Panama: Financial sector drives growth
While much of Panama’s impressive economic growth over the past decade has stemmed from government investment, the financial sector’s contribution to GDP is rising steadily on the back of strong private sector lending and well-planned fiscal consolidation.
Panama is fast carving out a niche for itself as a leading financial hub in Latin America, with figures from the National Statistics Agency showing that the sector accounted for 8.1% of GDP in 2011.
The financial industry, which expanded 11% in the first six months of 2012, has been singled out in the government’s Strategic Plan 2010-14 as one of four key sectors viewed as critical to sustaining Panama’s overall economic growth.
The economy began expanding rapidly after the country seized full control of its strategically important canal in 1999. A $5.3bn government-led project to expand the waterway followed and is earmarked for completion in 2014.
Data from the World Bank shows Panama’s economy expanded 10.6% in 2011, pushing up the country’s average annual GDP growth rate for the past five years to 8.9%. Figures also show that the economy, which maintained a strong performance even through the worst of the global economic crisis in 2008-09, expanded 10.6% in the first quarter of 2012 and 10.4% in the following three months in year-on-year (y-o-y) comparisons.
In its annual Article IV assessment of Panama, published last November, the IMF pointed to many years of strong real GDP growth, alongside successful fiscal consolidation, which it said had resulted in “a rapid decline in debt ratios and in upgrades of its sovereign debt credit rating”.
The assessment was also upbeat about the stress tests conducted in the context of a recent Financial Sector Assessment Programme (FSAP) mission, saying they confirmed that Panama’s “banking system can be expected to remain sufficiently capitalised even under challenging external conditions”.
First-half figures for 2012 showed that Panama’s international banking centre’s assets totalled $84.6bn, up 11.7% in a y-o-y comparison, while the banking system’s assets rose 13.4% for the same period to reach $69.1bn, according to the Superintendent of Banking of Panama (SBP).
Total deposits increased to $60.9bn, marking an 11.8% y-o-y increase and bringing the banking sector’s capital adequacy ratio to 16.1%, well above the 8% required by the Basel Committee. Lending from the national banking system also increased by 14.9% to reach $29.8bn in the first six months of 2012.
While Panama’s strong financial sector has benefitted in the past from its status as an “offshore” tax haven, new regulations and increased cooperation with other nations, including the US, have reduced the influence of foreign depositors.
In April 2011, the US-Panamanian Tax Information Exchange Agreement (TIEA) came into effect, paving the way for the two governments to exchange information on all national taxes relating to both civil and criminal matters beginning on or after November 30, 2007.
Prior to the signing of the TIEA, Panama began a campaign aimed at shedding its image as a tax haven, passing several national laws to help curb tax evasion. With 12 tax information exchange agreements now in place, including one signed with France just last year, Panama has now been removed from the Organisation for Economic Cooperation and Development’s “grey list” of countries that have yet to implement international standards for exchanging tax information. The US has also passed the Foreign Account Tax Compliance Act (FATCA), which should come into effect in 2013, although negotiations on its implementation are still ongoing with Panama.
While Panama’s impressive growth looks set to continue, an expected drop in government investment once the country’s canal project is complete should see the financial sector take on a more significant role in influencing broader economic expansion. Strong lending on the back of heightened private sector participation should help Panama strengthen its reputation as a regional financial centre and key component in the country’s economy.