Public debt increases $5.5 billion in one year
The balance of the debt of the non-financial public sector reached $32.7 billion at the end of May. The figure represents an increase of $439.8 million compared to the end of April.
This is mainly due to the disbursement of $513.5 million corresponding to the Rapid Financing Instrument of the International Monetary Fund (IMF), requested by Panama in the context of the economic crisis caused by the spread of the new coronavirus.
When compared to the balance of debt held by the public sector in May 2019, the increase is $5.5 billion. In other words, the increase in public debt in a single year is higher than the budget for the expansion of the Panama Canal, which was $5.25 billion.
The new coronavirus pandemic has put additional pressure on public accounts.
Current income suffered a drop of $881.5 million in the months of March, April and May, with respect to what had been budgeted, as a result of the stoppage of economic activity and of measures to postpone the payment of taxes approved by the Directorate General Income.
Meanwhile, the State has pressure on the spending side to address the health and economic crisis.
In addition to the line already disbursed by the IMF, which will be used to provide resources with a liquidity fund to give stability to the banking system, the Government also went out to the capital market to contract debt to balance the budget. That was the objective of the $2.5 billion bond issue carried out by the Ministry of Economy and Finance, which was disbursed in April, also increasing the amount of the public debt.
In addition to the debt balance, analysts and risk rating agencies consider the relationship between debt and gross domestic product (GDP) to gauge a country's solvency and how high the debt is compared to the size of the economy.
The Fiscal Social Responsibility Law establishes that the net debt does not exceed 40% of GDP. That goal was already exceeded at the end of 2019 and if the debt data for the month of May and the GDP estimate for the end of the year, which will be lower than that of 2019, are taken as a reference, the net debt / GDP ratio would exceed 48%.
Financier Álvaro Naranjo said that now we can see a little more clearly the debt panorama in Panama. I think they will have to issue more debt and that the estimates of GDP decrease are very conservative. So the projected debt / GDP percentage may be even higher by the end of the year.
In his most recent public interventions, the Minister of Economy and Finance, Héctor Alexander, has indicated that in addition to the issuance of bonds, the Government continues to negotiate new lines of financing to meet the different requirements of the crisis.
Therefore, it is expected that as the year progresses, debt indicators will continue to rise.
Economist Carlos Araúz stated that in a situation like the current one, with a low tax collection and without extraordinary income that can compensate for the lack of economic activity, an increase in debt is justified.
However, he also warned that the use of these resources is equally important. Using debt to continue paying inflated payrolls or per diem is not healthy: the adjustment in the salary of public servants is an immediate alternative to savings to jointly endure until December 2020, he said.
According to the economist, using debt to revitalize micro and small businesses, supporting the suspended worker and protecting the body of doctors and nurses who take care of us every day makes sense.
Economist Raúl Moreira pointed out that aid programs for population groups affected by the pandemic should require a significant amount of resources that could cause both the debt limit and the deficit limit to be exceeded and that that could be understood and allowed, as long as those resources effectively reach the needs of the population.
Moreira recalled that in the past we have had worse fiscal records and with proper management, its restoration was achieved until obtaining the desired degree of investment, which is why finding ourselves submerged in a global crisis, this situation could be expected now more than ever.
Despite the uncertainty caused by the crisis and the increase in debt in recent years, Panama continues to enjoy the confidence of international investors, said the Directorate of Public Financing of the Ministry of Economy and Finance, which highlighted that the indicator of Panama's sovereign risk remained below countries in the region such as Uruguay, Colombia, Brazil or Mexico.
When compared to the balance of debt held by the public sector in May 2019, the increase is $5.5 billion. In other words, the increase in public debt in a single year is higher than the budget for the expansion of the Panama Canal, which was $5.25 billion.
The new coronavirus pandemic has put additional pressure on public accounts.
Current income suffered a drop of $881.5 million in the months of March, April and May, with respect to what had been budgeted, as a result of the stoppage of economic activity and of measures to postpone the payment of taxes approved by the Directorate General Income.
Meanwhile, the State has pressure on the spending side to address the health and economic crisis.
In addition to the line already disbursed by the IMF, which will be used to provide resources with a liquidity fund to give stability to the banking system, the Government also went out to the capital market to contract debt to balance the budget. That was the objective of the $2.5 billion bond issue carried out by the Ministry of Economy and Finance, which was disbursed in April, also increasing the amount of the public debt.
In addition to the debt balance, analysts and risk rating agencies consider the relationship between debt and gross domestic product (GDP) to gauge a country's solvency and how high the debt is compared to the size of the economy.
The Fiscal Social Responsibility Law establishes that the net debt does not exceed 40% of GDP. That goal was already exceeded at the end of 2019 and if the debt data for the month of May and the GDP estimate for the end of the year, which will be lower than that of 2019, are taken as a reference, the net debt / GDP ratio would exceed 48%.
Financier Álvaro Naranjo said that now we can see a little more clearly the debt panorama in Panama. I think they will have to issue more debt and that the estimates of GDP decrease are very conservative. So the projected debt / GDP percentage may be even higher by the end of the year.
In his most recent public interventions, the Minister of Economy and Finance, Héctor Alexander, has indicated that in addition to the issuance of bonds, the Government continues to negotiate new lines of financing to meet the different requirements of the crisis.
Therefore, it is expected that as the year progresses, debt indicators will continue to rise.
Economist Carlos Araúz stated that in a situation like the current one, with a low tax collection and without extraordinary income that can compensate for the lack of economic activity, an increase in debt is justified.
However, he also warned that the use of these resources is equally important. Using debt to continue paying inflated payrolls or per diem is not healthy: the adjustment in the salary of public servants is an immediate alternative to savings to jointly endure until December 2020, he said.
According to the economist, using debt to revitalize micro and small businesses, supporting the suspended worker and protecting the body of doctors and nurses who take care of us every day makes sense.
Economist Raúl Moreira pointed out that aid programs for population groups affected by the pandemic should require a significant amount of resources that could cause both the debt limit and the deficit limit to be exceeded and that that could be understood and allowed, as long as those resources effectively reach the needs of the population.
Moreira recalled that in the past we have had worse fiscal records and with proper management, its restoration was achieved until obtaining the desired degree of investment, which is why finding ourselves submerged in a global crisis, this situation could be expected now more than ever.
Despite the uncertainty caused by the crisis and the increase in debt in recent years, Panama continues to enjoy the confidence of international investors, said the Directorate of Public Financing of the Ministry of Economy and Finance, which highlighted that the indicator of Panama's sovereign risk remained below countries in the region such as Uruguay, Colombia, Brazil or Mexico.