Bangkok--4 May--Standard & Poor's
Standard & Poor's Ratings Services said today that it revised its outlook on its 'BB' long-term sovereign credit rating on the Republic of Panama to positive from stable and affirmed its 'B' short-term foreign currency sovereign credit rating on the republic.
According to Standard & Poor's credit analyst Lisa Schineller, the outlook revision reflects the likelihood of an upgrade if recent improvements in fiscal performance endure, economic diversification continues to boost real GDP growth, and the planned expansion of the Panama Canal can be financed in a manner that does not unduly burden government finances, either directly or as a contingent liability.
After several years of lackluster growth following the withdrawal of U.S. troops from the Canal Zone in 1999, economic growth has not just consolidated, but diversified in Panama. Real GDP has expanded at a 7.5% annual rate during the last three years, and is projected to maintain that pace in 2007 and 2008.
"The foundation for growth has broadened beyond the traditional sources of canal transit, Colon Free Zone exports, and banking services, and more resilient growth prospects now incorporate the expansion of port and transshipping activity, telecommunications/call centers, as well as tourism and retiree communities," said Ms. Schineller. "Leveraging special favorable labor and tax laws, the development of reverted lands is advancing (albeit slowly), and impending expansion of the canal has clearly already enhanced economic opportunities. Investments underway anticipate the future boon to economic activity that the third-set of locks should provide in terms of increased canal transit, and actual construction activity associated with canal expansion itself should boost growth beginning 2009," she added.
Against this favorable economic backdrop, Standard & Poor's expects the Panamanian government to continue to pursue a strategy of fiscal consolidation. Since assuming office in September 2004, the Torrijos government engineered a turnaround in Panama's fiscal accounts. Modest initial improvement gained traction in 2006 as the full effects of the 2005 tax reform contributed to outstanding revenue performance, beyond one-off revenue items.
"The positive outlook assumes that this comparatively short track record of fiscal improvement remains on course and the government will keep the general government deficit near 1% of GDP, furthering a decline in net general government debt from current levels of 38% of GDP," explained Ms. Schineller. "This is particularly important given that official dollarization limits policy options in Panama and canal expansion could limit fiscal remittances to the government that now account for 20% of central government revenue," she added.
Ms. Schineller explained that the rating on Panama could be upgraded following additional evidence of fiscal consolidation, clarification of the fiscal framework (namely, pending reform of fiscal responsibility law), and definition on the size and strategy for financing expansion of the Panama Canal.
Standard & Poor's assumes that the free cash flow of the Panama Canal Authority (ACP)-after payments of tonnage fees and dividends to the central government-will remain robust throughout the construction period that extends through 2014, reflecting the canal's competitive position and prospects for increasing world trade.
ACP's cash-generating capacity, combined with its holdings of US$1.3 billion in cash and cash equivalents at fiscal year-end Sept. 30, 2006, supports ACP's financing capacity as it begins this complex project. As long as the expansion project remains on or close to budget-officially estimated at US$5.25 billion (31% of 2006 GDP), including US$1.1 billion in contingency costs-Standard & Poor's assumes that the project will pose limited risk to ACP's payments to the government; namely, payments of dividends and tonnage fees will be at least the minimum specified by the 2006 referendum.
"However, should canal expansion impair the government's fiscal performance or should the government's commitment to fiscal discipline weaken, the outlook would revert to stable," Ms. Schineller concluded.
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