The World Bank

Document of The World Bank

Public Disclosure Authorized Report No: ICR0001734

IMPLEMENTATION COMPLETION AND RESULTS REPORT

(IBRD 76850)

ON A

Public Disclosure Authorized LOAN

IN THE AMOUNT OF US$80 MILLION

TO THE

REPUBLIC OF PANAMA

FOR A

PROTECTING THE POOR UNDER GLOBAL UNCERTAINTY DEVELOPMENT POLICY LOAN Public Disclosure Authorized

October 30 , 2010

Poverty Reduction and Economic Management Central America Country Management Unit Latin American and the Caribbean Region

Public Disclosure Authorized

PANAMA - GOVERNMENT FISCAL YEAR January 1 – December 31

CURRENCY EQUIVALENTS (Exchange Rate Effective as of December 1, 2010)

Currency Unit Balboa US$1.00 B./1.00

Weights and Measures: Metric System

ABBREVIATIONS AND ACRONYMS

AIN-C Atención Integral a la Niñez en la Comunidad BNP National Bank of Panama CAR Capital Adequacy Ratio CBI International Banking Center (Centro Bancario Internacional) CCT Conditional Cash Transfer CD Cambio Democratico CFZ Colon Free Zone CPI Consumer Price Index DPL Development Policy Loan EEC Estrategia de Extensión de Cobertura FDI Foreign Direct Investment FSSRA Financial Sector Supervision and Regulation Assessment FY Fiscal Year of the World Bank (July 1 – June 30th) GDP Gross Domestic Product GNI Gross National Income GOP Government of Panama IADB Inter-American Development Bank IBRD International Bank for Reconstruction and Development IMF International Monetary Fund LCR Latin America and Caribbean Region LSMS Living Standards Measurement Survey MEF Ministry of Economy and Finance MIDES Ministry of Social Development MINSA Ministry of Health NFPS Non-Financial Public Sector PAISS Paquete de Atención Integral de Servicios de Salud PCA Panama Canal Authority

RdO Red de Oportunidades (the conditional cash transfer program) ROSC Report on the Observance of Standards and Codes SBN National Banking System (Sistema Bancario Nacional) SBP Superintendency of Banks of Panama SDR Special Drawing Rights SENAPAN National Nutrition Secretariat UNDP United Nations Development Program

Vice President: Pamela Cox Country Director: Laura Frigenti Sector Director: Marcelo Giugale Sector Manager: Rodrigo A. Chaves Lead Economist/Sector Leader: J. Humberto Lopez Task Team Leaders: David M. Gould and Lars C. Moller ICR Team Leader Christian Y. Gonzalez

PANAMA PROTECTING THE POOR UNDER GLOBAL UNCERTAINTY DEVELOPMENT POLICY LOAN PANAMA

CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Program Performance in ISRs H. Restructuring

1. Program Context, Development Objectives and Design ...... 1 2. Key Factors Affecting Implementation and Outcomes ...... 5 3. Assessment of Outcomes ...... 7 4. Assessment of Risk to Development Outcome ...... 17 5. Assessment of Bank and Borrower Performance ...... 17 6. Lessons Learned...... 19 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners ...... 19 Annex 1. Bank Lending and Implementation Support/Supervision Processes ...... 20 Annex 2. Beneficiary Survey Results ...... 21 Annex 3. Stakeholder Workshop Report and Results ...... 22 Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR ...... 23 Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders ...... 24 Annex 6. List of Supporting Documents ...... 25 MAP

A. Basic Information Protecting the Poor under Global Country: Panama Program Name: Uncertainty Development Policy Loan Program ID: P115177 L/C/TF Number(s): IBRD-76850 ICR Date: 10/27/2010 ICR Type: Core ICR REPUBLIC OF Lending Instrument: DPL Borrower: PANAMA Original Total USD 80.0M Disbursed Amount: USD 80.0M Commitment: Revised Amount: USD 80.0M Implementing Agencies: Ministry of Economy and Finance Cofinanciers and Other External Partners:

B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 02/06/2009 Effectiveness: 07/31/2009 07/31/2009 Appraisal: 03/11/2009 Restructuring(s): Approval: 04/21/2009 Mid-term Review: Closing: 04/30/2010 04/30/2010

C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Low or Negligible Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Satisfactory Government: Moderately Satisfactory Implementing Quality of Supervision: Moderately Satisfactory Moderately Satisfactory Agency/Agencies: Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance:

i C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Rating: Performance (if any) Potential Problem Quality at Entry Program at any time No None (QEA): (Yes/No): Problem Program at any Quality of No None time (Yes/No): Supervision (QSA): DO rating before Moderately

Closing/Inactive status: Satisfactory

D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Banking 50 50 Health 25 25 Other social services 25 25

Theme Code (as % of total Bank financing) Child health 7 7 Health system performance 15 15 Nutrition and food security 8 8 Social safety nets 20 20 Standards and financial reporting 50 50

E. Bank Staff Positions At ICR At Approval Vice President: Pamela Cox Pamela Cox Country Director: Laura Frigenti Laura Frigenti Sector Manager: Rodrigo A. Chaves Rodrigo A. Chaves Program Team Leader: Christian Yves Gonzalez Amador David Michael Gould ICR Team Leader: Christian Yves Gonzalez Amador ICR Primary Author: Christian Yves Gonzalez Amador

F. Results Framework Analysis

Program Development Objectives (from Project Appraisal Document) The objective of the DPL is to support the poverty reduction efforts of the Government of Panama in the context of the global economic crisis. Two complementary policy areas

ii are supported: (i) Mitigating the impact of economic shocks on the poor through improved targetting and coverage of social programs; (ii) reducing economic risks of a banking crisis through enhanced risk management and strenghtened regulation and supervision.

Revised Program Development Objectives (if any, as approved by original approving authority)

(a) PDO Indicator(s)

Original Target Formally Actual Value Values (from Revised Achieved at Indicator Baseline Value approval Target Completion or documents) Values Target Years The real value of monthly conditional cash transfers, adjusted by the consumer Indicator 1 : price index, has been maintained or increased for beneficiaries of the CCT program. Cannot be Value calculated ex-ante B./ 35 per month B./ 35 per month (in (quantitative or because inflation No change (in July 2008 July 2008 prices) Qualitative) until March, 31, prices) 2010 is unknown. Date achieved 07/01/2008 03/31/2010 03/31/2010 10/15/2010 Comments (incl. % N/A achievement) Number of social programs that are utilizing the Red de Oportunidades CCT Indicator 2 : program database to identify poor beneficiaries. 3 social programs are Value currently using the CCT (quantitative or 2 new programs No change 5 social programs database to target social Qualitative) spending. Date achieved 01/01/2009 03/31/2010 03/21/2010 10/15/2010 Comments (incl. % N/A achievement) Percentage of beneficiaries of the basic package of health services in poor and Indicator 3 : isolated rural communities that receive enhanced nutritional services to promote children's growth. Value (quantitative or 0 percent At least 75 percent No change 75 percent Qualitative) Date achieved 01/01/2009 03/31/2010 03/31/2010 10/15/2010 Comments (incl. % N/A achievement)

iii Additional persons in poor and isolated rural communities that are receiving Indicator 4 : the new nutritional component of health services package. Value At least 60,000 (quantitative or 0 persons No change 60,000 persons persons Qualitative) Date achieved 01/01/2009 03/31/2010 03/31/2010 10/15/2010 Comments (incl. % N/A achievement) Social investment expenditures defined as priorities by the Acuerdos de la Indicator 5 : Concertación Nacional are fully executed as stipulated in the 2009 Budget Law. Value 100 percent or (quantitative or 0 percent No change 100 percent or more more Qualitative) Date achieved 01/01/2009 03/31/2010 03/31/2010 10/15/2010 Comments (incl. % N/A achievement) Degree of completion of consolidated supervision of the financial Indicator 6 : conglomerates as measured by assets. Value (quantitative or 0 percent At least 50 percent No change 50 percent Qualitative) Date achieved 01/01/2009 03/31/2010 03/21/2010 10/15/2010 Comments (incl. % N/A achievement) Percentage of banks that apply the new regulatory parameters for the use of Indicator 7 : guarantees to cover credit risk. Value (quantitative or 0 percent 100 percent No change 100 percent Qualitative) Date achieved 01/01/2009 03/31/2010 03/31/2010 10/15/2010 Comments (incl. % N/A achievement) Percentage of banks that are valuing their liquidity risk in line with Directive Indicator 8 : No. 4-2008 requirements and have submitted regular reports thereon to the Superintendency of Banks. Value (quantitative or 0 percent 100 percent No change 100 percent Qualitative) Date achieved 01/01/2009 03/31/2010 03/31/2010 10/15/2010 Comments (incl. % N/A achievement)

(b) Intermediate Outcome Indicator(s)

Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Percentage of banks that meet the minimum capital adequacy ratio calculated Indicator 1 : on a consolidated basis. Value (quantitative or 0 percent 100 percent No change 100 percent Qualitative) Date achieved 01/01/2009 03/31/2010 03/31/2010 10/15/2010 Comments (incl. % N/A achievement)

G. Ratings of Program Performance in ISRs

Actual Date ISR No. DO IP Disbursements Archived (USD millions) 1 06/19/2009 Satisfactory Satisfactory 0.00 2 12/30/2009 Moderately Satisfactory Moderately Satisfactory 79.80

H. Restructuring (if any) Not Applicable

v 1. Program Context, Development Objectives and Design

1.1 Context at Appraisal

a. Macro-economic context at appraisal

Economic Context

Gross Domestic Product (GDP) during the four years previous to appraisal had accelerated peaking at a record rate of 11.5 percent in 2007, and remaining robust at 9.2 percent in 2008. This economic boom was triggered by rapid improvements in the external environment, coupled with an improved fiscal stance and banking system, both of which raised investor confidence and facilitated the transmission of positive global developments to the domestic economy. An internationally oriented service sector (Panama Canal, financial sector, air transport), accounting for some 80 percent of GDP growth since 2002, and, to some extent, a booming construction industry drove economic growth; in contrast, the highly protected agriculture and manufacturing sectors did not exhibit anywhere near the same dynamism.

During the same period the fiscal position of government posted a major improvement. The nonfinancial public sector balance, excluding the Panama Canal Authority (PCA), had turned from a deficit of about 5 percent of GDP in 2004 into a surplus of 0.4 percent of GDP in 2008. The positive fiscal results along with the strong economy had been reflected in a marked reduction in public debt (excl. PCA) from a peak of 62.2 percent of GDP in 2004 to 37.6 percent of GDP in 2008. Improvements in the fiscal stance did not preclude major increases in public investments, which rose from 3 percent of GDP in 2005 to nearly 5 percent in 2007 and to over 7 percent of GDP in 2008. In 2008, the improved fiscal and debt position contributed to a Standard & Poor’s upgrade of Panama’s long-term foreign and local currency ratings from BB to BB+, while Fitch affirmed Panama’s rating at BB+ and revised the rating outlook to positive.

A special currency regime, where the US dollar is legal tender, avoided the costs of foreign exchange volatility, but transmitted the increasing international prices of food and energy leading to an increase in inflation that reached over ten percent at the end of 2008. Higher oil prices and the imports needed in the expansion of the canal moved the current account balance from a deficit of 4.9 in 2005 to 12.1 of GDP in 2008. But, the deficit was adequately financed by foreign direct investment (FDI)—mainly in the financial, commerce and housing sectors— averaging over 9 percent of GDP annually since 2004.

High growth had made some inroads in decreasing poverty rates, but extreme poverty remained endemic in indigenous areas. Between 2003 and 2008, poverty fell from 36.8 to 32.0 percent, while extreme poverty was reduced from 16.6 to 14.5 percent. Extreme poverty, however, remained almost universal among indigenous groups. The intransigence of poverty, particularly in rural areas, despite high growth was the result of pattern of economic driven primarily by the services sector, which tends to employ relatively high-skilled individuals. With a Gini coefficient of 0.47, inequality of consumption in Panama was among the highest in the region and the world, and considerably higher than the average for countries with similar per- capita income levels. Social outcomes were likewise dispersed; in the indigenous areas, for instance, chronic child malnutrition rates are as high as 56 percent while the national average is 21 percent. The marked increase in food prices in 2007 and 2008 had most likely affected the poor disproportionately as they spent a larger share of their income on food than the non-poor.

A long-track record of institutional reform had contributed to this improved performance. Panama had been actively engaged in institutional reform since the second half of the 1990s, when trade barriers and price controls were largely dismantled, a far-reaching privatization program implemented and fiscal reforms coupled with reducing the level of public debt to GDP allowed Panama to regain access to international financial markets. The Torrijos Government (2005-2209) accelerated the momentum of this structural reform agenda and placed a renewed emphasis on fiscal sustainability, transparency and improved efficiency while, at the same time, exploiting the advantages of Panama’s open trade and investment regime. In particular, the Government succeeded in moving ahead with a project to expand the Panama Canal. It also introduced Panama’s Social and Fiscal Responsibility Law (SFRL--Law No. 34 of June 5, 2008), which became effective on January 1, 2009 thereby replacing the previous Fiscal Responsibility Law (FRL) adopted in May 2002. In addition, it introduced important social assistance programs such as the targeted Red de Oportunidades (RdO) and had engaged a broad consensus seeking around priorities for social spending in preparation for increasing public revenues arising from the expansion of the Panama Canal.

Macro-economic outlook in the context of the global crisis

At the time of appraisal the impact of the global financial crisis had been modest and the financial system remained stable, but prudent lending in the face of the crisis was restricting resources to the private sector. Panama’s banks had experienced only limited capital losses as a result of the crisis because of low exposure to toxic assets—less than .1 percent of total assets. The liquidity position of the International Banking Sector (CBI) and the National Banking System (SBN) banks remained comfortable, on average. Private Panamanian banks (holding 45.8 percent of the national banking system assets) were less liquid than foreign and public banks, with their liquidity ratio falling from 50.5 percent in 2006 to 40.6 percent in 2008 (4th quarter figures.) Despite the comfortable position, banks contracted credit growth and in the last quarter of 2008 and local businesses began to report difficulties in accessing credit.

The global slowdown was beginning to have an impact as growth in construction; free trade zones activity and shipping traffic through the Panama Canal were beginning to slowdown. The growth rate in the value of construction and maintenance had fallen from 33.9 percent in 2007 to 18.7 percent in 2008. Although this did not mean trouble for the banking sector with only 12percent of its portfolio in real estate and construction, it meant a potential impact on unemployment, given that construction had provided the bulk of new employment opportunities over the last four years. In addition, the Colon Free Zone (CFZ) and tourism sectors were slowing as Panama’s largest trading-partners experienced declining growth. Activity at the Panama Canal had fallen by 2.3 percent in 2008 owing to reduced trade between Northeast Asia and the US East Coast—the most important trade lane of the Canal. Container traffic growth at Panamanian ports is also falling for related reasons. The growth rate in container movement fell from 38 to 15 percent in the year to November 2008.

b. Core issues prior to loan approval

A key development challenge facing Panama was to ensure that economic stability and growth were maintained and that benefits were broadly shared. At the point of loan approval, the global slowdown threatened the stability of the economy and the livelihood of the poor. In addressing these issues, the challenge of the government was combining attention to the short- term risks while maintaining a focus on the reform agenda that was underway and had led over the last five years to significant institutional gains and improvements on the ground.

Declining incomes threatened a reversal of the social gains of the recent years. Of concern was that the expected drop in fiscal resources associated with the slowdown would lead to a drop in social expenditures, which could make it difficult for the government to deliver on social expenditure commitments emerging from extensive consultations with a broad range of civil society organizations around the use of forthcoming resources from the expansion of the Panama Canal. At the same time, the poor were likely to need additional support as incomes could drop and unemployment increase during the crisis. Lastly, there was concern that the focus on continued improvements in the social assistance programs (targeting, etc.) would be lost affecting programs such as Red de Oportunidades, basic health services to the poor in rural and isolated areas and scaled up and accelerated activities to improve the quality and access of educational services in indigenous areas.

Given its size and its increasing role as an international center, the fate of the financial sector was of particular concern for the stability of the economy. The consolidated assets of the banking system represented around 250 percent of Panama’s GDP, and the share of bank assets owned by foreign banks was close to 60 percent. Financial intermediation services played an important role in Panama’s recent economic boom, contributing around 9 percent of 2007 GDP. Although, Panama’s financial sector was relatively well positioned going into this global financial crisis, thanks to prudent policies, the downside risks were high.1 Concerns included a potential deterioration of the domestic portfolio of the banks given the likely slowdown in Panama’s services-export oriented economy, and possible withdrawal of deposits from the banking sector as liquidity tightened in other countries.

At the time of loan approval the country faced a presidential election in May 2009 and a change in administration on July 1, 2009. Primaries the previous year had determined as the main contenders the Partido Revolucionario Democrático (PRD) and the Partido Panameñista (PP.) The DPL document did not see this as a major concern as all the main candidates in the presidential race supported deepening poverty reduction efforts and were expected to maintain Panama’s current economic policy framework.

c. Alignment of the DPL program with Government and Bank strategies

The DPL operation supported progress towards medium-term program outcomes related to three CPS objectives: (1) reducing poverty, especially among the rural poor and indigenous groups through targeted social interventions; (2) improving health and nutrition outcomes through the expanded supply of basic public services, and (3) promoting broad-based economic growth by means of supporting financial sector stability. The CPS, in turn, was tightly aligned with the strategic objectives of the Torrijos administration. In addition, the DPL’s narrower focus was aligned with the government’s initiatives to protect the stability of the country and to soften the impact of the economic slowdown on the poor.

1 See, IMF--Article IV, July 2009.

1.2 Original Program Development Objectives (PDO) and Key Indicators (as approved)

This Development Policy Loan (DPL) was designed to support the poverty reduction efforts of the Government of Panama in the context of the global economic crisis.

1.3 Revised PDO and Key Indicators, and Reasons/Justification

Single tranche operation: neither PDO nor key indicators were revised.

1.4 Original Policy Areas Supported by the Program:

The one-tranche DPL supported two complementary policy areas:

 Mitigating the impact of economic shocks on the poor through improved targeting and coverage of social sector programs.  Reducing economic risks of a banking crisis through enhanced risk management and strengthened regulation and supervision.

A. Mitigating the Impact of Economic Slowdown on the Poor

The DPL supported steps that the Government took in 2008 to help mitigate the expected negative impact of external shocks on Panama’s poor population. The Panamanian authorities adopted a three-pronged response to the external economic shocks which have buffeted the poor since the economic slowdown began in 2008. First, they strengthened the safety net through an increase in the size of the conditional cash transfer to beneficiary families of the Red de Oportunidades program and an improvement in the targeting of other social programs to better cushion the poor against negative impacts. Second, the quality and coverage of health and nutrition services to the extreme poor were strengthened, including through mechanisms to monitor and improve the nutritional status of children, highly vulnerable during an economic slowdown. Third, the Government committed to maintaining levels of social spending during the economic deceleration and thus avoiding budget cuts in social spending should fiscal pressures arise in a downturn.

B. Promoting Financial Stability

The DPL supported actions and measures that the Government had taken to mitigate the impact of the global financial crisis on Panama’s banking sector. The Panamanian authorities adopted a two-pronged approach to ensure banking sector stability. First, the national regulatory and supervisory framework was being strengthened, moving toward a risk-based consolidated supervision approach. Second, regulations were issued to protect the solvency and liquidity of banks. These measures were expected to contribute to ensure the solvency and liquidity of the banks and hence to maintain credit flows, a necessary condition for economic growth and poverty reduction.

1.5 Revised Policy Areas

Policy areas were not revised. The DPL was single-tranche.

1.6 Other significant changes

None.

2. Key Factors Affecting Implementation and Outcomes

2.1 Program Performance

All the action triggers that were a condition of Board approval and are shown in table 3 were met. Most of these actions remain in place attesting to the sustainability of the programs.

Table 3. Prior Actions and Status for First and Second DPL

First Programmatic Reform Implementation Development Policy Loan Prior Actions Status I. Mitigating the impact of the economic shocks on the poor I.1. The Ministry of Social Development has, B./50 remains in place. pursuant to Resolution No. 160, increased the monetary transfer to the beneficiary families of the CCT program from B./ 35 to B./ 50 per month to help the extremely poor households cope with the increase in food prices and impact of the global economic downturn.

I.2. The Government of Panama has used the The Government of Panama continues to use the household registry and management information household registry and management information system, originally developed for the CCT system, originally developed for the CCT program, to improve targeting of other social program, to improve targeting of other social programs. programs.

I.3. The Ministry of Health and SENAPAN National Plan for the Fight against Children developed and are implementing a National Plan Malnutrition remains under implementation. for the Fight against Children Malnutrition. As part of this plan, the government included, in the basic package of health services delivered in isolated and poor areas, a nutrition component that includes growth promotion and monitoring at community level (AIN-C strategy).

I.4. The Ministry of Health has expanded the Outreach efforts continue under implementation. geographical coverage of the health service package delivered in isolated and poor areas. I.5. The National Assembly has approved legislation After a lull, the new administration is retaking the (Law 20 and the 2009 Budget Law) to agenda set by Law 20, with emphasis on implement the Directives de la Concertación monitoring of social spending. Nacional, which set goals for protection of key social investment expenditures. Law 20 creates a National Council for the National Development Dialogue, a Social Cabinet, and a Presidential Secretary of Goals.

II Maintaining stability

II.1. The government has, through Executive Decree- The same legislative framework for the financial Law No.2 of the President and Executive Decree sector remains in place. No. 52 of the Ministry of Economy and Finance, amended Banking Law No. 9 of 1998, thereby (i) extending the regulatory and supervisory powers of the Superintendency of Banks to financial conglomerates and cooperatives and savings and loans associations; (ii) introducing new procedures for the reorganization and liquidation of troubled banks; (iii) and improving the legal protection of the Borrower’s Superintendent of Banks and his staff while acting in their official capacity.

II.2. The Superintendency of Banks has, through Directive No. 2-2008 has been rescinded. Directive No. 2-2008, instituted new general parameters for the evaluation of guarantees for mitigating credit risk.

II.3. The Superintendency of Banks has issued Principles for the management of liquidity risk Directive No. 004-2008 and Circular No. 047- remain in place. Periodicity of reporting has 2008, which together institute: (i) new returned to once per week. conditions regarding policies, procedures and control systems available to banks in the Borrower’s territory for the management of their liquidity risk, and (ii) new requirements for the banks to submit more detailed information regarding the structure of their liquidity positions.

II.4. The Superintendency of Banks has, through Directive No. 005-2008 remains in place, with Directive No. 005-2008, established new some amendments and complementary directives. provisions regarding capital standards for credit risk applicable to banks on a consolidated basis.

2.2 Major Factors Affecting Implementation:

A strong CPS program supported the actions and the achievement of results under this DPL. Two previous DPL operations had provided the client with a good understanding on how the budget support operations work. The CPS program under implementation was quite strong in supporting targeted assistance and expansion of health and nutrition services through the Panama Social Protection Project and the Health Equity and Performance Improving Project. Analytical work such as Poverty Assessment (FY07) and a Public Expenditure Review (FY06) supported the design. To the contrary, the Bank had not been involved in the financial sector and relied on assessments from the IMF such as the 2006 ROSC, which examined compliance of the banking regulation and practices with Basel principles. In addition, a joint IMF/WB policy note on the global financial crisis for 2008, as well as the inputs of special technical missions helps support the design of the operation. The change of government affected the achievement of results in certain areas. The DPL document had properly identified the change in government as a risk area.

Monitoring and Evaluation (M&E) Design, Implementation and Utilization:

The Ministry of Economy and Finance (MEF) was responsible for the implementation of the DPL operation as well as for coordinating the actions among the concerned agencies, including the Superintendency of Banks (SBP), the National Bank of Panama (BNP), the Ministry of Social Development (MIDES), and the Ministry of Health (MINSA). Together with MEF and the National Institute of Statistics (INE), these institutions collect the necessary data for the identified monitoring indicators. The MEF and the Bank agreed to monitor the progress in the program supported by the DPL and to utilize its evaluation to inform preparation of a new Country Partnership Strategy, programmed for fall 2009 and delivered one year later in the fall of 2010.

2.4 Expected Next Phase/Follow-up Operation

The FY2011-FY2014 CPS, considered by the Board August 24, 2010, includes a substantive lending and AAA in support of the themes under this DPL. On social issues, besides continued implementation of the Social Protection and Health and Equity Performance Improvement projects, proposed new operations include further support for the social protection system and improving public sector efficiency. In addition, the FY2011-FY2014 CPS includes a Programmatic Broad-Based Growth and Efficiency DPL series in support of the competitiveness agenda of the government. The Bank will be participating jointly with the IMF in the preparation of a Financial Sector Assessment (FSAP) upon the request of the government.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation

The objectives and design of the DPL were relevant to Panama, which as an open economy was highly exposed to the global crisis. The specific focus on protecting the poor was relevant to the priority policy of government that sought to create mechanisms to share the benefits of growth and wanted to avoid a reversal of the gains achieved. The focus on the financial sector to protect against a downside risk was relevant given that difficulties in the banking sector were likely to have a major and lasting impact on the competitive position of the economy. The design of the DPL as a single tranche was adequate as it avoided committing the incoming administration to an inherited policy framework.

3.2 Achievement of Program Development Objectives

Table 4 below, is a summary of actual achievements under the DPL Protecting the Poor under Global Uncertainty relative to baselines and targets. Detailed Indicators provide evidence of progress toward achieving PDOs including both quantitative and qualitative values and explanatory comments on values achieved.

Table 4. Program Development Objectives Results

Protecting the Poor Under Global Uncertainty Development Policy Loan Formally revised target Actual value Achieved at Indicator Baseline value Original target (target years) Completion of Target Years Indicator 1. The real value of monthly conditional cash transfers, adjusted by the consumer price index, has been maintained or increased for beneficiaries of the CCT program.

Source: Ministry of Social Development Value (Qualitative Baseline: B./ 35 per month No less than B./35 in real No change 50 and Quantitative) (July 2008). terms

Comments: Target met. Transfer in real terms equals B./ 45 of 2008. Indicator 2.New social programs are utilizing the Red de Oportunidades CCT program database to identify poor beneficiaries. Values (qualitative Baseline: 3 programs using At least 2 new social No change 3 social programs and quantitative) the CCT database to target programs social spending (January 2009). Source: Ministry of Social Development.

Comments: Target not met. Although new social program of the incoming administration were not targeted, efforts are under way to target them using the information infrastructure of CCT program. Indicator 3. Enhanced nutritional services to promote children’s growth are being delivered.

Values (Qualitative Baseline: 0 percent (January At least 75 percent of the No change 100 percent and Quantitative) 2009). beneficiaries of the basic Source: Ministry of Health. package of health services in poor and isolated rural communities. Comments: Target met. Nutrition expansion plan financed with government resources and the support of the IDB and the IBRD is on track. Currently nutrition services have been expanded to all areas covered under the health expansion program; however, four of the 15 components of the nutrition program have yet to be fully roll-out, which is expected by the end of 2010. . Indicator 4. Additional persons in poor and isolated rural communities are receiving the new nutritional component of health services package.

Values (Qualitative Baseline: 0 (January 2009). At least 60,000 No change 76,000 and Quantitative) Source: Ministry of Health. Comments: Target met. Indicator 5. Social investment expenditures defined as priorities by the Directives de la Concertación Nacional are fully executed as stipulated in the 2009 Budget Law.

Source: Ministry of Finance (Budget Department).

Comments: Target met. Social expenditure (education health and Social Assistance) increased during 2009 with respect to 2008. Key social programs—such as Red de Oportunidades—were fully financed. New government launched and started implementing its own initiatives. Aggregate financing of social expenditures exceed commitments under the Directives de Concertación Nacional. Indicator 6. Consolidated supervision

Source: Superintendency of Banks. Baseline: 0 (January 2009). At least half of the No change Consolidated Supervision of all conglomerates financial conglomerates as measured by assets Comments: Target met. The rapid SBP implementation of this Directive is due to the fact that consolidated supervision of all conglomerates was in place January 2009, a view confirmed by the IMF 2006 ROSC assessment. Indicator 7. Apply the new regulatory parameters for the use of guarantees to cover credit risk (Directive 2-2008). Source: Superintendency of Banks. Baseline: 0 (January 2009). All banks No change Not under implementation.

Comments: Target not met. Directive 2-2008 was cancelled by Directive 08-2009. Indicator 8. Valuation of bank liquidity risk in line with Directive No. 4-2008 requirements and submission of regular reports thereon to the Superintendency of Banks.

Baseline: 0 (January 2009). All banks No change All banks follow Directive No. 4-2008.

Source: Superintendency of Banks. Comments: Target met. Indicator 9. All banks meet the minimum capital adequacy ratio calculated on a consolidated basis (Directive—5-2008).

Source: Superintendency of Banks. Baseline: 0 (January All banks No change All banks meet Directive 5-2008. 2009). Banks comply with the minimum required capital adequacy ratio but not on a consolidated basis. Comments: Target met. Implementation of Directive 5-2008 was postponed from 03-09 to 07-09 by Directive 2-2009.

Panama fared well during the global crisis. Economic growth at 2.4 percent in 2009 was one of the highest in the region. Growth in 2010 is expected to reach 4.8 percent. The authorities maintained a prudent macro-economic stance that further enhanced its public debt rating, which has now reached the level of investment grade. The country upheld the limits set by the SFRL fiscal rule on the Nonfinancial Public Sector (NFPS) fiscal balance, excluding the PCA, with a public sector deficit below 1 percent of GDP, excluding the Panama Canal Authority.2 The government maintained level of its social expenditure. Information on the impact of the crisis on the poor suggest that overall poverty rate continue to decline, but that improvements for the extreme poor stagnated. The labor market remained, with unemployment continuing to drop in 2009. The financial sector remains strong: high on liquidity, low levels of non- performing assets, and well capitalized. The agenda to improve its regulatory framework and practices continues. In 2010, the country debt reached investment grade status according to Fitch and Standard and Poor’s.

Table 1: Panama: Key Macroeconomic Indicators, 2006-2015

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 prelim. proj. Proj. Proj. Proj. Proj. Proj. (annual percentage change) National income and prices Real GDP 8.5 12.1 10.7 2.4 4.8 6.3 6.5 6.2 6.2 6.5 Inflation (eop) 2.2 6.4 6.8 1.9 3.0 2.7 2.5 2.5 2.5 2.5 (in percentage of GDP) Savings and investment Gross national savings 16.3 16.9 15.8 24.8 18.7 20.2 19.8 20.0 21.1 22.1 Gross fixed investment 19.5 24.1 27.4 24.8 26.7 28.2 28.3 27.8 26.9 26.6

Fiscal accounts Non financial public sector Total revenues and grants, including ACP 1/ 26.8 29.7 29.2 27.4 27.8 29.0 28.7 28.7 28.6 28.8 Total expenditures 25.6 25.0 26.7 27.9 29.8 30.9 30.7 29.9 28.4 27.7 Overall balance, including ACP 1/ 1.2 4.8 2.5 -0.5 -2.0 -2.0 -2.1 -1.1 0.2 1.1 Overall balance, excluding ACP 1/ 0.5 3.4 0.4 -1.0 -0.9 -0.9 -0.5 -0.1 0.3 0.5 Total public debt (net) 52.6 45.6 38.8 39.4 40.4 38.8 37.4 35.2 31.9 28.5 Ce ntral Governme nt Total revenues and grants 18.6 19.2 19.7 18.0 18.9 19.7 19.7 19.6 19.6 19.8 Tax Revenues 10.3 10.6 10.5 10.7 11.7 12.5 12.5 12.5 12.5 12.5 Total expenditures 18.4 18.0 19.4 19.5 20.0 21.1 20.8 20.5 20.4 20.2 Capital Expenditures 2.5 4.0 5.6 6.2 6.3 7.6 7.2 7.1 7.1 7.1 Overall balance 0.2 1.2 0.3 -1.4 -1.1 -1.4 -1.1 -0.8 -0.8 -0.4 (annual percentage change) External sector Merchandise Exports 14.3 11.7 5.2 -27.1 19.8 9.3 11.7 12.2 12.3 12.7 Merchandise Imports 18.2 40.7 18.9 -15.2 22.7 14.9 13.5 8.7 3.3 6.3 (in percentage of GDP) Net exports, from CFZ 3.4 2.3 0.0 8.2 3.3 3.2 3.3 3.4 3.4 3.4 Current account balance -3.1 -7.2 -11.6 0.0 -7.9 -8.0 -8.5 -7.7 -5.9 -4.5 Foreign direct investment 14.6 9.6 10.4 7.2 7.7 7.9 8.0 8.0 8.1 8.1 Source: WB staff calculations based on data from Contraloria General de Panama and IMF. 1/ Panama Canal Authority

2 Exceptions introduced to the SFRL to allow coping with the crisis were not necessary.

3.2.2 Mitigating the Impact of the economic shocks on the poor (Moderately Satisfactory)

3.2.2.1 Harnessing social programs to respond to crises.

The Red de Oportunidades program remains in operation benefitting around 63,000 households. The current government maintains the B./50 transfer set in mid-2008 in response to the global food price crisis. In real terms, the current transfer is higher than the previous level of B./35 in place up to mid-2008. The program is covering 63,000 households, a lower number than in March 2009 because the database has been cleaned from double counting.3 In addition, the program is well targeted; surveys indicate that 80 percent of the recipient households are in the lowest quintile of the distribution of income.4 The incoming administration audited the Red de Oportunidades program and suspended one of the two private agents managing the transfers to the beneficiaries because the contractor was not maintaining adequate bookkeeping. The transfers to the beneficiaries were frozen while a new transfer system was put into place; but, once the new system became operational (November, 2009), the government resumed the transfers including the backlogged amounts. The new administration remains committed to the CCT Program and has included it in its economic and social strategy. The following step foreseen in the strategy is to utilize the existing network to strengthen the capacity of and the opportunities in the local communities and to deliver other complementary services (training, education) that will allow the poor to increase their incomes.

Coordination across the various social assistance programs is improving. The household registry and management information system constructed to support the Red de Oportunidades program identified around 200,000 poor households and potential beneficiaries, of which the Red de Oportunidades provides financial assistance to those that meet the health, education and elderly presence eligibility criteria. The household database provides a foundation upon which build additional programs to help the poor, as done in the previous administration through: (a) income generating activities for disabled people; (b) agricultural training programs executed by INADEH; (c) a housing improvement program for the poor. The new government main social assistance initiatives, linked to their electoral commitments (“inperdonables’) were not targeted to the poor. Thus, a leading program for the elderly, 100 Balboas at 70 years of age, was launched untargeted covering 85,000 individuals. Since this program was launched, efforts are underway to refocus the 100 B./ at 70 program on the poor, by cleaning the its database utilizing the information from Red de Oportunidades. In addition, the coordination between Red de Oportunidades and health and nutrition programs has tightened during this administration both to facilitate the proof of eligibility and to benefit from each programs’ databases. The databases of the conditional cash transfer (CCT) program and the health and nutrition program are built from different sources, but the overlap is considerable and an increasing and timelier exchange of information is benefiting both programs.

3.2.2.2 Improving quality and coverage of health and nutrition services to the extreme poor

Improving the quality and coverage of health services to the extreme poor continued to expand during the economic slowdown of 2009. The expansion of coverage of health services has taken place

3 Ministerio de Desarrollo Social (MIDES) Informe Ejecutivo Comisión Interinstitucional de la Red de Oportunidades (CIRO) Secretaria del Sistema de Protección Social (junio de 2010) 4 Inter-American Development Bank (IBRD) Notas de Dialogo de Políticas; Panamá: Pobreza y Protección Social June, 2009

in line with the Estrategia de Extensión de Cobertura (EEC) that now assists communities that are more than one hour away from a health center that has, at a minimum, one doctor and one nurse. This health package is currently being offered, through mobile teams of health providers, to poor and isolated rural communities without access to a health facility. As a result of the expansion, the Ministry of Health reports that, since January, 2009, 76, 000 additional people living in the indigenous areas (Comarcas) benefit from the ambulatory health services. According to the Ministry of Health, the EEC serves around 451,090 persons. The Ministry of Health plans to incorporate the lessons learned from expanding coverage to the isolated areas to improve and strengthen the delivery of health services through the main health services network.

In addition, the program that seeks to expand a comprehensive nutrition component in the package of basic health services delivered to poor and isolated communities is on track. The Ministry of Health and the National Nutrition Secretariat (SENAPAN) published a National Plan to Combat Child Malnutrition (2008-15), a key action of which was the inclusion of an integrated package of nutritional services in the basic package of preventive and promotion health services (Paquete de Atención Integral de Servicios de Salud, PAISS) provided by the Coverage Extension Strategy, Estrategia de Extensión de Cobertura (EEC). Under the new national plan, nutrition services are to include growth promotion and monitoring at the community level following a strategy known as AIN-C (Atención Integral a la Niñez en la Comunidad). As of today, nutrition services are provided in the basic package of preventive and promotional health services, although four of the 15 of components of the nutrition package have yet to be fully rolled out to all communities. The expectation is that they will be fully rolled out by the end of 2010.

3.2.2.3 Maintain levels of social protection spending during economic downturns

The government maintained the level of social expenditure (health, education and social assistance) as programmed in the 2009 Budget Law (Law No. 69--2008) in line with the priorities of the Acuerdos de la Concertación Nacional. An examination of the 2009 budgetary outturns suggests that social expenditure (health, education, and social assistance) increased in 2009 in line with overall public expenditure. In 2009, public expenditure of the Central Government increased by 25.1 over the previous year, while public investment increased by 13.1 percent. At the same time, outturns of public investment in social ministries increased as well: Education (8.8 percent), Health (42.1 percent); and, Social Development (15.6 percent.) 5 While a formal stock-taking of individual social projects was not available at the time of the ICR, overall execution of the resources allocated in the 2009 Budget Law (Law N0. 69) were in line with the priorities identified in the Acuerdos de Concertación.6 During the transition between administrations, however, the institutional mechanism for verifying implementation of the Acuerdos was not operative, and therefore a formal evaluation of the compliance with the accords did not take place.

5 Contraloría General de La república Ejecución Fiscal del Sector Público 2009 6 In 2006, the Government initiated a national dialogue around development priorities and the document Directivas de la Concertación Nacional para el Desarrollo of October 2007 summarized the agreements reached with representatives from a broad range of social, political, religious, professional, and social organizations. The Acuerdos foresaw an allocation of 360 million B./ in 2009 for investment in projects covering a broad range of objectives: poverty reduction, education, health, water and sanitation, environment, transport, scientific development, titling, training and skills development, etc. According to Ministerio de Economía y Finanzas (MEF), the 2009 budget included a total of 1880 projects related to the Acuerdos to be carried out by 42 agencies. In addition, the budget included 39 strategic projects monitored by the Presidency for a total of 630 million B./ These projects included important initiatives such as the Red de Oportunidades, health and nutrition, transport and water and sanitation. Formal auditing of implementation of individual projects has not taken place.

Law 20 set the institutional framework to implement and monitor the agreements; this law established the legal basis for the National Council for the National Development Dialogue and the Presidential Secretary of Goals and the Social Cabinet. The Council and the Secretary were responsible for verifying the implementation and goals of the Concertación Nacional, while the Social Cabinet was to be responsible for the coordination of all social agencies in the implementation of the Agreements.

The new government has just completed the institutional arrangements to continue implementation of Law 20. The government has just completed the process of setting in place the mechanisms mandated by Law 20 to monitor compliance with the Acuerdos de Concertación Nacional. On September 23, 2010, the Consejo Ejecutivo de la Concertación para el Desarrollo installed a technical committee in charge of monitoring the implementation of the Acuerdos, composed by the Ministerio de Economia y Finanzas (MEF), the Secretaria de Metas Presidenciales, el Ministerio de Desarrollo Social (MIDES) and the Executive Secretary. Reportedly the government plans to align the commitments under the Acuerdos de Concertación, the Government Strategy 2010-2014, the Millennium Development Goals and the priority commitments of the Presidency (“inperdonables”.)

The ICR rates achievements of results under this pillar as moderately satisfactory. Of the five results expected under this pillar, four have been achieved—increasing the real value of the CCT transfers, expanding the coverage of health, expanding the nutrition program and maintaining social spending. The hiatus in the operation of the institutional mechanisms under Law-20 to monitor the agreements under the Acuerdos de Concertación has meant that a formal assessment of the implementation of the related commitments included in the 2009 Budget was not undertaken. However, maintaining the level of social expenditure during 2009 and financing of key programs such as Red de Oportunidades addressed a key concern under the DPL. Now that the mechanisms to track implementation of the agreements under the accords have been reactivated, the national dialogue on social development and tracking commitments to social expenditure should improve. Lastly, while the social assistance initiatives of the new administration did not emphasize targeting, the interest of the government in coordinating social programs and focusing on the poor has increased.

3.2.3 Maintaining stability by strengthening financial sector supervision and stability: Satisfactory.

The Government successfully contained the potential impact of the crisis on its financial sector through initiatives aimed to tighten regulation and oversight as well as continuing with the program to improve on the regulatory practices. As a result of the measures taken, the tighter oversight and the resilience of the economy, the final impact of the economic slowdown and the global financial crisis on the financial sector of Panama was small. Thus, the overall goal of protecting the financial sector during the crisis was met. In addition, regulatory practices are under improvement to take better account of risks.

The productive sectors did not need access to special lines of credit in the amounts initially envisioned. Given the tightening credit market conditions in 2008, the government created the Programa de Estímulo Financiero, PEF, a fund, for up to US$1.1 billion, intended to offer banks access to medium- term credit in order for them to increase their lending activities to productive sectors. The Fund resources available reached US$400 million of which US$240 million have been committed and US$60 million disbursed. Intended financing from multilateral institutions was not necessary. The Fund will close at the end of 2010. The limited size of commitments from the fund as compared to the original intention reflect the success in averting any major disruptions in the flow of funds from the financial sector to productive agents through a tight oversight that assured investors and depositors of the soundness of the banking sector.

Temporary measures taken to reduce the negative impact of extraordinary global financial volatility on bank’s equity position is being phased out as they are no longer needed. Specifically Directive-8-2008 allowed banks to request transfer securities held by them under the ‘available-for-sale’ category to the ‘Held-to-maturity’ securities to reduce the possible negative impact of drops in the market value of securities on the value of assets of the banks and their equity position. Directive-8-2008 included in the eligible securities : (a) obligations issued by the Panamanian state; (b) Treasury Bills and Notes of the USA; and (c) sovereign debt obligations of Latin American governments. As the threat of a crisis was lifted, Directive-1-2009 cancelled Directive-8-2009, allowing banks to keep in place the reclassified values.

The Directive to tighten the valuation of collateral to cover credit risk has rescinded. Directive No. 2-2008 tightened the parameters and basic general guidelines regarding the uptake of collateral for mitigating credit risk as protective measure during the crisis. This Directive, however, was cancelled by Directive No. 8-2009, which stipulates that a new proposal for collateral valuation procedures will be prepared. The view of the SBP is that the postponement does not represent a major weakness as asset valuation guidelines under the law and other Directives (such as Directive-5-2008) provide minimum and satisfactory guidelines. Moreover, crisis concerns have eased.

Tightened norms on liquidity management are under implementation. Directive No. 4-2008 (October 1, 20008) replaced Directive No. 9-2006 updating conditions regarding the banks’ policies, procedures and control systems needed for an effective management of liquidity risk and compliance with liquidity requirements. The norm established the responsibilities of the boards of directors to set up policies and strategies for the daily management of liquidity, and to establish contingency plans to manage potential liquidity needs. The norm also requires that banks have liquidity risk assessment manuals with policies and procedures for the valuation of the liquidity risk adequate to the structure and complexity of their operations. The norm reiterated the minimum of 30 percent weekly legal liquidity requirement that most banks must keep at all times and of 20 percent for those banks that keep an interbank deposit quarterly greater than 80 percent of their total deposits. These norms are under implementation.

During this DPL, Panama continued implementing its program to improve its regulation of the financial sector through the Superintendence of Banks (SBP).7 The Decree-Law 2 of 2008 amended the 1998 banking law and mandated a consolidated new text called the new Banking Law---Executive Decree 30 of 2008. The result has been strengthening of the regulatory framework by filling existing vacuum and making explicit powers that were not openly defined in the previously legislation. The new law contains all the relevant elements of a modern banking law, addressing concerns noted by the IMF ROSC noted above. Specifically, it strengthens the SBP institutionally and improves the legal protection of its officials, granting the SBP more autonomy to administer its human and financial resources and creating the career of Bank Supervisor as a specialized profession with professional standards and clear rights and obligations. In addition, auditing standards have been improved thus giving the SBP a better understanding of the impact of the international financial crisis on Panamanian banks. The law strengthens external auditing standards by requiring compliance with accounting norms approved by the

7 The SBP was created by 1998 Banking Law. According to the 2006/2007 IMF Report [Panama: Detailed Assessment of Observance of Standard and Codes for Banking Supervision, Insurance Supervision, and Securities Regulation—February 2007], Panama met all but 2 Basel-1 Core Principles. The scope for improvement, however, was considerable given that for several of the principles the country was only largely (not fully) complaint. Based on the lessons learned, the recommendations from external reviews and the need to bring the regulatory practices to international levels to enhance the relevance of Panama as a regional financial center, the government and the SBP engaged in a thorough revision of the regulatory financial framework.

SBP. The SBP has the authority to reject the hiring of external auditors that fail to meet standards of independence and experience as well as reject audit reports that have not been elaborated according to the law.

New procedures under the new Banking Law for addressing troubled banks (including reorganization and liquidation) helped SBP face the challenge posed by Stanford Bank. Using the powers granted by the new Banking Law, in February 17 2009 the SBP ordered the administrative takeover of Stanford Bank, later extending the period of takeover to undertake a reorganization of the Stanford Bank in order to protect the investors, facilitate its sale, and unblock assets in the U.S. (Texas) and Switzerland. The process was completed in April 2010 with the sale of the bank to private investors.8

The SBP is carrying out consolidated regulation and supervision of the banks under its purview. The new Banking Law extends explicit powers to the SBP to undertake consolidated regulation and supervision and to enter into agreements with other jurisdictions to carry out this mandate. According to the SBP these norms are under implementation. The rapid compliance with the expected results is due to the fact that the SBP was already undertaking consolidated supervision relying on article 17 of the 1999 law that extended various powers to the President of the SBP and agreements already signed with the supervisory bodies of other jurisdictions (now at 24). Indeed, the IMF 2006 ROSC found the country compliant with consolidated supervision (Principle No. 20). 9 It remains the case though that the new Banking Law made more explicit the powers of regulation over conglomerates enhancing the capacity to adequately monitor and manage risks. According to the SBP, today all conglomerates are supervised and report to the SBP consolidated accounts.

Capital Asset Ratio (CAR) regulations on a consolidated basis are now being met. Directive No. 5- 2008 (October 1 2008) replacing Directives No. 5 y No. 6 of 1998 established norms defining the main factors to be considered for the calculation of primary and secondary capital and the deductions that apply in the calculation of the CAR. The Directive 5-2008 responded to the growth and evolution of the risk profiles of both banks with general license and with international license. Directive 5-2008 required compliance with the CAR a consolidated basis, and not by bank, as previously was the case. In accordance with the new Banking Law, Directive 5-2008 reiterates that the CAR cannot fall below 8 percent of the total weighted assets and off-balance sheet operations that represent an irrevocable contingency, weighted in proportion to their risks, and that the total CAR will be calculated on a group basis. The law allows the SBP to modify the ratio, if required, given the risk profile of a bank or bank group, and to include other risks (market, operational and country risk) in the valuation of the capital requirement. The SBP reports that banks comply with Directive No-2008, which became effective July 2009. Previous progress with consolidated supervision has facilitated compliance with Directive 5-2008.

8 Resolución S.B.P. No. 078-2010. 9 The IMF 2007 ROSC noted “The on-site supervision teams conduct inspections of all entities controlled by banks, including non-banking activities in Panama and banking in foreign jurisdictions carried out through subsidiaries or branches of Panamanian banks.” In addition: “The on-site examinations program for consolidated supervision is active and includes deep analysis of relevant risks of all components of the banking groups, including inspections of non-banking activities. Economic groups are subject to consolidated supervision requirements for balance sheet and income statement and a requirement that the year-end consolidated financial statement supervision program comprehensive consolidated supervision is active and includes deep analysis of relevant risks of all components of the baking groups, including inspections of non-banking activities. Economic groups are subject to consolidated reporting requirements for balance sheet and income statement and a requirement that the year-end consolidated financial statement be audited.” 15

The ICR rates the achievements of results under this pillar as satisfactory.

The financial sector of Panama came out in a strong position from the financial crisis as feared downside risks did not materialize in part due to the careful monitoring of liquidity risks by the regulatory authorities and in part because of the impact of the crisis on economic activity was relatively mild. Feared deposit withdrawals by foreigners did not take place. Today, liquidity remains high, the percentage of non-performing loans remains low, and the aggregate financial system capitalization exceeds Basel criteria; the profitability of the sector understandably has decreased. Thus the overall objective of protecting the downside risk of a financial shock to the economy was met. Concurrently, the government (SBP) continued strengthening of the regulatory framework and practices initiated under the new Banking Law of 2008, with an emphasis on consolidated supervision and focus on identifying and managing potential risks. Three of the expected four results were met. These include (a) monitoring of liquidity; (b) consolidated supervision of conglomerates; and (c) capital deductions in line with risk criteria in the calculation of the capital required ratios on a consolidated basis. A directive tightening the valuation of collateral on loans was rescinded, but given the ebbing of the crisis and the existence of complementary regulation, the issue is not of great concern. In addition, the SBP used the powers to take control of troubled banks under the new Banking Law to sort of the difficulties presented by Stanford Bank.

3.3 Justification of Overall Outcome Rating

Ratings: Moderately Satisfactory

The transfer of government affected the timely delivery of all of the expected results. However, the likelihood is high that all of the results under the DPL will be achieved, as corrective actions such as setting of the mechanisms to monitor social expenditure and the renewed focus on targeted social expenditure are underway. In financial sector, the implementation of the Directive on valuing of guarantees for loans was not implemented, but the drafting of a new one is under consultation.

3.4 Overarching Themes, Other Outcomes and Impacts

(a) Poverty Impacts, Gender Aspects, and Social Development

The actions supported under the DPL had a direct impact on softening the impact of the economic slowdown on the poor through recuperating the real value of the CCT transfer, the expansion of health and nutrition services to isolated areas, and the maintaining the level of public expenditure. In addition, successful efforts to soften the impact of the global crisis on domestic economic activity prevented high income losses and emergence of unemployment. Moderate poverty in 2009 is reported at 29.9 a significant reduction from 37.1 percent in 2005. Absolute poverty decreased from 22.5 percent in 2005 to 16.1 in 2009. The Gini coefficient decreased from .538 in 2005 to .521 in 2009. The rate of unemployment continued to drop through 2009.

(b) Institutional Change/Strengthening

Institutional impact is high in all areas of engagement. The DPL program continued to support the strong institutional transformation process that the Bank had been supporting during CPS period and the previous Interim Strategy. On social assistance, the DPL helped advance two important agendas; (a) the institutional consolidation of the conditional transfer system and (b) the extension of health and nutrition to isolated populations. Work on both of these agendas is continuing under the current administration, which, in addition, has incorporated its own initiatives on social assistance and is examining next steps to improve the coordination across social programs possibly through the development of a unified beneficiary database. The social dialogue on public expenditure priorities and monitoring of the Acuerdos 16

de Concertación will continue now that the government has appointed the staff in charge to implement the law.

The agenda that the DPL supported in the financial sector is having and will continue to have a major impact on the quality of the regulatory design and its implementation. That agenda is grounded in the support that the new Banking law provides and focused on beginning implementation of Basel II principles thus emphasizing the identification and management of risks for banks and conglomerates. 10 Complementary actions include the plan to complete 12 tax-treaties by the end of 2010 as part of the process to qualify for the OECD to remove Panama from its gray list. Progress in this institutional agenda in the financial sector is fundamental for Panama to deepen its competitive advantage in financial services, while at the same time adhering to international practices.

N/A

3.5 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops

N/A

4. Assessment of Risk to Development Outcome (Negligible to Low)

The risk to development outcomes is negligible to low. In the financial sector, the risk to the sustainability of the gains in design and quality of banking regulation is nil because of the commitment of the authorities to enhance risk-based supervision and to adopt Basel II regulatory requirements. In addition, the authorities will have the technical support of a forthcoming FSAP that will access thoroughly the design and practice of banking regulation and will identify actions that will help the country strengthen consolidated risk-based regulation. In the social arena, the government’s social agenda supports the continuation of the health and nutrition programs and the institutions to oversee social expenditure (Acuerdos de Concertación, MDG, government program and Imperdonables) are in place. The emphasis on consolidating social expenditure and targeting it preferentially to the poor might take longer, given the technical and coordination challenges and much will depend on the role played by the Ministry of Social Protection and the Ministry of Finance.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry (Satisfactory)

The design of the DPL was appropriate, timely, and focused on critical challenges for the country arising from the global financial crisis. The one-tranche design was consistent with acting promptly at the end of one administration, when mid-term commitments involving the next administration may not have been

10 International Monetary Fund (IMF); Public Information Note (PIN) No. 10/2009 IMF Executive Board Concludes 2010 Article IV Consultation with Panama; August, 2010.

appropriate. In addition, the design aligned with advancing a reform agenda that had been under implementation under the previous ISN and the on-going CPS. Thus the DPL agenda fit the main country challenges, which were curtailing short-term risks while continuing with the implementation of the institutional building agenda that was underway. The DPL design built on work the Bank was already supporting in the social sectors; The Bank, however, had not been involved in the financial sector. Here, the Bank design relied on previous work that the IMF had undertaken, timely background analytical notes and the cooperation of the client.

(b) Quality of Supervision (Moderately Satisfactory)

The Bank supervised implementation as part of the verification of compliance with the triggers for the operation, all of which were met. After disbursement, the Bank supervised the program as part of the preparation of a new Country Partnership Strategy, with focus on those areas that needed attention in the dialogue with the new government to assure smooth continuity of the program. Bank supervision of has been an important factor in informing the incoming authorities on technical aspects of the DPL program. The Bank took remedies to reduce the risks to the program from the transition between governments, such as an active dialogue with all key political parties and the preparation of policy notes for the incoming administration. In addition, the dialogue and supervision of other Bank operations, including the Social Protection Project and the Health Equity and Performance Improvement Project helped mitigate institutional capacity risks. Still, the Bank may have underestimated the risks of the transition across administrations to the full and timely delivery of results and also should have paid more attention to follow-up on the particular results and outcomes of this operation.

The design and timing of the operation was highly satisfactory, but the institutional risks of the transition may have been underestimated, even after the substantive efforts of the bank to monitor key developments. Overall the performance of the Bank is considered moderately satisfactory. The Bank provided timely and relevant support to Panama with a program that had institutional impact, focus on the poor and where the risk to the development outcomes is negligible to low.

5.2 Borrower Performance

(a) Government Performance: Moderately Satisfactory

Justification of Rating for Overall Borrower Performance

The Government showed strong ownership the design of the DPL and delivered on all of the triggers of the operation. After the change in governments, the commitment of the authorities to continue improving the quality of the regulatory practices as mandated by the new Banking Law has continued, under the new leadership of the SBP. The new authorities are keen as well with complying with OECD guidelines and removing the country from the OECD gray list and they intend to move to implement Basel 2. The strategy of the new government is committed to social development, whose agenda combines programs under implementation with new initiatives. However, in some areas, the transition meant delays such as in the implementation of the institutions to follow on the Acuerdos de Concertación or the attention given to the targeting social assistance to the poorest segment of the population. In addition, focus on monitoring of intended results and coordinating the actions among the concerned agencies, including the Superintendency of Banks (SBP), the National Bank of Panama (BNP), the Ministry of Social Development (MIDES), and the Ministry of Health (MINSA) was weak.

6. Lessons Learned

 To support a country during a crisis situation through a budget support operation the Bank should not limit its intervention to areas where it has an on-going program. An on-going program of lending and AAA facilitates the delivery of timely and well design budget support operations. However, in a crisis situation a country may need support in areas where the Bank has not been actively involved. In these situations, the Bank should be guided by the relevance of the areas of intervention and not by the on-going program. Still, the design should mitigate the design risks through cooperation with other agencies and preparation of timely diagnostics. Under this DPL, the Bank team’s focus on the financial sector was adequate even if the Bank had not been actively involved in the sector.

 A one-tranche DPL is an adequate instrument to support a country in a crisis situation at the end of an administration, but the design should seek to minimize the risk to the delivery of results. A one tranche DPL operation avoids committing an incoming administration with development commitments. Still, the process of transition between two administrations may delay delivery of expected development results under the DPL, because it may take time to align new and preceding strategies and because of the lack of commitment to a programmatic agenda going forward. The experience under this DPL is that those risks are high even when the project teams make the best efforts to minimize them. Hence, the importance of designing sturdy results frameworks by minimizing dependence on the actions of the incoming administration.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners

(a) Borrower/Implementing agencies

N/A

(b) Cofinanciers

N/A

Annex 1. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members P115177 – Protecting the Poor Under Global Uncertainty DPL Responsibility/ Names Title Unit Specialty Lending Supervision David Gould Lead Economist LCSPE Co-TTL Lars Moller Country Economist LCSPE Co-TTL Gaston Blanco Senior Public Sector Specialist LCSHS Maria Eugenia Bonilla Senior Economist LCSHD Aline Coudouel Senior Economist LCSHS Andrea Kucey Senior Operations Officer LCC2C

(b) Staff Time and Cost P115177 – Protecting the Poor Under Global Uncertainty DPL Staff Time and Cost (Bank Budget Only) Stage USD Thousands (including travel No. of staff weeks and consultant costs) Lending FY09 $166.4 FY10

Total: Supervision FY10 FY11 $24

Total:

Annex 2. Beneficiary Survey Results

N/A

Annex 3. Stakeholder Workshop Report and Results

N/A

Annex 4. Summary of Borrower's ICR and/or Comments on Draft ICR

Borrower did not send any comments.

Annex 5. Comments of Cofinanciers and Other Partners/Stakeholders

N/A

Annex 6. List of Supporting Documents

Contraloría General de La república Ejecución Fiscal del Sector Público 2009

Ministerio de Desarrollo Social (MIDES) Informe Ejecutivo Comisión Interinstitucional de la Red de Oportunidades (CIRO) Secretaria del Sistema de Protección Social (junio de 2010)

Ministerio de Economía y Finanzas (MEF) Documento descriptivo de presupuesto de inversiones del sector público para la vigencia fiscal mayo 2009

Ministerio de Economía Y Finanzas (MEF) Decreto-Ejecutivo No. 52 (de 30 de abril de 2008) Que adopta el texto Único del Decreto ley 9 de 26 de febrero de 1998, modificado por el Decreto Ley 2 de 22 de febrero de 2008

Inter-American Development Bank (IBRD) Notas de Dialogo de Políticas; Panamá: Pobreza y Protección Social June, 2009

International Monetary Fund (IMF); Panama: Module—Banking Sector Assessment August 2001

International Monetary Fund (IMF) ; Panama: Detailed Assessment of Observance of Standards and Codes for Banking Supervision, and Securities Regulation; Report No. 07/67, February 2007

International Monetary Fund (IMF); Panama: 2009 Article IV Consultation—Staff report; Staff Statement and Supplement; Country Report No. 09/207July 2009

International Monetary Fund (IMF); Public Information Note (PIN) No. 10/2009 IMF Executive Board Concludes 2010 Article IV Consultation with Panama; August, 2010

Sistema de Naciones Unidas, “Concertación Nacional Para El Desarrollo Octubre 2007” (www.concertación.org.pa)

Sistema de Naciones Unidas CEPAL; Programas de transferencias condicionadas, políticas sociales y combate a la pobreza en Panamá, Alexis Rodríguez Mojica, Mayo 2010

Superintendencia de Bancos (SBP); Acuerdo No. 002-2008 (3 de julio de 2008) “Por medio de la cual se dictan parámetros generales para la valoración de garantías para la cobertura del riesgo de crédito.”

Superintendencia de Bancos (SBP); Acuerdo No. 004-2008(24 Julio de 2008) “Por medio del cual se deroga el Acuerdo No. 9-2006 de noviembre del 2006 y se dictan nuevas disposiciones para el cumplimiento del índice de liquidez legal”

Superintendencia de Bancos (SBP); Acuerdo No. 5-2008 (Octubre 1 de 2008) “Por la cual se establecen normas de capital para riesgo de crédito aplicables paras la Entidades Bancarias”

Superintendencia de Bancos (SBP); Acuerdo No8-2008 (31 octubre de 2008) Por el Cual se adoptan medidas temporales como consecuencia de la situación financiera internacional”

Superintendencia de Bancos (SBP); Acuerdo No.2-2009 (25 marzo del 2009) “Por el cual se extiende la entrada en vigencia del Acuerdo N. 5-2008 de 1 Octubre de 200.” Superintendencia de Bancos (SBP); Acuerdo No. 004-2009 (9 de junio de 2009) “Por medio del cual se modifica el artículo 4 del Acuerdo 5-2008”

Superintendencia de Bancos (SBP); Acuerdo No. 006-2009 (24 de junio de 2009) “Por el se establecen normas para limites de Concertación de Riesgos a Grupos Económicos y Partes Relacionadas.”

Superintendencia de Bancos (SBP); Acuerdo No. 8-2009 (6 de agosto de 2009) “Por el cual se deja sin efecto el Acuerdo No. 2-2008 de 3 de julio de 2008 sobre la Valoración de Garantías para la Cobertura de Riesgo de Crédito”

Superintendencia de Bancos (SBP); Acuerdo 010-2009 (18 de Diciembre de 2009) “Por medio del cual se modifica la periodicidad de la presentación del reporte del cálculo del índice de liquidez legal”

Superintendencia de Bancos (SBP); Resolución S.B.P (de 31 de Marzo de 2010)

The Economist Intelligence Unit (February 2010) Country Finance Panama

World Bank Social Protection-Support to the “Red de Oportunidades” Project June 8, 2007 Report No. 39193-PA

World Bank Health Equity and Performance Improvement Project July 10, 2008 The Republic of Panama Report No. 42866-PA

World Bank; Country Partnership Strategy (FY2011-FY2014) for the Republic of Panama August 24.2010

World Bank; Protecting the Poor under Global Uncertainty Development Policy Loan March 23. 2009 Report No. 47208-Panamá World Bank, “Did Latin America Learn to Shield from Economic Shocks” October 2010, LAC

ICR Interviews conducted in Panama, June 7-9

Barletta, Nicolás —Member of the Board of the SBP and Asesores Estrategicos Barría, Fernando (HCBS) Batista, Juan Alberto —Ministerio de Salud Diamond, Alberto and Directors-- Superintendencia de Bancos Guillen, Monica---Technical Secretary of the Social cabinet Mendez, Aracely—Ministerio de Economia y Finanzas (MEF) Robledo, Hernan—Ministerio de Economia y Finanzas (MEF) Torregroza, Jorge---Red de Oportunidades, Director—(MIDES)

PANAMA

SELECTED CITIES AND TOWNS MAIN ROADS PROVINCE CAPITALS RAILROADS NATIONAL CAPITAL PROVINCE BOUNDARIES RIVERS INTERNATIONAL BOUNDARIES

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Elena El Porvenir To Uatsi Portobelo Changuinola Ustupo Yantupo Teribe Bocas del Toro KUNA DE Colón Cordil COSTACOSTA lera de K U MADUNGANDI BOCASBOCAS Almirante CañitaCañita Sa N Salud LagoLago n B A LagoLagLagoo las DELDEL Cusapin GatúnGatún PanamaP Y KUNA DE RICARICA Golfo de los Coclé a PANAMPPANAMÁA N A M Á ChepoChepo PiriáPiriá n BayanoBaBayanoyano A del Norte CanalC a L TOROTORO Lago Chiriquí a m A WARGANDI Mosquitos COLÓNCOLC O L Ó N n a TocumenTocumen ° a ° 9 N Chiriquí San l 9 N VulcánVulcán BarúBarú Grande Cristóbal PANAMÁ (3475(3475 m)m) LaLa ChorreraChorrera CañazasCañazas CerroCerro Calovébora ChorchaChorcha NGOBEN G O B E CerroCerro PeñaPeña BlancaBlanca Puerto (2238(2238 mm)) CerroCerro Obaldía To (1314(1314 m)m) Bahía de Chiman ChucantiChucanti SantaSanta FéFé S Corredor BUGLEB U G L E ElEl CopéCopé e CHIRIQUÍC H I R I Q U Í ElEl ValleValle (1439(1439 m)m) E r CerroCerro SantiagoSantiago Panamá C r LaLa ConcepciónConcepción SoloySoloy SantaSanta FéFé h M a (2826(2826 m)m) u c n PenonomePenonome u B al n í DavidDavid Cord entr a a illera C LaLa PalmaPalma q E ChichicaChichica Isla u COCLCCOCLÉO C L É e R d

PedregaPedrega VERAGUASV E R A G U A S Rio Hato del Rey A e

o o

l Puerto l S anta M D Armuelles b aria Aguadulce GuabaláGuabalá a YavizaYaviza a Cerro P SantiagoSantiago r n i Tacarcuna a DívisaDívisa é S DARIÉNDARID A R I É N n (1875 m) ° Chitre Garachiné ° 8 N SonaSona OcúOcú A Golfo de YapeYape 8 N R BocaBoca dede TucutíTucutí Puerto E Panamá LimónLimón Mutis R CerroCerro PirrePirre Las Tablas (1445(1445 m)m) R EMBERA

E MacaracasMacaracas El Tigre H LOSLOS Puerto Piña Isla de SANTOSSANTOS Los Asientos Coiba Cerro Cambutal Tonosí 08020 40 60 100 Kilometers (1400 m) COLOMBIACOLOMBIA PANAMA 0 20 40 60 Miles

7°N

This map was produced by the Map Design Unit of The World Bank. IBRD 33462R PACIFIC OCEAN The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank JUNE 2007 Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries.

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