Panama outlook favorable in spite of risks – IMF

panamacanalAn International Monetary Fund (IMF) mission visited Panama City during February 11-21 to conduct the country’s annual consultations. The delegation concluded that Panama’s economic performance remains buoyant, outlook favorable, in spite of certain local and international risks. The IMF therefore thinks a tighter fiscal policy is recommended.

Growth averaged about 8.5 percent over the past decade, the highest in Latin America. Panama’s banking sector performance indicators are healthy; banks remain well-capitalized, liquid and profitable. The law issued in 2013 providing for the custody of bearer shares as well as the publication of the 2014 IMF’s Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism are positive steps towards improving the transparency of the corporate and financial sectors, the IMF reported.

The IMF’s baseline growth projections are favorable, with broadly balanced risks. Growth is moderating from the high levels of 2011-12 but remains strong—estimated at about 8 for 2013 and projected at above 7 percent in 2014—supported by robust public and private investments. Inflation is declining due to the deceleration of international food and fuel price inflation, but remains higher than in trading partners. The current account deficit remains large but continues to be financed mainly by buoyant Foreign Direct Investment (FDI) inflows.

Near-term risks, according to the IMF, arise mainly from shifts in global trade and financial conditions, overheating pressures, and the risk of further significant delays in the Canal expansion. The normalization—and the surrounding uncertainty—of U.S. monetary policy may expose vulnerabilities, including through capital outflows. Other external risks relate to a protracted economic slowdown in trading partners and persistent payment difficulties in Venezuela. Strong domestic fundamentals and the ability to implement countercyclical fiscal policies would, however, mitigate the impact of external shocks. Near-term domestic risks arise mainly from the build-up of overheating pressures and a possible loss of competitiveness, as well as the risk of further significant delays in the Canal expansion.

In this context, the IMF concluded, tighter fiscal policy in the near term would help build policy space in case of serious deterioration of the domestic or external environment. Given strong domestic demand and output above capacity, keeping the fiscal deficits below the revised Social and Fiscal Responsibility Law (SFRL) ceilings would also help contain domestic inflationary pressures and prevent them from becoming entrenched in wage dynamics.

Ongoing efforts to upgrade financial sector supervision and transparency are welcome and should be accelerated, the IMF added. Transparency of the corporate and financial sectors needs to be improved further, in line with the FATF’s and Global Forum standards —a particularly important task given Panama’s role as a financial center. The authorities should continue to build up financial safety nets and to enhance their capacity for monitoring systemic risks, conducting macro-prudential policies, and supervising non-bank financial institutions. Credit growth, financial leverage, and external exposures should continue to be closely monitored, and gaps in data that are critical for conducting sound macroeconomic policy should be closed.

The IMF’s discussions of medium-term issues focused on structural policies and institutional reforms to ensure a smooth transition towards strong and sustainable medium term growth when large public investment projects are completed. In order to maintain external sustainability and competitiveness, it is important to contain inflationary pressures and prevent further appreciation of the real exchange rate.

In view of addressing the country’s social challenges more efficiently, the IMF encourages the authorities to continue ensuring that social programs reach the intended targeted groups and effectively address social objectives. The IMF welcomed the effort to enhance the quality of public education and emphasize that measures to increase the availability of vocational training and stimulate female labor participation may raise labor productivity, which in turn would contribute to achieving sustainable and inclusive growth, further reducing poverty, and raising living standards (IMF).

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