Panama Granted Coveted Rating Hike

by Phillip Morton, Investors Offshore.com

30 March 2010

Panama has received an upgrade to the credit rating on its debt to investment-grade after ‘sustained improvements in public finances, underpinned by recent tax reforms’.

Fitch Ratings on March 23 announced that it had upgraded Panama's long-term foreign currency and local currency Issuer Default Ratings (IDRs) to 'BBB-' from 'BB+'. Both Rating Outlooks remain Positive. Fitch has also upgraded the short-term foreign currency IDR to 'F3' from 'B' and the country ceiling to 'A-' from 'BBB+'.

“The upgrades reflect a sustained improvement in public finances, underpinned by recent tax reforms, and the economy's resilience to the global financial crisis and associated recession. Although economic growth decelerated to 2.4% in 2009 from 10.7% in 2008, it was one of the strongest rates of growth in Latin America and among 'BBB' rated peers. Similarly, fiscal deterioration was moderate, especially by international standards while Panama's general government debt/GDP ratio stabilized around 45%. The Positive Outlook reflects the expectation that government debt/GDP ratio will further decline as the growth accelerates and fiscal discipline is maintained despite an ambitious public investment program,” Fitch Ratings’ statement said.

Theresa Paiz Fredel, Senior Director in Fitch's Sovereign Ratings team, further commented:

“Panama's key credit metrics have been on an improving trend since the middle of the last decade and held up well to the worst global downturn since World War II. Recent tax and fiscal reforms signaled a continuing commitment to fiscal discipline and enhancing the flexibility and quality of public finances.”

“Further upgrades will depend on additional measures to strengthen the management of public finances, successful implementation of the government's ambitious public investment program and sustainable economic recovery.”

“The passage of two tax reforms in the first nine months of the Martinelli Administration, which are expected to yield around 1.6% of GDP in additional revenue this year, underpin the government's commitment to sustainable fiscal policies.”

Fitch Ratings’ statement continues:

“Fiscal consolidation and vigorous growth reduced the government debt to GDP ratio to an estimated 45% last year, from a peak of 70% in 2004. Under conservative assumptions of a 1% of GDP fiscal deficit and average growth of 5%, Panama's government debt/GDP ratio will converge with the current 10-year 'BBB' category median of 35% by 2014 at the latest."

“Furthermore, net government debt, at 29% of GDP, is in line with the 10-year 'BBB' median. Given the moderate debt burden and Fitch's expectation that the non-financial public sector will maintain a deficit of close to 1% of GDP, the government's financing needs remain manageable at an estimated 2.6% of GDP this year, among the lowest of 'BBB' rated sovereigns and further supporting creditworthiness.”

“Evidence that the economy can sustain high growth without internal or external imbalances emerging would underpin confidence in sovereign creditworthiness, as would further measures to improve the management of public finances, including greater fiscal and funding flexibility. Successful execution of the government's public investment program, including the Panama Canal expansion project, without endangering Panama's favorable debt dynamics would also be positive for creditworthiness,” the ratings agency concluded.

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