Categories: Economy

Fitch changes the outlook for Panama from stable to negative

Credit rating agency Fitch Ratings affirmed Panama’s long-term foreign currency credit rating at ‘BBB-‘, but changed the rating outlook from “stable” to “negative”.
The decision is based on persistent fiscal pressures and uncertainties associated with fiscal consolidation in the country.
Over the past year, the Panamanian government has relied heavily on temporary measures and accounting maneuvers to reduce the fiscal deficit. In addition, fuel and electricity subsidies, along with rising interest spending, are putting pressure on the fiscal deficit in 2023.
A significant expansion budget spending planned for 2024 increases the risk of further deterioration of public finances and possible escalation of the national debt. In addition, the growing disparity in the defined benefit pension system represents a medium-term risk that could further worsen the country’s debt burden.
Panama’s fiscal credibility is in a delicate position. Despite the existence of the Law on Fiscal Responsibility, which establishes clear targets for the fiscal balance and an indicator of indebtedness in relation to the gross domestic product (GDP) of 40%, its compliance is irregular.
In 2022, the authorities reported a non-financial public sector (NFPS) deficit of 3.9% of GDP, but this figure was propped up by accounting maneuvers, such as a “cash flow swap” with a commercial bank entity. , which, according to the rating of Fitch, is equal to debt.
In addition, income is projected for future years cover current deficits.
In all administrations, fiscal targets have been modified to accommodate higher deficits, undermining the credibility of the fiscal framework. This situation becomes relevant due to the absence of an independent monetary policy that would compensate possible imbalances.
The government has accumulated arrears, which could increase the debt burden in the long run.
The lack of significant progress in the implementation of pension system reforms further worsens financial imbalances, posing additional challenges to the country’s economic stability.
On the other hand, Fitch improved Panama’s sovereign ceiling at ‘AA-‘, reflecting the agency’s view that the risks of exchange control are mitigated by the country’s full dollarization. Dollarization has supported macroeconomic stability and protects public and private balance sheets from exchange rate risks.
The agency also notes that the outcome of the general elections scheduled for May 2024 is uncertain and could affect the economic situation in the country.

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Published by
Jason
Tags: negativeperspectiveStable
2 years ago

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