17 August, 2022

Panama needs structural changes and reinventing itself to maintain the degree of economic investment

Panama comes from registering double-digit growth in the last decade to decline 17.9% in 2020 impacted by the coronavirus outbreak that led to severe mobility restrictions and border closures. Photo: Courtesy.
Editorial Dept. Voz de la Diaspora

In 2010 Panama obtained the investment grade in one of the best moments in its economic history, a decade later, it suffers the weight of the fiscal imbalance and a rising public debt that worsened due to the effects of the pandemic, hence, experts consider urgent structural changes in order not to lose the advantageous sovereign rating.

Experts analyzed the country's challenges during the virtual forum What should Panama do in order not to lose investment grade? developed by the Trinka group formed by some 180 members of different sectors who seek to raise awareness and bring to the public arena the realities of the country to promote changes.

Panama comes from registering double-digit growth in the last decade to decline 17.9% in 2020 impacted by the coronavirus outbreak that led to severe mobility restrictions and border closures, which resulted in less collection due to limited economic activity, facing the increase in expenses to attend the emergency.

In that context, Fitch Ratings, while maintaining the investment grade, revised down the country's sovereign rating from BBB to BBB- with a negative perspective that considers the effect of the pandemic on the economy and public finances.

The director of the Fitch Ratings sovereign team, Carlos Morales said that the decision reflects "the rather severe and material weakening of public finances" in the first place due to the economic disruptions of the health crisis that also exacerbated the fiscal risks that already existed before the global emergency..

Morales explained that prior to the pandemic, Panama showed a gradual but continuous deterioration of the public accounts with the increase of the debt as a percentage of the Gross Domestic Product (Schedule), and a limited capacity of the government to increase revenue.

As a result, it was also limited to act in cases of external shocks as occurred during the pandemic., therefore showed a greater increase in public debt and fiscal deficit compared to what happened with its peers in the region.

The expert explained that although in 2021 the country could maintain the fiscal deficit in line with the Law, there are "doubts" that it will achieve the fiscal consolidation necessary in the future to stabilize public debt.

The outlook is complicated for the country, despite the fact that it registers a marked advance in economic openness and growth projections that are around the 12% this year as vaccination against COVID-19 progresses rapidly, which according to the authorities is key to recovering "normality"

The lawyer Gian Castillero says that Panama should take priority actions so as not to lose the investment grade, in the public finances credibly show that the country has the fiscal discipline necessary to reduce debt, that during the pandemic went from 48% al 68% del PIB.

In the area of ​​economic prospects, the main challenge is to ensure that there is a growth prospect capable of being sustained over time., especially since much of the performance comes from foreign investment, and any problem that affects the country's reputation has a direct impact on the expansion of the economy.

The latter means that Panama also has the challenge of getting out of several lists of non-cooperating countries on issues such as tax evasion., and money laundering that affect your credibility and international reputation.

Gray list output

The economist and former Secretary General of the Superintendency of Banks of Panama, Gustavo Villa adds other aspects to the strategy for the country to maintain investment grade.

Villa affirms that Panama must have a viable and sustainable fiscal plan in the short term, medium and long term as the gap between income and expenses widens more and more.

In 2020 the fiscal deficit stood at 10%, Hence, Villa sees a need for a policy to contain public spending, above all current, and those that "do not have a multiplier effect" giving priority to capital and investment spending that complements private investment.

“… Not only requires cost containment, but also review the government revenue ", states.

From his perspective, Panama will at some point have to initiate a country discussion to make administrative adjustments that improve revenue collection., that also includes the tax base, since so far it is governed by the principle of territoriality, that not all countries see with good eyes.

The businessman and president of Trinka, Carlos Ernesto González De La Lastra considers it feasible for the government to enter into a mandatory austerity process to make way for priority spending, and necessary infrastructure works that expand the radius of action of economic activity.

But nevertheless, questioned that as a result of the political pressures that do not see that the country "is entering a real crisis", activities aimed at increasing public spending are being promoted "without creating parallel economic activities.".

Meanwhile, Villa also considers it urgent that Panama ensure the removal of the discriminatory lists, since although it has made legal changes, the country is still questioned by the application of laws to sanction tax evasion, and money laundering.

Panama has also been questioned on points such as the update of the national risk assessment, and end user verification, the expert recalled.

Gian Castillero affirmed that leaving the lists is essential for the future of the Panamanian service platform, Well, they somehow question the country's tax regime, what is worse than some such as the OECD derive in discriminatory measures against Panama.

It states that the country of 4.3 millions of inhabitants are obliged to demonstrate to the international community that they have not only adopted the legislation, rather, it has the effective capacity to implement it.

Panama must also work to demonstrate that it has adequate supervisory institutions so that the regulatory framework is met for internal purposes., and international commitments regarding transparency and information exchange, he claimed.

Another of the country's challenges is the need to reinvent the service platform to stay competitive against large global providers, which partly means adapting to the new transparency rules, and accountability with the support of the private sector.

A transformation at this level should prioritize the development of the tourism industry, the logistics sector and the international services platform on the basis of recognizing that the international rules of the game have changed.

"... we have to reinvent ourselves and redefine it so that this platform continues to drive growth ...", he claimed.

Trinka's vision

Trinka Group President, Carlos Ernesto González De La Lastra agrees that Panama must reinvent itself, adapting to the new provisions of a globalized world, that allows you to enhance your competitive advantages. "We have to break paradigms", he explained.

Hence, González De La Lastra sees it necessary for Panama as a country to follow the example of the maritime sector that went from being on all the black lists of the world merchant marine to being an example as the largest registry of ships in the world with more than 8 thousand registered vessels.

"It is vital that there is credibility in our institutions and legal and tax stability", explained the expert.

Panama with an economy based on more than 70% in the provision of services has a unique strategic geographic location, and a "hub" that connects the country by air, sea ​​and land, whose key element is the Interoceanic Canal that serves 144 maritime routes in 160 countries, Y 1,700 ports around the world.

Despite all those advantages, the country with the region's most modern capital of skyscrapers and a thriving banking center, drags unemployment that exceeded the 18% in 2020, deficiencies in health and education systems, as well as different levels of poverty and extreme poverty, mainly in rural areas and indigenous regions, according to experts.

For González De La Lastra, it is a matter for government decision that also requires will, leadership and citizen participation, opening up to global talent through an immigration system that improves educational quality that would give way to “extraordinary teachers” from different parts of the world.