Moody’s Changes Panama’s Outlook from Stable to Negative But Maintains Investment Grade

Panama is saved, Moody’s Ratings maintained the country’s investment grade rating, but changed the outlook from stable to negative. Last Tuesday, November 26, the rating agency Standard & Poor’s lowered the credit rating, leaving the country one step away from losing its investment grade.  Moody’s, on the other hand, kept the country in investment territory, but one step away from losing it and with a negative outlook.  The agency affirmed the issuer and long-term senior unsecured debt ratings at Baa3, as well as the long-term ratings of the senior unsecured debt program at Baa3.  The report also noted that the negative outlook reflects the greater-than-expected deterioration in the country’s 2024 fiscal balance and significant obstacles to achieving rapid fiscal consolidation, which points to risks that debt indicators could weaken considerably.  With Moody’s rating, Panama is one step away from losing its investment grade, as is the case with S&P, while with Fitch the country was left without investment grade since March of this year. 

“Despite the new government’s willingness to address structural fiscal challenges, as evidenced by the ongoing discussion on pension reform, underlying budgetary rigidities could limit the authorities’ ability to materially reduce fiscal deficits and stabilize debt ratios ,” Moody’s warns.  Panama’s total debt balance reached $53,809 million as of October 31, representing 61.6% of the nominal gross domestic product projected by the MEF, estimated at $87,347 million for 2024. While the fiscal deficit expected for this year will be higher than 4.5% and for 2025 at 4%. Moody’s expects this year’s fiscal deficit to exceed 6% of GDP, compared with a deficit limit of 2% of GDP originally set by the fiscal rule. While it estimates the debt-to-GDP ratio to approach 61%, exceeding the median of 56%, and debt affordability to weaken significantly, with the interest-to-income ratio projected at 19%, down from 14% in 2023, well above the median of 10%.  Furthermore, it indicates that this scenario in the country would affect the credibility of fiscal policy, increasing the sovereign’s borrowing costs and further deteriorating access to debt.

“Other credit risks come from contingent liabilities related to the Social Security Fund (CSS) and litigation associated with the Cobre Panamá mine.”  In the report, Moody’s says that the affirmation of the Baa3 rating reflects the opinion that Panama’s economic strength continues to support its sovereign credit profile, and that it expects economic growth to remain solid compared to other similar economies.  “We also highlight the government’s greater willingness to implement policies that address fiscal pressures, in contrast to previous administrations.”  In a statement, the Minister of Economy and Finance, Felipe Chapman, said that the government’s commitment to financial discipline has been reaffirmed, emphasizing that the fiscal deterioration, referred to by both rating agencies, Moody’s and S&P, affects everyone; hence the importance of having responsible regulatory frameworks that ensure economic stability and the well-being of the population.  “These warnings from the rating agency are an additional alert to the one issued this week by Standard & Poor’s (S&P), which revised Panama’s sovereign rating from BBB to BBB-, emphasizing in its report actions that strengthen tax collection. The rating changes were one of the risks anticipated by the Minister of Economy and Finance, Felipe Chapman, before taking office,” the MEF said in a statement.