Moody's downgrades Panama to Baa2
March 18, 2021 |
Rating agency cites the "unusually large" economic impact of COVID-19 in a one-notch cut for the Central American nation
Moody's downgraded Panama's long-term rating by one notch to Baa2 on Wednesday, citing the economic impact of the coronavirus pandemic in the Central American nation.
Moody's revised the outlook to stable from negative, but said there was a "very material" deterioration in Panama's fiscal strength as a result of the virus's impact on the economy that was "unusually large" relative to its rating peers.
At the same time any improvements on the fiscal front will likely be gradual with the expectation the government deficit will "will remain relatively large at around 7.5% of GDP in 2021 and that economic output will not return to 2019 levels until late 2023."
"Given Moody's expectation that fiscal metrics will remain weaker than Baa peer medians for the foreseeable future, the rating agency has concluded that Panama's sovereign credit profile has suffered a step change for the worse relative to peers and that on a comparative basis a Baa1 rating is no longer warranted," Moody's said.
The pandemic-induced economic contraction last year resulted in real gross domestic production falling 17.9% (20.7% in nominal terms) versus the firm's expectation last October for a 10% contraction. This represented the second largest GDP contraction among Baa-rated peers, Moody's said.
Moody's referenced a 21.2% drop in government revenue last year while on the spending side, "the authorities aimed to reallocate resources within the budget rather than increase total spending to respond to the pandemic, but a ramp up in capital expenditures in the last quarter led to a 5.7% increase in overall spending last year. The fiscal deficit reached 10.1% of GDP, up from 3.1% of GDP in 2019."
Government debt stock rose by $6 billion in large measure because of the response to the pandemic. "At $37 billion, government debt stood at 69.8% of GDP in 2020, up from 46.4% in 2019 and above the 62.1% Baa median. A debt increase of 23 percentage points (pps) of GDP far exceeded the average increase of 13pps reported by Baa-rated peers. Panama's debt affordability, as measured by the interest-to-revenue ratio, rose to 14.5% in 2020 from 10.3% in 2019 -- marking one of the largest increases among rating peers, and coming well above the 7.5% Baa median," Moody's said.