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Panama Defying The Downturn

by Ulrika Lomas,, Brussels

27 November 2012

Panama is in an enviably strong position, both in fiscal and economic terms, but the authorities must be wary of potential risks on the horizon, according to a recent mission to the nation from the International Monetary Fund (IMF).

The mission, headed by Corinne Delechat, identified that Panama's economy is expected to continue to achieve the fastest growth rate among Latin American nations this year, supported by large scale infrastructure projects such as the expansion of the Panama Canal. Having grown at an average rate of around 9% of gross domestic product (GDP) during the past five years, the economy will expand by 9.5% of GDP in 2012, the IMF predicts.

The IMF has recommended that in order to ensure the economy does not overheat, the government should rein in fiscal stimulus measures in the near-term and adopt a neutral stance that will help to reduce the fiscal deficit to below the targets set out in the revised Social and Fiscal Responsibility Law. Meanwhile, the mission identified that subsidies could be better targeted and further improvements should be made in the area of tax administration.

The Fund welcomed significant improvements to the nation's business environment since its assessment last year, which have involved eliminating remaining bottlenecks in the logistics chain to ensure that Panama can reap the full benefits of its substantial free trade agreement network and of the Canal expansion. Improvements to the education system will improve the skills base of the local population and promote a shift towards a services-based economy, the mission said.

The IMF highlighted that although all looks rosy for Panamanian policymakers, the recent conclusion of new free trade agreements, most recently with the United States, has increased Panama's exposure to US fiscal consolidation policies, i.e. the so-called "fiscal cliff," potentially leading to a decline in US financial flows and business that could be detrimental to economic growth. Furthermore, the prolonged debt crisis in Europe presents risks, the mission said.

Concluding, the IMF reported that Panama's financial sector is solid, and that banks are well capitalized, liquid and profitable. The mission recommended that authorities continue to upgrade financial sector supervision by strengthening the nation's capacity to monitor systemic risks, and welcomed efforts to enhance capital buffers in line with international best practices. The Mission also cautioned that while the banking system is healthy, strong credit growth, particularly in commercial real estate, tourism, and the Colon Free zone should be closely monitored, together with rising household and corporate leverage.

TAGS: tax | investment | business | free trade agreement (FTA) | banking | international financial centres (IFC) | agreements | education | trade | Panama

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