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Foreign Exchange

Prudent policies risk popular backlash

Panama's president  has
received praise from the IMF
for his fiscal austerity drive
but workers are wary of his
plans to reform social security

Panama's president, Martin Torrijos, came in for a nasty surprise when he took over the helm of central America's biggest debtor late last year. He inherited a hefty fiscal deficit of 5.2% of GDP that the outgoing government had maintained was half as big, and was met with street riots among workers suspicious that the new administration planned to privatize the state-run social security system. Panamanian debt sank sharply at the start of 2005 amid fears that the young government would not be up to the challenge of reforming the dollar-denominated economy, once seen as a safe haven credit in volatile Latin America. Panama's global 27 bond sold off almost 2.5% at the start of January and the paper fell to its support level of 105.00.

Since then, Torrijos, the son of 1970s strongman president Omar Torrijos, has surprised the markets with an aggressive reform agenda, quickly pushing a contentious package of tax increases and spending cuts through congress.

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