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International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper focuses on background, challenges, and policy options in Panama. Panama stands at a crossroad between taking the leap to become an advanced economy or getting stuck in the middle-income trap. The beginning of a new administration provides a window of opportunity to initiate and implement ambitious reforms. This note takes stock of fiscal issues in Panama and proposes policy options. The new administration’s fiscal agenda should feature a comprehensive reform of tax and customs administrations, a review of tax incentives and exemptions and consider steps toward a broader tax policy reform. Efforts to further strengthen the fiscal framework with the appointment of the members of the Fiscal Council should continue going forward. Panama should adopt best practice fiscal accounting and reporting methods. A comprehensive assessment and management of fiscal risks is necessary to create buffers and safeguard public finances given fiscal policy’s exclusive stabilization role.
Ms. Kimberly Beaton, Mr. Roberto Garcia-Saltos, and Mr. Lorenzo U Figliuoli


Abstract: Accelerating economic growth in Central America, Panama and the Dominican Republic (CAPDR) remains an elusive task. While the region performed relatively well in the post-global financial crisis period, over the last five years obstacles to growth have become more evident and new challenges have emerged. In response, the region has strengthened macro-financial frameworks but more progress will be required to pave the way to sustained growth and prosperity. This book considers the structural factors underlying the region’s growth outlook and assesses its macroeconomic and financial challenges to help shape the policy agenda going forward. The book first identifies the structural determinants of growth in the region related to: capital formation; employment; demographic factors, including immigration; productivity; and violence. It then highlights the importance of creating fiscal space through the design and implementation of fiscal rules and mechanisms to increase accountability (better quality of public spending, adequate policies to reduce income inequality and sustainable retirement plans). Finally, it presents recent evidence on the importance of a supportive financial sector for growth (including through financial inclusion and development).

Mr. Luis Catão, Valeriya Dinger, and Daniel Marcel te Kaat
Using a sample of over 700 banks in Latin America, we show that international financial liberalization lowers bank capital ratios and increases the shares of short-term funding. Following liberalization, large banks substitute interbank borrowing for equity and long-term funding, whereas small banks increase the proportions of retail funding in their liabilities, which have been particularly vulnerable to flight-to-quality during periods of financial distress in much of Latin America. We also find evidence that riskier bank funding in the aftermath of financial liberalizations is exacerbated by asymmetric information, which rises on geographical distance and the opacity of balance sheets.
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper assesses Panama’s business model founded on its ability to attract international financial, business, and transportation services. Panama has had exceptional growth over recent decades. A growth diagnostic exercise suggests that Panama is well placed to maintain this business model. Higher-quality education, stronger governance, and less bureaucracy will further strengthen Panama’s comparative advantage. Additional analysis suggests that investment will continue to support growth, while the logistics and tourism sectors promise to build further on Panama’s comparative advantage.
Luc Eyraud, Ms. Diva Singh, and Mr. Bennett W Sutton
The timing is ripe to pursue greater regional financial integration in Latin America given the withdrawal of some global banks from the region and the weakening of growth prospects. Important initiatives are ongoing to foster financial integration. Failure to capitalize on this would represent a significant missed opportunity. This paper examines the scope for further global and regional financial integration in Latin America, based on economic fundamentals and comparisons to other emerging regions, and quantifies the potential macroeconomic gains that such integration could bring. The analysis suggests that closing the financial integration gap could boost GDP growth be ¼ - ¾ percentage point in these countries, on average.
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper assesses the effectiveness of Panama's fiscal framework. The fiscal framework of Panama has played an important role in enhancing fiscal discipline since its establishment in 2009. Since the current fiscal framework went into effect in 2009, the primary balance and debt-to-GDP ratio of the nonfinancial public sector have improved significantly on average compared with those in 2000–08. The fiscal impulse given the output gap also shows that fiscal policy was less procyclical in 2009–15 than in 2001–08. However, there are options to better align the framework with best practice, including reducing unintended procyclicality, increasing transparency, and improving accountability.
Andras Komaromi, Metodij Hadzi-Vaskov, and Torsten Wezel
This paper assesses the resilience of Panamanian banks to (i) a very severe short-term, and (ii) a significant long-lasting liquidity shock scenario. Short-term liquidity buffers are evaluated by approximating the Liquidity Coverage Ratio (LCR) defined in the Basel III accord. The risk of losing a substantial part of foreign funding is analyzed through a conventional liquidity stress test scrutinizing several layers of liquidity across maturity buckets. The results of this study point to some vulnerabilities. First, our approximations indicate that about half of Panamanian banks would need to adjust their liquid asset portfolios to meet current LCR standards. Second, while most banks would be able to meet funding outflows in the stress-test scenario, a number of banks would have to use up all of their liquidity buffers, and a few even face a final shortfall. Nonetheless, most banks displaying sizable liquidity shortfalls have robust solvency positions.