debt stood at $18,098.2 billion and domestic public debt at $4,861.3 billion, said the report.

Market instability
According to the MEF, during the fifth month of the year there was great instability in the capital markets, due to investors’ concerns about the results of the French elections, the continuing clashes between the United States and North Korea and the risks associated with the political tensions of the United States, after President Donald Trump fired the FBI director, James Comey, that affected the yields of the United States Treasury Bonds.
The rise in the rate of the US Federal Reserve for the month of June means that the cost of Panama’s public debt could be increased in the short, medium and long term.

Total debt
With the increase of the NFPS debt of the NFPS in May 2017,the new balance of the total debt of public entities and companies associated to the public sector that are known exceeds $30.059 Billion.
In addition to the debt of the NFPS, which amounted to $ 22.96 billion in May 2017, the Government has other financial commitments.

Until April 2017, national government debt due to financial commitments of institutions and companies that were separated from the NFPS amounted to $2,259 billion, accounts payable of turnkey projects were$1,130 billion and commitments to pay for sentences executed and arbitration where the State was condemned were at $93 million.
In addition, Panama Canal liabilities totaled $3,618 bllion in September 2016, according to international auditors Ernst & Young.
The Panama Canal Authority notes that the Panamanian State is not responsible for the Panama Canal debt.
For the turnkey debt , the MEF only presents accounts payable until 2019. After that Metro Line 2 and others State works will be paid through this financial mechanism.
It is also important to note reports La Estrellz that the Panama Canal has several demands that could impact its liabilities . TheGrupo Unidos por el Canal, contractor’s claims for the design and construction of the third set of locks, totaled about $3.4 billion. This means that the total debt of public entities may exceed the published figures.



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Positive Outlook for Panama's Debt

S & P has improved Panama's outlook from stable to positive, re-affirming its BBB risk rating based on factors such as "high and consistent economic growth and a stable fiscal policy".

Wednesday, July 4, 2018

The rating granted by Standard & Poor's recognized " ... the progress made by Panama in recent years for the automatic exchange of tax information with 33 countries and changes in legal regulations to improve transparency in the financial system." 

From a statement issued by the Ministry of Economy and Finance:

The rating agency Standard & Poor's (S & P) improved Panama's outlook from stable to positive by re-affirming its BBB risk rating based on factors such as "high and consistent economic growth and a stable fiscal policy".

According to S & P, Panama's rating reflects the record growth of Gross Domestic Product, the effective formulation of sovereign policies, its cautious fiscal and debt management as well as the Government's actions to improve transparency and supervision in the financial system.

Read full statement (in Spanish).



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S&P’s Positive Outlook for Panama Debt

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Standard & Poor has improved Panama’s outlook from stable to positive, re-affirming its BBB risk rating based on factors such as “high and consistent economic growth and a stable fiscal policy”.

The rating granted by S & P  recognized ” … the progress made by Panama in recent years for the automatic exchange of tax information with 33 countries and changes in legal regulations to improve transparency in the financial system,” said a Ministry of Finance statement.

According to S & P, Panama’s rating reflects the record growth of Gross Domestic Product, the effective formulation of sovereign policies, its cautious fiscal and debt management as well as the Government’s actions to improve transparency and supervision in the financial system.



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The High Cost of Debt

In the first semester of this year, the Panamanian government paid $30 million more in interest payments on the public debt than the amount paid in the same period last year.

Thursday, August 9, 2018

According to official figures between the first six months of 2018 and the same period in 2017, the costs of the debt increased by 6%, rising from $537 million to $567 million. 

In line with the behavior of costs, during the first half of the year the country's public debt grew by 3.6%, rising from $23.384 billion in January to $24.233 billion at the end of June.

Projections of government revenues to meet their obligations depend on the performance of the economy, in this regard Olmedo Estrada, president of the College of Economists of Panama, told Prensa.com that " ... in a more deteriorated economic environment, revenues can decrease putting more pressure on public accounts to cope with the expenses generated by the debt."

In relation to the options to reduce the costs of the debt, Estrada explained that " ... the strategy should be different. 'The alternative is to put the breaks on the debt. The government has to make an effort to save money by eliminating unproductive activities.'"

See details of the debt figures.



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Panama  public debt nears $25 billion

Transmission entities, airport and corridors not included in debt
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The balance of public debt at the end of August was $24.721 billion, up by $1.667 billion from the previous year. In the last month, the debt grew by $334.8 million, reports the Finance Ministry.

The increase in the balance of the debt means that every year the Government has to reserve more funds to pay interest. In the first half of this  year, interest and commissions amounted to $566.6 million

Most of the debt is contracted in dollars, but there is a yen issue of $500 million from 2011 Therefore, the price of the dollar and the yen affects the balance of the debt. In the month of August, the yen gained 0.7% in relation to the dollar.

Since the administration of Juan Carlos Varela began, the public debt has grown by $7,082 billion, from $17,639.5 billion in June 2014 to the current $24.721.5 billion.

The figure of the debt does not include the commitments acquired by the National Company de Autopistas (ENA), the Tocumen International Airport and the Empresa de Electric Transmission entities, which have contracted debts to pay different investment projects and have their own income.

Since Panama obtained an investment grade in 2010, it had more access to international financing. In addition, the government’s debt capacity is greater because the growth of the economy generates more income to make against the expenses associated with the debt.

The risk rating agencies, , consider that the country’s debt capacity is greater. The outlook for the rating of sovereign debt has improved. In the five years of Ricardo Martinelli’s administration, the debt grew $6.837 billion, going from $10.802 billion in June 2009 to $ 17.639 billion in June 2014.

Therefore, the current administration has already surpassed of its predecessor with 9 months to go.

The president of the College of Economists, Olmedo Estrada, said that for this year a deficit is expected in the budget that will have to be financed with debt, and the first half of 2019, so the debt “can easily go up a billion more dollars “.



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Permission for State to Take On More Debt

In Panama, the Varela administration has submitted a bill that aims to raise the limit of public debt by $900 million more than the limit currently established.

Wednesday, September 26, 2018

The Minister of Economy and Finance, Eyda Varela de Chinchilla, presented a bill to the National Assembly to amend Law 34 on Fiscal Social Responsibility and Law 38 of 2012. 

The Assembly details in a statement that the project proposes that the maximum deficit limit of the fiscal balance of the non-financial public sector be 2.0 of GDP for fiscal year 2018; 1.75% for 2019 and 2020, and 1.5% from fiscal year 2021. 

From a statement issued by the Legislature:

A bill that modifies articles of Law 34 of 2008 on Fiscal Social Responsibility and Law 38 of 2012, by means of which the Savings Fund of Panama (FAP) is created, presented to the plenary session of the National Assembly the Executive Body, through the Ministry of Economy and Finance.  

The bill modifies the numerals 5, 23, 24, 25 and 29 and repeals the numerals 4, 6 and 8 of article 7 of Law 34 of Fiscal Social Responsibility; but, in addition, to that same Law, article 10 is modified; a new article is added on 10-A; and also article 11, 13 and 14 is modified.  

Read full statement (In Spanish).



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Panama issues bonds with maturity in 2050

Sun, 10/21/2018 - 20:17


Panama issued last Friday a debt of 550 million dollars with a new global bond, with a 4.5 percent coupon and maturity in 2050, to partially finance the investment plan of this year's state budget.

The Ministry of Economy and Finance (MEF) reported in a statement that the average weighted yield of the bond was 4.915 percent and "the demand was equivalent to 2.8 times the reference amount."

"This issuance had a high participation of investors from North America, Europe, Asia and Latin America, reflecting the confidence of the international financial community in macroeconomic conditions and credit risk of he Republic," said the ministry.

The margin of the bond (spread, in the financial language) was only 155 basis points over the 30-year US Treasury Bond "despite the volatility of global markets and the recent rises in interest rates by the Federal Reserve of the United States," the statement added.

Last April, Panama underwrote a debt with another global bond for 1.2 billion dollars, with a coupon of 4.50 percent and maturity in 2050, to also finance part of the investments included in this year's budgets.

Panamanian economy expanded by 5.4 percent in 2017 and recorded a non-financial public sector deficit (NFPS) of 1.7 percent, while public debt closed at 23,373.6 million dollars, an 8.2 percent more than the previous year, according to official rates.



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Panama Issues Debt for $550 Million

The Panamanian government issued $550 million of sovereign debt in the international market, expiring in 2050 and with an average yield of 4.92%.

Friday, October 19, 2018

According to information from the country's authorities, the resources collected will be used to partially finance the investment plan contemplated in the General State Budget for fiscal year 2018.

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From the press release of the Ministry of Economy and Finance:

October 19th, 2018. The Republic of Panama entered the international capital markets with the reopening of the Global Bond which expires in 2050 for a total of US$550.0 million and a weighted average yield of 4.915%.

Despite the global market volatility, and recent interest rate hikes by the US Federal Reserve, a spread of only 155 basis points over the 30-year US Treasury benchmark was obtained, as a reference.

This issue had a high participation of investors from North America, Europe, Asia and Latin America, reflecting the confidence of the international financial community in the macroeconomic conditions and credit risk that the Republic maintains. Demand was equivalent to 2.8 times the reference value.

The operation will partially finance the investment plan contemplated in the General State Budget for fiscal year 2018.



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President of Panama will approve state budget despite changes

Sat, 11/03/2018 - 20:24


Panamanian President Juan Carlos Varela said today he will approve bill 659 that establishes the General State Budget for the fiscal period 2019, for 23,669 million dollars, despite changes introduced to exempt some public entities from inspection.

"When you govern you have to look for the common good of citizens, and in that search for the common good I feel that what is convenient for the country is the approval of the State budget," Varela told reporters at a public ceremony.

The president said this is so "even though we disagree with some issues" that occurred during the discussion for approval in the third and last reading in the National Assembly (AN, Parliament) last Wednesday, October 31.

Varela acknowledged that it was a "very strong debate, and until the last minute we were close not to approve the budget since there were issues unaceptable to the Executive."

The important thing is that we will have the State budget "that will allow the continuity of public works by 2019, and especially job creation," said Varela.

The amendments in the budget were qualified as "goals" or "legislative branch".

The ex-attorney general and independent deputy Ana Matilde Gómez was the only vote against its approval, for the change of some articles that soften or exempt controls to the AN, in the hiring of temporary personnel, and to other entities such as Social Security, sports associations and boards.

"It is not right, I think it is not right, we should not exonerate any kind of tax; on the contrary, the Assembly needs the support of the MEF (Ministry of Economy and Finance) to develop a good personnel structure", said Gómez.

The private company expressed today its concern about the modifications that, they said, "would directly benefit public entities" such as Parliament.

The National Council of Private Enterprise (CONEP) stated that the approval of bill 659, which establishes the General Budget of the State, not only includes changes in terms of legislation on public finances, but also includes rules that promote the relaxation of controls in these institutions.

The business union requested "to clarify to the nation the basis of these modifications, since they contain intentions to avoid the corresponding inspection and dispute the provisions of the Law on Public Procurement".

"We are concerned about how to seek to approve bills that allow contracting without the minimum controls the law requires for the use of public funds."

The approved budget of 23,669 million dollars, after being readjusted upon request of deputies, is the last fiscal year of the Government of President Varela, and the next administration that assumes on July 1, 2019 will be responsible for its execution.

Last July the Executive introduced a budgetary bill for 23.318 million dollars but on October 4 was returned by the Legislative Budget Committee to be redrawn up.

The approved bill provides an adjustment of 350 million dollars in addition to what was initially budgeted by the MEF.

The budget considered the adjustment approved by Law 51, which amends Law 34 on Fiscal Social Responsibility; and Law 38 of the Savings Fund of Panama (FAP), increases to 2.0 percent the fiscal deficit, close to 350 million dollars.

It was estimated with a nominal growth of 6.9 percent of gross domestic product (GDP) and 2 percent of fiscal deficit.



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Moderator comment: This news article has been cross-posted at http://www.chiriqui.life/topic/5049-panamas-economy-investment-incentives-and-future-economic-growth-outlook/?do=findComment&comment=33230 because it contains two different but related subjects.


Panama growth for 2019 projected at 5,5% as deficit hits $1.339 billion

Posted 08/02/2019
Panama’s government said on Friday, February  8 it that the economy grew by 4.2% in 2018, a year in which the fiscal deficit hit $1,339 billion 2% of gross domestic product (GDP ).

"We estimate that (the growth) is 4.2%, but we are waiting for the Comptroller's Office to give the official figure on March 1. That estimate is similar to that projected by both the World Bank and the International Monetary Fund," said  Minister of Economy and Finance, Eyda Varela de Chinchilla.

The initial projection 5.5%, but this figure was adjusted more than one percentage point by the "multiplier effect" of a long strike in the construction sector, which represents about 18% of Panamanian GDP, said the minister.

Hundreds of works projects, including mega-projects such as the second subway line in Panama City were stopped for a month between April and May due to a strike called by the country's main union to demand salary increases.

Panama's economy grew by 5.4% of GDP in 2017, up from 5% in the previous year, driven by activities related to the external sector such as the Interoceanic Canal and air and financial services.

Varela de Chinchilla said that the prospects for this year are higher, around 5.5%, because the second metro line and the new terminal of Tocumen Airport, as well as exports from a huge copper mine, are expected to enter into operation.



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Fitch Confirms Panama's Risk Rating

Because of its strong and stable macroeconomic performance, Fitch confirmed the long-term foreign currency rating at 'BBB', with a stable outlook.

Friday, February 15, 2019

For the risk qualifier, the country's macroeconomic performance has driven a sustained increase in per capita income, and it also forecasts that GDP growth will recover to 5.8% in 2019 and 5.5% in 2020, above countries with similar ratings.

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From the Fitch Ratings report:

Fitch Ratings-New York-13 February 2019: Fitch Ratings has affirmed Panama's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BBB' with a Stable Outlook. 

A full list of rating actions is at the end of this rating action commentary.

Panama's ratings are supported by its strong and stable macroeconomic performance, which has driven a sustained rise in per-capita income and reflects policies and a strategic location and asset (the Panama Canal) that underpin a high investment rate. This is counterbalanced by a relatively narrow government revenue base and an uneven track record of meeting fiscal consolidation targets that has kept the government debt burden on an upward trend. 

Macroeconomic imbalances are low in the context of high growth reflected by low inflation (0.8% in 2018) and a high current account deficit (8% of GDP in 2018) but fully funded by robust FDI inflows.

Fitch forecasts GDP growth will recover to 5.8% in 2019 and 5.5% in 2020, above similar rated countries. The 'Minera Panama' copper mine, scheduled to start operations in February, is a key driver behind economic recovery this year. Ongoing and pending infrastructure projects, including a new subway line and a fourth Canal bridge, will continue to underpin growth. A slowdown in growth to 4% in 2018 reflected a weakening of construction activity due to a month-long strike, although this sector also appears to be experiencing a secular moderation amid oversupply in some sectors. This was partly mitigated by a recovery of re-export activity in the Colon Free Zone and transit performance in the recently expanded Panama Canal.

Key near-term risk for economic activity remains a protracted trade dispute between the U.S. and China that could affect transit going through the Panama Canal and reputational risks surrounding financial transparency issues, including possible re-introduction of Panama into the Financial Action Task Force (FATF) 'grey' list in the upcoming revision. 

In Fitch's view, relaxation of near-term deficit limits under the Fiscal Responsibility Law (LRSF) hinder improvement in fiscal policy credibility. In October 2018, the government modified the LRSF to simplify its framework and ease fiscal restrictions in the context of slower growth. This change allows for higher fiscal deficits compared with the previous rule through 2021, repeating a pattern seen over the past decade of postponement of consolidation targets that has weighed on policy credibility. The previous version of the LRSF set a limit of the non-financial public sector (NFPS) deficit and allowed any shortfall in Canal transfers below the 3.5% of GDP to count as an additional "let-out" above the deficit limit. The modified LRSF sets clean limits on the NFPS deficit of 2.0% of GDP in 2018 and 2019, 1.75% in 2020 and 2021 and 1.5% thereafter. 

Panama's NFPS deficit was 2.0% of GDP in 2018, exactly in line with the modified deficit ceiling. Fiscal performance had deteriorated earlier in the year due to significant revenue underperformance, but this trend was offset late in the year by several large one-off receipts, including those from a tax amnesty applied to taxes on properties. Fitch expects the NFPS deficit will remain at 2% of GDP in 2019 and gradually fall in line with the new deficit ceilings.

The central government deficit - relevant for sovereign borrowing - was 2.8% of GDP for 2018, below 3.1% in 2017, and down from 3.9% in 2014. The deficit decline has not been enough to put debt-to-GDP on a downward path, as previously expected, despite strong economic performance. Central government debt rose to an estimated 39.2% of GDP in 2018, from 37.5% in 2017, and is expected to gradually increase in 2019 and 2020. Fitch estimates net government debt rose to 37.3% of GDP in 2018 from 35.4% in 2017, inching closer to the 40.0% legal limit. General government debt (net of the social security government debt holdings) at 34.9% is slightly below the historical 'BBB' median of 36.2% in 2018.

Government revenues have persistently fallen short of economic activity. Tax collections grew 4.3% on average in the five years through 2018, compared with nominal GDP of 7.5%. Panama's VAT rate of 7% is among the lowest in the region and investment, a key growth driver, benefits from relatively low taxes. The revenue underperformance may reflect structural issues in the tax agency as well as broader issues regarding tax evasion. The new law criminalizing tax offences could help tackling this issue, but frequent tax amnesties continue to pose a challenge toward improving tax compliance.

General elections - electing the president, local governments and 71 seats in the unicameral legislature - are scheduled to be held in Panama in May 2019. Fitch expects policy continuity from the incoming administration given the lead of candidates from well-established political parties in the latest presidential polls. The electoral campaign period is now limited to two months prior to the election date as per the electoral reform approved in 2017. Presidential candidates will be allowed to publish their campaign platform until March 4, resulting in limited visibility on the policy stance from major contenders at this time.

Reputational risks are an important issue in Panama because of its sizable international banking sector; total banking assets account for 180% of GDP. The government has made substantial progress strengthening its Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) framework. According to the FATF report published early 2018, the government was compliant or mostly compliant with 35 of its 40 recommendations up from only five recommendations in 2012. In early 2019, Panama's legislative assembly also approved the criminalization of tax evasion, included in the list of deficiencies signalled by the FATF. Despite technical compliance, perceived deficiencies in the implementation of the AML/CFT framework pose risks of Panama being included in the FATF's "grey list". 

Overall banking system liquidity remains high and well above minimum requirements, reflecting conservative policies in the absence of a lender of last resort. A USD500 million liquidity facility being created by the Banco Nacional de Panama, while small in size, will provide some additional support. Credit growth has moderated reflecting weaker demand in key sectors, particularly construction, and supply-side restraint amid slower deposit growth (Bank's main funding source) and higher Basel III capital requirements. 

Fitch's proprietary SRM assigns Panama a score equivalent to a rating of 'BBB' on the Long-Term Foreign-Currency (LT FC) IDR scale. 

Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows:

- Macro: -1 notch, to reflect uneven track record of fiscal consolidation at the central government level that has hindered improvement in policy credibility and kept debt metrics on an upward path, a key consideration given absence of monetary policy. 

- Public Finances: +1 notch, to reflect that the SRM classifies public debt as fully denominated in foreign currency due to Panama's use of the U.S. dollar, but the century-old and well entrenched dollarization regime fully mitigates FX risk on the sovereign balance sheet. 

Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.


The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main factors that, individually or collectively, could lead to a positive rating action are:
--Improvement in fiscal policy credibility leading to a decrease of fiscal deficits and reduction of the debt burden over time;
--Sustained improvements in tax collection that enhances fiscal policy flexibility. 

The main factors that, individually or collectively, could lead to a negative rating action are:
--Fiscal deterioration leading to weakening in public debt dynamics;
--Deterioration in medium-term growth prospects.

-Fitch base case assumes that the expanded canal will continue to perform as expected, with no meaningful deviations from current projections due to external or technical factors. 

-The global economy performs largely in line with Fitch's Global Economic Outlook (December 2018).



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