Fitch Affirms Panama's IDRs at 'BBB'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Panama's Long-term foreign- and local-currency Issuer Default Ratings (IDRs) at 'BBB'. The Rating Outlook is Stable. The issue ratings on Panama's senior unsecured foreign- and local-currency bonds have been affirmed at 'BBB', the Short-term foreign-currency IDR at 'F3', and the Country Ceiling at 'A'.
KEY RATING DRIVERS
Panama's ratings are supported by its strong and stable macroeconomic performance, which has driven a sustained rise in per-capita income and reflects policies and a strategic location and asset (the Panama Canal) that underpin a high investment rate. This is counterbalanced by relatively high external financing needs, institutional challenges, a narrow fiscal revenue base, and uneven record of compliance with budget targets despite solid growth in recent years.
Panama continues to consolidate its position as a regional logistics hub, showing resilience to a less favorable backdrop of ebbing global trade volumes, weak regional growth, and U.S. dollar appreciation. Strong growth averaging 6% in 2013-2015 is double the 'BBB' median. Slower public investment and negative spill-overs from the region have driven a modest deceleration, but this has been offset by robust, broad-based growth in other sectors (logistics, business services, finance, tourism). Lower energy prices have also created recent economic tailwinds.
Fitch expects several drivers could sustain strong growth rates above 6% in the coming years: completion of the Canal expansion in 2016 and its spill-overs into related logistics activities, construction of a large copper mine (advancing despite the fall in metals prices), investments in electricity generation, and other public works projects in the pipeline.
Macro variables have shown improvement consistent with the preservation of stability in the context of dollarization. Inflation fell to 0.2% in 2015 from 2.6% in 2014, on lower energy prices, and over 5% on average in 2011-2013. Despite more benign inflation dynamics, food price controls imposed in mid-2014 remain in place without a strategy for their removal. The economy is relatively well positioned to adjust to tighter external financing conditions despite high financing needs. The large current account deficit has fallen to single digits on lower oil prices, is fully covered by FDI, and has proven capable of swift adjustment in the past.
Lending has grown at strong rates of around 12% in recent years, but Fitch's macro-prudential indicator of '1' indicates low vulnerability to systemic risks. Major banks maintain prudent lending standards, diversified portfolios and large liquidity buffers in the absence of a lender of last resort. Passage and implementation of anti-money laundering legislation in the past year has resulted in Panama's removal from the OECD 'grey list', mitigating related reputational and operational risks to globally-integrated financial and service sectors.
The authorities achieved a moderate fiscal consolidation in 2015 in compliance with the legal deficit ceiling, breaking a pattern of frequent upward revisions to the ceilings in past years. The non-financial public sector deficit fell to 2.8% of GDP in 2015 from 3.2% in 2014, below an effective ceiling of 3.5% (a 2% ceiling plus a 1.5% let-out permitted by a shortfall in Canal transfers below the threshold anticipated in the fiscal law). Under-execution of capital spending drove the improvement, more than offsetting revenue underperformance that reflects persisting institutional constraints at the tax agency.
Fitch expects the authorities will take the necessary steps to keep the fiscal deficit under the effective deficit ceiling of 3.1% of GDP in 2016. In the next two years, fiscal rules require the expected 0.7pp-of-GDP windfall from the expanded Canal to support consolidation, and require 1pp in further consolidation on top of this. The consolidation strategy is not yet clear, but measures to contain high current spending growth and improve tax administration are being considered. High capital expenditure represents a more flexible budget item that could serve as an adjustment variable in the absence of other measures.
Higher primary fiscal deficits since 2013 have lifted general government debt moderately to 38% of GDP in 2015, below the 'BBB' median of 43%. Fitch expects maintenance of strong growth and fiscal consolidation could stabilize debt by 2017 and put it on a downward path thereafter. Solid access to multilateral lenders and global capital markets support financing flexibility in the context of a limited and developing local market. Other potential liabilities pose some fiscal risks, chiefly a large actuarial deficit in the public pension system (estimated to be almost USD11 billion) that policymakers have not yet addressed, as well as debts accrued by public enterprises.
The Varela administration has moved forward with a drive to tackle corruption, an area of institutional weakness relative to 'BBB' peers according to World Bank indicators. Anti-corruption efforts so far have mostly involved executive actions (investigations of prior officials, heightened scrutiny of public contracts) rather than a concrete institutional reform agenda. Broad governability has been maintained despite the break-up of the ruling party's alliance with the largest opposition party, supporting passage of some legislative priorities, but the political climate could be more difficult for reforms or efforts in support of fiscal consolidation.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main factors that, individually or collectively, could lead to a positive rating action are:
--Fiscal consolidation consistent with improvement in fiscal policy credibility and the public debt trajectory.
--Maintenance of favorable growth rates and rising per-capita income amidst moderate inflation and financial stability.
The main factors that, individually or collectively, could lead to a negative rating action are:
--Fiscal deterioration or crystallization of contingent liabilities leading to weakening in public debt dynamics.
--A deterioration in medium-term growth prospects.
--Fitch base case assumes that the canal expansion will be completed in 2016.
--Fitch assumes that the impact on the economy and financial system of Venezuela's unresolved arrears with the Colon Free Zone (CFZ) and other corporates will be manageable.