Fitch Affirms Panama at 'BBB'; Outlook Stable

Tue May 14, 2013 5:20pm EDT

NEW YORK, May 14 (Fitch) Fitch Ratings has affirmed Panama's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB' with a Stable Rating Outlook. Fitch has also simultaneously affirmed Panama's Country Ceiling at 'A' and the Short-term foreign currency rating at 'F3'. The Outlook on the long-term ratings is Stable. KEY RATING DRIVERS Panama's ratings are supported by strong economic growth outperformance that has facilitated the convergence of its per capita income to levels comparable with rated peers. Panama's five-year average growth of 8.6% materially exceeds the 2.9% for the 'BBB' median. Panama's institutionalized dollarization and a robust financial system underpin the credit by providing solid anchors to macroeconomic stability. In recent years, inflation has reached historically high levels, but Fitch expects inflation to gradually trend downwards, averaging 4.4% over the next two years. The on-going public and private investment led growth cycle along with a diversified economic base biased towards export services (as opposed to commodities) are likely to protect, to a great extent, the economy against external shocks and the electoral cycle over the next two years. Panama's large current account deficit of -9% of GDP in 2012 is largely investment driven. Strong foreign direct investment flows and continued access to multilaterals loans alleviate risks. On the domestic front, while strong consumer credit growth in the context of an already high credit penetration needs to be monitored, Fitch believes that the sound banking sector is an important mitigating factor. The banking sector is well capitalised and has a history of conservative lending, offsetting the absence of a lender of last resort. Panama's government debt to GDP ratio is slightly higher than the 10-years 'BBB' median, although it is likely to continue on a downward trajectory. The lack of significant fiscal consolidation reflected by frequent increases in fiscal deficit ceilings has rendered debt dynamics less sensitive to the country's high growth rates. Ample market and multilateral access combined with proficient and proactive liability management places Panama's debt profile in better standing than peers, with an average maturity of 12.2 years buttressing financial flexibility. Panama's ratings are constrained by a narrow revenue base that could hinder fiscal flexibility needed in the future to address medium-term fiscal pressures arising from lingering structural shortcomings. These include the need to improve public education, address the social security actuarial imbalances, social inequality, natural disasters and security concerns. The creation of the Sovereign Wealth Fund (SWF) to administer the expected windfall coming from the expansion of the canal was an important step forward in designing a fiscal macro prudential framework for a dollarized economy. The fund now stands at 3.3% of 2012 GDP. Panama is the only non-commodity exporter in the 'BBB' category with a SWF. RATING SENSITIVITIES The current Outlook on the long-term ratings is Stable, which reflects Fitch's assessment that upside and downside risks to the rating are currently evenly balanced. The main factors that individually, or collectively, could trigger positive rating action: --Sustained strong and well-balanced growth and a decline in government indebtedness. Adherence to fiscal targets will also be positive for fiscal credibility. The main factors that individually, or collectively, could trigger negative rating action: --Sustained fiscal deterioration that leads to a persistent weakening in government debt dynamics; --A material build-up of macroeconomic imbalances; --A destabilizing bout of political or policy uncertainty. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: --The U.S. economy will continue its sluggish recovery and the eurozone crisis will remain contained. In addition, commodity prices will remain stable and will not be a significant source of additional pressure for fiscal and external accounts. --The next Presidential and legislative elections, scheduled for May 2014, will be held without disruptions to governance and power will be transferred smoothly. --Any potential modifications to the Sovereign Wealth Fund Law or deficit ceilings will not endanger fiscal sustainability. Contact: Primary Analyst Lucila Broide Director +1-212-908-0898 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Shelly Shetty Senior Director +1-212-908-0324 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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