Ayudándole a tomar decisiones en un entorno económico global

Thursday, February 25, 2010

Panama Economic Outlook - February, 2010

Tax reform

In second half of February of 2010, Legislative Assembly will be discussing a second phase of the tax reform. The first phase occurred successfully a few months ago, when achieved a greater contribution from Colon Free Trade Zone and container transshipment ports, among others economic sectors.

Currently, all those who earn US$9,500 and less per year do not pay income tax; they are 80% of the worker population. According to Government, this range would be extended to US$11,000. Workers with incomes between US$11,000 and US$50,000 would pay 15% on the surplus of US$11,000. Those with incomes between US$50,000 and more would pay US$5,850 more 25% on the surplus of US$50,000.

If the reform is such as was announced by the Government then workers will pay only two marginal rates, the first tax rate would be 15%, for those who earn US$11,000 per year but less than US$50,000 and second tax rate would be 25% for all those workers who earn US$50,000 and more per year. This tax reform would reduce the effective rate for all workers that currently pay taxes.

Currently, tax structure is progressive, based on the principle that those who earn most are those who must pay more taxes. This progressive structure would remain with the tax reform, but effective rates would be substantially reduces for all workers. This progressive structure is appropriate in Panama where wages are relatively low and income distribution is very unequal. Professionals, executives and workers with high salaries are those who have the greatest potential of becoming in entrepreneurs because they can save and invest more, but the current tax structure is a brake to the economic growth and wages. This tax reform will improve the situation of workers that pay taxes.

An aspiration of the new Government from electoral campaign was to become current progressive tax structure in a flat tax. A flat tax is a tax structure with a single rate. Theoretically, this single rate should be chosen of manner such that the sum of tax collected is at least equivalent to the sum collected currently. However, the problem is that will appear winners and losers, because for some its current effective rate would be at the top, while for others would be by below.

The complexity of a flat tax in Panama is that 80% of workers do not pay income tax. In other words, only 20% of the workers contribute to income tax. Panama Economy Insight has estimated that a flat tax of 6% on wage would collect the same amount of current tax structure. However, 50% of the collection comes 80% currently do not pay tax. Therefore, it is very complex to become current tax structure in a flat tax. The Government has sent clear signals that do not implement the flat tax and, instead, will reduce substantially marginal tax rates maintaining the progressive structure. This will reduce significantly the burden on 20% worker population that pay taxes and leave them more money available for consumption, savings or investment.

Nevertheless, ITBMS (a tax on sales) will be increased from 5% to 7% to compensate the reduction of income tax. In consequences, those workers that earn US$9,000 per year and do not pay income taxes, with the tax reform should pay an increase of two percent of ITBMS. However, foods, non-alcoholic beverages, electricity consumption, water, books and supplies for students do not pay ITBMS and Government has explained that the negative impact on low income household will be not strong. This increase will affect to consumption of cell phone, Internet, restaurants, clothes, shoes and cars purchases among others goods and services.

Fiscal deficit and public debt

Panama Government announced yesterday (on February 11st 2010) that the fiscal deficit of Non Financial Public Sector (NFPS) was by only 1% of GDP in 2009. Government achieved to down the NFPS deficit from 2.3% (US$575.2 million) from January to September to 1% (US$253.3 million) from January to December. Government explained that collected almost US$200 million plus due to“ley de moratoria” (a fiscal law that allow to pay taxes without penalty by delay), which allowed to down the NFPS deficit to 1%. Government fiscal performance was better than Panama Economy Insight forecasted; Panama Economy Insight forecasted the NFPS deficit by 2.3%, but this was by only 1% due to “ley de moratoria”.

Government sector value added expanded by 3.1% in the first three quarters of 2009, according to GDP data published by the Comptroller on its website. Meanwhile, the revenues of the Central Government contracted by 8.6%, year on year, according to data published by Ministry of Economy and Finance on its website. The previous Government, which concluded its mandate at the end of June, prepared the 2009 budget based on an economic growth of 7%, which was too optimistic with regard to the true situation. At that time, global economic downturn effects were not very clear and International Monetary Fund predicted a growth of 7% for Panama.

Panama Economy Insight estimates that public debt as percentage of GDP increased from 45% in 2008 to 46.7% in 2009, as a result of NFPS deficit, as well as also due to debt of the Financial Stimulus Programme (a financial stimulus for banks). By 2010, Panama Economy Insight forecasts that the NFPS will experience another deficit by 2.1%, because economic growth of just 2.3%. This deficit would fall to less than one percentage point of GDP in 2011 and 2012 and debt as percentage of GDP will reduce to 38.9% of GDP in 2012 because rapid economic expansion.

Source: based on information from Ministry of Economy and Finance.

Recently Standard & Poor roses Panama debt risk rating from BB+ with stable perspective to BB+ with positive perspective. This means that Panama debt is only a step of the so-called investment degree. Achieve this investment degree, the Panama debt cost could decrease because lower interest rates of global bonds because Panama would be see as a low-risk sovereign country. In fact, the iceberg tip began to see when the Panama Government, taking advantages of the improvement of the risk rating, issued global bonds for thousand millions of dollars reaching rates significantly lower than the current.

The Panama Government is using this money to pay off an old debt with the Panama National Bank (Banco Nacional de Panamá) and the Social Security Fund (Caja de Seguro Social). This means that you would be injecting money to these public entities. It is likely that the Social Security Fund invest that money in private instruments or of the Government. In the case of the Panama National Bank, it would use it to provide, which would substantially improve the supply of credit of the banking system National, which from January to October it has contracted in 15% year on year.


Panama inflation rate was by only 2.4% in 2009, according to information published by the General Comptroller in its Web site. The inflation in 2009 fell from 8.7% in 2008, due to the economic downturn and lower oil prices and import prices. Even, foods and beverages prices are falling, despite the suspicion about the existence of market power in several key markets. Panama Economy Insight forecasts that the inflation will be just 2.6% in 2010, however, it would increase by 3.5% and 4.5% in 2011 and 2012 respectively, because a future increases in oil prices.

Economic growth

Panama economy grew 3%, 2.2% and 1.1% in the first, second and third quarter of 2009 respectively. Panama remains one of the few countries in Latin America that grew in 2009. However, the economic growth plummeted from 12.1% and 10.7% in 2007 and 2008 respectively. Panama Economy Insight estimates Panama economy grew by only 1.6% in 2009 because economic growth continued slowing in the fourth quarter.

U.S. economy grew by 2.2% in the fourth quarter of 2009, according to data published by the U.S. Department of Commerce. In addition, U.S. Department of Commerce expects to grow in the first quarter of 2010, which will mean the start of the economic recovery of that country and, therefore, of the Latin American economies.

In 2009, Panama economy grew two rates: most of the activities linked to external markets contracted while than those linked to domestic market were in boom. Practically, contractions of the external sectors were to offset with the boom of the household consumption.

Panama Economy Insight forecasts that in 2010 Panama economy will grow by only 2.3%. After of 2010 the economic outlook is very positive. Panama Economy Insight forecasts that economy will grow by 9.4% to 8.6% in 2011 and 2012 respectively, because recovery of U.S. economy and Latin American economies, as well as due to the recovery of the baby boomer real estate market, Canal expansion, construction of a subway in Panama City and others public and private investments. This will allow the unemployment rate down to 4.8% and 4.6 % in 2011 and 2012 respectively.

YEARS 2009-2012
(Percent change of real GDP)


In October of 2009, the General Comptroller of the Republic of Panama published the unemployment rate based on the "household survey" applied in August. In Panama, unlike other countries, is not possible to observe the monthly unemployment rate due to "household survey" is apply only in March and August each year. This new "household survey" shows the unemployment rate soared by 1% year on year in August of 2009. The unemployment rate is now 6.6% against 5.6% of the last year. If the result of August of 2009 is compare with the data published in March of this year, the increase of the unemployment rate is only by 0.3%, which means that the global downturn has had an impact lower than expected by Panama Economy Insight due to the boom of the domestic markets in the first half of 2009. In previous monthly reports Panama Economy Insight had being forecasting that the unemployment rate will be around 8% in 2009, but the new "household survey" shows this was only 6.6% as a result of the domestic market boom.

Unemployment rate increase because population economically active grew more than employment, unlike what happened in countries that have being hit by the global downturn where companies have fired to a large number of workers. In fact, total employment in Panama grew, compared with August of the last year, according to the "household survey". In August of 2009 were generated 18,880 additional occupations compared with the same month of the last year. However, the economically active population increased by 35,974 persons, which led to increase the unemployment rate. Only five economic sectors showed a reduction of employment, according to the General Comptroller’s survey. Retail and wholesales employment decrease by 11,982 persons, as result of a lower sales in Colon Free Trade Zone compared with the last year. In addition, the personal services employment in the homes declined by 6,213 persons. Some people have lost their jobs indirectly because their contract of employment was not renewed.

Panama Economy Insight expects to grow the employment of commerce and homes with personal services by 4,864 and 12,706 persons respectively in 2010. However, Panama Economy Insight expects to decrease the employment of construction and real estate by 8,932 and 1,198 respectively in 2010, due to the adjustment of Panama real estate supply. Panama Economy Insight expects to grow the real estate sales in the first half of 2011.

In the next months will not be possible to know the unemployment evolution, especially when the construction is falling, but until May of 2010 when the General Comptroller published the results of the "household survey" applied in March of 2010. Panama Economy Insight forecasts that in 2010 the unemployment rate will increase by 7.6% because economically active population growth and the jobs loss in construction and real estate and its linked activities. These job losses would occur despite Panama Canal is expanding and the Government will invest substantially in infrastructure, because these investments are less labor intensive than houses and apartments construction.

Monthly Economic Activity Index (IMAE)

In January, General Comptroller published Monthly Economic Activity Index (IMAE). This indicator grew 1.91%, 1.69% and 3.08% in September, October and November of 2009 respectively, after two months straights of contraction.

Source: based on information from General Comptroller of the Republic of Panama.

The IMAE growth remains below the GDP growth. Even, while GDP grew by 1.1% in the third quarter, the IMAE contracted 0.6%. The IMAE is useful because it shows information of the activities growth as a whole before GDP is published, however, thought that this indicator underestimating the economic growth.

Consumption and retail sales

Collection of taxes on sales (ITBMS), which is a tax on consumption, grew substantially from January to October of 2009, according to information published by Ministry of Economy and Finance on its website. This shows that the consumption was booming in 2009, spite the global economic downturn.

From January to November of 2009, consumption of residential electricity and gasoline sales grew by 12.8% and 16.6% respectively, according to information published by General Controller, which shows that consumption has been boom. However, new car sales fell by 27.7% from January to November, due to credit restrictions by banks.

Source: based on information from Ministry of Economy and Finance.

Supply credit for consumption has contracted, the which, together other credit restrictions, have been putting pressure to consumption boom. New loans for consumption fell by 23.1% from January to October, according to information published by Superintendent of Banks on its website. Most consumer loans affected were credit cards and credit for car purchases. Panama Economy Insight expects consumption grow just 2.6% in 2010 due to these credit restrictions and lower economic growth and employment; however, expects consumption grow by 9.6% and 8.7% in 2011 2012 as a result of Canal of Panama and recovery real estate market.

Construction and real estate

Panama real estate sales fell by 50% in 2009. Panama real estate has been strong impacted by the U.S. real estate collapse. Real estate sales are fallen since Lehman Brothers bankruptcy and the collapse of the U.S. house prices. The U.S. Baby boomers (the main buyers of houses and condominiums in Panama) cannot sell your house and moved to second home in Panama. The supply/sales ratio is increasing since Lehman Brothers bankruptcy. Spite oversupply of house and condominiums, prices is not ease.

General Comptroller published in its web site that the premixed concrete production and construction permits value fell by 9.9% and 6.2% from January to November year on year respectively. In 2009 the premixed concrete production contracted eight month straights. In June of 2009, construction permits soared in 265% year on year. This atypical situation occurred because in June the real estate tax exemption ended. After June, it is another adverse factor for the construction sector, because the new projects have not this incentive.

Value added of real estate (market production) contracted by 4.4% from January to September of 2009 year on year, according to data published by General Comptroller. However, construction value added grew 6.6% from January to September of 2009 year on year. In the first quarter of 2009, construction was in boom, spite real estate market sales were contracting. This construction boom in the first quarter was the result of the boom of condominiums construction and infrastructure projects such as the Coast Tape, the Highway Panama-Colón and the Northern Corridor among others.

Panama Economy Insight estimates that construction GDP contracted by 0.8% in 2009 and forecasts another contraction in 2010 by only 5.1%, due to the impact of the Canal expansion in second half of 2010 and construction of a subway in Panama City in fourth quarter 2010. Canal expansion will have major impact on construction investment, cement production and premixed concrete industries, as well as on sand extraction and quarries sectors, but not on employment. Canal expansion will compensate losses of jobs in residential construction, but not at all, because Canal expansion is not labor intensive. The problem is that the construction sector employs 138,000 people, while Canal expansion will employ approximately 7,000 people in the project peak because this is little labor intensive. Panama Economy Insight expects to decrease the employment of construction and real estate by 8,931 and 1,858 respectively in 2010, due to the adjustment of Panama real estate supply. Panama Economy Insight expects to grow the real estate sales in the first half of 2011. Panama Economy Insight forecasts that GDP will grow only 2.3% in 2010 due to this real estate supply adjustment, spite Panama Canal expansion.

Transport and logistics

Despite global economic downturn affected sharply to world shipping industry, Panama Canal net tonnage fell by only 2.3% from January to November of 2009 due to sudden increase in dry bulk segment. Nevertheless, Panama port container movement decreased by 9.2%, according to information published by Comptroller in January on its website. Panama Canal Railway fell by 25% in 2009. Transit passenger of the international air hub grew 19% from January to November of 2009; however, number of tourist fell 5% in the same period.

Despite contraction experienced by Panama Canal, ports and passengers air transport, value added of the “transport, warehousing and telecommunication” sector grew by 8.2% from January to September of 2009, due to unexpected boom of telecommunications. “Transport, warehousing and telecommunication” sector represents 21.4% of GDP. Telecommunication sector contribution to “Transport, warehousing and telecommunication”sector was 32.2% in 2008 meanwhile Panama Canal, air hub and ports contributed to this sector by only 22.1%, 13.8% and 10.4% respectively in the same year, according to General Comptroller of the Republic of Panama. Therefore, telecommunications, among other consumption sectors, helped to prevent the contraction of the Panama GDP.

Panama Economy Insight forecasts that the Panama Canal net tonnage and container movements will grow by 3.2% and 15.9% in 2010 respectively. This forecast is higher than the Panama Canal Authority forecast.


Hotels and restaurants value added grew by only 1.3% in from January to September of 2009 year on year. In first quarter, hotels occupation was high and arrival of tourists from cruises were in boom due to the Enchantment Overseas cruse, which established in Panama its Home Port. However, the situation changed substantially in the second quarter, because hotel activities declined due to the global downturn. Occupied hotel rooms (daily average) contracted by 12.6% from January to September of 2009. Tourist arrivals declined by 6.3% in this period. Conversely, the number of cruise ship tourists increased by 19.1% from January to September of 2009, according to the same information source. Tourist expenditures grew by just 1.6% in this period.

Colon Free Trade Zone

From January to September of 2009, Colon Free Trade Zone (CFTZ) export value grew by 16.1%, while volume fell by 23% in the same period.

By 2010, CFTZ exports to Colombia (the second greatest purchaser from CFTZ) are expects to improve because dismantling of the barriers that country had for many years against imports from CFTZ. In last year, World Trade Organization (WTO) ordered to Colombia dismantling the barriers against imports from CFTZ.

Panama Economy Insight forecasts that CFTZ re-exports value will grow by only 3.4% in 2010. By 2010, the CFTZ growth could be higher, but the problem is that Venezuela (the greatest buyer from CFTZ) will have another economic contraction, according to International Monetary Fund forecast published in October in its web site.

Petroleum Free Trade Zones

Bunker sales to ships in transit through Panama Canal contracted by 21.6% from January to November of 2009 year on year, because global shipping industry downturn. However, bunker sales grew by 8.2% and 19.8% in October and November respectively, after eight straight months of contraction. Panama Canal net tonnage increased in the same period and allowed the recovery of bunker sales. Nevertheless, Panama container transshipment ports continued to contract in the same period. Panama logistics and transport cluster (Canal, ports, bunker and railway among other activities) is an indicator of the health of the global shipping industry and, in consequence, is not yet clear the recovery.


In 2009, banks took lower risks, which reflected in negative growth rates for new loans in 2009. Banks sacrificed profits and restricted the new credits so to maintain high liquidity to offset the global economic downturn. The Panama Banking System remains the most strong in the region and it has faced the global economic crisis without any problem.

Source: based on information from Panama Banking Superintendence.

Banking value added contracted by 0.1% from January to September of 2009 because lower profits than previous year. Assets of National Banking System grew by only 1% from January to November. National Banking System profits remain substantially positive, unlike what happened with U.S. and Europe banks. However, from January to November of 2009, profits were 29.3% below previous year. Panama Economy Insight estimates that banking value added contracted by 1.7% in 2009; also expects to contract another 1.7% in 2010, because lower profits.

Source: based on information from Panama Banking Superintendence.

Electric power generation

Value added of "electric energy, gas and water" grew by 6.7% from January to September 2009. Electric power generation grew by 8.6% from January to October. Residential electricity consumption grew by 12.6% in the same period due to the growth of condominiums in Panama City, which have air conditioners and other electrical appliances, moreover due to the boom in domestic demand. Panama Economy Insight expects to moderate the residential consumption in 2010. In 2010, hydraulic electricity generation could decrease due to the phenomenon of "El Niño". After 2010, generation capacity should be substantially expand to cover a rapid expansion of demand. Panama Economy Insight forecasts that demand will grow by 10.3% and 8.9 % in 2011 and 2012 respectively.


In 2009, telecommunications had a performance higher than expected, because aggressive entry of Digicel (a telecommunication company). Digicel not only took share of incumbent companies (Cable & Wireless and Movistar), but has expanded the market size of the cellular phone segment. Telecommunications value added expanded extraordinarily by 49.6% in the third quarter of 2009, due to this cellular phone supply expansion and consumption boom. The extraordinary expansion of telecommunications has been one of the factors that helped to offset the GDP contraction. Panama Economy Insight expects to moderate of telecommunication growth rates in 2010.


Manufacturing value added contracted by 0.5% from January to September of 2009, according to information published by Comptroller. Electricity consumption (which is a measure of manufacturing performance) did not grow from January to October of 2009. Panama Economy Insight estimates that the value added of the manufacturing sector will grow just 0.6% 2009 and forecasts that grow by only 0.7% in 2010.


General Comptroller reported that value-added agriculture and fishing contracted by 10% and 3.3% respectively from January to September of 2009, which is attributable to the sharp fallen of fruit and seafood exports to United States and Europe, as well as also due to loss of tariff preferences in European Economic Community. Agricultural and seafood exports fell sharply by 50.4% and 13.4% respectively from January to November of 2009, due to economic downturn in United States and Europe (which are its main markets).

Since early 1990s, banana sector has been contracting due to barriers imposed by the European Economic Community. In Puerto Armuelles (one of the main producer areas of this fruit) the activity has almost disappeared. With the reversal of the measures imposed by the European Community, is expects that banana exports begin to emerge in Puerto Armuelles.

Panama Economy Insight®, all rights reserved.

To send your comments or opinions to write to our e-mail:

You can also write to:

P.O. Box: 0832-2366, World Trade Center, Panama

No comments:

Post a Comment