Panama sovereign credit rating cut to BBB by S&P Global

Panama sovereign credit rating cut to BBB by S&P Global

Asset Management Bonds Debt Corporate & Sovereign Strategy Economy & Policy Fixed Income Funds Panama Latin America Coronavirus Credit Ratings S&P Global Downgrade

Editor's note: LatinFinance is making some of its most important coronavirus-related material available to all readers. Visit our coronavirus section for all our coverage and sign up to receive the Daily Brief newsletter in your inbox every morning.

S&P Global late on Tuesday cut the sovereign foreign currency credit rating for Panama by one notch to BBB from BBB+ citing sharp economic contraction due to the COVID-19 pandemic and an increase in government financing needs.

However, the government is expected to realize more stabile public finances in 2021 as the economic recovers, leading the firm to give the investment grade credit rating a stable outlook.

"The downgrade reflects pressures on Panama's debt servicing costs because of the government's higher debt burden, coupled with an abrupt decline in fiscal revenue," S&P Global said in a statement.

"We estimate the government's interest payments will consume 17% of its revenue in 2020 and then average 12% in the coming two to three years (2021-2023) as growth accelerates and debt stabilizes," the firm said. 

S&P Global said the strict lockdown measures instituted by the government will likely result in gross domestic product shrinking by 9% this year. However in 2021 economic growth is expected to rebound by 7% and then average roughly 5% growth in 2022 and 2023 as large infrastructure projects and mining exports come online.

Panama's general government deficit is expected to increase beyond 8% of GDP in 2020, more than 5 percentage points of GDP higher than 2019. But it is then gradually expected to decline on the assumption that fiscal consolidation will start next year. However it also warned that deeper structural reforms "could be difficult to implement." The fiscal deficit is expected to be 5.6% of GDP in 2021 and then 2% in 2023.

"We forecast the current account deficit (CAD) will slightly increase in 2020 to 6.2% of GDP and stabilize below 6% in the coming three years," the firm said, adding that net foreign direct investment will likely average 7% in the 2021-2023 period.

A stable democracy and political institutions underpin the economy alongside prudent and predictable economic policies and macroeconomic management, S&P Global said.

"Key infrastructure projects, such as a third metro line, expansion of the Tocumen airport, a new hospital, and road construction (2,000 kilometers), should sustain growth momentum in the next couple of years and contribute to better productivity. The construction of a fourth bridge over the Panama Canal has been delayed for budgetary reasons. Moreover, the Panama Canal Authority has recently launched the tender process for an upgrade of its water supply systems," S&P Global said.