Panama’s investment grade is on the scales

A large government payroll, the increase in the payment of civil servants, the need for a reform of the social security system whose reserves are expected to run out in 2024, and the payment of interest on a debt that is increasing were the factors that led Moody’s to change Panama’s outlook from stable to negative in its sovereign rating and maintain its Baa2 investment grade.

The rating agency’s decision was no surprise to economists Ernesto Bazán and Raúl Moreira, who, speaking to Bloomberg Línea, agreed that Panama still has time to get on track.

“The lack of progress on pension reform and measures to increase tax revenues denotes weak policy effectiveness, an element related to governance, according to Moody’s ESG analytical framework.

Although Panama’s economic growth prospects remain favorable relative to its peers,” the agency’s report cites.

According to Bazán, an expert in risk analysis, this “means that the rating agency considers that in the future, the most likely scenario is a rating downgrade”.

There are three possibilities: the rating will go up, remain the same, or decrease.

“If it is most likely that the rating will go up, then the outlook is assigned as positive; if the rating will be maintained, the outlook is stable, and if the probability is that it will decrease, a negative outlook is assigned.

“The negative outlook serves to give a warning; even though we cannot assure that it will go down, the message is that it is most likely to decrease,” explained Bazán.

Panama would be placed at the minimum level in the investment grade and with the threat of losing that credit quality, which allows the country to be financed at lower levels.

The economist added that it would hurt all Panamanians because the country would have to pay more interest on the debt, which would imply reducing expenses and citizens receiving fewer services.

“There is a worrying degree of uncertainty about how the government will face situations that will exert intense pressures on our fiscal structure.

“The government congratulates itself on its “good” results compared to other countries, without warning internally about the deterioration of situations such as its fiscal structure and the price level, among other issues,” said Moreira.

In its report, Moody’s expects GDP growth in the coming years to be lower than before the pandemic.

In this context of lower growth, “the inability of the authorities to address fiscal pressures would hinder the improvement of Panama’s debt metrics”, a feature that the agency has identified as “critical” to support the credit profile, “following the sharp deterioration in fiscal strength that occurred during the pandemic”.

But apparently, all is not lost. According to Bazán, the good news is that we are in time to correct course, which means reducing spending and implementing a genuine austerity policy.

“We are a country that is spending more and investing less, that is what the report says, so that is a trend we have to reverse.

“We should develop more investments in infrastructure since they are an important source for the generation of jobs” instead of increasing the state payroll, emphasized Bazán.

The public sector payroll registers a total of 255,184 civil servants and a gross salary of US$412 million, according to the most recent official figures, as of July 2022.

The July 2022 payroll compared to July 2021 increased by 6,196 civil servants or 2.5%, and an increase of US$15.3 million (3.8%) in gross salary.

With information from Bloomberg

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