Panama’s fiscal deterioration in 2024 exceeded the worst-case scenarios predicted by two risk agencies assessing the country’s finances and indebtedness. Fitch Ratings, which withdrew the country’s investment grade rating last March, recently projected that debt will end the year representing 63% of gross domestic product (GDP), while interest payments will be equivalent to 19% of projected income for this year. According to Fitch, this ratio is “worse than expected for the end of the year, after downgrading the rating at the end of the first quarter.”

Moody’s, which changed its perception of Panamanian debt from negative to stable at the end of November, indicated that Panama’s fiscal accounts and debt metrics have significantly deteriorated this year, exceeding their projections from October 2023. Both rating agencies noted that President José Raúl Mulino’s government failed to approve a budget significantly smaller than that of 2024, highlighting the challenge the country will face next year to improve its fiscal profile.

The Mulino administration initially presented a budget of $26.084 billion, but strong opposition in the National Assembly led to the approval of $30.111 billion, a figure lower than the $30.690 billion approved for 2024. Fitch and Moody’s view the approved figure for next year as a step forward in strengthening the country’s finances, but believe it will be insufficient for significant short-term change.

Esteban Tamayo, chief economist for Central America and the Andean countries at Citi, stated that Moody’s change in outlook should be seen as a wake-up call. He emphasized that Panama has 12 months to achieve significant change before the rating agency conducts a new review of the fiscal profile. “We already have Fitch below investment grade, and if Moody’s lowers the country’s rating, two of the three major rating agencies would be below investment grade, which the market understands as losing investment grade,” said Tamayo.

René Quevedo, a business consultant, noted that the market and investors already treat Panama as a country without investment grade, citing high interest rates on the country’s debt, which currently amounts to $53.809 billion. “We went from rates below 3% in 2019 to paying interest above 8% at the end of the last five years, and we are currently around 6%. We are seen as a high-risk country,” Quevedo said.

To improve the country’s fiscal profile, the government is betting on increasing tax revenue in 2025, relying heavily on electronic invoicing. However, Fitch believes this task will be challenging. “We believe that achieving such a large improvement will be difficult. Panama’s tax collection has been underperforming economic growth for a long time. The authorities hope that their efforts to combat tax evasion will reverse this trend. Previous efforts, including electronic invoicing and penalizing tax evasion, have failed,” Fitch stated. Moody’s added that a materially worse than projected fiscal situation this year, combined with fiscal rigidities that impair the government’s ability to quickly reduce the deficit, increases the risks that Panama’s fiscal strength will weaken materially below previous expectations.

Source: (Newsroom Panama)