Moody's upgrades Panama to Baa2
November 1, 2012 Moody's Investors Service
New York, October 31, 2012 -- Moody's Investors Service has upgraded the Government of Panama's bond rating to Baa2 from Baa3. The outlook has been revised to stable from positive.
The upgrade reflects the following key drivers:
1) Panama's ongoing economic dynamism and positive medium-term growth prospects; and
2) Continuing improvements in its debt metrics.
Panama's economy has grown at an average rate of 7.3% during the past ten years, the highest rate of growth in Latin America and among the highest in the world. Despite weakening external conditions, Panama continued to show remarkable economic dynamism in the first half of 2012 when GDP increased at an annualized rate of 10.6%, roughly the same pace it registered during 2011. Though recent growth rates are not sustainable, medium-term growth prospects remain strong thanks to the expansion of the Panama Canal, the Martinelli administration's ambitious infrastructure investment plans, and the recent ratification of the free trade agreement by the U.S. Congress. Together, these developments should improve Panama's position as a global logistics hub. Panama's economy will also benefit from a massive new copper and gold mining project.
As a result of strong economic growth, debt to GDP fell from a peak of 70% of GDP in 2004 to 41.5% in 2011, just slightly above the median for Baa-rated sovereigns of 38%. The pace of improvement in the government's debt metrics has slowed considerably since 2008 as the government's fiscal performance has slipped on the back of a significant increase in capital expenditures. However, debt/GDP has continued to improve gradually and is forecasted to fall below 40% in 2012. Furthermore, while the recent fiscal trend has been negative, deficits remain moderate compared to many of Panama's rating peers (as well as more highly rated countries), particularly in the context of the country's strong economic growth.
Panama's National Assembly recently approved an increase the deficit ceilings in Panama's fiscal rule at the same time that it voted to create a new sovereign wealth fund. Although not credit negative, the increase in the deficit ceiling significantly lessens the degree to which both the fiscal rule and the fund might have been credit positive.
In conjunction with the upgrade to Panama's government bond rating, Moody's has also unified its foreign currency bond and deposit country ceilings at A3 and withdrawn its local currency ceilings.
The stable outlook is based on Moody's expectation that growth in Panama will remain solid (if not quite as stellar as in the past two years). It also reflects the likelihood that the pace of further improvements in Panama's debt metrics will continue to slow unless the government demonstrates significantly greater fiscal discipline than it has done in recent years. The rating could see further upward pressure if the current infrastructure investments sustain the economy's growth momentum and the government reverses the recent deterioration in its fiscal performance. If its fiscal performance continues to deteriorate, however, and the economy suffers a sharper than expected slowdown, the rating could face downward pressure.
The principal methodology used in this rating was Sovereign Bond Ratings published in September 2008. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Company — Panama
Full nameRepublic of Panama