Latin Finance - July/August 2012 - 30

Panama

In June, Barclays’ analysts cited the re-election issue and policy missteps as creating potential political problems. Their report also added a third element – perceived corruption. There have been allegations of bribes to contractors for public works projects. The administration has dismissed the allegations, but they could take the shine off the country’s reputation as a solid source for investment. Rudolf and Broide say the government needs to begin addressing poverty and inequality. “Side by side with impressive economic growth is a persistently high level of poverty and inequality affecting much of the country’s population, especially its rural residents,” says Rudolf. According to a 2011 report by the U.N. Economic Commission for Latin America and the Caribbean (ECLAC), 26% of Panama’s population live below the poverty line, a figure that is almost double (45%) for the rural population. And 27% of the rural population live in absolute poverty, defined as surviving on $1 or less daily. Broide says there are “important levels of inequality and unmet needs within a context of growth, which means there is going to be greater pressure for public services.”

Analysts have mixed feeling about the government’s decision to replace its Trust Fund for Development, which Fiscal pressures holds around $1.2 billion from the sale On the economic side, even the most of state assets, with a new sovereign bullish analysts have raised concerns wealth fund. The original cash will about fiscal pressures. Reports from be augmented annually, starting in Barclays, Fitch and Nomura highlight a 2015, with revenue from the canal. The looming problem with the fiscal deficit. government estimates the fund will The non-financial public sector deficit increase by about $1.5 billion annually was 2.3% of GDP in 2011 and climbing in Gloria Rudolf, Panama expert from taxes and fees on the canal. the first quarter of this year. Congress has Revenue from the canal is targeted at $3 increased the deficit ceiling to 2.9% of billion annually in 2020, five years after GDP for the year, up from 2%. the expansion is complete. While Fitch ratified its BBB rating with stable outlook for While Fitch sees the future fund as “a useful tool to Panama in late May, Broide says the administration needs to maintain macroeconomic stability,” Segura fears that it could pay greater attention to the deficit. “The fiscal stance is the main variable that we will monitor going forward. Fiscal deficits be used for political machinations in the near term. He says that if the administration is successful in a renewed push to sell are manageable in the near term because of strong growth, shares in the telecom company, valued around $750 million, but prudent fiscal management is extremely important in a the money may not go into the trust fund but be spent in predollarized economy,” she says. electoral jockeying by the administration. “The fundamental point is that Panama has several fiscal Segura recommends zero exposure to Panamanian challenges and a great fiscal opportunity stemming from sovereign bonds today, saying that there appears to be a the windfall coming from the expansion of the canal. Good “desperation among authorities to spend, which will increase management of fiscal accounts and the recently created the deficit and speaks poorly to the country’s fiscal stance”. savings fund will be fundamental for Panama to leverage this Another area in which analysts are divided is Panama’s opportunity.” Panama’s overall debt as a percentage of GPD has fallen from decision to stimulate the financial sector by issuing debt to local investors. The goal is to increase the weight of domestic approximately 70% in 2004 to 42%, but there is concern that it debt to 20% of the total. is not dropping faster given the high rates of growth. Barclays Segura says he does not understand the government’s puts the debt at 39% of GDP for 2012, despite rapid economic strategy. “The priority is to develop the local market — which expansion. Barclays and Nomura raise concerns about the government’s I do not think is a wise policy decision,” he says. “Panama is a dollarized economy with an open capital account, so there is commitment to fiscal spending. Both fear an uptick in public

“Concern over [President] Martinelli’s erratic behavior and policies is uniting both the left and right of the political spectrum”

expenditures in the lead up to the 2014 elections, which Martinelli has promised would go to his party with or without him as a candidate. “I am worried mostly about the government’s fiscal stance. Expenditures are growing like there is no end in sight and for an economy that is expanding by 10% the fact that Congress has raised the deficit and this new ceiling might actually be surpassed by the end of the year is troubling,” says Nomura’s Segura. The fiscal deficit, however, could trend downward if international fuel prices continue to decline. A large percentage of the deficit is caused by a subsidy on electricity for customers who use less than 500kV monthly. The subsidy is blamed for the government missing its deficit target in 2011. About 50% of electricity is generated from imported fuel. Also helping to lower the burden on imported fuel will be the construction of hydroelectric plants locally and an agreement with Colombia to build a transmission line connecting the countries and integration of their electricity systems.

Financial stance

30 LatinFinance

July/August 2012

Latin Finance - July/August 2012

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