Panama’s downgrade worries Cortiz’s government

Downgrade of the country’s long-term foreign currency issuer rating from ‘BBB’ to ‘BB+’, with a stable outlook from the risk rating agency Fitch Ratings, keeps the government uneasy Laurentino Cortizo.

The state government respects the opinion of FitchRatings, but does not share it considering that there are elements that have not been fully considered, said the minister Commerce and Industry, Jorge Rivera Staff.

Risk ratings are the country’s ability to regularly pay its debts and are long-term ratings, Rivera staff reminded. For officials, international markets have already been dealing with these possibilities since the Supreme Court of Justice ruling that declared the Minera Panamá contract unconstitutional.

However, “if the trend continues in the medium term, we would face a higher cost of financing for companies, for banks and loans”, the head of trade and industry showed.

In view of this, the People’s Government has sent the company reasons why it does not match the assessment, especially in the macrofiscal environment, the minister pointed out. It thereby seeks to provide greater elements of judgment for its next short-term review.

While Panama awaits the assessment of the other two rating agencies and multilateral companies, Rivera Staff acknowledges that the recovery of the risk rating is another task that will be inherited by the next administration that takes office on July 1.

What did FitchRatings consider?
Panama’s downgrade to ‘BB+’ reflects fiscal and governance challenges exacerbated by events surrounding the closure of the country’s largest mine, the company said.

He added that large fiscal deficits and poor revenue performance had fueled some of the largest increases in public debt/GDP and interest/income since 2019 before the pandemic, limiting countercyclical policy space. which was already more limited in the context of dollarization, and represents greater vulnerability in light of the sovereign’s strong dependence on external markets for its financing.

In its report, Fitch Ratings insisted that the closure of the Minera Panama copper mine further complicates the fiscal outlook and highlights growing management challenges.

The authorities are hoping to significantly over budget to meet the LRSF limit of 2%, but this seems doubtful in opinion Fitch. Fitch predicts the deficit will widen to 4.7% due to the loss of extraordinary expenses, weaker canal revenues due to the drought, higher interest costs and other spending increases (with less under-execution than the authorities forecast) .

Likewise, gross general government debt is projected to continue its upward trajectory in 2024 as growth slows and the fiscal deficit widens, jumping to 60.7% of GDP. On a consolidated basis (excluding the CSS stake), Fitch forecasts debt to increase to 56.0%, above the ‘BB’ median of 53.9%, and over 330% as a share of revenue, well above the ‘BB’ median of 190%.

Panama’s current account deficit has a history of smooth and rapid adjustment, but has raised net external debt to approximately 50% of GDP by the end of 2023. This is one of the highest in the ‘BB’ and ‘BB’ categories. BBB’, which represents a certain sensitivity to changes in external financing conditions, the report states.

Fitch expects the likely winners of the May 2024 election to make some effort to address these fiscal challenges. However, the expected slowdown in growth, a tense social context and party fragmentation are likely to limit the scope for decisive action, and rebuilding fiscal space and credibility will take time.

Considerations
Risk Assessment Agency FitchRatings believes that cStructural fiscal consolidation that puts public debt/GDP and interest/income on a firm downward trajectory could lead to a positive rating or upgrade. As well as evidence of improved governance, for example through improvements in the credibility and predictability of fiscal policy.

However, the country’s government defends that the economic foundations of Republic of Panama which support the country’s credit rating remains solid, with strong economic growth, low inflation, declining unemployment levels and compliance with fiscal targets.

“Our economy grew by 7.3 percent in 2023 and we adhered to the reduction of fiscal restrictions established by the Law on Fiscal Social Responsibility from 2020,” he noted.

The anti-cyclical policy implemented by the Republic of Panama since 2020, with the consultation and support of the International Monetary Fund, has favored strong economic growth, employment in the country and the lowest inflation rate in Latin America and the Caribbean, one of the lowest in the world, which allowed Panama to counteract external shocks, such as the effects of the pandemic, the war in Ukraine and high market interest rates, the Ministry of Economy and Finance indicated in a recent statement.