Cortizo hit the ground running in economic and financial policies… while the economy continues to slide
July was an active month for “Nito” Cortizo’s government. He visited international banks in New York to explain the government’s strategy to eliminate Panama from the gray list of non-cooperating countries in matters of money laundering after its inclusion (again) in June of this year. Also, the new economic team tapped the market on July 17 with two global bond placements: one for US$ 1.2 billion due in 2030 with a coupon of 3.1% and another for US$ 750 million due in 2060 at 3.87% under the coordination of Citigroup. The funds are expected to clear most of the arrears (around US$ 1.5 billion) to government contractors, teachers, banks and energy distributors, among many other creditors. These payables were not registered as part of the deficit.
The deficit itself ‒ according to official estimates ‒ would reach 3.8% of GDP at the end of 2019, higher than the 2.0% allowed by the Fiscal Law, in the absence of adjustments. Minister Alexander therefore announced a downward revision of US$ 500 million from the operating budget and close to one billion in the investment program. The adjustments will be made mostly to the central government (56%) and to decentralized agencies (30%). If the proposed cuts are fully executed and no extra-budgetary expenditures are approved in the next five months, the deficit limit may close near the ceiling by December 2019. Tax revenues decreased 1.3% through June with respect to the same period of 2018; indirect taxes fell 2.3%. With respect to the budget, tax revenues were 18.6% lower. Therefore, we consider that at the end of the year the deficit will be close to 3.0% of GDP, and the net debt/GDP ratio will be approximately 41.5%, both above the legal limit.
The Monthly Index of Economic Activity (IMAE) increased 2.38% y/y in May and 3.12% year to date, the lowest cumulative result since the financial crisis of 2009. The economic slowdown persisted during the first five months of the year. Economic activity was affected by El Niño, mainly in the agricultural sector. Real estate and construction grew for the first time this year, while commerce, agriculture and manufacturing showed a contraction. In political news, a proposal for a constitutional reform and a new procurement law have already been approved by the Cabinet.
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