Before you invest and move to another country, investigate its  financial strengths.

Moody’s Investors Service has today affirmed the Government of Panama’s issuer rating and senior unsecured bonds at Baa2 and senior unsecured shelf at (P)Baa2. The outlook changed to positive from stable.

Two key drivers underpin the positive outlook:

1) Moody’s expectation that the debt trend will improve over the coming years supported by fiscal consolidation and compliance with the fiscal rule;

2) Panama’s GDP growth rate continues to outperform peers, supporting its economic strength

The affirmation of Panama’s Baa2 issuer rating reflects credit strengths including strong economic growth and moderate debt burden and debt affordability that balance the credit challenges stemming from its exposure to global developments as well as its still-developing track record of compliance with fiscal rules.

Panama’s long-term and short-term foreign currency bond ceiling and the foreign currency bank deposit ceiling remain unchanged at A3/P-1.

RATINGS RATIONALE

RATIONALE FOR THE CHANGE TO POSITIVE OUTLOOK

— FIRST DRIVER: IMPROVEMENT IN THE DEBT TREND CONTINGENT ON DEFICIT REDUCTION AND COMPLIANCE WITH THE FISCAL RULE

Moody’s expects that as Panama’s fiscal rule lowers deficit ceilings over the coming years, the government will take actions to reduce its deficit, and this in turn would lead to a declining trend in government debt metrics. The Varela administration has begun to establish a track record of compliance with the fiscal rule since 2015 avoiding the use of waivers, as was the case in the past. Still, this has not been sufficient to prevent a deterioration of government debt metrics.

The current government has reduced the deficit of the non-financial public sector, the relevant government level for the fiscal rule targets, since it took office to 1.9% in 2016 from 3.2% in 2014. However, the central government deficit, which drives the government’s net borrowing requirements, has remained relatively constant at about 4% of GDP. Despite government efforts to contain spending by reducing capital expenditures in recent years, total expenditure growth has outpaced revenue growth for the central government. Consequently, even though Panama has had strong economic growth and favorable financing conditions, the debt/GDP ratio rose to 39.1% in 2016 from 35.0% in 2013.

Looking ahead, however, Moody’s expects that, as authorities deepen their fiscal consolidation efforts, the central government deficit will narrow over the coming years supporting a decline in the government debt ratio. Part of the deficit reduction will be driven by the higher transfers from the Panama Canal Authority (ACP) that we expect will average 2.5% of GDP in 2017-20 compared to 1.8% in 2016. In addition, the authorities have announced measures to contain growth of current expenditures while reiterating their commitment to enhancing tax collection.

Moody’s also expects the government will continue to reduce the non-financial public sector deficit in accordance with the fiscal rule, and this continued reduction will also support an improvement in debt metrics. Furthermore, an extended track record of compliance with the fiscal rule will enhance the credibility of policymaking and would solidify its role as an anchor that effectively sets deficit limits that ensure the stability of debt dynamics.

Moody’s expects authorities will continue to strengthen the institutional framework, particularly in the fiscal front. The government has made significant efforts to increase transparency on fiscal and debt management in addition to creating an independent fiscal council to evaluate government budgets, both credit positive developments.

— SECOND DRIVER: STRONG MEDIUM-TERM GROWTH PROSPECTS THAT WILL OUTPERFORM MOST RATING PEERS

Thanks to strong GDP growth, the size of Panama’s economy has more than doubled over the last decade, and per capita incomes have increased to $13,670 in 2016 from $6,029 in 2007. Panama’s investment-driven high growth rates will remain a distinct credit strength. GDP expanded at an average annual rate of 7.3% in 2007-16. Moody’s expects the Panamanian economy will continue to report strong economic growth over the medium term, averaging 5.7% in 2017-21 — compared to the Baa median GDP growth of 3%. A strong economic performance will support the government’s fiscal consolidation efforts and will contribute to improve debt metrics.

Economic growth will be supported by a large pipeline of projects, equivalent to about 30% of GDP. Some of the projects aim to reduce infrastructure bottlenecks in the energy and transport sectors. Others will reinforce Panama’s position as a regional trade and financial hub.

Panama’s investment ratio was about 45% of GDP over the past five years. Given prospects for continued and robust infrastructure spending, we expect capital accumulation and productivity gains will support Panama’s high potential growth, which we estimate at 5.5%.

WHAT COULD CHANGE THE RATING – UP

We would consider upgrading Panama’s ratings if: (1) the government demonstrates fiscal discipline by adhering to the deficit targets incorporated into the fiscal rule and reducing central government deficits; (2) the authorities strengthen the fiscal framework, including changes to the fiscal rule that bolster its role as a fiscal anchor and countercyclical tool; (3) the authorities proactively address potential contingent liabilities related to the social security system.

WHAT COULD CHANGE THE RATING – DOWN

The outlook would return to stable if insufficient fiscal consolidation at the central government leads to continued deterioration of debt metrics, or should the government prove unable to meet the deficit ceilings for the non-financial public sector set forth in the fiscal rule. Negative ratings pressure would also develop if a sustained weakening of government revenues, or the materialization of contingent liabilities lead to wider fiscal deficits and debt accumulation that adversely affects government debt ratios. An economic shock that materially undermines the ongoing fiscal consolidation process could also lead to a negative rating action.

GDP per capita (PPP basis, US$): 23,024 (2016 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 5% (2016 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 1.5% (2016 Actual)

Gen. Gov. Financial Balance/GDP: -1.9% (2016 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -5.6% (2016 Actual) (also known as External Balance)

External debt/GDP: 27.8 (2016 Actual)

Level of economic development: Moderate level of economic resilience

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 27 September 2017, a rating committee was called to discuss the rating of the Panama, Government of. The main points raised during the discussion were: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s governance and/or management, have not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.