The risk rating agency Moody’s rated the country’s investment grade in baa1 with a stable expectation and strong growth in the medium term although at lower percentages than in the last decade.
The rating is subject to very specific factors that the firm trusts will be implemented in the country, such as: a strict fiscal policy regarding the payment of the debt, the strength of certain government institutions and the government’s ability to collect taxes, which It will give greater credibility to the country at the international level in terms of the debt repayment commitment. One of the great strengths that act in favor of Panama at the time of being evaluated by this type of firm, is the continuous flow of contributions made by the Panama Canal Authority (ACP) to the central government, the logistical role of the country in region and expansion capacity, which profiles the country in 2021 as the richest in Latin America, according to the risk rating agency. This leaves the Isthmus very well compared to other world economies hit by the covid-19.
The average annual growth of real GDP was 6.2% between 2010-19, supported by high levels of investment that today are severely hit by the virus that will contract the economy with 1% of real GDP. In addition to this, the medium-term growth prospects will be moderate in relation to the last 10 years, but they will continue to be supported by contributions from the Canal and continued investment in the country. Overall, Panama will continue to improve its position as a logistics hub and is on its way to becoming the richest country in Latin America in terms of purchasing power per capita in 2021.
In the case of Panama, the rating agency analyzes that the country had a sustained record as a growing economy due to the high levels of investment and the global role of the Panama Canal. He estimates that the pandemic will severely affect the growth that was projected for 2020 and will lead to tighter fiscal measures in the future due to restrictions on its currency, the dollar. According to the firm, this is key to supporting debt payment planning and the sovereign credit profile.
Four factors determine Panama’s credit profile:
- A strong economy (baa1)
- Strong institutions (baa3)
- Fiscal policy (a2)
- The ability to recover from a risky event (baa).
In analyzing these factors, Moody’s maintained its risk rating at A3-Baa2 based on Panama’s credit strengths. Namely: a service economy that maintained a positive growth trajectory, a favorable credit history with low refinancing without changing the risk rate, and a constant flow of income associated with Canal contributions.
Among the credit challenges, they identify that the Isthmus has a relatively small income base that weighs on the affordability of debt, a moderate debt burden that has deteriorated in recent years, and limitations in the management of economic policy due to the dollarization.
Despite the pandemic plaguing the great European and US economies, the firm hopes that economic growth will be able to support the credit portfolio, surpassing the Isthmus over other countries. Internal factors related to investment in the mining sector will provide a strong base of growth. But they note that the country is exposed to external risks derived from the global slowdown. However, they observe that these, for Panama’s growth prospects, are balanced.
The rating agency foresees a stable perspective of the country, incorporates its expectation that the debt indexes will stabilize in the coming years as the government builds a plan to comply with the new fiscal rules. Likewise, they expect the authorities to adopt measures to increase government revenues to maintain social spending and investment while complying with fiscal regulations.
Among the factors that Moodys details to obtain an improvement in the rating, highlights the possibility of the government to develop a solid compliance with the new fiscal rules with discipline, which will support the credibility of the policies and would lead to a substantial decrease in the indexes of debt. In this same line, it observes that the government must make continuous efforts to strengthen its collection capacity, which would speak in favor of its credit profile. Another upward push would occur if the authorities proactively address potential contingent liabilities related to the social security system.
Despite the positive outlook that the Panamanian rating agency gives, they warn that the rating could be lowered if they see insufficient fiscal consolidation that leads to a continuous deterioration in the payment of debt. As a second point, it establishes the possibility that the government cannot comply with the deficit limits of the non-financial public sector in the fiscal rule, and the third alarm is based on the assumption that government revenues or the materialization of contingent liabilities lead to wider fiscal deficits and debt build up.
Impact of the virus
The virus will severely impact the development of the economy and fiscal accounts.
In this line, the rating agency analyzed the preventive measures adopted by the government to reduce contagions and the moratoriums on the payment of announced taxes, in addition to the suspension of the payment of public services for those with a salary of less than $ 2,000 a month. He reviewed the flexibility of banks by granting grace periods and smoothing the terms of loans to their clients.
However, he warns that mobility restrictions will have a negative effect on consumption while the confinement lasts. Several key activities have halted its operations for a long time, such as construction, which accounts for 20% of GDP, which halted all activities for a month from March 25. Copa Airlines did the same since March 23, transport services represent 4% of GDP. In addition to this, it foresees a decrease in the load that crosses the Panama Canal due to the slowdown in growth in the United States and Asian countries. Taking into account that Canal transfers to the central government represent 121.2% of the total government revenue, it would be a weak point to consider in the State’s finances.
Moodys recharges the country’s growth in the operations of the year that Cobre Panamá recorded, which began its production phase in 2019. However, the price of copper worldwide may limit the production of the mineral this year. Overall, the rating agency expects the economy to contract sharply during the second quarter of the year and gradually recover, leading to a year of 1% contraction. They expect growth to return to 4% in the medium term and forecast a rebound to 3.7% in 2021.
Institutions rating
Panama’s institutions and government strength received a baa3 rating. This balances their relative governance scores and the effective performance of the Panama Canal Authority, which was rated A1 as stable.
It is clear that the dollarized economy causes the importation of inflation from the United States, however, they have taken into consideration the government’s record regarding the Fiscal Responsibility Law. They observed the changes in 2018 to this law but highlight a lack of transparency in the delays of the reports on the modifications to the law in the framework of the fiscal policy that provides Panama’s credit profile.
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