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.
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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Renzo Merino
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
