1. What is public debt?

A: Is the debt of the public sector of the Republic of Panama, contracted through loans and issuance of securities.

2. What is public indebtedness?

A: The public indebtedness refers to any financial or economic obligation acquired by the state, arising directly or indirectly as a result of a loan agreement or other type of credit facility, internal or external, for obtaining capital, goods and services complying with the laws and administrative provisions governing this matter. The debt is comprised of resources obtained through loans from national or international sources, intended to finance state investments. Every debt operation conditions are different and are in accordance with the provisions of the respective contract or agreement. The debt of the public sector, includes financial or economic obligations, both from the central government and decentralized entities.

3. What is internal debt?

A: It is the debt contracted with natural or legal persons domiciled or resident in the republic and in which the payment can be enforceable within the national territory.

4. What is external debt?

A: It is the debt contracted with another state or international agency or with any another natural or legal person without residence or domicile in the republic and whose payment can be enforceable out of its territory. The external debt of the sector public is integrated by:

  • Public placements in the international capital markets which correspond to issuance of government bonds, commercial papers and medium-term notes.
  • Financing from international financial organizations.
  • Resources directly obtained from commercial banking.
  • Bilateral loans, which are loans granted between governments through their official banks, or from commercial banks guaranteed by an official entity.
  • Assumed debt is the debt of liquidated or merged entities that the republic assumes.
  • Restructured debt, which corresponds to those financings that have been renegotiated in various programs in order to reduce the balance of the debt as well as its service.

5. What is indirect and direct public debt?

A: The direct debt of the central government is the one assumed by the government as the main debtor. The indirect public debt of the central government is the one agreed by any person, natural or legal, public or private, other than the government, but that has the government’s endorsement, guarantee or collateral.

6. What are the operations of public debt / What type of operations does public debt perform?

A: In public debt, the following operations can be identified:

  • Creation of a liability: Creation or issuance of debt represents for the borrower the emergence of a liability as a result of obtaining capital in compliance with legal standards. Liabilities should be recognized at the same time as the disbursement of the capital by the lender and for the maximum amount that the public administration debtor agrees to pay by the due date.
  • Fees or interests: Retribution or interests constitute the obligations and expenses derived from the cost of borrowing, which must be carried on the due date and for the earned value.
  • Amortization: Amortization represents for the public entity the total or partial cancellation of the emerged liability at the time of the creation of the debt.
  • Acquisition: The acquisition means that in issuance of securities, the government debtor can repay debt, through the purchase of securities that is represented in the capital market. In this matter, the value of refund at the time of amortization is the value of securities acquisition in the capital market once deducted accrued interests and interest receivable.
  • Conversion: The conversion of a debt consists in its replacement by another with different characteristics and conditions. The conversion consists of two simultaneous operations: the repayment of a debt and the creation of a new one. The possible differences that may occur between the value of the paid debt and the value of the new debt will be made effective, as appropriate, in accordance with the terms of conversion.

7. What is the mechanism of indebtedness in a foreign currency?

A: The debt in a foreign currency is the one concluded in another currency and created both internally and externally as internal and external. The liability should be recognized simultaneously at the moment that the lender disburses the capital, for the equivalent in national currency that results from the current maximum exchange rate in that foreign currency, that the public entity undertakes to pay at the date of due date of the capital. At the closing of each financial year, the totality of the liability should be assessed by the conversion value in national currency resulting from applying the respective exchange rates prevailing at such date to the maximum values of refund in foreign currency. The possible difference in the debt arising as a result of the application of the new current exchange rates, either negative or positive as it has increased or decreased the total liabilities. Such difference will be included within the results of the exercise. At the time of maturity, the liability object of amortization should be reduced for the conversion value in national currency in which it is valued in the financial statements. Simultaneously, the negative or positive difference must be included in the result of the exercise as a result of applying the current exchange type at the date of expiration.

8. What can be financed with debt?

A: With public debt, the state can finance any of its activities previously defined in its annual budget and the law.

9. What are the public debt securities?

A: The Republic of Panama issues treasury bills on the domestic market, representing short term debt (12 months or less), placed at a discount and payable at maturity at face value. On the other hand, notes and treasury bonds are issued, which are medium and long term debt instruments.

10. What is the size of the sovereign bond market in Panama? What size is the sovereign bond market in Panama?

A: With the implementation of the Market Creator Program, which has a positive assessment from multilateral institutions and rating agencies, the republic has strengthened the country with investment-grade status. In accordance with financing strategies, auctions are held frequently, thus increasing the volume of issuances; Currently, the outstanding balance of issued instruments in the local market amounts to US$ 3,582.37 million. In this regard, the participation of public debt securities in the local market as of March 2016 represents 20% of the total public debt, helping to diversify the sources of financing of the state.

11. Is there a yield curve?

A: Indeed, the Republic of Panama has a local performance curve made through the implementation of various initiatives intended to develop the internal capital market. Simultaneous and permanent contributions through bid/offers added liquidity and depth to the market, positively influencing the formation of prices and the creation of a local performance curve. Currently, the local performance curve provides 2024 maturities.

12. What is the weighted average cost of public debt?

A: The Weighted Average Cost (WAC) is a financial measure, which is intended to encompass in a single figure expressed in percentage terms, the cost of different sources of funding that owns the portfolio of the Republic. To calculate the CPP, it is required to know the balances and interest rates that has each of the sources of funding for their weight and weight them relative to total debt.

13. Is financial leasing a debt?

A: Although a lease is classified as a debt because it accrues interest, it is considered as a loan and its biggest advantage is at the fiscal level.

14. How is factoring made?

A: Factoring or transfer of bills is a means of financing projects that the Ministry of Economy and Finance (MEF) authorizes for some projects of large social impact that do not have the required budget availability and at the same time do not want to compromise the limits of the Social Fiscal Responsibility Law.
The bills generated by the contractor are transferred to a bank and the bank disburses the amount of the bill at a discount to the contractor. A due date is established for these discounted bills, which is generally in a future fiscal term, and at the due date, the State commits to pay the total amount of the bills to the bank and the financial costs to the contractor, which generally include interests, banking commissions, legal expenses, taxes, among others.
As a general practice, the Executing Unit (hiring Ministry) is the one in charge of establishing and securing the budget item in the agreed term to pay the nominal amount of the bills presented before the bank; and the MEF, through the Directorate of Public Financing (DdFP) assigns a budget line of the public debt service for the respective fiscal term given that it is the responsible of repaying the contractor the financial costs incurred in this operation, after validating said costs. Specifically, the Department of Credit Resources Management is in charge of both evaluating the factoring proposals and validating the financial costs; and the Department of Registration and Statistics of Public Financing is in charge of instructing the payment of these costs to the Treasury Directorate.

15. What is ISDA ?

A: International Swaps and Derivatives Association Master Agreement.

16. If an Implementation Unit wishes to contract a loan, what steps must be followed?

A: In principle the implementation units must follow these steps to obtain financing:

  1. The institution must identify clearly the project, scope and objectives. (In these cases the institution seeks previous advise with the Agency to receive guidance in the process of project identification).
  2. Project creation: includes studies of pre-feasibility, feasibility, market, social and environmental. Depending on the type of project include studies, designs and construction. Law 34 of 2008 (Law of Social Fiscal Responsibility).
    1. Project profile: less than US$ 5.0 million.
    2. Project pre-feasibility: between US$5.0 and US$10.0 million.
    3. Feasibility study: more than US$20.0 million.
  3. Create an investment and operations budget. (budget allocation).
  4. Register the project in the investment projects database. (National System of Public Investment – SINIP).
  5. Procure possible internal financing sources, own resources/revenue generation, external.

Once the institution has prepared or identified said project:

  1. The institution requests through a note to the MEF, the procurement of possible financing sources. This note must include at least a project profile with its global costs by component and activities.
  2. The MEF, based on the note received and depending on the case, will create a financing request to the Agency, taking into consideration that exploratory or project identification missions are performed.
  3. The Agency will perform the different missions jointly with the team of the institutions (Implementation Unit, MEF, and Agency).
  4. The technical administrative base of the project is finalized at the financing level, which implies: (MEF processing)
    1. Financing negotiation.
    2. Preparation of a contract draft.
      1. Annex: project includes: Objectives and Scope. Components and Activities / Costs / Activities Schedule.
    3. Presentation for the respective approvals before the PRECENA, CENA, Cabinet Council, CGR endorsement and Legal Opinion of the Procuraduría de la Administración.

17. What is a turnkey project?

A: Is that in which the contractor assumes an obligation before the State to perform different services, which must include, as a general rule, studies, designs, scope of work and execution of a project, for a determined priced by the contracting entity. In these cases, the contracting entity must establish the bases and terms of reference that precisely determine the project to be executed (Article 2 of the Single Text of Law 22 of June 27, 2006 which regulates public procurement).
Turnkey projects are subscribed by the Executing Units of the Project that is being performed under this scheme, after the financial feasibility is issued by the Ministry of Economy and Finance. The accounts are carried the same way by the Executing Units, and the form of payment consists in a single and exclusive payment or deferred payments to the Contractor for the execution of the Project.
The execution of the Project is financed by the Contractor whether through its own funds or through partial or complete financing through the transfer of credit to the bank entity(ies), in accordance with the Financing conditions finally approved by the Ministry of Economy and Finance and the Executing Unit. The Financing of turnkey projects based on the deferred payment mechanism is perform through the issuance of partial payment accounts, Cuentas de Pago Parcial (CPPs) or Certificados de No Objeción (CNOs), whose amounts will be deducted from the total amount of the Contract according to the due dates established in the same. Each CPP or CNO approved and endorsed will constitute an autonomous, unconditional and irrevocable obligation of the Executing Unit. In order to pay the CPPs or CNOs it is necessary to carry out the collection process and submit the documentation indicated in the Ministerial Resolution Mo. 001-DT of February 24, 2015.

1. What projects can be funded with debt?

A: Projects for economic, social and environmental development of the territorial entities can be financed; for investments in science, technology and innovation; and in general to increase the competitiveness of the economy, looking to improve social conditions of the population.

2. How are the investments that are financed with debt selected?

A: The investments financed with debt are contained in the Strategic Government Plan and are selected primarily those that are priorities for the republic (have a greater social impact).

3. What financial institutions finance projects?

A: Inter-American Development Bank (IDB), Latin American Development Bank (CAF), Latin American Reserve Fund, International Monetary Fund (IMF), World Bank, Export Import Bank EXIM Bank, Banco Latinoamericano de Exportaciones BLADEX, International Finance Corporation (IFC), Inter-American Investment Corporation (IIC), Central American Bank of Economic Integration (BCIE), among others.

4. How do the IFI’s select the projects they finance?

A: Each IFI has its own requirements and evaluation criteria for selecting which projects they finance. These depend on the ultimate goal of each institution.

1. What is the credit rating of Panama?

A: Fitch Ratings: BBB, investment grade, stable. Moody's: Ba1, investment grade, stable. Standard and Poor's: BBB, investment grade, stable.

2. What is the benefit for Panama in having investment grade rating?

A: Some of the benefits for the Republic of Panama on having investment grade include: lower financing cost for the public and private sector, increased financing options in international capital markets (including institutional investors), increase in private capital inflows, and a rapid financial development.

3. What is risk rating and what are the categories?

A: The risk rating is a professional, informed and independent opinion on the ability of a financial institution, an insurance company, an issuer or a counter-party to comply with their contractual obligations. Their categories depend specifically on the rating agency. However, in general terms they are divided into short and long term. The latter is divided into investment-grade (stable companies) and speculative-grade (companies with high risk).

4. To what risks is the republic exposed?

A: Exchange rate risk (exposure to the exotic non USD currencies) and interest rate risk (FED rates).

5. How does the Directorate of Public Financing mitigate such risks?

The DdFP mitigates the risks by making complex economic analyses and implementing mechanisms such as Forwards, Swaps (exchange rate risk), bunker hedging, limitation of warranty to decentralized enterprises and centralization of indebtedness capacity.

1. How is the maximum amount of debt to be subscribed defined?

A: With the budget, the needs of funding are defined (deficit of the central government, external debt maturities, internal debt and financial investments maturities). The amount is given after issuing bonds, multilateral, and budget support loans.

2. What is the budget?

A: The budget is the calculation and negotiation of income and expenditures of all economic activity for a specific period. In Panama, they are called fiscal periods and they have a one-year duration (January to December) in the central government.

3. What happens if a project has less budget that the expected?

A: If a project has less budget than expected, its execution might be low and even none.

4. How does it work in cases of liabilities management operations?

A: The Directorate of Public Financing makes liabilities management to soften the debt amortization profile that it has accrued. There are two types of swaps (exchange of an issuance about to mature for another of longer term) and repurchases (early repayment of part of the outstanding amount of an issuance through payment in cash).