NS4540 Winter Term 2019 Panama Economy Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

Panama: Economic Freedom

Panama: Governance Trends

Overview I Panama’s geographical location has enabled the country to be one of the most important sipping crossroads and ports in the world Richly endowed with natural resources, fishing grounds, mineral deposits and forests Economy based largely on services 2014 services accounted for 64.1% of GDP In recent years Panama has invested heavily in public infrastructure to position itself as a maritime and air transport hub Country also region’s international trading, banking and services center Trade liberalization and a series of free trade agreements have increased efficiency and stimulated growth

Overview II Panama’s dollar based economy eliminates foreign exchange risk (with debt denominated in dollars rather than local currency) The fully dollarized economy makes Panama dependent on the US Fed’s monetary policy. Hence, it is less equipped to deal with external inflationary pressures. However in the net the dollarized economy helps account for country’s impressive rates of economic growth since controlling of Canal in 1999 GDP growth averaged 6.9% between 2000 and 2014 Between 2007 and 2014 growth accelerated to 8.7% placing Panama as one of the fastest growing countries in the world High rates of growth in recent years not accompanied by a corresponding increase in skills of workforce Led to a reliance on immigrants

Overview III Growth not benefitted all Panamanians Youth unemployment substantially higher than overall unemployment rate Social indicators improving slowly Inequality in income remains fairly high -- Gini 0.53 Many sections of rural population, especially indigenous communities do not receive basic services such as education, electricity and sanitation. Panamanian Government aware of problems and has made attempts toward alleviation

Growth Strategy I However in recent years authorities have been more focused on Sustaining high rates of economic growth Increasing country’s importance as a regional trade hub Strengthening growth in areas such as tourism and mining Strategy has involved large infrastructure projects such as the expansion of the Panama Canal Evidence that public investment has had a positive impact not only on growth but also private investment (crowding-in) Going forward, sustaining strong growth performance will depend more on productivity and human capital accumulation Quality of macroeconomic policies and structural reforms will remain crucial Growth accounting from IMF Panama Selected issues August 2015

Growth Strategy II Panama’s budget operates within the framework of the Social and Fiscal Responsibility Law (SFRL). The SFRL sets a yearly fiscal deficit target. In addition, the Sovereign Wealth Fund (SWF) aims to work as a stabilization mechanism to remove the cyclical effect of the Canal contributions on fiscal accounts. Fiscal consolidation is expected to continue with targets to 2019 of the Deficit falling to -1.2% of GDP and Public debt declining to 38.7% .

External debt-to-GDP ratio is high (157 External debt-to-GDP ratio is high (157.9% in 2017) although it is projected to decrease. In addition, Panama’s economic structure depends on trade. The amounts of merchandise transiting the Canal and toll revenues are highly correlated with changes in trade flows.

Panama: Economic Patterns I

Panama: Economic Patterns II

Panama: Economic Patterns III

Sources of Growth I Decomposition of the sources of growth suggests that labor has been relatively stable Employment increased as the economy grew while education indicators improved over the years Enrollment rates compare favorably with peers in region In particular, tertiary education enrollment accelerated since the 1990s, and doubled from 22.7% in 1991 to 45.7% in 2010 Average years of schooling of population 15 years and older increased from 7.7 years in 1990 to 9.6 years in 2010.

Sources of Growth II

Sources of Growth III However quality of education could be a constraint to human capital accumulation Student assessment scores relative to other countries suggest that the country performed below what its income and investment in education would predict The quality of education and the mismatch between demand for skilled labor and supply could be an impediment to medium term growth

Sources of Growth IV Capital contribution to output increased over time While 1980s were marked by a lack of investor confidence, private investment surged with remarkable strength in 1990s Since 2000 both private and public investment have boosted growth In the period between 2007 and 2014 output growth averaged 8.7%, with fixed investment by both public and private sectors contributing to almost half of output growth.

Sources of Growth V

Sources of Growth VI TFP did not contribute to output growth until 2004 TFP had a negative contribution to growth in 1980s and 1990s Suggests weakness in improving economic efficiency during the period. In last decade, TFP, contributed about ¼ of output growth. Positive TFP also corresponds with intensive reforms carried out in period of positive contribution

Structural Reforms I Structural reforms over the years helped to improve the competitiveness of the economy Beginning in the 1990s authorities adopted an economic strategy aiming at a permanent reduction of public indebtedness and an economy-wide increase in productivity Structural reforms were implemented in the 2000s to remove impediments to Productivity growth and Private sector investment and to Enhance the pubic sector capacity

Structural Reforms II These reforms include Significant efforts in privatization Trade and market liberalization Strengthening financial supervision and Promotion of private sector investment As part of the institutional improvements to attract foreign investment, an agency for the Attraction of Investments and Promotion of Exports (Proinvex Panama) was established as a one stop shop Potential investors can identify all the relevant information on investing in Panama Measures have also been taken to increase labor mobility

Structural Reforms III Investor confidence high because of Improvements in the efficiency of the economy as well as public finances Better climate for private sector activities The investment opportunities opened up by privatizations and The reverting of the Panama Canal and neighboring land Private sector investment averaged 22% of GDP in 1990-2012 Increase from 9% average for 1980-1990 Today Panama ranks among the top Latin American countries in the major competitive indicators Most competitive economy in Latin America after Chile Improved its ranking in the ease of doing business from 65 in 2008 to 52 in 2014 Imf selected issues page 46

Panama: Public Investment I Impact of public investment on real GDP and private investment Results from an econometric exercise indicate that pubic investment has had a positive impact on output growth as well as private investment – crowding in effect Economy has been in an investment boom since 2007 Number of sectors have been identified as the growth engines of the economy: Logistics, Tourism Agriculture, and Financial services

Panama: Public Investment II The vision was for Panama to become a hub for logistics services, financial services and tourism. Consistent with the growth strategy authorities identified areas which public investment and government action would yield better returns in terms of sustained eocnomc growth and job creation The Strategic Plan of the government realsed in January 2015 plans to invest US$19.5 billion over 2015-19 most of which would be invested in long term infrastructural projects New highways, airports, roads ports, urban infrastructure, new subways, sewage systems and healthcare facilitis.

Going Forward I Projections next five years suggest 6-7% rate of growth Based on public sector investment plans 2015-19 Assumes other factor contribution and TFP follow past trends Quality of public investment and accompanying macroeconomic policies will remain critical Investment should be sustainably financed to avoid buildup of public debt Structural reforms to improve the business climate would encourage complementary private sector investment

Going Forward II large public investment is expected to slow-down in the medium term, growth will depend more on productivity and human capital accumulation With the increase of public capital stock and the normalization of public investment challenge is to develop the strategy to maintain a more sustainable and inclusive growth Imperative to increase the efficiency of education investment and further reform of the labor market to alleviate skill mismatches and ensure better job opportunities.