Dagong Maintains Sovereign Credit Ratings for Panama
Dagong Global Credit Rating Co., Ltd.
August 10, 2017
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided to maintain both local and foreign currency sovereign credit ratings for the Republic of Panama (“Panama”) at A-, each with a stable outlook. Panama’s debt repayment environment remains stable, its economic growth remains strong, and the country’s continuous fiscal consolidation will drive down the government debt ratio from a low level. Therefore, the government solvency remains stable.
The primary reasons for maintaining Panama’s sovereign credit ratings are listed below:
1. The country’s repayment environment is stable. Panama’s government has aimed to lead balanced economic development, support education and healthcare, reduce poverty, fight corruption, and combat money laundering. Panama’s national development strategy conforms to national conditions and the level of government governance has been improved. Additionally, progress in cooperation with China and other countries in diplomacy, customs duties, and trade channels is helping Panama to enhance its international image and attract external investment. In the short term, the acceleration of adopting a tighter monetary policy in the United States will drive up Panama’s domestic credit costs, but the opening of the new canal navigation and the recovery of the Colon Free Zone will boost credit demands. The country’s credit system maintains strong support for the real economy.
2. In the short term, Panama’s economy will be improved and stable, and the new canal is a powerful force for wealth creation. Under the influence of adverse external factors, such as major exporters’ economic slowdown or even recession and global trade slowdown, Panama’s economy declined to a rate of 4.9% in 2016. However, expansion of the canal will improve its capacity and port business; economic radiation of the canal will stimulate the recovery of the Colon Free Zone. Therefore, economic growth is expected to rise to 5.8% and 6.0% in 2017 and 2018, respectively. In the medium and long term, Panama’s economy remains fragile due to weak industrial foundations and a heavy dependence on the external environment. However, enhanced labor skills, narrowing gap between the rich and the poor, the opening of the new canal, and construction of infrastructure projects, will all contribute to developing its long-term economic growth potential.
3. Short-term fiscal deficit will gradually narrow, and strong external financing capacity leads to good security of repayment sources. Although wage and welfare spending keeps rising, public investment will decline following the completion of the canal. At the same time, the government’s intensive efforts to collect and manage tax and revenues from the canal will together yield increasing fiscal revenues, thus improving the country’s short-term fiscal situation. Therefore, the general government deficit is expected to fall to 2.0% and 1.4% in 2017 and 2018, respectively, while primary finance is expected to produce a small surplus in 2018. Under the expectation of a tightening monetary policy in the United States, the Panama government will gradually increase its proportion of short-term debt financing in order to minimize financing costs, and it is therefore expected that government financing demand will rise to 3.2% and 3.3% in 2017 and 2018, respectively. However, continuous fiscal consolidation and a strong external financing capacity will guarantee the stability of the government’s repayment sources.
4. Panama’s debt ratio is low and will enter a downstream channel. A reasonable debt structure and strong external financing capacity will guarantee government solvency. The general government debt ratio of Panama rose slightly to 39.2% in 2016, and the net debt ratio rose to 36.6%, which was still below the debt management target of 40%. However, the government implements strict debt management. With economic recovery and fiscal consolidation, it is expected that the general government debt ratio in Panama will drop to 38.3% and 36.7% in 2017 and 2018 respectively, and the level of debt will enter a downstream channel. Most of government debts are medium- and long-term debts, the vast majority of which are US dollar debt and under fixed interest rates, resulting in low risks to debt concentration expiration, exchange rate and interest rate. Otherwise, strong external financing capacity ensures a stability of government solvency.
In the short term, the opening of the new canal will facilitate the recovery of the growth rate of Panama’s economy and increase fiscal revenue, while ongoing consolidation of finance and the strict management of debt will make the government debt ratio continue to decline at a low level. Additionally, the external financing capacity is strong; therefore, the government solvency is stable. As a result, Dagong has decided to maintain a stable outlook for both local and foreign currency sovereign credit ratings of Panama for the next one to two years.