Fitch  moves Panama outlook from stable to negative

The Fitch rating agency has revised negatively the perspective of Panama’s debt rating. The review reflects the “marked deterioration in fiscal deficits and the significant increase in government debt levels, linked to the commitments carried out by the previous administration and by higher levels of the fiscal deficit under a modified fiscal social responsibility law.”

In addition, a greater than anticipated slowdown creates additional challenges for deficit reduction. The agency maintained Panama’s rating level at BBB, but the outlook goes from stable to negative, which could be the prelude to a downgrade in the rating.

 The review reflects the “marked deterioration in fiscal deficits and the significant increase in government debt levels, linked to the commitments carried out by the previous administration and higher levels of the fiscal deficit under a modified fiscal social responsibility law,” said. the agency.

In addition, a greater than anticipated slowdown creates additional challenges for deficit reduction. Fitch notes, in a Thursday, February 6statement that the administration of Laurentino Cortizo revealed that in the previous government, debt accumulation and discretionary management were used to meet deficit limits. The debts carried forward, equivalent to 1.8% of the gross domestic product (GDP), were settled through the issuance of debt, and accounting will be allocated to the years in which the commitments were acquired, which will raise the deficits recorded in the previous years .

The agency recalls that the new administration raised the fiscal deficit limit to 3.5% of GDP, which qualifies as a weak starting point for planned fiscal consolidation or deficit reduction, a consequence of the “weak credibility of fiscal policy. in past administrations, an issue previously highlighted by Fitch. ” Being a dollarized country and having no independent monetary policy, “improving the strength and credibility of the fiscal framework is particularly important for Panama’s risk rating,” the agency says. The last change in the deficit limits (from 2% to 3.5%) occurred just one year after a similar movement in 2018. “The modification of the deficit ceilings in the fiscal rule follows a pattern that lasts a decade of postponement of the objectives of consolidation and stabilization of public debt, despite high growth rates. “

 Usually, the higher the risk rating of a country, the better interest rates it gets on its debt issues. An eventual reduction in Panama’s ratings could, therefore, mean that the country must pay higher interest rates.

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