Panama: Fitch Reaffirms Investment Grade

Fitch Ratings has ratified the investment grade of the Republic of Panama at BBB with a stable outlook, arguing a strong and stable macroeconomic performance.

Tuesday, February 20, 2018

From a statement issued by Fitch Ratings:

Fitch Ratings-New York-16 February 2018: Fitch Ratings has affirmed Panama's Long-term Foreign and Local Currency Issuer Default Ratings (IDRs) at 'BBB' with a Stable Rating Outlook. 

KEY RATING DRIVERS 

Panama's ratings are supported by continued strong and stable macroeconomic performance, which has driven a sustained rise in per-capita income and reflects policies and a strategic location and asset (the Panama Canal) that underpin a high investment rate. This is counterbalanced by the fact that, despite improved compliance with legal deficit targets, adjustments have been insufficient to put the public debt burden on a downward path, as had been anticipated in prior rating reviews. 

A sustained infrastructure investment drive and large increases in traffic and tonnage through the expanded Panama Canal lifted real GDP growth to around 5.5% in 2017, from 5% in 2016. The boost to transport and construction offset stagnant growth in the manufacturing and commerce sectors, which are being weighed down by declining activity in the Colon Free Zone. Fitch expects ongoing and pending infrastructure projects to continue to underpin growth of between 5%-6% over the forecast period. The Odebrecht corruption scandal has not interrupted progress on the works in which the company is still involved. Price pressures remain contained, in part because of price controls on staple food products, and headline inflation is projected to rise modestly on the back of higher energy prices. 

There is still little material or discernible negative economic impact from the Mossack Fonseca papers or episodes of grey-listing by the European Union and the OECD. Foreign deposits declined sharply in 2017, yet it is unclear whether this fall is attributable to reputational damage from those events or other extraneous factors. Either way, the impact on the Panamanian economy should be limited by regulation segmenting foreign deposit-taking and domestic lending, while recent reforms to strengthen the AML/CFT compliance framework should help to mitigate reputational risk going forward. Domestic credit growth has continued to moderate from double digit rates in recent years to a level that is broadly in line with nominal GDP.

The government posted a non-financial public sector (NFPS) budget deficit of 1.6% of Fitch-estimated GDP in 2017, below the effective ceiling of 1.8% (1% plus a 0.8% let-out permitted under the fiscal rule). In 2014-2016, a high effective deficit ceiling meant that the fiscal rule was not a binding constraint on the central government - the metric relevant for sovereign borrowing - and deficit reduction was achieved mainly through rising surpluses at state-owned entities and government agencies. In 2017, the additional revenues from the first full-year of the expanded Panama Canal helped to narrow the central government deficit. However, stagnant tax revenue growth and higher current spending pressures inhibited a greater improvement. 

Fitch assumes that the government will again meet its NFPS deficit target in 2018 of 1.5% (0.5% plus a 1.0 pts let-out), which requires only a 0.1 pts adjustment. The canal contributions are projected to fall gradually as a share of GDP starting in 2018, allowing commensurately higher deficits under the current design of the fiscal rule, but Fitch assumes the government will maintain a stable deficit in the forecast horizon. A track record of fiscal discipline at the central government level is needed to improve policy credibility, in Fitch's view.

General government debt rose to 37% of GDP in 2017, from 33% in 2013. Fitch projects Panama's public debt trend will remain relatively stable over the medium term, assuming no further consolidation in the central government deficit and continued rapid economic growth. However, Fitch's debt dynamics are sensitive to growth shocks and fiscal slippage, leaving little counter-cyclical fiscal policy space. Furthermore, debt-to-revenues are projected to rise and remain above the 'BBB' median during the forecast horizon.

The absence of currency mismatch on the sovereign balance sheet (all income and liabilities are in USD), favourable financing access to multilaterals and capital markets, and a long-dated maturity profile insulate Panama's sovereign debt dynamics from currency, interest rate, and rollover risks. 

The government has taken steps to strengthen the fiscal framework in recent years, for instance, by introducing legislation to criminalize tax evasion and create a fiscal council. It has refrained from altering the high savings threshold under the fiscal rule in order to maintain consistency and as a deliberate policy of channelling additional Canal revenues into infrastructure investment. However, this has prevented it from supporting its original intention of lowering debt levels and accumulating sovereign wealth funds to create fiscal space. It has also eased the pressure on addressing structural fiscal weaknesses such as the widening pension deficit of the Social Security Fund (CSS) and the falling tax-take. Fitch does not expect reforms to taxes, pensions, or the fiscal rule during the final years of the administration.

More on this topic

El Salvador's Debt Rating Downgraded Again

February 2017

In line with recent warnings issued by other credit rating agencies regarding the country's bleak fiscal outlook, Fitch has reduced the debt rating from B + to B, and changed the outlook to negative.

From a press release issued by Fitch Ratings:

Fitch Ratings-New York-01 February 2017: Fitch Ratings has downgraded El Salvador's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'B' from 'B+'.

Guatemala: Fitch Maintains Debt Rating

June 2015

Noting uncertainty and political instability in the country as the main risk factor for the economy, the rating remains at BB with a stable outlook.

From the press release by Fitch Ratings:

Fitch Ratings-New York-19 June 2015: Fitch Ratings has affirmed Guatemala's long-term foreign- and local-currency Issuer Default Ratings (IDRs) at 'BB' with a Stable Outlook.

Costa Rica: Fitch Changes Outlook to "Negative"

January 2015

In a clear warning signal, the ratings agency has changed the outlook for Costa Rica's sovereign debt from stable to negative, arguing that there is a lack of measures to reduce the fiscal deficit.

From a statement issued by Fitch Ratings:

Fitch Ratings-New York-22 January 2015: Fitch Ratings has revised the Rating Outlook on Costa Rica's Long-term foreign and local currency Issuer Default Ratings (IDRs) to Negative from Stable and affirmed the IDRs at 'BB+'. The issue ratings on Costa Rica's senior unsecured foreign and local currency bonds have been affirmed at 'BB+'. The Short-term foreign currency IDR has been affirmed at 'B' and the Country Ceiling at 'BBB-'.

Fitch Downgrades Guatemala's Ratings to 'BB'

June 2014

Fitch has also downgraded the issue ratings on Guatemala's senior unsecured foreign and local currency bonds to 'BB' from 'BB+', with outlook revised to Stable.

From the press release by Fitch Ratings:

Fitch Ratings has downgraded Guatemala's long-term foreign and local currency Issuer Default Ratings (IDRs) to 'BB' from 'BB+'.

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