Fitch Affirms Panama at ‘BB+’; Outlook Stable

Fitch Ratings – New York – 10 Dec 2025: FitchRatings has affirmed Panama’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘BB+’ with a Stable Outlook.

A full list of rating actions is at the end of this Rating Action Commentary.

Key Rating Drivers

Ratings Affirmed: Panama’s ratings are supported by high per-capita GDP, low inflation and macro-financial stability anchored by dollarization, and robust growth prospects centered around logistics activities and the strategic asset of the Panama Canal. This is counterbalanced by weaknesses in governance and public finances, including a narrow government revenue base, high and rising government debt and interest burdens, heavy reliance on external markets for funding, and weak fiscal transparency.

2025 NFPS Deficit on Target: We expect the government to meet its non-financial public sector (NFPS) deficit target of 4% of GDP in 2025, down from 7.4% of GDP in 2024. Fiscal consolidation this year is being driven by the roll-off of last year’s 0.7%-of-GDP arrears settlements, a 0.5pp post-drought recovery in Canal and tax revenue, and a 0.8pp statistical benefit from the pension reform (money previously flowing into individual accounts managed by the CSS social security bank can be called CSS revenue). Lower investment is contributing to consolidation but partly reflects postponement of projects, or of project payments (e.g., deferral of “turnkey” obligations by the Panama City Metro), rather than cuts.

We forecast the central government deficit, relevant for sovereign financing needs and debt dynamics, to reach 6.1% of GDP this year, above the 3% budget forecast. The pension reform requires the government to make an additional USD966 million (1% of GDP) transfer to the CSS, which while neutral for the NFPS deficit drives up the central government deficit.

Rising Government Debt: We expect gross government debt to rise to 67.2% of GDP at end-2025 from 62.5% in 2024, and consolidated debt (net of intra-public holdings) to 61.6% from 57.2% in 2024, above the ‘BB’ median of 54%. Borrowing has exceeded the government’s financing plan this year, given a high central government deficit and below-the-line financing needs that may be related to arrears settlement. We expect government debt levels to continue to rise over the medium term, with consolidated debt reaching 64.6% of GDP by 2027. We expect the interest to revenue ratio to reach 18.8% in 2025, compared to the ‘BB’ median of 11.4%, and rise in coming years.

Medium-Term Fiscal Challenges: The 2026 budget projects a NFPS deficit of 3.5%, in line with the target revised last year, although again reliant on optimistic revenue forecasts. We expect slower reduction of the NFPS deficit to 3.6% of GDP in 2026 and 3.3% in 2027. Current spending remains under pressure from subsidy programs, rising public-sector headcount and salaries, and popular demand for improved public services. Lower capex in 2024 may be difficult to sustain, as it partly reflects postponements rather than cuts, and investment plans are sizeable. Medium-term consolidation prospects are likely to hinge on better tax administration, as the government has ruled out tax reform.

Weak Fiscal Transparency: Fiscal transparency remains weak. Budgets continue to overestimate revenue and spending and are subject to revisions without updated projections. Growing liabilities related to turnkey projects not included in debt statistics totaled 3.5% of GDP in March, but data has not been released since then. The authorities began publishing monthly fiscal data last year but have since moved to quarterly.

Financing Strategy: The government continued to rely on short-term bank loans this year, while it has remained out of international capital markets since February 2024. The government has secured around USD5.3 billion equivalent in EUR- and CHF-denominated loans this year. The shorter-term nature of the loans (two- to three-year maturity) has contributed to larger maturity walls in 2027 and 2028 and could pose some refinancing risks, while the currency denomination could introduce some FX risk for the dollarized economy.

Growth Rebound, Canal Investment Pipeline: We forecast growth to pick up to 3.8% in 2025 after falling to 2.7% in 2024 due to a historic drought that limited Panama Canal transits and the closure of the copper mine. Medium-term growth will be supported by the large investment pipeline of the Panal Canal Authority (ACP). Projects totaling more than USD8 billion, including a gas pipeline, two new ports and the Rio Indio reservoir project, are planned over the coming years. We forecast growth of 4% in 2026-2027, above the ‘BB’ median average of 3.7% but below Panama’s 6.2% average over 2010-2019. Geopolitical tensions around Chinese influence around the Canal have eased but continue to pose some uncertainty around the status of two port concessions.

CSS Reform, Limited Political Capital: President Mulino achieved his first major initiative in March 2025 with passage of a social security reform, which ensures the system’s financial solvency but offers limited fiscal relief from the higher employer contribution, as an initial provision to increase the retirement age was removed. Approval of the reform led to several months of protests from various sectors and took a toll on Mulino’s popularity. Other reforms that require legislative approval may be challenging to advance without a congressional majority, such as changes to address structural budget rigidities, including the 7% of GDP budget mandate for education and automatic salary increases.

Mine Re-Opening Prospects: The government’s next priority is a resolution of the Cobre Panama copper mine, closed in 2023 following social unrest. An environmental audit of the mine is expected to be completed by 1Q26. The mine’s future remains uncertain, although there is growing optimism around a possible reopening, potentially through executive action. Public sentiment is evolving, with greater recognition of the economic and employment impact of the mine’s closure, though a majority still opposes reopening, according to recent surveys.

External Risks Contained: We expect the current account deficit to widen to 0.8% in 2025 from a surplus of 1.9% in 2024, although data has been subject to large revisions in recent years. Net external debt is projected to reach 49.7% of GDP at end-2025, one of the highest levels in the ‘BB’ category.

Governance: Panama has an ESG Relevance Scores (RS) of ‘5’ [+] for Political Stability and Rights, and ‘5’ for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in Fitch’s proprietary Sovereign Rating Model (SRM). Panama has a medium WBGI percentile score of 47.3, reflecting a recent track record of peaceful political transitions, a moderate level of rights for participation in the political process, moderate institutional capacity and rule of law, and a high level of corruption.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

—Public Finances: Failure to reduce the budget deficit that leads to a significant increase in the government debt/GDP and interest/revenue burdens, or material erosion in market borrowing conditions;

—Macro: Reduced confidence in Panama’s ability to sustain relatively high economic growth rates;

—Structural: Further social instability or political gridlock that adversely affects the economy and public finances.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

—Public Finances: Structural fiscal consolidation that puts government debt/GDP and interest/revenue on a firm downward path;

—Structural: Evidence of improving governance, for example via enhancements in fiscal policy credibility and predictability.

Sovereign Rating Model (SRM) and Qualitative Overlay (QO)

Fitch’s proprietary SRM assigns Panama a score equivalent to a rating of ‘BB-‘ on the Long-Term Foreign-Currency IDR scale.

Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final the Long-Term Foreign-Currency IDR by applying its Qualitative Overlay (QO), relative to SRM data and output, as follows:

—Macro: +1 notch, to offset the deterioration of GDP growth volatility variable in the SRM due to the impact of the pandemic, which Fitch expects will be temporary, and would otherwise add excess volatility to the rating.

–Public Finances: +1 notch, to reflect that the SRM classifies public debt as fully denominated in foreign currency due to Panama’s use of the U.S. dollar, but the well-entrenched dollarization regime mitigates foreign exchange risk on the sovereign balance sheet.

–Structural: Fitch removed a -1 notch on Structural Features as the impact of weaknesses in governance has now been reflected in a lower SRM output.

Fitch’s SRM is a proprietary multiple regression rating model that employs 18 variables based on three-year centered averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.

Debt Instruments: Key Rating Drivers

Senior Unsecured Debt Equalized: The senior unsecured long-term debt ratings are equalized with the applicable long-term IDR, as Fitch assumes recoveries will be ‘average’ when the sovereign’s long-term IDR is ‘BB-‘ and above. No Recovery Ratings are assigned at this rating level. (See Rating Actions table below for the full set of instrument ratings.)

Country Ceiling

The Country Ceiling for Panama is ‘A+’, +6 notches above the Long-Term Foreign-Currency IDR. This uplift reflects Fitch’s view that Panama’s full dollarization is a longstanding and entrenched part of its economic model, which has encouraged private-sector entities to maintain strong liquidity buffers of their own in the absence of a lender-of-last-resort and reduces the sovereign’s incentives to impose transfer restrictions.

Fitch’s Country Ceiling Model produced a starting point uplift of +2 notches above the IDR. Fitch’s rating committee applied a +4-notch qualitative adjustment to this, under the Long-Term Institutional Characteristics, reflecting Panama’s fully dollarized economy.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Climate Vulnerability Signals

The results of our Climate.VS screener did not indicate an elevated risk for Panama.

ESG Considerations

Panama has an ESG Relevance Score of ‘5’ [+] for Political Stability and Rights as WBGIs have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and a key rating driver with a high weight. As Panama has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Panama has an ESG Relevance Score of ‘5’ for Rule of Law, Institutional & Regulatory Quality and Control of Corruption as WBGIs have the highest weight in Fitch’s SRM and are therefore highly relevant to the rating and are a key rating driver with a high weight. As Panama has a percentile rank below 50 for the respective Governance Indicators, this has a negative impact on the credit profile.

Panama has an ESG Relevance Score of ‘4 [+]’ for Human Rights and Political Freedoms as the Voice and Accountability pillar of the WBGI is relevant to the rating and a rating driver. As Panama has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on the credit profile.

Panama has an ESG Relevance Score of ‘4 [+]’ for Creditor Rights as willingness to service and repay debt is relevant to the rating and is a rating driver for Panama, as for all sovereigns. As Panama has a track record of 20+ years without a restructuring of public debt and captured in Fitch’s SRM variable, this has a positive impact on the credit profile.

The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores