TEXT-S&P raises Panama ratings to 'BBB/A-2'
-- We expect Panama's GDP growth will remain strong over the medium term, boosted by the country's high and diversified investments.
-- In addition, double-digit revenue growth since 2010 has allowed the Panamanian government to boost public infrastructure investment without increasing the country's debt burden.
-- As a result, we have raised the foreign- and local-currency sovereign credit ratings on the republic to 'BBB/A-2' from 'BBB-/A-3'.
-- The stable outlook balances our view that Panama's economic growth prospects and fiscal flexibility are strong against the challenges that could emerge in transitioning to a less buoyant environment. Rating Action On July 2, 2012, Standard & Poor's Ratings Services raised its long-term foreign- and local-currency sovereign credit ratings on the Republic of Panama to 'BBB' from 'BBB-'. At the same time, Standard & Poor's raised the short-term ratings to 'A-2' from 'A-3'. The outlook is stable. Rationale The upgrade reflects our view that Panama's economic policy flexibility is strengthening as the economy continues to grow, diversify, and gain resilience. We expect that the country's real GDP per capita will expand by 6% in 2012 and then about 4% annually through 2015. This, along with high external inflows, continues to underpin the country's strong fiscal position. As a result, the government has been able to implement an ambitious public infrastructure investment plan of more than 60% of 2011 GDP (including the expansion of the Panama Canal) over the next three years without increasing its fiscal debt burden.
Public investment in productive infrastructure and an expanding services sector that benefits from the country's emerging role as a regional hub for trade, finance, and transportation support the increasing resilience and diversification of Panama's economy. Real GDP per capita has grown an average of 7.2% per year since 2007, and it has doubled in nominal terms since 2005.
Panama's national assembly recently approved legislation for a sovereign wealth fund (SWF) to manage the canal's revenues when it begins expanded operations early in 2015. We expect that the creation of the SWF--as well as tax reforms implemented in 2010 and 2011--will provide the government with ample resources to fund its ambitious investment plans without eroding its fiscal flexibility or increasing its debt burden. Net general government debt will likely remain just under 30% of GDP, which compares favorably with that of similarly rated peers.
That said, Panama's open economy remains vulnerable to external shocks. Although gross domestic savings (expected to reach 20% of GDP in 2012) are strengthening, they are still too low to finance Panama's large investment program. This is reflected in high current account deficits over the past few years, which we expect to remain at about 10% of GDP through 2015. Foreign direct investment (FDI) has financed about three-fourths of these deficits in recent years. As a result, both gross public-sector external debt (expected at 41% of current account receipts in 2012) and net financial-sector external debt (expected at 20% of current account receipts in 2012) have not changed significantly, nor do we expect them to in the near future. However, Panama remains vulnerable to shifts in investor sentiment because of its small domestic debt market and heavy reliance on external financing.
At the same time, since the breakup of the governing coalition, the political environment has become more polarized. President Ricardo Martinelli's push for a second presidential term has eroded his popularity. This has opened the field for the opposition, and Panama is quickly entering into election campaign mode. In our view, although this will likely generate much political noise in the medium term, it will not impair Panama's overall economic environment because the official party and the opposition largely agree on macroeconomic policies. Outlook The stable outlook balances our view that Panama's economic growth prospects and fiscal flexibility are strong against the challenges that could emerge in transitioning to a less buoyant environment. Our outlook assumes the government will continue to implement its investment plans without further eroding its fiscal stance or raising the debt burden. It also assumes possible political noise that could arise from a more polarized political environment as we get closer to the general elections.
If Panama's external imbalances shrink without significantly impairing economic growth and the government's investments continue to boost growth prospects without raising the debt burden, we will likely raise the ratings again. Further development of domestic debt markets to improve domestic funding prospects would be another positive rating factor. On the other hand, if politics deteriorate further or investor sentiment weakens, thereby impeding fiscal management or jeopardizing the successful expansion of the Panama Canal, we could consider a downgrade. Related Criteria And Research
-- Sovereign Government Rating Methodology And Assumptions, June 30, 2011 Ratings List Upgraded
To From Panama (Republic of) Sovereign Credit Rating BBB/Stable/A-2 BBB-/Positive/A-3 Senior Unsecured BBB BBB- Affirmed Panama (Republic of) Transfer & Convertibility Assessment AAA Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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