Reducing the Fiscal Deficit

In recent days, the government has launched a spending containment plan worth $1.387 billion as the first front to reduce the fiscal deficit and begin stabilizing public finances, though it admits it is not enough and this year the 2% fiscal target will not be met.

The Minister of Economy and Finance, Felipe Chapman, said there is consensus that the economy will accelerate by 2025, but for this year the projection remains at 2.5%. “There is a strong commitment to fiscal discipline,” he stated.

“For the first half of 2024 there is a slight drop in revenue compared to 2023 collections, but when compared to what was projected in the 2024 budget, the gap is significant…,” Chapman revealed in a meeting with the media.

Along the same lines, the minister noted that, facing this reality, the government also committed to settling $877 million in outstanding payables.

Likewise, Minister Chapman noted that this is a financial sacrifice for the State, but they expect these payments to work as operating capital so that companies can keep operating and generating jobs.

As part of the directive issued by the Central Government, Minister Chapman stated they will provide technical support to each entity and ministry so they can properly cut resources and adjust their line items to comply with the spending reduction plan.

It was also emphasized that, given the behavior of public finances, with debt of over $51 billion and a drop in revenue, it will be difficult this year to meet the 2% GDP fiscal rule set as the ceiling in the Fiscal Social Responsibility Law.

The head of the Ministry of Economy and Finance explicitly stated: “We are going to be completely transparent; what the Fiscal Social Responsibility Law mandates, with a 2% ceiling, is impossible to comply with. Looking at the numbers, the revenue behavior is evident,” he revealed.

“Doing the math on revenue and the limitations to reduce spending, it is evident that meeting the 2% target is impossible. We are working on it, but the figure will be higher than 2%,” he noted, indicating that they will have to raise the ceiling set by law.

Growth outlook and future financing alternatives

Minister Chapman noted that the economic growth outlook for this year is maintained at 2.5%, while for 2025 there is consensus that the economy will accelerate, driven by a higher pace of private and public investment.

He emphasized that the national government will carry out the necessary strategies to recover the Republic’s investment grade from rating agency Fitch in the short term.

On reactivating travel allowances, the minister noted that with these resources eliminated, officials cannot travel to meetings with the International Monetary Fund, rating agencies, investors or bondholders. “This makes good governance of the Republic difficult.”

He assured that, should travel allowances be authorized again, a very careful administration of those resources will be applied. “This comes with a very careful administration; so there is no abuse, so it is money well invested from taxpayers,” he stated.

Regarding funding sources, the Minister of Economy and Finance stated that the financing strategy of up to $6 billion is not intended to increase debt.

“It is an authorization to access markets when needed to honor our obligations and pay maturities. Every year the Government has to pay debt maturities, and they must be paid to keep good credit and ensure Panama is seen as a debtor that meets and honors its commitments,” he explained.

The MEF head indicated that this plan allows them to have such financing in place well in advance, available when needed via a pre-authorization.

For the fiscal 2025 budget, the minister stated they aspire for it to be lower than the 2024 budget, which stood at $30.690 billion.

Chapman specified that they have held videoconference and video-call meetings with the different international economic agents represented in rating agencies.

“The reception from the rating agencies was very good — it was done via videoconference, we could not travel because we have no travel allowances. That human contact allows for a better perception. But the perception we got was positive; we spoke to them with frankness.”

Chapman made clear that one of the goals is to improve collection with the tax rules currently in force, so he ruled out raising rates on the various taxes.

“Panama has no intention of going out to international markets for the remainder of 2024. The Republic’s intention is to start a treasury notes program with the players in the local issuance market, with terms from two to 10 years,” detailed Deputy Finance Minister Eida Sáiz, noting that this program is authorized for up to $6 billion and these issuances may be executed through 2029.

Amid the economic instability in which the country’s public finances are immersed, the national government has begun to implement measures aimed at cleaning up the negative numbers of the public treasury. The results of these actions are tied to the responsibility and commitment of the authorities in making decisions in the exercise of their duties.

Reducing the state payroll responsibly and properly executing the 2025 national budget are some of the short-term actions the national government must execute in the best possible way; with high indebtedness and the lack of responsible internal control over public finances, it will be hard for the country to climb out of the chasm it is in.