Caribbean & Central America - December 2020

At the end of October Panama’s 71-member unicameral national legislature approved a proposal by the Partido Revolucionario Democrático (PRD) government led by President Laurentino Cortizo that raises the legally established limits for the fiscal deficit included in the 2008 social and fiscal responsibility law (LRSF). This is the latest sign of the difficulties facing the government in dealing with increased spending as a result of the fallout from the coronavirus (Covid-19) pandemic.

Following the changes approved by the legislature, the ceiling for the fiscal deficit is now 9%-10.5% of GDP in 2020, 7%-7.5% next year, 4% in 2022, 3% in 2023, 2% in 2024, and 1.5% thereafter. In November 2019 the government already amended the LRSF to increase its fiscal deficit limits citing smaller revenues and a need to settle accumulated arrears inherited from the previous Partido Panameñista (PPA) government led by Juan Carlos Varela (2014-2019). Following the changes in November 2019, limits were set at 3.5% of GDP in 2019, 2.75% in 2020, 2.5% in 2021, and 2% thereafter, compared with the previous version of the LRSF, which set the ceiling on a gradual decline towards 1.5% of GDP by 2022.

The latest amendment to fiscal deficit ceilings comes off the back of an economic downturn due to the pandemic and stimulus spending by the PRD government. However, the repeated raising of the fiscal deficit limits have caused concern among international credit ratings agencies, including Fitch Ratings, which, in a 9 November briefing pointed out that its revision of Panama’s rating outlook in February to ‘negative’ from ‘stable’ (which stemmed from fiscal concerns) occurred before the pandemic struck. The agency underlined that Panama has been postponing fiscal deficit consolidation goals for a decade now, and the “development of credible consolidation plans” will be key to improving the outlook.

Repeated changes to the fiscal rule have “weighed on policy credibility,” Fitch says, but “improving fiscal policy credibility is particularly important to Panama’s rating in the absence of independent monetary policy”, a consequence of the country’s dollarized economy. Fitch believes the 2020 fiscal deficit will be almost 9.5% of GDP, as fiscal revenue takes a hit due to reduced economic activity during the pandemic. Revenue was 34% below the budget target in September, according to Fitch, while the government enacted a coronavirus stimulus package worth almost 3% of GDP.

Fitch predicts that fiscal consolidation will be possible thanks to recovery in tax collection from next year. It also says that prioritising economic growth now could see revenue recovery that makes consolidation easier down the line, as tax revenue relies heavily on consumption. It forecasts that GDP will contract by 9% this year but expects it to recover to grow by almost 4% in 2021, citing a full year of production at the Minera Panama copper mine in Colón province and government-led infrastructure projects as driving factors. However, Fitch also mentions the risk of a surge in unemployment, forecast to hit 25% by the end of the year, causing an extended retail sector slump that will affect tax revenue.

Other ratings agencies are also concerned about Panama’s outlook. Standard & Poor’s (S&P) revised its outlook to ‘negative’ in April, and on 20 October Moody’s Investors Service followed suit, citing “absent meaningful fiscal consolidation” and warning that “the sharp deterioration in fiscal and debt metrics will continue to undermine Panama’s credit profile in the coming years”.

Amid these concerns, on 29 October Panama’s legislators approved a 2021 budget worth US$24.19bn, up from US$23.3bn in 2020. The economy & finance ministry (MEF) announced that 33% of the total will be spent on “physical investments” such as the construction and rehabilitation of schools, strengthening of educational technologies and improvements in health infrastructure. It also contemplates investment for housing projects, maintenance and rehabilitation of roads and the construction of an electrical transmission line.

Some analysts such as Cristina Guevara of the US-based think tank Atlantic Council warn that the rise in public debt coupled with the lack of transparency surrounding the allocation of public funds and ongoing corruption scandals could lead to social unrest as economic deterioration continues. Brazilian construction company Odebrecht was found to have paid more than US$100m in bribes to government officials working under former presidents Martín Torrijos (2004-2009), Ricardo Martinelli (2009-2014) and Varela, and there have been further corruption scandals during the pandemic, including the acquisition of vastly overpriced ventilators. Unless they start to see concrete actions taken to improve their daily lives, Panamanians will surely start to wonder where all the money is going.

• Tallying the impact of the pandemic on the Canal

 On 5 October Ricaurte Vásquez Morales, the administrator of the Panama Canal authority (ACP), presented the results for the 2020 fiscal year (1 October 2019 to 30 September 2020) which revealed the coronavirus pandemic’s impact on the ACP. Vásquez revealed that in FY2020, 475.1m Panama Canal/Universal Measurement System tonnes (PC/UMSt) passed through the Canal, down 4% on what had been forecast. He said that the year began with the passage of tonnage above expectations, but that traffic was subsequently affected by impact of the pandemic. Effects were most pronounced between May and July when transit was 20% below forecasts, mainly in the passenger cruise sector (down 10%); vehicle carriers (down 21%); and liquid natural gas (down 15%). The ACP, which also noted that cargo volumes were affected by the US-China trade war, said that negative impacts were partially offset by increases in the sectors of liquefied petroleum gas and bulk carriers, which were 27% and 21% above forecasts respectively.

   In a report released ten days later, Vásquez cited estimates from the World Trade Organization (WTO), that global trade will fall by 9.2% in 2020, but is expected to rebound 7.2% in 2021. In line with these projections, the ACP expects a 10% reduction in traffic through the canal in FY2021, while the estimated tonnage for FY2021 is expected to decrease by approximately 9% compared with the previous fiscal year. International credit ratings agency Moody’s Investors Service echoed concerns over the impact of the pandemic in a report released on 21 October.

   Moody's estimates that “tonnage and transits will decrease by 3% and 8%, respectively, during 2020 (under fiscal year analysis)”, citing the global economic contraction and shifting supply chains. “We expect a slow recovery in 2021, but performance will still be below 2019 levels”, it said. Moody's notes that despite the “pandemic and US-China trade tensions, the ACP’s operational and financial performance has been strong, supported by the recent expansion and a new tariff scheme”, and highlights that the ACP’s credit quality “is also underpinned by the robust institutional framework, corporate governance, and international treaties that ensure its operation without interference”.

   The ACP’s own report also alludes to another challenge - water shortages as a result of drought. The Panama Canal watershed experienced its fifth driest year in 70 years in 2019, reducing water levels at Gatún and Alhajuela lakes, the main sources of water for the Canal. However, water levels need to remain high in order for bulk cargo ships - which is forecast to represent a higher proportion of overall traffic in 2021 and into the future - to safely pass through the Canal (see sidebar).

• Bigger vessels

In a report released in October the ACP notes that toward the end of FY2020, for the first time in 20 months, vessels with a 50-foot draught – the maximum draught offered by the neo-panamax locks- were able to transit as a result of “resource planning, efficient water usage and recent rains”.