Document of The World Bank
FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 47208-PA
INTERNATIONAL BANK FOR RECONSTRUCTIONAND DEVELOPMENT
PROGRAM DOCUMENT FOR A PROPOSED LOAN
INTHE AMOUNT OF US%80MILLION
TO THE Public Disclosure Authorized REPUBLIC OF PANAMA
FOR A
PROTECTING THE POOR UNDER GLOBAL UNCERTAINTY DEVELOPMENT POLICY LOAN
March 23,2009 Public Disclosure Authorized
Poverty Reduction and Economic Management Central America Country Management Unit Latin America and Caribbean Region
This document has a restricted distribution and may be used by recipients only in the performance oftheir official
Public Disclosure Authorized duties. Its contents may not otherwise be disclosed without World Bank authorization. PANAMA - GOVERNMENT FISCAL YEAR January 1 - December 3 1
CURRENCY EQUIVALENTS (Exchange Rate Effective as ofMarch 26,2009)
Currency Unit Balboa US$1.oo BJ1.00
Weights and Measures: Metric System
ABBREVIATIONS AND ACRONYMS
AIN-C Atenci6n Integral a la Nifiez en la Comunidad BNP National Bank ofPanama CAR Capital Adequacy Ratio CBI International Banking Center (Centro Buncurio Internacional) CCT Conditional Cash Transfer CD Cambio Democratico CEA Country Environmental Analysis CEWICA Country Economic Memorandumhvestment Climate Assessment CFMCPAR Country Financial Accountability and Procurement Assessment Report CFZ Colon Free Zone CPI Consumer Price Index CPS Country Partnership Strategy css Social Security Institute (Caja de Seguro Social) DPL Development Policy Loan EEC Estrategia de Extensi6n de Cobertura FDI Foreign Direct Investment FOB Free On Board FRL Fiscal Responsibility Law FSSRA Financial Sector Supervision and Regulation Assessment FY Fiscal Year ofthe World Bank (July 1 - June 30") GDP Gross Domestic Product GNI Gross National Income GOP Government ofPanama IADB Inter-Ameri c an Development Bank IBRD International Bank for Reconstruction and Development IFC International Finance Corporation IMF International Monetary Fund INE National Institute of Statistics LCR Latin America and Caribbean Region LDP Letter ofDevelopment Policy LSMS Living Standards Measurement Survey MEF Ministry of Economy and Finance MIDES Ministry of Social Development MNSA Ministry of Health NFPS Non-Financial Public Sector PAISS Paquete de Atenci6n Integral de Servicios de Salud PCA Panama Canal Authority PP Partido Panameiiista PRD Partido Revolucionario Democratic0 RdO Red de Oportunidades (the conditional cash transfer program) ROSC Report on the Observance ofStandards and Codes SBN National Banking System (Sistema Bancario Nacional) SBP Superintendency of Banks of Panama SDR Special Drawing Rights SENAPAN National Nutrition Secretariat UNDP UnitedNations Development Program
Vice President: Pamela Cox Country Director: Laura Frigenti Sector Director: Marcel0 Giugale Sector Manager: Rodrigo A. Chaves Lead Economist/Sector Leader: J. Humberto Lopez Task Team Leaders: David M. Gould and Lars C. Moller
PANAMA PROTECTING THE POOR UNDER GLOBAL UNCERTAINTY DEVELOPMENT POLICY LOAN
Table of Contents
I. INTRODUCTION...... 1 I1. COUNTRY CONTEXT...... 1 I11. ECONOMIC CONTEXT AND MACROECONOMIC OUTLOOK ...... 3 A . ECONOMICCONTEXT ...... 3 B . MACROECONOMICOUTLOOK IN THE CONTEXTOF THE GLOBALCRISIS ...... 6 C . DEBTSUSTAINABILITY ...... 10 IV. THE GOVERNMENT’S PROGRAM AND KEY ISSUES IN PROTECTING THE POOR UNDER GLOBAL UNCERTAINTY ...... 11 A . MITIGATINGTHE IMPACT OF ECONOMICSLOWDOWN ON THE POOR ...... 12 B . PROMOTINGFINANCIAL STABILITY ...... 15 V . THE PROPOSED LOAN...... 19 A . LINKTO THE COUNTRY PARTNERSHIP STRATEGY ...... 19 B. LOANDESIGN ...... 19 c . COLLABORATION WITH THE IMF. OTHERBANK OPERATIONS. AND OTHER DONORS...... 25 D. LESSONSLEARNED FROM PRIOR DPLS IN PANAMA ...... 26 E. CONSULTATION. DISTRIBUTIONAL.AND ENVIRONMENTALASPECTS ...... 27 VI. LOAN IMPLEMENTATION ...... 29 A . IMPLEMENTATION. MONITORINGAND EVALUATION...... 29 B. FIDUCIARYASPECTS ...... 29 C . DISBURSEMENTS...... 29 D. RISKSAND RISK MITIGATION...... 30 ANNEX 1. LETTER OF DEVELOPMENT POLICY ...... 31 ANNEX 2 . PANAMA BANKING SECTOR STATISTICS...... 41 ANNEX 3 . IMP STATEMENT ON THE MACROECONOMIC SITUATION...... 45 ANNEX 4 . PANAMA: DEBT SUSTAINABILITY ANALYSIS ...... 47 ANNEX 5 . PANAMA: OPERATIONS PORTFOLIO (IBRDDDA AND GRANTS) ...... 55 ANNEX 6 . PANAMA - IFC COMMITTED AND DISBURSED OUTSTANDING INVESTMENT PORTFOLIO ...... 57 ANNEX 7 . PANAMA AT A GLANCE, 3120109 ...... 58 MAP...... 61 LIST OF TABLES. FIGURES AND BOXES
Table 1: Panama Medium-Term Macroeconomic Framework* ...... 5 Table 2: CPS Program Objectives and Select Areas ofAction ...... 20 Table 3: Matrix ofPolicy Actions and Expected Outcomes ...... 21 Table 4: Links between the DPL and Prior Analytical Work ...... 24
Figure 1: Panama Growth and CPI Inflation. 2002-08 (quarterly data) ...... 3 Figure 2: Colon Free Zone. Cumulative Net Re-exports (millions of Balboas) ...... 7
Box 1. Poverty and Inequality in Panama...... 4 Box 2 . Panama’s Financial Sector ...... 8 Box 3 . The Social and Fiscal Responsibility Law ...... 10 Box 4 . GOP Strategic Vision of Economic and Employment Development Towards 2009 ...... 12 Box 5 . Red de Oportunidades - the Government’s Flagship Poverty Program ...... 13 Box 6 . Good Practice Principles on DPLs...... 27
This DPL was prepared by an IBRD team led by David Gould (LCSPE) and Lars Moller (LCSPE) and included Solange Alliali (LEGLA). Gaston Blanco (LCSHS). Maria Eugenia Bonilla (LCSHH). Aline Coudouel (LCSHS). Mariluz Cortes (Consultant). Maria Lucia Guerra (LCSPE). Patricia De la Fuente Hoyes (LOAFC). and Marie Vidal (LCSPE) . The team is grateful for the close collaboration of the Government of Panama during loan preparation. Rodrigo A . Chaves (LCSPE) and Humberto Lopez (LCSPR) provided internal quality oversight . The peer reviewers were Pablo Fajnzylber (LCSCE). Edgardo Favaro (PRMED) and Dino Merotto (AFTP2) . LOAN AND PROGRAM SUMMARY
PANAMA PROTECTING THE POOR UNDER GLOBALUNCERTAINTY DEVELOPMENTPOLICY LOAN
Borrower Republic ofPanama Implementing Ministry ofEconomy and Finance Agency Financing Data IBRLI Loan Amount: US$80 Million Terms: Fixed Spread Loan (FSL) in US dollars with level repayments ofprincipal commitment-linked, payable in 20 years, including a 2 year grace period. Front-end Fee is of0.25 percent on principal amount, payable out ofloan proceeds upon loan effectiveness. Operation Type Single tranche Development Policy Loan to be disbursed upon loan effectiveness.
Main Policy This Development Policy Loan (DPL) is designed to support the poverty reduction Areas efforts ofthe Government ofPanama in the context ofthe global economic crisis. Two complementary policy areas are supported: Mitigating the impact of economic shocks on the poor through improved targeting and coverage ofsocial sector programs.
0 Reducing economic risks of a banlung crisis through enhanced risk management and strengthened regulation and supervision. Key Outcome Mitigating the impact of economic shocks on the poor through improved targeting and Indicators coverage of social sector programs. (by March 3 1, The real value ofmonthly conditional cash transfers, adjusted by the consumer 2010). price index, has been maintained or increased for beneficiaries ofthe CCT program. (Baseline: B./ 35 per month, July 2008). At least 2 new social programs are utilizing the Red de Oportunidades CCT program database to identify poor beneficiaries. (Baseline: 3 programs using the CCT database to target social spending, January 2009). Enhanced nutritional services to promote children’s growth are being delivered to at least 75 percent of the beneficiaries of the basic package ofhealth services in poor and isolated rural communities (Baseline: 0 percent, January 2009). At least 60,000 additional persons in poor and isolated rural communities are receiving the new nutritional component ofhealth services package. (Baseline: 0, January 2009) Social investment expenditures defined as priorities by the Acuerdos de la Concertacidn Nacional are fully executed as stated in the 2009 Budget Law.
Reducing economic risks of a banking crisis through enhanced risk management and strengthened regulation and supervision. Consolidated supervision has been completed in at least half of the financial conglomerates as measured by assets. (Baseline: 0, January 2009). All banks apply the new regulatory parameters for the use of guarantees to cover credit risk. (Baseline: 0, January 2009) All banks are valuing their liquidity risk in line with Directive No. 4-2008 requirements and have submitted regular reports thereon to the Superintendency of Banks.
1 0 All banks meet the minimum capital adequacy ratio calculated on a consolidated basis. (Baseline: 0 percent, January 2009. Banks comply with the minimum required capital adequacy ratio but not on a consolidated basis.) I(Note: The full list ofoutcome indicators can be found in Table 3). Program The DPL operation supports progress towards medium-term program outcomes related Development to three CPS objectives: (1) reducing poverty, especially among the rural poor and Objectives and indigenous groups through targeted social interventions; (2) improving health and Contribution to nutrition outcomes through the expanded supply of basic public services, and (3) CPS promoting broad-based economic growth by means of supporting financial sector stability.
(Table 2 highlights the CPS areas directly connected to the DPL Program). Risks and Risk The operation is subject to two main risks: Mitigation On the economic front, the main risk derives from the ongoing global crisis and more specifically, from the possibility of a deep and prolonged global recession. Although Panama is not expected to fall into recession in 2009 and beyond, the current global situation is anticipated to adversely impact growth as private sector credit contracts and foreign demand for Panamanian services, real estate, and exports weaken. Should the global slowdown be more protracted than anticipated, ongoing financial sector reforms may be delayed. Risks of economic slowdown have been incorporated into the macroeconomic projection and the Bank and the Fund are maintaining an on-going dialogue with the authorities on macroeconomic policy issues. In case ofunanticipated financial sector developments, both institutions would be available to provide consultation and support to the authorities as deemed appropriate.
On the political and institutional front, the main risk relates to the government transition on 1 July, 2009, which is likely to involve changes within the civil service as the new government takes power. Under Panama’s Constitution, the president may not be elected to a consecutive term. While all major presidential candidates support the broad DPL objectives, the change may slow the implementation of the country’s reform program. The Bank is supporting the continuity of development policies over the political transition through ongoing dialogue with all key political parties and the preparation of policy notes for the incoming administration. Moreover, dialogue and supervision of other Bank operations, including the Social Protection Project and the Health Equity and Performance Improvement Project should serve to mitigate institutional capacity risks to the proposed operation.
Operation ID P115177 Number
11 PANAMA PROTECTING THE POOR UNDER GLOBAL UNCERTAINTY DEVELOPMENT POLICY LOAN
I. INTRODUCTION
1. This document describes a Development Policy Loan for US$80 million to the Republic of Panama. The operation supports the poverty reduction efforts of the Government of Panama in the context of the current global financial crisis and economic slowdown. Specifically, it supports policy measures, which: (a) mitigate the impact of economic shocks on the poor through improved targeting and coverage of social sector programs, and (b) help reduce the risk of an economic and financial crisis through enhanced banking sector risk management and strengthened banking regulation and supervision. Maintenance of financial sector stability is a necessary condition to poverty reduction efforts as it is fundamental to sustained growth. Moreover, the costs of financial and economic instability tend to be borne disproportionately by the poor. The Protecting the Poor under Global Uncertainty DPL also assists Panama by providing access to long- term financing to support priority spending during the global financial crisis.
2. Originally envisaged in the Country Partnership Strategy (CPS) for FY10, the preparation of this DPL has been accelerated to FYO9 owing to the deteriorating global economic environment and the need to protect the poor. Due to new circumstances since the CPS was discussed by the Board on October 30, 2007, the Government has requested that the Bank accelerate the preparation ofthis DPL in order to have it ready by the time that a new administration takes over on 1 July 2009. The government is responding to the new challenges with policy actions to mitigate the impact of the global economic crisis on the poor. The impacts of the deteriorating external environment, the government response, and proposed World Bank support are described in the following sections.
11. COUNTRY CONTEXT
3. Panama is an upper middle-income country with a population of 3.3 million and a per-capita GNI of US$5,510 (2007). About three-quarters ofthe population live in urban areas, mostly around the Panama Canal. Less than 10 percent ofthe population is of indigenous origin and primarily reside in remote rural areas, having little contact with mainstream economic activities. Panama has traditionally been characterized as a dual economy, consisting of a dynamic services export sector that is very competitive at the global level and a rigid, largely protected, low productivity domestic goods sector. The international services sector, which accounts for three-fourths of Panama’s GDP and over 80 percent of its total exports, rests on five main activities, comprising the operations of the Panama Canal, ports and logistics, tourism, re-exports of the Colon Free Zone, and financial intermediation.
4. The economy has been expanding very fast in recent years with GDP growth averaging 8.8 percent per year in 2004-08, much higher than the historical trend and the regional average. During these years, Panama reaped the benefits of external growth with a broad-based reform agenda that was initiated in the second half of the 199Os, when
1 trade barriers and price controls were largely dismantled. In addition, a far-reaching privatization program, anti-trust legislation agenda, and fiscal reforms coupled with reducing the level ofpublic debt to GDP allowed Panama to regain access to international financial markets. The current Government continued 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 and is currently exploring a range ofother large infrastructure projects. The canal expansion, planned for completion in 2014, is expected to provide a basis for additional growth.
5. A key development challenge facing Panama is to ensure that economic stability and growth are maintained and that benefits are broadly shared. Indeed, Panama’s economic development has been characterized by a high degree of inequality. Growth has traditionally benefited mainly the capital-intensive service sectors concentrated geographically in the Panama and Colon provinces, while generating little economic opportunity for low-income members of society. A large share of the population (32 percent) continues to live in poverty, including about 15 percent in extreme poverty, according to.the 2008 Living Standards Measurement Survey (LSMS). With a Gini coefficient of 0.47, inequality of consumption in Panama is 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 similarly exhibit a wide dispersion. In the indigenous areas, for instance, chronic child malnutrition rates are as high as 56 percent while the national average is 21 percent.
6. To address this challenge, the current Administration introduced a flagship program for reducing poverty and strengthened social programs that provide basic services to the poor. Launched in early-2006, the Red de Oportunidades (a conditional cash transfer program) targets the poorest households with children aiming to improve standards of living and access to basic social services. The conditional cash transfer program currently covers all regions, including indigenous areas. The government has also strengthened programs that offer 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. In the medium term, Panama will benefit from increased fiscal transfers due to higher revenue from greater canal traffic due to the canal expansion. This offers a unique opportunity for the country to ensure a broader sharing of economic benefits.
7. Presidential elections are scheduled for May 2009. Since the return to democratic rule in 1989, two parties, the Partido Revolucionario Democratic0 (PRD) and the Partido Punamefiista (PP), have alternated government leadership. The term of the current Tomjos administration (PRD), will expire on July 1,2009. With the conclusion of the last primary election in early September 2008, the main contenders for the presidential elections on May 3, 2009 have been determined. All the main candidates in the presidential race support deepening poverty reduction efforts and are expected to maintain Panama’s current economic policy framework.
2 111. ECONOMIC CONTEXT AND MACROECONOMIC OUTLOOK
A. Economic Context
8. Panama's economic growth accelerated during the past four years, peaking at a record rate of 11.5 percent in 2007, and has remained relatively robust at 9.2 percent in 2008. The 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 (Figure 1). GDP growth was mainly driven by the internationally oriented service sector, accounting for some 80 percent of GDP growth since 2002, and, to some extent, a booming construction industry. In contrast, the highly protected agriculture and manufacturing sectors did not exhibit anywhere near the same dynamism shown by the service sector.
Figure 1: Panama Growth and CPI Inflation, 2002-08 (quarterly data).
10 IC
8 a
6 6
4 4
2 2
0 0 I I I -2 L 1 -2
9. High growth in recent years has made some inroads in decreasing poverty rates, but extreme poverty remains 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, remains almost universal among indigenous groups (see Box 1). The intransigence ofpoverty, particularly in rural areas, despite high growth is explained by the fact that growth was driven primarily by the services sector, which tends to employ relatively high-skilled individuals. The marked increase in food prices in 2007 and 2008 is likely to have affected the poor disproportionately as they spend a larger share of their income on food than the non-poor. It is also likely to have pushed those that were just above the poverty line into poverty.2
' According to the 2008 Living Standard Measurement Survey. Poverty is measured by household consumption. Recent Bank research is indicative of this effect. For example, rising food prices during the period May 2007-May 2008 is estimated to have increased the headcount poverty rate in Honduras by 4.0 percentage points and by 1.O percentage points in Guatemala (Demombynes et al., 2008).
3 Box 1. Poverty and Inequality in Panama Despite being a fast-growing upper-middle income country Panama has high levels of poverty and inequality. Broadly speaking, the population can be divided into three different socio-economic groups: those with access to the dynamic services sector (urban residents), those who depend on less competitive, lower growth sectors like agriculture (rural areas excluding the protected areas, or cornarcas) and those who are geographically isolated from modem economic activity (indigenous people residing in cornarcas). Poverty is almost universal amongst comarca residents whose consumption level is eight times lower that ofurban residents and four times less than rural dwellers.
Poverty and Extreme Poverty in Panama 1997-2008. Poverty (%) Extreme poverty (%) Residence / Group 1997 2003 2008 1997 2003 2008 Urban 15.3 20.0 17.4 3.1 4.4 3.2 Rural 58.7 54.0 50.4 28.7 22.0 21.8 Comarcas (indigenous) 95.4 98.4 95.2 86.4 90.0 82.9 National 37.3 36.8 32.4 18.8 16.6 14.2 Source: LSMS (2008)
About a third of Panama’s population is poor and one in every seven persons have insufficient resources to meet basic nutritional needs (the extreme poor). The extraordinarily high growth rates since 2003 lead to reductions in poverty and extreme poverty despite Panama’s low poverty elasticity of growth and the food price crisis of 2008. Income inequality (measured by the Gini coefficient, 48.5 in 2003) is among the highest in the region and the world, and considerably higher than the average for countries with similar per-capita income levels. The Panama and Colon provinces, where the Canal economy is concentrated, account for more than eighty percent of total output, but only about 60 percent ofthe population. The concentration ofthe economic boom in the service sector suggests that income inequality in the 2003-08 period may have increased.
There are also marked differences in social indicators across income, regions and ethnic groups and Panama tends to lag behind in international comparisons in these areas. Primary school enrolment is universal in Panama and the average years of schooling have increased. Urban children, however, spend six years more in school compared to children from indigenous families. Similarly, 85 percent of children from non-poor households are enrolled in secondary schools, compared to only 32 percent of the extremely poor youth. These disparities are also present in health and nutrition outcomes and in access to health services. Child and maternal mortality rates in Panama are among the highest in the group ofupper-middle income countries in the region. Moreover, close to 21 percent ofchildren less than five years are chronically malnourished - one ofthe highest rates in countries with similar per capita income in the region. In the comarcas, the prevalence rate ofchronic malnutrition is 56 percent - a rate comparable with that of post- conflict countries such as Burundi. Similarly, in 2003, while about 84 percent of non-poor children were immunized against measles, only 74 percent of poor children and 71 percent of extremely poor received immunization. Finally, while access to safe water is universal in the urban areas, one in five rural households (including the cornarcas) do not have access to safe water. Half of the rural population does not have access to adequate sanitary facilities compared to close to 90 percent ofurban dwellers.
These results are not likely to be solely a result of low social spending. Panama spends almost 17 percent ofits GDP in the social sectors compared to 14 percent in Latin America. This suggests that improving the targeting, efficiency and effectiveness of social spending is crucial if Panama is to achieve poverty reduction. Poverty reduction policies should thus be formulated to reduce the depth ofpoverty by targeting the extreme poor who reside primarily in the indigenous and rural areas. As explained elsewhere in this document, the Government of Panama has made good progress in expanding access to basic social services during the past five years, especially in the rural and indigenous areas. The Protecting the Poor under Global Uncertainty DPL supports such policy measures recently adopted by the Government.
10. Panama also avoided the costs of foreign exchange volatility experienced by other countries due to its special currency regime; the US dollar has been the legal tender since 1904. Nonetheless, while full dollarization eliminates foreign exchange risks, it also means that there is no lender oflast resort or independent monetary policy functions of a central bank to buffer the economy’s exposure to external shock^.^
11. Panama’s CPI inflation accelerated rapidly in 2007 and 2008, reaching levels not seen since the oil price shocks of the 1970s and 1980s. Year-on-year CPI inflation
The absence of a central bank and the lender of last resort function expose Panama to bank runs, although fiscal resources can be used as means to partially backstop the banking sector.
4 peaked at 10.0 percent in September 2008 driven by food and oil prices and strong aggregate demand. Food prices (accounting for a third of the consumer basket) rose by 15.4 percent in the same month compared to 2.4 percent in January 2007. To address the higher cost of living for the poor, the government took several measures, including: (i)increasing the size ofthe conditional cash transfer in its Red de Oportunidades program (see Section IV); (ii)reducing the income tax of low-income earners; and (iii)lowering the import tariffs on selected food and intermediate items.
Table 1: Panama Medium-Term Macroeconomic Framework* (in % ofGDP, unless noted otherwise) --__-_- Actual------Estimate -_------_---Projection 2005 2006 2007 2008 2009 2010 2011 2012 Growth, Prices, Investment and Saving GDP growth rate (%) 7.2 8.5 11.5 9.2 3.0 4.0 6.0 7.0 Inflation rate (%, average) 2.9 2.5 4.2 8.8 4.7 3.0 3.5 3.5 National savings 13.4 16.3 15.6 13.2 14.9 15.1 15.9 16.4 Gross domestic investment 18.4 19.5 22.8 25.3 25.4 27.7 26.5 24.4 Open unemployment (%) 8.1 6.8 5.3 4.2 n.a. n.a. n.a. n.a. Nonfinancial Public Sector (excluding PCA) Revenue 22.3 24.9 27.9 26.0 23.5 24.0 24.6 25.0 Expenditure 24.9 24.4 24.4 25.6 24.5 24.9 25.3 25.5 Overall balance -2.6 0.5 3.5 0.4 -1.0 -0.9 -0.7 -0.5 Primary balance 1.8 4.8 6.9 3.5 1.6 1.5 1.4 1.3 Public debt** 58.3 52.6 45.7 37.6 36.3 35.4 31.2 28.8 External Sector Merchandise exports (fob)*** 8.3 8.6 8.3 7.7 6.9 6.7 6.5 6.4 Merchandise imports (fob)*** 20.5 21.9 26.7 31.0 27.2 29.4 28.1 25.8 Net exports from CFZ 3.7 3.4 1.8 2.1 1.2 1.2 1.6 1.9 Services, net 9.3 12.9 14.9 14.2 13.2 13.1 13.3 12.8 Current account balance -4.9 -3.1 -7.2 -12.1 -10.4 -12.6 -10.6 -8.0 - related to Canal expansion 0.0 0.0 -0.4 -1.3 -3.4 -5.5 -4.2 -2.0 Foreign direct investment 6.2 14.6 9.7 9.0 5.5 6.8 6.8 6.8 *Projections will be revised as necessary during loan preparation. **Net of CSS and Fiduciary Fund debt owed by the Central Government. ***Excludes the Col6n Free Zone. Source: IMF and World Bank calculations.
12. Public finances have strengthened remarkably in recent years as revenues surged and spending was kept under control. The nonfinancial public sector balance, excluding the Panama Canal Authority (PCA), turned from a deficit of about 5 percent of GDP in 2004 into a surplus of0.4 percent of GDP in 2008. This outcome was the result of a number of factors including: (i)a tax reform package adopted by the Torrijos Administration in 2005, (ii)higher fiscal transfers from the PCA, (iii)containment of current expenditures, including a reduction in the number ofpublic sector employees, (iv) more effective tax collection efforts, and (v) one-time events that boosted tax revenue^.^ Improvements in the fiscal stance are notable, especially given the major increases in public investments which have risen from 3 percent ofGDP in 2005 to nearly 5 percent in 2007, and to over 7 percent ofGDP in 2008.
13. The positive fiscal results along with the strong economy have been reflected in a marked reduction in public debt (excl. PCA) from a peak of 62.2 percent of GDP
One-time events explain approximately one percentage point of the increase in the revenue-to-GDP ratio in 2006 and 2007, including capital gains tax generated from the acquisition by HSBC (an international bank) of Banistmo (a local bank) in 2006 as well as the tender for the duty-free concession at the Tocumen Airport in 2007.
5 in 2004 to 37.6 percent of GDP in 2008. Prudent management of public debt over the past 3-4 years has resulted in a smooth redemption profile and a reduced need to rollover short-term debt in the medium term. 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. The Panama Canal Authority, which had originally planned to raise financing from commercial markets by the amount of US$2.3 billion for the canal expansion project, decided to borrow exclusively from multilateral institutions because of the global financial crisis, including US$300 million from the International Finance Corporation (IFC).
14. On the external front, Panama’s current account balance is estimated to have reached a deficit of 12.1 percent of GDP in 2008 up from 4.9 percent in 2005. This was the result of two main factors: higher oil prices during 2008 and increased capital goods imports associated with the canal expan~ion.~The current account deficit has been financed by foreign direct investment-mainly in the financial, commerce and housing sectors-averaging more than 9 percent ofGDP annually since 2004.
B. Macroeconomic Outlook in the Context of the Global Crisis
15. The global economic crisis will likely lead to a significant slowdown in Panama’s services-export oriented economy. Although the direct effects of the global financial crisis have been modest to date and the financial system has remained stable, Panama’s economy has been negatively affected by the indirect impact in the form of a contraction in credit growth, reduced trade financing and a halt in new real estate construction lending. Moreover, the global economic recession, particularly in the United States, is leading to reduced demand for Panamanian trade-based economic services, real estate, goods and tourism. The planned investment arising from the Panama Canal expansion project currently underway is expected to provide a substantial fiscal stimulus that will partially offset the negative impact, but overall economic uncertainty has increased substantially.
16. Credit growth is contracting with important effects on medium-term growth. While Panamanian banks have so far only experienced limited capital losses as a result of the crisis, including low exposure to toxic assets, banks are currently hoarding liquidity and exhibit strong caution in extending credit.6 Credit growth slowed substantially in the last quarter of 2008 (see Annex 2) and local businesses began to report difficulties in accessing credit and the cancellation of previously agreed credit lines. A. contraction of consumer credit is also expected to slow domestic demand. Moreover, banks have become much more selective in extending supplier’s credit, particularly in the Colon Free Zone (CFZ), as declining export demand resulted in a 38 percent reduction in net CFZ re-exports in 2008. As banks focus credit on the larger clients with well-established business relations in the CFZ, the small- and medium-scale business will have much more limited access to credit.
The Canal expansion project is estimated to contribute around 2.5 percent of GDP to the current account deficit, according to the IMF (2008 Article IV Staff Report). Less than 0.1 percent of total banking sector assets in Panama were linked to US subprime mortgages and troubled financial institutions, according to the Banking Superintendency.
6 Figure 2: Colon Free Zone, Cumulative Net Re-exports (millions of Balboas).
1050 1050 850 1 yr" 850 :- 650
- 250
17. The real estate sector is expected to experience a slowdown during 2009 owing to financing constraints and reduced foreign demand. The Panamanian housing market has experienced a construction and price boom in recent years fuelled by growth in the economy, access to credit, tax incentives, and strong foreign demand.' Construction activity was growing at very high rates prior to the onset ofthe US financial crisis. Owing to uncertainty in the strength of future demand, most large banks have decided not to finance new high-end projects, although they continue to finance ongoing projects8 The growth rate in the value of construction and maintenance fell from 33.9 percent in 2007 to 18.7 percent in 2008, according to the General Controller's office, including a 14 percent decline for the fourth quarter. This trend is expected to continue throughout 2009. There are currently about 200 high-rise buildings with approximately 19,000 new apartments under construction in Panama with a total project value of about US$4,300 million-only 62 percent of which is being financed. Half of the apartments under construction have already been pre-sold to Panamanian and foreign buyers. Lending to the real estates sector has been much more conservative in Panama, requiring a 30 percent down payment and caps on property valuations. Nonetheless, while the real estate sector is unlikely to pose a systemic risk for the financial sector in Panama (about 9 percent of bank assets are in housing loans and another 3 percent are in construction loans), declines in values may impact a few local banks. The excess supply of housing units will exert downward pressures on prices and construction activity will eventually wane as existing projects are completed. A subsequent rise in unemployment among construction workers is also expected.'
18. The liquidity position of the banking system remains comfortable, on average, although there is dispersion in liquidity ratios across banks. The liquidity position of
7 In 2004-07, the construction sector accounted for 4.4 percent of GDP, contributed by 6.3 percent to economic growth and accounted for 5 1 percent oftotal fixed capital investment. 8 Construction activity for domestic low-income housing is expected to continue, in part buoyed by a US$50 million loan extended by IADB to the largest domestic bank, Banco General. Employment in the construction sector rose by close to 33,000 workers between 2004 and 2007, representing around a quarter of total jobs created over this period. The real estate market is only one segment ofthe construction sector.
7 the International Banking Sector (CBI) and the National Banking System (SBN) banks has remained fairly stable over time, and has even increased in the fourth quarter of 2008 (see Annex 2). Private Panamanian banks (which hold 45.8 percent of the national banking system assets) are less liquid than foreign and public banks. The liquidity ratio (liquid assets plus investments over total deposits) of this group fell from 50.5 percent in 2006 to 40.6 percent in 2008 (4th quarter figures) - including a slight increase relative to the third quarter of 2008.’’ There are differences in liquidity ratios even within this group, however. Foreign banks and the two public banks (Banco Nacional de Panama and Caja de Ahorros) are the most liquid banking groups, with 55.8 and 61.9 percent respectively, and they also registered noticeable improvements in the final quarter of 2008.
Box 2. Panama’s Financial Sector
Panama’s financial sector is an important offshore financial and business center with financial intermediation dominated by the banking sector-the largest in Central America. As of mid-2008, there were 2 state-owned banks; 43 general license banks, which can operate locally and internationally; 32 international license banks that operate internationally, but can only participate in the domestic interbank market; and 14 licensed representation-offices of foreign banks. Banks that operate internationally form what is called the International Banking Center (CBI), created with the Banking Law of 1970, which aimed at promoting the physical establishment in Panama of prestigious international banks attracted by the country’s absence of capital controls, bilingual market, modem telecommunications system and dollarized economy. Banks that operate in the local market, including the two public banks, form the National Banking System (SBN). The consolidated assets of the banking system represent around 250 percent of Panama’s GDP. Recent mergers and acquisitions have increased the role of international conglomerates, such as HSBC and CitiBank, and the share of bank assets owned by foreign banks is close to 60 percent. The net loan portfolio to assets ratio stands at 60 percent. Domestic capital markets are comparable in terms of market capitalization to countries of similar size. Financial intermediation services played an important role in Panama’s recent economic boom, contributing around 9 percent of 2007 GDP.
Panama’s financial sector is relatively well positioned going into this global financial crisis, thanks to prudent policies, but the downside risks are high. Banking system soundness indicators were strong in 2008, despite some liquidity ratio fluctuations due to the rapid consumer and housing lending growth. Maintenance of high liquidity is critical for Panama’s banking sector stability, even more so than in other countries, because there is no formal lender of last resort or deposit insurance. Asset quality was also relatively good with non-performing loans constituting 1.4 percent of total loans and a ratio of provision to non-performing loans of around 130 percent (see Annex 2). Credit growth has been relatively strong in recent years as the economy has expanded with net credit growing around 18 percent in 2007. The recent consolidation of the regional and domestic banking market also raises exposure to cross-border supervisory concerns, which may require stronger collaboration and information-sharing among supervisors. Bank supervision exhibits a high degree of compliance with the Base1 Core Principles reflecting generally satisfactory implementation combined with an adequate legal and regulatory foundation (according to the 2006 FSSRA). Improvements are needed in non-bank financial supervision, the institutional framework for insurance and securities, and anti-money laundering practices. The Panamanian authorities recently made a request to the IMF to conduct a Financial Sector Assessment Program (FSAP), which is planned to be carried out in Fall 2009.
19. The global economic recession is slowing shipping traffic through the Panama Canal. Activity at the Panama Canal fell 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. Revenues from the Canal, however, increased by 12.5 percent due to increased
loNote that these are end-of-quarter liquidity figures. The legal requirement for all banks is based on weekly data and includes liabilities and assets up to 186 days. For the banking system as a whole, the weekly liquidity ratio has remained above 60 percent since the week of November 21, 2008, and was about 61 percent as of the week ofMarch 17,2009. The weekly legal required liquidity ratio is 30 percent.
8 tolls. The ACP expects canal traffic to fall by a further 4 percent in 2009 and 3 percent in 2010. Despite expectations ofreduced transits and no toll increases for 2009, the operating surplus of ACP (before transfers to the Government) is expected to remain constant in 2009 owing to cost savings measures implemented in response to expected decline in revenue growth. 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.
20. The Colon Free Zone (CFZ) and tourism sectors are slowing as Panama’s largest trading partners experience declining growth. Demand for CFZ re-exports is contracting because some of the free zone’s larger regional clients, including Colombia and Venezuela, have been hard hit by the global slowdown and lower commodity prices (Figure 2). Moreover, Ecuador (in an attempt to deal with its mounting trade deficit) recently introduced import tariffs which affect key CFZ re-exports. The free trade zone is also negatively affected by non-tariff barriers imposed by Colombia. In addition, tourism revenue growth has fallen marginally, and is expected to slow further as foreign consumers cut back travel spending. Tourist arrivals from the United States, Colombia and Venezuela remain Panama’s most important sources oftourism receipts.
21. While the current account deficit is expected to remain relatively high, peaking at 12.6 percent of GDP in 2010, this increase is primarily due to capital imports by the canal expansion project, which are largely pre-financed with multilateral loans. The external deficit will widen as exports ofgoods and service decline in 2009-10 and capital imports associated with the canal expansion increase (peaking in 2010). This trend will reverse once the canal project nears completion in 2014 and the effects ofthe global downturn diminish. Excluding the impact ofthe canal expansion, the current account deficit is expected to remain relatively stable at around 6-7 percent ofGDP over the next 4 years. In the unexpected event of financing shortfalls, the current account balance will adjust through a reduction of imports given that Panama is a fully dollarized economy.
22. Growth is expected to slow substantially over the coming years, but Panama is relatively better positioned to weather the crisis compared to most countries in the region. Until recently, Panama was expected to grow around 8 percent in 2009 and 2010 due to strong fundamentals and high public and private investment. These growth projections have been revised downwards on several occasions as global economic prospects continued to deteriorate. While uncertainty over the growth trajectory is high, conservative projections suggest that Panama will experience a decline in growth to 3 percent in 2009 and rise slightly to 4 percent in 2010. A number ofsectors that contributed to the economic boom in prior years will likely experience substantial slowdowns, including the construction sector, the Colon Free Zone and the Canal, and overall unemployment will rise from the historically low current level. Nonetheless, the pre- financed stimulus from the canal construction project (estimated to contribute around one percentage point to GDP growth annually) will partially offset the impacts of the sharply deteriorating global environment. Growth is projected to recover to 6 percent in 201 1, as the global economy recovers (see Table 1). Foreign direct investment is expected to fall as the sectors which have been driving past inflows contract, especially the housing and financial sectors.
9 23. Despite global economic conditions and the forthcoming political transition, Panama is expected to continue to pursue a sound medium term macroeconomic policy framework. On the fiscal front, revenues are expected to slow due to lower growth and the overall fiscal balance is projected to move from a surplus of0.4 percent of GDP in 2008 to a deficit about 1 percent in 2009. The projected deficit is consistent with the recently approved Social and Fiscal Responsibility Law (SFRL), which allows for a maximum deficit of 1 percent of GDP, except under specified circumstances (see Box 3). If fiscal revenues fall more than expected, the Government has the option of delaying planned infrastructure investment (which has grown significantly in recent years) as a means to adhere to the deficit ceiling without reducing social spending. The canal investment proj ect-which lies outside the government investment budget-will provide a combined ‘fiscal’ stimulus of about 9.2 percent of GDP in 2009 and 2010 compared to 2.1 percent in 2008.” Inflation in 2009 is expected to return to 2007 levels owing to falling fuel and food prices.
Box 3. The Social and Fiscal Responsibility Law
Panama’s Social and Fiscal Responsibility Law (Law No. 34 of June 5, 2008) became effective on January 1, 2009 thereby replacing the previous Fiscal Responsibility Law adopted in May 2002. The law contains important provisions to help increase fiscal stability and transparency.
A key feature of the SFRL is a fiscal rule which imposes limits on the Nonfinancial Public Sector (NFPS) fiscal balance, excluding the PCA. Specifically, the NFPS deficit must not exceed 1 percent of the Gross Domestic Product (GDP) in any given year. The Government, with the approval ofthe National Assembly, can only deviate from this rule under special circumstances, including: (1) natural disasters, (2) a national state of emergency, or; (3) if the country experiences an economic recession - defmed as a GDP growth rate of 1 percent per year, or less. In such cases, the NFPS can reach no more than 3 percent of GDP in the first year ofadjustment, 2 percent in the second year, and, 1 percent in the third. The SFRL also stipulates a target for the net debt ofthe NFPS of40 percent ofGDP by 2015.
The Law also contains important fiscal transparency provisions, such as clearer definitions to the components of fiscal accounts, and the requirements to prepare and publish the medium-term fiscal framework, sector strategies, a multi-annual financial and public investment program, and periodic reports on compliance with the Law, including a specific report on accounts payable.
The SFRL was approved after a series of intensive consultations across a wide political spectrum - a process initiated as a part ofthe national dialogue for development. The World Bank and the IMF provided technical inputs to the drafting of the Law. The SFRL was supported in the Competitiveness and Public Financial Management DPL presented to the Board on 16 December 2008.
C. Debt Sustainability
24. A debt sustainability analysis, prepared by the Bank in the context of the proposed operation, suggests that Panama’s public debt is on a sustainable trajectory. In the baseline scenario, the public-debt-to-GDP ratio of the NFPS (excluding the Panama Canal Authority, PCA) is expected to fall from 45.7 percent in 2007 to 28.8 percent in 2013. The trajectory of public debt (as a share of GDP) is declining even under the most
” In comparison, the proposed US fiscal stimulus package amounts to an additional 5.8 percent of GDP over two years.
10 pessimistic alternative scenario. l2 These conclusions hold for most shocks, even when including debt of the Panama Canal Authority-which is not explicitly guaranteed by the Central Government. This analysis uses the latest available macroeconomic projections (as presented in table l),which incorporate the expected impact of the global financial turbulence on the Panamanian economy and the recent downward revisions of GDP growth in the US. The limits on public deficits and debt introduced by the Social Fiscal Responsibility Law are expected to further strengthen debt sustainability.
25. Debt projections of the Bank are consistent with those of the IMF which suggest that public debt falls to 33.7 percent of GDP in 2010 and to 26.4 percent by 2013. Even when using the broadest measure ofpublic debt (including the PCA), the MF analysis finds that debt is sustainable. Thus, although Panama’s growth outlook has deteriorated, the country’s overall macroeconomic framework is consistent with the government’s development objectives.
26. In sum, the Panamanian economy is entering a substantial downturn due to the severe global economic crisis with significant risks to the near-term outlook. Nonetheless, Panama’s macroeconomic policy framework is deemed adequate for this proposed World Bank development policy loan.
IV. THE GOVERNMENT’S PROGRAM AND KEY ISSUES IN PROTECTING THE POOR UNDER GLOBAL UNCERTAINTY
27. President Torrijos assumed office in September 2004 with a strong political mandate that gave his party’s coalition a majority in the Legislative Assembly. In early 2005, the Government launched its ambitious medium-term development strategy (see Box 4), which gives renewed attention to poverty reduction and reinvigorates the structural reform program initiated during the 1990s. This comprehensive development program encompasses policies aimed at reducing poverty and improving the income distribution, fostering economic growth and employment creation, reorganizing public finances, developing human capital, and modernizing the state.
28. The Torrijos Administration has taken a range of reform steps which were supported in prior DPL operations. In the context ofits strategic development plan, the Government has taken some major steps to strengthen the overall foundations for sustained broad-based economic growth, including the passage during 2005 of the fiscal reform package and the politically difficult pension reform, together with measures to increase fiscal transparency, improve budget management and modernize public procurement. These reforms were supported by the Bank through the Public Finance and Institutional DPL (FY 07) and the programmatic Competitiveness and Public Financial Management DPL (FY08, FY09). The programmatic DPL also supported the complementary agenda of reforms so that Panama can take advantage ofrecent Free Trade Agreements into which it has entered, as well as a pending US Agreement awaiting the approval ofthe US Congress.
’* A scenario of contemporaneous shocks in GDP growth, the primary balance, and real interest rates yields a debt-to-GDP ratio of 42.5 percent in 2013.
11 Box 4. GOP Strategic Vision of Economic and Employment Development Towards 2009
The Strategic Vision is comprised offive pillars: Pillar I - Reduce Poverty and Income Inequality encompasses four dimensions: stimulate growth and expand employment opportunities, especially for youth; build human capital of the poor; pioneer a flagship conditional cash transfer program (Red de Oportunidudes) which brings together efforts to improve education, health, nutrition and basic infrastructure access, targeting the poorest areas; and invest in productive activities in rural areas, including land tenure security Pillar I1 - Foster Economic Growth and Employment focuses on efforts to open the economy to international competition and promote export-led growth, including through free trade agreements, development of export infrastructure (roads, ports, etc.), removal of distortions and unfair sector incentives, and targeted complementary investments in Canal expansion, irrigation, and urban transport. Pillar I11 - Reform Public Finance includes actions to reduce public debt, achieve fiscal sustainability and modernize public financial management, including fiscal and pension reform, measures to improve the accuracy and transparency of national accounting systems, modernization of procurement and tax administration, and improvements in budget management. Pillar IV - Develop Human Capital seeks to improve the competitiveness of Panama’s labor force and reduce inequality through investments in education and health. Initiatives will support national curriculum reform, expanded coverage of preschool and secondary education, effective worker training, preventative and occupational health programs, and expanded health, water, and sanitation infrastructure in rural and indigenous areas. Pillar V - Reform and Modernize the State supports activities to help the public sector and public institutions become better facilitators of countrywide development. Measures will be taken to reduce corruption, improve private participation in infrastructure, increase competition in the electricity and transport sectors, and foster decentralization of service-delivery.
A. Mitigating the Impact of Economic Slowdown on the Poor
29. The economic slowdown is expected to have a negative impact on poverty. To address this concern, the Government is harnessing its social safety nets and other social programs to target assistance to the poor and vulnerable population. The economic deceleration is expected to lead to an overall rise in unemployment and a reduced rate of poverty reduction. Beyond potential short term effects, the coping mechanisms of the poor-including distress sale of productive assets, increased supply of child labor, and reduced health care take-up-are often detrimental to their long-term livelihood prospects. The government is helping to mitigate the impact on the poor with social support interventions that directly target the most vulnerable groups.
30. In 2008, the Government took important steps to help mitigate the 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, social programs have been strengthened through an increase in the size of the conditional cash transfer to beneficiary families of the Red the Oportunidudes program and an improvement in the targeting of other social programs. The use of effective mechanisms to identify the poor and vulnerable enables the government to better cushion them against negative impacts. Second, the quality and coverage ofhealth and nutrition services to the extreme poor have been strengthened. Mechanisms to monitor and improve the nutritional status are of utmost importance during an economic slowdown. Third, the Government is committed to maintaining levels ofsocial spending during the economic deceleration. This is important, because such spending is typically vulnerable to budget cuts when fiscal pressures arise in a downturn.
12 Harnessing Social Programs to Respond to the Crisis
31. The amount of the conditional cash transfer program (Red de Oportunidades) to beneficiary families has been increased. As a part of its response to the global food price crisis in mid-2008, the Government effectively harnessed the conditional cash transfer (CCT) program to mitigate the impact on the poorest households in the country, thereby helping them to protect their human and productive capital (See Box 5). The monthly transfer amount was increased from B./35 to B./50 for all beneficiaries and no additional conditions were imp~sed.'~
Box 5. Red de Oportunidades - the Government's Flagship Poverty Program
In early 2006, the Government launched the Red de Oportunidades (RdO), a program targeted to extreme poor and vulnerable households with children in Panama and aiming to improve their living standards and their access to basic social services. The multi-sectoral Red de Oportunidades program seeks to lower both demand and supply barriers impeding access to basic social services. The program involves five main elements: (a) a conditional cash transfer program, (b) supply of basic services linked to co-responsibilities (education, health and legal identification of beneficiaries), (c) support to beneficiary families to boost their demand for these services, (d) rural infrastructure (public works, housing, agricultural development), and (e) program management, monitoring and evaluation. The CCT program aims not only at transferring resources to the most vulnerable sections of the population but also at breaking the cycle of poverty by linking these transfers to investments in the education and health of the children of the beneficiary families.
As highlighted in the Panama Poverty Assessment (2007), the relatively high levels poverty in Panama are not due to lack of social spending, but rather to inadequate targeting, efficiency and effectiveness of government programs. The creation and subsequent expansion of the RdO is an important step forward in this respect. The program is very well targeted, currently covering 367,378 people (1 1 percent of the population). This effective way of targeting beneficiaries is a result of the combined use of regional targeting and the application of a Proxy-Means Test to estimate the vulnerability and eligibility of households, differentiating between urban, rural, and indigenous areas. In fact, other social programs are increasingly making use of the household registry and management information system developed for the CCT program to reach their beneficiaries.
Over the past two years, the Government of Panama has progressively expanded the Red de Oportunidades to cover all regions and indigenous areas. A comprehensive strategy to improve the effectiveness of the conditional cash transfers intervention has also been implemented. This strategy provides the RdO management team with adequate tools and mechanisms to target the poorest groups, ensure timely payments of transfers, verify compliance with co-responsibilities in healthhutrition and education and support families to take advantage of the program and other social services.
The IADB and the World Bank have helped develop the RdO and will support the implementationof components (b), (c) and (e) with two operations. The GOP is fully funding the cash transfers (component a) with its own resources. Before the increase in the transfer amount, the cost of the program was estimated at US$207 million over a seven year period, of which US$162 would be financed by the GOP, US$21 million by the IADB and the remaining US$24 by the World Bank.
32. The Government has used the household registry and management information system, originally developed for the CCT program, to improve targeting of other social programs. The Red de Oportunidades program and its household registry and management information system are useful tools that can be deployed in times of crisis to scale up transfers, channel additional programs, identify additional beneficiaries, reach the poorest, and diagnose areas with the most pressing needs. Even in a non-crisis context, the registry of beneficiary families and other vulnerable families has already been used by other social programs to identify beneficiaries, thereby improving targeting efficiency. The social programs that currently use this targeting mechanism to identify beneficiaries include: (a) income generating activities for disabled people; (b) agricultural training programs executed by INADEH; (c) a housing improvement program for the poor.
l3The real value of the original transfer amount had fallen by around B./5 since 2006.
13 Improving quality and coverage of health and nutrition services to the extreme poor
33. The Government has included a comprehensive nutrition component in its package of basic health services delivered to poor and isolated communities, as a part of a new national plan to combat child malnutrition. The Ministry of Health and the National Nutrition Secretariat (SENAPAN) have published a new National Plan to Combat Child Malnutrition (2008-15). A key action of the Plan is the inclusion of an integrated package of nutritional services in the basic package of preventive and promotion health services (Paquete de Atencion Integral de Sewicios de Salud, PAISS) provided by the Coverage Extension Strategy, Estrategia de Extensidn de Cobertura (EEC).14 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. Previously, the health package included only a few nutrition services. With the new national plan, nutrition services will include growth promotion and monitoring at the community level following a strategy known as AIN-C (Atencidn Integral a la Niiiez en la Comunidaq. This strategy has been successful in significantly improving the nutritional status of children in other countries, including Honduras and Madagascar. The strategy is very useful in times of economic downturns, and functions as an early warning system, through its monitoring of children’s growth.
34. The Ministry of Health has expanded the geographical coverage of the health service package delivered in isolated and poor areas through a more comprehensive inclusion of previously underserved areas. The targeting mechanism of the Estrategia de Extensidn de Cobertura (EEC) program has been improved. Previously, the program targeted communities that were more than one hour away from any health facility and that were also classified as poor. However, since some health centers do not have all the required personnel, the criteria have been changed. Now the package of services will be expanded to communities that are more than one hour away from a health center that has, at a minimum, one doctor and one nurse. In the indigenous areas (Comarcas), the Ministry of Health proceeded to identify the communities where the package will now be offered and to assign a provider to each of the newly identified communities. As consequence, it is estimated that an additional 60,000 people in the Comarcas will benefit from this health care service. In 2008, more than 400,000 families benefitted from the health package in rural areas, including the indigenous Comarcas.
Maintain levels of social protection spending during economic downturns
35. The National Assembly has approved legislation to implement the Acuerdos de la Concertacidn Nacional, which sets goals for key social expenditures. In 2006, the Government initiated a national dialogue around priorities for the country and its development agenda. The objective of this dialogue was to improve equity and reduce poverty in Panama. The outcome ofthe process is summarized in the document Acuerdos de la Concertacidn Nacional para el Desarrollo of October 2007. Representatives from a broad range of social, political, religious, professional, and social organizations participated in this process and endorsed the agreement^.'^ The financing of activities and programs stipulated in the Agreement is expected to come partly from the increased fiscal
14 The EEC is offered in coordination with the CCT program to ensure that its beneficiaries can comply with the health co-responsibilities.
14 revenues arising from the Panama Canal expansion. The Government has taken several steps to translate these broad agreements into policies and programs. It has created a legal framework for their implementation that includes: a Law 20, which creates mechanisms to verify and monitor the agreements and objectives of the Concertacidn Nacional. The Law establishes the legal basis for the National Council for the National Development Dialogue, the Presidential Secretary of Goals and the Social Cabinet. The Council and the Secretary are responsible for verifying the implementation and goals of the Concertacidn Nacional, while the Social Cabinet is responsible for the coordination of all social agencies in the implementation ofthe Agreements. a Social and Fiscal Responsibility Law (Law No. 34). The Law intends to ensure that fiscal accounts remain under control, as described in Box 3. a The 2009 Budget Law (Law No. 69). The budget law ensures spending in the social sectors prioritized by the Agreements: education, health, and social protection. In addition, in anticipation of a potential economic slowdown, the 2009 budget has allocated sufficient resources to ensure the continuity of the Red de Oportunidades in its current form, and to expand the program, if necessary, both in the transfer amount and in the scope of its beneficiaries.
B. Promoting Financial Stability
36. Maintenance of financial sector stability is a necessary condition for economic growth and poverty reduction. As current international circumstances demonstrate, financial sector instability and the ensuing possibility of a collapse in bank credit may lead to lower consumer spending and investment, and, hence, to slower economic growth, loss of jobs, and increases in poverty. The policy measures taken by the Panamanian authorities to strengthen the financial sector will contribute to ensure the solvency and liquidity ofthe banks and hence to maintain credit flows.
37. The Government has taken important measures to mitigate the impact of the global financial crisis on Panama’s banking sector. The Panamanian authorities have adopted a two-pronged approach to ensure banking sector stability. First, the national regulatory and supervisory framework is being strengthened, moving toward a risk-based consolidated supervision approach. Second, regulations have been issued to protect the solvency and liquidity ofbanks.
38. A new Banking Law has been enacted that strengthens financial sector regulation and supervision on a consolidated basis. The National Assembly has
15 Many of these agreements relate to the social sectors, including: (i)put into effect the implementation of the free education law from pre-school to middle school; (ii)put into effect the implementation of the obligatory middle school education; (iii)update curricular content; (iv) increase and target the coverage of initial education in indigenous, rural, and urban-marginal areas; (v) improve access and quality of health services, particularly in rural areas; and (vi) guarantee the conditional cash transfers to families in extreme poverty.
15 approved a revised version of the 1998 Banking Law.I6 The new law contains all the relevant elements of a modern banking law. The law was changed in response to the challenges posed by the increased integration ofPanama’s financial sector to the rest ofthe region, particularly to Central America, and the need to comply with international best practice. The effects of the new law are therefore long term in nature. While the goal is long-term stability, some of the new provisions in the law will allow Panama to better respond to the challenges from the international financial crisis and help boost confidence in the banking sector. The subsequent paragraphs highlight some of the most important provisions ofthe 2008 Banking Law.
39. The regulatory and supervisory power of the Superintendency of Banks (SBP) has been extended to supervise and regulate financial conglomerates. The International Banking Center (CBI) includes operations of foreign bank subsidiaries with headquarters in Panama. The extension of banking regulation and supervision to the operations of foreign and local conglomerates was therefore necessary to adequately monitor and manage risks. The new law broadens the reach ofthe regulation and supervision activities of the SBP to cover all entities that are part of a banking group, including financial as well as non-bank and non-financial associates. This follows the concept of consolidated regulation and supervision of all the activities that pose a risk to third party resources managed by banks. The law allows the SBP to sign agreements for consolidated supervision with foreign supervisory agents. It also expands the SBP supervisory and regulatory powers to cooperatives and savings and loans associations.
40. Capital requirement provisions of banks have been strengthened to ensure that banks hold capital reserves appropriate to their risk exposure. The new law strengthens the capital adequacy framework on a consolidated basis and authorizes the SBP to require corrective measures if the capital adequacy ratio (CAR) of a bank falls below the minimum regulatory requirement. The law stipulates that the CAR cannot fall below 8 percent ofthe 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, and to include other risks (market, operational and country risk) in the valuation of the capital requirement. The CAR is extended to banks with international licenses over which the SBP is the supervisor oforigin.
41. 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 SBP. Auditors must provide their opinion independently of whether the financial statements provide a true and reasonable description of the banks’ situation and financial performance. The SBP has the authority to reject the hiring of external auditors that fail to meet standards of independence and
16 The 1998 Banking Law had created the Superintendency of Banks ofPanama (SBP) as a state organization independent of the political sphere, and supported a regulatory framework consistent with the main recommendations of the Basel Committee. Evaluations made in 2001 and 2005 concluded that Panama was in compliance with 23 out of 25 Basel Core Principles as well as with the recommendations of the Global Financial Action Group (GAFI) about compliance with the 40 + 9 recommendations against money laundering and terrorism financing.
16 experience as well as reject audit reports that have not been elaborated according to the law.
42. New procedures for addressing troubled banks (including reorganization and liquidation) have been introduced. A clear and effective bank resolution mechanism is crucial to allow the SBP to minimize the cost and time involved in resolving troubled banks, to reduce the possibility that a bank failure may affect other banks in the system negatively, and to boost confidence in the financial sector. Such a mechanism is particularly relevant in the current environment of increased financial sector risks. The new procedures range from taking preemptive corrective measures, taking administrative and operational control ofa bank, to reorganization and/or liquidation ofa bank.
43. The new law strengthens the SBP institutionally and improves the legal protection of its officials. The SBP has been granted more autonomy to administer its human and financial resources and the career of Bank Supervisor has been created as a specialized profession with professional standards and clear rights and obligations. Legal and institutional protection for the Superintendent of Banks and members of the Board in the exercise of their functions has also been established. This includes preventing these decision makers from being fired in the event ofa legal suit against them until the case has been decided, and the assumption by the SBP of the legal expenses incurred in defending the officials from legal charges against them. This provision allows the SBP to take the required measures to protect the solvency of the banking system unencumbered by the threat oflegal action from affected parties.
44. Aside from the approval of a new Banking Law, the SBP has issued several important regulations to protect the liquidity and solvency of the financial system in the context of the global financial crisis. These regulations include:
Valuation of collateral to cover credit risk. Directive No. 2-2008 establishes parameters and basic general guidelines regarding the uptake of collateral for mitigating credit risk. The norm establishes collateral valuation procedures taking into account the cash value ofthe collateral and the bank’s ability to liquidate it to ensure that the collateral is and continues to be highly realizable.
Liquidily management. Directive No. 4-2008 stipulates new conditions regarding the banks’ policies, procedures and control systems needed for an effective management ofliquidity risk and compliance with liquidity requirements. The nomestablishes the responsibilities ofthe boards of directors to set up policies and strategies for the daily management of liquidity, to oversee the actions of the general manager’s office with respect to liquidity management, 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 ofthe liquidity risk adequate to the structure and complexity oftheir operations. The norm establishes 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
17 greater than 80 percent oftheir total deposits.” The norm establishes which assets and debentures are accepted as liquid assets.
Capital standards for credit risk. Directive No. 5-2008 establishes the criteria for the calculation of the CAR on a consolidated basis in accordance to the new Banking Law. The norm defines the main elements that have to be considered for the calculation of primary and secondary capital and the deductions that apply. It also updates the general criteria for asset risk classification and the risk weights applied to each category.
45. The authorities have taken temporary measures to reduce the negative impact of extraordinary global financial volatility on bank’s equity position. Securities held by banks under the ‘available-for-sale’ category are reported at fair value (current market price for the instrument, or similar) and thus the value of these securities are affected by price fluctuations. ‘Held-to-maturity’ securities, in contrast, are reported at amortized cost and are not affected by market fluctuations. The loss of asset values during the current financial crisis is likely to have reduced the value of banks’ investments under the ‘available for sale’ category, with negative effects on their equity position. Directive No. 8-2008 stipulates that the SBP may allow some investment instruments currently held as ‘available-for-sale’ securities to be transferred, at a bank’s request, to the ‘held-to- maturity’ securities category. These securities include: (a) obligations issued by the Panamanian state; (b) Treasury Bills and Notes of the USA; and (c) sovereign debt obligations of Latin American governments. The provisions of this Directive follow similar measures in the United States and the European Union.’*
46. The government has announced the creation of a US$1.1 billion fund (Prograrna de Estirnulo Financiera, PEF) to help facilitate credit expansion and foster economic growth. The program aims to offer banks access to medium-term credit in order for them to increase their lending activities to productive sectors. While the details of the fund remain to be determined (such as interest rate and maturity of credits) the sources ofthe fund are the Andean Development Corporation (CAF, US$210 million), the Inter-American Development Bank (IDB, US$500 million), and the National Bank of Panama (BNP, $400 million), which will also act as the fund’s manager. Given that local banks remain well capitalized, the government has stressed that the PEF would not constitute a program of subsidies, bank liquidity support, or financial rescue, but rather would be a preventive measure to counteract the negative impact of the global economic recession on the Panamanian economy. To facilitate the fund’s usage, the authorities will
17 For the banking system as a whole the actual liquidity ratio was about 61 percent for the week of March 17, 2009. The United States has taken a similar provision under the Emergency Economic Stabilization Act of2008 which gives the Securities and Exchange Commission (SEC) the authority to suspend the application of the accounting regulation (FAS 157) on fair value measurements if the SEC determines that this is in the public interest and protects investors. Although mark-to-market accounting generally gives an accurate picture of the market value of assets, it may sometimes give a misleading picture of a bank’s viability if the asset is not expected to be sold in the near-term or if markets are extremely volatile. A risk in allowing banks to transfer assets from one category to another is that banks may switch assets back and forth between categories to meet regulatory requirements and mask low capital adequacy ratios. However, the risks ofthis measure are mitigated in Panama by the fact that only sovereign debt obligations can be transferred from the ‘available- for-sale’ to the ‘held-to-maturity’ categories, and that the transferred securities have to be accounted at market value as part ofliquid assets.
18 need to develop transparent operational details for disbursement as well as a mechanism to monitor the program’s success.
V. THE PROPOSED LOAN
A. Link to the Country Partnership Strategy
47. The proposed DPL supports poverty reduction and economic stability policy objectives of the Panama Country Partnership Strategy (CPS) 2008-2010. The CPS aims to provide selective, demand driven, technical, financial, analytical and capacity building assistance that deepens the Panama-World Bank partnership in support of four objectives which are aligned with the pillars and goals of Panama’s 2004-2009 Strategic Vision (Table 3). The CPS lending envelope of $390-465 million over FY08-10 aims at a balanced program with about half of new lending to be channeled through Development Policy Loans, and the remainder devoted to poverty-focused investment projects and a policy reform TA loan. This DPL for US$80 million was originally envisaged for FY2010; however, preparation of the DPL has been accelerated to FY09 due to the deteriorating global economic environment and the urgent need for the government to respond to mitigate the adverse impact on the poor.
B. Loan Design
48. The Protecting the Poor Under Global Uncertainty DPL is designed to support the implementation of the Government’s medium-term development strategy and is part of the Bank’s multi-year engagement with Panama. The primary development objective ofthe DPL is to support government’s efforts to protect the poor and buttress the financial system in the context of the current global financial crisis and economic slowdown. The government has taken actions to improve targeting and coverage of social sector programs, including health and nutrition, as well as measures to ensure that spending in these areas are prioritized in the national budget. The proposed operation also supports selective and critical actions in maintaining economic and financial stability. Government actions in this area contribute to continued macroeconomic stability, which is a foundation for sustained economic growth and poverty reduction. Areas supported by the DPL form an integral part ofthe Government’s economic and social development plan, the Bank’s Country Partnership Strategy, and complement the actions supported in the prior Competitiveness and Financial Management DPL series. Table 2 shows the CPS program objectives and the selected programs supported by the Bank, including this operation (marked in bold) as well as areas supported by the prior DPL series. This operation supports near-term objectives that could be attained by March, 3 1,2010.
49. The proposed operation has strong links with other Bank investment operations, particularly in the social sector. The Bank has provided technical assistance and financial support to Red de Oportunidades through the Panama Social Protection Project, PSPP, (US$24 million, FY07) as well as the health sector through the Health Equity and Performance Improvement Project, HEPI, (US$40 million, FY09). The monetary transfers of the CCT program are financed by the Government’s own resources, while the Bank provides support to the program’s management information system and to the supply of social services linked to co-responsibilities, particularly health and nutrition
19 services in the indigenous areas. The HEPI project complements these efforts through financial support to the provision of a basic package of health and nutrition services in poor and isolated rural areas outside the indigenous areas. Finally, the Bank is preparing an Access to Finance Project for Panama in FY 10. Access to financial services (including payments, savings, credit and possibly insurance) represent the intersection of the two areas supported in this DPL.
Table 2: CPS Program Objectives and Select Areas of Action
Panama 2004-2009 trategic Vision
Pillar I Pillar I1 Pillar I11 and V Pillar IV Reduce Poverty and Promote Economic Growth Reform Public Finances and Develop Human Inequality and Employment Modernize the State Capital
e CPS will contribute Reduce poverty, Improve health, especially among rural Promote broad-based Establish modem PFM nutrition, and poor and indigenous economic growth systems and institutions education attainment groups Selected Programs Suppor d by the World Bank* Redde Financial sector Fiscal sustainab&q++ Supplyof @ofl&nddde5 stability. Financial management integrated program. Reduce costs for doing systems and fiscal package of Poverty monitoring business and improve transparency.** basic health & social assistance competition through Comprehensive public and nutrition targeting/ streambed procedures procurement reform.:’:+ services. administration. and on-line Efficiency and Water and Land tenure security processing.”“ effectiveness of fiscal sanitation and access for the Market-oriented worker oversight.’r* coverage for the rural poor. training.** Tax administration.’+* mal poor. Competitiveness of Technical innovation Debt management and Wtyand small-scale rural support.:+* debt market coverage of producers, including More efficient urban development.”’” preschool, basic access to mal finance. transport in Panama City and secondary Sustainable use of the including mass transit education. Atlantic for the urban poor. Mesoamerican Sustainable tourism Biological” Corridor. outside Panama City. *Areas supported by this DPL are in bold. **Programs supported by prior Competitiveness and Publim jinancial Management DPL series.
20 I
3 N
3 3 2 9
N N 50. The DPL supports policy actions to mitigate the impact of economic shocks on the poor through improved targeting and coverage of social sector programs as well as measures to enhance financial market stability. The policy actions involve expanding benefits of the CCT program, improving targeting of social programs, increasing access of the extreme poor to health and nutrition services, protecting social spending and enhancing financial sector risk management and banking supervision and regulation. Areas of support and expected results are identified in the policy matrix in Table 3.
5 1. The social sector policy actions supported by this operation will contribute to the medium term outcomes of the First and Fourth Pillar of the CPS. The effects of an economic deceleration on the poorest and most vulnerable sections of the population can result in higher poverty and increased prevalence ofmalnutrition. The actions taken by the Panamanian authorities to increase the benefits of the conditional cash transfer program and harness its beneficiary registry and information system to target other social programs aim to mitigate this impact. The adoption of the AIN-C strategy of growth promotion and monitoring seeks to reduce the negative effect of lower economic activity on child malnutrition and contribute to the more general goal of reducing Panama’s currently high levels of malnutrition, particularly in the indigenous areas. Similarly, the expansion in the number of beneficiary communities of the EEC aims at increasing the poor’s access to health services. Finally, by putting in place the mechanisms that would implement the National Dialogue Agreements, the Government is helping to ensure the achievement ofthese Agreements’ social expenditure goals. By prioritizing and targeting social expenditure on health, education, and social protection, the Government intends to avoid any reduction in human capital investments during the expected economic slowdown.
52. The financial sector policy actions supported by this operation will contribute to the medium term outcomes of the Second Pillar of the CPS. The proposed DPL supports a number of policy actions adopted by the Panamanian authorities to ensure financial sector and economic stability at a time of international financial turmoil. The policy actions involve strengthening regulation and supervision of the banking sector moving towards a risk-based consolidated supervisory approach, regulations issued to protect the solvency and liquidity of banks, and enhanced monitoring efforts by the regulatory authority.
53. The indicative outcome indicators of the policy actions to strengthen the financial sector have been established taking into account that some of the regulatory and supervisory reforms will take some time to be fully implemented. For example, the full implementation ofthe risk-based consolidated supervision approach will require time for the SBP to: (i)identify the members ofthe financial conglomerates, (ii)elaborate a new manual of risk-based consolidated supervision that will allow the SBP to evaluate and follow up on the financial and non-financial risks that apply to the supervised entities, (iii)elaborate risk profiles for the supervised entities, and, (iv) carry out the in-situ supervision of the entities involved. The banks also need time to implement the new risk management and liquidity management norms and provide the SBP with the required information. While fully implementing enhanced regulatory and
23 supervisory reforms may take time, the current capacity and authority of the SBP is adequate to intervene and address potential bank concerns should they arise.
54. The DPL operation is also expected to help Panama obtain stable financing for its public borrowings and diversify options for finance. Indeed, while Panama is a creditworthy country with access to world capital markets under normal circumstances, the current global financial crisis has increased the cost of and constrained access to finance. IBRD financing, therefore, would help Panama maintain adequate financing for poverty reduction efforts and other public services.
55. Analytical Underpinnings. The actions supported by the DPL have been assessed through analytical work of the Bank and the IMF. The substantial body of analytical work has provided the basis for an in-depth dialogue with the government and has supported the design of the DPL. Table 4 shows the links between the prior actions included in the DPL and the recommendations included in recent analytical work.
Table 4: Links between the DPL and Prior Analvtical Work I.MITIGATING THE IMPACT OF THE ECONOMIC SHOCK ON THE POOR Links to DPL Analytical Reports - ‘indings and Recommendations Prior Actions Poverty Assessment Improving the targeting, efficiency and effectiveness of social spending will be (FY07) crucial if Panama is to achieve poverty reduction. Economic growth per se is I.1, 1.2, unlikely to have significant impacts on the welfare of the poor in the short and 1.3, 1.4 medium-term. Poverty reduction policies should thus be formulated to reduce the depth of poverty by targeting the extreme poor who reside primarily in the indigenous and rural areas. A CCT program is an effective tool in fighting extreme poverty and malnutrition in indigenous areas since cash constraints represent a main bamer to access to I.1 schools and health centers. A higher amount (B./ 42 vis-a-vis B./ 35) per beneficiary family would enhance the impact of the CCT program. Combining Proxy Means Testing and geographic targeting techniques seems to be the best approach to ensure that the transfers reach the neediest. I.1, 1.2 The effectiveness of social spending can be improved by introducing more effective targeting tools to all ongoing social programs. 1.2
Panama can improve its development strategy by improving access to basic health services in rural areas, with special attention to enhancing immunization, 1.3 nutritional monitoring and education in rural and indigenous areas.
Long distances to health facilities are a main obstacle preventing the extreme poor from accessing publicly funded health. 1.4 Concentratingthe responsibility for the Social Cabinet agenda and results within one ministry would allow for better management of the poverty reduction strategy. 1.5 LCR Position Paper Rapid response: Conditional cash transfer programs could deliver additional cash on ‘Rising Food transfers to poor households to offset the risk of worsened nutrition outcomes, I.1 Prices’ (FY08). dropping out of school, or reduced health take-up. Medium term: Intensify nutrition monitoring and counseling in the first two years of life in high-risk communities. 1.3
Public Expenditure The poor and indigenous communities often face significant barriers because they Review (FY06). are located in rural areas and mostly require primary care, which tend to be 1.4 underserved.
24 To rationalize and improve the targeting of nutrition programs, particular attention I should be given to: (i)focusing nutrition programs on prenatal care for poor I.1, 1.3 women and children under 3 years of age; (ii)emphasize prevention, including nutrition education and periodic growth control of children, and, (iii)support poor families through cost effective conditional transfers.
11. MAINTAINING STABILITY
Links to DPL Analytical Rep0 i - Findings and Recommendations Prior Actions IMF (2006) The assessment of bank supervision showed a high degree of compliance with Basel Assessment of Core Principles reflecting generally satisfactory implementation combined with an 11.1 Financial Sector adequate legal and regulatory foundation Areas of Meakness were (I) legal prorection Supervision and for supervisors and (11) the need for harmonized regulation of non-bank deposit taking Regulation institutions
IMF Offshore Recommended Action Plan in Relation to the Basel Core Principles: Financial Harmonize the supervisory and regulatory arrangements for nonbank deposit 11.1,11.2, Assessment taking institutions (cooperatives, and savings and credit institutions); 11.3,11.4 Program (2006). Develop a career plan to reduce the risk of losing senior SBP staff acting in their Detailed official capacity; Assessment of Implement an insurance policy to provide legal protection for SBP staff acting in Observance of their official capacity; Standards and Adapt capital charges according to Basel Accord; Codes Develop and revise as appropriate current supervisory policy for country risk, which is becoming increasingly significant; Develop policies for market risk that consider the evolution in the complexity in activities among larger financial institutions; Develop clear guidelines for working with distressed entities, including use of remedial measures and for insolvent banks, guidelines for winding up and transferring assets and liabilities; Amend the Banking Law to provide the same level of clarity for the consolidated supervision of financial activities by holding companies as is currently the case for SBP direct oversight of banks and their subsidiaries. IMF/WB (2008) The new Banking Law strengthens the powers of the SBP as regulator and supervisor Panama: Policy and modernizes the procedures for the reorganization and liquidation of banks. Some 11. I,11.2,11.3, Note No. 1 local banks could be affected by the international crisis and require the intervention of 11.4 Policies to the authorities. As long as the problem is clearly and publicly identified, the Confront the mechanisms of reorganization and liquidation provided in the new Banking Law may Global apply. Financial Crisis
C. Collaboration with the IMF, Other Bank Operations, and Other Donors
56. The Bank’s country team has been collaborating very closely with the IMF.19 This cooperation includes the review of macroeconomic developments (Annex 3) and Reports on the Observance of Standards and Codes (ROSC). Most recently, the Fund collaborated with the Bank in the preparation of two Policy Notes on inflation and the financial sector. The proposed DPL program is consistent with IMF policy advice regarding financial sector supervision and public debt management. In fact, the IMF provided technical assistance to the Government of Panama in the preparation of the revised Banking Law.
l9 Panama is on the standard 12-month Article IV consultation cycle.
25 57. Comprehensive multilateral assistance for Panama has been provided by the IADB, the Bank and the UNDP, followed by more modest and targeted support from bilateral aid agencies. In terms of lending and technical assistance operations, the Bank and the IADB are supporting several complementary areas of the Government’s development strategy. In general, as part ofthe consultations for preparation ofthe CPS, the Bank and IADB went through the CPS program to identify areas ofpotential synergy and agreed on collaboration approaches in both lending and non-lending activities.
D. Lessons Learned from Prior DPLs in Panama
58. Three main lessons from the Competitiveness and Public Financial Management DPL are relevant and have been incorporated into the design of the Protecting the Poor under Global Uncertainty DPL. These include:
0 Previous DPL operations in Panama successfully incorporated lessons from adjustment loans extended to Panama during the 1990s and best practice for well performing middle income countries. This included (a) emphasis on upfront actions instead of ex-ante conditionality, and (b) support of a reform program rather than isolated conditionalities.
0 Ownership of reform is critical for a successful outcome. This suggestion is not novel, but nevertheless deserves emphasis as it is well-illustrated by previous operations. The satisfactory outcome of previous DPLs is to a large extent a consequence of exclusively supporting government-led initiatives. The legal and regulatory framework underpinning reform was initiated and developed by the Administration itself, with technical input from the Bank. The government made substantial progress also in areas that were not monitored by the Bank. DPL objectives were strategically aligned with the government strategy (procurement reform is a good example). In the public financial management components, the core DPL objectives were linked to the Government’s reform and strategy. Two critical entities, the Ministry of Finance and General Controller’s Office, shared the same objectives to strengthen fiscal transparency, and coordinated their complementary efforts to their pursuit.
0 Strong analytical underpinnings and links to Bank investment lending provide the foundation for a well-designed development policy operation. The key pieces of Economic and Sector Work (ESW), the PER and the Country Financial Accountability and Procurement Assessment Report (CFMCPAR) contributed not only to the design of the previous DPL operations, but also helped inform the reform efforts ofGovernment and supported a fruitful policy dialogue.
59. The lessons learned through the Bank’s previous engagement in Panama, as well as the latest thinking on Development Policy Lending for well performing middle income countries (see Box 6), have influenced the design ofthis DPL.
26 Box 6. Good Practice Principles on DPLs
Principle 1: Reinforce Ownership. The operation is based on the GOP’s medium-term development strategy, Strategic Vision of Economic and Employment Development Toward 2009, which results from Panama’s engagement of democratic processes in the development of public policy. The DPL, as part of the CPS, responds to a GOP request to support Panama during the financial turmoil and global economic slowdown. The operation supports specific programs and areas which reflect the outcome of the national policymaking processes. The administration has a good track record of policy implementation as attested by the passage of a fiscal reform package, a politically difficult pension reform, and modem legislation for public procurement and fiscal responsibility. The process developed with the GOP to select the focused areas of DPL support responds, in large part, to the strong policy dialogue undertaken recently around extensive analytic work. Principle 2: Agree up front with the government and other financial partners on a coordinated accountability framework The Bank’s support is summarized in a brief and focused policy matrix, agreed with the GOP, which provides the accountability framework for the operation. The DPL is consistent with IMF’s policy advice. Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances. The MEF has indicated that it intends to fill its multilateral ‘budget support’ needs through the proposed DPL operation, complementing the investment lending portfolio of other donors and the Bank The selected policy areas covered by the DPL program are derived from the GOP’s medium-term development strategy. Accordingly, the specific actions and intended outcomes also enjoy technical and political support in their respective sectors. The relevance and soundness of said actions have been assessed through Bank analytical work and follow-up activities. Principle 4: Choose only actions critical for achieving results as conditions for disbursement. The prior actions form part of an agreed accountability framework that focuses on the GOP’s critical actions for achieving the program objectives, as assessed through Bank analytic work. The operation supports two complementary policy areas and the policy matrix has been limited to a number of actions considered necessary to maintain coherence of policy dialogue and benefit from complementaritiestowards the intended outcomes. Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial support. The approach and the timing of planned disbursement respond to the GOP’s stated financial needs. The MEF will exercise leadership in coordinating the monitoring and evaluation arrangements.
E. Consultation, Distributional, and Environmental Aspects
60. The DPL supports the Government’s development program, which has been consulted with a broad range of stakeholders. The GOP has made use of various consultation fora to develop reforms and reach agreement. Recent examples include the national referendum on the Panama Canal and the National Dialoguefor Development.20 The consultations done for the CPS stressed issues contained in this DPL, particularly: (i) the importance of promoting broad-based economic growth as a way to reduce poverty and promote employment creation; and (ii)the importance of strengthening access to education and health services for the poor.
61. Within the context of the Bank’s analytical and investment lending support for social protection, an environmental and social assessment, as well as an indigenous peoples plan, have been completed.*’ Understanding the social, cultural,
2o The main goal of this national dialogue - the “Concertacion Nacional Para el Desarollo” -has been that of prioritizing the use of additional revenues to be generated by the expansion of the Panama Canal, in the context of the overarching objective of eradicating poverty in Panama. The process, facilitated by UNDP, had the participation of representatives from Government and a wide range of civil society and private sector organizations. The Government’s programs on Economic Growth and Competitiveness, Fiscal Stability, and Institutional Strengthening were among the focal areas discussed by the working groups. 21 See project document, “Social Protection-Support to the Red de Oportunidades,” Report No. 39193- PA, June 8,2007, The World Bank.
27 and economic context of indigenous communities (where poverty is close to universal) is key to the success of projects targeting the poor. In the context of the Bank’s Social Protection Project, a broad consultation process was undertaken to evaluate how the implementation of the Red de Oportunidades can be tailored to best achieve its intended result of transferring money to those most in need and ensuring that recipients comply with their co-responsibilities. The outcome of this consultation was an Indigenous Peoples Plan, which is currently being implemented by the Government. Poverty reduction policy actions supported by the DPL are consistent with this plan.
62. The policy actions supported by this DPL are not likely to have a significant negative distributional impact. The DPL complements on-going government and Bank supported investment projects, including the Panama Social Protection Project, that directly and indirectly target poverty reduction through the government’s conditional cash transfer program, Red de Oportunidades. Policy actions to support these social programs are expected to have a significant positive distributional impact, particularly in poor and isolated rural areas ofthe country, including indigenous comarcas.
63. Measures to enhance financial sector prudential regulation are expected to have an indirect positive impact on poverty reduction. By reducing the risk of a systemic financial crisis, which have large costs in terms of lower economic growth and job losses, as well as strain government finances, the supported measures help ensure that growth and the government’s program on poverty reduction are sustainable.
64. Specific actions supported by this DPL are not likely to have significant effects on the environment, forests, or other natural resources. In terms of the environmental impact of expanding health coverage, the environmental assessment prepared for the Panama Social Protection Project determined that the legal framework for management of healthcare waste (an environmental concern) is appropriate and consistent with international guidelines. The government is taking measures’ to reduce the risk of environmental impact due to increased demand and supply of basic and preventive health care services.
65. Panama has made positive efforts to combine forest conservation with the social dimensions of the poor living in forested areas. Although policy actions supported by this DPL are not likely to have any significant impacts on forests or the environment, it is worth noting that the government is fostering a socially equitable process to provide positive incentives for reducing green house gas emissions from deforestation and forest degradation (REDD). Given the prominence of indigenous populations in forest areas, and the high prevalence ofpoverty in indigenous areas, it is essential to include indigenous peoples in the conservation efforts. Indigenous peoples are already taking part in the national and international negotiations on REDD, and this has created sense ofempowerment and new opportunities for environmentally sustainable development (including seed grants for capacity building from the World Bank and other institutions).
28 VI. LOAN IMPLEMENTATION
A. Implementation, Monitoring and Evaluation
66. The Ministry of Economy and Finance (MEF) is responsible for the implementation of the DPL operation as well as for coordinating the actions among the concerned agencies, including the Superintendency ofBanks (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 have agreed to monitor the progress in the program supported by the DPL and its evaluation will serve to inform preparation ofa new Country Partnership Strategy (programmed for fall 2009).
B. Fiduciary Aspects
67. In general, the public financial management and public procurement systems are adequate for this operation. The Bank recently prepared a CFMCPAR to document the current state of public financial management in the country, including the actions taken by the current administration to further increase transparency. While challenges remain, the Government is moving ahead to further strengthen its public fiduciary control framework. Public financial management processes have been supported by the Bank through both ofthe previous DPL operations. These operations have included actions to improve management and control of government transactions, particularly payments, through the launch and implementation of document tracking and management systems. The Bank is also engaged in policy dialogue with the Government to follow up on priorities identified in the CFMCPAR.
C. Disbursements
68. The Bank would make the single loan disbursement to the MEF’s Treasury Single Account. Since this account centralizes government revenues for financing of government spending, upon its deposit the DPL disbursement will become available to finance budgeted expenditures. The account is denominated in US dollars, which has legal tender in the country, and is held in the National Bank of Panama (BNP), the financial agent of government. Based on the review of external audit reports and the experience with special accounts for investment lending, the banking control environment into which the loan proceeds will flow is deemed adequate.22 Upon the Bank’s request, the MEF would provide the Bank with a written Confirmation of the described transaction. No additional fiduciary arrangements (e.g., dedicated accounts subject to audit) are deemed necessary for this DPL.
22 An unqualified (“clean”) audit opinion was issued by external auditors on BNP’s financial statements as of December 3 1, 2007, which was prepared in accordance with International Financial Reporting Standards.
29 D. Risks and Risk Mitigation
69. The DPL loan is subject to two main risks: economic and political.
70. Economic risks. On the economic front, the main risk derives from the ongoing global financial crisis and possibility of a deep and prolonged global recession. While Panama is not expected to fall into recession in 2009 and beyond, the current global situation is anticipated to adversely impact growth as private sector credit contracts and foreign demand for Panamanian services, real estate and products weaken. Should the global slowdown be more protracted than anticipated, ongoing financial sector reforms may be delayed. Risks of economic slowdown have been incorporated into the macroeconomic projection and the Bank and the Fund are maintaining an on-going dialogue with the authorities on macroeconomic policy issues. In case of unanticipated financial sector developments, both institutions would be available to provide consultation and support to the authorities as deemed appropriate.
71. Political and institutional risks. The current Administration will complete its term of office on June 30, 2009. Under Panama’s Constitution, the President may not be elected to a consecutive term. Traditionally, new administrations have, upon taking office, made changes within the civil service and line ministries. While all major presidential candidates support the broad DPL objectives, the government transition may slow the implementation ofthe country’s reform program. Staffing changes can make an orderly transition challenging and can be disruptive to on-going programs, including those supported by this DPL operation. The Bank is supporting the continuity of development policies over the political transition through ongoing dialogue with all key political parties and the preparation of policy notes for the incoming administration. Moreover, country dialogue and supervision of other Bank operations, including the Social Protection Project and the Health Equity and Performance Improvement Project should serve to mitigate institutional capacity risks to the proposed operation.
30 ANNEX 1. LETTER OF DEVELOPMENT POLICY
1I de matzo de 2009 DdCPIFEII 83
Seiior Robert Zoellick Presidente Banco Mundial Washington, D. C.
Ref.: Carta de Pollticas para el Programa Social de Protecci6n a 10s Pobres en tiempos de lncertidumbre Global
Estimado senor Zoellick:
Desde 10s primeros dias en el ejercicio de las funciones de Gobierno se anunciaron las prioridades de la administracidn: la disciplina fiscal, el combate a la cormpci6n, la reduccidn de la pobreza por la via de la creaci6n de empleos, tograr una sociedad con mayores oportunidades, la transparencia en la gestic% pQblica y la ejecucidn de un programa de inversiones publicas que sirviera de sustento al crecimiento econ6rnico. A partir del aRo 2004, el Gobierno lanzo una ambiciosa estrategia de rnediano y largo plazo la cual prestaba especial atenci6n a la reduccMn de 10s niveles de pobreza, mediante la cobertura de cuatro dimensiones que son: (7) la estimulacidn del crecimiento y expansidn de las oportunidades de empleo, (2) construir un capital humano a partir de grupos pobres, (3) iniciar un programa de transferencia condicional de dinero en efectivo llamado “Red de Oportunidades” el cual une esfuerzos para rnejorar la educacidn, salud, nutricion y acceso basico a infraestructuras, y (4) la inversion en actividades productivas en areas rurales incluyendo titulacion de tierras. Adicional a esto, el Gobierno tambien ha fortalecido otros programas que ofrecen servicios basicos de salud a 10s pobres en hreas tanto rurales como aisiadas, ademas ha ampliado y acelerado las actividades encaminadas a mejorar la calidad y el acceso a servicios educacionales en areas indigenas.
. ..I2
31 DdCP/FE/183 Pagina No.2
En el context0 de la actual crisis financiera y la depreciacion economica mundial, el Gobierno se esfuerza en proteger al grupo en pobreza y en apuntalar el sistema financier0 local. Para esto el Gobierno ha tomado acci6n poniendo en marcha la implementacidn de nuevas tacticas cOmo la mitigacion del impacto econdmico a la pobreza a traves del mejoramiento en la focalizacion y cobertura de 10s programas sociales y por otro lado, la reduccidn de 10s riesgos econbmicos de una crisis bancaria a traves def mejoramiento de la gestidn de riesgo y el fortalecimiento de las regulaciones y supervision. Las acciones del Gobierno en estas 4reas contribuyen a la continuidad de la estabilidad macroeconomica, lo cual es la base de un crecimiento economico sostenido y la reduccidn de la pobreza en el pais.
1. La Estrategia del Gobierno El Programa de Gobierno de la actual Administracidn se bas6 en cinco pilares estrategicos cuyos objetivos y medidas se presentan a continuacidn. 1. Reduccion de la pobreza y mejora de la distribucion del ingreso mediante un Programa de Subsidios directos focalizados a 10s mas necesitados y la ejecucidn de programas que fortalezcan la capacidad productiva de la economia, con la insercidn a1 mercado de grupos excluidos. 2. Una politica de crecimiento econ6mico para la generacion de empleos fundamentada en (i) el desarrollo de un modelo enfocado hacia fuera, que incluye la firrna de Tratados de Libre Comercio, especialmente con Estados Unidos de NorteamBrica; (io la promocion de una economia de mercado, con neutralidad de incentivos y fibertad de entrada en 10s diversos mercados; y (iii) el potenciar el desarrollo de la posicion geografica, con la expansibn y modernizacidn del Canal de Panama, (iv) la ejecucidn de un programa de inversiones publicas para el desarrollo. 3. Saneamiento permanente de las finanzas plfblicas, acci6n que es una precondici6n para el desarrollo econbmico sostenible, con un manejo responsable de las finanzas pljblicas a corto plazo y reformas estructurales para el largo plazo. Estas reformas estarhn acompafiadas de un control estricto del gasto corriente, el cual tiene como objetivo generar ahorro pfiblico que perrnita financiar una parte importante de la inversion plrblica. 4. Desarrollo de Capital Humano por medio de la reforma y rnodemizaci6n del sistema educativo que incorpore el estudio del idioma ingles, la tecnologla de cdmputo y tecnicas empresariales, la ejecuci6n de programas de formacion profesional 5. Reforma y Modernizacidn del Estado que garantice la transparencia y ayude a erradicar la corrupcidn en el Sector PSlblico. Ademas, se busca reestructurar el sistema de planificacion de la acci6n del Gobierno, incrementandose la participaci6n del sector privado dentro del componente de inversion pliblica.
..I3
32 DdCP/FE/I 83 PAgina No.3
11. La Conduccion Macroeconttmica La estrategia financiera seguida desde el inicio de la actual administracibn, en septiembre de 2004, apunt6 a afianzar la estabilidad de la economia, fortaleciendo el entorno de las inversiones mediante el saneamiento y un manejo prudente de las finanzas poblicas, privilegiando ademas la atencibn a la inversi6n social. La estrategia consistib en la generacidn de ahorro corriente para financiar una porcibn cada vez mayor del programa de inversiones lo que permiti6 reducir la dependencia del endeudamiento al utilizar el ahorro corriente generado para financiar las mismas. Otro elemento de la estrategia se orient6 a la estabilizacibn financiera y actuarial de la Caja del Seguro Social, mediante las reformas implementadas a traves de la Ley No.51 y la Ley No.6 de febrero de 2005, “que implements un programa de equidad fiscal, /a cual incluyd un programa de reduccidn de gastos y /a reestructuracidn de/ sistema tributario”. AI cierre del aTio 2008, el monto absoluto de la Deuda Pliblica se redujo en aproximadamente US$31.0 millones respecto al aAo 2007 y la cifra acumulada del ahorro corriente del atio 2006 al 2008 fue de aproximadamente US$2,852.0 millones, cifra muy similar a 10s US$2,904.0 millones de desembolsos para inversiones, lo cual demuestra el &xito de la estrategia financiera seguida. Es importante resaltar que se han logrado superar las metas macro fiscales establecidas en la Estrategia Econ6rnica de Gobiemo para el perio 2004-2009, que consistieron en reducir el dtificit fiscal, aumentar el ahorro corriente, orar el perfil de la deuda y la reduccidn del dbficit financier0 y actuarial de la Caja de Seguro Social. En consecuencia la economia de nuestro pals ha respondido adecu medidas estrategicas adoptadas y a 10s estimulos de las politicas pliblicas implementadas, logrando un crecimiento de 11.5% en el 2007 y estimandose un crecimiento de aproximadarnente 9.0% para el aAo 2008. Estos niveles de crecimiento se han fundamentado, primordidmente en el sector extemo, a travks del fuerte incremento en las exportaciones de sewicios de sectores tales como banca, turismo, puertos, el Canal de Panama y la Zona Libre de Colbn, asi como el crecimiento en el sector domestico, en particular la construccion. Por otro lado, se ha logrado una reduccibn en el lndice de desempleo abierto, el cual pas6 de 9.2% en el 2004 a 4.2% en el 2008. Las perspectivas para 10s aiios venideros, a la luz de la crisis financiera intemacional, son alentadoras, debido a la existencia de mega-proyectos de inversibn, entre ios cuales se encuentran 10s trabajos de un tercer juego de exdusas para la modernizaci6n del Canal. Nuestras metas al final del periodo de Gobierno consisten en la transicibn ordenada y transparente de las finanzas pliblicas en cumplimiento de la ley No.34 de Responsabilidad Social Fiscal, la cual continuarA apoyando la sostenibilidad macroeconbmica del pais.
. . .14
33 DdCPIFEll83 Pagina No.4
111. La pobreza en nuestro pak Con la finalidad de apoyar a la igualdad de oportunidades y el crecimiento econ6mico del pais el Gobierno ha desarrollado varias iniciativas focalizadas en la reducci6n de la pobreza siendo el Programa Red de Oportunidades uno de 10s mas importantes. Este programa est& dirigido a personas de pobreza extrema en hogares vulnerables con el fin de mejorar sus estAndares de vida y el acceso a 10s servicios sociales basicos. La creacidn y puesta en rnarcha del programa Red de Oportunidades ha sido un importante paso por parte del gobierno en busca de mejorar 10s niveles de pobrera en nuestro pais. Este programa actualmente ofrece cobertura a 367,378 personas (1 IYO de la poblacibn) y la base de datos creada a traves de este prograrna estA siendo utilizada por otros programas sociales para llegar a un mayor nirmero de beneficiarios. A pesar de 10s esfuerzos puestos en 10s diferentes programas de inter& social y del crecimiento alto y sostenido de nuestra economla, la pobreza extrema, principalmente presentada en grupos indigenas localizados en Breas rurales, no parece dar tregua y se debe primordialmente a que nuestro factor de crecimiento es un resultado de las actividades del sector de servicios 10s cuales utilizan mano de obra con altos estgndares y niveles de conocimientos.
IV. Objetivos y Componentes del Programa En este contexto, consideramos Irnportante el apoyo del Banco Mundial a traves del Programa Social de Proteccidn a 10s Pobres en tiempos de Incedidumbre Global, con la finalidad de apoyar las pollticas pOblicas adoptadas por el GdP para mitigar el impact0 de la desaceleracibn econdmica mundial en 10s sectores mAs pobres: Reforzamiento de 10s programas sociales a traves de un aumento de US$35.00 a US$SO.OO en 10s montos de las transferencias en efectivo condicionadas a las familias beneficiarias; Fortalecimiento de la calidad y cobertura de 10s servicios de salud y nutrici6n a grupos en extrema pobreza rnediante la inclusibn de un paquete integral de servicios nutricionales en et paquete bBsico de prevenci6n y prornocidn de servicios de salud (Paquete de Atencidn Integral de Servicios de Salud, PAISS); . Expandir la cobertura geogr5fica de la entrega del paquete de servicios de salud, lo cual traerla corn0 consecuencia un aumento de aproximadamente 60,000 personas beneficiadas dentro de las Comarcas; El gobiemo a traves del documento Acuerdos de la Concertacidn Nacional para el Desarrollo de Octubre 2007, se compromete entre otras cosas a mantener 10s niveles de gastos sociales durante la desaceleraci6n econbmica. La importancia de este cornpromiso radica en que durante tiempos de crisis este rengl6n se vuefve vulnerable a recortes presupuestarios; .. .I5
34 DdCPIFEI183 Phgina No.5
(v) Mantener la estabilidad del sector financier0 es una condicion necesaria para el crecirniento y la reduccion de la pobreza por lo cual las autoridades Panameiias han fortalecido su apoyo a este sector para as1 garantizar la solvencia y iiquidez de 10s bancos y por tanto mantener el flujo de cr6ditos en el pais.
Por lo anterior, el Gobierno de la Repljblica de Panama solicita la aprobaci6n del citado Programa.
Atentamente,
Hector E. Alexander H. Ministro
35 Republic ofPanama Ministry ofEconomy and Finance Office ofthe Minister
11 March 2009
Mr. Robert Zoellick President World Bank Washington D.C.
Ref.: Letter of Development Policy for the Protecting the Poor Under Global Uncertainty Development Policy Loan.
Dear Mr. Zoellick:
From its first days in office, this administration announced its priorities: fiscal discipline, the fight against corruption, poverty reduction through job creation, achieving a society with greater opportunities, transparency in public administration and undertaking a program ofpublic investment to sustain economic growth.
Since 2004, the Government launched an ambitious medium and long-term strategy that paid special attention to reducing the level of poverty through four dimensions: (i) stimulating growth and expanding employment opportunities, (ii)building the human capital ofthe poor, (iii)initiating a program ofconditional cash transfers entitled Red de Oportunidades which unites efforts to improve education, health, nutrition and access to basic infrastructure, and (iv) investment in productive activities in rural areas, including land titling.
In addition, the Government has strengthened other programs that offer basic health services to the poor in rural and isolated areas, as well as broadened and accelerated activities aimed at improving the quality of and access to education services in indigenous areas.
In the context of the current financial crisis and world economic deceleration, the Government is making efforts to protect the poor and backstop the domestic financial system. To do so, the Government has implemented new policies such as mitigating the economic impact on the poor by, on the one hand, improving coverage and targeting of social programs, and on the other, reducing the risk of a banking crisis through improved risk management and strengthened regulation and supervision. The Government actions in these areas have contributed to continued macroeconomic stability, which is the foundation for sustainable growth and poverty reduction in the country.
36 I.The Government Strategy
The governing program ofthe current administration is based on five strategic pillars, the objectives and actions ofwhich are discussed below.
1. Poverty reduction and improved income distribution via a program of direct subsidies targeted at those most in need and the implementation of programs to strengthen the productive capacity of the economy, through the inclusion of previously excluded groups. 2. A policy of economic growth and job creation based on: (i)developing a model focused on external markets, which includes the signing of free trade agreements, especially with the United States; (ii)promoting a market economy, with neutral incentives and freedom in various markets; (iii)maximizing the development potential of the country’s geographic position through the expansion and modernization of the Panama Canal; and (iv) executing a program of public investment for development. 3. Placing public finances on a permanently healthy foundation-a precondition for sustainable development-with responsible management ofpublic finances in the short term and structural reforms in the long term. These reforms will be accompanied by a strict control ofcurrent expenditure, with the aim of generating public savings to finance an important part ofthe public investment program. 4. Development of human capital through reforms and modernization of the education system that incorporate English language training, IT, business studies and career development. 5. Reform and modernization of the state that guarantees transparency and helps eradicate public sector corruption. Moreover, the government planning system will be restructured to increase the role ofthe private sector in public investment projects.
11. Macroeconomic Policy
The macroeconomic policy pursued since the beginning of the current administration, in September 2004, has been aimed at ensuring economic stability, strengthening the investment climate through a healthy and prudent management of public finances, and prioritizing social investment.
The strategy has consisted of generating current savings to finance an increasingly large portion of the investment program, which permitted a reduced dependence on debt creation. Another element in the strategy is oriented toward the financial and actuarial stabilization ofthe Social Security System, through reforms implemented via Law 5 1 and Law 6 in February 2005 “that implement a program offiscal equity, which includes a program of reduced expenditures and a restructuring of the tributary system.”
At the close of 2008, the stock of public debt was reduced by approximately US$31 million compared to 2007. At the same time, the amount ofcurrent savings from 2006 to
37 2008 was approximately US$2.85 billion, very close to the US$2.9 billion spent on investments, which demonstrates the success ofthe financial strategy.
It is important to highlight that the macro-fiscal targets established in the Government Economic Strategy for 2004-2009 have been exceeded. These targets include reducing the fiscal deficit, increasing current savings, improving the debt profile, and reducing the financial and actuarial deficit ofthe Social Security System.
Our economy has responded well to the strategic measures adopted and the stimulus of public policies, achieving a growth rate of 11.5 percent in 2007 and an estimated growth of 9 percent for 2008. These growth rates have been based mainly on strong exports by service sectors such as banking, tourism, ports, the Panama Canal and the Colon Free Zone, as well as growth in the domestic sector, particularly construction. Moreover, open unemployment has declined from 9.2 percent in 2004 to 4.2 percent in 2008. The prospects for the coming years, in light ofthe international financial crisis, are reasonably good due to the existence of mega investment projects, including the construction of a third set of locks ofthe Panama Canal.
Our goals at the end ofthe administration consist of an orderly and transparent transition in public finances, in keeping with the Social and Fiscal Responsibility Law, so as to continue supporting macroeconomic sustainability.
111. Poverty
With the aim of supporting equal opportunities and economic growth, the Government has developed various targeted poverty reduction programs, with the Red de Oportunidudes conditional cash transfer program being one of the most important. This program is directed to people in extreme poverty in vulnerable households, and aims to improve their living standards and access to basic social services.
The creation and implementation ofRed de Oportunidudes has been an important step in the effort to lower the level ofpoverty. The program currently covers 367,378 people (11 percent of the population) and the database created by the program is being used by other social programs to improve the targeting ofthese.
Despite efforts by the different social programs and the high and sustained growth of our economy, extreme poverty-principally among indigenous groups located in rural areas-remains very high. This is mainly due to the fact that our growth is largely the result of service sector activities that utilize labor with high standards and levels of knowledge.
38 IV. Objectives and Components of the Program
In this context, we consider the support of the World Bank through the Protecting the Poor Under Global Uncertainty Development Policy Loan to be important. The aim of the loan is to support public policies adopted by the Government to mitigate the impact of the world economic deceleration on the poorest sectors, through the following actions:
1. Strengthen social programs through an increase the amount of conditional cash transfers to beneficiary families from US$35 to US$50 per month. 2. Strengthen the quality and coverage of health and nutrition services to groups in extreme poverty via the inclusion of an integrated package of nutrition services into the basic package of health promotion and prevention services (Puquete de Atencidn Intregral de Servicios de Sulud, PAISS). 3. Expand the geographic coverage for the delivery of the health services package, which would result in an increase ofapproximately 60,000 beneficiaries. 4. Government commitment, through the National Agreement for Development of October 2007, to maintain the level of social spending during times of economic deceleration. This commitment is important as social spending can become vulnerable to budget cuts during an economic downturn. 5. Strengthen the support of Panamanian authorities to the financial sector to guarantee and solvency and liquidity of the banking system and in this way maintain financial sector stability and the flow of credit in the country, which are necessary conditions for growth and poverty reduction.
For the above reasons, the Government of the Republic of Panama requests the approval ofthe program.
Yours sincerely,
Hector E. Alexander H. Minister
39
ANNEX 2. PANAMA BANKING SECTOR STATISTICS
Table A2.1 Assets and Deposits by Type of Bank (millions ofBalboas and percent) Number 44 2006 % growth 44 2007 % growth 44 2008 %growth of
International Banking 90 Center Total Assets 45,273.84 17.24 56,209.56 24.15 63,953.29 13.76 Total Deposits 31,345.94 17.90 39,999.23 26.21 47,292.64 18.23 National Banking System 45 Total Assets 38,020.98 18.39 46,641.87 20.04 53,426.74 17.06 Total Deposits 26,621.02 18.67 32,883.79 23.99 39,352.66 19.67 Private Panamanian 15 Banks 15,720.01 17.75 Total Assets 16,754.44 20.83 13,350.83 -20.31 11,933.93 20.89 Total Deposits 11,797.89 25.22 9,872.08 -16.32 Private Foreign Banks 28 Total Assets 16,264.95 20.70 26,292.60 61.65 30,717.29 16.83 Total Deposits 10,873.12 17.63 18,072.95 66.22 2 1,455.09 18.71 Public Banks 2 Total Assets 5,001.60 4.80 6,998.43 19.93 6,989.45 16.52 Total Deposits 3,850.00 4.76 4,930.77 26.28 5,963.64 20.75 Source: Superintendency ofBanks.
Table A2.2 Loans by Type of Bank (millions of Balboas and percent) 442006 %growth 442007 %growth 442008 %growth 12 months 12 months 12 months International Banking Center Local 16,265.03 13.40 18,876.27 16.06 21,853.76 13.42 Foreign 10,344.30 20.81 14,563.10 40.68 15,758.90 6.90 National Banking System Local 16,265.03 13.40 18,878.16 16.07 21,853.76 13.42 Foreign 6,183.53 18.65 7,964.27 28.80 8,920.26 10.49 Private Panamanian Banks Local 8,599.20 19.19 7,308.86 -15.01 8,844.95 18.96 Foreign 977.60 31.61 1,097.70 15.81 1,347.91 18.81 Private Foreign Banks Local 5,011.36 10.33 8,632.93 72.27 9,869.27 12.50 Foreign 5,205.93 16.51 6,832.11 3 1.24 7,572.35 9.13 Public Banks Local 2,654.46 2.67 2,936.37 10.62 3,139.55 2.63 Foreign Source: Superintendency of Banks.
41 Table A2.3 Liquidity Indicators by Type of Bank (percent) 44 2006 44 2007 43 2008 44 2008 International Banking Center Liquid assetsitotal deposits 28.39 25.06 23.16 26.58 Liquid assets +invest/deposits 50.81 49.96 47.89 50.65 National Banking System Liquid assetdtotal deposits 28.55 26.79 23.86 28.44 Liquid assets +invest/deposits 50.35 49.91 48.17 52.01 Private Panamanian Banks Liquid assetsitotal deposits 23.31 16.42 13.44 14.81 Liquid assets +invest/deposits 50.55 42.57 39.63 40.59 Private Foreign Banks Liquid assetsitotal deposits 29.77 27.35 24.49 30.56 Liquid assets +invest/deposits 48.62 5 1.88 60.88 55.76 Public Banks Liquid assetsitotal deposits 41.14 45.50 42.90 48.07 Liquid assets +invest/deposits 54.90 57.33 55.91 61.92 Source: Superintendency ofBanks. Note that these are end-of-quarter liquidity figures. The legal requirement for all banks is based on weekly data and includes liabilities and assets up to 186 days.
Table A2.4 Portfolio Quality by Type of Bank (percent) 44 2006 44 2007 43 2008 International Banking Center NPLs/total loans 1.29 1,18 1.17 Provisions/NPLs 140.83 44.04 139.44 National Banking System NPLdtotal loans 1.47 1.40 1.38 Provisions/NPLs 127.40 32.87 126.24 Private Panamanian Banks NPLs/total loans 1.22 0.83 0.96 ProvisiodNPLs 137.96 84.1 1 149.69 Private Foreign Banks NPLs/total loans 0.58 1.18 1.28 Provisions/NPLs 2 16.03 34.69 121.91 Public Banks NPLs/total loans 6.78 4.16 3.13 Provisions/NPLs 85.20 100.74 110.31 Source: Superintendency of Banks.
Table A2.5 Capital Adequacy Ratio (CapitaVAssets) by Type of Bank (percent) 44 2006 44 2007 43 2008 International Banking Center 16.11 13.71 14.09 National Banking System 15.78 13.64 14.01 Private Panamanian Banks 14.18 15.15 15.49 Private Foreign Banks 15.74 12.43 12.67 Public Banks- 13.71 11.26 11.35 Source: Superintendency of Banks.
42 Table A2.6 Profitability and Efficiency Indicators by Type of Bank (percent) 44 2006 44 2007 43 2008 International Banking Center ROA: Net income/total assets (average) 1.75 1.98 2.21 ROE: Net income/equity (average) 14,12 16.21 17.19 Net interest income/ Average earning assets 3.25 2.96 2.81 Loansiemployees 1.74 2.01 2.18 National Banking System ROA: Net income/total assets (average) 1.67 2.03 2.60 ROE: Net incomeiequity (average) 13.31 15.67 17.87 Net interest income/ Average earning assets 3.36 3.32 3.17 Loansiemployees 1.62 1.67 1.80 Private Panamanian Banks ROA: Net income/total assets (average) 0.64 1.23 1.85 ROE: Net income/equity (average) 6.72 11.73 17.91 Net interest income/ Average earning assets 2.60 2.43 3.09 Assets/employees 1.48 1.69 1.69 Private Foreign Banks ROA: Net income/total assets (average) 2.35 2.39 2.91 ROE: Net income/equity (average) 17.62 16.10 17.90 Net interest income/ Average earning assets 3.33 3.33 2.84 Assets/employees 2.44 2.35 2.50 Public Banks ROA: Net income/total assets (average) 2.78 2.82 2.17 ROE: Net income/equity (average) 20.11 22.79 17.59 Net interest income/ Average earning assets 6.44 6.44 5.24 Assets/employees 0.65 0.71 0.78 Source: Superintendency ofBanks.
43
ANNEX 3. IMF STATEMENT ON THE MACROECONOMIC SITUATION
Panama-Assessment Letter to the World Bank (March 6,2009)
1. The weak global environment will dampen Panama’s near-term growth outlook. Real GDP growth is projected to slow from an impressive 10 percent per annum during 2006-08 to about 4-5 percent in 2009-10. The expansion ofthe Panama Canal and a strong public investment program are expected to mitigate the effects of the global slowdown on economic activity. Nevertheless, the growth outlook is subject to considerable risk and the depth and length of Panama’s slowdown will depend on the magnitude and duration ofthe US. recession, the resilience of foreign direct investment, and the absence of adverse shocks to confidence. After reaching a peak of 10 percent in September 2008, the 12-month rate of inflation declined sharply following the drop in world food and oil prices, and is projected to fall below 4 percent during 2009. The external current account is projected to remain around 12-14 percent of GDP, mainly due to higher imports related to the Canal expansion.
2. A strong fiscal position will enable the government to add some fiscal stimulus. After three years of budget surpluses, the government has room to partially absorb weaker revenues and achieve its budget deficit target of 1 percent ofGDP-the limit stipulated in the Social and Fiscal Responsibility Law approved in 2008-by containing capital spending. The public sector debt-to-GDP ratio is projected to remain stable at about 38 percent of GDP by end-2009, even after including the new borrowing associated with the Canal expansion.
3. The banking system has fared relatively well during the global financial crisis. Periodical assessments by the Superintendency of Banks have not revealed exposure to complex structured assets. As in many other countries in the region, banks’ access to foreign credit lines became more problematic starting in October 2008, but bank deposits and credit outstanding have remained broadly stable. Banks are vulnerable to additional external shocks, particularly given the importance of foreign depositors and the large presence of foreign banks. In addition, the output slowdown is likely to deteriorate somewhat the quality ofbank assets.
4. The government has responded proactively to the new risks. In October 2008, the President formed a high-level committee to monitor the impact ofthe global crisis on Panama, the Superintendent of Banks increased it scrutiny of financial institutions, and the National Bank of Panama (BNP) established a collateralized line of credit for on-lending to banks. In January 2009, the government announced a stimulus package for a total of US$I. 1 billion, including increased resources for on-lending. The government’s rapid action with regard to the Stanford Bank has helped prevent major repercussions on the rest of the banking system.
5. This letter updates the assessment ofthe IMF Executive Board at the time of the 2008 Article IV consultation (see the Public Information Notice of August 28, 2008 available at htt~://www.imf.or~/extemal/np/sec/Dn/20n~8~1 .htm). The next Article IV Consultation is scheduled for May 2009.
45 n L
Table 1. Panama: Selected Economic indicators
Prel. Proj. 2005 2006 2007 2008 2009 2010
(percent change) Production and prices Real GDP (1996 prices) 7.2 8.5 11.5 9.2 4.0 5.0 Consumer price index (average) 2.9 2.5 4.2 8.8 3.0 2.5 Consumer price index (end of year) 3.4 2.2 6.4 6.8 3.8 2.5 Domestic demand (at constant prlces) Public consumption 4.1 2.7 7.5 -8.7 4.3 4.9 Private consumption 8.8 4.9 15.0 15.8 4.1 4.4 Public investment -4.1 17.2 67.3 36.2 35.7 28.4 Private investment 4.9 12.6 25.1 9.9 -6.2 6.2 Financial sector Private sector credit 13.3 12.9 18.2 14.6 6.1 9.2 Broad money 8.5 21.5 15.9 18.4 9.4 8.4 Average deposit rate (1 year) 3.2 5.1 4.6 3.8 ...... Average lending rate (1 year) 8.2 8.6 9.0 8.5 ...... External trade Merchandise exports 11.9 14.3 11.7 10.8 -9.8 8.2 Merchandise imports 14.3 18.2 40.7 38.1 -4.6 21.5
(percent of GDP) Saving-investment balance Gross domestic investment 18.4 19.5 23.5 26.1 26.4 28.8 Public sector 4.0 4.3 6.6 8.2 10.6 12.9 Private sector 14.4 15.2 16.9 17.8 15.8 15.9 Gross national saving 13.4 16.3 16.2 13.7 15.4 14.9 Public sector 2.9 5.3 9.1 9.4 7.7 7.8 Private sector 10.6 11.1 7.1 4.3 7.7 7.1 Public finances Revenue and grants 24.3 26.8 30.1 29.4 26.8 26.7 Expenditure 25.9 25.6 26.3 27.0 29.1 31.2 Current 21.9 21.3 19.7 18.8 18.6 18.3 Capital 4.0 4.3 6.6 8.2 10.6 12.9 Overall balance -1.6 1.2 3.8 2.3 -2.3 -4.5 Overall balance, excluding PCA -2.6 0.5 3.5 0.4 -1.o -1 .o External sector Current account -4.9 -3.1 -7.3 -12.3 -11.0 -13.9 Net oil imports 3.4 3.1 4.5 5.6 2.7 3.2 Foreign direct investment 6.2 14.6 9.8 9.2 6.7 7.5 Total public debt Total debt 58.3 52.6 46.3 38.6 37.8 38.2 Extemai 45.5 40.4 37.9 32.5 32.5 34.7 Domestic 12.9 12.1 8.4 6.1 5.2 3.4 Memorandum items: GDP (in millions of US$) 15,465 17,134 19,485 23.088 25,132 27,185
Sources Comptroller General, Superintendency of Banks, and Fund staff estimates and projections
46 ANNEX 4. PANAMA: DEBT SUSTAINABILITY ANALYSIS
1. The debt sustainability analysis presented in this annex is based on the macroeconomic framework summarized in Table 1, which incorporates the expected impact of the global economic crisis incorporating the most recent downward revisions of US economic growth. The analysis applies two different concepts of public debt: (1) Non- Financial Public Sector (NFPS) debt, excluding the accounts of the Panama Canal Authority (PCA); (2) NFPS debt including debts of the PCA.23 Both definitions define debt on a net basis by excluding public debt instruments held by the Fiduciary Fund and the Institute of Social Security (CSS) from gross public debt.
2. The impact of the global crisis will be most noticeable in 2009 with growth moderating to 3 percent compared to a projected 8 percent growth rate prior to the crisis. The economy is expected to recover to a growth rate of 7 percent by 2012. In the baseline scenario, the fiscal deficit of the NTPS, excl. PCA will remain below the 1 percent of GDP stipulated in the Social and Fiscal Responsibility Law. GDP inflation is expected to fall to 3.5 percent (from 9.3 percent in 2008) in the medium-term as commodity prices decline.
3. Table A4.1 presents the evolution ofthe stock ofNFPS debt (excl. PCA) from 2005 to 2007, providing a breakdown by credit for the stock ofnet debt and the average terms ofgross debt. Panama’s public debt is mainly external (82 percent oftotal debt), ofwhich most is held in bonds (65.7 percent of total debt). Domestic debt corresponds to 18 percent of total debt. The majority of gross debt is held in US dollars (96.4 percent). In addition, most of NFPS debt is held with interest rates between 6 and 9 percent (63.2 percent oftotal gross debt).
4. The baseline scenario for NFPS debt (excl. PCA) is presented in Table A4.2. It indicates that an average primary surplus of 1.8 percent of GDP between 2008 and 2013 would result in a gradual decline in the public debt-to-GDP ratio from 45.8 percent of GDP in 2007 to 28.8 percent of GDP by 2013. This primary surplus is consistent with an overall public sector deficit averaging 0.5 percent ofGDP during this period.
23 The Panama Canal Authority is an autonomous agency with fiscal accounts separate from that of the Non- Financial Public Sector. ACP debt has an investment grade rating while Central Government debt has a rating one notch below that. ACP debt is not explicitly guaranteed by the sovereign.
47 Table A4.1. Panama: Composition of NFPS Debt (excl. PCA), 2005-2007 2005 2006 2007 2007 (In millions of US$, unless (In percent indicated otherwise) of total)
Nominal value Total NFPS Debt (Net) 11 9,070 9,012 9,039 100.0
External 7,023 6,932 7,407 81.9 o/w Multilateral 1,136 1,183 1,235 13.7 olw Bilateral 259 237 224 2.5 olw Bonds 5,548 5,503 5,941 65.7 o/w Private 80 8 6 0.1
Domestic 2,047 2,080 1,632 18.1 o/w Public sources 784 768 636 7.0 o/w Private sources 1,264 1,312 995 11.0
Currency composition of gross debt Total NFPS Debt (Gross) 10,23 1 10,453 10,471 100.0
US dollars 9,749 10,025 10,092 96.4 Units ofaccount - IADB 29 1 261 235 2.2 Japanese yen 71 64 61 0.6 Korean won 22 24 24 0.2 Euros 11 11 11 0.1 Swiss francs 3 3 3 0.0 Other 84 64 44 0.4
Average interest rate terms of gross debt Concessional rate (below 3%) 44 8 112 103 1.o Between 3% and 6% 2,164 1,920 1,958 18.7 Between 6% and 9% 5,085 6,63 1 6,616 63.2 Above 9% 2,535 1,790 1,794 17.1
Average maturity of gross debt (in years) Total NFPS Debt (Gross) n.a. n.a. 12.2 External n.a. n.a. 14.6 Domestic n.a. n.a. 3.7 1. External debt is net of government bonds held by the Fiduciary Fund and domestic debt is net of debt instruments held by the Social Security Administration (CSS). Sources: Ministry of Finance of Panama and World Bank staff calculations.
48 Table A4.2. Panama. Debt Sustainability Analysis: NFPS, excl. PCA (Baseline Scenario) Actual Projection 2007 2008 2009 2010 2011 2012 2013
Total External Debt (% of GDP) 37.5 31.2 29.2 28.3 26.6 24.4 23.7 Public Debt (YOof GDP) 45.8 37.6 36.3 35.4 33.4 31.2 28.8
Key Assumptions Real GDP growth (%) 11.5 9.0 3.0 4.0 6.0 7.0 7.0 GDP deflator (% change) 4.2 9.3 4.7 3.0 3.5 3.5 3.5
Growth ofreal primary spending (% change) 15.5 16.1 2.2 7.6 10.0 10.0 7.7 Primary balance (% ofGDP) 6.9 3.6 1.6 1.5 1.4 1.3 1.3 Overall balance (% ofGDP) 3.5 0.7 -1.0 -0.9 -0.7 -0.5 -0.5
Nominal interest rate on public debt (%) 7.4 7.2 8.8 8.4 7.5 7.0 6.0
Memorandum items: Nominal GDP (in bns ofBalboas) 19.7 23.5 25.4 27.2 29.8 33.0 36.6 Note: Debt measured onnet basis (see footnote 24). Source: Ministry ofEconomy and Finance, IMF, and World Bank staff estimates.
5. Although the debt outlook under the baseline scenario looks fairly stable, the global financial crisis has significantly increased different types of economic risks. To examine the potential implications of these risks, Table A4.3 presents projected debt dynamics for the Non- Financial Public Sector (excl. PCA) under more pessimistic alternative scenarios:
Under a less optimistic growth scenario (3.9 percent over 2008-2013) compared to the baseline (6.0 percent over 2008-201 3)-scenario Al-the public debt-to-GDP ratio would be 4.3 percentage points ofGDP higher than under the baseline scenario in 2013.24
Assuming a looser fiscal policy-scenario A2-with an average primary surplus of 0.9 percent of GDP over 2008-2013 instead of the assumed 1.8 percent of GDP under the baseline scenario, the public debt-to-GDP-ratio would be 5.3 percentage points of GDP higher than under the baseline scenario in 2013.25
Considering tighter financial market conditions reflected in higher real interest rates for public debt over 2008-2013-scenario A3-projected debt indicators for 2013 would be 1.9 percent higher than under the baseline scenario.26
24 The GDP growth stress scenario (implying an annual growth rate of3.9 percent per year for 2008-13) represents a permanent one-half standard deviation shock (-1.7 percent) to GDP growth of the 10-year historical average (5.6 percent). 25 The looser fiscal policy scenario (a primary balance of 0.9 percent of GDP for 2008-2013) assumes a permanent one-half standard deviation shock (1.2 percent ofGDP) to the primary balance of the 10-year historical average (2.1 ercent of GDP). In this scenario, the implied overall balance exceeds 1 percent ofGDP. The real interest rate rises by halfa standard deviation (0.6 percent) to 6.0 percent compared to the historical 10- year average of5.4 percent.
49 o Under a scenario ofcontemporaneous shocks in which GDP growth, the primary balance, and real interest rates are affected-scenario A4-the public debt-to-GDP would reach 42.5 percent in 2013, or 13.7 percentage points higher than in the baseline scenario.
o Assuming a potential one-time materialization ofcontingent liabilities equal to 10 percent of GDP in 2009 (which could occur as a result of a bailout of local banks by the central government)-scenario A5-public debt would reach 39.2 percent ofGDP by 2013.
o The final set of scenarios examines the evolution of public debt to GDP when key variables are fixed at historical averages. Results vary considerably depending on whether historical averages are based on the last 5 or 10 years. This difference is due to the notable improvement in economic growth and the fiscal stance in recent years. Scenario A6 is based on average data for the last five years. Under this assumption, public debt to GDP would reach 25.7 percent by 2013, approximately 3.1 percentage points lower than under the baseline. Alternatively, a 10 year historical average- scenario A7-would result in a public debt to GDP ratio of 29.0 percent in 2013, 0.2 percent higher than in the baseline.
Table A4.3. Panama. Debt Sustainability Analysis, excl. PCA (Alternative Scenarios) 2007 2008 2009 2010 2011 2012 2013 Non-Financial Public Sector Debt Sustainability Analysis
Baseline scenario 45.8 37.6 36.3 35.4 33.4 31.2 28.8
Al. Real GDP growth is historical average minus 112 s.d. 45.8 39.6 38.1 37.2 35.9 34.6 33.1 A2. Primary balance is historical average minus 112 s.d. 45.8 40.3 39.9 39.5 38.1 36.2 34.1 A3. Real interest rate onpublic debt is historical average plus 45.8 38.7 37.3 36.3 34.5 32.6 30.7 112 s.d. A4. Combination of Al-A3 using 112 s.d. shocks 45.8 43.8 43.1 43.1 42.9 42.7 42.5 A5. One time 10 percent of GDP contingent liability in 2009 45.8 48.3 45.5 44.2 41.8 39.8 37.8 A6. Key variables are at their 5 year historical averages 45.8 38.8 35.4 32.9 30.4 28.0 25.7 A7. Key variables are at their 10 year historical averages 45.8 39.6 36.8 34.7 32.8 30.8 29.0
6. The second part ofthe analysis incorporates the accounts ofthe Panama Canal Authority and the canal expansion borrowing schedule for the period 2009-2013. The PCA is an autonomous entity which has fiscal accounts separate from the rest of the Panamanian public sector. Nonetheless, the PCA has close ties to the public sector, and has contributed to the annual revenues of the NFPS by an average of 3.3 percent of GDP during 2004 - 2007. Until 2008, the PCA had no debt on its books and had maintained an overall average annual surplus equal to 0.8 percent of GDP between 2004 and 2007, contributing to accumulation of assets totaling US$4.1 billion by the end ofthe 2007 fiscal year. However, due to the expansion of the Panama Canal, PCA debt will increase noticeably over the next five years.
7. The debt sustainability analysis for the NFPS, including the PCA (Table A4.4), indicates that an average primary surplus of 0.2 percent of GDP between 2008 and 2013 would lead the debt-to-GDP ratio to gradually decline to 38.4 percent of GDP by 2013. This figure is 9.6
50 percentage points of GDP higher than the NFPS debt excluding the PCA.27 Figure A4.2 illustrates the alternative scenarios. The most severe test, which assumes a combined shock on the growth rate, interest rate and primary balance for the entire forecast period leads to an increasing debt-to-GDP ratio, which reaches 5 1.1 percent by 2013.28 A realization of contingent liabilities totaling 10 percent of GDP would also bring the debt-to-GDP ratio higher than under the baseline (51.1 percent). However, it is noteworthy, that the projected debt-to-GDP ratio declines under all other stress tests.
Table A4.4. Panama. Debt Sustainabilitv Analvsis: NFPS incl. PCA (Baseline Scenario) Actual Prqjection 2007 2008 2009 2010 2011 2012 2013
Total External Debt (% of GDP) 37.5 31.2 30.9 33.8 34.0 32.4 31.9 Public Debt (YOof GDP) 45.8 37.8 38.1 41.0 41.5 40.0 38.4
Key Assumptions Real GDP growth (%) 11.5 9.0 3.0 4.0 6.0 7.0 7.0 GDP deflator (YOchange) 4.2 9.3 4.7 3.0 3.5 3.5 3.5
Growth ofreal primary spending (% change) 17.5 12.9 6.9 13.3 3.9 3.0 6.4 Primary balance (YOof GDP) 7.3 3.4 -0.2 -2.4 -1.0 0.6 0.8
Nominal interest rate onpublic debt (%) 7.4 7.2 7.9 7.9 7.9 7.9 7.9
Memorandum items: PCA borrowing requirement (% ofGDP) 0.0 0.0 1.8 5.5 7.4 7.9 8.2 Nominal GDP (in billions ofBalboas) 19.7 23.5 25.4 27.2 29.8 33.0 36.6 Note: Debt measured on net basis. Source: Ministry of Economy and Finance, IMF, and World Bank staff estimates.
8. Over the past years, the PCA has shown a very sound financial performance. Annual revenue growth averaged 17.6 percent between 2003 and 2007, and the net profit margin increased steadily over the same period. Current assets have also grown substantially, due mainly to the increase in appropriated and unappropriated retained earnings, and total assets nearly doubled during this period, reaching US$4.1 billion in 2007.29
9. The US$2.3 billion in credit resources required for the expansion of the Canal have been acquired with five multilateral institutions at a term of 20 years and a grace period of 10 years. During the first 10 years ofthe project, the PCA will only pay interest and will begin to amortize the loans thereafter. Disbursements are scheduled to begin in 2009.
’’ The baseline assumptions of real GDP growth, interest rates, and inflation are the same for both scenarios (including and excluding the PCA). The primary deficit assumptions differ noticeably because the analysis including the PCA incorporates the expected additional spending carried out by the PCA. 28 The shock to the primary balance (when including the PCA) is applied to the average of the projected values of the primary balance for the period 2008 - 2013 rather than the historical average (the template default). This was done because the historical fiscal performance when including the PCA was extraordinarily strong. 29 Appropriated earnings refer to those assigned in the budget as reserves for future Canal expansion, contingency, and working capital purposes. Unappropriated earnings represent surplus in respect of the previous fiscal year that is to be transferred to the Treasury ofPanama.
51 Figure A4.1. Panama: Debt Sustainability Analysis, Bound Test Results: 2003 - 2013' (Net Non Financial Public Debt, excluding the PCA, in percent ofGDP) Baseline and Historical Scenarios 65 60 - 55 - :::\50 - 50 - - Hist. 1Oyr avg 45 40 - Baseline 35 - 30 30 - 2520 Hist. 5yr avc. . - 25 - li 25.7 L 20- ' ' ' ' ' ' ' ' ' ' 2003 2005 2007 2009 2011 2013
Primary balance shock
69 65 60 - 60 - 55 - 55 - 50 - 50 - Primary - 45 - balance 45 40 - 40 - 35 - 35 - 30 - 30 - Baseline 25 28.8 25 - 28 8 20 20 2003 2005 2007 2009 2011 2013
Combined shock 21 65 60 - 55 - Comblned 50 - Conbngent 50 t \. - -.-..-..-..-..- 425 45 - 40 40 - -. 35 - 30 Baseline 25 - 28.8 28.8 I 201 ' ' ' ' ' ' ' ' ' ' 1 20 2003 2005 2007 2009 2011 2013
Sources: World Bank staff estimates. I/Shaded areas represent actual data. Individual shocks are permanent 1/2 standard deviation shocks. Figures in the boxes represent average projections in the baseline and scenario being presented. Scenario for ten and five-year historical average ofkey variables is also shown. 2/ Permanent 112 standard deviation shocks applied to real interest rate, growth rate, and primary balance. 3/ One-time 10 percent ofGDP shock to contingent liabilities occurs in 2009.
52 Figure A4.2. Panama: Debt Sustainability Analysis, Bound Test Results: 2003 - 2013 1/ (Non-Financial Public Debt including the PCA, in percent of GDP)
65 , 65 I 60
L 55 HistHist. 10yravg1Oyr avg 50 - 37.8 45 - Baseline 40 - - .. 35 Baseline 1
30 - Hist. 5yr avg 25 - 34 2 20' ' ' ' ' ' ' ' ' ' ' ' 2003 2005 2007 2009 2011 2013
Interest rate shock
65 i 1
rc6o t '
35- Base I in e 38 4 30 - 25 - ::I , , , , , , , , , , 1 20 20 2003 2005 2007 2009 2011 2013
Contingent liabilities shock 4/ 65 65 60 Combined
~ .. - . . 50 - -
45 - 45 40 - 40
35 - Baseline Baseline 38 4 38.4 1 30 - 25 - 25 201 ' ' ' ' ' ' ' ' ' ' 1 201 ' ' ' ' ' ' ' ' ' ' I 2003 2005 2007 2009 2011 2013 2003 2005 2007 2009 2011 2013
Sources: World Bank staff estimates. l/Shaded areas represent actual data. Individual shocks are permanent 1/2 standard deviation shocks. Figures in the boxes represent average projections in the baseline and scenario being presented. Scenario for ten and five year historical average of key variables is also shown. 21 The shock was applied to the average of the projected primary balances in 2008 - 2013. 3/ Permanent 1/2 standard deviation shocks applied to real interest rate, growth rate, and primary balance. 41 One-time 10 percent ofGDP shock to contingent liabilities occurs in 2009.
53
.. rp mE a9 vj x E 5
xd00000
000000 rn .-E U E m c 000000 v) 5c U Q, E 3 ooomocn P (?(4 .-v) NO n d c,
Y
Pv) Q)* Ua
xd00000
000000
000000
ooomocn ma ANNEX 7. PANAMA AT A GLANCE, 3/20/09
Panama at a glance 3/20/09
Latin Upper Key Development Indicators America middle Age dlstrlbution, 2007 Panama 8 Carib. income (2007) Male Female
Population, mid-year (millions) 3.3 563 823 75-79 Surface area (thousand sq. km) 76 20,421 41,497 Population growth (%) 1.7 1.2 0.6 50-84 Urban population (% of total population) 71 78 75 4545
GNI (Atlas method, US$ billions) 18.4 3,118 5,750 30-34 GNI per capita (Atlas method, US$) 5,500 5,540 6,987 15-19 GNI per capita (PPP, international $) 10,830 9,320 11,868 04 GDP growth (%) 11.5 5.7 5.8 15 io 5 0 5 10 15 GDP per capita growth (%) 9.7 4.5 5.1 Dercent
(most recent estimate, 200cC2007)
Poverty headcount ratio at $1.25 a day (PPP. %) 8 Under4 mortality rate (per 1,000) Poverty headcount ratio at $2.00 a day (PPP. %) 18 Life expectancy at birth (years) 75 73 70 Infant mortality (per 1,000 live births) 19 22 22 I Child malnutrition (YO of children under 5) 5 50 40 Adult literacy, male (% of ages 15 and older) 93 91 94 Adult literacy, female (% of ages 15 and older) 91 89 92 30 Gross primary enrollment, male (% of age group) 114 120 112 20 Gross primary enrollment, female (% of age group) 111 116 109 10
Access to an improved water source (% of population) 90 91 95 0 Access to improved sanitation facilities (% of population) 73 78 83 L0 Panama 0 Latin America 8 the Caribbean
Net Aid Flows 1980 1990 2000 2007 a
(US$ millions) Net ODA and official aid 45 99 16 30 Growth of GDP and GDP per capita (X) Top 3 donors (in 2006): United States 15 97 -9 19 47 European Commission 0 0 3 13 Spain 6 13 6
Aid (YO of GNI) 1.3 2.0 0.1 0.2 Aid per capita (US$) 23 41 5 9
Long-Term Economic Trends
Consumer prices (annual % change) 13.8 -5.1 1.5 4.2 GDP implidt deflator (annual % change) 33.7 0.6 -1.2 3.3 LGDp95 -w GDP per capita 1 Exchange rate (annual average, local per US$) 1.o 1.o 1.o 1 .o Terms of trade index (2000 = 100) 90 94 100 105 1980-90 1990-2000 2000-07 (average annual growth %) Population, mid-year (millions) 1.9 2.4 2.9 3.3 2.1 2.0 1.8 GDP (US$ millions) 3,810 5,313 11.621 19,740 0.5 4.7 6.0 (% of GDP) Agriculture 8.9 9.8 7.2 6.7 2.5 3.1 4.1 Industry 19.5 15.1 19.1 16.5 -1.3 6.0 4.0 Manufacturing 11.0 9.7 10.1 7.1 0.4 2.7 0.6 Services 71.5 75.1 73.6 76.8 0.7 4.5 6.3
Household final consumption expenditure 44.9 56.9 59.9 60.1 3.8 6.4 6.7 General gov't final consumption expenditure 17.6 18.1 13.2 11.5 1.2 1.7 4.0 Gross capital formation 28.1 16.8 24.1 23.3 -9.2 10.4 5.9
Exports of goods and services 98.2 86.8 72.6 80.0 0.4 -0.4 5.8 Imports of goods and services 88.8 78.6 69.8 75.0 1.o 1.2 6.2 Gross savings 27.6 24.2 23.1 17.8
Note: Figures in italics are for years other than those specified. 2007 data are preliminary. .. indicates data are not available a. Aid data are for 2006.
Development Economics, Development Data Group (DECDG).
58 Panama
Balance of Payments and Trade 2000 2007 IGovernance indicators, 2000 and 2007 (US$ millions) Total merchandise exports (fob) 5,838 9,312 Voice and accountability Total merchandise imports (cif) 7,655 14,508 Net trade in goods and services -279 481 Political stability Current account balance -715 -1,430 ReQulatoWquality as a % of GDP -6.2 -7.2 I 1 Rule of law Workers' remittances and Compensation of employees (receipts) 16 173 Control of corruption
Reserves, including gold 707 1,935
2007 Country's percentile rank (0-100) Central Government Finance 0 2000 higher YSIUBS imply httw mtmgs (% of GDPJ Soume KaUfmann-Kraay-ManrUUi World Bank Current revenue (including grants) 18.2 27.9 Tax revenue 9.6 10.6 Current expenditure 16.9 24.4 Technology and Infrastructure 2000 2007 Overall surplusideficit -1.1 3.4 Paved roads (% of total) 34.6 Highest marginal tax rate (%) Fixed line and mobile phone individual 30 27 subscribers (per 100 people) 28 86 Corporate 30 30 High technology exports (%of manufactured exports) 0.1 0.3 External Debt and Resource Flows Environment (US$ millions) Total debt outstanding and disbursed 6,384 8.258 Agricultural land (% of land area) 29 30 Total debt service 834 779 Forest area (% of land area) 57.9 57.7 Debt relief (HiPC. MDRI) - - Nationally protected areas (% of land area) .. 21.7
Total debt (% of GDP) 54.9 45.7 Freshwater resources per capita (cu. meters) .. 45,613 Total debt service (% of exports) 8.9 10.0 Freshwater withdrawal (% of internal resources) 0.6
Foreign direct investment (net inflows) 824 1,910 C02 emissions per capita (mt) 1.9 1.8 Portfolio equity (net inflows) 0 0 GDP per unit of energy use (2005 PPP 5 per kg of oil equivalent) 9.5 11.7 Cornposltlon of total external debt, /A;::o4 Energy use per capita (kg of oil equivalent) 875 804
(US$ millions)
IBRD Total debt outstanding and disbursed 283 320 Disbursements 22 116 Principal repayments 24 38 I I Interest payments 21 13 I PnvBIo, 7.601 I IDA Total debt outstanding and disbursed 0 0 Disbursements 0 0 Private Sector Development 2000 2008 Total debt service 0 0
Time required to start a business (days) - 13 IFC (fiscal year) Cost to start a business (% of GNI per capita) - 19.6 Total disbursed and outstanding portfolio 226 175 Time required to register property (days) - 44 of which IFC own account 117 157 Disbursements for IFC own account 84 0 Ranked as a major constraint to business 2000 2007 Portfolio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 2 54 Electricity .. 30.6 Tax rates .. 14.6 MlGA Gross exposure 0 0 Stock market capitalization (% of GDP) 24.0 31.5 New guarantees 0 n Bank capital to asset ratio (%) 9.6 11.3
Note: Figures in italics are for years other than those specified. 2007 data are preliminary. 3/20/09 .. indicates data are not available. -indicates Observation is not applicable.
Development Economics, Development Data Group (DECDG).
59 Millennium Development Goals Panama
With selected targets to achieve between 1990 and 2015 (estimate closest to date shown, +/- 2 years)
Goal 1: halve the rates for extreme poverty and malnutrition 1990 1995 2000 2007 Poverty headcount ratio at $1 25 a day (PPP, % of populabon) Poverty headcount raho at nahonal poverty line (% of population) 37 3 Share of income or consumption to the poorest qunitile (%) 25 Prevalence of malnutrition (% of children under 5) 61 81
Goal 2: ensure that chlldren are able to complete primary schooling Primary school enrollment (net, %) 98 98 Primary completion rate (% of relevant age group) 66 94 94 Secondary school enrollment (gross, %) 62 67 70 Youth literacy rate (% of people ages 15-24) 95 96 97 97
Goal 3: eliminate gender disparity In education and empower women Ratio of girls to boys in primary and secondary education (%) 100 101 Women employed in the nonagricultural sector (% of nonagricultural employment) 43 43 43 44 Proportion of seats heid by women in national parliament (%) 6 10 10 17
Goal 4: reduce underd mortality by two-thirds Under-5 mortality rate (per 1,000) 34 30 26 24 Infant mortality rate (per 1 000 live births) 27 23 20 19 Measles immunization (proportion of one-year oids immunized %) 73 84 97 99
Goal 5: reduce maternal mortality by three-fourths Maternal mortality ratio (modeled estimate, per 100,000 live births) 160 Births attended by skilled health staff (% of total) 86 90 93 Contracephve prevalence (% of women ages 15-49)
Goal 6: halt and begin to reverse the spread of HIWADS and other major dlseases Prevalence of HN(% of populahon ages 1549) 10 10 incidence of tuberculosis (per 100,000 people) 72 45 Tuberculosis cases detected under DOTS (%) 35 133
Goal 7: halve the proportion of people wlthout sustalnable access to basic needs Access to an improved water source (% of population) 90 90 Access to improved sanitation facilities (% of populahon) 71 73 Forest area (% of total land area) 58 8 57 9 57 7 Nationally protected areas (% of total land area) 21 7 C02 emissions (metric tons per capita) 13 13 19 18 GDP per unit of energy use (constant 2005 PPP $ per kg of oil equivalent) 10 1 98 95 I1 7
Goal 8: develop a global partnershlp for development Telephone mainlines (per 100 people) 9.0 11.4 14.5 14.7 Mobile phone subscribers (per 100 people) 0.0 0.0 13.9 71.6 internet users (per 100 people) 0.0 0.1 6.6 15.7 Personal computers (per 100 people) 3.6 4.6
:ducation indlcators (%) Measles lmmunlzatlon (% of I-year olds) CT indicators (per 100 people)
00 90 IC0 7 60 70 60 50 40 2s 2OW 2002 2004 2005 30 'ii 20 10 0 1980 19% 2000 2005 ---cS-Primary net enrollment raBo OFixed + mbile subscribers +Ratio of girls to boys in primary 8 0 Panama 0 Latin Amrica &the Caribbean secondary education internet users
Note: Figures in italics are for years other than those specified. .. Indicates data are not available. 3/20/09
Development Economics, Development Data Group (DECDG).
60 MAP SECTION
PANAMA
SELECTED CITIES AND TOWNS MAIN ROADS PROVINCE CAPITALS RAILROADS NATIONAL CAPITAL PROVINCE BOUNDARIES RIVERS INTERNATIONAL BOUNDARIES
83°W82°W81°W80°W79°W78°W 10°N 77°W 10°N Caribbean Sea
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
l
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.
83°W82°W81°W80°W79°W78°W77°W