Panama: How Does Fitch Think About the New Government?

The qualifier is expecting that with the arrival of Laurentino Cortizo to the presidency, "priority will be given to a constitutional review aimed at strengthening institutions, reinforcing the separation of powers and improving controls and balances.”

Tuesday, July 2, 2019

On July 1, Laurentino Cortizo assumed the presidency of Panama, who assumed power after promising a campaign to reactivate the economy, make constitutional reforms and make structural changes in several entities.

Cortizo takes power in a context of economic slowdown in Panama, since in 2018 the country's Gross Domestic Product reported a 3.7% year-on-year growth, far from the increases of 11.3% and 9.8%, reported in 2011 and 2012, respectively.

See "Cortizo Era Begins"

From the Fitch Ratings statement:

Fitch Ratings-New York-01 July 2019: Panama's new administration is likely to maintain broad economic policy continuity while prioritizing constitutional reform to strengthen institutions, says Fitch Ratings. Maintaining existing market-oriented policies will contribute to macroeconomic stability and supports our forecast for stronger GDP growth in 2019-2020. However, the new administration will face fiscal challenges amid weakening tax collections, reported accumulation of arrears and pledges to increase social spending, which could complicate compliance with the fiscal deficit ceiling, barring reforms to boost government revenues.

Laurentino Cortizo from the center-left Partido Revolucionario Democratico (PRD) was sworn in as Panama's president for a five-year term on July 1. The election outcome denotes broad policy continuity as the campaign focused on corruption and transparency rather than macroeconomic policy. 

As a result, President Cortizo is expected to prioritize a constitutional revision aiming to strengthen institutions, reinforcing the separation of powers and improving checks and balances. A constitutional revision requires a two-thirds majority in Congress through two consecutive legislatures before being approved by popular referendum by YE20 at the earliest. Constitutional reforms are not uncommon in Panama, the latest being in 2004.

Legislative elections resulted in a favorable congress for the new administration. Cortizo's PRD party secured 35 seats out of the 71 seats of the unicameral assembly, meaning that the government will need only one more seat in Congress to attain a simple majority and pass legislation.

Panama's non-financial public sector (NFPS) fiscal deficit reached 1.4% of GDP in 1Q19, up from 0.8% a year prior, due to a 7% year-over-year decline in revenues. Weak revenues due to slower growth and structural weakness in tax collections, coupled with arrears that the incoming administration totals at USD1 billion, may affect compliance with the deficit ceiling of 2% of GDP. Tax collection underperformance has led to an uneven track record of compliance with the fiscal rule. The fiscal deficit reached 2.1% in 2018, slightly above the 2% ceiling, and there has been a gradual increase in government debt. However, ample international market access eases financing constraints arising from current fiscal trends.

The outgoing government modified the fiscal responsibility law by simplifying its framework but allowing higher deficits through 2021, repeating a pattern of postponing consolidation targets. The modified LRSF sets limits on the NFPS deficit of 2.0% of GDP in 2018 and 2019, 1.75% in 2020 and 2021 and 1.5% thereafter.

Cortizo's administration is expected to present pension reform as the unfunded defined benefit component of Panama's mixed pension system enters into a cash deficit. The latest actuarial estimates show that reserves could be depleted by 2027 absent any parametric reform.

Accelerating economic growth beginning this year should help contain fiscal pressures. Economic growth softened to 3.7% in 2018 from 5.3% in 2017 and decelerated further to 3.1% in 1Q19 mostly due to construction and slowdown in commerce. However, economic activity is expected to recover given new mining operations and ongoing public infrastructure programs. The Minera Panama copper mine, which anticipates yielding USD2 billion at peak capacity, three times Panama's goods exports, began production February 2019. Fitch expects real GDP growth will rise to 4.7% in 2019 and 5.3% in 2020.

Despite government progress in strengthening its Anti-Money Laundering and Combating the Financing of Terrorism framework, shortcomings in its effectiveness resulted in Panama being placed back on the FATF's "gray list." The impact of this remains uncertain. Panama did not exhibit an extended macroeconomic impact when placed on the "gray list" in 2014. The country lost 74 corresponding bank relationships in 2015-2016 but 92 have since been established. Smaller financial institutions are more susceptible to this risk.

More on this topic

Panama: Fitch Downgrades Risk Outlook

February 2020

The rating agency maintained BBB's long-term issuer default rating, but decided to change the risk outlook from stable to negative, arguing that the debt burden will continue to increase in 2020.


The revision of Panama's Outlook to Negative reflects a marked deterioration in fiscal deficits and a significant increase of the government's debt burden, related to accumulation of arrears by previous administration and higher fiscal deficit targets under the modified Fiscal Responsibility Law. In addition, the recent greater-than-anticipated growth deceleration creates additional challenges for fiscal consolidation.

Negative Risk Outlook for Guatemala

April 2019

Fitch Ratings confirmed the long-term foreign currency debt default rating of "BB", but changed the outlook from stable to negative.

The review of Guatemala's negative outlook reflects political tension and greater uncertainty in agents, as well as a constant erosion in the government's low tax collection, the rating agency argued.

Fitch Confirms Panama's Risk Rating

February 2019

Because of its strong and stable macroeconomic performance, Fitch confirmed the long-term foreign currency rating at 'BBB', with a stable outlook.

For the risk qualifier, the country's macroeconomic performance has driven a sustained increase in per capita income, and it also forecasts that GDP growth will recover to 5.8% in 2019 and 5.5% in 2020, above countries with similar ratings.

Negative Outlook for Costa Rica's Debt

January 2018

Fitch Ratings has changed the outlook from stable to negative, due to "diminished flexibility to finance its rising budget deficits and public debt burden, as well as persistent institutional gridlock preventing progress on reforms to correct the fiscal imbalance."