Dulcidio De La Guardia, Minister of Economy and Finance: Interview

Interview: Dulcidio De La Guardia

With GDP growth forecast at 7% in 2015, why is a spurt expected after the slowdown in 2014?

DULCIDIO DE LA GUARDIA: Despite an increase in public spending, 2014 was not a typical year due to the elections, which have historically had an impact on the growth rate. In addition to this, the expansion of the Panama Canal was interrupted for several weeks in the first quarter of the year, at a time when the country was also facing strikes by construction workers.

While these elements combined to hurt the economy in 2014, they are not obstacles we face in 2015. In fact, all sectors of the economy are growing at a good pace. The drop in the oil price is, of course, beneficial for the economy of Panama, given that the country is a net importer of petrochemical products. Several large projects will also trigger growth, including construction on Line 2 of the metro, which will begin in the first half of 2015; a large hydroelectric project in the interior of the country; and continued growth in foreign direct investment, which reached $2.5bn during the first half of 2014. This was more than $500m higher than the level recorded in the first half of 2013.

What are the main provisions to prevent money laundering and the financing of terrorism?

DE LA GUARDIA: In June 2014 Panama was included on the grey list of the Financial Action Task Force (FATF). The previous administration set out a four-pillar plan to get the country removed from this list, and the current administration has continued this work. The first pillar is strengthening Panama’s Financial Analysis Unit through restructuring, giving it a larger budget and professionalising its staff. The second two pillars focus on acknowledging money laundering crimes that have taken place as precedents and empowering the Public Ministry and the judiciary with the necessary tools to combat money laundering and terrorism financing crimes. The fourth and final pillar is a law aimed at preventing money laundering and the financing of terrorism. This new legal framework was unanimously approved by the National Assembly, and its regulation and implementation are currently in the works.

How do you plan to contain the fiscal deficit?

DE LA GUARDIA: Certainly, containing the fiscal deficit is a challenge. The aim is to have sustainable debt, meaning that debt growth is not tied to GDP growth. Today, net debt stands at 36%: the goal is to bring it down to 32-33% over the next five years. This scenario has been shared with the main credit rating agencies and the IMF, which have recognised that Panama’s medium-term fiscal situation is solid, providing us with the ability to face the challenges.

What changes lay ahead for electricity tariffs?

DE LA GUARDIA: Electricity tariffs in the country are regulated by the Public Service Authority on a six-month basis, based on the cost of producing and transmitting energy. In 2012 a subsidy was introduced in order to freeze tariffs for end consumers; however, a lack of subsequent control led to electricity subsidies costing the country the equivalent of 1% of GDP, or around $450m. This subsidy was not only benefitting the parts of the population most in need, which should be the aim of these types of public policies, but also large companies and malls.

The former model was not sustainable. To address this, we have initiated a process to reduce energy subsidies and reach those who really need them, thereby strengthening the state’s capacity to respond and cater to basic needs. The energy subsidy cuts will provide the government with more resources to construct schools, aqueducts and health centres.

Other measures have been taken to reduce energy costs, such as increasing the transparency of public bids and the number of bidders. There are also two 350-MW bids happening in 2015 that will significantly increase Panama’s generating capacity.