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Panama Consolidates Sovereign Debt

by Mike Godfrey,, Washington

23 November 2005

Last week Panama offered a new US$980m 20-year benchmark sovereign bond, in exchange for four of its global bonds, maturing in 2008, 2011, 2012 and 2020. The new paper matures in 2026.

Panama said it wanted to extend its debt maturity profile and reduce its short-term debt burden by swapping the existing earlier-maturing debt. The swap is being managed by Citigroup, who said that the 7.125 percent coupon bond is priced at a yield of 7.295 percent, and will trade on the secondary market within two weeks.

The amount issued was slightly more than the $975 million outstanding on Panama's global bond due 2027, currently considered Panama's benchmark paper. Its price fell as investors shifted their portfolios to accommodate the new benchmark. The price of the global 27 fell 1.250 to bid 116.750 while the global bond due 2034 fell 1.312 to bid 108.188.

Last month, Panama filed with the US Securities and Exchange Commission (SEC) to issue up to $2 billion worth of debt. Panama said it planned to issue the securities to raise money for general refinancing and other spending needs. The ‘shelf registration’ allows Panama to sell securities in one or more offerings, determining details such as size and price at the time of sale.

The Panamanian economy expanded by 6.2% in the first six months of this year, as measured by the monthly index of economic activity. The most dynamic sectors included fish and seafood exports, agriculture products and tourism.

The government has forecast economic growth this year of between 4.5% and 5%, below the 6.1% growth witnessed in 2004, which was partly a result of temporary real estate tax breaks. The tax breaks, which gave exemption from real estate taxes for up to 20 years, had led to a construction boom in 2004.

Fiscal austerity measures agreed last February are being implemented by the government, with the IMF's strong approval, and are expected to dent the economy this year. The package seeks to raise revenues from new business taxes, in a bid to reduce the country’s level of debt. The legislature voted 46 to 28 in favour of the measures, which will include a new 1.4% tax on companies’ gross revenues, and a levy on firms operating in the Colon Free Trade Zone – the largest free port in the Americas.

Finance Minister Ricaurte Vasquez said that the fiscal reform package will "stabilize Panama's public finances and establish conditions for the economic and social growth of the country”.

President Martin Torrijos hopes that the new measures will reduce Panama’s $700 million budget deficit, equal to 5.2% of GDP in 2004. He is also hopeful that the extra revenues will help the government to reduce its sovereign debt and restore the confidence of international institutional investors.

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