20240626-IMF-Panama_2024_Article_IV_Consultation-Press_Release_and_Staff_Report_103页_7mb

Panama: 2024 Article IV Consultation Summary

Core Content

The IMF Executive Board concluded the 2024 Article IV consultation with Panama on June 3, 2024, endorsing the staff report without a meeting. The consultation was based on discussions held in Panama City from February 19 to March 1, 2024, and the staff report was completed on May 16, 2024. The consultation included a Debt Sustainability Analysis and an Informational Annex, which were separately released.

Panama experienced a strong post-pandemic recovery, with real GDP growth reaching 7.3% in 2023, surpassing pre-COVID-19 levels. However, the economy is expected to slow in 2024 due to the closure of the Cobre Panamá copper mine, which contributed about 5% to GDP. The fiscal deficit decreased from 10.0% of GDP in 2020 to 3.0% in 2023, meeting the Social and Fiscal Responsibility Law (SFRL) targets. Despite this, the fiscal deficit is projected to rise to 4.0% in 2024, which may pose risks to fiscal sustainability and sovereign credit rating.

The external position is broadly in line with fundamentals and desirable policies. Panama exited the FATF grey list in November 2023, and the banking system remains well-capitalized and liquid, with current capital adequacy and liquidity indicators well above regulatory minima. However, risks have increased due to higher interest rates and a slowing economy.

Main Views

Economic Recovery

• Panama experienced rapid growth from 1994 to 2019, driven by construction and investment booms and expansion of services and logistics sectors.
• GDP per capita increased from 33% to 48% of US GDP per capita.
• The pandemic caused a sharp decline in GDP (down 17.7% in 2020), attributed to a strict lockdown and construction sector shutdown.
• 2023 saw a strong rebound in real GDP growth, reaching 7.3%, and unemployment returned to near pre-crisis levels.
• GDP has grown by 39% since 2020 and 14% since 2019, surpassing pre-crisis levels in 2022.

Fiscal Challenges

• The fiscal deficit dropped to 3.0% of GDP in 2023, meeting SFRL targets, but is expected to rise to 4.0% in 2024.
• Fitch and Moody's downgraded Panama's credit rating in 2023, reflecting concerns over fiscal sustainability and sovereign credit risk.
• The government aims to reduce the fiscal deficit to 2.0% of GDP in 2024, but this would require large compression of public investment, which is not desirable given the expected increase in unemployment and slower growth.
• A credible multi-year fiscal consolidation plan is needed to reduce the deficit to 1.5% by 2027, ensuring long-term fiscal sustainability.

Risks and Outlook

• The economic outlook is uncertain, with medium-term growth projected at 4%.
• Key risks include:
  • Loss of investment grade status.
  • Global slowdown and higher financing costs.
  • Social unrest and delays in Canal traffic restoration due to rainfall issues.
  • Adverse outcomes from copper mine arbitration.
  • External risks and reduced private consumption.
• Construction and investment are unlikely to provide the same growth support as before the pandemic.

Key Information

Financial Sector

• The banking system is resilient but faces increased risks due to higher interest rates.
• FSAP (Financial Sector Assessment Program) outlined a reform agenda to improve financial stability and foster financial development.
• All Fintech companies engaging in financial activities must be subject to AML/CFT regulation.

Social and Economic Indicators

IMF Support

• Panama received IMF support through the Rapid Financing Instrument (RFI), Precautionary and Liquidity Line (PLL), and SDR allocation.
• The RFI was disbursed in April 2020, with a total of $377 million.
• The PLL was treated as precautionary and expired in January 2023.
• The SDR allocation was $361 million in August 2021.

Debt Sustainability

• The total public debt is well above pre-crisis levels.
• External debt is $159.5 billion in 2024.
• Debt sustainability is concerned due to potential loss of investment grade and higher financing costs.
• A multi-year fiscal consolidation plan is essential to reduce the deficit to 1.5% by 2027 and ensure debt sustainability.

Policy Recommendations

• Strengthen fiscal sustainability by implementing a credible multi-year fiscal consolidation plan.
• Enhance financial integrity through AML/CFT regulation and supervision of all financial entities.
• Maintain financial sector resilience by continuing intensive supervision and expanding macroprudential tools.
• Sustain convergence by improving education, governance, and reducing informal employment.
• Improve statistical data quality through continued implementation of the national statistical plan.

Conclusion

Panama has successfully recovered from the pandemic, but fiscal challenges and external risks remain. A credible fiscal consolidation plan is necessary to ensure long-term stability and prevent further sovereign downgrades. The financial sector remains resilient, but increased supervision and regulation are needed to mitigate risks. Sustaining convergence and improving governance will be key to future growth.