High NFPS deficit in the first quarter of 2019: the challenges to Cortizo´s administration

PANAMA - In Brief 13 May 2019 by Marco Fernandez

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The net deficit of Q1 was $966 million: 1.4% of projected (by MEF) nominal GDP for the complete year, or around 5% of “adjusted” GDP for the quarter. This figure does not include payments in arrears to contractors (a figure that may be at least 600 million, according to private sources). The primary deficit was more than five times higher than the first quarter of last year. The mid-year deficit, Varela’s inheritance to Nito Cortizo, is likely to be higher percentage-wise due to the slow economic activity we projected for the first half. The composition of the deficit is worrisome: tax revenues were 18 percent below budget and 3.2 percent below the first quarter of 2018 whereas current expenditures grew 11.8 percent. Savings were negative, and investments grew 3.6%, pressuring liquidity. The $1 billion placement in April partially explains the fiscal situation. The implicit real GDP growth for 2019, according to the presentation of Minister Eyda Varela, is at least 6% (a nominal growth of 8%) much larger than the analysts foresee. The fiscal rule, in terms of the NFPS net deficit, calls for a 2.0% ceiling at the end of 2019 (when Cortizo would have been in charge for only six months); 1.75% in 2020-2021; and 1.5% in 2022 and thereafter. We consider that the nominal and real values for the GDP will be lower than the projected by MEF, so the deficit cap will be missed by a large proportion, especially if Cortizo’s promise to protect the agricultural sector is accompanied with subsidies, institutional enhancements, or otherwise. If the fiscal cap is to be achieved at the end of the year, the deficit for the rest of the year must be $430 million (accepting the GDP projecti...