PANAMA 2010 STATE BUDGET

THE PREMISES OF THE NEW BUDGET

By Felipe Argote

On September first, the minister of the presidency Demetriu Papadimitriu sent on behalf of the state general budget for fiscal 2010 proposed by the Minister of Finance Alberto Vallarino. This project, in accordance with common usage, is integrated as Bill N. 49 WHICH DELIVERS THE STATE BUDGET for fiscal 2010.

In this first article on the subject, we will confine ourselves to analyzing the fundamentals that anchor as premises and can not be divorced from monetary amounts to be received as income and therefore what will be available for outcome of this general budget.

In later articles we will present the budget analysis from various perspectives.

General State Budget for 2010 include the following premises: · a growth in Gross Domestic Product (GDP) of 3.5% · A price index rising by 3% · An unemployment level of 5% · A deficit Nonfinancial Public Sector (NFPS) of 2%.

Here are some elements of analysis of these variables: A GDP growth of 3.5% is acceptable for 2010. IT is because in January begins the period of greatest use of labor and inputs canal expansion project. Although the global economy is in crisis and that there are countries like Mexico where his tragic strategy to raise levels of dependency with the U.S. through a free trade agreement (NAFTA) has led to a contraction in gross domestic product (GDP ) exceeding double digits, in Panama instead the economy should not go beyond the slowdown, if there is a change in the direction of global recession for next year. Panama has submitted figures for average annual growth of over 6% in the last eight years with levels above 11% in 2007 and 8.5% in 2008, thus a 3.5% growth in 2010 is conservative but realistic.

On the inflation rate of 3% seems to be too optimistic. This is because last year's inflation levels were 8.7%, according to official figures, with increases in food of 15%. Being that the determinants of inflation were economic growth and immigration of people with high income levels and means, it is unlikely that this trend is reduced without changing the elements that made it soar. This should be directly proportional to the trend in GDP growth that is expected to grow 3.5% next year, it must be accompanied by a level of growth in the Consumer Price Index (CPI). Otherwise, if you expect lower levels of inflation, should be a higher GDP slowdown and rising unemployment levels.

However, the budget of 2010 to consider a level of unemployment of 5%, which would determine a decrease of 1.5% over the last year. There is an inverse relationship between inflation and unemployment. With lower unemployment levels rise due to price that if there is a level of population with greater purchasing power, then it has a higher purchasing power. This leads by default, to the increased of demand and hence a rise in prices. If you plan to reduce unemployment in times of global economic crisis, which is highly optimistic by the Ministry of Economy and Finance, is also unlikely to reduce the price index, unless new contributions in economics, to determine that this inverse relationship becomes direct.

The unemployment rate dropped significantly last year. In 2007 amounted to 7.8% of the Economically Active Population (PEA), while in 2008 dropped more than a percentage point to 6.5% of the PEA. This significant reduction was driven by the rapid growth of the Panamanian economy. While U.S. bankruptcy of Lehman Brothers, an entity born in 1850, reveal a recessionary process that had already been born in late 2007 and early 2008 as confirmed by its economists a year late, in Panamá instead, we enjoyed a growth of 8.5%. In the current year 2009 it is expected to gross domestic product growth around 3% for Panamá. In fact by 2009 there are estimates ranging from 3.5% to Deloitte forecast to -1.0% which calculates the publication Insight (¿?), Panama Economy, by 3% from the International Monetary Fund estimates and the actual Ministry of Economy and Finance, 2.5% from Standard and Poor's and CEPAL and 1.4% which calculates the British magazine The Economist.

Then MEF forecasts that underpin the new budget of 2010 presented extremely optimistic, if we see that the reduction of just over one point was supported by economic growth of above 8%. Now they want to reduce unemployment levels in one and a half points, assumming for this year 2009 the unemployment remained at 2008 levels, which is unrealistic if it is true, as it appears that the economy only grow by 3%. As the MEF consider the deficit underlying nonfinancial public sector (NFPS) shall not exceed 2.0% in 2010, according to Social Responsibility Law led by international financial organizations, in my view have the contradiction of being overly optimistic if not forestall that can not be acceptable economic growth accompanied a 3.5% decrease in inflation rates of more than five points and a reduction of one and a half of unemployment levels because these elements are contradicted by the vertex.

Such levels of growth and falling unemployment that necessarily has to cope with an increase in the price level and above, especially the growth of the economy in times of global recession can only be maintained with anti recessive or as some call them "anti-cyclical measures" that are not nothing but a state investment in economic activities with significant multiplier effect, which promotes economic growth at a time when private enterprise is not willing to invest for fear of losing their capital amid the crisis. I understand that in this direction that the new government to build the meter and make emphasis on investment over spending. These measures take us at least to be very conservative in responding to the question of whether or not it is possible to meet the 2% deficit of the nonfinancial public sector.