Arguing that the outlook remains more positive in the medium term, Moody’s upgraded its foreign currency long-term issuer rating from Baa2 to Baa1.
For the rating agency, Panama will continue to grow quickly, surpassing the growth achieved by the majority of qualified pairs in Baa.
From Moody’s statement:
New York, March 08, 2019 — Moody’s Investors Service (“Moody’s”) has today upgraded the Government of Panama’s foreign-currency long-term issuer rating to Baa1 from Baa2. Moody’s has also upgraded the foreign-currency long-term senior unsecured debt ratings to Baa1 from Baa2, as well as the foreign-currency long-term senior unsecured shelf ratings to (P)Baa1 from (P)Baa2.
The outlook has been changed to stable from positive.
The key drivers for today’s rating action are the following:
1. Panama’s economic growth and fiscal metrics exceed that of most Baa-rated peers and prospects remain more favorable over the medium term;
2. The government has strengthened its fiscal policy framework.
The stable outlook reflects Moody’s expectation that Panama will continue to grow fast, outpacing growth achieved by most Baa-rated peers. The outlook also incorporates Moody’s expectations that Panama’s fiscal metrics will only register a moderate decline as the government builds a track record under the new fiscal rules.
Moody’s has also raised the foreign-currency long-term bond and deposit ceilings to A2 from A3. The foreign-currency short-term bond and deposit ceilings remain unchanged at Prime-1 (P-1).
RATINGS RATIONALE
RATIONALE FOR THE UPGRADE TO Baa1
PANAMA’S ECONOMIC GROWTH AND FISCAL METRICS EXCEED THAT OF MOST Baa-RATED PEERS AND PROSPECTS REMAIN MORE FAVORABLE OVER THE MEDIUM TERM
In Moody’s view, Panama’s growth outlook over the coming years will remain robust, following a deceleration in 2018 to 3.7%. Moody’s projects GDP growth above 5% through 2022 — compared to a Baa-category median of about 3%. Panama’s economic dynamism will remain tied to investment and activities related to the Canal and the logistics sector. Over the coming years, Moody’s expects that large-scale infrastructure projects will sustain the contribution of gross fixed capital formation to growth, while continued development along the Panama Canal zone related to logistics will solidify Panama’s role as regional trade and financial hub, further supporting growth. Moody’s notes that the Panamanian economy is the third fastest growing within the Baa category, after India (Baa2 stable) and the Philippines (Baa2 stable).
On the fiscal side, Moody’s expects that the government debt burden will stabilize at or below 40% of GDP through 2020. After remaining broadly stable around 37% during 2015-17, the debt-to-GDP ratio rose to an estimated 39.5% last year. Moody’s notes that despite growth deceleration in 2018, the authorities maintained the central government deficit flat relative to 2017, while complying with the non-financial public sector deficit target. Moody’s expects that as growth recovers in 2019, the new administration — which will take office in July 2019 — will continue reducing the fiscal deficit over the coming years in line with targets set in the fiscal responsibility law, a condition that will contribute to stabilizing the debt-to-GDP ratio. At around 40% of GDP in 2019, the government debt burden will continue to compare favorably to the median of 50% for Baa-rated peers. Moreover, Moody’s expects debt affordability — measured as interest payments-to-revenue — to remain broadly in line with the median for Baa-rated peers, even though Panama’s tax revenue base is smaller than that of similarly-rated sovereigns.
THE GOVERNMENT HAS STRENGTHENED ITS FISCAL POLICY FRAMEWORK
Last year the government reformed the Social and Fiscal Responsibility Law that had been in place since 2008 and whose performance had been mixed. During the first phase (2009-14), fiscal deficit targets where constantly modified. At a later stage (2015-17), the rules’ mechanics became overly complex and introduced an inherent deficit bias by allowing upward adjustments to the deficit targets.
Following changes made in 2018, the fiscal deficit target defined in the new rules will not incorporate an upward adjustment as it did in the past. This will facilitate in-year monitoring of fiscal performance relative to targets, but more importantly it will make the actual fiscal targets more transparent for policymakers and market participants.
While the fiscal deficit target will continue to be set at the non-financial public sector (NFPS) level, a new rule introduced a ceiling for nominal growth of central government current expenditures — excluding expenditures on health, pensions and interest payments — that cannot exceed potential growth plus inflation. Central government expenditures are important because the central government deficit drives Panama’s borrowing needs and consequently debt accumulation. Containing current expenditures, which have been rising in recent years, will create room for the government to deliver on the deficit targets while maintaining relatively high levels of capital spending. Moreover, Moody’s expects the creation of an independent fiscal council to provide increased oversight over the budget process and its execution, thus supporting fiscal discipline.
The mechanism that leads to the accumulation of assets in the sovereign wealth fund (Fondo de Ahorro de Panama, FAP) was also modified. Under previous rules, because the conditions to make transfers to the FAP were unrealistic, no transfers of additional resources to the fund occurred, leading to a decline in FAP’s assets relative to GDP and to the government’s debt stock. The revised framework, which incorporates lower thresholds for Canal transfers to the government, will potentially allow resources to flow to the FAP.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook reflects Moody’s expectation that economic growth will remain supportive of Panama’s credit profile and that it will be stronger than that of peers. Domestic factors, related to continued investment and the expansion of the mining sector, will provide the basis for this strong growth. Meanwhile, Panama is somewhat exposed to external risks stemming from the ongoing trade dispute between the US and China. Thus, Moody’s considers that risks to Panama’s growth outlook are balanced.
The stable outlook also incorporates Moody’s expectation that debt ratios will remain stable over the coming years as the government complies with the new fiscal rules. Moody’s baseline scenario considers that the next administration will likely implement a tax reform to maintain social spending and investment, while also complying with the fiscal rules. Additionally, Moody’s expects that Panama’s debt metrics will continue to compare favorably to its Baa peers.
WHAT COULD CHANGE THE RATING UP/DOWN
The rating could be upgraded should the government develop a strong track record of compliance with the new fiscal rules, demonstrating fiscal discipline, which would support policy credibility and lead to a material decline in debt ratios. Continued efforts to strengthen Panama’s revenue raising capabilities would also be positive for Panama’s credit profile. Additional upward momentum would emerge if the authorities proactively address potential contingent liabilities related to the social security system.
Alternatively, the rating could be downgraded if: (i) insufficient fiscal consolidation leads to continued deterioration in debt metrics; (ii) the government is unable to meet non-financial public sector deficit ceilings set forth in the fiscal rule; (iii) a weakening of government revenue, or the materialization of contingent liabilities lead to wider fiscal deficits and debt accumulation that translates into higher government debt ratios.
SUMMARY OF MINUTES FROM RATING COMMITTEE
GDP per capita (PPP basis, US$): 25,405 (2017 Actual) (also known as Per Capita Income)
Real GDP growth (% change): 5.4% (2017 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 0.5% (2017 Actual)
Gen. Gov. Financial Balance/GDP: -1.9% (2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -7.9% (2017 Actual) (also known as External Balance)
External debt/GDP: 26.8% (2017 Actual; Non-financial public sector only)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been recorded since 1983.
On 06 March 2019, a rating committee was called to discuss the rating of the Panama, Government of. The main points raised during the discussion were: An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate. The issuer’s institutional strength/framework, have increased. Other views raised included: The issuer’s economic fundamentals, including its economic strength, have not materially changed. The issuer’s fiscal or financial strength, including its debt profile, has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.