Moody’s Warns of Future Challenges as Panama Reduces its Fiscal Deficit

Panama managed to stabilize its public finances during 2025 thanks to fiscal consolidation measures implemented by the government, according to Moody’s Ratings’ most recent periodic review report. However, the agency warned that the fiscal adjustment relied heavily on a sharp reduction in capital spending, a strategy that poses challenges to long-term economic sustainability.  The report confirms that the deficit of the Non-Financial Public Sector (NFPS) was reduced to 3.7% of Gross Domestic Product (GDP), a significant improvement compared to the 6.2% recorded in 2024 and below the legal limit of 4.0% established by Panamanian fiscal regulations. 

Moody’s Highlights the Reduction in the Fiscal Deficit

The rating agency believes that the fiscal performance reflects a greater management capacity on the part of the Panamanian authorities and a partial recovery of budgetary discipline.  The adjustment brought Panama’s fiscal indicators closer to those observed in countries with a similar credit rating, temporarily strengthening the State’s financial position.  However, Moody’s emphasizes that much of the correction was achieved by reducing public investment rather than through permanent structural changes in current revenues or expenditures. 

Investment Cuts Spurred Fiscal Adjustment

Technical analysis reveals that the reduction in public spending exceeded the equivalent of 2% of GDP and was mainly concentrated on the halting of new state infrastructure projects and the restructuring of works that were already underway.  According to the agency, this strategy made it possible to achieve short-term fiscal goals, but it highlights the need to implement deeper reforms to guarantee financial stability in the coming years.  Moody’s noted that the reliance on cuts in capital spending demonstrates the urgency of adopting more sustainable and lasting fiscal measures.

Panama Maintains its Investment Grade Rating, but with a Negative Outlook.

Despite the warnings, the rating agency maintained Panama’s sovereign rating at Baa3, the lowest level within investment grade.  However, the outlook remains negative, reflecting the existence of risks that could affect the country’s credit rating if the fiscal progress achieved is not consolidated.  The agency believes that the main challenge will be to sustain the reduction of the deficit without resorting again to significant cuts in public investment. 

The First Quarter of 2026 Shows Positive Signs

The report also highlights that public finances started 2026 with favorable results.  During the first quarter of the year, the fiscal deficit stood at just 1.4% of GDP, driven by strong tax collection and strict control of current spending.  This performance strengthens expectations that Panama can meet the 3.5% deficit target set by the fiscal rule by the end of the year.

Panama Canal and Economic Growth Support the Projections

Moody’s projects that the country’s economic expansion and the expected increase in contributions from the Panama Canal will help strengthen state revenues in the coming months.  However, the agency warns that some of the investments postponed in 2025 will have to be carried out later, which could slow the pace of fiscal consolidation in the short term.

Public Debt Could Stabilize by 2027

In its baseline scenario, Moody’s estimates that the combination of sustained economic growth and gradual deficit reduction will allow public debt to stabilize between 66% and 67% of GDP by 2027.  Furthermore, it anticipates a gradual decrease in the financial costs associated with sovereign debt, following the high levels recorded in recent years.  The agency believes that the recovery of international investor confidence is already beginning to be reflected in lower financing costs for the country. 

Tax Reforms Remain the Main Challenge

Despite the progress, Moody’s warns that Panama faces significant structural challenges related to budget rigidity and limited capacity to generate tax revenue.  The report indicates that authorities are evaluating legal reforms to provide greater flexibility to public finances and consolidate the results achieved.  However, the rating agency also warns of potential difficulties in implementing these changes due to the government’s limited political capital and the challenges involved in reaching legislative consensus.

Moody’s will Maintain Vigilance over Panama’s Investment Grade

The agency concludes that the evolution of tax reforms and the government’s ability to maintain budgetary discipline will be determining factors in preserving the country’s investment grade.  Although it acknowledges significant progress in fiscal consolidation, Moody’s believes that Panama must demonstrate that it can sustainably reduce the deficit without compromising the public investment needed to boost long-term economic growth.