The MEF roadmap to reduce the fiscal deficit

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

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.

Felipe Chapman explained that the aim is to be transparent in the management of public finances and apply austerity measures, given the drop in revenue and the fiscal deficit the new government has had to face. “There is a strong commitment to fiscal discipline,” he stated.

He maintained that they have been forced to contain spending due to the drop in revenue, which is below what was budgeted.

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

He said that, facing this reality, the government also committed to settling $877 million in outstanding payables.

“We felt obligated to make those payments, and above all to focus on economic reactivation,” he stated, noting that the disbursements will be made to large, medium and small companies, many of which have their operations at risk and could close if these commitments are not honored.

He admitted that this is a financial sacrifice for the State, but they expect these payments to act as working capital so companies can keep operating and generating jobs. He clarified that accounts that are not properly documented and supported will not be paid. “We hope to settle this debt with suppliers before year-end,” he reiterated.

He said 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.

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

“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.

Chapman noted that they cannot cut spending any further because they are tied by special laws that set a series of raises for public employees, which he called a straitjacket for adjusting the national budget.

“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.

He said they expect precisely to modify that architecture of the Fiscal Social Responsibility Law because it is overly rigid and not very effective. “It does not include the concept of a structural deficit or what happens when the economic cycle changes.”

Growth outlook

The minister also emphasized 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 specified that they hope to work to recover the Republic’s investment grade from rating agency Fitch in the short term.

On the drop in revenue, Chapman said they are analyzing the reasons for the fall in these resources. Moody’s has noted that revenue estimates have not been realistic, and Chapman maintained that they are trying to validate that hypothesis.

On reactivating travel allowances, he said 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.

Funding source available for the future

The minister also clarified that the financing strategy of up to $6 billion is not intended to increase debt.

“It is an authorization for when we need to access markets 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.

He said this plan allows them to have such financing in place well in advance, available when needed via a pre-authorization.

“It will not increase the debt; they are pre-authorizations.”

He assured that both these spending containment measures and strategic financing planning send a positive signal to the markets.

On the fiscal 2025 budget, he 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.”

He maintained that one of the goals is to improve collection with the tax rules currently in force, so he ruled out raising taxes.

This year, the Government will not issue debt in the international market; instead they will issue notes in the local securities market.

“Panama has no intention of going 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.

Working capital credit lines of up to $3 billion will also be available.

Chapman also maintained that they do not intend to abruptly reduce payrolls and jobs, but rather aim for a moderate strategy so that those who leave the public sector can be reinserted into the economy with productive jobs in the private sector.