NEW YORK, March 23 (Reuters) – Fitch Ratings upgraded its credit rating for Panama one notch to BBB-minus on Tuesday, becoming the first rating agency to give it coveted investment grade status, citing a sustained improvement in public finances underpinned by tax reforms.<\/p>\n
The upgrades reflect a sustained improvement in public finances, underpinned by\u00a0recent tax reforms, and the economy’s resilience to the global financial crisis\u00a0and associated recession. Although economic growth decelerated to 2.4% in 2009\u00a0from 10.7% in 2008, it was one of the strongest rates of growth in Latin America\u00a0and among ‘BBB’ rated peers. Similarly, fiscal deterioration was moderate,\u00a0especially by international standards while Panama’s general government debt\/GDP\u00a0ratio stabilized around 45%. The Positive Outlook reflects the expectation that\u00a0government debt\/GDP ratio will further decline as the growth accelerates and\u00a0fiscal discipline is maintained despite an ambitious public investment program.<\/p>\n
‘Panama’s key credit metrics have been on an improving trend since the middle of\u00a0the last decade and held up well to the worst global downturn since World War\u00a0II. Recent tax and fiscal reforms signaled a continuing commitment to fiscal\u00a0discipline and enhancing the flexibility and quality of public finances,’ said\u00a0Theresa Paiz Fredel, Senior Director in Fitch’s Sovereign Ratings team. ‘Further\u00a0upgrades will depend on additional measures to strengthen the management of\u00a0public finances, successful implementation of the government’s ambitious public\u00a0investment program and sustainable economic recovery,’ added Paiz Fredel.<\/p>\n
Sustained growth in investment, underpinned by rising domestic savings as well\u00a0as inflows of foreign direct investment, have supported rapid economic growth in\u00a0recent years, while increases in real income and employment bode well for\u00a0private consumption over Fitch’s rating horizon. The Panama Canal expansion\u00a0project and other public works projects will also raise the economy’s potential\u00a0output and sustainable rate of growth. Nonetheless, continued fiscal discipline\u00a0and effective management of government assets and the public investment program,\u00a0as well as the expansion of the Canal, will be required to ensure that the\u00a0Outlook for the economy and public finances remains Positive.<\/p>\n
‘The passage of two tax reforms in the first nine months of the Martinelli\u00a0Administration, which are expected to yield around 1.6% of GDP in additional\u00a0revenue this year, underpin the government’s commitment to sustainable fiscal\u00a0policies,’ said Paiz Fredel.<\/p>\n
Panama’s per capita GDP, governance and human development indicators, as well as\u00a0a stable financial system support the sovereign’s IDR of ‘BBB-‘. Furthermore,\u00a0dollarization underpins an established record of macroeconomic stability that\u00a0compares favorably with peers, as illustrated by an extended period of high\u00a0growth in conjunction with low inflation.<\/p>\n
Although Panama’s gross public debt ratios remain high relative to ‘BBB’ peers,\u00a0official dollarization, a favorable amortization profile and the government’s\u00a0considerable financial and land assets offset this weakness. Fiscal\u00a0consolidation and vigorous growth reduced the government debt to GDP ratio to an\u00a0estimated 45% last year, from a peak of 70% in 2004. Under conservative\u00a0assumptions of a 1% of GDP fiscal deficit and average growth of 5%, Panama’s\u00a0government debt\/GDP ratio will converge with the current 10-year ‘BBB’ category\u00a0median of 35% by 2014 at the latest. Furthermore, net government debt, at 29% of\u00a0GDP, is in line with the 10-year ‘BBB’ median. Given the moderate debt burden\u00a0and Fitch’s expectation that the non-financial public sector will maintain a\u00a0deficit of close to 1% of GDP, the government’s financing needs remain\u00a0manageable at an estimated 2.6% of GDP this year, among the lowest of ‘BBB’\u00a0rated sovereigns and further supporting creditworthiness.<\/p>\n
While the net sovereign external debt to current account receipts ratio remains\u00a0high at 22.5% compared with a 10-year peer median of -8.1% in 2009, this partly\u00a0reflects Panama’s monetary regime whereby the authorities do not technically\u00a0maintain international reserves. However, the overall level of foreign\u00a0indebtedness of the economy is very low – net debt is equivalent to less than 2%\u00a0of GDP, substantially less than the 10-year ‘BBB’ median of around 10%.<\/p>\n
Evidence that the economy can sustain high growth without internal or external\u00a0imbalances emerging would underpin confidence in sovereign creditworthiness, as\u00a0would further measures to improve the management of public finances, including\u00a0greater fiscal and funding flexibility. Successful execution of the government’s\u00a0public investment program, including the Panama Canal expansion project, without\u00a0endangering Panama’s favorable debt dynamics would also be positive for\u00a0creditworthiness. By contrast, Fitch could revise the Outlook to Stable if\u00a0unexpected fiscal deterioration beyond the scope of the Fiscal Responsibility\u00a0Law or the realization of contingent liabilities lead to a sustained\u00a0deterioration in the government’s debt dynamics.<\/p>\n","protected":false},"excerpt":{"rendered":"
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