Moody’s lowered Panama’s risk rating

Moody’s reduced this Tuesday to Baa3 from Baa2 Rating of Panama and changed the outlook from negative to stable, as a result of the absence of an “effective response” by the authorities to address the structural fiscal challenges that “grew up over time” in the Central American country.

Among the reasons for lowering the rating to Baa3, Moody’s cites public spending and “very small tax base” from Panama.

As for expenditures, he points out that the state wage fund accounts for “so far more than 30 percent of total spending” and that he expects it to continue to “grow due to the increase in wages” established by law, to which are added subsidies and transfers that are used to “solve social unrest” and spending allocated to the education sector, which increased from 6% to “7% of gross domestic product (GDP)”.

As for tax revenues, Moody’s states that they have been decreasing since 2017, reaching an average of 7.6% of GDP by 2022a situation that is “partially” compensated by the growing contributions of the Panama Canal, which now represent “more than 25% of central government revenues”.

Regarding the stable outlook, Moody’s in its report highlights the “solid economic growth” expected for Panama “over the coming years, with annual rates in the range of 4% – 5%”, which offers key support to the country’s credit profile.

In addition, Panama will continue to benefit from moderate sensitivity to risk events, partly reflecting the role of dollarization in mitigating sharp changes in key credit indicators, the rating agency said.

“Strong growth dynamics will keep the debt ratio stable and could lead to a gradual decline in the debt-to-GDP ratio,” which Moody’s expects to remain in line with the median Baa of comparable companies, around 55% of GDP in 2023.

Mining income and rising interest

In its report, Moody’s links the adjustment in 2023 to the target of a deficit of 3% of GDP, which is established in the fiscal rule, with the entry into the treasury 770 million dollars (0.9% of GDP) for the contract with Minera Panamá, a subsidiary of Canada’s First Quantum Mineral that operates the largest open pit copper mine in Central America.

Authorities predict that this contract law, approved last week and sparking the biggest street protests in decades in Panama, “would secure royalties of $375 million (0.4% of GDP) annually in the coming years.”

“However, given the recent social protests, the contract will be subject to approval in a national consultation that would take place in December 2023. Nevertheless, Moody’s believes that these additional revenues would not be sufficient to cope with the growing fiscal pressures arising from the interest burden and continuous deterioration of the company’s finances Social Insurance Fund (CSS)“.

Moody’s adds that the prospect of an increase in the interest burden in 2024, when it will reach “15% of government revenues, will adversely affect Panama’s fiscal strength,” although the debt/GDP ratio will have to be kept relatively stable.

Risk Assessment Agency Fitch Last September, it maintained Panama’s rating at BBB-, but changed the outlook from stable to negative.pointing out “permanent fiscal pressures” and that in the last year the government “largely” relied on “one-off measures and accounting maneuvers to reduce fiscal deficits”.