For the first time ever, Panama has earned an investment-grade credit rating from Fitch Ratings. The international ratings agency upgraded Panama’s long-term foreign currency and local currency Issuer Default Ratings (IDRs) to ‘BBB-’ from ‘BB+’. The new rating is the lowest investment-grade level rating with a positive outlook. Fitch also raised Panama’s short-term foreign currency IDR from a ‘B’ rating to ‘F3′ and the country ceiling from from ‘BBB+’ to ‘A-’.
The new ratings reflect a sustained improvement in public finances, low debt, and recent tax reforms. “Recent tax and fiscal reforms signaled a continuing commitment to fiscal discipline and enhancing the flexibility and quality of public finances,” said Theresa Paiz Fredel, a Senior Director at Fitch Sovereign Ratings. The new ratings also reflect the Panama economy’s resilience to the global financial crisis. Panama’s economic growth was among the world’s fastest in 2007 and 2008, ranging from 8% to 11%.
In 2009, even though growth decelerated to 2.4%, Panama’s was one of few economies in the world to continue growing and held one of the strongest growth rates in the Latin America region. Sustained growth in investment, rising domestic savings, and continuing foreign direct investment have supported Panama’s economic growth in recent years.
Meanwhile, increases in real income and employment, says Fitch, bode well for private consumption in Panama. In addition, the Panama Canal expansion project and other mega-projects will contribute to economic growth.
The upgrade is a victory for Panama President Ricardo Martinelli, a conservative that took office in 2009 and immediately set about pushing tax reforms through the legislature. Two tax reforms passed within the first nine months of the new administration are expected to yield approximately 1.6% of GDP in revenue this year. Per Fitch, the reforms underpin the government’s commitment to sustainable policy.
Although Panama’s gross public debt ratios remain high, Fitch maintains that Panama’s dollarized economy, favorable amortization profile, and financial and land assets offset this weakness. Furthermore, the Panama government’s financing needs remain manageable at an estimated 2.6% of GDP this year. Also, the Panama economy maintains a very low overall level of foreign indebtedness, with net debt equivalent to less than 2% of the GDP.
Fitch says further upgrades will depend on additional measures to strengthen public finances management and implementation of the government’s public investment program. Continued effective management of the Panama Canal expansion may help ensure that the outlook for the Panama economy remains positive. Evidence that the economy can sustain growth without imbalances, and greater fiscal and funding flexibility, would underpin confidence in sovereign creditworthiness.
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