Panama Still Maintains Investment Grade Despite S&P’s BBB- Says Chapman

The rating agency Standard & Poor’s Global Ratings (S&P) on Tuesday lowered Panama’s credit rating to BBB- from BBB, but kept its investment grade “stable.” S&P said the main reason for the rating downgrade is the country’s fiscal situation. The stable outlook reflects expectations of political stability, continuity in key economic policies and a gradual reduction in the fiscal deficit of public administrations.  Despite these results, the Minister of Economy and Finance, Felipe Chapman, assured in a press conference that “Panama still maintains its investment grade rating, as does the other rating agency (Moody’s).” He pointed out that the country is evaluated by three risk rating agencies: Fitch, S&P and Moody’s. And, at the end of March, Fitch made the decision to reduce Panama’s risk rating to “BB+” from “BBB-“, with a “stable” outlook, removing the country’s investment grade. Therefore, “it was to be expected that a similar decision would be made by the other two rating agencies, Moody’s and S&P.”

However, he pointed out that “Moody’s is currently evaluating the outlook for the risk rating, which is currently stable, with a probability of being revised to negative, but everything indicates that the probability remains very high that it will continue to be within the investment grade risk rating threshold.” Chapman demonstrated that the decision taken by S&P was also anticipated and that long before he took up his post as Minister of the MEF, he already anticipated that there was very likely a high risk that the other two risk rating agencies would take the same decision. The MEF minister said that the decision of $&P is mainly based on financial, mathematical, numerical calculations. That is, a very concentrated analysis of the quantitative side, paradoxically giving support, or a very favorable qualitative opinion.  “We were very much anticipating that this would happen because the financial relations of the Republic of Panama had been deteriorating for years. Especially in the last four years, the deterioration has accelerated significantly.” he noted.  To this, the Vice Minister of Finance, Fausto Fernández, added that this is an expected result, because when they entered the Government they spoke with all the rating agencies (the three most important ones) about the process and about what initiatives they had to focus on during the next 18 months to try to maintain the rating and try to win the rating they had lost at Fitch. 

In this regard, he said that they began to take certain initiatives and, evidently, one of the things that most worries the rating agencies at this time is the debate that is being held with the Social Security Fund (CSS) and the tax collection situation, so they are working on that, as part of a Government strategy. “In one way or another we were expecting this downgrade in the rating, but maintaining a stable perspective. For us it is not surprising. This was part of a plan that we have been developing over the last five months to try to put in order and put in order the financial and fiscal situation of the country,” said Fernandez.  The S&P report also highlights that the government of President Raúl Mulino, who took office on July 1, 2024, introduced a pension reform to address significant long-term fiscal challenges.  The approval of this reform would help stabilize fiscal balances in the long term and could lay the groundwork for advancing other economic policies that support investor confidence and long-term GDP growth.  Similarly, he stressed that the pension reform, proposed in November 2024, includes an increase in contributions to 7.25% from 4.25%, an increase in the retirement age and the strengthening of the universal basic security pension (non-contributory) to $144 from $120 per month.  “We expect the administration to maintain favorable policies for Panama’s business sector, which have enabled long-term economic growth. We do not expect substantial tax reform, as the government’s priority is to reduce tax evasion and strengthen tax collection,” S&P noted, however, “it remains unknown how the government will manage the pending issues related to the closure of Minera Panama in 2023.”