Economic Performance: Panama and Latin America

Mahesh C. Khemlani Vice Minister of Finance March, 2013

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Table of Contents

1. Macroeconomic Overview: Panama and the Region. 2. Fiscal Performance 3. Other Key-Developments: Debt Profile and Performance 4. Conclusions

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Macroeconomic Overview: Panama and the Region

3

Key Economic Indicators

Latin American economies remain resilient to external shocks and will continue to grow in the short term. Impact of Eurozone crisis in global growth perspectives

•

According to the IMF, Panama’s growth rates can be sustained in the medium term. In October 2012, it reviewed Panama’s average annual growth rate forecast from 5.6% to 6.5% for 201317 period; outperforming our regional peers.

•

LAC economies represent almost 70% of China’s GDP with nearly 43% of it’s population.

IMF 2013-2017F Annual Real GDP Growth (%) LATAM 3.9% average growth 6.5% 6.0%

4.6%

4.5%

4.1%

4.0% 3.4%

Source: IMF WEO (April and October, 2012).

Panama

Peru

Chile

Colombia Brazil

Uruguay Mexico

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Key Economic Indicators

In 2012, Panama’s economy grew at a rate of 10.7% year-on-year, one of the highest growth rates in the investment grade category. Latin America has evolved from being low growth and heavily indebted to becoming the driver of global economic development in upcoming years. 14.0%

12.1%

12.0%

GDP Growth

10.0% 8.0% 6.0% 4.0%

10.8%

10.1% 8.5% 7.5% 6.0% 4.9%

5.8%

4.7% 4.5%

6.2% 4.2%

5.2%

8.5%

7.6%

7.2% 5.7%

10.7%

4.5%

3.9%

3.2%

5.4% 5.3%

2.0%

2.8%

3.9%

-0.6%

3.9%

3.3%

3.6%

2012

2013F

0.0% -2.0%

-1.5%

-4.0% 2004

2005

2006

2007

Panama Real GDP Source: IMF and MEF.

2008

2009

Global Real GDP

2010

2011

LAC Real GDP

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Key Economic Indicators

The unemployment rate in Latin America was 6.4% at year-end 2012, continuing a downward trend that is expected to carry on this year. 12.0% 10.0% 8.0%

36.0%

Total Unemployment Rate 9.8% 8.7% 9.0%

8.1%

7.9% 7.3%

8.6%

6.0%

7.3% 6.7% 6.6%

6.4%

34.0%

32.8%

32.0%

33.4%

6.4%

22.0%

0.0%

20.0%

Total Unemployment Panama

2009

2010

2011

2012F

Total Unemployment LAC

25.8%

24.0%

2.0%

2008

27.6%

26.0% 4.0%

28.8%

29.8%

28.0%

4.5%

2007

29.4%

6.5%

4.0%

2006

31.0%

30.0%

5.6%

2005

Poverty

2009

2010

Poverty Panama

2011

2012F

Poverty LAC

The Panamanian economy has created an average of 80,000 new jobs in the past two years, resulting in 110,000 people leaving poverty last year. Source: ECLAC, INEC and ILO.

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Key Economic Indicators

FDI inflows to LAC increased 16.0% to a record of US$217 billion in 2011. In Panama FDI reached an all-time high in 2012, totaling US$3.0 billion, representing 8.3% of GDP. Panama’s enhanced competitiveness and comprehensive regulatory framework is an important factor to attract FDI.

According to 2012 UNCTAD’s World Investment Report, Panama and Uruguay are performing above expectations in regards to the FDI Attraction Index and FDI Potential Index; while Brazil, Chile, Colombia and Peru are front runners. 7

Key Economic Indicators

GDP Composition 2012

Panama improved nine notches in the WEF’s Global Competitiveness Report, positioning itself as the second most competitive economy in Latin America.

Others 20.0%

Agriculture 2.9%

Fishing 0.4%

General Government 6.0% Real Estate, Business and Rental Activities 5.1% Financial Intermediation 8.1%

Transportation, Warehousing and Communications 24.1%

Financial Market Development Availability of financial services Affordability of financial services Soundness of banks Source: INEC and MEF.

Mining 1.8%

Manufacturing Industries 4.9% Electricity, Gas and Construction Water Supply 7.2% 2.6% Wholesale and Retail Commerce 14.0% Hotels and Restaurants 2.9%

Infrastructure

4th 2th 4th

Quality of port infrastructure Quality of air transport infrastructure Mobile telephone subscriptions

4th 6th 2nd 8

Key Economic Indicators

Central Government expenditure has shifted from being OpEx oriented to CapEx focused. According to IMF figures, over the last decade, the region has allocated more than 20% of its GDP towards efficiency and infrastructure investments.

% of total expenditure

Panama’s Central Government Expenditure Composition

2000

20.7%

14.6% 12.4% 10.9%

14.3%

18.9%

31.8% 34.9% 37.6% 41.7%

63.8%

60.3%

2001

2002

2003

2004

Current Expenditure Source: IMF and MEF.

9.5%

22.0%

2005

2006 2007 Year

Capital Expenditures

53.6% 52.7% 51.4% 48.8%

2008

2009

2010

2011

2012

Interest Payments 9

Fiscal Performance

10

Central Government’s Revenue Growth

Tax revenues increased by US$978.1 million or 24.6% compared to 2011. • The tax revenues increase, is mainly due to an increase in the direct taxes collection, derived from Panama’s economic expansion, recent tax reforms and an improved tax administration office. 2,500

3,000

US$2,478

US$ million

US$1,762 1,500

2,000

US$776 or 45.6%

2,000

US$1702 US$1224

US$2,010 US$1,532

1,500

US$1,394 US$1,025

1,000

US$1,266

US$711

US$202 or 10.0%

US$2,212

US$ million

2,500

1,000

Indirect Taxes

Direct Taxes

US$528

2012

US$932 2011

500

US$916

2012 2011

500

US$467

US$499 0

0 I

II

III Quarters

IV

I

II

III

IV

Quarters

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Fiscal FiscalPerformance Performance

Sound countercyclical fiscal policies were put in place to strengthen the macroeconomic stability of the region. Fiscal Balances, GDP Growth an Debt to GDP ratio of LATAM Investment Grade Countries and G-7

10.0%

Brazil

Fiscal Balance (%GDP) 2012

5.0%

Chile Germany

Peru

0.0% Uruguay Italy

Panama

Mexico Canada

-5.0%

Colombia France USA

UK -10.0%

Size of the bubble represents Debt to GDP ratio Japan -15.0% -5.0%

0.0%

5.0%

10.0%

15.0%

Real GDP Growth 2012 (%) Source: IMF and IDB.

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Other Key Developments: Debt Profile and Performance

Sovereign Debt Profile

Public Debt to GDP ratio decreased to 39.3% in 2012.

71.2% 69.4% 67.0% 70.4% 66.5% 66.2%

US$ million

12,000

BB+

61.0%

BBB

BBB-

52.9%

BB

43.7% 40.9% 39.3%

8,000

80% 60% 40%

45.4% 45.4%

4,000

20%

0

Debt to GDP ratio

16,000

0% 2000

2001

2002

2003

2004

External Debt

2005

2006

2007

Internal Debt

2008

2009

2010

2011

2012

Debt to GDP

•

Panama’s public debt stock was US$14.3 billion at the end of 2012, representing an increase of US$1,451.0 million compared to December 2011.

•

The Average Weighted Cost of the public debt was 5.58% as of year-end 2012, down from 5.81% recorded the previous year and 6.67% in 2009.

•

The Government continues to diversify its financial sources by reducing external public debt as a percentage of total public debt. It has gone from 92.5% in 2009 to 75.6% in 2012, partially due to the success of the Market Makers Program. 14

Source: MEF, Public Credit Directorate

Sovereign Rating Improvements

Significant upgrades in our credit rating and outlook have taken place in 2012.

Standard & Poor’s (July 2012) “Continuous economic growth, combined with moderate fiscal deficits should reduce the government debt burden.”

Fitch Ratings (August 2012) “The improvement in the rating reflects a sustained improvement in public finances, accompanied by the recently approved fiscal reforms and a diversified economy.”

Moody´s (October 2012) “Continued economic growth, positive growth prospects in the medium term and the Government’s solid balance sheet , together with the favorable debt dynamics, aided mainly by a progressive decrease of the debt/GDP ratio.” 15

Panama PanamaSavings SavingsFund Fund

According to forecasts, the financial capability of future Administrations to execute their Strategic Government Plan is sustainable over time. Panama Savings Fund

ACP contributions ($mn)

NFPS Gross Debt (% GDP)

NFPS Net Debt (% GDP)

CG Capital Expenditure ($mn)

NFPS Capital Expenditure ($mn)

Assets ($mm)

% GDP

National Treasury

Transferred to FAP

2013

1,200

3.20%

972

0

40.3%

37.2%

2,668

2,910

2014

1,200

2.90%

1,104

0

40.2%

37.3%

2,879

3,295

2015

1,200

2.60%

1,416

0

39.7%

37.0%

3,348

3,782

2016

1,430

2.90%

1,724

230

38.0%

35.1%

3,243

3,697

2017

1,826

3.40%

1,873

396

36.0%

32.6%

3,348

3,823

2018

2,245

3.90%

2,035

419

33.6%

29.8%

3,477

3,976

2019

2,531

4.00%

2,212

286

31.5%

27.4%

3,961

4,357

2020

2,890

4.20%

2,403

360

29.4%

25.2%

4,444

4,877

2021

3,357

4.50%

2,599

467

27.7%

23.2%

4,869

5,340

2022

3,930

4.90%

2,811

572

26.1%

21.2%

5,283

5,785

2023

4,559

5.30%

3,039

630

24.7%

19.4%

5,604

6,158

2024

5,231

5.60%

3,287

671

23.3%

17.7%

6,038

6,638

2025

5,922

5.80%

3,554

691

22.1%

16.2%

6,567

7,225

2040

6,923

2.40%

5,712

0

20.7%

18.2%

15,952

17,592

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Conclusions

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Conclusions

The Government will continue to implement its ambitious investment plan without compromising its fiscal stability or raising the debt burden. •

During 2012, Panama obtained an upgrade from Moody’s and S&P, based on positive growth prospects and sustainable public debt indicators. There are seven Investment Grade Latin American sovereigns: Brazil, Chile, Colombia, Mexico, Panama, Peru and Uruguay.

•

Panama’s debt to GDP ratio dropped from 40.9% in 2011 to 39.3% in 2012. The debt/GDP ratio should continue its downward trend boosted by strong economic growth. Public indebtedness levels across the region are favorable. Since 2000, gross general government debt of LAC as a percentage of GDP has been close to 50%, while mayor advanced economies have increased it from 77.3% to 125.1%

•

In 2013 the Government has committed to continue to stimulate the domestic capital market via an ambitious local auction program for public securities. During 2012, the Government issued US$1,364.0 million in Treasury Bonds, providing more liquidity to the local capital market.

•

The Global Competitiveness Report for 2012-2013 ranks Panama as the 40th most competitive country in the world and 1st in Central America.

•

The global trade flows of finished goods are no longer dominated by the Northern Hemisphere. The development of the Latin American economies have shifted this trend; nowadays global trade is characterized by significant flows of merchandises from developing to developed countries. 18

Economic Performance: Panama and Latin America Thank You! QUESTIONS?

Public Credit Directorate http://cpublico.mef.gob.pa/ +(507) 507-7205 19

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