Growth is Robust, But a Pension System Deficit Looms
The Monthly Index of Economic Activity grew 7.5% y/y in March, and 6% in Q1. March IMAE growth was its highest since December 2014. There were three main drivers of Q1 growth: transportation, due to an increase in Canal and ports activity; commerce, due to the recovery of Colon Free Zone reexports; and construction, due to public projects, such as the second metro line, and private projects linked to the copper mine. We expect that once the Panama Canal figures of H2 2017 become comparable with those of H2 2016 (namely, when the effect of the expansion is considered), GDP will fall to a 5%-5.4% path.
Fiscal figures released by the Ministry of Economy and Finance for January-March 2017 show an overall non-financial public sector (NFPS) surplus of US$205 million, compared with a US$ 158 million deficit in the same period in 2016. From 2018 to 2022, revenues generated by the NFPS are expected to increase by US$ 4.4 billion, and expenditures by US$ 5.1 billion, creating a deficit of US$ 660 million. As a percentage of GDP, the NFPS deficit is forecast to increase from 1.4% in 2017 to 1.8% in 2022, below the 2% legal limit. So the government wouldn’t need to change the legal limit to comply. NFPS debt is expected to rise by US$ 6.1 billion from 2017 to 2022, and fall by 6.2 pp in GDP percentage terms.
One of the two social security pension subsystems, the Exclusively Defined Pension System, may have insufficient funds to cover its future obligations to retirees. According to the latest official actuarial studies, the program started to incur operating losses in 2016, and its estimated reserves will be depleted by 2025. The last beneficiaries of this program are projected to retire by 2048. Without major reforms, the unfunded pension subsystem will burden future budgets. Failing to deal with the pension system deficit over the next five years means increasing the average deficit to above 2% of GDP. That’s not disquieting, but could alarm the market.
A GAFILAT delegation – an inter-governmental financial organization to which Panama belongs – arrived in Panama May 15th, to evaluate the country’s progress in money laundering prevention, terrorism financing, and in complying with GAFILAT’s international standards policy recommendations. The delegation will stay in Panama for two weeks, and meet with regulators and the national commission on money laundering to produce a report that will be discussed and evaluated at the GAFI plenary on December 2017. GAFILAT’s evaluation is to be made public by yearend.
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