EXHIBIT D
Republic of Panama
This description of the Republic of Panama is dated as of September 30, 2009 and appears as Exhibit D to the Republic of Panama’s Annual Report on Form 18-K to the U.S. Securities and Exchange Commission for the fiscal year ended December 31, 2008.
TABLE OF CONTENTS
The fiscal year of the Government of the Republic of Panama (the “Government”) ends on December 31. The twelve-month period ended December 31, 2008 is referred to in this description of the Republic of Panama as “2008” and other years are referred to in a similar manner unless otherwise indicated. All references to “$” or “dollars” are to United States Dollars.
Totals in certain tables in this description of the Republic of Panama may differ from the sum of the respective individual items in such tables due to rounding.
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INDEX OF TABLES
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TABLE NO. 1 | | Selected Panamanian Economic Indicators | | D-7 |
TABLE NO. 2 | | Inflation (percentage change from previous period) | | D-21 |
TABLE NO. 3 | | Gross Domestic Product | | D-22 |
TABLE NO. 4 | | Sectoral Origin of Gross Domestic Product (in millions of dollars) | | D-23 |
TABLE NO. 5 | | Percentage Change from Prior Year for Sectoral Origin of Gross Domestic Product (percentage change) | | D-24 |
TABLE NO. 6 | | Sectoral Origin of Gross Domestic Product (as percentage of GDP) | | D-25 |
TABLE NO. 7 | | Selected State-Owned Enterprises 2008 Financial Statistics (in millions of dollars) | | D-28 |
TABLE NO. 8 | | Panama Canal Principal Statistics | | D-34 |
TABLE NO. 9 | | Labor Force and Employment | | D-42 |
TABLE NO. 10 | | Average Real Monthly Wages | | D-44 |
TABLE NO. 11 | | Budgeted Expenditures of the Central Government by Function (in millions) | | D-48 |
TABLE NO. 12 | | Central Government Operations (in millions of dollars) | | D-51 |
TABLE NO. 13 | | Consolidated Non-Financial Public Sector Operations (in millions of dollars) | | D-52 |
TABLE NO. 14 | | International Reserves (in millions of dollars) | | D-53 |
TABLE NO. 15 | | Largest Banking Institutions (assets in millions of dollars) | | D-55 |
TABLE NO. 16 | | The Banking Sector (in millions of dollars) | | D-56 |
TABLE NO. 17 | | Banco Nacional de Panamá Balance Sheet (in millions of dollars) | | D-59 |
TABLE NO. 18 | | Composition of Merchandise Exports, F.O.B. (in millions of dollars) | | D-63 |
TABLE NO. 19 | | Composition of Merchandise Imports, C.I.F. (in millions of dollars) | | D-64 |
TABLE NO. 20 | | Direction of Merchandise Trade (as percentage of total) | | D-65 |
TABLE NO. 21 | | Balance of Payments (in millions of dollars) | | D-67 |
TABLE NO. 22 | | Public Sector Internal Debt (in millions of dollars) | | D-69 |
TABLE NO. 23 | | Public Sector External Debt (in millions of dollars) | | D-70 |
TABLE NO. 24 | | Public Sector External Debt Amortization (in millions of dollars) | | D-70 |
TABLE NO. 25 | | External Direct Debt of the Republic Central Government | | D-75 |
TABLE NO. 26 | | External Debt Guaranteed by the Republic Decentralized Institutions | | D-76 |
TABLE NO. 27 | | Internal Securities Debt of the Republic Outstanding on December 31, 2008 | | D-77 |
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RECENT DEVELOPMENTS
National Elections
On May 3, 2009 Ricardo Martinelli (“Martinelli”), President of Cambio Democratico (“CD”), was elected President of the Republic of Panama for a five-year term with 60.0% of the vote, and took office on July 1, 2009. Martinelli’s coalition, consisting of CD, Partido Panamenista (“Panamenista”), Movimiento Liberal Republicano Nacionalista (“MOLIRENA”) and Union Patriotica (“UP”), won a majority of the 71 seats available in the Assembly, securing 15, 21, two and four seats, respectively. The Partido Revolucionario Democratico (“PRD”) secured 26 seats, the Partido Popular secured one seat, the Vanguardia Moral de la Patria secured none. Two nonpartisan seats were secured.
President Martinelli announced during his inauguration speech that under his term, the priorities of the Government will focus on security for its citizens and the eradication of corruption within governmental institutions. Moreover, the Government will have a stronger participation in infrastructure projects such as the construction of a metro system to improve the efficiency of the transportation system in the country. Before assuming office, Martinelli directed his plans to promote various fiscal reforms which would allow the Government to increase its revenues and redirect them towards social investment projects such as the construction of house facilities for limited income families.
Recent Government Actions
On June 5, 2008, Law No. 34 of 2008 was ratified, establishing a new Social and Fiscal Responsibility Regime, in order to promote sound fiscal policies and management. This Law was published in the Gaceta Oficial Digital No. 26,056 of June 6, 2008, and came into force on January 1, 2009. The new Social and Fiscal Responsibility Regime established by Law No. 34 of 2008 will require any new government to present, during the first six months of its administration, a multi-year social strategy, a five-year financial plan and the macroeconomic criteria to manage public expenditures and to incentivize current savings.
On December 11, 2008, the Cabinet Council of Panama adopted Cabinet Resolution No. 221, published in the Gaceta Oficial Digital No. 26,184 of December 15, 2008, approving a transaction to provide a cap on the cost of bunker fuel for electric generation in 2009, based on fuel prices prevailing at that time. The transaction is aimed at stabilizing the cost of electricity to consumers in 2009. The cost of the program is not considered to be material to the 2009 budget of the Republic.
On January 21, 2009, the Financial Stimulus Program (“Programa de Estímulo Financiero” or “PEF”) was announced by President Torrijos. The program will provide up to $1.1 billion to promote economic stability and growth of employment and commercial activity. The program was created under Cabinet Decree No. 9, dated March 9, 2009, published on the Gaceta Oficial Digital No. 26,237 of March 10, 2009, and its main objective is to compensate for the reduction in credit available to Panamanian banks from international sources due to reductions in credit lines from banks abroad and the international financial markets. The funds for the program will be borrowed from Corporación Andina de Fomento (“CAF”), the Inter-American Development Bank (the “IADB”) and Banco Nacional de Panamá (“BNP”), and will be deposited in a trust administered by BNP (as authorized under Cabinet Resolution No. 28, dated March 16, 2009), provided with a guarantee issued by the Republic of Panama for the total amount of the program. While negotiations were significantly advanced with each of the financial institutions providing funds for the program, under Cabinet Decree No. 19, dated June 2, 2009, the Republic of Panama modified the fundamentals of the program, reducing the initial amount of the funds and maintaining only the portion to be provided by CAF and BNP, leaving the possibility for BNP to enhance its support to the program in the future. PEF and its trust was duly implemented after the credit facilities were executed, including the Republic’s guarantee, and made publicly available to the Panamanian financial institutions, which will be required to provide full collateral for their borrowings from the trust. Interest will be charged at rates determined with reference to the interest on the loans used to fund the trust and to the term of each loan. Additionally, some fees will be assessed to cover administrative costs of the program. The participating institutions are expected to fully repay their borrowings under the program. Furthermore, they will provide collateral according to their level of creditworthiness as a requirement to gain access to the program funds. In connection with the program, President Martinelli issued Executive Decree No. 89, dated July 24, 2009, appointing the new Directive Council of the PEF, which is comprised of five individuals, including the General Manager and Risk Manager of BNP. The
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function of the Directive Council is to advise the Government on applicable measures to counteract the effects that the global economic crisis may have on Panama and to recommend credit policies that may apply to the program.
On April 30, 2009, President Torrijos issued Executive Decree No. 114 of 2009, published in the Gaceta Oficial Digital No. 26,272-A of April 30, 2009, creating the “Comisión de Alto Nivel para la Defensa de los Servicios Internacionales y Financieros”. This Comission is created as a permanent consultative group to advise the President in relation to the development and implementation of a national policy to maintain the competitiveness of the Republic’s national and international financial services. Through Executive Decree No. 206 dated July 15, 2009, President Martinelli designated the new members of the Comission from both the public and private sectors.
On July 2, 2009, President Martinelli issued Executive Decree No.150, published in the Gaceta Oficial Digital No. 26,316 of July 3, 2009, and came into force on July 2, 2009. This decree created the Secretary of Metro for Panama. The Secretariat is part of the Ministry of the Presidency and is responsible for the organization and execution of all actions necessary with respect to the design, execution, administration, operation and maintenance of the metro transportation system project, which will be known as “El Metro de Panamá”. El Metro de Panamá will be designed in order to provide Panamanians with a more efficient mass transportation system.
On July 22, 2009, President Martinelli issued Executive Decree No. 250, published in the Gaceta Oficial Digital No. 26,329-A of July 22, 2009, and came into force on August 1, 2009. Under this decree, the basic wages of certain positions in the police force have been increased in order to provide citizens better incentive to join the police force and to promote overall security in Panama.
On July 27, 2009, President Martinelli issued Executive Decree No. 97, published in the Gaceta Oficial Digital No. 26,337 of August 3, 2009, and came into effect on August 3, 2009. This decree created the “Comisión para el Logro del Grado de Inversión para la Deuda de Largo Plazo de la República”, a temporary consultative body designed to assist the Republic in seeking to obtain a long-term issuer credit rating of investment grade from Standard & Poor’s, Moody’s Investors Services and Fitch Ratings. Currently, Panama’s long-term issuer credit rating is BB+, Ba1, and BB+, respectively, from those rating agencies. Each such rating is one level below the investment grade category for each of those rating agencies. A Standard & Poor’s “BB” rating indicates that an obligor is less vulnerable in the near term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitments. The ratings from “AA” to “CCC” for Standard & Poor’s may be modified by the addition of a plus “+” or minus “-” sign to show relative standing within the major rating categories. For Moody’s, obligations rated “Ba” are judged to have speculative elements and are subject to substantial credit risk. Moody’s appends numerical modifiers 1, 2 and 3 to each generic rating classification. The modifier 1 indicates a high-range ranking in the Ba generic rating classification. A Fitch “BB” rating indicates that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time; however, business or financial alternatives may be available to allow financial commitments to be met. The modifiers “+” or “-” may be appended to a Fitch rating to denote relative status within major rating categories. Detailed explanations of the ratings may be obtained from the rating agencies. The information above was obtained from information available on the websites of the rating agencies.
On September 17, 2009, Law 49 of 2009 was ratified, modifying the Panamanian Fiscal Code. This law was published in the Gaceta Oficial Digital No. 26,370-C of September 17, 2009, and came into force on September 17, 2009, with the exceptions of Articles 9, 10 and 29, which will come into effect on January 1, 2010. Currently, the Republic has one of the lowest tax rates in Latin America, which accounts for approximately 10% of GDP. This Law seeks to modify the Fiscal Code so that the Republic can generate additional revenue to provide for public services. With the additional funds that the Republic will receive, the Republic intends to contribute to social expenses, security expenses and infrastructure development.
The Economy
In the first six months of 2009, Panama’s gross domestic product (“GDP”) registered an estimated real increase of 2.4% compared to the same period of 2008. The mining sector grew an estimated 13.1% percent in the first six months of 2009 compared to the same period of 2008 primarily due to an increase in demand for basic material products for construction. Manufacturing activity increased an estimated 0.5% in the first six months of 2009 compared to the same period of 2008 due in part to increased production of meat products and beverage products, and an increase in production mills. In the first six months of 2009, the construction sector
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grew by an estimated 12.8% compared to the same period of 2008 due to an overall increase in construction projects. The transportation and communications sector grew an estimated 7.8% in the first six months of 2009 compared to the same period of 2008 primarily due to an increase in mobile phone registrations, high-speed internet and international phone services. The financial intermediation sector grew an estimated 2.0% in the first six months of 2009 compared to the same period of 2008 primarily due to an increase in activities from insurance companies.
The agriculture sector decreased an estimated 12.5% in the first six months of 2009 compared to the same period of 2008 primarily due to a decrease in the exports of banana and other fruit products as well as a decrease in the harvesting of fruits. The fisheries sector decreased an estimated 3.3% in the first six months of 2009 compared to the same period of 2008 due to a decrease in industrial fishing and the capture of fish for commercial purposes. The commerce, hotels and restaurant sector decreased an estimated 6.5% in the first six months of 2009 compared to the same period of 2008 primarily due to the external commercial decrease in the Colón Free Trade Zone (or the “CFZ”) and a decrease in the hotel sector. The real estate sector decreased an estimated 5.1% in the first six months of 2009 compared to the same period of 2008 primarily due to a decrease in international activities related to real estate.
The Assembly approved Panama’s 2009 budget on December 4, 2008. The 2009 budget contemplates total expenditures of $9.8 billion, with budget estimates based on an anticipated 13.5% growth in nominal GDP and an anticipated consolidated non-financial public sector deficit of approximately $263.0 million (or approximately 1.0% of nominal GDP) for 2009.
Public Debt
As of August 31, 2009, Panama’s external debt totaled $9.1 billion, up from $8.5 billion as of December 31, 2008. Panama’s total public sector debt as of August 31, 2009 was $11.1 billion, up from $10.4 billion as of December 31, 2008.
In an effort to promote the development of Panama’s capital markets, the Government continued in 2008 with a program of Treasury Bill issuances with seven auctions from January 15, 2008 to August 26, 2008. Panama issued $211.0 million of zero-coupon Treasury Bills with short-term maturities of one-year or less in Panama’s capital markets. By comparison, the program of Treasury Notes remains suspended since 2005. As of December 31, 2008 outstanding Treasury Bills amounted to $59.0 million and outstanding Treasury Notes amounted to $565.1 million.
In June 2008, the IADB granted Panama a $51.3 million loan for the financing of commercial development and public/private sector competitiveness progress, furthering the governmental goals of strengthening systematical capacities, which plans were implemented by a $19.7 million financing made available by the IADB. Under the support of the IADB, the Republic established and executed programs directed to enhance the development of geographic regions with the greatest needs, such as Bocas del Toro, Colón and Provincias Centrales (Coclé, Herrera, Los Santos, Veraguas), with loans of approximately $29 million, $20 million, and $43 million, respectively. The participation of the IADB also included granting of a loan for Empresa de Transmisión Eléctrica S.A., or ETESA, a Republic-owned corporation in charge of energy transmission along its territory. The IADB executed three loans for the Republic in 2009 directed to improve living conditions for the poor, energy sector consolidation, and public corporation reforms, for approximately $30 million, $100 million, and $14 million, respectively.
The Republic has improved its debt-to-GDP ratio in the past 10 years and estimates that the level would be further reduce to approximately 42% by the year 2010, compared with 67.5% ten years ago.
International Trade
Panama concluded its free trade negotiations with the United States in December 2006, and signed a free trade agreement with the United States (the “Trade Promotion Agreement”) on June 28, 2007 that will come into effect upon approval by each country’s legislature. The Panamanian Assembly ratified the Trade Promotion Agreement on July 11, 2007, but as of September 2009, the U.S. Congress has yet to ratify the agreement.
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IMF Relationship
Panama’s most recent standby agreement with the International Monetary Fund (“IMF”) expired in March 2002, and no new standby facility has been arranged. The IMF concluded its most recent Article IV consultation with Panama on June 1, 2009 for year-end 2008. In this review, the IMF Executive Board noted Panama’s strong economic fundamentals during a time of global financial downturn. The IMF Executive Board also welcomed the effective adoption of the Social and Fiscal Responsibility Law to help strengthen fiscal discipline and enhance transparency and accountability, as well as the strong liquidity position of banks and the timely passage of the new Bank Law which will improve bank supervision and the bank resolution framework.
The Panama Canal
In a national referendum on October 22, 2006, the citizens of Panama voted to approve the canal expansion project proposed by the Panama Canal Authority, and on December 6, 2006, the Cabinet approved the first $120 million of expenditures to begin work. The expansion project includes the building of a new lane of traffic in conjunction with the construction of a third set of locks which will double the Canal’s capacity, allowing increased traffic and larger ships. As part of the canal expansion project, in April 2008 the canal awarded a $177 million contract to the Belgian firm Dredging International to excavate the Pacific entrance of the canal. On July 15, 2009, the construction of the third set of locks was awarded to the Grupo Unidos por el Canal consortium, composed of Sacyr Vallehermoso, S.A., Impregilio S.p.A., Jan de Nul n.v., and Constructora Urbana, S.A. (“CUSA”), for a total base price of approximately $3.1 billion. On August 11, 2009, Grupo Unidos por el Canal provided a performance bond of $400 million to the Panama Canal Authority. Construction is scheduled to begin in the third quarter of 2009.
The Panama Canal Authority announced that toll revenues for the fiscal year ended September 30, 2008 reached $1.3 billion, an increase of 11.3% over fiscal year 2007. On July 21, 2008, the Assembly approved the Panama Canal Authority’s budget for fiscal year 2009, allocating $152.0 million to the Canal’s investment program and $835.7 million to the Canal’s expansion project relating to the third set of locks. In addition, in September 2009, the Assembly approved the Panama Canal Authority’s budget, allocating $40.3 million to the Canal’s investment program and $752.2 million to the Canal’s expansion project relating to the third set of locks.
On December 9, 2008, the Panama Canal Authority signed a $2.3 billion agreement with five multilateral and development organizations to finance the Canal’s expansion project, which is estimated to cost approximately $5.25 billion. The Japan Bank for International Cooperation (“JBIC”), the European Investment Bank (“EIB”), the IADB, CAF and International Finance Corporation (“IFC”) each agreed to provide the financing under favorable terms to the Panama Canal Authority. The remaining funds for the expansion project are expected to come from the Canal’s regular business operations and implementation of toll increases. To reduce the risk of lowering demand resulting from toll increases, the Panama Canal Authority implemented a three-year toll increase designed to generate the appropriate cash flows needed to finance a significant portion of the program. As of March 2009, the Panama Canal Authority has financed approximately $500 million of the expansion project through internal funding. In June 2009, the Panama Canal Authority paid $9.0 million of up-front fees to JBIC, IADB, IFC and CAF.
The United States, the main source of customers of the Panama Canal, recently experienced a marked deceleration of economic activity. In spite of the economic conditions in the United States, trade via the Panama Canal during its fiscal year ended September 30, 2008 was only slightly affected and toll revenues remained firm. From the beginning of its 2009 fiscal year, which began on October 1, 2008, through August 31, 2009, approximately 13,277 transits passed through the Canal as compared to 13,633 transits for the same period during fiscal year 2008, resulting in a decrease of approximately 2.6%. Approximately 182.8 million long tons of cargo passed through the Canal between October 1, 2008 and August 31, 2009 as compared to 193.8 million long tons during the same period of time for fiscal year 2008, representing a decrease of approximately 5.7%. Toll revenue remained firm despite the decrease in transits. As of August 31, 2009, toll revenue totaled approximately $1.3 billion as compared to $1.2 billion for the same period in fiscal year 2008, representing an increase of approximately 9.5%, mainly due to the effects of the implementation of the toll price adjustment discussed below.
The Panama Canal Authority estimates that PC/UMS (Panama Canal Universal Measurement System) tonnage of cargo passing through the Canal will drop by approximately 5.9% during fiscal year 2009, but toll revenues will not experience significant change due to the implementation of the last phase of a three step toll rate increase approved in May 2005. Several shipping companies have recently requested the cancelation or deferral of the scheduled 2009 toll rate increase. The final decision to implement the third phase
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of the three-step toll increase was made in 2007 after extensive consultations in 2006 and early 2007 and significant accommodations to industry requests. The Panama Canal Authority believes that its price setting consultation process provides for transparency and predictability in its pricing proposals in a manner that permits industry-wide participation. The Panama Canal Authority estimates that toll revenue for fiscal year 2010 will be approximately $1.5 billion, which represents approximately $69 million, or 4.7% more than fiscal year 2009 or thereafter.
The estimated results for the Panama Canal are subject to revision based on the duration and severity of the global economic downturn, and accordingly no assurance can be given concerning actual results for fiscal year 2009.
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TABLE NO. 1
Selected Panamanian Economic Indicators(1)
The following table sets forth Panama’s principal economic indicators for the years 2004 through 2008:
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| | | 2004(R) | | | 2005(R) | | | 2006(R) | | | 2007(R) | | | 2008(E) | |
Economic Data: | | | | | | | | | | | | | | | | | | | | |
GDP (millions, current dollars) | | $ | 14,179 | | | $ | 15,465 | | | $ | 17,137 | | | $ | 19,485 | | | $ | 23,088 | |
GDP (millions, constant dollars)(2) | | $ | 13,099 | | | $ | 14,041 | | | $ | 15,239 | | | $ | 16,998 | | | $ | 18,558 | |
GDP (% change, constant dollars)(2) | | | 7.5 | % | | | 7.2 | % | | | 8.5 | % | | | 11.5 | % | | | 9.2 | % |
Service Sector (% change, constant dollars)(2)(3) | | | 7.8 | % | | | 8.3 | % | | | 9.4 | % | | | 11.3 | % | | | 8.1 | % |
Other (% change, constant dollars)(2)(4) | | | 4.7 | % | | | 2.7 | % | | | 7.8 | % | | | 8.6 | % | | | 12.9 | % |
GDP Per Capita (constant dollars)(2) | | $ | 4,132 | | | $ | 4,347 | | | $ | 4,646 | | | $ | 5,089 | | | $ | 5,466 | |
Population (millions) | | | 3.17 | | | | 3.23 | | | | 3.28 | | | | 3.34 | | | | 3.40 | |
CPI (% change)(5) | | | 2.0 | % | | | 3.5 | % | | | 2.0 | % | | | 6.5 | % | | | 6.5 | % |
Unemployment | | | 9.2 | % | | | 7.6 | % | | | 6.7 | % | | | 4.7 | % | | | 4.2 | % |
| | | | | |
Public Finance: | | | | | | | | | | | | | | | | | | | | |
Total Consolidated Non-Financial Public Sector Revenues (millions) | | $ | 3,001 | | | $ | 3,474 | | | $ | 4,283 | | | $ | 5,505 | | | $ | 6,020 | |
Total Consolidated Non-Financial Public Sector Expenditures (millions)(6) | | $ | 3,087 | | | $ | 3,169 | | | $ | 3,451 | | | $ | 4,138 | | | $ | 5,197 | |
Overall Surplus (Deficit) (millions) | | $ | (691 | ) | | $ | (500 | ) | | $ | 88 | �� | | $ | 683 | | | $ | 98 | |
As % of Current GDP | | | (4.9 | )% | | | (3.3 | )% | | | 0.5 | % | | | 3.5 | % | | | 0.4 | % |
Central Government Surplus (Deficit) (millions) | | $ | (768 | ) | | $ | (606 | ) | | $ | 36 | | | $ | 240 | | | $ | 64 | |
As % of Current GDP | | | (5.4 | )% | | | (3.9 | )% | | | 0.2 | % | | | 1.2 | % | | | 0.3 | % |
| | | | | |
Public Debt (at December 31): | | | | | | | | | | | | | | | | | | | | |
Internal Debt (millions) | | $ | 2,758 | | | $ | 2,652 | | | $ | 2,664 | | | $ | 2,195 | | | $ | 1,960 | |
External Debt (millions) | | $ | 7,219 | | | $ | 7,580 | | | $ | 7,788 | | | $ | 8,276 | | | $ | 8,477 | |
Total Public Debt (millions) | | $ | 9,977 | | | $ | 10,231 | | | $ | 10,453 | | | $ | 10,471 | | | $ | 10,438 | |
Public Debt (as % of Current GDP) | | | | | | | | | | | | | | | | | | | | |
Internal Debt | | | 19.5 | % | | | 17.1 | % | | | 15.5 | % | | | 11.3 | % | | | 8.5 | % |
External Debt | | | 50.9 | % | | | 49.0 | % | | | 45.4 | % | | | 42.5 | % | | | 36.7 | % |
| | | | | |
Trade Data: | | | | | | | | | | | | | | | | | | | | |
Exports (f.o.b.) Goods(7) (millions) | | $ | 6,080 | | | $ | 7,375 | | | $ | 8,478 | | | $ | 9,334 | | | $ | 10,323 | |
Imports (c.i.f.) Goods(7) (millions) | | $ | (7,617 | ) | | $ | (8,933 | ) | | $ | (10,190 | ) | | $ | (12,524 | ) | | $ | (14,869 | ) |
Merchandise Trade Balance (millions) | | $ | (1,537 | ) | | $ | (1,558 | ) | | $ | (1,712 | ) | | $ | (3,190 | ) | | $ | (4,546 | ) |
Current Account Surplus (Deficit) (millions) | | $ | (1,003 | ) | | $ | (1,022 | ) | | $ | (527 | ) | | $ | (1,407 | ) | | $ | (2,677 | ) |
Overall Balance of Payments Surplus (Deficit)(8) (millions) | | $ | (395 | ) | | $ | 675 | | | $ | 172 | | | $ | 622 | | | $ | 585 | |
Total Official Reserves (at December 31) (millions) | | $ | 624 | | | $ | 1,205 | | | $ | 1,328 | | | $ | 1,927 | | | $ | 2,417 | |
| (1) | All monetary amounts in millions of U.S. dollars at current prices, unless otherwise noted. |
| (2) | Constant GDP figures are based on 1996 constant dollars. |
| (3) | Including real estate, public administration, commerce, hotels and restaurants, financial services, the Colón Free Trade Zone (or the “CFZ”), Panama Canal, transportation and communications and public utilities. |
| (4) | Including manufacturing, agriculture and construction. |
| (5) | End of period. The CPI figures for 2004—2006 have been calculated using a newly adopted methodology and a revised base year of 2002. |
| (6) | Excluding interest on external debt. |
| (8) | Figures were calculated pursuant to the V Version of the Balance of Payments Manual prepared by the IMF. |
Sources: Directorate of Analysis and Economic Policies, Office of the Comptroller General, Banco Nacional de Panamá (“BNP”) and Ministry of Economy and Finance.
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THE REPUBLIC OF PANAMA
Area and Population
Panama is a republic located on the narrowest point of the Central American isthmus, which connects the continents of North America and South America. It has a coastline of approximately 1,868 miles on the Caribbean Sea and Pacific Ocean and is bordered on the east by Colombia and on the west by Costa Rica. Panama has a national territory of approximately 29,157 square miles situated within its coastline and 345 miles of land borders, and includes numerous coastal islands. The Panama Canal, one of the most important commercial waterways in the world, which connects the Atlantic and Pacific Oceans, bisects the country running northwest to southeast. Panama’s climate is primarily tropical.
As of December 31, 2008, Panama had an estimated population of 3.4 million and a population density of 116.5 people per square mile. During the period from 2004 to 2008, the population grew by an average of 1.7% per annum. Approximately 64.2% of Panama’s population lives in cities and towns with more than 1,500 inhabitants, and 10.1% of the population is indigenous, some of whom are seeking greater autonomy from the Government. Of the Panamanian population, 29.7% is under 15 years of age, 64.0% is between the ages of 15 and 64, and 6.3% is over the age of 65. Average life expectancy in Panama is 75 years. The infant mortality rate is estimated at 19 per 1,000 births. Panama’s official language is Spanish.
Panama’s per capita GDP for 2008, expressed in 1996 constant prices, was approximately U.$5,466 million. Education indicators show that Panama’s adult literacy rate is approximately 91.9%. During the period 2004-2008, the Government spent an average of 4.5% of GDP and 25.2% of Central Government expenditures on education. Estimates show that 37.3% of the population is considered to be living in poverty while 18.0% is considered to be living in extreme poverty.
As of July 1, 2009, the Panama Province, the Republic’s largest province, is estimated to comprise 51.0% of Panama’s total population. The Colón Province, located at the northern terminus of the Panama Canal, is estimated to comprise 7.2% of the total population.
Historical Information
Panama gained its independence from Spain in 1821 and subsequently joined the Confederation of Greater Colombia, from which Panama declared its independence on November 3, 1903. Several weeks after independence, Panama signed the Hay/Bunau-Varilla Treaty with the United States, which, among other things, granted the United States the right to occupy a ten-mile wide zone and a concession for the construction, maintenance, operation and protection of the Panama Canal (the “Canal Zone”). See “The Panama Canal—General.”
Panama adopted its first constitution in 1904, and, between 1904 and 1968, Panama generally experienced social and political stability and economic growth under a constitutional democracy. During the period immediately following World War II, the Panamanian military interfered with the civilian government, although this interference largely ended by the mid-1950s. Constitutional government continued until October 1968, when the National Guard mounted a military coup and replaced the civilian government. Although the military made nominal efforts during the late 1970s to return to civilian government, the military generally remained in control of the Government until 1989.
Issues related to control of the Panama Canal and the Canal Zone caused considerable unrest in Panama. In 1977, following 13 years of negotiations, Panama signed treaties with the United States that provided for abolishing the Canal Zone in 1979 and the eventual turnover of the Panama Canal to Panama in 1999. See “The Panama Canal—The Canal Treaty of 1977.”
In 1983, General Manuel Antonio Noriega (“Noriega”) became Commander of the National Guard and assumed effective control of the Government. In the spring of 1987, a political crisis galvanized Noriega opponents and resulted in the formation of a major civilian protest and opposition movement widely supported by civilian organizations, political parties and the business community. This political crisis generated an economic crisis as well.
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In response to the ensuing political crisis, in March 1988, the United States suspended its Agency for International Development (“AID”) programs to Panama and blocked preferential sugar quotas, causing further economic disruption. The United States imposed additional economic sanctions that year, including a freeze on all United States payments for the Panama Canal (at that time, approximately $6 million per month), an order prohibiting American citizens and companies from making payments to the Government and a freeze on all Government accounts (and certain additional assets) in the United States.
In December 1989, relations between Panama and the United States deteriorated, culminating in a United States military intervention that resulted in the removal of Noriega. Guillermo Endara (“Endara”), who had been elected by a significant majority of the popular vote earlier in the year, was subsequently sworn in as President.
Since the end of 1989, Panama has enjoyed political and economic stability under democratically elected governments. Relations with the United States have been fully restored. Endara finished his presidential term, and in the spring of 1994, orderly national elections were held. Ernesto Pérez Balladares (“Pérez Balladares”), who was elected President with 33% of the vote in May 1994, finished his presidential term in August 1999. Mireya Moscoso, who was elected with 44.8% of the vote in May 1999, took office on September 1, 1999 and completed her presidential term on August 31, 2004. On May 2, 2004, Martín Torrijos was elected President with 47.4% of the vote. He took office on September 1, 2004 and completed his presidential term on June 30, 2009. Ricardo Martinelli, who was elected President with 60.0% of the vote on May 3, 2009, took office on July 1, 2009.
The Panamanian military was disbanded in 1990, and, in 1994, by constitutional amendment, the military was abolished. Costa Rica, Panama’s western neighbor, also does not have a military. If Panama were attacked by a foreign force and the neutrality of the Panama Canal were jeopardized, the United States would have the right under treaties related to the Panama Canal to take measures to protect the neutrality of the Canal. The national police force of Panama also has certain defensive capabilities.
Form of Government and Political Parties
Panama is a republic with a representative form of government. In 1972, the original version of the current Constitution was adopted (the fourth in Panama’s history), setting forth the structure of the Government, individual and collective rights and duties, and the division of powers among the executive, legislative and judicial branches.
Executive power is vested in the President and the presidentially appointed Ministers, who constitute the Cabinet. The President and the Vice-President are each elected by direct, universal suffrage for a term of five years. The President and the Vice-President may not be reelected to the same office within ten years after the expiration of their term. In the event the President is unable to finish a term, the Vice President would succeed to the presidency.
National legislative power is vested in the Assembly, Panama’s unicameral legislative body. The number of electoral circuits, each comprising an average of approximately 57,000 persons, determines the number of legislators; as of May 2009, the Assembly had 71 seats. The full Assembly is elected by universal suffrage every five years. Members of the Assembly are not subject to limits on the number of terms in office to which they may be elected. The Assembly has, among other powers, the authority to enact legislation, ratify treaties, approve the budget and ratify the appointment of the Comptroller General, the Attorney General and justices of the Supreme Court of Justice (the “Supreme Court”). To be enacted, legislation must be approved after three separate readings by a majority of all legislators or by a majority of legislators present at the session, depending on the substance of the legislation being enacted. The President may veto bills adopted by the Assembly, but the Assembly may override presidential vetoes by a vote of two-thirds of its members. Pursuant to the Constitution, the Assembly may empower the President and the Cabinet to adopt legislation when the Assembly is not in session. The Assembly has the power to amend the Constitution. Amendments to the Constitution may be adopted either by a majority vote of all legislators in two different Assemblies or by a majority vote of all legislators in two sessions of the same Assembly and a public referendum.
On May 3, 2009 Martinelli, President of CD, was elected President of the Republic of Panama for a five-year term with 60.0% of the vote, and took office on July 1, 2009. Martinelli’s coalition, consisting of CD, Panamenista, MOLIRENA and UP, won a majority of the 71 seats available in the Assembly, securing 15, 21, two and four seats, respectively. The PRD secured 26 seats, the Partido Popular secured one seat, the Vanguardia Moral de la Patria secured none. Two nonpartisan seats were secured.
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Historically, there have been few material ideological differences among the significant political parties in Panama. CD is a relatively recent political party in Panama, having been founded on May 20, 1998. CD was an opposing party to the PRD, which was the former party that governed the Republic under President Torrijos’ administration. This is the first time the CD party, led by President Martinelli along with a coalition of other conservative parties, wins to secure the presidential elections in 2009.
In May 2009, Jose Luis Varela was elected President of the Assembly for a one year period.
Judicial power is vested in the Supreme Court and various lower tribunals. The President appoints the nine justices of the Supreme Court for staggered ten-year terms, with two justices being selected every two years, subject to ratification by the Assembly. Lower court judges are appointed by the Supreme Court. The judicial branch prepares its own budget and sends it to the executive branch for inclusion in the general budget presented to the Assembly for approval. The Supreme Court is the final court of appeal and has the power to declare null and void laws, regulations or other acts of the executive or legislative branches that conflict with the Constitution.
Panama is administratively divided into nine provinces and three territories. In each province, executive power is exercised by a governor who is appointed by the President. There are no provincial legislative or judicial bodies. Provincial governments do not have their own independent budgets. Within each province are municipalities that are, in turn, divided into precincts. Each municipality has a municipal council and a mayor who exercises executive power. Mayors and members of municipal councils are elected by direct, universal suffrage for five-year terms. Municipalities levy and collect municipal taxes and adopt their own budgets for financing local projects.
Foreign Affairs and International Organizations
Panama maintains diplomatic relations with 123 countries. Panama is a charter member of the United Nations (“U.N.”) and a member of various other international organizations, including the IMF and the IADB. Panama is a founding member of the Organization of American States and is also a member of the International Bank for Reconstruction and Development (“World Bank”) and the World Bank affiliates, the IFC and the Multilateral Investment Guaranty Agency (“MIGA”), as well as a member of the San José Pact, under which Venezuela and Mexico agreed to provide the Central American countries and four Caribbean countries with crude oil and petroleum products under preferential terms. On September 6, 1997, Panama acceded to membership in the World Trade Organization (“WTO”).
Panama consults with various international agencies, such as the IADB, the World Bank and the IMF, regarding its economic program, objectives, projections and policies. Panama has utilized the IADB, the World Bank and the IMF for significant external financing. See “Public Sector Debt—External Debt.”
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THE PANAMANIAN ECONOMY
General
Panama’s unique geographic position, service economy (including the Panama Canal) and monetary regime anchored on the use of the U.S. dollar as legal tender are major factors in Panama’s economic performance.
Panama has used the U.S. dollar as its legal tender since shortly after gaining its independence. The national currency, the Balboa, is used primarily as a unit of account linked to the U.S. dollar at a ratio of one dollar per one Balboa. The Government does not print paper currency, although a limited amount of coinage is minted. Panama’s monetary system is based on its Constitution (beginning with the 1904 Constitution, which established the Balboa) and Panamanian laws expressly recognizing the U.S. dollar as legal tender. There are no Panamanian foreign exchange controls or reporting requirements, and capital moves freely in and out of the country, without local currency risk. Under Panama’s unique monetary system, foreign exchange reserves are not needed to support the currency.
The absence of a national printed currency and a Balboa exchange market causes the balance of payments to be less important than fiscal policy as an indicator of the Government’s external debt service capacity. Surpluses and deficits in the balance of payments have less effect than public sector fiscal surpluses and deficits on the accumulation and drawdown of Government reserves available for sovereign debt service. Moreover, this monetary system imposes an element of discipline on Panamanian authorities in the areas of monetary and fiscal policy. Panama is limited in its ability to conduct a stimulative monetary policy and can finance public sector deficits only through borrowing. In 2004, the non-financial public sector registered a deficit of 4.9% of GDP, and in 2005, the non-financial public sector registered a deficit of 3.3% of GDP. In 2006, however, the non-financial public sector registered a surplus of 0.5% of GDP, and in 2007, the non-financial public sector registered a surplus of 3.5% of GDP. In 2008, the non-financial public sector registered a surplus of 0.4% of GDP. From 2004 to 2008, Panama experienced an average annual rate of inflation, as measured by the end-of-period consumer price index, or CPI, of 4.1%. In 2008, the annual rate of inflation, as measured by a revised end-of-period CPI with a base year of 2002, was estimated at 6.5%.
The Panamanian economy is dominated by a large service sector, which in recent years has represented an average of over three-quarters of GDP. The manufacturing and agricultural sectors represent far smaller percentages. Historically, the Panamanian economy has been characterized by an imbalance between the open, internationally oriented service sector and the fairly closed manufacturing and agricultural sectors, where productivity has been considerably lower and government policies have impeded efficient resource allocation. See “Structure of the Panamanian Economy—Principal Sectors of the Economy.”
While much of the service sector economic activity is represented by activities associated with public administration, commerce and real estate, the significant, internationally-oriented activities of this sector distinguish the Panamanian economy. The Panama Canal has played a significant role in the economy, accounting for an average of 4.9% of GDP since 2004. The withdrawal of the U.S. military and reversion of facilities in the former Canal Zone, culminating with the reversion of the Canal itself at the end of 1999, had substantial fiscal and macroeconomic impacts on Panama and its economy. These impacts have largely been absorbed by Panama in the years since the withdrawal. In the Canal’s 2008 fiscal year (which ended September 30, 2008), commercial oceangoing traffic registered 14,702 transits, and the Canal’s toll revenue was $1.318 billion. See “The Panama Canal—Reversion of the Canal Area to Panama.”
Another significant and distinctive factor in the Panamanian economy is the CFZ, a tax-favored export and import trading zone located near the Atlantic entrance to the Canal, which has accounted for approximately 7.4% of GDP since 2004. See “The Colón Free Zone.” As a result of the dollar-based economy, the international trade associated with the Panama Canal and the CFZ and certain legislative initiatives, Panama has also developed an important banking sector that has represented an average of 7.6% of GDP since 2004. There is no lender of last resort or deposit insurance in Panama. See “Financial System—The Banking Sector.”
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Reforms and Development Programs
In September 2004, the Torrijos administration announced its initial development plan, Alianza para la Patria Nueva, or “Alliance for a New Homeland.” The development plan contemplates wide-ranging reforms, including reforms to the Constitution, fiscal system, public sector and judiciary. Before assuming office, Torrijos also pledged to seek enhancements in consumer protection, to combat corruption and to promote sustainable economic and human development. In November 2004, the Assembly ratified Legislative Act No. 1 of July 27, 2004, amending the Constitution. As a result of these amendments, the Supreme Court is permitted to conduct investigations of Assembly members without specific authorization from the Assembly. In December 2005, the Torrijos administration achieved one of its primary legislative objectives when the Assembly approved Law No. 51 that reformed Panama’s social security system by, among other things, requiring employees to make contributions into the social security system for 20 years (up from the prior 15-year requirement) before becoming eligible to receive benefits and gradually transitioning from the current defined benefits system to personal savings accounts. Law No. 51 also establishes the obligation to support the Régimen de Invalidez, Vejez y Muerte (“IVM”) with annual deposits to an administration and investment trust created for the sustainability of the IVM, of $75 million in 2007, 2008 and 2009, $100 million in 2010, 2011 and 2012, and $140 million in 2013 through 2060.
Privatization. Since the Pérez Balladares administration, the Government has pursued partial privatization of the sizable state sector of the economy. Generally, entities were slated for privatization based on whether they performed customary governmental functions and in the order of complexity that would be involved in the privatization process. The more straightforward privatizations were undertaken first, while certain more complex transactions requiring special legislation and the restructuring of operations and organizations prior to completion were undertaken later.
Trade Liberalization. Trade liberalization received new impetus under the Pérez Balladares administration. Panama’s accession to the WTO became effective September 6, 1997. Panama had begun lowering its duties and quantitative restrictions in anticipation of WTO accession, although significant duties permitted under WTO rules remained in place for certain products. On January 1, 1997, a series of measures became effective generally providing for the: (i) conversion of all existing quotas and import permits to ad valorem tariffs; (ii) conversion of all remaining specific or mixed tariffs to ad valorem tariffs; and (iii) setting of a tariff ceiling of 40% for industrial products and 50% for agri-industrial products. A major piece of legislation designed, in part, to remove barriers to Panama’s accession to the WTO, the Ley de Universalización de Incentivos Tributarios a la Producción (the “LUIT”), was passed by the Assembly in June 1995. As of September 1, 1997, tariffs were reduced to 10% for components of bread, cooking oils and numerous construction industry inputs, including steel and cement. The Ministry of Planning and Economic Policy, now referred to as the Ministry of Economy and Finance, retained a consultant to study further lowering of duties below those agreed with the WTO, and on October 10, 1997, the Cabinet approved additional reductions of tariffs on certain specific products to 15%. Upon assuming office, the Moscoso administration increased tariffs for certain agricultural products in October 1999. See “Foreign Trade and Balance of Payments—Tariffs and Other Trade Restrictions.”
In early 2002, Panama signed an agreement in principle (the “Free Trade Agreement”) with Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua to work towards a Central American free trade zone by 2005. The agreement was aimed at diversifying the commercial market and services in the region, eliminating trade barriers and increasing investment. The Assembly approved the Free Trade Agreement in February 2003. Pursuant to the Free Trade Agreement, Panama and El Salvador signed a bilateral protocol, also approved by the Assembly in February 2003, which covers approximately 85% of both countries’ output. Panama has concluded the negotiation of comprehensive free trade agreements with Costa Rica, Honduras and Guatemala. In this regard, Law No. 17 of February 13, 2008, published in the Gaceta Oficial Digital No. 25,982 of February 20, 2008, serves as the ratification of the free trade agreement between Panama and Costa Rica; the effective date of the agreement was November 23, 2008, and its Tariffs Program entered into effect on January 1, 2009. Law No. 23 of April 25, 2008, published in the Gaceta Oficial Digital No. 26,032 of May 5, 2008, serves as the ratification of the free trade agreement between Panama and Honduras; this agreement became effective on January 9, 2009. The free trade agreement between Panama and Guatemala was ratified by the Assembly of Panama under Law No. 48 of 2008, published in Gaceta Oficial Digital No. 26,084 of July 16, 2008, and became effective on June 20, 2009. Upon complete effectiveness of these commercial agreements, nearly 90% of Panama’s total exports to these countries will enter duty-free.
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Panama entered into a bilateral trade agreement with the Dominican Republic that became effective in December 2003, after each country ratified a negotiated list of 199 products for inclusion in the agreement. On August 21, 2003, Panama signed a free trade agreement with Taiwan. The agreement, which took effect on January 1, 2004, was ratified by Taiwan’s legislature on October 1, 2003 and by Panama’s Assembly on October 13, 2003. Under the agreement, 95% of import tariffs will be phased out over ten years.
In July 2004, the Assembly adopted Law No. 41 creating a special economic zone at the former United States military base of Fort Howard in the district of Arraijan and established an independent agency responsible for administering the zone. The Area Económica Especial Panamá-Pacifico (“AEEPP”) is intended to attract foreign investment and to create jobs by granting preferential tax treatment to businesses involved in such areas as technology, aircraft repair and maintenance, maritime cargo and transportation logistics. The AEEPP is not expected to compete with the CFZ as a result of a legislative prohibition on the importation into and reexportation out of the AEEPP of finished products.
On October 11, 2005, Panama signed a bilateral investment treaty with Mexico, which was approved by the Assembly on November 8, 2006. In May 2005, after a six-year interruption, Panama resumed negotiations to conclude a free trade agreement with Chile. On January 12, 2007, the Assembly approved Law No. 7, which implements the free trade agreement signed with Chile in June 2006. This free trade agreement entered into force on March 7, 2008, eliminating nearly 93% of Chile’s tariffs on goods immediately, with remaining tariffs phased out over 10 years.
On June 20, 2006, President Torrijos signed Law No. 19 approving the free trade agreement between Panama and Singapore, which was signed by the parties on March 1, 2006. Upon effectiveness, Panama will receive immediate zero-tariff access for all products exported to Singapore. Panama negotiated varying terms (0-10 years) for tariff reductions on certain agricultural and industrial imports from Singapore and excluded from the agreement more than 200 agricultural products, including rice, pork, dairy products and chicken.
On December 19, 2006, Panama announced the completion of negotiations for the Trade Promotion Agreement with the United States. In 2006, more than 96% of Panama’s merchandise exports to the United States entered duty-free considering the application of various trade preference programs designed to promote economic development, such as the Caribbean Basin Initiative and the Generalized System of Preferences. The Trade Promotion Agreement with the United States is expected to expand and secure those benefits for Panama in the long term. Upon effectiveness, this agreement will eliminate nearly 71.2% of Panama’s tariffs on industrial goods immediately, with remaining tariffs phased out over 10 years. In return, the United States will eliminate immediately 99.7% of tariffs applied to industrial goods from Panama. On June 28, 2007, Panama and the United States signed the Trade Promotion Agreement, which will come into force upon approval of each country’s legislature. On July 11, 2007, Panama’s legislature ratified the Trade Promotion Agreement, but as of September 2009, the U.S. Congress has yet to ratify the agreement.
On August 11, 2009, President Martinelli and the Prime Minister of Canada, Stephen Harper, entered into a free trade agreement between Panama and Canada. Under the agreement, Panama’s fresh and processed maritime products, representing approximately 30% of its exports to Canada, will have better access to the Canadian market, and Canada will immediately eliminate 99% of its tariffs on imports from Panama. In addition, the agreement will remove tariffs on 90% of goods imported from Canada, with the remaining ones to be phased out over the next decade. The Free Trade Agreement still requires ratification by each country’s legislative bodies to take effect.
Other Economic Reforms. Other areas of economic reform in recent years have included elimination of virtually all price controls, adoption of a competition law addressing antitrust, consumer protection and other issues, establishment of a public utility regulatory body, adoption of securities laws, strengthening of anti-money laundering legislation and promotion of investment in infrastructure and services in order to stimulate private investment in the interior. See “Structure of the Panamanian Economy—The Role of the Government in the Economy.”
Law No. 22 of June 27, 2006 established a new system for government procurement in Panama. Law No. 22 of June 27, 2006, which replaced Law No. 56 of December 27, 1995, created an autonomous government agency known as the Directorate General of Government Contracts that is responsible for the regulation and oversight of the government procurement process. Under Law No. 22 of June 27, 2006, the President appoints and the Assembly ratifies the appointment of a General Director of the Directorate General of
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Government Contracts. Law No. 22 of June 27, 2006 created an administrative tribunal to resolve appeals by Government contractors and required that the Government’s procurement of goods and services below $300,000 be conducted through an electronic system known as “Panamá Compra.”
During 2007, two export processing zones, or EPZs, were created in Panama. EPZs are well-defined areas for establishing industrial, commercial and service facilities for operation in a free trade system. In June 2007, Zona Procesadora Chilibre was created, and in August 2007, Zona Procesadora Colon Maritime Investor, S.A. was created to provide the infrastructure, facilities and support systems necessary to attract new business and foreign investments. During 2008 and through July 2009, two licenses were granted to operators of EPZs and 19 business licenses were granted to companies located in EPZs. In addition, there were nine registrations for official call centers in 2008 and two additional official call centers registered as of July 31, 2009. A total of 112 investors received assistance between January 2008 and July 2009.
Fiscal Reforms. To enforce fiscal discipline and budgetary compliance, the Government has established special review procedures for public sector expenditures. See “Public Finance—Central Government Budget.” In addition, the LUIT removes some of the fiscal mechanisms used to disfavor foreign competition in the domestic economy and eliminates certain tax exemptions and fiscal incentives that are believed to have led to distortions in the economy. The LUIT reduces the maximum tax rate applicable to most corporations for non-CFZ income and reforms the tax subsidies and incentives regime by generally granting all enterprises, regardless of size, similar tax abatements on imports of manufacturing inputs and investments in capital goods. Previously, many of these subsidies and incentives were available only to a specified class of manufacturers. In addition, the LUIT authorized the gradual elimination by year-end 2003 of tax exemptions and subsidies, either direct or indirect, for activities that substitute imports. In December 2002, the Assembly approved tax reforms aimed at improving and streamlining tax collection processes, as well as creating a broader tax base. See “Public Finance—Taxation.” The approved tax reform legislation raised the level of income exempt from income tax from $300 to $800 per month, contained measures that combat tax evasion and increased the income tax on banks.
In February 2005, the Assembly passed Law No. 6, introducing certain fiscal reforms aimed at increasing tax revenues and reducing the public sector deficit. The fiscal reforms seek to increase tax revenues through the creation of an alternative minimum income tax of 1.4%, a tax on professional services, and a selective consumption tax on certain products, services and activities, such as jewelry, weapons, cable television, cellular phones and casino and gaming activities. Certain tax provisions were eliminated by the fiscal reforms, including taxes on sugar production, insurance and private pension plans. With the fiscal reforms, the Government chose to discontinue the use of open-ended tax incentives in favor of tax incentives that are limited to a specific amount and time period. In addition, the fiscal reforms provide for a gradual reduction of current Government expenditures for wages and salaries through a reduction in the size of the Government work force.
On June 19, 2006, through Law No. 18, the Assembly modified articles of the Fiscal Code which implements a 10% capital gains tax on the sale of stocks, bonds and other securities. On January 11, 2007, Law No. 5 was passed which facilitated the process by which companies are formed. The law was created with the intention to foster increased investments within the country and to promote new business ideas. This law also protects commercial enterprises from unfair competition.
External Debt Normalization. During the Pérez Balladares Administration, Panama normalized relations with its external creditors. See “Public Sector Debt—External Debt,” and “Recent Developments—Public Debt.”
Labor Code. In order to facilitate labor market flexibility, in August 1995, the Assembly adopted substantial amendments to Panama’s Labor Code, which eased restrictions in areas such as termination of employees and payment of incentives. Prior to these amendments, the Labor Code significantly and adversely affected the development of the private sector economy and discouraged foreign investment.
Social Developments. Panama’s social spending generally does not involve income subsidies or other welfare benefits but instead focuses on spending in the social sectors of health, education and housing. Together, these areas represented 49.0% of 2008 government expenditures.
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The laws that currently govern the Development Trust Fund provide that up to $200 million may be drawn down from the Development Trust Fund to support infrastructure projects. The disbursements are to be made against invoices presented to the Ministry of Economy and Finance. See “Structure of the Panamanian Economy—The Role of the Government in the Economy.” For 2004 through 2008, funds were available in the following amounts: $65.9 million to water supply; $30.0 million to irrigation and agricultural projects; and $97.0 million to road rehabilitation. As of December 31, 2008, $69.8 million had been disbursed to fund water supply projects; $26.6 million to fund irrigation and agricultural projects; and $89.3 million to fund road rehabilitation projects. As of December 31, 2008, $188.4 million had been disbursed from the Development Trust Fund to support infrastructure projects, $4.5 million of which was disbursed in 2008.
In April 2001, Panama entered into a $47.9 million loan agreement with the World Bank to finance a land administration program, which in March 2006 was restructured and now is slated to operate through December 31, 2009. The program will provide equitable access to land and provide land administration services in selected rural, semi-urban and urban areas. In March 2003, Panama entered into two loan agreements with the IDB for a total of $25.2 million to support a program for the sustainable development of the Bocas del Toro region and a program to strengthen the fiscal management of the public sector.
On February 1, 2006, the Assembly approved Law No. 6, which assigns to the Ministry of Housing the responsibility to develop and oversee the coordination of national and local plans for sustainable development in Panama’s urban areas. Law No. 6 also requires the Ministry of Housing to coordinate with the various municipalities in its efforts to develop and execute local plans for the sustainable development of urban areas.
On August 4, 2009, Law 44 of 2009 was ratified, establishing a Special Program of Economic Assistance under the Ministry of Social Development. This Law was published in the Gaceta Oficial Digital No. 26,338-A of August 4, 2009. The program consists of issuing a monthly payment of $100 to all Panamanians who are 70 years or older and who do not receive retirement or pension benefits. With this program, the Government seeks to improve the quality of life for the elderly currently living in poverty.
On August 25, 2009, President Martinelli issued Executive Decree No. 55, published in the Gaceta Oficial Digital No. 26,369 of September 16, 2009. This decree created the “Fondo Solidario de Vivienda” under the Ministry of Housing. This fund seeks to give low-income families up to U.S.$5,000 per family to use on the purchase of a home not to exceed U.S.$30,000. This contribution will be given to families that have an income of less than U.S.$800 a month.
Environmental Law. In 1998, the Assembly enacted the Ley General del Ambiente y de los Recursos Naturales (the “Environmental Protection Law”). The Environmental Protection Law created the Autoridad Nacional del Ambiente y los Recursos Naturales (“ANAM”), an autonomous administrative agency, which regulates the use of natural resources in local areas and assists in protecting the environment on the local level. The Environmental Protection Law also created the Consejo Nacional del Ambiente (the “National Environmental Council”), a governmental agency headed by three government ministers. The National Environmental Council advises the Government on appropriate national environmental policy for Panama. In addition to creating the foregoing agencies, the Environmental Protection Law established standards, sanctions and other provisions to protect more effectively the environment in Panama. In December 1999, Panama entered into an agreement with the IADB pursuant to which the IADB provided a $15.8 million loan to ANAM to regulate and manage environmental projects in Panama. In July 2004 and August 2004, the Government and the United States Government signed two debt-for-nature swap agreements, pursuant to which Panama and the United States agreed to restructure debt owed by Panama to the United States in return for Panama’s commitment to fund, through 2016, a trust devoted to forest conservation activities in Panama’s Darién National Park and Chagres National Park.
During 2008 and 2009, numerous executive decrees were enacted concerning environmental policies, including decrees relating to the protection of whale sharks, establishing a national committee on climate change and changing the general environmental law. In addition, many resolutions were enacted in 2009, such as the protection of specific regions, the approval of the management plan for a national park and the regulation for wildlife preservation.
Infrastructure. Through the privatization of major public utilities, the Government has sought significant improvements in Panama’s infrastructure. The Government is expanding the highway network through administrative concessions for toll road
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projects. See “Structure of the Panamanian Economy—The Role of the Government in the Economy.” In January 2000, a two-lane addition to the Pan American highway was completed, extending from La Chorrera to San Carlos, west of Panama City. In November 2000, the Government, with the assistance of a $72 million loan from the IDB, began a five-year program to install electrical transmission lines from hydroelectric plants in the countryside to urban areas. In addition, plans were implemented in 2002 for the construction of a new bridge over the Panama Canal, together with feeder roads. The estimated total cost of the project, including the designs, inspections and construction of the bridge and feeder roads, was approximately $204.1 million. On August 15, 2004, the span of the second bridge over the Panama Canal was completed. On September 2, 2005, the feeder roads to the bridge were completed at a cost of $87.2 million. During 2007, Panama experienced a significant developmental increase in infrastructure. In 2008, the Ministerio de Obras Públicas (Ministry of Public Works, also referred to as MOP), invested $248.2 million in projects relating to the construction, rehabilitation and maintenance of all national highways, consisting of 13,615 kilometers of transportation networks.
Plan Puebla-Panama. In June 2001, Panama, together with Mexico, Nicaragua, Guatemala, Honduras, El Salvador, Belize and Costa Rica signed the Puebla-Panama Plan, a development plan to be supported by up to $2 billion in loans from the IDB and other multilateral organizations. The development would include joint management of natural resources and infrastructure projects such as highways, roads, electricity, seaports, airports, gas pipelines and communications as well as a plan for environmental protection. In July 2003, the IADB approved an additional $37 million loan to Panama to rehabilitate and upgrade a highway on the Pacific Corridor, a component of the Puebla-Panama Plan’s network of Mesoamerican highways. In May 2006, the Government signed a loan agreement with CAF, for $80 million, of which $17.9 million was disbursed through December 2006, to improve and rehabilitate roads. In 2006, various initiatives were undertaken in Panama under the Plan Puebla-Panama such as the construction of the Central American System of Electrical Interconnection, known as SIEPAC, and the repair and widening of the Tran-isthmus and Pan-American highways. In addition, the Voluntary Agreement for Sustainable Environmental Behavior was signed by Panama. In 2007, Plan Puebla-Panama continued its initiative to develop infrastructure projects. During 2007, the construction of SIEPAC began, which will create approximately 1,867 km of a regional energy grid at an estimated cost of $385 million. In 2008, the presidents of the countries in Central America, Colombia and Mexico agreed to restructure the Plan Puebla-Panama by developing it into the Mesoamerica Project, seeking to strengthen regional integration and to create new opportunities among the member countries.
Prevention of Money Laundering and Other Crimes. The Pérez Balladares administration, with international encouragement and support, targeted certain illegal activities, including money laundering, corruption and drugs, for reduction and elimination. The Moscoso and Torrijos administrations have continued to target these illegal activities. Legislation adopted in 1994 mandated forfeiture of proceeds derived from money laundering, while a decree issued that year by the Pérez Balladares administration required resident agents of corporations to know the identity of the corporation’s beneficial owners. In June 1995, the Financial Analysis Unit (“UAF”), an independent investigative unit reporting to the President, was created to monitor certain financial transactions. Banks, casinos, financial institutions, exporters and others are required to report to the UAF cash transactions exceeding $10,000. Additionally, new banking legislation was enacted which has tightened controls and supervision of various banking activities. The UAF has signed letters of understanding with regulatory bodies in 38 other countries to combat money laundering. The letters of understanding are intended to pave the way for greater cooperation between countries by facilitating the exchange of information. See “Financial System—The Banking Sector.”
The Government has collaborated with other nations, including the United States and Canada, in several investigations and prosecutions related to drug smuggling and money laundering. In February 2000, the United States certified Panama under applicable United States law as having adequately complied with the U.N. Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. Since then, the United States has not identified Panama as having failed demonstrably to make substantial efforts to adhere to its obligations under the U.N. Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances. In June 2001, the Financial Action Task Force on Money Laundering (“FATF”) of the Organization for Economic Cooperation and Development (“OECD”) removed Panama from its list of countries and jurisdictions that are non-cooperative in the fight against money laundering. In April 2002, the OECD removed Panama from the list of countries that it considers uncooperative tax havens. As part of an agreement with the OECD, Panama has pledged to improve the transparency of its tax system and to provide certain tax information to the OECD member countries. In March 2003, Panama signed a cooperation agreement with Mexico that provides for the exchange of financial information to prevent and detect money laundering.
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Economic Performance—2004 Through 2008
Revision of Non-Financial Public Sector Deficit Calculations. In 2004, the Torrijos administration revised the methodology used by the Moscoso administration to calculate the non-financial public sector deficit. The revised methodology used to calculate the 2004 deficit and restate the deficit for prior years going back to 2002 does not include expected BNP dividends, the Panama Canal Authority’s net financial results or the savings generated by debt repurchase operations, all of which were included under the previous administration’s methodology. The revised methodology uses cash-based accounting standards.
Revision of Consumer Price Index Calculations. In 2004, the OECD revised its calculation of the CPI by adopting a 2002 base year; the base year previously used was 1987. In addition, beginning with figures for 2004, the area sample was expanded to incorporate a broader population and updated expenditure weights were used in the market baskets to reflect new spending patterns.
Revision of Unemployment Rate. In 2004, the OECD revised its calculation of the unemployment rate by adopting open unemployment as the official indicator of unemployment. The open unemployment rate includes only persons actively seeking employment. The Government believes that the adoption of open unemployment as the official indicator of unemployment produces a better comparison with countries in the region, including the United States, that use open unemployment as the official indicator of unemployment. The revised methodology has been applied retroactively to, and thus adjusts, economic statistics from fiscal year 2002 onward.
Economic Performance in 2004. Panama’s economy grew in virtually all sectors during 2004. Panama’s GDP registered a real increase of 7.5% during 2004. In 2004, the primary sector grew an estimated 2.6% from 2003. In particular, the agriculture sector grew 1.4% in 2004, representing a contribution to GDP of 7.4% in 2004 as compared to 7.9% in 2003. This increase is primarily attributable to a continued growth in melon and pineapple exports and an increase in the price of tuna. The transportation and telecommunications sector grew by an estimated 17.0% in 2004 (contributing 12.6% to GDP in 2004 compared to 11.6% in 2003) due to increased cellular phone usage and the opening to competition of the international telecommunications market. Mining activities increased 12.5% in 2004, reflecting a contribution to GDP of 1.0% (an increase from 0.9% of GDP in 2003), due to high demand for mining products from construction activity. The construction industry grew by 13.9% in 2004 due to the large number of construction projects, in both the commercial and residential sectors, as a result of favorable interest rates. The contribution of the construction industry to GDP rose from 4.2% in 2003 to 4.5% in 2004. Activities of the CFZ increased 16.3% in 2004, reflecting a contribution to GDP of 7.1% in 2004 compared to 6.6% of GDP in 2003. This increase is primarily attributable to the continued economic recovery of South America. The manufacturing sector grew 2.1% in 2004 due in part to an increase in the production of food and beverages and construction-related materials. Panama Canal activities grew 9.7% in 2004 (contributing 4.9% to GDP in 2004 compared to 4.9% in 2003) due to an increase in canal traffic and cargo volume. The public utilities sector grew by 6.1% in 2004, representing a contribution to GDP of 3.1% in 2004 compared to 3.2% in 2003. This increase was in part attributable to increased hydroelectric power generation due to the opening of the new Estí power plant, expanded activity of the Bayano power plant and increased demand from construction projects and new shopping centers. In 2004, the only sector that declined was the financial intermediation sector, which fell 5.6% in 2004 compared to 2003. This decrease occurred despite an increase in external and internal credit in 2004 compared to 2003.
Inflation, as measured by the end-of-period CPI, was 2.0% in 2004. The open unemployment rate decreased from 10.9% in 2003 to 9.2% in 2004.
The Government’s current account for 2004 registered a deficit of $331 million (2.3% of nominal GDP), compared to a deficit of $119 million in 2003. The Government’s overall deficit increased from $489 million in 2003 (3.8% of nominal GDP) to $768 million in 2004 (5.4% of nominal GDP). In 2004, Panama’s non-financial public sector balance registered a deficit of approximately $691.0 million (or 4.9% of nominal GDP), up from $623.4 million (or 4.8% of nominal GDP) in 2003.
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Economic Performance in 2005. During 2005, Panama’s economy grew in all sectors, except public administration. Panama’s GDP registered a real increase of 7.2% in 2005 compared to 7.5% in 2004. Inflation, as measured by the end-of-period CPI, was 3.5% in 2005, compared to 2.0% in 2004, primarily due to higher international prices for petroleum and certain dairy products and a decline in the supply of agricultural products as a result of severe weather during 2005. The open unemployment rate decreased from 9.2% in 2004 to 7.6% in 2005.
In 2005, the primary sector grew an estimated 2.3% compared to 2004, primarily due to increased production in the fisheries sector, which grew by an estimated 2.6%, and the agriculture sector, which grew an estimated 2.6%. The growth in the agriculture sector was due in part to an increase in pineapple and live cattle exports, as well as an increase in rice production. The transportation and telecommunications sector grew by an estimated 14.1% in 2005 compared to 2004 due in part to increased port activity and shipments of cargo by railway. In 2005, the construction sector, which was negatively impacted by work stoppages in June 2005, grew an estimated 1.0% compared to 2004. Manufacturing activity increased an estimated 4.2% in 2005 compared to 2004 due in part to increased production of carbonated beverages and rubber and plastic products. The commerce, hotels and restaurant sector grew an estimated 5.5% in 2005 compared to 2004 due to an increase in wholesale and retail sales and an increase in the number of tourists visiting Panama. Activities of the CFZ increased an estimated 14.2% in 2005 compared to 2004 due in part to a rise in the demand for the CFZ’s services from Central America, Venezuela, and Ecuador.
Panama Canal activities grew an estimated 6.1% in 2005 compared to 2004 due to a rise in cargo volume and increased toll receipts resulting from changes to the toll structure implemented on May 1, 2005. The financial intermediation sector grew an estimated 16.4% in 2005 compared to 2004 due to increases in external and internal credit. The public utilities sector grew by an estimated 5.6% in 2005 compared to 2004 due to increased demand for electricity from industrial, commercial and residential customers. Mining activities rose 0.1% in 2005 compared to 2004.
The Government’s current account for 2005 registered a deficit of $228 million (1.5% of nominal GDP), compared to a deficit of $331 million in 2004. The Government’s overall deficit decreased from $768 million in 2004 (5.4% of nominal GDP) to $606 million in 2005 (3.9% of nominal GDP). In 2005, Panama’s non-financial public sector balance registered a deficit of approximately $500.1 million (or 3.3% of nominal GDP), down from $691 million (or 4.9% of nominal GDP) in 2004.
Economic Performance in 2006. Panama’s GDP registered a real increase of 8.5% in 2006 compared to 7.2% in 2005. Inflation, as measured by the end-of-period CPI, was 2.0% in 2006, compared to 3.5% in 2005. The open unemployment rate decreased from 7.6% in 2005 to 6.7% in 2006.
In 2006, the primary sector grew an estimated 5.8% compared to 2005, primarily due to growth in the mining sector and the agriculture sector, which grew by an estimated 17.2% and 4.2%, respectively. The growth in the agriculture sector was due in part to an increase in pineapple and live cattle exports. The transportation and telecommunications sector grew by an estimated 13.9% in 2006 compared to 2005 due in part to increased investments in port infrastructure and a rise in activity and shipments of cargo by railway. In 2006, the construction sector increased by an estimated 18.4% compared to 2005. Manufacturing activity rose an estimated 3.9% in 2006 compared to 2005 due in part to the continued production of carbonated beverages and rubber and plastic products. The commerce, restaurants and hotels sector expanded an estimated 11.0% in 2006 compared to 2005 due to an increase in sales of automobiles and construction materials and an increase in the number of tourists visiting Panama. Activities of the CFZ increased an estimated 11.6% in 2006 compared to 2005 due in part to a rise in the prices of Latin American exports.
Panama Canal activities increased an estimated 13.4% in 2006 compared to 2005 due to an increase in cargo volume that was complemented by toll receipts resulting from changes to the toll structure implemented on May 1, 2005. The financial intermediation sector expanded an estimated 15.0% in 2006 compared to 2005 due to increases in external and internal credit. The public utilities sector grew by an estimated 3.3% in 2006 compared to 2005 due to increased demand for electricity from industrial, commercial and residential customers.
The Government’s current account for 2006 registered a surplus of $446.8 million (2.6% of nominal GDP), compared to a deficit of $228 million in 2005. The Government’s overall deficit decreased from $606 million in 2005 (3.9% of nominal GDP) to a surplus of $35.7 million in 2006 (0.2% of nominal GDP). In 2006, Panama’s non-financial public sector balance registered a surplus of approximately $87.7 million (or 0.5% of nominal GDP), up from a deficit of $500.1 million (or 3.3% of nominal GDP) in 2005.
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Economic Performance in 2007. During 2007, Panama’s economy grew in all sectors. Panama’s GDP registered a real increase of 11.5% in 2007 compared to 8.5% in 2006. Inflation, as measured by the end-of-period CPI, was 6.5% in 2007, compared to 2.0% in 2006, primarily due to the worldwide increase in oil prices affecting various sectors of the economy, such as increased costs in energy and food production. The open unemployment rate decreased from 6.7% in 2006 to 4.7% in 2007.
In 2007, the primary sector grew an estimated 4.5% compared to 2006, primarily due to the mining sector, which grew by an estimated 22.7%, and the agriculture sector, which grew an estimated 1.7%. The growth in the mining sector was primarily due to the increased production of construction materials, and the growth in the agriculture sector was due in part to increased corn production. The transportation and telecommunications sector grew by an estimated 22.5% in 2007 compared to 2006 due in part to an increase in cargo tonnage at ports, increased air travel and the use of cellular phones and the Internet. In 2007, the construction sector grew an estimated 20.3% compared to 2006 due to the construction of new high-rise buildings and family residences, the expansion of certain container ports and the Government’s and the Panama Canal Authority’s investments in infrastructure. Manufacturing activity increased an estimated 5.5% in 2007 compared to 2006 due in part to a rise in the processing of food and beverage products. Activities of the CFZ increased an estimated 5.1% in 2007 compared to 2006 due in part to greater demand for imported goods and the recovery of national manufacturing production.
The commerce, hotels and restaurants sector grew an estimated 12.6% in 2007 compared to 2006 due to increased tourism. Panama Canal activities grew an estimated 3.1% in 2007 compared to 2006 due to an increase in number of transit vessels and net tons transported. The financial intermediation sector grew an estimated 19.3% in 2007 compared to 2006 due to increased banking and insurance activity. The public utilities sector grew by an estimated 9.2% in 2007 compared to 2006 due to increased electricity production.
The Government’s current account for 2007 registered a surplus of $1,013 million (6.0% of nominal GDP), compared to a surplus of $447 million in 2006. The Government’s overall surplus increased from approximately $36 million in 2006 (0.2% of nominal GDP) to approximately $240 million in 2007 (1.2% of nominal GDP). In 2007, Panama’s non-financial public sector balance registered a surplus of approximately $683.0 million (or 3.5% of nominal GDP), up from $87.7 million (or 0.5% of nominal GDP) in 2006.
Economic Performance in 2008. During 2008, Panama’s economy grew in all sectors. Panama’s GDP registered a real increase of 9.2% in 2008 compared to 11.5% in 2007. Inflation, as measured by the end-of-period CPI, was 6.5% in 2008, compared to 6.5% in 2007. As Panama is a net importer, the decrease in the price of oil and other commodities during the end of 2008 and early 2009 has had a short-term positive impact on the Panamanian economy, relieving some of the inflationary pressures and allowing for more disposable income of the population in general. The open unemployment rate decreased slightly from 4.7% in 2007 to 4.2% in 2008.
In 2008, the primary sector grew an estimated 9.7% compared to 2007, primarily due to the mining sector, which grew by an estimated 29.8%, and the agriculture sector, which grew an estimated 6.0%. The growth in the mining sector was primarily due to a greater demand for raw materials used by the construction sector, and the growth in the agriculture sector was due to increases in the amount of land used for farming. The construction sector grew by an estimated 30.0% in 2008 as compared to 2007 due to the construction of new high-rise buildings and family residences, the expansion of certain container ports and the Government and the Panama Canal Authority’s investments in infrastructure. However, construction activity decreased by approximately 35.0% in September 2008, 3.9% in October 2008 and 43.1% in November 2008, in each case as compared to the same months in 2007, due primarily to the effects of the global economic crisis. The total value of new construction, additions and repair projects approved in Panama increased 18.7% in 2008 as compared to 2007. During the first six months of 2008, the value of these projects increased over 50% as compared to the same period in 2007; however, during the final quarter of 2008, when the global economic crisis became more pronounced, the value of construction projects approved fell 13.9% as compared to the same period of 2007. It is expected that a continuation of the economic crisis will continue to negatively impact the construction sector in 2009 and beyond.
The CFZ grew an estimated 6.1% in 2008 as compared 2007, although a slowdown of foreign trade and maritime activity is expected in 2009, primarily due to the global economic crisis and the CFZ’s dependence on foreign market activity. The PEF was
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designed by the Government to offset certain effects of the global economic crisis and to maintain the proper functioning of the productive sectors of the economy, including the CFZ. See “Recent Developments—Government”. Ongoing projects within the CFZ, including commercial movement automation and the completion of the Don Alberto Motta Highway, may have a positive impact in contributing to maintaining the efficiency and competitiveness of the CFZ operations.
The commerce, hotels and restaurant sector grew an estimated 8.4% in 2008 as compared to 2007 primarily due to increased tourism. The transportation and communications sector grew 18.3% in 2008 as compared to 2007 primarily due to an increase in cargo tonnage at ports, increased air travel and the use of cellular phones and the Internet. Specifically, the Republic’s largest regional air carrier, COPA Holdings, S.A., experienced a 20.0% increase in traffic during 2008 as compared to 2007. In December 2008, COPA reported that air traffic increased 16.5% as compared to December 2007. Cable & Wireless Panamá S.A., a telecommunications entity 49% owned by the Government, experienced a 14.0% increase in sales in their fiscal year ended March 31, 2008 as compared to their fiscal year ended March 31, 2007, primarily due to growth in broadband internet usage, mobile devices and international communications. The financial intermediation sector grew an estimated 2.3% in 2008 as compared to 2007 primarily due to greater development in international banking. The real estate sector grew an estimated 5.8% in 2008 as compared to 2007.
The Government’s current account for 2008 registered a deficit of $2.8 billion (15% of nominal GDP), compared to a surplus of $1.0 billion in 2007. The Government’s overall surplus decreased from approximately $240 million in 2007 (1.3% of nominal GDP) to approximately $585 million in 2008 (3.2% of nominal GDP). In 2008, Panama’s non-financial public sector balance registered a surplus of approximately $97.8 million (or 0.4% of nominal GDP), down from $683.0 million (or 3.5% of nominal GDP) in 2007.
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The following table sets forth Panama’s principal price indicators for each of the years 2004 through 2008:
TABLE NO. 2
Inflation
(percentage change from previous period)
| | | | | | | | | | | | | | | |
| | | 2004(R) | | | 2005(R) | | | 2006(R) | | | 2007(R) | | | 2008 | |
Period Average: | | | | | | | | | | | | | | | |
Consumer Price Index | | 0.5 | % | | 3.3 | % | | 2.3 | % | | 4.2 | % | | 8.8 | % |
Wholesale Price Index: | | | | | | | | | | | | | | | |
Imports | | 7.3 | | | 10.4 | | | 10.1 | | | 5.8 | | | 21.1 | |
Industrial products | | 1.7 | | | 1.6 | | | 1.8 | | | 4.5 | | | 11.6 | |
Agricultural products | | 2.6 | | | (0.2 | ) | | 3.2 | | | 6.3 | | | 3.5 | |
All products | | 4.4 | | | 5.7 | | | 6.1 | | | 5.3 | | | 15.8 | |
| | | | | |
End of Period: | | | | | | | | | | | | | | | |
Consumer Price Index | | 2.0 | % | | 3.5 | % | | 2.0 | % | | 6.5 | % | | 6.5 | % |
Wholesale Price Index: | | | | | | | | | | | | | | | |
Imports | | 8.7 | | | 11.2 | | | 5.2 | | | 16.5 | | | (19.4 | ) |
Industrial products | | 2.7 | | | 1.4 | | | 2.3 | | | 6.2 | | | 0.6 | |
Agricultural products | | 2.2 | | | 5.6 | | | 3.8 | | | 7.0 | | | 0.1 | |
All products | | 5.3 | | | 6.2 | | | 3.9 | | | 11.4 | | | (10.7 | ) |
Source: Office of the Comptroller General and Ministry of Economy and Finance.
Gross Domestic Product
Real GDP grew 7.5% in 2004, primarily due to a continued increase in construction, transportation and communications, mining and Panama Canal activities. In 2005, real GDP grew an estimated 7.2%, primarily due to increases in transportation and communications, CFZ and financial intermediation activities. In 2006, real GDP grew an estimated 8.5% and in 2007, real GDP grew an estimated 11.5%. In 2008, real GDP grew an estimated 9.2%, led by growth in the transportation and communications sector (18.3%), the construction sector (30.0%), the mining sector (29.8%) and the commerce, restaurants and hotels sector (8.4%).
The sectoral composition of Panama’s GDP has remained relatively constant in recent years. In 2008, approximately 75.7% of real GDP was attributable to services, 12.2% of real GDP to the industrial activities of manufacturing and construction and 7.5% of real GDP to the primary activities of agriculture, fishing and mining.
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The following tables set forth Panama’s GDP, including sectoral origin (in dollars and as a percentage of GDP) and percentage change from 2004 to 2008.
TABLE NO. 3
Gross Domestic Product
| | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2005 | | | 2006(R) | | | 2007(P) | | | 2008(E) | |
Gross Domestic Product (millions of dollars in constant prices)(1) | | $ | 13,099.2 | | | $ | 14,041.2 | | | $ | 15,238.6 | | | $ | 16,997.6 | | | $ | 18,558.1 | |
% Change over Previous Year | | | 7.5 | % | | | 7.2 | % | | | 8.5 | % | | | 11.5 | % | | | 9.2 | % |
Gross Domestic Product (millions of dollars at current prices) | | $ | 14,179.3 | | | $ | 15,464.7 | | | $ | 17,137.0 | | | $ | 19,485.4 | | | $ | 23,087.9 | |
% Change over Previous Year | | | 9.6 | % | | | 9.1 | % | | | 10.8 | % | | | 13.7 | % | | | 18.5 | % |
| (1) | Figures are based on 1996 constant dollars. See “—Economic Performance—2004 Through 2008.” |
Source: Office of the Comptroller General.
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TABLE NO. 4
Sectoral Origin of Gross Domestic Product
(in millions of dollars)(1)
| | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2005 | | | 2006(R) | | | 2007(P) | | | 2008(E) | |
Primary Activities: | | | | | | | | | | | | | | | | | | | | |
Agriculture(2) | | $ | 971.9 | | | $ | 997.0 | | | $ | 1,039.1 | | | $ | 1,056.4 | | | $ | 1,119.7 | |
Mining | | | 136.0 | | | | 136.1 | | | | 159.5 | | | | 195.7 | | | | 254.1 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,107.9 | | | $ | 1,133.1 | | | $ | 1,198.6 | | | $ | 1,252.1 | | | $ | 1,373.8 | |
| | | | | |
Industrial Activities: | | | | | | | | | | | | | | | | | | | | |
Manufacturing | | $ | 985.5 | | | $ | 1,026.9 | | | $ | 1,066.7 | | | $ | 1,125.7 | | | $ | 1,168.5 | |
Construction | | | 588.6 | | | | 594.6 | | | | 704.0 | | | | 846.9 | | | | 1,101.2 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 1,574.1 | | | $ | 1,621.5 | | | $ | 1,770.7 | | | $ | 1,972.6 | | | $ | 2,269.7 | |
| | | | | |
Services: | | | | | | | | | | | | | | | | | | | | |
Public utilities | | $ | 410.6 | | | $ | 433.4 | | | $ | 447.6 | | | $ | 488.6 | | | $ | 513.5 | |
Commerce, restaurants and hotels | | | 1,298.2 | | | | 1,370.0 | | | | 1,520.3 | | | | 1,711.6 | | | | 1,854.8 | |
Transportation and communications | | | 1,648.0 | | | | 1,880.0 | | | | 2,140.7 | | | | 2,622.8 | | | | 3,103.9 | |
Colón Free Zone | | | 931.3 | | | | 1,063.5 | | | | 1,186.9 | | | | 1,247.4 | | | | 1,323.4 | |
Panama Canal Authority | | | 648.3 | | | | 688.0 | | | | 780.2 | | | | 804.4 | | | | 861.2 | |
Financial intermediation | | | 887.0 | | | | 1,032.4 | | | | 1,187.1 | | | | 1,416.3 | | | | 1,449.4 | |
Real estate | | | 2,103.1 | | | | 2,257.4 | | | | 2,401.3 | | | | 2,583.4 | | | | 2,734.3 | |
Public administration | | | 1,217.0 | | | | 1,208.3 | | | | 1,231.8 | | | | 1,272.7 | | | | 1,321.0 | |
Other services | | | 735.3 | | | | 762.5 | | | | 803.4 | | | | 872.2 | | | | 914.9 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 9,878.8 | | | $ | 10,695.5 | | | $ | 11,699.3 | | | $ | 13,019.4 | | | $ | 14,076.4 | |
| | | | | |
Plus Import Taxes(3) | | $ | 800.9 | | | $ | 880.2 | | | $ | 944.3 | | | $ | 1,133.2 | | | $ | 1,175.3 | |
Less Imputed Banking Services | | | (262.5 | ) | | | (289.0 | ) | | | (374.3 | ) | | | (379.7 | ) | | | (337.1 | ) |
| | | | | | | | | | | | | | | | | | | | |
Gross Domestic Product | | $ | 13,099.2 | | | $ | 14,041.2 | | | $ | 15,238.6 | | | $ | 16,997.6 | | | $ | 18,558.1 | |
| (1) | Figures are based on 1996 constant dollars. See “—Economic Performance—2004 Through 2008.” |
| (3) | Including value-added tax. |
Source: Office of the Comptroller General and Ministry of Economy and Finance.
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TABLE NO. 5
Percentage Change from Prior Year for
Sectoral Origin of Gross Domestic Product
(percentage change)(1)
| | | | | | | | | | | | | | | |
| | | 2004 | | | 2005 | | | 2006(R) | | | 2007(R)(P) | | | 2008(E) | |
Primary Activities: | | | | | | | | | | | | | | | |
Agriculture(2) | | 1.4 | % | | 2.6 | % | | 4.2 | % | | 1.7 | % | | 6.0 | % |
Mining | | 12.5 | | | 0.1 | | | 17.2 | | | 22.7 | | | 29.8 | |
Total | | 2.6 | | | 2.3 | | | 5.8 | | | 4.5 | | | 9.7 | |
| | | | | |
Industrial Activities: | | | | | | | | | | | | | | | |
Manufacturing | | 2.1 | | | 4.2 | | | 3.9 | | | 5.5 | | | 3.8 | |
Construction | | 13.9 | | | 1.0 | | | 18.4 | | | 20.3 | | | 30.0 | |
Total | | 6.2 | | | 3.0 | | | 9.2 | | | 11.4 | | | 15.1 | |
| | | | | |
Services: | | | | | | | | | | | | | | | |
Public utilities | | 6.1 | | | 5.6 | | | 3.3 | | | 9.2 | | | 5.1 | |
Commerce, restaurants and hotels | | 8.9 | | | 5.5 | | | 11.0 | | | 12.6 | | | 8.4 | |
Transportation and communications | | 17.0 | | | 14.1 | | | 13.9 | | | 22.5 | | | 18.3 | |
Colón Free Zone | | 16.3 | | | 14.2 | | | 11.6 | | | 5.1 | | | 6.1 | |
Panama Canal Authority | | 9.7 | | | 6.1 | | | 13.4 | | | 3.1 | | | 7.1 | |
Financial intermediation | | (5.6 | ) | | 16.4 | | | 15.0 | | | 19.3 | | | 2.3 | |
Real estate | | 7.5 | | | 7.3 | | | 6.3 | | | 7.6 | | | 5.8 | |
Public administration | | 2.4 | | | (0.7 | ) | | 1.9 | | | 3.3 | | | 3.8 | |
Other services | | 4.8 | | | 3.7 | | | 5.4 | | | 8.6 | | | 4.9 | |
Total | | 7.8 | | | 8.3 | | | 9.4 | | | 11.3 | | | 8.1 | |
| | | | | |
Plus Import Taxes(3) | | 5.7 | | | 9.9 | | | 7.3 | | | 20.0 | | | 3.7 | |
Less Imputed Banking Services | | (12.6 | ) | | 10.1 | | | 29.5 | | | 1.4 | | | (11.2 | ) |
Gross Domestic Product | | 7.5 | % | | 7.2 | % | | 8.5 | % | | 11.5 | % | | 9.2 | % |
| (1) | Figures are based on 1996 constant dollars. See “—Economic Performance—2004 Through 2008.” |
| (3) | Including value-added tax. |
Source: Office of the Comptroller General and Ministry of Economy and Finance.
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TABLE NO. 6
Sectoral Origin of Gross Domestic Product
(as percentage of GDP)(1)
| | | | | | | | | | | | | | | |
| | | 2004 | | | 2005(R) | | | 2006(R) | | | 2007(R)(P) | | | 2008(E) | |
Primary Activities: | | | | | | | | | | | | | | | |
Agriculture(2) | | 7.4 | % | | 7.2 | % | | 6.8 | % | | 6.2 | % | | 6.1 | % |
Mining | | 1.0 | | | 1.0 | | | 1.0 | | | 1.2 | | | 1.4 | |
| | | | | | | | | | | | | | | |
Total | | 8.4 | | | 8.2 | | | 7.8 | | | 7.4 | | | 7.5 | |
| | | | | |
Industrial Activities: | | | | | | | | | | | | | | | |
Manufacturing | | 7.5 | | | 7.3 | | | 7.0 | | | 6.6 | | | 6.3 | |
Construction | | 4.5 | | | 4.2 | | | 4.6 | | | 5.0 | | | 5.9 | |
| | | | | | | | | | | | | | | |
Total | | 12.0 | | | 11.5 | | | 11.6 | | | 11.6 | | | 12.2 | |
| | | | | |
Services: | | | | | | | | | | | | | | | |
Public utilities | | 3.1 | | | 3.1 | | | 2.9 | | | 2.9 | | | 2.8 | |
Commerce, restaurants and hotels | | 9.9 | | | 9.8 | | | 10.0 | | | 10.1 | | | 10.0 | |
Transportation and communications | | 12.6 | | | 13.4 | | | 14.1 | | | 15.4 | | | 16.7 | |
Colón Free Zone | | 7.1 | | | 7.6 | | | 7.8 | | | 7.3 | | | 7.1 | |
Panama Canal Authority | | 4.9 | | | 4.9 | | | 5.2 | | | 4.7 | | | 4.6 | |
Financial intermediation | | 6.8 | | | 7.4 | | | 7.8 | | | 8.3 | | | 7.8 | |
Real estate | | 16.1 | | | 16.1 | | | 15.7 | | | 15.2 | | | 14.7 | |
Public administration | | 9.3 | | | 8.6 | | | 8.0 | | | 7.5 | | | 7.1 | |
Other services | | 5.6 | | | 5.4 | | | 5.2 | | | 5.1 | | | 4.9 | |
| | | | | | | | | | | | | | | |
Total | | 75.4 | | | 76.2 | | | 76.7 | | | 76.5 | | | 75.7 | |
| | | | | |
Plus Import Taxes(3) | | 6.1 | | | 6.2 | | | 6.3 | | | 6.7 | | | 6.4 | |
Less Imputed Banking Services | | (2.0 | ) | | (2.1 | ) | | (2.5 | ) | | (2.2 | ) | | (1.8 | ) |
| | | | | | | | | | | | | | | |
Total | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| (1) | Figures are based on 1996 constant dollars. See “—Economic Performance—2004 Through 2008.” |
| (3) | Including value-added tax. |
Source: Office of the Comptroller General.
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STRUCTURE OF THE PANAMANIAN ECONOMY
Principal Sectors of the Economy
Service Sector. The Panamanian economy is based primarily on the service sector, which accounted for an average of 76.1% of real GDP from 2004 to 2008. Services include real estate, transportation and communications, commerce restaurants and hotels, financial intermediation, public administration, the Panama Canal, the CFZ and public utilities. While real estate and public administration represent significant percentages of real GDP (estimated to be 14.7% and 7.1%, respectively, of real GDP in 2008), the Panamanian economy is distinguished by the economic benefits generated by the Panama Canal and the CFZ.
Real Estate. The largest single component of the service sector is real estate, which consists of rental income and the imputed rental value of real estate that is occupied but not rented. In 2003, an amendment to the tax law created a property tax exemption and tax incentives for improvements made to residential and commercial properties prior to 2005, which in addition to low mortgage rates resulted in a rise in real estate activity in 2003 and 2004. Real estate represented 16.1% of real GDP in 2004, 16.1% of real GDP in 2005, 15.7% of real GDP in 2006, 15.2% of real GDP in 2007 and an estimated 14.7% of real GDP in 2008.
Transportation and Communications. The transportation and communications sector, which includes ports, rails and telecommunications, has been a increasing component of the Panamanian economy in recent years. It represented an estimated 16.7% of GDP in 2008, 15.4% of GDP in 2007, 14.1% of GDP in 2006, 13.4% of GDP in 2005 and 12.6% of GDP in 2004.
Commerce. Commerce (which includes wholesale and retail activities, restaurants and hotels) represented an estimated 10.0% of GDP in 2008, 10.1% of GDP in 2007, 10.0% of GDP in 2006, 9.8% of GDP in 2005 and 9.9% of GDP in 2004. In 2008, retail and wholesale activities rose 10.9% and 4.8%, respectively, compared to 2007 in part as a result of increased commercial activities due to favorable economic performance. In 2008, the restaurants and hotels sector grew 9.3% primarily due to an increase in tourist spending.
Financial Services. The financial services sector represented an estimated 7.8% of GDP in 2008, 8.3% of GDP in 2007, 7.8% of GDP in 2006, 7.4% of GDP in 2005 and 6.8% of GDP in 2004. Approximately 6.3% of this sector’s contribution to GDP is accounted for by the banking sector, which as of December 2008, consisted of BNP and Caja de Ahorros, two state-owned banks, and 74 private banks. The banking sector includes general license banks, international license banks, and foreign banks with representative offices. Figures show that, as of December 31, 2008, banking sector assets and deposits totaled approximately $64.0 billion and $47.3 billion, respectively. See “Financial System—The Banking Sector.”
Public Administration. Public administration, principally representing government activities, represented an estimated 7.1% of GDP in 2008, 7.5% of GDP in 2007, 8.0% of GDP in 2006, 8.6% of GDP in 2005 and 9.3% of GDP in 2004.
Colón Free Zone. The CFZ has developed into the largest duty-free zone in the Western Hemisphere in terms of commercial activity. As of December 31, 2008, approximately 2,824 companies used the CFZ service facilities for a variety of trading activities. The CFZ represented an estimated 7.1% of GDP in 2008, 7.3% of GDP in 2007, 7.8% of GDP in 2006, 7.6% of GDP in 2005 and 7.1% of GDP in 2004. Total imports to the CFZ rose to $9.1 billion in 2008 from $7.6 billion in 2007. Total re-exports in 2008 were $9.6 billion, as compared with $8.5 billion in 2007. CFZ value added (re-exports minus imports) increased to an estimated $569 million in 2008, compared to $885 million in 2007. See “The Colón Free Zone.”
Panama Canal. For the years 2004 through 2008, economic activity associated with the Panama Canal Authority contributed an average of 4.9% to GDP. Total toll revenue increased 11.3% to $1.32 billion at fiscal year-end 2008 from $1.18 billion at fiscal year-end 2007. Canal transits decreased 0.2% in the Canal’s 2008 fiscal year (which ended September 30, 2008) to 14,702 transits, and cargo tonnage increased 0.7%. From 2006 to 2008, toll revenues increased 28.4%, while cargo tonnage decreased 0.9% and the number of transits increased 3.6%. See “The Panama Canal—General.”
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Industrial Sector. After the service sector, the next largest segment of the economy consists of the industrial activities of manufacturing and construction, collectively representing an estimated 12.2% of GDP in 2008, 11.6% of GDP in 2007, 11.6% of GDP in 2006, 11.5% of GDP in 2005 and 12.0% of GDP in 2004. Manufacturing represented an estimated 6.3% of GDP in 2008. Manufacturing is principally geared to the production of processed foods and beverages and, to a lesser extent, clothing, chemical products and construction materials for the domestic market. Traditionally, the manufacturing industries have been protected by high tariffs and fiscal incentives. In connection with Panama’s accession to the WTO and free trade negotiations, many of such protections have decreased significantly. See “Foreign Trade and Balance of Payments—Tariffs and Other Trade Restrictions.” Manufacturing facilities are primarily located in the Panama City and Colón areas, although agricultural processing facilities tend to be located closer to raw materials.
Construction activity increased by 13.9% in 2004. This increase was primarily attributable to certain tax exemptions, which expired in December 2003, that provided incentives for constructing middle-income housing and a large number of construction projects, in both the commercial and residential sectors, as a result of favorable interest rates. In 2005, construction activity increased by 1.0% in part due to work stoppages in June 2005. In 2006, construction activity increased by 18.4% in part due to real estate construction. In 2007, construction activity increased by 20.3% in part due to due to the construction of new high-rise buildings and family residences, the expansion of certain container ports and the Government’s and the Panama Canal Authority’s investments in infrastructure. In 2008, construction activity increased by 30.0% and represented an estimated 5.9% of GDP in part due to due to the construction of new high-rise buildings and family residences, the expansion of certain container ports and the Government and the Panama Canal Authority’s investments in infrastructure.
Agriculture and Mining Sector. The agriculture and mining sector is the third largest segment of the Panamanian economy in terms of GDP, accounting for an estimated 7.5% of GDP in 2008, 7.4% of GDP in 2007, 7.8% of GDP in 2006, 8.2% of GDP in 2005 and 8.4% of GDP in 2004. This sector employs a significant percentage of the Panamanian employed workforce (17.9% in 2008). Principal agricultural products include bananas, fish, shrimp, sugar, coffee, meat, dairy products, tropical fruits, rice, corn and beans. In 2008, the value of agricultural production (which includes fisheries production) is estimated to have increased by 6.0%, after having increased by 1.7% in 2007.
Historically, bananas were Panama’s primary agricultural product and merchandise export. However, the European Union (“E.U.”) establishment in 1994 of a preferential trade assistance program with certain ACP (African, Caribbean and Pacific) countries receiving assistance under the Lomé Convention resulted in trade barriers that have adversely affected Panama’s banana industry.
In April 2001, the E.U. and the United States resolved their ongoing dispute regarding the preferential trade assistance program before the European Commission, agreeing on a tariff-only system to be implemented by 2006. In January 2006, Panama began paying a tariff of 176 Euros per metric ton of bananas entering the E.U. However, in the transition period, Panama’s banana exports to the E.U. continued to experience a decline. In 2004, banana production decreased 2.2% from 2003 and accounted for an estimated 8.2% of agricultural value. In 2005, banana production decreased 12.5% and accounted for 6.9% of agricultural value. In 2006, banana production increased 18.0% and accounted for 7.6% of agricultural value. In 2007, banana production increased 1.1% and accounted for 7.6% of agricultural value. In 2008, banana production decreased to 17.2% and accounted for 5.9% of agricultural value.
In recent years fisheries have provided one of Panama’s primary agricultural product and merchandise exports. Fisheries increased by 13.4% from 2007 to 2008, representing an estimated 36.1% of 2008 agricultural value. The increase in the fisheries sector in 2008 was primarily attributable to an increase in industrial fishing and capture of fish for industrial purposes. Frozen yellow fin tuna and fresh and frozen fish filet exports increased 0.9% from $280.7 million in 2004 to $283.3 million in 2008. See “Foreign Trade and Balance of Payments—General.”
Figures indicate that shrimp exports totaled $40.7 million in 2008, a decrease of 27.8% from $56.4 million in 2007.
Cattle and other livestock production represented an estimated 9.4% of 2008 agricultural value and increased slightly by 1.7% from 2007. Cattle and livestock production has accounted for a declining portion of agricultural value in recent years, as other sectors such as fisheries and poultry production have grown in importance. Cattle and livestock production accounted for 9.4%, 9.8% and 10.7% in 2008, 2007 and 2006, respectively.
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The Panamanian agriculture and fisheries sector has been protected by significant tariff and non-tariff barriers. Agricultural products are controlled principally by the Ministry of Agriculture and the Agricultural Marketing Institute (“IMA”). See “Foreign Trade and Balance of Payments—Tariffs and Other Trade Restrictions.”
The Role of the Government in the Economy
The Government plays a significant role in the economy through, among other means, its ownership of certain public utilities and other enterprises. Current expenditures by the public sector, including Government-owned enterprises (other than the state-owned financial institutions), were $5.197 billion in 2008, $4.138 billion in 2007, $3.451 billion in 2006, $3.169 billion in 2005 and $3.087 billion in 2004. The Government also has a significant impact on the economy through various statutory and other governmental initiatives, including enforcement of a labor code, subsidies and tariff policies.
The following table sets forth summary financial information on principal public sector businesses for fiscal year 2008:
TABLE NO. 7
Selected State-Owned Enterprises(1)
2008 Financial Statistics(2)
(in millions of dollars)
| | | | | | | | | | | | | | | | |
| | | Total
Assets | | Capital and
Reserves | | Gross
Revenues | | Net
Income | | | Dividends
Paid to the
Government |
Banco Nacional de Panamá (banking) | | $ | 5,583.1 | | $ | 508.3 | | $ | 252.5 | | $ | 110.4 | | | $ | 110.4 |
Instituto de Acueductos y Alcantarillados Nacionales (“IDAAN”) (water) | | | 641.3 | | | 575.6 | | | 86.9 | | | (37.4 | ) | | | 0.0 |
| (1) | All enterprises are 100% owned by the Government. |
| (2) | For fiscal year ended December 31, 2008. |
Sources: BNP and IDAAN.
In 1991, the Government initiated a privatization and public restructuring program managed by the executive branch through the Privatization Process Coordination Unit, an office within the Ministry of Economy and Finance. In May 1995, the Government created the Development Trust Fund to hold and manage the proceeds generated by most privatizations. Pursuant to the law establishing the Development Trust Fund, the proceeds earned by investments from the monies in the Development Trust Fund were to be used mainly for investment in social development programs and not for financing general Government expenditures. Development Trust Fund legislation was approved on January 7, 1997 by the Cabinet pursuant to the Assembly’s delegation of legislative powers to the executive branch for this purpose. Among other things, the law provides that money deposited in the Development Trust Fund from the proceeds of privatization cannot be withdrawn.
On June 27, 2000, the Assembly approved Law No. 22 which approved the use of the Development Trust Fund principal for social development programs. It also authorized the investment of the then approximately $1.3 billion of aggregate assets of the Development Trust Fund in seven types of investments.
Law No. 22 further provided that up to $559.0 million of the principal of the Development Trust Fund could be disbursed from 2001 to 2004 for social development programs. See “The Panamanian Economy—Reforms and Development Programs.”
Law No. 22 established a five-member Advisory Board to determine investment criteria and other policies for the Development Trust Fund. Law No. 22 provides that the Advisory Board shall consist of the Minister of Economy and Finance, who will also be the
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chairperson of the Advisory Board, another Minister appointed by the President, a representative designated by the Executive Organ, and a delegate from each of the Consejo Nacional de Trabajadores Organizados (the “National Council of Organized Workers”), which represents unionized workers, and the private business sector. The Executive Organ selects the labor and business delegates from a list of three nominees provided by the National Council of Organized Workers or the private business sector, as the case may be.
In the first half of 2002, the National Dialogue (the discussions among government, the business sector, representatives of workers and opposition parties) resulted in an agreement that earnings on Development Trust Fund investments could be used for general budget support. In 2003 and 2004, the Development Trust Fund transferred $61.9 million of investment earnings to the Central Government. The agreement is reflected in the Fiscal Responsibility Law, which was signed on May 7, 2002. The law sets targets for the ratio of total debt to GDP at 50% and the ratio of external debt to GDP at 35% and provides a mechanism, adjusted to reflect the Republic’s economic growth, to meet those targets over the medium term. To facilitate debt management, the law allows the Republic to invest up to 100% of the principal of the Development Trust Fund in Panamanian bonds. The law also provides for up to $200 million in spending of Development Trust Fund principal on several large infrastructure projects, designed to stimulate employment starting in 2003. These projects include the widening of the Inter-American highway for $69 million, road and canal rehabilitation projects for $28 million, irrigation projects for $30 million, and projects aimed at improving the supply of potable water and the sewage system for $70 million. In 2007, the Development Trust Fund disbursed $253.3 million for water and sewage system projects, but in 2008, there were no disbursements.
In October 2004, the Assembly approved Law No. 52, which further amended the law creating the Development Trust Fund and reallocated certain funds from the Development Trust Fund to new projects, including aid for neighborhoods destroyed by floods in September 2004.
As of December 31, 2008, audited financial statements showed a balance of $1.177 billion in the Development Trust Fund, an increase from the December 2007 balance of $1.135 billion.
The Ministry of Economy and Finance has invested part of the principal of the Development Trust Fund with three asset managers. The asset managers are Goldman Sachs, Morgan Stanley and Black Rock. As of December 31, 2008, the three asset managers had $145 million under management. The Bank of New York Mellon has been appointed global custodian of the funds administered by the asset managers.
The Government has taken other steps in recent years to reduce its direct role in the economy. These include the elimination of price controls and certain import restrictions as well as a general reduction in tariffs. At the same time, the Government has implemented various measures intended to facilitate the operation of the private sector, including the adoption of the LUIT and an antitrust and consumer protection law. The Government has also reformed Panama’s social security system by, among other things, gradually transitioning from a defined benefits system to personal savings accounts. See “—Other Legislation Related to Economic Reform—Economic Regulatory System.” In addition, on January 11, 2007, the Assembly approved Law No. 5 which simplifies the prerequisites to establish companies in the Panama.
Principal Operations and Privatization of Public Sector Enterprises
Electric Power. Created in 1969, Instituto de Recursos Hidráulicos y de Electrificación (“IRHE”) was the autonomous state entity having exclusive control of the electricity sector in Panama. IRHE was responsible for the planning, coordination and supervision of programs for electricity generation, transmission and distribution, as well as conservation of energy resources. Electric rates were set by IRHE; however, since the privatization of IRHE in 1998, the successors to the assets and liabilities of IRHE have set their own rates, which are subject to review by the Ente Regulador de Servicios Públicos (“ERSP”). See “—Other Legislation Related to Economic Reform—Public Services Law.”
Pursuant to legislation authorizing the restructuring and privatization of IRHE, the company was split into nine corporate entities with 100% of the stock of each owned initially by the Government. These entities included three hydroelectric generating companies, one thermoelectric generating company, four distribution companies and a transmission company as successors to the assets and liabilities of IRHE under the privatization scheme. Following completion of the restructuring, a public bidding process commenced to sell 51% (or more) of the stock in each of the thermoelectric and distribution companies and up to 49% of the hydroelectric
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companies. The law states that up to 10% of the stock of each company will be made available for the benefit of employees. In October 1998, 51% of the stock of three IRHE distribution companies was sold. In January 1999, 49% of the stock of the hydroelectric generating companies, and 51% of the stock of the thermoelectric generating company was sold. Panama received $604 million in the aggregate for the sale of the shares. Pursuant to the law, the transmission company remains 100% state-owned.
Panama currently has high electric rates (an average of 0.108 cents per Kilowatt Hour as of December 31, 2008), and demand for electricity in 2008 grew an estimated average rate of 2.8% from 2007. As of December 31, 2008, Panama had an installed generating base of 1,637.9 Megawatts (“MW”), of which 870.0 MW was hydroelectric and 768.0 MW was thermoelectric. In November 2003, Hidroeléctrica Esti initiated operations of two hydroelectric plants in the province of Chiriquí that generate a base load of 120 MW. In 2006, total energy generation in the wholesale market increased 5.4% from 2005, and Panama registered a gross generation of 6,073.4 Gigawatt Hour (“GWh”), of which 3,819.9 GWh was hydroelectrically generated and 2,253.5 GWh was thermoelectrically generated. In 2007, total energy generation in the wholesale market increased 7.4% from 2006, and Panama registered a gross generation of 6,431.1 GWh, of which 3,706.0 GWh was hydroelectrically generated and 2,725.1 GWh was thermoelectrically generated. In 2008, total energy generation in the wholesale market registered a gross generation of 6,346.6 GWh, of which 3,924.6 GWh was hydroelectrically generated and 2,422.0 GWh was thermoelectrically generated.
Telecommunications. INTEL, S.A. (“INTEL”) was the state-owned telecommunications company with a monopoly over local and long distance landline service.
In 1997, the Ministry of the Treasury auctioned 49% of INTEL’s stock. Cable & Wireless of the United Kingdom won the public auction by bidding $652 million for the shares. INTEL was subsequently renamed Cable & Wireless (Panamá) S.A. (“C&W Panama”). Although Cable & Wireless is not a majority owner of C&W Panama, it has operational and managerial control of C&W Panama. The Republic retains 49% of the shares of C&W Panama, and the remaining 2% of the shares of C&W Panama are held in a trust fund for C&W Panama’s unionized employees. There are currently no plans for the sale of Panama’s remaining 49% interest in C&W Panama. INTEL was historically profitable and regularly paid dividends to the Central Government. Those dividends averaged approximately $103 million per year during the 1990-1996 period, but have decreased significantly following privatization, in part because Panama holds only 49% of the shares of C&W Panama. In 2008, C&W Panama paid $66.4 million in dividends to the Central Government. For the company’s fiscal year ended March 31, 2009, C&W Panama paid $71.7 million in dividends to the Central Government.
Cable & Wireless’ concession to manage C&W Panama lasts 20 years and is renewable for ten additional years. The C&W Panama board of directors approved a $572 million capital expenditure program to expand and upgrade C&W Panama’s telephone system between 1998 and 2003. Under the concession Cable & Wireless would be subject to monetary penalties if C&W Panama’s service did not reach certain specified goals.
C&W Panama experienced an 8.0% increase in sales in their fiscal year ended March 31, 2009 as compared to their fiscal year ended March 31, 2008, primarily due to an aggressive sales force, increased coverage and client services. C&W Panama experienced a 14.0% increase in income from broadband service in their fiscal year ended March 31, 2009 as compared to their fiscal year ended March 31, 2008, primarily due to growth in broadband internet usage, mobile devices and international communications.
On December 31, 2002, the exclusive landline telephony service concessions granted to C&W Panama expired, leaving the local and long distance telecommunications market open to competition from other providers effective January 1, 2003. In 2009, the telecommunications market was comprised of approximately 355 companies.
In June 2002, the Assembly approved Law No. 32, which ratified the Central American Telecommunications Treaty signed by Panama, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua in August 1995. The treaty facilitates the integration and development of telecommunications facilities across Central America.
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As of December 31, 2008, there were approximately 495,752 telephone lines in the country with a line penetration rate of approximately 14.6 lines per 100 inhabitants. As of December 31, 2008, there were approximately 3.8 million subscribers to cellular telephone service.
Water. The national water and sewage utility is the Instituto de Acueductos y Alcantarillados Nacionales, or IDAAN, which serves approximately 100.7% of the population for which it is responsible (which constitutes 73.0% of the total population) through its 52 water purification plants, five filtration galleries, 149 pumping stations and 695 underground sources. Inefficiency in IDAAN’s operations and management, combined with leakage, has accounted for an estimated annual water loss of 44.8%. Unlike INTEL and IRHE, which had generally paid dividends to the Government on an annual basis prior to privatization and required no Government funding, IDAAN has required periodic transfer payments from the Government in order to meet its operating and capital expenses.
IDAAN has been reorganizing and modernizing following the passage of Law No. 77 of 2001, which granted IDAAN autonomy and financial independence from the central Government. In 2003, the Government initiated a water optimization program for the areas of Panama City, Colón, Chorrera and Arraiján. The total cost of this project is estimated to be $23.2 million. As of December 31, 2007, $18.5 million had been disbursed under this program. In 2003, the Government also began designs for the rehabilitation and renovation of the Federico Guardia Conte water purification plant. The total cost of this project is estimated to be $47.8 million. As of July 31, 2009, $45.8 million of this amount had been disbursed for the rehabilitation and renovation of the plant.
Under the Fiscal Responsibility Law, $70 million was allocated for investment in water projects, such as the construction of water purification plants and distribution lines. IDAAN periodically conducts a bidding process for water infrastructure projects. At July 31, 2009, approximately $64.3 million had been allocated to the construction of water purification plants and distribution plants.
Ports. The Panama Maritime Authority owns and controls most of Panama’s ports. A number of Panama’s ports have been privatized through the grant of concessions.
The Manzanillo International Terminal (“MIT”) is a container port located at the former United States military base at Coco Solo, and is managed and operated by a joint venture formed between Stevedoring Services of America and Motores Internacionales, S.A. In 2008, MIT handled approximately 1.6 million Twenty Foot Equivalent Units (“TEUs”), or 10.3 million metric tons, of cargo and containers compared with approximately 1.3 million TEUs, or 8.6 million metric tons, in 2007.
In May 2007, a $100 million expansion program of MIT was undertaken to increase its annual handling capacity from 1.5 million TEU’s to 2.2 million TEU’s.
Evergreen International, S.A. (“Evergreen”), a subsidiary of the Evergreen Group of Taiwan, manages and operates the container port in Colón. The initial investment was for $80 million and Evergreen began operations in the fourth quarter of 1997. In recent years, the container port in Colón has moved a significantly increasing number of containers. In 2008, the container port in Colón moved 4,229,973 metric tons of cargo and containers.
The Panama Canal Railway Co., a joint venture between two United States corporations, Kansas City Southern Industries, Inc. and MI-JACK Products, Inc., holds a 25-year concession (that is set to expire in 2023) to the trans-isthmus railway, principally for connecting the container ship ports on both coasts. Under the terms of the concession, the joint venture is required to pay to the Government 5.0% of its profits until it recovers its initial investment. After recovery of its initial investment, the joint venture will be required to pay the Government 10.0% of its profits. In 2008, the railway moved approximately 7.9 million metric tons of containers, an increase from 3.9 million metric tons in 2007. See “The Panama Canal—Reversion of the Canal Area to Panama.”
The Panama Ports Company, a subsidiary of Hutchinson Whampoa, Ltd. of Hong Kong, operates the principal existing ports at Balboa and Cristobal at the entrances to the Panama Canal. Annual payments to the Government under this renewable 25-year concession, granted in 1996, were set at approximately $22.2 million plus 10.0% of revenues. In addition, an initial up-front grant to the Government of 10.0% of the shares in the operating company was required under the concession. In June 2002 Panama agreed to forego the $22.2 million annual rental payments in view of Hutchinson Whampoa’s investments in terminal expansion, but in September 2005 the Torrijos administration overturned the decision. The Panama Ports Company will pay the Government $102 million in back fees and proceed with its $1.0 billion ports expansion program.
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Banking. The public banking sector is made up of four institutions: BNP; Caja de Ahorros (a savings bank); Panama’s agricultural development bank, Banco de Desarrollo Agropecuario (“BDA”); and the national mortgage bank, Banco Hipotecario Nacional (“BHN”). In accordance with the laws that govern these banks, the Government is responsible for the liabilities of all four institutions. BNP is the country’s largest deposit-taking financial institution and Caja de Ahorros is among the largest. Collectively, they had approximately 15.1% of the deposits and 13.1% of the assets in the national banking system as of December 31, 2008. As of December 31, 2008, the Government had not announced any plans to privatize these financial institutions. See “Financial System—Public Sector Banking Institutions.”
Other Privatizations
Under a privatization law that governs the privatization program for various state-owned entities other than the ports, IRHE, IDAAN and INTEL, the privatization of public enterprises may be effected by any of the following means: (i) transforming state enterprises into regular stock corporations, and subsequently selling all of their shares to the private sector; (ii) transforming state enterprises into mixed capital companies whose capital is divided between the Government and the private sector, and in which the Government retains a minority participation; (iii) selling operating concessions; or (iv) leasing or selling the assets of the public enterprises. Such privatization provides the Republic with non-taxable income. As of December 31, 2008, the Republic received approximately $1.8 billion from toll road concessions, telecommunications concessions, and the sale and lease of assets from public enterprises and other state-owned activities, representing an 8.1% increase from 2007. In 2008 the Autoridad Nacional de los Servicios Públicos (“ASEP”) carried out a public bid to award two concessions to provide personal communications services in Panama. On May 14, 2008 in Cabinet Resolutions No. 66 and No. 67 the ASEP awarded Claro Panamá S.A. (“Claro”) and Digicel Panamá S.A (“Digicel”), contracts to provide personal communications services in the Republic. Claro’s contract was awarded for $73.1 million and Digicel’s for $86.0 million.
Other Legislation Related to Economic Reform
Intellectual Property. Since 1994, Panama has taken actions to modernize its copyright protection legislation. Under the existing law, authors and their successors are entitled to benefit from their works for a period of 50 years. The law also contains administrative, civil and criminal sanctions for violations and provides for three civil circuit courts with jurisdiction over issues relating to intellectual property rights. The registration procedures and rules for granting intellectual property rights and protecting foreign-owned trademarks, patents and copyrights were streamlined in 1996. In January 2004, the Assembly passed legislation authorizing the imprisonment of, and imposition of fines on, persons who violate intellectual property rights.
Legislation to Promote Tourism. Law No. 2 of January 7, 2006, delegates authority to the Ministry of Economy and Finance to grant concessions to develop state-owned land for tourism-related purposes. Law No. 2 also sets forth the requirements for establishing and maintaining tourism-related investments in areas specifically dedicated by the Government for the development of tourism.
Extraordinary Legislative Powers. Pursuant to Law No. 1 of January 3, 2006 and Article 159 of the Panamanian Constitution, the Assembly granted President Torrijos extraordinary legislative powers through February 28, 2006, when the Assembly ended its recess and a new legislative session began. President Torrijos’ exercise of extraordinary legislative powers, which was limited to certain actions, included the establishment of a trust fund to benefit the rehabilitation and modernization of the Panama Canal, the reorganization of Panama’s competition commission and BNP, the delegation of new responsibilities to the Ministry of Commerce and Industry and the Ente Regulador de los Servicios Públicos (now called ASEP) and the creation of an independent entity to regulate the importation of food products.
Foreign Investment in the Private Sector
Foreign investment in Panama has traditionally reflected the dual nature of the economy. There has been significant foreign investment in the internationally-oriented service sector, including the CFZ and the banking sector. However, notwithstanding Panama’s history of low inflation and lack of exchange controls and statutory restrictions on foreign investment, foreign investment
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in Panama’s domestic sectors, principally manufacturing and agriculture, has not been significant. The limited foreign investment is attributable to perceived deficiencies in public infrastructure and public services, slow progress on economic reforms, rigid employment regulations, limited governmental efforts to attract investment and unfavorable trade policies.
In 1996, the Government entered into agreements with the United States Overseas Private Investment Corporation, the Export-Import Bank of the United States, MIGA and certain other bilateral agencies of the OECD countries to enable such entities to offer noncommercial risk insurance to foreign investors. Additionally, the Government has sought to facilitate foreign investment through the Panamanian Trade Development Institute, which provides investors with information, expedites specific projects, leads investment-seeking missions abroad and supports foreign investment missions.
The Moscoso administration successfully negotiated free trade agreements with certain Central American countries. The objective was to diversify commercial markets and services in the region, reduce trade barriers, increase investment, promote economic integration and facilitate negotiation of trade issues with the other trading partners. In early 2002, Panama signed the Free Trade Agreement with Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua to work towards a Central American free trade zone by 2005. The Assembly approved the Free Trade Agreement in February 2003. Pursuant to the Free Trade Agreement, Panama and El Salvador signed a bilateral protocol, also approved by the Assembly in February 2003, which covers about 85% of both countries’ output. Panama has concluded the negotiation of comprehensive free trade agreements with Costa Rica, Honduras and Guatemala. In this regard, Law No. 17 of February 13, 2008, published in the Gaceta Oficial Digital No. 25,982 of February 20, 2008, serves as the ratification of the free trade agreement between Panama and Costa Rica; the effective date of the agreement was November 23, 2008, and its Tariffs Program entered into effect on January 1, 2009. Law No. 23 of April 25, 2008, published in the Gaceta Oficial Digital No. 26,032 of May 5, 2008, serves as the ratification of the free trade agreement between Panama and Honduras; this agreement became effective on January 9, 2009. The free trade agreement between Panama and Guatemala was ratified by the Assembly of Panama under Law No. 48 of 2008, published in Gaceta Oficial Digital No. 26,084 of July 16, 2008, and became effective on June 20, 2009. Upon complete effectiveness of these commercial agreements, nearly 90% of Panama’s total exports to these countries will enter duty-free.
Panama entered into a bilateral trade agreement with the Dominican Republic that became effective in December 2003, after each country ratified a negotiated list of 199 products for inclusion in the agreement. In August 2003, Panama signed a free trade agreement with Taiwan. In February 2004, Panama entered into free trade negotiations with Singapore, and was approved on June 20, 2006 by Law No. 19. Panama signed a Trade Promotion Agreement with the United States on June 28, 2007 that will come into force upon approval of each country’s legislature.
In addition, the development of several designated export processing zones, which offer tax-free status, special immigration privileges and labor laws and license and customs exemptions to manufacturers located within their boundaries, is intended to promote manufacturing investments. Similarly, the Government has allowed the creation of petroleum export zones with tax-free status and exemption from certain government regulations for the production, refining and exportation of petroleum products.
In order to attract more foreign investment in Panama, the Assembly passed Law No. 41 of August 24, 2007 that creates incentives for multinational enterprises to establish their headquarters in Panama. A principal characteristic of this legislation is that it provides foreign companies the opportunity to establish their headquarters in Panama with fiscal advantages, provided their activities are focused on international rather than internal trade within Panama. The objectives of this law are to attract and promote investment in the country, to generate employment and the transfer of technology and to make the Republic more competitive in the global economy. Among the incentives that are offered are an exemption from income tax for services rendered by the headquarters to its operations abroad, an exemption from transfer taxes on services and movable goods and the streamlining of the granting of visas to foreign personnel and dependents of the multinational enterprise.
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THE PANAMA CANAL
General
Following Panama’s declaration of independence from Colombia, Panama ratified the Hay/Bunau-Varilla Treaty with the United States on December 2, 1903. Under the terms of the treaty, Panama ceded to the United States the Canal Zone, a ten-mile wide strip of Panama’s territory, to build, operate, maintain and protect an interoceanic canal across the isthmus, in return for annual payments. The Panama Canal measures 51 miles from the Atlantic to the Pacific side. The former Canal Zone encompassed a land area of 94,385 hectares (364 square miles) and a water surface of 45,594 hectares (176 square miles) and included military bases, ports, airports, schools, hospitals and housing units.
The Canal plays a significant role in the Panamanian economy. For the years 2004 through 2008, the activities of the Panama Canal Authority, PCA, have accounted for an average of approximately 4.9% of Panama’s GDP. In the Canal’s 2008 fiscal year, canal transits experienced a slight decrease to 14,702 transits from 14,721 transits in 2007, and cargo tonnage increased slightly to 209.8 million long tons from 208.2 million long tons in 2007. From 2004 to 2008, transits through the Canal increased by 4.8% and cargo tonnage increased by 4.7%. In addition to factors such as the development in recent years of alternative land routes and the general downturn of the global economy in the 2001-2003 period, the increasing size of vessels transiting the Canal has led to a decrease in the number of vessels required to transport cargo. However, from 2004 to 2008, toll revenues increased by 73.9%, primarily due to increases in toll charges. In 2008, total toll revenue was $1.318 billion, up 11.3% from 2007.
The United States, the main source of customers of the Panama Canal, recently experienced a marked deceleration of economic activity. In spite of the economic conditions in the United States, trade via the Panama Canal during its fiscal year ended September 30, 2008 was only slightly affected and toll revenues remained firm. From the beginning of its 2009 fiscal year, which began on October 1, 2008, through August 31, 2009, approximately 13,277 transits passed through the Canal as compared to 13,633 transits for the same period during fiscal year 2008, resulting in a decrease of approximately 2.6%. Approximately 182.8 million long tons of cargo passed through the Canal between October 1, 2008 and August 31, 2009 as compared to 193.8 million long tons during the same period of time for fiscal year 2008, representing an decrease of approximately 5.7%. Toll revenue remained firm despite the decrease in transits. As of January 31, 2009, toll revenue totaled approximately $1.3 billion as compared to $1.2 billion for the same period in fiscal year 2008, representing an increase of approximately 10.5%, mainly due to the effects of the implementation of the toll price adjustment. See “Recent Developments—The Panama Canal.”
As of December 31, 2008, the Canal’s total work force (which includes temporary and permanent employees) was 9,510. Of the 2008 total work force, 7,801 were permanent workers and 1,709 were temporary workers. See “Employment and Labor—Salaries and Wages.”
The following table sets forth the Canal’s statistical and financial information for fiscal years 2004 through 2008 (each ending on September 30):
TABLE NO. 8
Panama Canal Principal Statistics
| | | | | | |
Fiscal Year | | Number
of Transits | | Tolls
(millions
of dollars) | | Long Tons
of Cargo
(millions) |
2004 | | 14,035 | | 757.7 | | 200.3 |
2005 | | 14,011 | | 847.6 | | 193.8 |
2006 | | 14,193 | | 1,026.4 | | 211.6 |
2007 | | 14,721 | | 1,183.9 | | 208.2 |
2008 | | 14,702 | | 1,317.5 | | 209.8 |
Source: Panama Canal Authority.
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The Canal Treaty of 1977
In September 1977, the Governments of Panama and the United States signed two treaties with respect to the Canal which became effective on October 1, 1979. The first treaty, known as the Canal Treaty of 1977, terminated all prior treaties between the United States and Panama concerning the Canal and abolished the Canal Zone, effective in 1979. The Canal Treaty of 1977 also afforded the United States the right to continue to manage, operate and maintain the Canal until the expiration of the treaty on December 31, 1999, at which time Panama would assume full responsibility for the Canal and its facilities. The second treaty, known as the 1977 Treaty on the Permanent Neutrality and Operation of the Canal, committed Panama and the United States to continue to protect the Canal and to ensure its permanent neutrality beyond the expiration of the Canal Treaty of 1977. Pursuant to the Canal Treaty of 1977, the United States, beginning in 1979, gradually transferred former Canal Zone land and facilities to Panama. On December 31, 1999, Panama acquired full title to the Canal from the United States.
The Panama Canal Commission and Panama Canal Authority
The Panama Canal Commission
The Canal Treaty of 1977 dissolved the former Panama Canal Company and established the Panama Canal Commission (“PCC”), a binational agency of the executive branch of the United States government charged with managing and operating the Canal until the expiration of the Treaty on December 31, 1999. Following the transfer of the Canal to Panama on December 31, 1999, the PCC was closed. The PCC was supervised by a nine-member Board of Directors. Five members were nationals of the United States and four were Panamanian citizens nominated by the Panamanian Government and approved by the United States government. From 1990 to 1999, the Administrator of the PCC was a Panamanian. The PCC’s primary mission was to service world shipping by operating the Canal in an efficient and orderly manner, while also ensuring the smooth and orderly transfer of the Canal to Panama on December 31, 1999.
Pursuant to the Canal Treaty of 1977, the Canal was expected to be operated by the PCC on a not-for-profit basis and its income was not to exceed its costs. The PCC was expected to recover through tolls and other revenues all costs of operations, maintenance and Canal improvements. The PCC’s operation of the Canal was conducted on a self-financing basis. The PCC independently set the Canal’s tolls.
The PCC’s long-term investment planning was designed to ensure that reliable and efficient service was continually provided and was based primarily on future traffic projections. Investment was financed with PCC resources derived from toll and other revenues. The Canal had operated for many years at close to capacity in terms of transits, and the PCC’s goal was to increase capacity to avoid backlog and permit overhaul work. In this regard, the PCC (and later, the PCA, which assumed management of the Canal from the PCC on December 31, 1999) began several major Canal improvement projects, including the widening of the Canal’s Atlantic entrance; the widening of the Gaillard Cut (the narrowest point in the Canal) to permit two-way traffic; and the overhaul of the Gatun, Miraflores, and Pedro Miguel locks. In November 2001 the PCA completed the widening of the Canal’s Gaillard Cut, a project that the PCC had begun in 1992. The total cost of the project was approximately $232.3 million. Other major maintenance programs, such as the overhaul of the locks, have been successfully completed. The PCA initiated the deepening of Gatun Lake and the Gaillard Cut in 2002. The cost of this project is estimated to be approximately $110.5 million. As of December 31, 2007, approximately $106.7 million, or 96.6%, of the project cost had been advanced. During PCA fiscal year 2008, approximately $6.8 million of the project cost was advanced.
The Panama Canal Authority
Recognizing the importance of the Canal to Panama, the Government took a number of actions to ensure that the Canal would continue to operate efficiently following its reversion to Panama in 1999. A 1994 Constitutional amendment created the PCA, an autonomous public entity which assumed management of the Canal from the PCC on December 31, 1999. The PCA’s annual budget must be prepared in accordance with a three-year financial plan and submitted for approval by the Cabinet and the Assembly. Under the terms of the 1994 amendment, this budget is not included in the budget of the Central Government. The revised public-sector accounting practices used by the Torrijos administration (retroactively to fiscal year 2000) to calculate the non-financial public sector results do not consolidate the net financial results of the PCA with the Government’s own non-financial public-sector results.
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As was the case with the PCC, the PCA makes annual payments to the Central Government based upon the amount of tonnage that transits the Canal. By law, the rate (as measured on a per ton basis) for such payments may not be set at a level that will generate lower payments than those paid to Panama by the PCC on December 31, 1999. The PCA transfers to the Central Government any net surpluses generated by the Canal. In the fiscal year ended in September 2004, the PCA had a surplus of $380.3 million. In fiscal year 2006, the PCA had a surplus of $676.0 million, up 39.7% from $483.9 million in 2005. In fiscal year 2007, the PCA had a surplus of $806.6 million, up 19.3% from 2006, and in fiscal year 2008, the PCA had a surplus of $1.0 billion.
In July 2002, the PCA announced changes in an effort to modernize its toll structure. The first phase of such changes (implemented in October 2002) raised tolls by an average of 8.0% and the second phase (implemented in July 2003) raised tolls by an average of 4.5%, with actual toll fees based on vessel type and tonnage, and a fee for locomotive usage based on the number of locomotive cables required. On May 1, 2005, furthering changes to the toll structure that began in 2002, Panama implemented a revised measurement and pricing system applicable to full container vessels and other vessel types with on-deck container carrying capacity. The Panama Canal Authority adopted the TEU as the new measurement unit for full container vessels, thereby replacing the Panama Canal Universal Measurement System (“PC/UMS”). Since May 1, 2005, fully dedicated container vessels have been charged based on the total number of TEUs the vessel can carry fully loaded, taking into account the visibility restriction imposed by the Panama Canal Authority that limits the height of on-deck containers. For other vessel types with on-deck container carrying capacity, the former PC/UMS system will be used to measure spaces below-deck and the TEU toll will be applied to the actual number of containers on-deck. Under the new system, vessels in ballast (not carrying containers or any other cargo above or below deck) are charged less than laden vessels. The new measurement and pricing system is being phased-in over three years from May 2005. Under the new system, tolls increased nearly one-third beginning on May 1, 2005 and will increase approximately 65% by the end of the phase-in period. In 2007, the PCA modified its regulations for vessel measurement and the Panama Canal toll system. Vessels that are charged a toll depending on their displacement will be assessed a toll based on their maximum displacement, while passenger vessels will be assessed based on maximum passenger capacity. The average increase over the next three years will be between 10% and 15%. Revenues generated by the new toll system will help fund the Canal’s modernization program.
The fiscal year of PCA ends on September 30 of each year. Toll revenues for fiscal year ended September 30, 2008 reached $1.3 billion, an increase of 11.3% over fiscal year 2007. Toll revenues for the fiscal year ended September 30, 2007, reached $1.2 billion, an increase of 15.3% over fiscal year 2006.
The PCA investment plan for 2002 through 2004 totaled more than $350 million, of which $126.1 million were incurred during fiscal year 2002, $113.3 million were incurred during fiscal year 2003 and $136.7 were incurred during fiscal year 2004. The Canal investment plan for fiscal years 2004 through 2006 contemplated investments of more than $497 million, and included such projects as deepening and widening of the Gaillard Cut, the Gatun Lake and the Pacific and Atlantic entrances of the Canal; acquisition of tugboats and towing locomotives; rehabilitation of railways for towing locomotives; and an increase in the capacity of the potable water system. In July 2006, the Assembly approved the PCA’s budget for fiscal year 2007, allocating $176.4 million to the Canal’s investment plan. On July 10, 2007, the Assembly approved the PCA’s budget for fiscal year 2008, allocating $230.7 million to the Canal’s investment plan. On July 21, 2008, the Assembly approved the PCA’s budget for fiscal year 2009, allocating $152.0 million to the Canal’s investment plan and $835.7 million to the Canal’s expansion project relating to the third set of locks.
In February 2002, the Government announced that the German firm Bilfinger & Berger had won the bid for the construction of a second bridge over the Panama Canal. The construction of the bridge began in June 2002 and was completed in August 2004 at a cost of $104.1 million. On September 2, 2005, access roads to the second bridge over the Panama Canal were completed at a cost of $87.2 million.
On April 24, 2006, the Panama Canal Authority submitted to President Torrijos and the Cabinet Council its recommendation to build a new lane along the Panama Canal through the construction of a new set of locks that will double capacity. On June 26, 2006, the Cabinet Council approved the plan to expand the Canal and submitted it to the Assembly for approval. On July 14, 2006, the Assembly approved the $5.25 billion canal expansion plan, which was approved in a national referendum held on October 22, 2006.
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The $5.25 billion expansion plan includes $1.0 billion for the Pacific locks, $0.2 billion for water supply improvements, $1.1 billion for the Atlantic Locks; $0.5 billion for waterway improvements, $0.9 billion for improving access channels for new locks and existing navigational channels, $0.5 billion for potential inflationary risk, and up to an aggregate $1.0 billion in contingencies. The plan provides that the project will be funded entirely by the Panama Canal Authority, either with its own resources or from borrowing to be repaid with its own resources and not with resources of the Republic of Panama. The Panama Canal Authority will obtain a portion of these resources through an increase in tolls. Water-saving basins will be built alongside the new locks, which will reuse 60% of the water in each transit, thereby eliminating the need for constructing dams, flooding and displacing communities along the Canal’s Watershed. Construction is expected to be completed by 2014.
On December 6, 2006, the Cabinet approved the first $120 million of expenditures to begin work. As part of the canal expansion project, in April 2008 the canal awarded a $177 million contract to the Belgian firm Dredging International to excavate the Pacific entrance of the canal. Dredging International removed close to 530,000 cubic meters of material in April 2009, 410,000 cubic meters in May 2009 and 470,000 cubic meters in June 2009, representing approximately 36% of the total amount to be excavated.
On December 9, 2008, the Panama Canal Authority signed a $2.3 billion agreement with five multilateral and development organizations to finance the Canal’s expansion project, which is estimated to cost approximately $5.25 billion. The JBIC, the EIB, the IADB, CAF and the IFC each agreed to provide the financing under favorable terms to the Panama Canal Authority. The remaining funds for the expansion project are expected to come from the Canal’s regular business operations and implementation of toll increases. To reduce the risk of lowering demand resulting from toll increases, the Panama Canal Authority implemented a three-year toll increase designed to generate the appropriate cash flows needed to finance a significant portion of the program. As of March 2009, the Panama Canal Authority has financed approximately $500 million of the expansion project through internal funding. In June 2009, the Panama Canal Authority paid out $9.0 million of up-front fees to JBIC, IADB, IFC and CAF.
Effective April 1, 2006, the Panama Canal Authority increased the rates for tug and linehandling services due to rising operating costs. Rates for tug services increased 7.0% and rates for linehandling services rose 4.0%. Rates for these services had not been increased since March 2004.
The Panama Canal Authority estimates that PC/UMS (Panama Canal Universal Measurement System) tonnage of cargo passing through the Canal will drop by approximately 5.9% during fiscal year 2009, but toll revenues will not experience significant change due to the implementation of the last phase of a three step toll rate increase approved in May 2005. Several shipping companies have recently requested the cancelation or deferral of the scheduled 2009 toll rate increase. The final decision to implement the third phase of the three-step toll increase was made in 2007 after extensive consultations in 2006 and early 2007 and significant accommodations to industry requests. The Panama Canal Authority believes that its price setting consultation process provides for transparency and predictability in its pricing proposals in a manner that permits industry-wide participation. The Panama Canal Authority estimates that toll revenue for fiscal year 2010 will be approximately $1.5 billion, which represents approximately $69 million, or 4.7% more than fiscal year 2009.
The estimated results for the Panama Canal are subject to revision based on the duration and severity of the global economic downturn, and accordingly no assurance can be given concerning actual results for fiscal year 2009 or thereafter.
Reversion of the Canal Area to Panama
Reversion of the Former Canal Zone Properties
In 1993, the Government established the Interoceanic Region Authority (“ARI”) to assist with the orderly transfer of the Canal and the former Canal Zone. ARI was an autonomous Government agency charged with integrating the former Canal Zone properties and resources into the Panamanian economy to enhance the country’s economic and social development. To this end, ARI was responsible for administering and managing the former Canal Zone areas (other than the Canal itself) after their reversion to Panamanian control. By law, the net proceeds from ARI’s activities were deposited in the Development Trust Fund, together with certain of the proceeds generated by the Government’s privatization program. See “Structure of the Panamanian Economy—The Role of the Government in the Economy.”
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With financial assistance from the IADB and the assistance of international consultants, ARI developed a Plan of General Use (the “Plan”) regarding redevelopment of the reverted Canal areas, which was adopted by the Assembly in July 1997. Under the Plan, ARI had broad authority to effect the Plan without further legislative approval, including the authority to sell and lease property and to grant concessions and contracts. Among the Plan’s objectives were: increasing maritime business; developing manufacturing for exports; expanding tourism; developing one or more educational and research institutions; improving trade and communications infrastructure; and conserving natural resources within the former Canal Zone. The Plan set forth a general scheme for use and development of the 140,000 hectares (540 square miles) of land and water surface in the former Canal Zone, of which 31,873 hectares (123 square miles) reverted to Panamanian control between 1997 and 2000, and the 7,000 buildings and other structures on this land. The Plan also covered 234,707 hectares (906 square miles) of land in the Canal watershed that was not part of the former Canal Zone.
ARI has granted significant concessions in furtherance of the Plan’s objectives. Pursuant to a concession granted to an international consortium, the former United States Fort Amador, located on Panama’s Pacific coast adjacent to Panama City, has been redeveloped as a tourist resort with several hotels and cruise ship facilities. The 197.7-acre resort includes shopping malls, restaurants, office buildings, residential developments and a golf course. The development consortium has contractually agreed to invest not less than $300 million through 2006. Additionally, ARI has granted a concession to an Exxon Mobil affiliate to provide fueling services to ships transiting the Canal. This affiliate has agreed to pay, on average, $1.5 million per year for ten years as a concession fee and to invest $25 million in the project.
In July 2004, the Assembly created a special economic zone at the former United States military base of Fort Howard and established an independent agency responsible for administering the zone. The Area Económica Especial Panamá-Pacifico is intended to attract foreign investment and to create jobs by granting preferential tax treatment to businesses involved in such areas as technology, aircraft repair and maintenance, maritime cargo and transportation logistics.
The laws establishing ARI, Law No. 5 of 1993, as modified by Law No. 7 of 1995, contemplated that ARI would not continue to operate beyond 2005 unless legislation was passed to extend its tenure. On December 27, 2005, the Cabinet issued Cabinet Resolution No. 108 transferring ARI’s functions and responsibilities to the Ministry of Economy and Finance. On January 1, 2006, the Ministry of Economy and Finance began overseeing the integration of former Canal Zone properties and resources into the Panamanian economy.
Other Trans-Isthmus Transportation
The dimensions of the Canal permit much of the world’s commercial maritime fleet to transit. However, certain classes of ships, principally the largest capacity tankers and container ships, are too large to transit the Canal. This limitation, combined with the fact that the Canal has generally operated at capacity in terms of units, has caused the exploration of other trans-isthmus modes of transportation as a means of connecting the Atlantic and Pacific. Two such modes, a railway which was constructed in the former Canal Zone and an oil pipeline constructed outside of the former Canal Zone, exist.
Railway. In February 1998, Panama granted a renewable, 25-year concession to the Panama Canal Railway Co., a joint venture between two United States corporations, Kansas City Southern Industries, Inc. and MI-JACK Products, Inc., to renovate and reopen the trans-isthmus railway, principally for connecting the container ship ports on both coasts. Under the terms of this concession, this joint venture is required to pay to the Government 5.0% of its profits until it recovers its initial investment; after recovery of its initial investment, it will be required to pay the Government 10.0% of its profits. Passenger and container transport services were initiated in September and October 2001, respectively. In 2008, the railway moved approximately 7.9 million metric tons of containers, an increase from 3.9 million metric tons in 2007.
Oil Pipeline. The trans-isthmus oil pipeline was completed in 1982 and constructed to address the fact that the world’s largest oil tankers could not transit the Panama Canal. The pipeline operated in an eastward direction, in large part to service the market for Alaskan crude oil shipments to oil refineries on the east coast of the United States. On November 28, 1995, the United States
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Congress rescinded the ban on the exportation of Alaskan crude oil, thereby allowing the export of Alaskan crude oil to Asia and eliminating the need to transport Alaskan crude oil to the east coast of the United States by means of the trans-isthmus oil pipeline. In June 1995, the Government signed a contract with Petroterminales de Panamá S.A. (a joint venture between the Government and Northville Industries Corp.) allowing Petroterminales de Panamá S.A. to expand the pipeline’s terminal ports at Chiriquí Grande on the Caribbean and Puerto Armuelles on the Pacific into general cargo ports until 2016. Since November 2003, the pipeline has reopened to fulfill spot contracts for pumping Ecuadorian crude oil across the isthmus for export to the United States Gulf Coast.
Additionally, Panama granted a concession in 1994 for construction of a trans-isthmus toll road between Panama City and Colón to Proyectos y Construcciones, S.A. (“PYCSA”), a Mexican consortium. The first of a total of two sections of this road was completed in May 1999 and is in use. In January 2007, the Government approved the transfer of the concession from PYCSA to Odebrecht, a Brazilian construction company for the section between Madden to Colon City (Second Phase), which then transferred the concession to Concesionaria Madden-Colón (“CMC”), one of its Panamanian subsidiaries. Odebrecht built and completed this section of the toll road at a total cost of approximately $299 million. On April 28, 2009, the Madden-Colón Highway became operational under the maintenance and administration of CMC, and the operation of the highway has been continuous and uninterrupted, and has generated toll payments.
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THE COLÓN FREE ZONE
The CFZ was created by the Panamanian Government in 1948 to take advantage of Panama’s unique geographic location and to boost trading activity in the province of Colón. The CFZ, located at the Atlantic entrance of the Panama Canal, has developed into the largest duty-free zone in the Western Hemisphere in terms of commercial activity. As of December 31, 2008, approximately 2,824 companies used the CFZ service facilities for a variety of trading activities.
In addition to being exempt from tariffs and duties, companies operating in the CFZ enjoy preferential tax treatment. In the past, the income of CFZ companies was taxed at graduated rates from 2.5% to 8.5%. Under the LUIT, such income was to be taxed at a flat 15%. However, significant protests, including a refusal by some CFZ companies to pay taxes, resulted in the elimination of all taxes on international operations income for CFZ companies effective January 1, 1997.
The CFZ has a significant impact on the Panamanian economy. From 2004 through 2008, it contributed an average of 7.4% of GDP and employed an estimated average of 1.8% of the workforce. The value of goods passing through the CFZ is considerable, particularly in relation to the Panamanian economy as a whole. In 2008, total imports to the CFZ were preliminarily estimated at $9.1 billion (up from $7.6 billion in 2007), while total re-exports were $9.6 billion (up from $8.5 billion in 2007). By contrast, Panama’s non-CFZ, non-petroleum merchandise exports were preliminarily estimated at $1.1 billion in 2008, while non-CFZ merchandise imports were $9.1 billion in 2008.
The contribution of the CFZ to real GDP was 7.1% in 2004. In 2005, the contribution of the CFZ to real GDP increased by 14.2%, to 7.6% in 2005, due in part to increased trade with China and increased demand from Central and South America. The contribution of the CFZ to GDP rose by 11.6%, to 7.8% of real GDP in 2006. This increase was primarily attributable to growth throughout Latin America and an increase in the price of exports. In 2007, the activities of the CFZ increased by 5.1% compared to 2006, reflecting a contribution of 7.3% of GDP compared to 7.8% of GDP in 2006. This increase was attributable in part to greater demand for imported goods and the recovery of national manufacturing production. The activities of the CFZ increased by 6.1% in 2008, reflecting a contribution of 7.1% of GDP compared to 7.3% of GDP in 2007.
The CFZ’s major competitors are the Miami, Chile, Aruba, Curaçao and Uruguay free trade zones. Traditionally, the CFZ has enjoyed several competitive advantages over certain of its competitors, including the CFZ’s use of the U.S. dollar as legal tender, lack of restrictions on capital movements and access to frequently traveled land, air and sea routes. Global and regional trends in trade patterns and capital liberalization, however, have begun to narrow several of these competitive advantages and affect the CFZ’s prospects for continued rapid growth.
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EMPLOYMENT AND LABOR
Labor Force
In 2008, Panama’s labor force was preliminarily estimated at 1.51 million (up from 1.45 million in 2007), which represented approximately 44.4% of the total population. In 2008, the service segment (principally consisting of real estate, commerce and tourism, public administration, the Panama Canal, banking, the CFZ and public utilities) employed 63.0% of the employed labor force, compared to 17.9% for the primary sector (consisting of agriculture and fisheries) and 19.1% for the industrial sector (consisting of manufacturing and construction).
In 2004, the Government adopted the open unemployment rate as the official indicator of unemployment. The open unemployment rate considers only those persons actively seeking employment. The Government believes that the open unemployment rate produces a better comparison with countries in the region, including the United States, that rely on open unemployment as the official unemployment indicator. Unemployment rate figures from 2002 onward have been revised to reflect the open unemployment rate.
In 2004, the unemployment rate decreased to 9.2%. This decrease was partially attributable to an increase in construction projects and the opening of new shopping centers. In 2005, the unemployment rate decreased further to 7.6%, primarily as a result of improved economic conditions. Figures for 2006 indicated an unemployment rate of 6.7%. Figures for 2007 indicated a decrease in the unemployment rate to 4.7%, which is attributable to improved economic conditions. In 2008, the unemployment rate decreased slightly to 4.2% primarily as a result of improved economic conditions.
Historically, Panama’s unemployment rate has been influenced by the service-oriented nature of the economy, which is not labor intensive. The Moscoso administration introduced programs aimed at reducing unemployment, including Government-sponsored job fairs and a program to train those entering the work force for the first time. In 2004, the Torrijos administration launched an economic plan that seeks to reduce unemployment by increasing foreign trade and investment and initiating programs to enhance education.
Panamanian private sector workers have the legal right to join unions of their choice, subject to the unions’ registration with the Government. Applicable law prohibits anti-union discrimination by employers. As of August 2008 approximately 18.8% of Panama’s total employed labor force was organized. The largest unions exist in the construction industry workers. Unions engage in collective bargaining, primarily involving the negotiation of wages. Most workers enjoy the right to strike. Excluded from this right, however, are certain public service providers vital to public welfare and security (e.g., police, health, and PCA employees). While there were significant strikes during the economic and political disruptions of the mid- to late-1980s, there have generally been a limited number of strikes in recent years.
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The following table sets forth certain labor force and unemployment statistics for the years 2004 through 2008:
TABLE NO. 9
Labor Force and Employment
| | | | | | | | | | | | | | | |
| | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2008 | |
| | | (thousands of persons) | |
Total Population | | 3,172 | | | 3,228 | | | 3,284 | | | 3,340 | | | 3,395 | |
Working-Age Population | | 2,169 | | | 2,216 | | | 2,263 | | | 2,310 | | | 2,357 | |
| | | | | |
Labor Force | | | | | | | | | | | | | | | |
Employed | | 1,212.7 | | | 1,269.8 | | | 1,294.9 | | | 1,357.0 | | | 1,422.3 | |
Unemployed | | 161.4 | | | 137.7 | | | 122.8 | | | 92.3 | | | 83.8 | |
| | | | | | | | | | | | | | | |
Total | | 1,374.1 | | | 1,407.5 | | | 1,417.7 | | | 1,449.3 | | | 1,506.1 | |
| |
| | | (annual percentage change) | |
Total Population | | 1.8 | % | | 1.8 | % | | 1.7 | % | | 1.7 | % | | 1.6 | % |
Working-Age Population | | 2.2 | | | 2.2 | | | 2.1 | | | 2.1 | | | 2.0 | |
| | | | | |
Labor Force | | | | | | | | | | | | | | | |
Employed | | 4.6 | | | 4.7 | | | 2.0 | | | 4.8 | | | 4.8 | |
Unemployed | | (7.1 | ) | | (14.7 | ) | | (10.8 | ) | | (24.8 | ) | | (9.2 | ) |
| | | | | | | | | | | | | | | |
Total | | 3.1 | % | | 2.4 | % | | 0.7 | % | | 2.2 | % | | 3.9 | % |
| |
| | | (in percent) | |
Labor Force: | | | | | | | | | | | | | | | |
Participation Rate(1) | | 63.3 | % | | 63.5 | % | | 62.6 | % | | 62.7 | % | | 63.9 | % |
Employment Rate(2) | | 88.2 | | | 90.2 | | | 91.4 | | | 93.6 | | | 95.8 | |
Unemployment Rate(3) | | 9.2 | | | 7.6 | | | 6.7 | | | 4.7 | | | 4.2 | |
Of which: | | | | | | | | | | | | | | | |
Metropolitan Area(4) | | 11.1 | % | | 9.6 | % | | 8.2 | % | | 5.7 | % | | 4.9 | % |
| (1) | Total labor force as percentage of working-age population. |
| (2) | Employed labor force as percentage of total labor force. |
| (3) | Open unemployment based on the annual August Employment Survey. The open unemployment rate excludes persons not actively looking for employment. |
| (4) | Including the cities of Panama and Colón. |
Source: Office of the Comptroller General.
Salaries and Wages
Panamanian labor law provides for a basic minimum wage ($1.01 to $1.87 per hour in 2008, depending upon the worker’s location), minimum benefits and working conditions for employees, including maximum working hours (48 hours/week), specified holidays, vacations, retirement and severance benefits, and health and safety regulations. The Panamanian economy, however, has a substantial informal sector in which some workers earn below the minimum wage and do not enjoy many of the benefits required by law. The informal economy, which is estimated to involve approximately one-fourth of the labor force, includes street vendors, operators and employees of unlicensed businesses and certain other self-employed persons. While overall GDP statistics include economic contributions of the informal sector, the Government has not found it feasible to quantify fully the GDP contribution of this sector.
Workers in the Panama Canal Zone were subject to United States wage and labor laws rather than Panamanian wage and labor laws. Although Canal Zone workers have been within the jurisdiction of Panamanian laws since the abolition of the Canal Zone in 1979, numerous treaty provisions and legislative and administrative actions have permitted the continuation of separate wage and
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benefit regimes for Canal Zone workers. Private sector employees rendering services related to the Panama Canal are subject to a significantly higher minimum wage than is applicable in the rest of Panama. PCC employees and civilian employees of the United States military were subject to special labor and social security regimes, depending on their nationality and when they were originally employed. By an amendment to the Constitution adopted in 1994, PCA employees did not have their wages or benefits diminished when the PCA assumed control of the Panama Canal on December 31, 1999. In 2008, as a result of these factors, average monthly wages for the PCA were $3,791 for full time workers and $2,000 for temporary workers.
In 2008, average monthly wages for central Government employees increased to $598.97 and by 5.0% compared to 2007, while average monthly wages for public sector employees of municipalities increased to $378.42 and by 2.5% compared to 2007. In 2008, average monthly real private sector wages increased to $565.34, and by 7.1% compared to 2007. In 2008, average banana plantation monthly wages were $362.33, increasing by 1.3% from 2007.
In 2008 average monthly wages in all sectors of the Panamanian economy increased in real terms an average of 5.2% while in 2007 average monthly wages in all sectors of the Panamanian economy increased by 5.5%. In 2006 and 2005, average monthly wages in all sectors of the Panamanian economy increased in real terms by 5.1% and 1.2%, respectively. In 2004, average monthly wages in all sectors of the Panamanian economy increased in real terms an average of 1.2%.
In 2004 and 2005, total public sector wages increased by 0.9% and 2.9%, respectively, due to an increase in the number of PCA employees. Total public sector wages increased by 1.9% in 2006 and 3.9% in 2007. In 2008, public sector wages increased by 3.6%. In 2004, average real private sector wages grew, increasing by 2.3%. In 2005, average real private sector wages grew, increasing by 1.3%. The growth in private sector wages in 2004 and 2005 reflects the growth in the Panama Canal, CFZ, ports and other sectors. As a response to declining exports, banana plantations had reduced their workforces, resulting in a decline in total wages in 2004. Average real private sector wages experienced significant increases in 2006 and 2007, growing by 7.8% and 7.3%, respectively. In 2008, average real private sector wages grew, increasing by 7.1%.
By law, the minimum wage is subject to review every two years. The minimum wage was raised to its current levels by Executive Decree No. 46 dated December 11, 2007, increasing the minimum wage by a percentage of between 9.3% and 13.9%, depending on the sector. The minimum wage will be increased in December 2009.
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The following table sets forth a summary of average real monthly wages for the years 2004 through 2008:
TABLE NO. 10
Average Real Monthly Wages
| | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2008 | |
Public Sector: | | | | | | | | | | | | | | | | | | | | |
Central Government | | $ | 508.64 | | | $ | 520.74 | | | $ | 527.98 | | | $ | 570.61 | | | $ | 598.97 | |
Autonomous agencies(1) | | | 902.15 | | | | 924.90 | | | | 955.62 | | | | 960.77 | | | | 981.02 | |
Municipalities | | | 354.74 | | | | 352.60 | | | | 357.80 | | | | 369.30 | | | | 378.42 | |
All Public Sector | | | 646.35 | | | | 664.94 | | | | 677.75 | | | | 704.46 | | | | 730.09 | |
Private Enterprise | | | 451.02 | | | | 456.63 | | | | 492.13 | | | | 527.99 | | | | 565.34 | |
Banana Plantations(2) | | | 312.01 | | | | 330.68 | | | | 333.38 | | | | 357.74 | | | | 362.33 | |
| | | | | | | | | | | | | | | | | | | | |
All Employees | | $ | 514.69 | | | $ | 520.84 | | | $ | 547.16 | | | $ | 577.10 | | | $ | 607.20 | |
| | | | | |
| | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2008 | |
| | | (annual percentage change) | |
Public Sector: | | | | | | | | | | | | | | | | | | | | |
Central Government | | | 0.2 | % | | | 2.4 | % | | | 1.4 | % | | | 8.1 | % | | | 5.0 | % |
Autonomous Agencies(1) | | | 4.0 | | | | 2.5 | | | | 3.3 | | | | 0.5 | | | | 2.1 | |
Municipalities | | | (1.5 | ) | | | (0.6 | ) | | | 1.5 | | | | 3.2 | | | | 2.5 | |
All Public Sector | | | 0.9 | | | | 2.9 | | | | 1.9 | | | | 3.9 | | | | 3.6 | |
Private Enterprise | | | 2.3 | | | | 1.3 | | | | 7.8 | | | | 7.3 | | | | 7.1 | |
Banana Plantations(2) | | | (26.1 | ) | | | 6.0 | | | | 0.8 | | | | 7.3 | | | | 1.3 | |
| | | | | | | | | | | | | | | | | | | | |
All Employees | | | 1.2 | % | | | 1.2 | % | | | 5.1 | % | | | 5.5 | % | | | 5.2 | % |
| (1) | Includes PCA employees. |
| (2) | Calculation includes wages of laborers on independent producers’ farms, and excludes wages of laborers who work 22 or more days in a given month. |
Source: Office of the Comptroller General.
Social Security
Social security benefits covering private sector and public sector employees are provided by Caja de Seguro Social (“CSS”), with additional benefits for public sector employees provided through the Complementary Pension Fund for Civil Servants (“CPF”). CSS administers the CPF. The main sources of CSS revenue are contributions equal to 20.25% of wages (8.0% paid by employees and 12.25% by employers), Central Government transfers and investment income. In 2008, CSS’s revenues and expenditures (including transfers from the Central Government) amounted to 8.0% and 6.7%, respectively, of real GDP, making it the second largest entity in the public sector.
In June 2005, the Assembly approved Law No. 17, reforming Panama’s social security system by raising the minimum retirement age for men from 62 to 65, and for women from 57 to 60. Additionally, Law No. 17 gradually increased employer contributions to the social security system from 10.75% to 13.25% and employee contributions from 7.25% to 9.0% through 2010. As a result of the reforms, by 2015 employees would have been required to make contributions into the social security system for 25 years (up from the then current 15-year requirement) before becoming eligible to receive benefits. In June 2005, opponents of Law No. 17 organized nationwide protests. Teachers and construction and public health workers participated in several weeks of strikes and called for the repeal of Law No. 17. In response, on July 5, 2005, the Government postponed the effective date of Law No. 17 for 90 days to accommodate a national discussion to address the concerns of the unions and to assess proposed amendments to the law submitted by the private sector. On October 10, 2005, the Assembly approved Law No. 32, further postponing the effective date of Law No. 17 until December 31, 2005.
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On December 28, 2005, after approval by the Assembly on December 21, 2005, the Torrijos administration approved Law No. 51, which replaces Law No. 17 and further reforms Panama’s social security system. Law No. 51 is the product of several months of national discussion that concluded on November 18, 2005 and amends or repeals numerous reforms included in Law No. 17. Under Law No. 51, by 2013, employees will be required to make contributions into the social security system for 20 years (up from the current 15-year requirement and down from the 25-year requirement embodied in Law No. 17) before becoming eligible to receive benefits. As of January 1, 2008, Law No. 51 maintains the current retirement age at 62 for men and at 57 for women. However, Law No. 51 permits early or delayed retirement within a range of ages that, depending on the age, determines a retiree’s level of benefits. Additionally, Law No. 51 gradually increases employer contributions to the social security system from 10.75% to 12.25% and employee contributions from 7.25% to 9.75% through 2013. Further, Law No. 51 reforms Panama’s social security system by gradually transitioning from the current defined benefits system to personal savings accounts. All persons under 35 years of age that are currently covered by the social security system will have the option of retaining the current defined benefit system or electing to participate in the personal savings accounts. Persons with a monthly salary over $500 per month and entering into the social security system after 2008 will have only the option of the personal savings accounts.
The CSS performs four separate functions: health, pensions and disability (“IVM”), workers’ compensation and program administration. IVM accounts for approximately 48.4% of CSS’s revenues and almost 56.1% of its expenditures. Demographic trends such as an aging population and an increase in the number of pension beneficiaries have contributed to the deterioration in the financial position of IVM.
On September 12, 2008, the Republic, represented by the Ministry of Economy and Finance, executed an Administration and Investment Trust with BNP acting as Trustee, to provide annual funds to the IVM Regime of the CSS, which acts as beneficiary, as mandated by Law No. 51. In this connection, the Republic disbursed the first deposit of funds of $75 million in December 2007 to cover the 2007 deficit. During 2008, the Republic disbursed an additional $75 million. The Republic is scheduled to disburse an additional $75 million in 2009, $100 million in each of 2010, 2011 and 2012, and $140 million each year from 2013 through 2060. Each year’s funds provision are to be made before the closing of each fiscal year. As a result of these disbursements, the annual surplus of IVM for calendar year 2008 was $78.3 million, up from a deficit of $70.8 million in 2007 and $62.4 million in 2006. Preliminarily, the IVM’s actuarial deficit as of December 31, 2008 was $5.8 billion, or 31% of 2008 real GDP. At the Government’s request, the International Labor Organization (“ILO”), a U.N.-related organization, completed a study of methods of restructuring and financing IVM in December 1998. The Government addressed the recommendations of the ILO study, which include issues relating to financing of the CSS and the future of the CPF, which provides benefits for public sector employees, in Law No. 51 of December 2005.
The CPF was created in 1975 to facilitate the payment of pensions to retired public sector employees, including those eligible to receive pensions on the basis of special laws. Certain of the special laws date back to the 1930s when the Government began granting benefits to particular categories of public sector employees. Special laws generally allow retirement before the CSS’s statutory retirement ages (as of December 31, 2008, 62 for men and 57 for women) with pensions of up to 100% of the most recently earned salary. In addition, once the statutory retirement age is reached and CSS pensions are received, the special laws provide additional pensions so as to maintain 100% of the most recently earned salary (up to certain maximums).
To finance the CPF’s pension payments, since 1975, public sector employees have contributed 2.0% of their salaries to the CPF while their employers paid 0.3% of their wages to cover the CPF’s administrative costs. The number of retirees covered by the CPF was 29,480 in 2004, 28,480 in 2005 and 19,974 in 2006. In 2007, the number of such retirees covered by CPF was 27,516, and in 2008, the number of such retirees was 26,897.
In February 1997, the Assembly adopted legislation that reformed the CPF and established the Public Employees Savings Pension Capitalization System (“SIACAP”), a new defined contribution pension plan for most public sector employees. Only public sector employees who retired or were eligible for CPF pensions on or before December 31, 1999 continue to be CPF participants. Other public sector employees were immediately transferred to SIACAP. SIACAP participants have individual accounts funded initially with Government-issued bonds equal to CPF contributions previously made by the participant plus interest at 5.0% per annum since contribution. In August 1999, the Government issued $395 million aggregate principal amount of such bonds (the “SIACAP Bonds”). Future contributions will be made by participants and the Government as a percentage of the participant’s wages. Because SIACAP is a defined contribution plan, the value of future retirement benefits will depend on the assets in an individual’s
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account, thus eliminating future unfunded pension liability for the CPF for SIACAP participants. Because SIACAP participants will no longer be making current contributions to the CPF, the CPF will have no revenues and will run annual deficits, although its annual deficits will decline as the number of participants falls. The CPF’s annual deficit, which has been funded by the Central Government, was $88.5 million in 2004 and $99.3 million in 2005. In 2006, the CPF’s annual deficit was $78.7 million. The CPF’s annual deficit increased to $71.8 million in 2007 due to increased payments covered by CPF. In 2008, the CPF’s annual deficit was $67.2 million.
At the end of 2004, the actuarial deficit increased to $811.1 million or 6.2% of 2004 real GDP. At the end of 2005, the actuarial deficit decreased to $798.8 million or 5.7% of 2005 real GDP. At the end of 2006, the actuarial deficit decreased to $708.1 million or 4.7% of 2006 real GDP as a result of the decline in the number of CPF participants. The CPF’s actuarial deficit decreased to $713.5 million in 2007 or 4.2% of 2007 real GDP as a result of increased payments covered by CPF. At the end of 2008, the actuarial deficit decreased to $629.7 million or 3.4% of 2008 real GDP as a result of the decline in the number of CPF participants.
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PUBLIC FINANCE
Public finance in Panama is heavily influenced by the U.S. dollar-based monetary arrangements in place since 1904. The lack of a printed national currency and the general absence of domestic budgetary financing through the banking system, except to a limited extent, have imposed constraints on fiscal and monetary policy that are not present in countries that can finance their deficits by printing local currency.
Central Government Budget
The Government’s fiscal year is the calendar year. Pursuant to the Panamanian Constitution, responsibility for the preparation of the Central Government budget rests with the executive branch. Under Article 184 of the Constitution, the executive branch must submit a budget proposal to the Assembly by October 1 of each year.
Prior to December 31 of each year, the Assembly may accept, reject or suggest revisions to the budget proposal. If the Assembly accepts either the original or a revised budget proposal, it becomes law. If the Assembly rejects the budget proposal or the Assembly suggests revisions to the executive branch budget proposal and the executive branch does not reflect the revisions in the form of a new budget proposal submitted to the Assembly, for most expenditures the prior year’s budget remains in force until a new budget is approved. For certain limited classes of expenditures, including budgeted debt service payments, the budget proposal must be implemented each year regardless of Assembly action. If the Assembly fails to take action on the budget by December 31 by accepting, rejecting or suggesting revisions, the new budget automatically becomes law on January 1.
The Assembly approved Panama’s 2008 budget on December 11, 2007. The 2008 budget contemplates total expenditures of $8.3 billion, with budget estimates based on an anticipated 8.5% growth in nominal GDP and an anticipated consolidated non-financial public sector deficit of approximately $225.0 million (or approximately 1.1% of nominal GDP) for 2008. Under the 2008 budget, the Central Government’s total financial needs for the year were approximately $4.89 billion, which included approximately $791.6 million for public debt service.
The 2008 budget allocated public expenditures as follows: 49.2% to the social sector; 7.1% to infrastructure; 17.0% to production/development; 10.4% to general services; and 16.3% to debt service.
The Assembly approved Panama’s 2009 budget on December 4, 2008. The 2009 budget contemplates total expenditures of $9.8 billion, with budget estimates based on an anticipated 13.5% growth in nominal GDP and an anticipated consolidated non-financial public sector deficit of approximately $263.0 million (or approximately 1.0% of nominal GDP) for 2009. The 2009 budget was planned in accordance with the Fiscal Responsibility Law (Law No. 34 of 2008) and, as a result, the budget was structured on a cash execution basis unlike budgets prior to 2004, which were formulated on a commitment execution basis. Under a cash execution basis, the Government recognizes revenue and expenditures when received or paid, as opposed to a commitment execution basis where revenue and expenditures are recognized when earned or incurred even if revenue has not yet been received and expenditures have not yet been paid. The Torrijos administration moved to a cash execution basis because it was believed to be an improved tool for managing the Government’s public finances. The 2009 budget was formulated taking into account the new provisions of the Financial Responsibility Law (Law No. 34 of 2008) concerning election years. This Law establishes that during the first six months of an election year, or the last six months of a government’s term, the government is prohibited from using more than 50% of the operating expenses within the general budget.
The 2009 budget allocated public expenditures as follows: 45.7% to the social sector; 8.0% to infrastructure; 19.9% to production/development; 11.3% to general services; and 15.2% to debt service.
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TABLE NO. 11
Budgeted Expenditures of the Central Government by Function
(in millions)
| | | | | | | | | | | | | | | |
Itemization | | 2004 | | 2005 | | 2006 | | 2007 | | 2008 |
Legislative | | $ | 45.4 | | $ | 39.6 | | $ | 46.2 | | $ | 51.8 | | $ | 53.6 |
Judiciary | | | 42.4 | | | 40.8 | | | 45.9 | | | 54.6 | | | 60.9 |
Administration and Planning | | | 318.9 | | | 281.2 | | | 340.9 | | | 516.8 | | | 397.5 |
Agriculture | | | 113.0 | | | 85.7 | | | 78.7 | | | 88.8 | | | 108.2 |
Public Security | | | 265.0 | | | 258.8 | | | 308.3 | | | 345.4 | | | 360.7 |
Education | | | 563.2 | | | 607.1 | | | 701.6 | | | 790.7 | | | 904.6 |
Housing | | | 28.5 | | | 23.1 | | | 25.3 | | | 40.4 | | | 51.1 |
Industry and Commerce and Services | | | 24.8 | | | 33.3 | | | 38.9 | | | 39.8 | | | 42.0 |
Foreign Affairs | | | 38.3 | | | 33.4 | | | 36.0 | | | 40.4 | | | 41.3 |
Health | | | 437.2 | | | 433.0 | | | 438.2 | | | 626.6 | | | 787.7 |
Labor | | | 20.0 | | | 20.0 | | | 24.9 | | | 89.3 | | | 90.4 |
Transportation | | | 216.7 | | | 158.5 | | | 234.5 | | | 299.1 | | | 334.4 |
Intergovernmental Transfers | | | 297.0 | | | 312.3 | | | 257.3 | | | 310.9 | | | 325.4 |
| | | | | | | | | | | | | | | |
Total | | $ | 2410.4 | | $ | 2326.8 | | $ | 2576.7 | | $ | 3294.6 | | $ | 3557.8 |
Source: Ministry of Economy and Finance.
In September 2004, the Torrijos administration revised the methodology used by the former Government to calculate the non-financial public sector deficit. The revised methodology used to calculate the non-financial public sector deficit does not include expected BNP dividends, the Panama Canal Authority’s financial results or the savings generated by debt repurchase operations, all of which were included under the previous administration’s methodology. The revised methodology uses cash-based accounting standards. In October 2004, the Assembly passed Law No. 51, which suspended in fiscal years 2004 and 2005 the requirement, set forth in the Fiscal Responsibility Law, that the annual fiscal deficit not exceed 2% of GDP.
In 2008, Panama’s non-financial public sector balance registered a surplus of approximately $97.8 million (or 0.4% of nominal GDP). The Central Government’s overall balance registered a surplus of approximately $64.0 million (or 0.3% of nominal GDP) in 2008, up from a surplus of $240.0 million (or 1.2% of nominal GDP) in 2007. In 2007, Panama’s non-financial public sector balance registered a surplus of approximately $683.0 million (or 3.5% of nominal GDP), up from a surplus of $87.7 million (or 0.5% of nominal GDP) in 2006.
In September 2005, the Torrijos administration repealed a decision by the Moscoso administration to cancel annual payments by the Panama Ports Company (“PPC”) to the Government in exchange for significant investments to expand and modernize the ports. As a result of negotiations between the Torrijos administration and the PPC, the PPC agreed to pay the Government $102.0 million in back fees and to proceed with its port expansion program. On October 18, 2005, the PPC paid the Government $102.0 million in back fees and initiated the expansion of the Port of Cristobal, which is part of its $1.0 billion ports expansion program.
The Torrijos administration has settled most of the accounts payable to suppliers that existed when President Torrijos took office. The total value of accounts payable inherited by the current administration was approximately $503.1 million, including registered and non-registered debts. By March 2005, the Torrijos administration had reduced such accounts payable to $34.8 million. On October 26, 2005, the Cabinet approved an additional $34.7 million credit to the 2005 budget to settle the remaining accounts payable outstanding as of December 31, 2004. As of December 31, 2008, the Central Government maintained accounts payable to suppliers of $371.3 million due to an increased execution in investment programs.
Taxation
The Panamanian Constitution authorizes the levying and collection of taxes by taxing authorities at both the national and municipal levels. The Central Government collects taxes on personal and corporate income, real property and certain securities. In
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addition, the Central Government collects import and export duties and a 5.0% value-added tax on all movables, except food, medicine and other minor items. Municipalities are permitted to collect taxes from sources of a more local nature, such as taxes on public performances, sales of alcoholic beverages, quarry activities and forestry.
Preliminary figures indicate that approximately 57.7% of the Central Government’s revenues in 2008 came from various forms of taxation. Preliminarily, Central Government tax revenues in 2008 were $2.4 billion, an increase of 16.5% over 2007 tax revenues. Revenues from income taxes represented the primary component of tax revenues in 2008. Approximately 46.7% of 2008 tax revenues were from income taxes, compared to their 47.1% contribution to 2007’s tax revenues. Income tax revenues increased 15.5% in 2008, rising to $1,138 million from $985 million in 2007.
Personal income tax rates vary by incremental stages based on the individual’s earnings per year. Each tax bracket includes a fixed component as well as a variable percentage assessed on anything above the minimum income level of that bracket. Corporate income taxes are 30% of non-CFZ income, as a result of the LUIT. Domestic transaction taxes, such as the value-added tax, a tax on petroleum products and tobacco and beverage taxes, made up 25.1% of 2008 tax revenues. The balance of tax revenue comes from duties on foreign trade (16.9% of 2008 tax revenues) and a wealth tax assessed on real estate (3.3% of 2008 tax revenues). The foreign trade duties are overwhelmingly assessed on imports rather than exports.
In February 2005, the Assembly passed Law No. 6, introducing certain fiscal reforms aimed at increasing tax revenues and reducing the public sector deficit. The fiscal reforms seek to increase tax revenues through the creation of an alternative minimum income tax of 1.4%, a tax on professional services, and a selective consumption tax on certain products, services and activities, such as jewelry, weapons, cable television, cellular phones and casino and gaming activities. Certain tax provisions were eliminated by the fiscal reforms, including taxes on sugar production, insurance and private pension plans. With the fiscal reforms, the Government chose to discontinue the use of open-ended tax incentives in favor of tax incentives that are limited to a specific amount and time period. In addition, the fiscal reforms provide for a gradual reduction of current Government expenditures for wages and salaries through a reduction in the size of the Government work force.
As a result of the LUIT, Panama’s accession to the WTO and free trade negotiations, the rates and computation of various import duties have changed and can be expected to continue to change in the future. See “Foreign Trade and Balance of Payments—Tariffs and Other Trade Restrictions.” In addition to the changes in corporate tax rates, other tax changes in the LUIT included: eliminating the deductibility of certain non-agricultural investment costs by agricultural enterprises (thus reducing a tax preference for the agricultural sector); initially reducing and then eliminating in 2003 tax credit certificates given to certain exporters of non-traditional exports; restricting a tax exemption to only low-cost housing for real estate capital gains income reinvested in new housing; restricting the deductibility of interest paid on back-to-back credits; and eliminating, in 2000, a 25% income tax credit for certain new investments. The LUIT also introduced a drawback mechanism whereby an exporter, at the time of shipping, can obtain a reimbursement of all taxes paid upon importation on account of products used in the process of manufacturing the exported goods.
In addition to Central Government and municipal taxes, other public sector entities also have taxing authority. These include CSS, whose various taxes and assessments generally equal approximately 12.25% of an employer’s wage bill, and an education tax equal to 1.50% of an employer’s wage bill, each as of December 31, 2008.
On August 5, 2009, Law 45 of 2009 was ratified, granting an extension for the payment of taxes owed. This law was published in the Gaceta Oficial Digital No. 26,339 of August 5, 2009, and came into force on August 6, 2009. The law grants individuals an extension for the payment of taxes, which includes taxes, fees, contributions or any other financial debt that a person is required to pay to the Department of General Income. This agency, which is under the supervision of the Ministry of Economy and Finance, will accept payments for taxes, including those that have been postponed pursuant to this law, through June 30, 2009. In addition, taxpayers will also be able to reach an agreement with the agency in order to delay payment until December 31, 2009.
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Revenues and Expenditures
The following tables set forth the revenues, by source, and expenditures, by sector, of the Central Government and the consolidated non-financial public sector for the years 2004 through 2008. The non-financial public sector includes the Central Government, decentralized agencies and non-financial public enterprises. Decentralized agencies include CSS, principal universities and ARI. Under the terms of the 1994 amendments to the Constitution, the PCA budget is not included in the budget of the Central Government.
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TABLE NO. 12
Central Government Operations(1)
(in millions of dollars)
| | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2005 | | | 2006 | | 2007 | | 2008(P) | |
Revenues: | | | | | | | | | | | | | | | | | | |
Tax Revenues: | | | | | | | | | | | | | | | | | | |
Income tax | | $ | 489 | | | $ | 584 | | | $ | 878 | | $ | 985 | | $ | 1,138 | |
Other direct taxes | | | 77 | | | | 88 | | | | 92 | | | 109 | | | 120 | |
Taxes on foreign trade | | | 217 | | | | 241 | | | | 271 | | | 269 | | | 412 | |
Taxes on domestic transactions | | | 426 | | | | 429 | | | | 522 | | | 730 | | | 769 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 1,209 | | | $ | 1,342 | | | $ | 1,763 | | $ | 2,093 | | $ | 2,439 | |
| | | | | |
Nontax Revenues: | | | | | | | | | | | | | | | | | | |
Panama Canal | | | 158 | | | | 204 | | | | 269 | | | 359 | | | 355 | |
Oil Pipeline | | | 1 | | | | 0 | | | | 0 | | | 1 | | | 0 | |
Transfers from balance of public sector | | | 198 | | | | 201 | | | | 228 | | | 245 | | | 212 | |
Other(2) | | | 459 | | | | 592 | | | | 902 | | | 1,054 | | | 1,225 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 815 | | | $ | 996 | | | $ | 1,400 | | $ | 1,659 | | $ | 1,792 | |
| | | | | |
Current Revenues | | | 2,024 | | | | 2,339 | | | | 3,163 | | | 3,751 | | | 4.231 | |
Grants-in-Aid | | | 0 | | | | 0 | | | | 0 | | | 31 | | | 83 | |
Capital Revenues | | | 18 | | | | 7 | | | | 23 | | | 23 | | | 244 | |
| | | | | | | | | | | | | | | | | | |
Total Revenues | | $ | 2,042 | | | $ | 2,346 | | | $ | 3,187 | | $ | 3,805 | | $ | 4,558 | |
| | | | | |
Expenditures: | | | | | | | | | | | | | | | | | | |
Current Expenditures: | | | | | | | | | | | | | | | | | | |
Wages and Salaries(3) | | | 762 | | | | 768 | | | | 812 | | | 875 | | | 1,098 | |
Goods and Services | | | 208 | | | | 215 | | | | 219 | | | 235 | | | 323 | |
Pensions and Transfers | | | 739 | | | | 737 | | | | 870 | | | 928 | | | 930 | |
of which: | | | | | | | | | | | | | | | | | | |
Social Security Agency | | | 376 | | | | 311 | | | | 352 | | | 341 | | | 435 | |
Decentralized agencies | | | 98 | | | | 107 | | | | 114 | | | 121 | | | 128 | (e) |
Public enterprises | | | 0 | | | | 5 | | | | 17 | | | 3 | | | 3 | (e) |
Nonconsolidated agencies | | | 265 | | | | 314 | | | | 387 | | | 463 | | | 364 | (e) |
Interest: | | | | | | | | | | | | | | | | | | |
Internal | | | 102 | | | | 119 | | | | 171 | | | 80 | | | 143 | |
External | | | 491 | | | | 564 | | | | 555 | | | 598 | | | 622 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 593 | | | $ | 682 | | | $ | 726 | | $ | 678 | | $ | 765 | |
| | | | | |
Other Current Expenditures | | | 53 | | | | 165 | | | | 90 | | | 53 | | | 85 | |
| | | | | | | | | | | | | | | | | | |
Total Current Expenditures | | $ | 2,355 | | | $ | 2,566 | | | $ | 2,716 | | $ | 2,769 | | $ | 3,201 | |
| | | | | |
Capital Expenditures: | | | | | | | | | | | | | | | | | | |
Fixed Capital Formation | | | 358 | | | | 277 | | | | 329 | | | 717 | | | 1,209 | |
Transfers of Capital: | | | | | | | | | | | | | | | | | | |
To decentralized agencies | | | 97 | | | | 108 | | | | 106 | | | 79 | | | 85 | (e) |
Other | | | 47 | | | | 52 | | | | 36 | | | 38 | | | 63 | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 97 | | | $ | 108 | | | $ | 106 | | $ | 79 | | $ | 85 | |
Total Capital Expenditures | | | 455 | | | | 385 | | | | 435 | | | 796 | | | 1,294 | |
| | | | | | | | | | | | | | | | | | |
Total Expenditures | | $ | 2,810 | | | $ | 2,951 | | | $ | 3,151 | | $ | 3,565 | | $ | 4,494 | |
| | | | | |
Current Account Balance (deficit)(4) | | | (331 | ) | | | (228 | ) | | | 447 | | | 1,013 | | | (2,792 | ) |
Overall Balance (deficit) | | | (768 | ) | | | (606 | ) | | | 36 | | | 240 | | | 64 | |
Of which: Capitalization of Interest | | $ | 1 | | | $ | 1 | | | $ | 1 | | $ | — | | $ | — | |
| (1) | Figures exclude savings generated by Brady Bond repurchase operations and anticipated BNP dividends. |
| (2) | Includes other non-tax revenue, interest received from the Development Trust Fund as a result of privatizations beginning 1997 and dividends. |
| (3) | Includes severance payments and back pay of wages. |
| (4) | Including grants-in-aid. |
Sources: Office of the Comptroller General and Ministry of Economy and Finance.
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TABLE NO. 13
Consolidated Non-Financial Public Sector Operations
(in millions of dollars)(1)
| | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2008(P) | |
Revenues: | | | | | | | | | | | | | | | | | | | | |
General Government | | | | | | | | | | | | | | | | | | | | |
Central Government | | $ | 1,963.7 | | | $ | 2,264.8 | | | $ | 3,076.7 | | | $ | 3,651.2 | | | $ | 3,986.3 | |
Caja de Seguro Social (“CSS”) | | | 796.3 | | | | 827.3 | | | | 898.7 | | | | 1,104.0 | | | | 1,330.2 | |
Consolidated agencies | | | 79.2 | | | | 82.7 | | | | 100.4 | | | | 120.6 | | | | 134.5 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,839.2 | | | $ | 3,174.8 | | | $ | 4,075.7 | | | $ | 4,875.9 | | | $ | 5,451.0 | |
| | | | | |
Public Enterprises Operations Surplus | | | 95.9 | | | | 156.9 | | | | 128.1 | | | | 163.7 | | | | 275.6 | |
Nonconsolidated Agencies Surplus | | | 38.1 | | | | 98.3 | | | | 37.2 | | | | 184.5 | | | | (36.4 | ) |
Capital Revenues | | | 27.5 | | | | 44.2 | | | | 41.6 | | | | 250.0 | | | | 247.0 | |
Donations | | | 0.0 | | | | 0.0 | | | | 0.0 | | | | 31.2 | | | | 83.2 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 3,000.7 | | | $ | 3,474.2 | | | $ | 4,282.8 | | | $ | 5,505.3 | | | $ | 6,020.4 | |
| | | | | |
Expenditures: | | | | | | | | | | | | | | | | | | | | |
General Government | | | | | | | | | | | | | | | | | | | | |
Central Government | | | 1,285.8 | | | | 1,350.2 | | | | 1,507.6 | | | | 1,625.3 | | | | 1,912.3 | |
CSS | | | 1,150.9 | | | | 1,196.2 | | | | 1,251.8 | | | | 1,374.5 | | | | 1,504.7 | |
Consolidated agencies | | | 149.2 | | | | 156.3 | | | | 160.9 | | | | 164.7 | | | | 161.0 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 2,585.9 | | | $ | 2,702.7 | | | $ | 2,920.3 | | | $ | 3,164.5 | | | $ | 3,578.0 | |
| | | | | |
Capital Expenditures | | | 501.5 | | | | 466.0 | | | | 530.3 | | | | 973.6 | | | | 1,619.4 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 3,087.4 | | | $ | 3,168.7 | | | $ | 3,450.6 | | | $ | 4,138.1 | | | $ | 5,197.4 | |
Balance(2) | | | (86.7 | ) | | | 305.5 | | | | 832.0 | | | | 1,367.3 | | | | 823.0 | |
Debt Interest Paid | | | 604.3 | | | | 694.0 | | | | 744.3 | | | | 684.2 | | | | 725.2 | |
Surplus (Deficit) | | | (691.0 | ) | | | (388.5 | ) | | | 87.7 | | | | 683.0 | | | | 97.8 | |
Overall Surplus (Deficit) | | $ | (691.0 | ) | | $ | (500.1 | ) | | $ | 87.7 | | | $ | 683.0 | | | $ | 97.8 | |
Percentage of GDP (nominal) | | | (4.9 | )% | | | (3.3 | )% | | | 0.5 | % | | | 3.5 | % | | | 0.4 | % |
| (1) | Figures exclude savings generated by Brady Bond repurchase operations, anticipated BNP dividends and the operational surplus of the Panama Canal Authority. |
| (2) | Excluding external interest payments. |
Sources: Office of the Comptroller General, Ministry of Economy and Finance and other public institutions.
International Reserves
Because Panama uses the U.S. dollar as legal tender and prints no domestic paper currency, Panama does not have foreign currency reserves in the conventional sense. In Panama, unlike in other countries, foreign currency reserves are not necessary for providing the private sector economy foreign currency to pay for imports or for supporting exchange rates for a domestic currency. Panama’s foreign currency reserves are generally considered to consist of BNP’s U.S. dollar-denominated foreign assets. As of December 31, 2008, BNP’s foreign assets increased to $2.4 billion (from $1.9 billion as of December 31, 2007), primarily due to an increase in reserves, loans and other assets. Neither BNP nor the Government currently has gold reserves.
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The following table sets forth certain information regarding Panama’s international reserves at the dates indicated:
TABLE NO. 14
International Reserves
(in millions of dollars)
| | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2004 | | 2005 | | 2006 | | 2007 | | 2008 |
Gold | | $ | 0.0 | | $ | 0.0 | | $ | 0.0 | | $ | 0.0 | | $ | 0.0 |
Foreign Exchange(1) | | | 611.4 | | | 1,192.5 | | | 1,315.9 | | | 1,914.5 | | | 2,404.7 |
Reserve Position in IMF | | | 11.9 | | | 11.9 | | | 11.9 | | | 11.6 | | | 11.9 |
Special Drawing Rights | | | 0.6 | | | 0.3 | | | 0.6 | | | 0.9 | | | 0.5 |
| | | | | | | | | | | | | | | |
Total | | $ | 623.9 | | $ | 1,204.7 | | $ | 1,328.4 | | $ | 1,927.0 | | $ | 2,417.1 |
| (1) | Foreign assets of BNP. |
Source: IMF and BNP.
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FINANCIAL SYSTEM
In 2004 and 2005, the financial service sector represented 6.8% of GDP and 7.4% of GDP, respectively. In 2006 and 2007, the financial service sector continued to increase, representing 7.8% of GDP and 8.3% of GDP, respectively. In 2008, the financial service sector represented 7.8% of GDP
The Banking Sector
The banking sector accounts for approximately 6.3% of the financial system’s contribution to GDP. The banking sector’s development has been fostered by the use of the U.S. dollar as the legal tender, the liberal banking law in effect from 1970 to 1998, the current Banking Law enacted in 1998, tax advantages and the large flows of trade fostered by the Panama Canal and CFZ. The most distinctive feature of the banking sector is its international orientation with numerous foreign banks playing an important role.
Banks in Panama are classified into four groups: (i) official banks, which are those owned by the Government and authorized to carry out banking business in the domestic market and abroad; (ii) general license banks, which can undertake domestic or international operations; (iii) international license banks, which do not undertake domestic operations but are authorized to direct, from their Panamanian offices, transactions that are negotiated, carried out or produce their results abroad; and (iv) foreign banks with representative offices, which may not book transactions in Panama. As of December 31, 2008, two official banks, 44 general license banks, 30 international license banks and 15 representative offices constituted the banking sector. Of the 44 general license banks, 15 were incorporated in Panama and the rest abroad.
Measured by Panamanian assets, the largest bank based in Panama is Banco General, S.A., with $8.0 billion in Panamanian assets at December 31, 2008. HSBC Bank (Panama) S.A., with $5.2 billion in Panamanian assets at December 31, 2008 and Primer Banco del Istmo, S.A., with $4.7 billion in Panamanian assets at December 31, 2008 are the second and third largest, respectively. See “—Public Sector Banking Institutions—Banco Nacional de Panamá.” Two of the other largest banks, based on Panamanian assets, are Banco Latinoamericano de Exportaciones, S.A. and BNP Paribas Sucursal Panama, both Panamanian-owned. The largest international license banks, based on Panamanian assets, are Bancolombia (Panama), S.A., Banco de Crédito del Perú, ES Bank (Panama), S.A., GTC Bank, Inc., Banco de Bogotá, S.A. and Popular Bank Ltd., Inc.
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The following table sets forth information regarding the largest banks in Panama based on their assets at December 31, 2008, in each of three categories:
TABLE NO. 15
Largest Banking Institutions
(assets in millions of dollars)
| | | |
| | | Panamanian
Assets |
Official Banks | | | |
Banco Nacional de Panamá(1) | | $ | 5,583.1 |
Caja de Ahorros | | | 1,379.1 |
| |
General License Banks(2) | | | |
Banco General, S.A. | | | 7,970.4 |
HSBC Bank (Panama), S.A. | | | 5,209.1 |
Primer Banco del Istmo, S.A. | | | 4,660.7 |
Banco Latinoamericano de Exportaciones, S.A. | | | 4,452.8 |
BNP Paribas Sucursal Panama | | | 3,418.2 |
| |
International License Banks | | | |
Bancolombia (Panama), S.A. | | | 2,518.8 |
Banco de Crédito del Perú | | | 2,489.5 |
ES Bank (Panama) S.A. | | | 862.3 |
GTC Bank, Inc. | | | 812.5 |
Banco de Bogotá S.A. | | | 582.0 |
Popular Bank Ltd., Inc. (Banco Popular de Panamá) | | | 559.9 |
| (1) | Also considered a general license bank. |
| (2) | Other than BNP and Caja de Ahorros. |
Source: Superintendency of Banks.
Total assets of the banking sector were approximately 54.4% higher at year-end 2008 than at year-end 2004. Deposits were approximately 60.4% higher at year-end 2008 than at year-end 2004.
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The table below sets forth information on the banking sector at December 31 for each of the years 2004 through 2008:
TABLE NO. 16
The Banking Sector
(in millions of dollars)
| | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2004 | | 2005 | | 2006 | | 2007 | | 2008(P) |
Assets: | | | | | | | | | | | | | | | |
Liquid Assets: | | | | | | | | | | | | | | | |
Deposits in local banks | | $ | 1,088 | | $ | 1,414 | | $ | 2,027 | | $ | 2,211 | | $ | 2,264 |
Deposits in foreign banks | | | 5,928 | | | 4,799 | | | 4,935 | | | 6,009 | | | 8,281 |
Other | | | 367 | | | 507 | | | 609 | | | 590 | | | 649 |
| | | | | | | | | | | | | | | |
Total Liquid Assets | | | 7,383 | | | 6,721 | | | 7,571 | | | 8,811 | | | 11,193 |
| | | | | |
Loans | | | 19,900 | | | 22,905 | | | 22,449 | | | 26,842 | | | 30,243 |
Investments in Securities | | | 5,760 | | | 6,857 | | | 5,782 | | | 7,600 | | | 9,307 |
Other assets | | | 1,566 | | | 2,133 | | | 2,220 | | | 2,389 | | | 2,684 |
| | | | | | | | | | | | | | | |
Total Assets | | | 34,610 | | | 38,615 | | | 38,021 | | | 45,642 | | | 53,427 |
| | | | | |
Liabilities: | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | |
Internal: | | | | | | | | | | | | | | | |
Official | | | 1,795 | | | 2,289 | | | 2,442 | | | 3,310 | | | 4,140 |
Public | | | 11,065 | | | 12,001 | | | 14,617 | | | 17,052 | | | 19,596 |
Banks | | | 1,083 | | | 1,421 | | | 2,145 | | | 2,558 | | | 2,454 |
| | | | | | | | | | | | | | | |
Total Internal Deposits | | | 13,943 | | | 15,712 | | | 19,203 | | | 22,921 | | | 26,190 |
| | | | | |
External: | | | | | | | | | | | | | | | |
Official | | | 35 | | | 31 | | | 43 | | | 22 | | | 15 |
Public | | | 6,235 | | | 6,589 | | | 3,349 | | | 5,244 | | | 6,646 |
Banks | | | 4,319 | | | 4,765 | | | 3,926 | | | 4,697 | | | 6,501 |
| | | | | | | | | | | | | | | |
Total External Deposits | | | 10,589 | | | 11,385 | | | 7,318 | | | 9,963 | | | 13,162 |
| | | | | |
Total Deposits | | | 24,531 | | | 27,096 | | | 26,521 | | | 32,884 | | | 39,353 |
| | | | | |
Obligations | | | 4,478 | | | 5,154 | | | 5,261 | | | 4,944 | | | 5,085 |
Other Liabilities | | | 956 | | | 1,343 | | | 1,666 | | | 1,560 | | | 1,881 |
| | | | | | | | | | | | | | | |
Total Liabilities | | | 29,965 | | | 33,593 | | | 33,448 | | | 39,388 | | | 46,319 |
| | | | | |
Capital and Reserves | | | 4,644 | | | 5,022 | | | 4,573 | | | 6,253 | | | 7,108 |
| | | | | | | | | | | | | | | |
Total Liabilities and Capital | | $ | 34,610 | | $ | 38,615 | | $ | 38,021 | | $ | 45,642 | | $ | 53,427 |
Source: Superintendency of Banks.
Banking Law
On February 26, 1998, the President of the Republic, upon authority granted by the Assembly, adopted Law No. 9 of February 26, 1998 (the “Banking Law”), a comprehensive revision and restatement of the 1970 banking law of Panama. The Banking Law became effective on June 13, 1998. Among the significant changes introduced by the Banking Law were the replacement of the National Banking Commission with the Superintendency of Banks, a more independent regulatory agency with greater supervisory powers, the establishment of new minimum capital requirements and the adoption of capital adequacy standards consistent with those contained in the Basle Accord.
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The Banking Law established the Superintendency of Banks as an autonomous agency of the Government with its own assets and independent governance. The principal governing body of the Superintendency of Banks is a five-member board of directors (the “Board of Directors”). Members of the Board of Directors must meet certain minimum qualifications and are appointed by the President, without need for legislative ratification. Board members are appointed to eight-year terms, with the possibility of an additional term, and may be removed only for cause. In order to provide for staggered terms, the initial terms of three of the members of the Board of Directors were for less than eight years. In addition to exercising administrative functions, the Board of Directors is responsible for approving regulations concerning the interpretation and implementation of banking laws and setting capital adequacy standards.
The Banking Law also established the office of the Superintendent of Banks, a full-time government official appointed by the President (again without legislative intervention) for a maximum of two five-year terms. As with the members of the Board of Directors, the Superintendent of Banks must meet certain minimum qualifications and may be removed only for cause. As chief administrative officer of the Superintendency of Banks, the Superintendent of Banks is charged with managing the day-to-day operations of the agency, granting banking licenses, authorizing new branches, ordering intervention and the liquidation of banks, performing banking inspections required by law or ordered by the Board of Directors, overseeing the activities of banks in the system, imposing sanctions and, in general, exercising all powers that are not reserved to the Board of Directors.
All banks operating in Panama, including BNP and other official banks, are supervised by the Superintendency of Banks. BNP and other official banks are also supervised by the Comptroller General.
Under the Banking Law, general license banks must have paid-in capital of not less than $10 million. Additionally, general license banks must maintain a minimum capital of 8.0% of their total risk-weighted assets. Capital is defined to include primary capital and secondary capital. Primary capital (also known as tier one capital) is comprised of paid-in capital, declared reserves and retained earnings, and secondary capital (also known as tier two capital) includes undeclared reserves, revaluation reserves, general reserves for losses, certain hybrid instruments and certain subordinated indebtedness. Secondary capital may not exceed primary capital. The Superintendency of Banks is authorized to increase the minimum capital requirement percentage in accordance with generally accepted international capitalization standards.
General license banks are required to maintain 30.0% of their global deposits in liquid assets of the type prescribed by the Superintendency of Banks. In addition, general license banks are required to maintain local assets in Panama in an amount not less than 85.0% of their local deposits.
Regulations regarding interest rate ceilings in the prior banking law were abolished by the Banking Law. Currently, each bank in Panama fixes the amount of interest that it charges on loans and other facilities. Banks are required to indicate the effective interest rates of loans and deposits in their statements to clients or at a client’s request. Under the Banking Law, deposits from central banks and other similar institutions are immune from attachment or seizure.
Compared to the prior banking law, the Banking Law provides for lower lending limits to a single borrower and certain related parties. Under the new limits, no bank in Panama may make loans, assume obligations or otherwise extend credit or issue guarantees to any one person or group of related persons in excess of 25.0% of the bank’s total capital. A higher lending limit of 30.0% of total capital applies to banks whose shares are owned by governmental and private institutions whose principal office is located in Panama and whose main line of business is lending to other banks.
The Banking Law also provides for additional limitations and restrictions on a bank’s extending credit and issuing guarantees to parties related to such bank. Such related parties include the bank’s officers and directors and certain shareholders owning individually 5.0% or more of the capital stock of the bank.
Banks in Panama are subject to inspection by the Superintendency of Banks at least once every two years. Such supervisory powers of the Superintendency of Banks also extend to each bank’s subsidiaries and branches. Each bank is required to file monthly balance sheets and quarterly and annual statements indicating the performance of its credit facilities and other reports and information as prescribed by the Superintendency of Banks. In addition, each bank is required to make available for inspection its accounting records, minutes, reports on cash on hand, securities, receipts and any other reports or documents that are necessary for the
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Superintendency of Banks to ensure such bank’s compliance with Panamanian banking laws and regulations. Banks subject to supervision may be fined by the Superintendency of Banks for violations of the banking laws and regulations.
Under the Banking Law, the Superintendency of Banks may order the reorganization of a bank without having intervened previously, when it considers this course of action to be in the best interests of the depositors and to guarantee the solvency and continuity of such bank. The Superintendency of Banks has broad powers under the Banking Law to reorganize banks and can require shareholders to pay in additional capital or to authorize the issuance of new shares and their sale to third parties, at prices determined by the Superintendency of Banks. Furthermore, the Superintendency of Banks may require a bank to restructure itself more fundamentally. For example, the Superintendency of Banks may require a bank to merge or consolidate with other banks, negotiate bridge loans, sell or partially liquidate assets and grant security interests in connection with such reorganization. Ultimately, if the reorganization efforts fail, the Superintendency of Banks is empowered to begin the liquidation process.
The Banking Law established an annual supervisory charge to be paid by general license banks equal to $30,000 plus $35.00 per each $1.0 million in assets, up to a maximum charge of $100,000.
Public Sector Banking Institutions
Banco Nacional de Panamá
BNP, a commercial bank created in 1904, also has many functions of a central bank. BNP is responsible for supplying banks operating in Panama with U.S. dollars and has authority to issue and to distribute coins in Panama. BNP is the Government’s banker and financial agent and acts as a clearinghouse for checks and other instruments for all other Panamanian banks. Also, BNP offers a wide range of commercial banking services through its 62 branches throughout Panama. In accordance with the law that governs BNP, the Government is responsible for the liabilities of BNP.
Given Panama’s U.S. dollar-based economy, BNP does not make monetary policy or print paper currency and is not a lender of last resort for Panama. BNP has no direct regulatory authority over Panamanian banks, and under the Banking Law BNP has no representation in the Superintendency of Banks. BNP does not use rediscount or loan mechanisms with other commercial banks. There are no restrictions on its activities other than those imposed on commercial banks in Panama. BNP, as with other commercial banks, has the ability to make direct loans to the Government as well as to purchase notes issued by Panama. BNP has certain competitive advantages as compared to the rest of the Panamanian banking system in that it enjoys a monopoly on public sector deposits. The Banking Law, however, subjects BNP to regulation by the Superintendency.
BNP is the largest banking institution in Panama in terms of domestic credit, local deposits and savings deposits. At December 31, 2008, total assets of BNP were $5.6 billion, deposits were $4.9 billion and loans were $2.1 billion, of which $590.9 million were made to the public sector and $1.6 billion were made to the private sector. The public sector credits primarily consist of loans to the Central Government, one of which was the result of overdrafts by the Central Government during the 1987-1989 period. See “Public Sector Debt—Internal Debt.”
As of December 31, 2008, BNP’s capital and reserves represented 10.4% of its bank deposits and 9.1% of its total assets. BNP generated gross income of $181.9 million in 2008, compared to $195.4 million in 2007, and had net income of $110.4 million in 2008, compared to $135.2 million in 2007. This decrease in net income is primarily attributable to a $20.0 million reduction from interest from deposits and security investments. There are no laws pertaining to the payment of dividends by BNP to the Central Government. In 2008, BNP paid the Central Government dividends totaling $110.4 million.
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The following table sets forth BNP’s balance sheet at December 31 for the years 2004 through 2008:
TABLE NO. 17
Banco Nacional de Panamá
Balance Sheet
(in millions of dollars)
| | | | | | | | | | | | | | | | | | | | |
| | | December 31, | |
| | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2008 | |
Assets: | | | | | | | | | | | | | | | | | | | | |
Cash and checks | | $ | 111.2 | | | $ | 140.9 | | | $ | 135.3 | | | $ | 169.3 | | | $ | 205.8 | |
Bank deposits | | | 566.1 | | | | 1,174.5 | | | | 1,274.5 | | | | 1,855.8 | | | | 2,396.2 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | | 677.3 | | | | 1,315.3 | | | | 1,409.8 | | | | 2,025.1 | | | | 2,602.0 | |
| | | | | |
Loans: | | | | | | | | | | | | | | | | | | | | |
Domestic loans: | | | | | | | | | | | | | | | | | | | | |
Public sector | | | 841.1 | | | | 788.6 | | | | 772.0 | | | | 721.2 | | | | 589.8 | |
Private sector | | | 1,232.9 | | | | 1,164.4 | | | | 1,202.6 | | | | 1,444.1 | | | | 1,602.1 | |
Foreign loans | | | 0.0 | | | | 0.0 | | | | 0.0 | | | | 0.0 | | | | 0.0 | |
Less provisions | | | (104.5 | ) | | | (99.1 | ) | | | (148.7 | ) | | | (97.1 | ) | | | (98.6 | ) |
| | | | | | | | | | | | | | | | | | | | |
Total (net) | | | 1,969.5 | | | | 1,854.0 | | | | 1,825.9 | | | | 2,068.2 | | | | 2,093.4 | |
| | | | | |
Investments | | | 308.1 | | | | 323.0 | | | | 434.5 | | | | 496.9 | | | | 700.0 | |
Net Fixed Assets | | | 40.1 | | | | 39.4 | | | | 41.6 | | | | 46.7 | | | | 51.2 | |
Other Assets | | | 149.0 | | | | 111.4 | | | | 89.0 | | | | 108.2 | | | | 136.6 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | | 3,144.0 | | | | 3,643.2 | | | | 3,800.8 | | | | 4,745.1 | | | | 5,583.1 | |
| | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Deposits | | | 2,479.6 | | | | 2,962.4 | | | | 3,114.4 | | | | 4,072.6 | | | | 4,901.1 | |
Obligations with Financial Institutions and International Organizations | | | 42.7 | | | | 33.8 | | | | 25.6 | | | | 16.8 | | | | 9.9 | |
Other Liabilities | | | 106.7 | | | | 120.5 | | | | 147.8 | | | | 143.4 | | | | 163.8 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | | 2,629.0 | | | | 3,116.7 | | | | 3,287.9 | | | | 4,232.8 | | | | 5,074.8 | |
| | | | | |
Capital and Reserves | | | 515.1 | | | | 526.5 | | | | 513.0 | | | | 512.3 | | | | 508.3 | |
| | | | | | | | | | | | | | | | | | | | |
Total Liabilities and Capital | | $ | 3,144.1 | | | $ | 3,643.2 | | | $ | 3,800.8 | | | $ | 4,745.1 | | | $ | 5,583.1 | |
Source: BNP.
Caja de Ahorros, the state-owned savings bank, has 42 branches throughout Panama. Caja de Ahorros is primarily a mortgage lender specializing in financing medium-income customers. Due to its liquidity position in recent years, however, Caja de Ahorros has begun to promote personal loans. Total assets of Caja de Ahorros at December 31, 2008 were $1.4 billion (a 12.7% increase from 2007). Total deposits in Caja de Ahorros at December 31, 2008 were $1.1 billion (a 22.7% increase from 2007), while total net loans held by Caja de Ahorros at that date were $904.0 million (a 7.6% increase from 2007). Caja de Ahorros had a net gain of $20.8 million in 2008, compared to a net gain of $20.2 million in 2007, primarily due to a $1.8 million increase in interest income from investments.
Other Public Sector Institutions. The Panamanian public banking sector includes two other significant institutions. They are BDA, which is the agricultural development bank, and BHN, which is the national mortgage bank. Panama created BDA to provide a source of financing for agricultural development. BDA’s activities have mainly focused on providing financing to medium and small producers. Historically, BDA has experienced significant losses. An external audit was completed in May 2001 to identify ways to
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improve BDA’s operational efficiency. After evaluating BDA’s loan portfolio, the external audit estimated a possible loss due to unrecoverable loans of up to $9.0 million in principal and $15.4 million in net interest. Under the LUIT, one-half of a surcharge on consumer and commercial loans (which previously was used exclusively to subsidize certain BDA and commercial bank agricultural loans) has been allocated to bolster BDA’s capital. Additionally, the LUIT tightened eligibility for BDA’s subsidized loans. As of December 31, 2008, preliminary figures indicate that BDA had $150.9 million in loans on its books. As of December 31, 2008, the total assets of BDA reached $329.3 million. BDA had net income of $400.5 million in 2008.
Panama created BHN in 1973 to provide a source of financing for national housing projects and foster the development of savings associations. As of December 31, 2008, BHN’s loan portfolio was $192.1 million and its total assets amounted to $321.0 million. BHN had a net loss of $2.2 million in 2008.
Other Financial System Components
Stock Exchange. In 1990, a private stock exchange, Bolsa de Valores de Panamá (“La Bolsa”) was created. While it has had considerable growth, with aggregate trades increasing from $30.6 million in 1991 to $1.9 billion in 2008, La Bolsa remains a small portion of the financial services sector. Its current listings are highly concentrated in domestic private sector fixed-income securities. Equity trades represented 7.6% of 2008 trading volume. Most securities issued by the Republic are not listed on La Bolsa.
Interest Rates. Interest rates show a downward trend, especially with regard to borrowing rates, which are consistent with international rates. In December 2008, the average interest rate paid by Banca Panameña for one-year deposits was 4.10%, while the interest rate for personal credit transactions with a maturity of one to five years averaged 11.67% at the end of the month. In general terms, the differential between borrowing and lending interest rates for Banca Panameña exceeded 7% at December 31, 2008.
Insurance. In 1984, Panama adopted legislation intended to foster offshore insurance activity. In July 1996, the Assembly passed a law establishing a new insurance regulatory structure. As of December 31, 2008, there were 26 insurance companies and 2,323 insurance brokerages. The 2,322 insurance brokerages consisted of 2,021 individual brokers and 322 brokerage companies. The total registered assets of the insurance companies, as of 2007, equaled $1.01 billion.
Due to the economic growth that occurred in 2007, the insurance sector grew by approximately 22.3% as compared to 2006. During this time, many local and international insurance companies applied to conduct business in Panama. Additionally, on December 27, 2006, Executive Decree No. 640 mandated that any vehicle owner must have auto insurance beginning on January 1, 2007, which also contributed to the increase in the insurance sector.
In 2008, the insurance sector grew by 27.5% as compared to 2007 primarily due to the economical development that the country experienced.
Financial Services. A small nondeposit-taking financial services industry exists that provides leasing, consumer durables financing and other small-scale lending. As of December 31, 2008, there were 149 locally incorporated companies participating in this industry, and in 2008 total assets equaled approximately $903.8 million. As of August 2009, there were approximately 152 companies participating in this industry.
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FOREIGN TRADE AND BALANCE OF PAYMENTS
General
Foreign trade plays a significant role in Panama’s economy because of the internationally oriented service sector, the limited scope of domestic manufacturing capability, the lack of significant domestic energy resources (other than hydroelectric) and the limited scope of agricultural production. These factors have made it necessary to import significant amounts of manufactured goods, raw materials and other merchandise. Notwithstanding a history of significant tariff and non-tariff barriers, imports cover a wide range of raw materials and manufactured goods used throughout the economy.
Panama’s net exports of goods and services rose by 3.6% in 2008 compared to 2007. In 2008, Panama’s imports of goods, excluding the CFZ, rose 31.7% compared to 2007.
Prior to 2001, the largest single category of exports historically had been bananas, which in 1995 represented 33.0% of total non-petroleum, non-CFZ merchandise exports. Since 2004, however, bananas have represented a declining percentage of Panama’s non-petroleum, non-CFZ merchandise exports (12.2% in 2004, 10.0% in 2005, 10.7% in 2006, 9.9% in 2007 and 8.6% in 2008).
In recent years, the exportation of fish, in particular tuna, has become the largest single category of exports. In 2008, exports of frozen yellowfin tuna and fresh and frozen fish filets totaled $283.3 million, reflecting a 0.9% increase from $280.7 million in 2004. In 2008, 2007, 2006, 2005 and 2004, yellow fin tuna, together with fresh and frozen fish filets, constituted 24.8%, 20.3%, 22.7%, 27.5% and 31.5%, respectively, of Panama’s non-petroleum, non-CFZ merchandise exports.
In 2004, shrimp exports decreased by 4.8% and represented 6.0% of total non-petroleum, non-CFZ merchandise exports. In 2005, shrimp exports rose by 7.4% to $57.8 million and represented 6.0% of total non-petroleum, non-CFZ merchandise exports. In 2006, shrimp exports decreased by 13.1% to $50.2 million and represented 4.9% of total non-petroleum, non-CFZ merchandise exports. In 2007, shrimp exports increased by 12.4% to $56.4 million and represented 5.0% of total non-petroleum, non-CFZ merchandise exports. In 2008, shrimp exports decreased by 27.8% to $40.7 million and represented 3.6% of total non-petroleum, non-CFZ merchandise exports.
In 2004, petroleum exports were $4.8 million. In 2005, petroleum exports were $7.1 million. In 2006, petroleum exports were $7.7 million, and in 2007, petroleum exports were $7.5 million. In 2008, petroleum exports were $7.2 million.
Because of the use of the U.S. dollar as legal tender and the absence of a Balboa exchange market, Panamanian private sector imports and exports do not affect the Government’s foreign currency reserves. Thus, the balance of payments is less significant than fiscal policy in assessing the external debt service capacity of the Republic.
Tariffs and Other Trade Restrictions
In the 1990s, the Government enacted a number of trade reforms in preparation for WTO accession. Panama became a member of the WTO on September 6, 1997. In November 1997, the Government passed Cabinet Decree No. 68 of 1997, which reduced import duties for most products to levels significantly below those agreed to under the WTO accession process. As of December 31, 2008, the import duty ceiling for many such products ranged from 30.0% to 40.0%.
One of the major changes in Panamanian tariffs since 1990 has been the movement away from specific tariffs and mixed specific and ad valorem tariffs to a solely ad valorem system. Panama’s accession to the WTO required Panama to streamline its customs valuation system to conform to international standards. Additionally, Panama changed its international trade classification system from the Customs Cooperation Council Nomenclature and Brussels Tariff Nomenclature to the Harmonized Tariff System, which became effective for the year 1998.
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The LUIT also included several tariff reduction measures. A 3.0% tariff, which had been available to only a limited number of industrial concerns for certain inputs and capital goods, was made available to all enterprises. Similarly, a tax rebate equivalent to 95.0% of the amount of import taxes paid on imported goods used for exports, which had been available only to exporters of industrial goods, was made available to all exporters.
The Cabinet, by Decree No. 11 dated April 7, 2004, approved the elimination of import tariffs on certain raw and intermediate materials, such as linseed, corrugated steel bars and support rods for concrete, although the national 5.0% value-added tax on goods and services will continue to be assessed on such products at their time of entry into Panama. On June 26, 2004, the Customs Cooperation Council introduced an amendment to the national tariff system in response to technological advances and changes in trade at the international level. This amendment went into effect in 2007, and facilitated a uniform application of the nomenclature of the Harmonized Tariff System.
Composition of Foreign Trade
The United States has historically been Panama’s most important trading partner. In 2008, trade with the United States was preliminarily estimated at 38.3% and 30.5% of total goods exported and imported, respectively. Panama’s other significant trading partners have included Costa Rica for exports and Japan, Brazil and Venezuela for imports.
As of December 31, 2008, Panama’s largest trading partners for exports were the United States, Netherlands and Costa Rica, with exports amounting to $435.1 million, $122.8 million and $66.0 million, respectively. As of December 31, 2008, Panama’s largest trading partners for imports were the United States, the Petroleum Free Zone of Panama, the CFZ and Costa Rica, with imports amounting to $2.7 billion, $1.4 billion, $840.0 million and $456.0 million, respectively.
The share of imports from Central American countries other than Costa Rica has decreased from 3.8% of total imports in 2004 to 3.1% of total imports in 2008. Additionally, approximately 9.3% of Panama’s 2008 imports came from the CFZ.
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The following tables set forth the composition and geographical distribution of Panama’s imports and exports for the years indicated:
TABLE NO. 18
Composition of Merchandise Exports, F.O.B.(1)
(in millions of dollars)
| | | | | | | | | | | | | | | | | | | |
| | | 2004(R) | | | 2005(R) | | | 2006(R) | | | 2007(R) | | | 2008(P) |
Petroleum(2) | | $ | 4.8 | (3) | | $ | 7.1 | (3) | | $ | 7.7 | (3) | | $ | 7.5 | (3) | | $ | 7.2 |
Non-petroleum Merchandise Exports: | | | | | | | | | | | | | | | | | | | |
Bananas | | | 108.5 | | | | 96.5 | | | | 109.4 | | | | 111.6 | | | | 98.7 |
Muskmelon | | | 49.2 | | | | 79.9 | | | | 96.2 | | | | 115.1 | | | | 117.2 |
Pineapple | | | 11.9 | | | | 21.0 | | | | 36.9 | | | | 42.9 | | | | 36.5 |
Watermelon | | | 21.7 | | | | 38.1 | | | | 70.2 | | | | 87.4 | | | | 96.8 |
Sugar | | | 10.4 | | | | 23.7 | | | | 21.3 | | | | 17.6 | | | | 15.1 |
Shrimp | | | 53.8 | | | | 57.8 | | | | 50.2 | | | | 56.4 | | | | 40.7 |
Coffee | | | 11.0 | | | | 13.6 | | | | 13.4 | | | | 16.3 | | | | 16.0 |
Fishmeal(4) | | | 9.3 | | | | 4.5 | | | | 12.1 | | | | 9.4 | | | | 15.9 |
Frozen yellowfin tuna, fresh and frozen fish filet | | | 280.7 | | | | 264.8 | | | | 231.7 | | | | 229.2 | | | | 283.3 |
Other seafood | | | 6.4 | | | | 7.1 | | | | 1.7 | | | | 0.8 | | | | 0.1 |
Clothing | | | 8.8 | | | | 10.3 | | | | 9.9 | | | | 12.4 | | | | 10.6 |
Meat from cattle | | | 14.0 | | | | 15.4 | | | | 17.4 | | | | 13.9 | | | | 14.5 |
Standing cattle | | | 13.2 | | | | 21.2 | | | | 30.6 | | | | 16.4 | | | | 0.5 |
Leather and similar products | | | 8.4 | | | | 7.3 | | | | 10.3 | | | | 17.8 | | | | 4.7 |
Other exports | | | 283.8 | | | | 302.0 | | | | 310.5 | | | | 379.6 | | | | 393.4 |
| | | | | | | | | | | | | | | | | | | |
Total | | | 891.1 | | | | 963.2 | | | | 1,021.8 | | | | 1,126.8 | | | | 1,144.0 |
| | | | | |
Re-exports Other Than CFZ | | | 49.1 | | | | 50.2 | | | | 60.5 | | | | 69.4 | | | | 96.4 |
| | | | | |
Total | | $ | 945.0 | | | $ | 1,020.5 | | | $ | 1,090.0 | | | $ | 1,203.7 | | | $ | 1,247.6 |
| (2) | Petroleum exports primarily consist of maritime and aviation fuel sales. |
| (3) | Excludes oil sales for consumption on board. In August 2002, Refinería Panamá S.A. closed its refinery operations. |
| (4) | Including fish oil and fishmeal. |
Source: Office of the Comptroller General and Ministry of Economy and Finance.
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TABLE NO. 19
Composition of Merchandise Imports, C.I.F.(1)
(in millions of dollars)
| | | | | | | | | | | | | | | |
| | | 2004(R) | | 2005(R) | | 2006(R) | | 2007(R) | | 2008(P) |
Consumer Goods | | $ | 1,480.8 | | $ | 1,793.0 | | $ | 2,053.5 | | $ | 2,911.2 | | $ | 4,077.6 |
Non-durable | | | 540.2 | | | 580.1 | | | 658.3 | | | 810.8 | | | 1,000.9 |
Semi-durable | | | 292.1 | | | 325.8 | | | 373.4 | | | 506.7 | | | 626.7 |
Domestic utensils | | | 132.2 | | | 150.6 | | | 177.0 | | | 362.3 | | | 584.6 |
Fuels and lubricants | | | 516.3 | | | 736.6 | | | 844.8 | | | 1,231.4 | | | 1,865.4 |
| | | | | |
Intermediate Goods | | | 1,171.1 | | | 1,266.0 | | | 1,489.3 | | | 2,003.7 | | | 2,666.5 |
Agricultural raw materials | | | 118.5 | | | 113.2 | | | 113.4 | | | 153.2 | | | 196.7 |
Industrial raw materials | | | 681.4 | | | 767.7 | | | 830.8 | | | 1,099.0 | | | 1,373.7 |
Construction materials | | | 342.6 | | | 354.3 | | | 501.5 | | | 682.2 | | | 980.9 |
Other intermediate goods | | | 28.7 | | | 30.8 | | | 43.5 | | | 69.3 | | | 115.2 |
| | | | | |
Capital Goods | | | 940.2 | | | 1,093.9 | | | 1,274.9 | | | 1,955.0 | | | 2,306.1 |
Agricultural | | | 26.7 | | | 24.6 | | | 28.8 | | | 39.5 | | | 47.0 |
Industrial, construction and electricity | | | 209.1 | | | 214.0 | | | 274.1 | | | 601.1 | | | 807.2 |
Transportation equipment and telecommunication | | | 321.7 | | | 375.5 | | | 415.5 | | | 623.6 | | | 757.5 |
Other capital goods | | | 382.8 | | | 479.8 | | | 556.4 | | | 690.8 | | | 694.4 |
| | | | | |
Total | | $ | 3,592.2 | | $ | 4,152.8 | | $ | 4,817.7 | | $ | 6,869.9 | | $ | 9,050.2 |
Source: Office of the Comptroller General.
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TABLE NO. 20
Direction of Merchandise Trade
(as percentage of total)(1)
| | | | | | | | | | | | | | | |
| | | 2004(R) | | | 2005(R) | | | 2006(R) | | | 2007(R) | | | 2008(P) | |
Exports (F.O.B.): | | | | | | | | | | | | | | | |
Western Hemisphere: | | | | | | | | | | | | | | | |
United States and Canada | | 48.8 | % | | 43.7 | % | | 38.8 | % | | 35.0 | % | | 38.3 | % |
Central America and the Caribbean | | 15.6 | | | 17.5 | | | 18.6 | | | 15.5 | | | 15.6 | |
South America | | 2.5 | | | 2.7 | | | 2.5 | | | 2.7 | | | 2.7 | |
Other | | 1.6 | | | 1.8 | | | 1.0 | | | 0.8 | | | 0.8 | |
| | | | | | | | | | | | | | | |
Total | | 68.5 | | | 65.7 | | | 60.9 | | | 54.0 | | | 57.4 | |
| | | | | |
Europe: | | | | | | | | | | | | | | | |
Germany | | 0.6 | | | 0.2 | | | 0.6 | | | 0.3 | | | 0.4 | |
Italy | | 1.4 | | | 1.6 | | | 2.6 | | | 1.6 | | | 2.6 | |
Belgium and Luxembourg | | 3.3 | | | 2.6 | | | 3.8 | | | 3.8 | | | 1.0 | |
Other | | 19.9 | | | 23.8 | | | 26.4 | | | 28.3 | | | 27.6 | |
| | | | | | | | | | | | | | | |
Total | | 25.2 | | | 28.2 | | | 33.4 | | | 34.0 | | | 31.6 | |
| | | | | |
Other Countries | | 6.3 | | | 6.1 | | | 5.7 | | | 12.0 | | | 11.0 | |
TOTAL | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| | | | | |
Imports (C.I.F.): | | | | | | | | | | | | | | | |
Western Hemisphere: | | | | | | | | | | | | | | | |
United States and Canada | | 29.4 | % | | 27.8 | % | | 27.5 | % | | 31.0 | % | | 30.6 | % |
Mexico | | 4.0 | | | 3.7 | | | 3.6 | | | 3.1 | | | 3.5 | |
Central America and the Caribbean | | | | | | | | | | | | | | | |
Costa Rica | | 4.9 | | | 4.7 | | | 5.1 | | | 4.7 | | | 5.1 | |
Trinidad and Tobago | | 0.6 | | | 1.1 | | | 0.7 | | | 0.6 | | | 0.4 | |
Colón Free Zone | | 12.4 | | | 12.2 | | | 11.9 | | | 10.4 | | | 9.1 | |
Other | | 15.9 | | | 21.0 | | | 18.9 | | | 18.0 | | | 20.6 | |
| | | | | | | | | | | | | | | |
Total | | 33.8 | | | 39.0 | | | 36.6 | | | 33.7 | | | 35.2 | |
South America: | | | | | | | | | | | | | | | |
Venezuela | | 3.1 | | | 1.0 | | | 1.1 | | | 0.8 | | | 0.5 | |
Ecuador | | 0.2 | | | 0.3 | | | 0.3 | | | 0.2 | | | 1.0 | |
Brazil | | 3.3 | | | 3.1 | | | 3.1 | | | 2.0 | | | 1.6 | |
Other | | 6.1 | | | 5.6 | | | 6.1 | | | 5.5 | | | 5.0 | |
| | | | | | | | | | | | | | | |
Total | | 12.7 | | | 10.0 | | | 10.6 | | | 8.6 | | | 8.1 | |
TOTAL | | 79.9 | | | 80.5 | | | 78.2 | | | 76.4 | | | 77.4 | |
| | | | | |
Europe: | | | | | | | | | | | | | | | |
Germany | | 1.2 | | | 1.3 | | | 1.2 | | | 1.3 | | | 1.4 | |
France | | 0.5 | | | 0.6 | | | 0.5 | | | 0.8 | | | 0.4 | |
Spain | | 1.4 | | | 1.5 | | | 1.5 | | | 1.6 | | | 1.6 | |
Italy | | 0.6 | | | 0.5 | | | 0.5 | | | 0.8 | | | 0.7 | |
Netherlands | | 0.4 | | | 0.8 | | | 0.5 | | | 0.6 | | | 0.4 | |
United Kingdom | | 0.4 | | | 0.3 | | | 0.7 | | | 0.5 | | | 0.3 | |
Other | | 2.9 | | | 2.5 | | | 2.7 | | | 1.7 | | | 2.0 | |
| | | | | | | | | | | | | | | |
Total | | 7.4 | | | 7.5 | | | 7.6 | | | 7.3 | | | 6.8 | |
| | | | | |
Japan | | 5.3 | | | 4.5 | | | 4.8 | | | 4.8 | | | 4.3 | |
Other countries | | 7.4 | | | 7.5 | | | 9.4 | | | 11.5 | | | 11.5 | |
| | | | | |
TOTAL | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
| (1) | Includes exports and imports between the CFZ and Panama. |
Source: Office of the Comptroller General.
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Balance of Payments
The unique Panamanian monetary system and unusual features of the economy cause the balance of payments to be a less important indicator than fiscal policy for purposes of assessing the Government’s debt service capacity. In the absence of a national printed currency and a Balboa exchange market, balance of payments surpluses or deficits have less effect than fiscal policy on the accumulation or drawdown of Government foreign exchange reserves. Panamanian exporters retain the foreign exchange earned from their overseas sales, and Panamanian importers utilize their domestic U.S. dollar-denominated revenues to pay for foreign shipments. In addition, given the absence of a national printed currency and the limited role of BNP in the economy, it is often difficult to register capital movements in an orderly manner. Thus, errors and omissions in the balance of payments figures have tended to be significant.
In 1997, Panama implemented the V Version of the Balance of Payments Manual prepared by the IMF (“V Version”), a different methodology from that previously used, to calculate Panama’s balance of payments.
For 2004, 2005, 2006 and 2007 the current account balance calculated under V Version were deficits of $1,003.2 million, $1,021.8 million, $526.8 million and $1,407.5 million, respectively. For 2008, the preliminary estimate for the current account balance calculated under V Version is a $2,677.1 million deficit. For 2004 and 2005 the capital and financial account balances under V Version were $506.5 million deficit and a $1,018.3 million surplus, respectively. For 2006, the capital and financial account balance calculated under V Version is a $144.5 million deficit. For 2007, the preliminary estimate for the capital and financial account balance calculated under V Version is a $1,095.9 million surplus. For 2008, the preliminary estimate for the capital and financial account balance calculated under V Version is a $289.0 million surplus.
In reviewing Panamanian balance of payments statistics for merchandise imports and exports, it is also important to consider the effect of the CFZ and the significant amount of merchandise passing through it. See “The Colón Free Zone.” Panama had $9.1 billion in non-CFZ merchandise imports in 2008 (an increase of 31.7% from 2007), while imports to the CFZ for the same period were $9.1 billion. Similarly, Panama had $1.1 billion in non-CFZ merchandise exports in 2008 (1.5% higher than in 2007), while CFZ re-exports for the same period were $9.6 billion.
Excluding the CFZ, Panama has historically suffered large merchandise trade deficits. The deficit, excluding the CFZ, was $7.8 billion (42.0% of real GDP) in 2008, an increase of 37.7% from 2007. However, these deficits have been significantly offset by the economic value added by the CFZ. In 2008, the merchandise trade deficit including the CFZ was $4.7 billion (25.4% of real GDP), an increase of 48.1% from 2007. Other segments within the service sector of the Panamanian economy, including ports and the Panama Canal, also help offset the merchandise trade deficit. In 2008, the service sector had a net balance of payments surplus of $3,262.1 billion (a 15.8% increase from 2007). The resulting current account preliminarily registered a deficit of $2,792.2 million in 2008, compared to the $1,422.4 million deficit in 2007.
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The following table sets forth Panama’s balance of payments for the years 2003 through 2007:
TABLE NO. 21
Balance of Payments(1)
(in millions of dollars)
| | | | | | | | | | | | | | | | | | | | |
| | | 2004 | | | 2005 | | | 2006 | | | 2007(P) | | | 2008(P) | |
Current Account: | | | | | | | | | | | | | | | | | | | | |
Merchandise Trade(2) | | | | | | | | | | | | | | | | | | | | |
Exports | | $ | 6,079.9 | | | $ | 7,375.2 | | | $ | 8,478.1 | | | $ | 9,333.7 | | | $ | 10,323.2 | |
Imports | | | (7,616.5 | ) | | | (8,933.0 | ) | | | (10,190.0 | ) | | | (12,523.8 | ) | | | (14,869.1 | ) |
| | | | | | | | | | | | | | | | | | | | |
Balance | | | (1,536.6 | ) | | | (1,557.8 | ) | | | (1,711.9 | ) | | | (3,190.1 | ) | | | (4,545.9 | ) |
Services | | | 1,336.7 | | | | 1,419.9 | | | | 2,210.3 | | | | 2,836.3 | | | | 3,204.7 | |
Rent(3) | | | (1,020.4 | ) | | | (1,125.6 | ) | | | (1,277.7 | ) | | | (1,306.4 | ) | | | (1,573.8 | ) |
Unilateral Transfer(4) | | | 217.1 | | | | 241.7 | | | | 252.5 | | | | 253.2 | | | | 237.9 | |
| | | | | | | | | | | | | | | | | | | | |
Balance | | | (1,003.2 | ) | | | (1,021.8 | ) | | | (526.8 | ) | | | (1,407.0 | ) | | | (2,677.1 | ) |
| | | | | |
Capital and Financial Account: | | | | | | | | | | | | | | | | | | | | |
Capital Account | | | 0.0 | | | | 15.8 | | | | 15.2 | | | | 43.7 | | | | 56.9 | |
Financial Account | | | 496.7 | | | | 2,040.1 | | | | 382.3 | | | | 2,459.2 | | | | 2,909.2 | |
Direct Investment | | | 1,019.1 | | | | 917.6 | | | | 2,497.9 | | | | 1,776.5 | | | | 2,401.7 | |
Portfolio Investment | | | 125.0 | | | | (557.1 | ) | | | (493.1 | ) | | | (631.6 | ) | | | (526.6 | ) |
Other Capital | | | (657.4 | ) | | | 1,669.8 | | | | (1,632.4 | ) | | | 1,314.3 | | | | 1,034.1 | |
Assets | | | (1,542.8 | ) | | | (334.4 | ) | | | (3,781.8 | ) | | | (5,118.5 | ) | | | (3,000.6 | ) |
Liabilities | | | 885.4 | | | | 2,004.2 | | | | 2,149.4 | | | | 6,432.8 | | | | 4,034.7 | |
| | | | | | | | | | | | | | | | | | | | |
Balance | | | (506.5 | ) | | | 1,018.3 | | | | (144.5 | ) | | | 1,095.9 | | | | 289.0 | |
| | | | | |
Errors and Omissions (net) | | | 111.1 | | | | (359.3 | ) | | | 301.3 | | | | (464.4 | ) | | | 295.8 | |
Overall Surplus (Deficit) | | $ | (395.4 | ) | | $ | 674.8 | | | $ | 172.0 | | | $ | 621.5 | | | $ | 584.5 | |
| | | | | | | | | | | | | | | | | | | | |
Financing | | | 395.4 | | | | (674.8 | ) | | | (172.0 | ) | | | (621.5 | ) | | | (584.8 | ) |
Total Reserves | | | 396.3 | | | | (521.3 | ) | | | (162.1 | ) | | | (611.4 | ) | | | (579.4 | ) |
Use of IMF credit and IMF loans | | | (10.0 | ) | | | (9.8 | ) | | | (9.9 | ) | | | (10.1 | ) | | | (5.4 | ) |
Exceptional Financing(5) | | | 9.1 | | | | (143.7 | ) | | | 0.0 | | | | 0.0 | | | | 0.0 | |
| (1) | Figures were calculated pursuant to Version V of the Balance of Payments Manual prepared by IMF. |
| (3) | Includes wages and investment profits. |
| (4) | Unilateral transfers consist of transactions without a quid pro quo, many of which are gifts and migrant transfers. |
| (5) | “Exceptional Financing” refers only to financing from the exchange or the repurchase of Government bonds and the capitalization of PDI bonds. External financing raised in the international markets by the Central Government is included under the caption “Financial Account.” |
Source: Office of the Comptroller General.
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PUBLIC SECTOR DEBT
Internal Debt
From 2004 to 2008, Panama’s public sector internal debt represented approximately 23.8% of the total public sector debt. A substantial portion of total public sector internal debt is extended by public sector sources, such as CSS and official banking institutions, and BNP in particular. As of December 31, 2008, Panama’s public sector internal debt totaled approximately $1.96 billion, a decrease of $234.9 million from December 31, 2007. Panama’s public sector internal debt as a percentage of GDP was 10.6% as of December 31, 2008.
Two significant loans by BNP to the Central Government with a total outstanding principal amount of $676.9 million as of December 31, 2005, were both repaid in 2006. The first loan was a result of approximately $933 million in overdrafts by the Noriega-controlled Central Government during the 1987-1989 period. Until 1993, such obligation was undocumented. In October 1993, a restructuring was completed whereby the overdraft was converted into a series of 25-year non-negotiable, non-transferable notes, bearing interest at 2.0% per annum and requiring $17.3 million in semi-annual principal payments. As of December 31, 2008, BNP’s largest loan to the Central Government had a total outstanding principal amount of $396.4 million.
In December 2004, the Torrijos administration issued Cabinet Decree No. 47, authorizing the second loan consisting of an eleven-year $350 million loan agreement with BNP, to refinance a short-term $350 million line of credit authorized in 2003. The Government used the proceeds from this loan to finance the 2004 budget.
The Central Government also has a limited amount of debt obligations outstanding in the domestic private sector. The Ministry of Economy and Finance occasionally has issued domestic bonds, bills and notes in the domestic market. In an effort to promote the development of Panama’s capital market, the Government initiated in July 2002 a program of Treasury Note issuances in the local market.
In August 1999 the Government issued $395.0 million aggregate principal amount of SIACAP Bonds for the purpose of initially funding the retirement benefits of SIACAP participants. See “Employment and Labor—Social Security.”
The Ministry of Economy and Finance expects to continue issuing short term domestic instruments. In addition, the Government has a cash management plan that is intended to increase the volume of trades on La Bolsa. This plan provides for the issuance of short-term securities to cover current cash needs, which securities have an outstanding balance of $59.0 million as of December 31, 2008.
The second largest component of public sector internal indebtedness as of December 31, 2008 is the $541.2 million owed by the Central Government to CSS. This amount represents accruals of contributions due CSS from the Central Government wage bill that were not made in cash by the Central Government and were evidenced by interest-bearing notes and bonds. In 2008, the Central Government made payments to the CSS aggregating $434.9 million.
In October 2004, the Torrijos administration issued Cabinet Decree No. 36, authorizing a short-term $300 million line of credit with HSBC Bank USA, N.A., Panama Branch. As of March 15, 2005, the expiration date of the line of credit, the Government had repaid $80 million, the full amount disbursed under the line of credit as of that date.
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The following table sets forth Panama’s outstanding public sector internal debt at year-end for the years 2004 through 2008:
TABLE NO. 22
Public Sector Internal Debt
(in millions of dollars)
| | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2004 | | 2005 | | 2006 | | 2007 | | 2008(P) |
Private Sector Sources: | | | | | | | | | | | | | | | |
Treasury notes | | $ | 708.2 | | $ | 775.1 | | $ | 815.1 | | $ | 565.1 | | $ | 565.1 |
Treasury bills | | | 236.6 | | | 192.1 | | | 249.8 | | | 206.8 | | | 59.0 |
Domestic bonds | | | 31.4 | | | 21.5 | | | 12.2 | | | 2.2 | | | 2.2 |
Long-term private financing | | | 14.0 | | | 2.7 | | | 2.1 | | | 22.3 | | | 35.6 |
Labor notes(1) | | | 3.9 | | | 2.6 | | | 1.2 | | | 0.0 | | | 0.0 |
SIACAP Bonds | | | 307.4 | | | 269.6 | | | 231.9 | | | 198.8 | | | 165.7 |
| | | | | | | | | | | | | | | |
Total | | $ | 1,301.4 | | $ | 1,263.6 | | $ | 1,312.5 | | $ | 995.2 | | $ | 827.6 |
Public Sector Sources: | | | | | | | | | | | | | | | |
CSS | | $ | 622.6 | | $ | 604.2 | | $ | 583.9 | | $ | 563.5 | | $ | 541.2 |
Official banking institutions(2) | | | 833.7 | | | 783.9 | | | 768.0 | | | 636.3 | | | 591.3 |
| | | | | | | | | | | | | | | |
Total | | $ | 1,456.2 | | $ | 1,388.1 | | $ | 1,351.8 | | $ | 1,199.8 | | $ | 1,132.5 |
| | | | | |
Total Public Sector Internal Debt | | $ | 2,757.6 | | $ | 2,651.7 | | $ | 2,664.3 | | $ | 2,195.0 | | $ | 1,960.1 |
| (1) | Notes issued under the Government’s early retirement program. |
| (2) | The remaining unpaid overdraft debt that the Central Government incurred at BNP during the 1987-1989 period is reflected in this category. |
Source: Ministry of Economy and Finance.
External Debt
General. As of December 31, 2008, total public sector external debt was approximately $8.5 billion, up from approximately $8.3 billion as of December 31, 2007. At December 31, 2006, Panama’s external debt was equal to approximately $7.8 billion, compared with approximately $7.6 billion at December 31, 2005 and approximately $7.2 billion at December 31, 2004. Panama’s public sector external debt as a percentage of GDP was 45.7% as of December 31, 2008.
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The following tables set forth the composition of public sector external debt outstanding at year-end for the years 2004 through 2008 and the scheduled amortizations for public sector external debt for each of the years indicated:
TABLE NO. 23
Public Sector External Debt(1)
(in millions of dollars)
| | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2004 | | 2005 | | 2006 | | 2007 | | 2008(P) |
Commercial banks | | $ | 9.3 | | $ | 79.6 | | $ | 8.3 | | $ | 6.5 | | $ | 169.6 |
Bonds | | | 5,702.9 | | | 6,104.8 | | | 6,359.8 | | | 6,809.8 | | | 6,747.6 |
Multilateral agencies | | | 1,212.9 | | | 1,136.1 | | | 1,183.0 | | | 1,235.4 | | | 1,349.9 |
Bilateral entities | | | 294.2 | | | 259.2 | | | 237.2 | | | 224.0 | | | 210.3 |
| | | | | | | | | | | | | | | |
Total | | $ | 7,219.2 | | $ | 7,579.7 | | $ | 7,788.3 | | $ | 8,275.6 | | $ | 8,477.4 |
| (1) | Debt stated at its outstanding principal amount and not at trading value in the secondary market. |
Source: Ministry of Economy and Finance.
TABLE NO. 24
Public Sector External Debt Amortization
(in millions of dollars)
| | | | | | | | |
| | | 2009 | | 2010 | | 2011 | | 2012-2036 |
Multilaterals | | | | | | | | |
World Bank | | 23.78 | | 23.46 | | 20.07 | | 203.91 |
IDB | | 64.13 | | 64.79 | | 69.92 | | 749.63 |
IMF | | 0.00 | | 0.00 | | 0.00 | | 0.00 |
IADF(1) | | 1.02 | | 1.02 | | 1.01 | | 7.05 |
CAF(2) | | 0.00 | | 8.24 | | 8.24 | | 53.58 |
EIB(3) | | 1.22 | | 1.90 | | 1.90 | | 44.98 |
Total | | 90.15 | | 99.41 | | 101.14 | | 1,059.15 |
| | | | |
Bilaterals | | 17.45 | | 16.44 | | 15.93 | | 160.43 |
Bonds | | 0.00 | | 0.00 | | 332.88 | | 6,414.67 |
Commercial Debt | | 1.85 | | 1.85 | | 0.93 | | 165.00 |
Total | | 19.30 | | 18.29 | | 349.74 | | 6,740.10 |
| (1) | International Agricultural Development Fund. |
| (2) | Andean Development Corporation. |
| (3) | European Investment Bank |
Source: Ministry of Economy and Finance.
The 1980s Debt Crisis. Panama’s economic performance measured by the growth rate of GDP during the 1980s was poor in comparison with the strong results registered during the previous three decades. The factors causing low growth rates included the growing influence of the public sector on the economy and the uncertainty related to the military government’s control of the country.
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Additionally, Panama had borrowed heavily in the late 1970s and early 1980s, and the profile of maturities on Panamanian public sector debt was highly concentrated.
In 1987, Panama defaulted under all of its external indebtedness. Panama subsequently was declared ineligible to use the resources of the IMF and the World Bank, and the IADB placed the country on non-accrual status.
Following the United States’s military operation in December 1989, the Endara government declared that it would honor existing financial obligations. Panama subsequently cleared its substantial arrears with the international financial institutions, the Paris Club and its international bondholders. In 2001, Panama completed payments on its restructured Paris Club debt and, in 2002, on its floating rate notes issued in 1994 to restructure bonds in default at that time.
1995 Financing Plan. On May 9, 1995, Panama and its Bank Advisory Committee reached an agreement-in-principle on the restructuring of Panama’s medium- and long-term public sector indebtedness owed to commercial banks, as well as for interest arrears accrued in respect of such indebtedness since 1987. Pursuant to that agreement, on July 17, 1996, Panama issued approximately $3.2 billion principal amount of bonds to holders of debt (“Eligible Debt”) in consideration for the tender by such holders of their Eligible Debt and interest arrears accrued in respect thereof since 1987 (“Eligible Interest”). The bonds were issued pursuant to an exchange agreement implementing the Republic of Panama 1995 Financing Plan (the “1995 Financing Plan”), which provided for the restructuring of approximately $2.0 billion of Eligible Debt and arrangements for approximately $1.8 billion of Eligible Interest. On July 17, 2006, Panama redeemed all of the bonds issued under its 1995 Financing Plan.
International Financial Institutions. Panama has used the IADB as a significant source of financing. As of December 31, 2008, Panama had agreements with the IADB for a total of $948.5 million in loans, of which $135.0 million had been disbursed in 2008. These agreements finance projects in health, transportation, social investment and modernization as well as co-financings with the World Bank concerning the public sector reforms and financial adjustments contemplated by the Desarrollo Social con Eficiencia Económica, or “Social Development with Economic Efficiency” program, of the Pérez Balladares administration and the Desarrollo Económico, Social y Financiero con Inversión en Capital Humano, or “Economic, Social and Financial Development with Investment in Human Capital” development plan, of the Moscoso administration. Prior to 1990, Panama borrowed money from the IDB’s Fund for Special Operations and Social Progress Trust Fund in order to finance agricultural, fisheries, transportation, education, real estate, urban and industrial development programs.
On October 4, 2006, the IADB approved a 20-year $70.0 million loan for the first stage of a program to improve Panama’s road infrastructure, which was signed by Panama on December 29, 2006. The project aims to rehabilitate priority highways and to ensure continuous maintenance programs. Panama will invest $35.0 million during the first phase of the program. On June 6, 2007, the IADB approved a 25-year $20.2 million loan to strengthen Red de Oportunidades, Panama’s poverty alleviation and reduction strategy, which was signed by Panama on July 5, 2007. On June 29, 2007, the IADB approved a 25-year $21.6 million loan to Panama for the second stage of a program to improve the administration of justice, which was signed by Panama on March 13, 2008. This second stage will focus on strengthening the management of judicial agencies, opening new judicial units, developing a model for alternative dispute resolution for indigenous groups, and to educate citizens and communities on justice and conflict resolution. On August 2, 2007, the IADB approved a 20-year $27.0 million loan to Panama for modernization of land management in the metropolitan region, which was signed by Panama on October 31, 2007.
In June 2008, the IADB granted Panama a $51.3 million loan for the financing of commercial development and public/private sector competitiveness progress, furthering the governmental goals of strengthening systemic capacities, which plans were implemented by a $19.7 million financing made available by the IADB. Under the support of the IADB, the Republic established and executed programs directed at enhancing the development of geographic regions with the greatest needs, such as Bocas del Toro, Colón and Provincias Centrales (Coclé, Herrera, Los Santos, Veraguas), with loans of approximately $29 million, $20 million, and $43 million, respectively. The participation of the IADB also included granting of a loan for Empresa de Transmisión Eléctrica S.A., or ETESA, a Republic-owned corporation in charge of energy transmission along its territory. The IADB executed three loans for the Republic in 2009 focused on improving living conditions for the poor, energy sector consolidation, and public corporation reforms, for approximately $30 million, $100 million, and $14 million, respectively.
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On June 30, 2000, the Republic entered into a 21-month standby arrangement with the IMF for SDR 64 million (approximately $85.5 million) to support the Government’s economic program for 2000 to 2001. The Government viewed this standby arrangement as a precautionary measure as it moved forward with important fiscal and structural reforms. No disbursements were made pursuant to the standby agreement. Panama and the IMF have maintained a continuous dialogue concerning Panama’s economic performance and economic programs. As of December 31, 2008 the Government had no arrangement in place with the IMF. The IMF concluded their 2008 Article IV review of Panama on June 1, 2009.
Panama entered into five different loans with the World Bank during 2008, which consisted of an educational improvement loan in the amount of $35 million, two equal health program loans in the amount of $40.8 million, a policy development loan in the amount of $75.0 million and a technical assistance loan for public reforms in the amount of $6.0 million. During 2009, Panama has entered into one loan with the World Bank, which consists of a loan in the amount of $100.0 million for the second program for the competitive development and administration of public finance.
As of August 31, 2009, Panama’s subscription to the IMF (which corresponds to its quota) was SDR 206.6 million. As of June 30, 2008, Panama’s subscription to the capital of the World Bank was $46.4 million. Of this amount, $3.2 million had been paid as of June 30, 2008. The balance of Panama’s subscription is callable only if required by the World Bank to meet its obligations for funds borrowed or loans guaranteed by it. In addition, Panama has subscriptions to the IFC and MIGA of $1.0 million and $2.5 million, respectively, as of June 30, 2008.
As of December 31, 2008, Panama’s subscription to the IADB was $435 million. Of this subscription, $18.7 million had been paid as of December 31, 2008, and the balance is callable if required to meet the IADB’s obligations. Panama’s contribution to the IADB’s Fund for Special Operations (which corresponds to its quota) was $25.4 million as of December 31, 2008. On September 21, 2005, the Cabinet approved a $10 million increase to Panama’s equity in the Andean Development Corporation. Panama joined the Andean Development Corporation as a Series “C” shareholder (i.e., a non-Andean community member) in 1997.
On August 9, 2006, the Cabinet approved Panama’s accession to the Central American Bank for Economic Integration (“BCIE”). In January 2007, Panama joined the BCIE as a non-regional and non-founding member and agreed to pay a subscription of $57.6 million, with 25% as payable capital and 75% as demandable capital. The balance of Panama’s subscription is callable only if required by the BCIE to meet its obligations for funds borrowed or loans guaranteed by it. The BCIE was established in 1960 to promote economic integration and development in Central America. It currently is comprised of five regional member countries and seven non-regional member countries.
Global Notes and Bonds. The amount of total public sector external debt reflects the conclusion in July 1996 of the Republic’s Brady Plan restructuring of substantially all its medium- and long-term commercial bank debt and the outstanding amount of global bonds sold by Panama. On September 26, 1997, Panama retired approximately $713 million aggregate principal amount of Brady Bonds pursuant to an exchange offer for $600 million aggregate principal amount of its 8-7/8% U.S. Dollar-Denominated Global Bonds Due 2027. Simultaneously, Panama sold $100 million aggregate principal amount of these bonds for cash. During 2000 and 2001, Panama repurchased Brady Bonds in the aggregate principal amount of $53.5 million and $147.9 million in each respective year. In 2002 and 2003, a total of $488 and $123.5 million aggregate principal amount of Brady Bonds was retired through debt management operations, respectively. In 2005, Panama repurchased Brady Bonds in the aggregate principal amount of $12.8 million.
In January 2004, Panama issued $250 million aggregate principal amount of its 8.125% Global Bonds due 2034 containing collective action clauses. Also in January 2004, Panama launched an offer to purchase (“Offer to Purchase”) outstanding Brady Bonds, which offer was financed by a further issuance in February 2004 of $326 million aggregate principal amount of its 9.375% Global Bonds Due 2023; $430 million aggregate principal amount of such bonds had been previously issued. Pursuant to the settlement of the Offer to Purchase, which occurred in February 2004, Panama repurchased approximately $406 million aggregate original principal amount of Brady Bonds, of which there were approximately $177 million aggregate original principal amount of Past-Due Interest Bonds Due 2016 (“PDIs”), approximately $221 million aggregate original principal amount of Interest Reduction Bonds Due 2014 (“IRBs”), approximately $5.5 million aggregate original principal amount of Par Bonds Due 2026 (“Par Bonds”) and approximately $2.5 million aggregate original principal amount of Discount Bonds Due 2026 (“Discount Bonds”). The
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consummation of the Offer to Purchase yielded a nominal net reduction of $57.0 million in Panama’s public sector debt balance and reduced the balance of outstanding Brady Bonds. In 2004, a total of $428.2 million aggregate principal amount of Brady Bonds was retired through debt management operations.
On November 23, 2004, Panama issued $600 million aggregate principal amount of its 7.250% Global Bonds due 2015 containing collective action clauses as pre-funding for 2005.
In August 2005, Panama issued $250 million aggregate principal amount of its 8.125% Global Bonds due 2034, which was consolidated to form a single series with the $250 million principal amount of such bonds that had been previously issued in January 2004.
In November 2005, Panama launched an offer to purchase (“Offer to Purchase”) certain outstanding Global Bonds, which offer was financed by the net proceeds of an issuance on November 29, 2005 of $980 million aggregate principal amount of 7.125% Global Bonds due 2026. Pursuant to the settlement of the Offer to Purchase, which occurred on November 29, 2005, Panama repurchased approximately $449 million aggregate principal amount of outstanding 8.25% Notes due 2008, $165 million aggregate principal amount of outstanding 9.625% Global Bonds due 2011 and $201 million aggregate principal amount of outstanding 10.75% U.S. Dollar-Denominated Global Bonds due 2020, for an aggregate cash consideration of $969,268,486 (which includes accrued interest of $9,553,596). The consummation of the Offer to Purchase reduced the balance of outstanding 8.25% Notes due 2008 to approximately $201 million aggregate principal amount, outstanding 9.625% Global Bonds due 2011 to approximately $585 million aggregate principal amount and outstanding 10.75% U.S. Dollar-Denominated Global Bonds due 2020 to approximately $149 million aggregate principal amount.
On January 10, 2006, Panama commenced an invitation (the “Invitation”) to holders of Panama’s 10.75% U.S. Dollar-Denominated Global Bonds due 2020 (the “2020 Bonds”), 9.375% Global Bonds due 2023 (the “2023 Bonds”), 8.875% U.S. Dollar-Denominated Global Bonds due 2027 (the “2027 Bonds”), 9.375% U.S. Dollar-Denominated Global Bonds due 2029 (the “2029 Bonds”) and 8.125% Global Bonds due 2034 (the “2034 Bonds” and, together with the 2020 Bonds, the 2023 Bonds, the 2027 Bonds and the 2029 Bonds, the “eligible bonds”), to submit one or more offers to exchange such eligible bonds for 6.700% U.S. Dollar-Denominated Amortizing Global Bonds due 2036 (the “2036 Bonds”). The invitation expired on January 17, 2006. Pursuant to the Invitation, Panama accepted $117,970,000 aggregate principal amount of outstanding of 2020 Bonds, $617,100,000 aggregate principal amount of outstanding of 2023 Bonds and $327,163,000 aggregate principal amount of outstanding of 2034 Bonds. Panama decided not to accept any offers to exchange the 2027 Bonds or the 2029 Bonds. Pursuant to the Invitation, on January 26, 2006, Panama issued $1,363,297,000 aggregate principal amount of 2036 Bonds. Following the cancellation of the eligible bonds accepted by Panama and surrendered in exchange for the 2036 Bonds, the aggregate principal amount outstanding of the 2020 Bonds, 2023 Bonds and 2034 Bonds was approximately $30,710,000, $138,900,000 and $172,837,000, respectively.
On July 10, 2006, Panama entered into a $318.9 million bridge loan agreement with Barclays Bank PLC (the “Barclays Loan”). Panama used the proceeds to redeem a portion of its outstanding Brady Bonds. On July 17, 2006, Panama redeemed all of its outstanding Brady Bonds. On August 1, 2006, Panama issued $313,000,000 aggregate principal amount of 7.250% Global Bonds due 2015, the proceeds of which were used to repay the Barclays Loan.
On April 2, 2007, Panama issued $450 million aggregate principal amount of its 6.700% U.S. Dollar-Denominated Amortizing Global Bonds due 2036.
On June 11, 2008, Panama exchanged $251,727,000 of its 9.625% Global Bonds due 2011 and $267,491,000 of its 9.375% Global Bonds due 2012 for $451,425,000 of its 9.375% U.S. Dollar-Denominated Global Bonds due 2029. In addition, Panama simultaneously issued $235,000,000 of its 7.250% Global Bonds due 2015.
On March 25, 2009, Panama issued and additional $323,000,000 of its 7.250% Global Bonds due 2015.
The global notes and bonds issued by Panama in the international capital markets since 1997 are unsecured, pay interest semi-annually, and have been issued in global registered form; these debt securities each rank pari passu in right of payment without any preference among themselves and with all other existing and future unsecured and unsubordinated indebtedness of Panama. In
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September 2003, Panama amended its fiscal agency agreement with the Bank of New York Mellon (formerly JPMorgan Chase Bank) to provide for the issuance in the future of global bonds with collective action clauses that, among other things, permit Panama to amend certain key terms of the bonds, including the maturity date, interest rate and other payment terms, with the consent of the holders of not less than 75% of the aggregate principal amount of outstanding bonds of the same series.
Other Development Financing
On August 19, 2004, the Government and the United States Government signed a debt-for-nature swap agreement, pursuant to which Panama and the United States agreed to restructure debt, aggregating approximately $9.4 million principal amount, owed by Panama to the United States in return for Panama’s commitment to fund, through 2016, a trust devoted to forest conservation activities in Panama’s Darién National Park. This follows a similar debt-for-nature swap agreement that Panama and the United States signed on July 10, 2003, pursuant to which the two countries agreed to restructure other debt owed by Panama to the United States in exchange for Panama’s commitment to fund, through 2016, a trust for conservation activities in Panama’s Chagres National Park. Under the 2003 debt-for-nature swap, approximately $16.1 million principal amount of debt was restructured.
As of December 31, 2008, approximately 81.9% of the total public sector external debt was owed to commercial lenders and bondholders, with 15.6% owed to multilateral institutions and 2.4% owed to bilateral lenders.
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TABLES AND SUPPLEMENTARY INFORMATION
TABLE NO. 25
External Direct Debt of the Republic
Central Government
| | | | | | | | | | | | | | | | |
| | | Interest | | Issue Date | | Final
Maturity | | Amortization | | Amount
Issued | | | Principal
Amount(s)
Outstanding at
December 31,
2008(1) | |
MULTILATERAL ORGANIZATIONS | | | | | | | | | | | | | | | | |
International Monetary Fund | | Floating | | Various | | Various | | Various | | $ | 0.0 | | | $ | 0.0 | |
World Bank | | Various | | Various | | Various | | Various | | | 752.5 | | | | 271.2 | (2) |
Inter-American Development Bank | | Various | | Various | | Various | | Various | | | 1,825.2 | (2) | | | 923.0 | (2) |
International Agricultural Development
Fund | | Various | | Various | | Various | | Various | | | 63.7 | (2) | | | 10.1 | (2) |
European Investment Bank | | Floating | | Various | | Various | | Semiannually | | | 90.0 | | | | 50.0 | |
Andean Development Corporation | | Floating | | Various | | Various | | Semiannually | | | 80.0 | | | | 70.1 | |
| | | | | | | | | | | | | | | | |
Total (Multilateral Organizations) | | | | | | | | | | | | | | $ | 1,324.4 | |
| | | | | | |
BILATERAL ORGANIZATIONS | | | | | | | | | | | | | | | | |
Government Direct Creditors(3) | | Fixed | | Various | | Various | | Semiannually | | $ | 310.9 | (2) | | $ | 71.2 | (2) |
Banks with Official Guarantees(4) | | Various | | Various | | Various | | Semiannually | | | 112.5 | (2) | | | 68.5 | (2) |
Support Groups | | Fixed | | Various | | Various | | Semiannually | | | 162.8 | (2) | | | 66.4 | (2) |
| | | | | | | | | | | | | | | | |
Total (Bilateral Organizations) | | | | | | | | | | | | | | $ | 206.1 | |
Commercial Banks | | Various | | Various | | Various | | Semiannually | | $ | 174.3 | | | $ | 169.6 | |
| | | | | | |
BONDS | | | | | | | | | | | | | | | | |
Global Bonds due 2036 | | 6.70% | | 26-Jan-06 | | 26-Jan-36 | | Various | | | 1,813.3 | | | $ | 1,785.3 | |
Global Bonds due 2027 | | 8-7/8% | | 26-Sep-97 | | 30-Sep-27 | | Bullet | | | 975.0 | | | | 975.0 | |
Global Bonds due 2029 | | 9.375% | | 31-Mar-99 | | 1-Apr-29 | | Bullet | | | 500.0 | | | | 951.4 | |
Global Bonds due 2020 | | 10.75% | | 13-July-00 | | 15-May-20 | | Bullet | | | 350.0 | | | | 30.7 | |
Global Bonds due 2011 | | 9.625% | | 8-Feb-01 | | 8-Feb-11 | | Bullet | | | 750.0 | | | | 332.9 | |
Global Bonds due 2012 | | 9.375% | | 23-Jan-02 | | 23-July-12 | | Bullet | | | 500.0 | | | | 232.5 | |
Global Bonds due 2023 | | 9.375% | | 03-Dec-02 | | 16-Jan-23 | | Bullet | | | 756.0 | | | | 138.9 | |
Global Bonds due 2026 | | 7.125% | | 29-Nov-05 | | 29-Jan-26 | | Bullet | | | 980.0 | | | | 980.0 | |
Global Bonds due 2034 | | 8.125% | | 28-Jan-04 | | 28-Apr-34 | | Bullet | | | 500.0 | | | | 172.8 | |
Global Bonds due 2015 | | 7.250% | | 23-Nov-06 | | 15-Mar-15 | | Bullet | | | 1,148.0 | | | | 1,148.0 | |
| | | | | | | | | | | | | | | | |
Total (Bonds) | | | | | | | | | | | | | | $ | 6,747.5 | |
| (1) | All obligations are denominated in U.S. dollars unless otherwise indicated. Currencies other than U.S. dollars are translated into U.S. dollars by the exchange rate (selling) as of December 31, 2008. |
| (3) | Includes former account for AID and AID-Guaranteed. |
| (4) | Former account for Official Providers. |
Source: Ministry of Economy and Finance.
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TABLE NO. 26
External Debt Guaranteed by the Republic
Decentralized Institutions
| | | | | | | | | | | | | | | | |
| | | Interest | | Issue Date | | Maturity | | Amortizations | | Disbursed | | | Principal
Amount
Outstanding
as of
December 31,
2008(1) | |
| | | | | | | | | | | (in millions of dollars) | |
Multilateral Organizations | | | | | | | | | | | | | | | | |
Inter-American Development Bank | | Various | | Various | | Various | | Semiannually | | $ | 52.9 | (2) | | $ | 25.4 | (2) |
Bilateral Organizations | | | | | | | | | | | | | | | | |
Government Suppliers | | Fixed | | Various | | Various | | Semiannually | | $ | 14.9 | | | $ | 4.11 | |
Banks with Official Guarantee | | Various | | Various | | Various | | Semiannually | | | 0.00 | | | | 0.00 | |
Official Providers(2) | | Various | | Various | | Various | | Semiannually | | | 0.00 | | | | 0.00 | |
| | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | $ | 29.5 | |
| (1) | All obligations are denominated in U.S. dollars unless otherwise indicated. Currencies other than U.S. dollars are translated into U.S. dollars by the exchange rate (selling) as of December 31, 2008. |
Source: Ministry of Economy and Finance.
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TABLE NO. 27
Internal Securities Debt of the Republic
Outstanding on December 31, 2008(1)
| | | | | | | | | | | | |
Name | | Interest Rate | | | Amortization | | Issuance Date | | Final Maturity | | Outstanding Amount |
| | | | | | | | | | | | (in millions of dollars) |
I. Bonds | | | | | | | | | | | | |
Agrarian | | 1.0 | % | | Quarterly | | Various 1969 | | Various 2009 | | $ | 1.03 |
1984 Agrarian A Series | | 6.0 | % | | Quarterly | | Various 1984 | | Various 2009 | | $ | 1.15 |
Treasury Notes 2009 | | 5.25 | % | | Semiannually | | Various 2004 | | January 2009 | | $ | 300.00 |
Treasury Notes 2010 | | 5.75 | % | | Semiannually | | Various 2005 | | June 2010 | | $ | 196.26 |
Treasury Notes 2015 | | 7.00 | % | | Semiannually | | Various 2005 | | December 2015 | | $ | 28.81 |
Treasury Notes 2011 | | 6.00 | % | | Semiannually | | Various 2006 | | July 2011 | | $ | 12.95 |
Treasury Notes 2011 | | 6.00 | % | | Semiannually | | Various 2006 | | November 2011 | | $ | 10.00 |
Treasury Notes 2011 | | 6.00 | % | | Semiannually | | Various 2006 | | July 2011 | | $ | 17.10 |
| | | | | | | | | | | | |
Total (Bonds) | | | | | | | | | | | $ | 567.32 |
| | | | | |
II. SIACAP Bonds | | | | | | | | | | | | |
SIACAP C Series | | 8.5 | % | | Semiannually | | August 1999 | | August 2013 | | $ | 165.65 |
| | | | | | | | | | | | |
Total (SIACAP Bonds) | | | | | | | | | | | $ | 165.65 |
| (1) | Instruments with a maturity of more than one year. |
Source: Ministry of Economy and Finance.
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