The rating agency has raised the outlook from stable to positive and reaffirmed the Baa2 investment grade rating, arguing that economic growth will continue to rise and will remain above the level of its peers.
Monday, October 2, 2017
From a statement issued by Moody´s:
New York, September 29, 2017 -- Moody's Investors Service has today affirmed the Government of Panama's issuer rating and senior unsecured bonds at Baa2 and senior unsecured shelf at (P)Baa2. The outlook changed to positive from stable.
Two key drivers underpin the positive outlook: 1) Moody's expectation that the debt trend will improve over the coming years supported by fiscal consolidation and compliance with the fiscal rule; 2) Panama's GDP growth rate continues to outperform peers, supporting its economic strength
Panama's long-term and short-term foreign currency bond ceiling and the foreign currency bank deposit ceiling remain unchanged at A3/P-1.
RATINGS RATIONALE
RATIONALE FOR THE CHANGE TO POSITIVE OUTLOOK
-- FIRST DRIVER: IMPROVEMENT IN THE DEBT TREND CONTINGENT ON DEFICIT REDUCTION AND COMPLIANCE WITH THE FISCAL RULE
Moody's expects that as Panama's fiscal rule lowers deficit ceilings over the coming years, the government will take actions to reduce its deficit, and this in turn would lead to a declining trend in government debt metrics. The Varela administration has begun to establish a track record of compliance with the fiscal rule since 2015 avoiding the use of waivers, as was the case in the past. Still, this has not been sufficient to prevent a deterioration of government debt metrics.
The current government has reduced the deficit of the non-financial public sector, the relevant government level for the fiscal rule targets, since it took office to 1.9% in 2016 from 3.2% in 2014. However, the central government deficit, which drives the government's net borrowing requirements, has remained relatively constant at about 4% of GDP. Despite government efforts to contain spending by reducing capital expenditures in recent years, total expenditure growth has outpaced revenue growth for the central government. Consequently, even though Panama has had strong economic growth and favorable financing conditions, the debt/GDP ratio rose to 39.1% in 2016 from 35.0% in 2013.
Looking ahead, however, Moody's expects that, as authorities deepen their fiscal consolidation efforts, the central government deficit will narrow over the coming years supporting a decline in the government debt ratio. Part of the deficit reduction will be driven by the higher transfers from the Panama Canal Authority (ACP) that we expect will average 2.5% of GDP in 2017-20 compared to 1.8% in 2016. In addition, the authorities have announced measures to contain growth of current expenditures while reiterating their commitment to enhancing tax collection.
Moody's also expects the government will continue to reduce the non-financial public sector deficit in accordance with the fiscal rule, and this continued reduction will also support an improvement in debt metrics. Furthermore, an extended track record of compliance with the fiscal rule will enhance the credibility of policymaking and would solidify its role as an anchor that effectively sets deficit limits that ensure the stability of debt dynamics.
Moody's expects authorities will continue to strengthen the institutional framework, particularly in the fiscal front. The government has made significant efforts to increase transparency on fiscal and debt management in addition to creating an independent fiscal council to evaluate government budgets, both credit positive developments.
-- SECOND DRIVER: STRONG MEDIUM-TERM GROWTH PROSPECTS THAT WILL OUTPERFORM MOST RATING PEERS
Thanks to strong GDP growth, the size of Panama's economy has more than doubled over the last decade, and per capita incomes have increased to $13,670 in 2016 from $6,029 in 2007. Panama's investment-driven high growth rates will remain a distinct credit strength. GDP expanded at an average annual rate of 7.3% in 2007-16. Moody's expects the Panamanian economy will continue to report strong economic growth over the medium term, averaging 5.7% in 2017-21 -- compared to the Baa median GDP growth of 3%. A strong economic performance will support the government's fiscal consolidation efforts and will contribute to improve debt metrics.
Economic growth will be supported by a large pipeline of projects, equivalent to about 30% of GDP. Some of the projects aim to reduce infrastructure bottlenecks in the energy and transport sectors. Others will reinforce Panama's position as a regional trade and financial hub.
Panama's investment ratio was about 45% of GDP over the past five years. Given prospects for continued and robust infrastructure spending, we expect capital accumulation and productivity gains will support Panama's high potential growth, which we estimate at 5.5%.
WHAT COULD CHANGE THE RATING - UP We would consider upgrading Panama's ratings if: (1) the government demonstrates fiscal discipline by adhering to the deficit targets incorporated into the fiscal rule and reducing central government deficits; (2) the authorities strengthen the fiscal framework, including changes to the fiscal rule that bolster its role as a fiscal anchor and countercyclical tool; (3) the authorities proactively address potential contingent liabilities related to the social security system.
WHAT COULD CHANGE THE RATING - DOWN The outlook would return to stable if insufficient fiscal consolidation at the central government leads to continued deterioration of debt metrics, or should the government prove unable to meet the deficit ceilings for the non-financial public sector set forth in the fiscal rule. Negative ratings pressure would also develop if a sustained weakening of government revenues, or the materialization of contingent liabilities lead to wider fiscal deficits and debt accumulation that adversely affects government debt ratios. An economic shock that materially undermines the ongoing fiscal consolidation process could also lead to a negative rating action.
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Arguing that the high fiscal deficit is still on an upward trend, the rating agency downgraded the long-term and senior unsecured government bond issuer's note from B1 to B2.
Fiscal deficits averaging more than 6% of GDP since 2015 have led to higher public debt/GDP than its 'B'-rated peers, the rating agency said.
The agency highlights the country's macroeconomic stability, while noting a slight deterioration of fiscal indicators in recent years.
From a press release issued by Moody's:
New York, October 25, 2016 -- Panama's Baa2 rating with a stable outlook reflects the country's strong economy and its broad macroeconomic stability, says Moody's Investors Service.
Improving the sovereign debt rating from B3 to B2 reflects the significant reduction achieved in the fiscal deficit, which fell from 7.9% of GDP in 2013 to 3.1% in 2015.
The main factor which influenced the rating upgrade was consolidation of the fiscal discipline process enacted over the past two years and controls imposed on public institutions to achieve cost containment and improve tax administration.
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