Fitch downgrades Panama to junk 

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By Marco Echevarria

Waste, mining crisis and water shortages shake Panama in the eyes of Fitch; what comes after losing the degree of investment 

The financial world and the qualifiers will have their eyes on who is elected president of Panama in the elections of May 5, understanding that the country will face major challenges in the management of debt, excessive public spending, the pension crisis, the scarcity of water and the absence of mining income.

All this influenced Fitch Ratings to become the first agency to withdraw the degree of investment from the country, thus placing the label of garbage bonuses on Panamanian debt.

Economist Felipe Chapman told La Prensa that the next president must act with great responsibility: as a good father of a family.

It will make important, difficult and very unpopular decisions, including austerity.

Once you read the Fitch report you can understand the value of the perception of increased risk from the deterioration of public finances; the increase in debt, wages and public spending; corruption; political uncertainty; and poor governance, he said.

Fitch attributes some of the deterioration to the closure of Minera Panama, which it estimates will significantly affect economic growth this year, as copper exports account for about 5% of GDP.

While this happens, the Government continues to increase current expenditure in the middle of the electoral year.

The loss of investment has an effect, Chapman warns: raising interest rates for the Government, state and private sector companies, for individuals and households. [Also] the greater difficulty in attracting foreign investment or higher cost.

Carlos Araúz, also an economist, warns that all actions have its reaction, reflecting on the way in which public finances are managed.

Stop doing has as much or more weight than ineptitude or incapacity. The failures of the last 15 years in programming, planning and a country vision that would go through sustainability, human development and the promotion of competences that guarantee private investment that created formal employment, has passed us the bill,” he said.

He recalled that the pandemic (officially declared by WHO on 11 March 2020), undoubtedly hit us, but the accumulated recklessness concert that covered increases in operational expenses, unjustified wages (bottles, or people who do not work, but do charge) and an increase in debt at times of very high interest rates, left the country without room to maneuver.

It will all cost us more expensive personal debt and higher cost of living with less opportunities for well-paid wages, he said, before warning that this Thursday, March 28, it had become a sad day for Panama.

Since before Fitch withdrew the degree of investment from Panama, international financial markets were already penalizing Panama’s debt with higher financing rates, as if the country had lost the degree of investment, although it still maintained it.

“If we lacked something to unite as a nation because we have found it: recovering the degree of investment will take years and it will only be achievable if we understand that the mirage of economic growth ran out.”

Carlos Araúz, economist

An example of this was a recent placement of the bonds. Of the $3.1 billion issued, $1.1 billion was in bonds due in 2031 at a coupon rate of 7.5%; others for $1.25 billion, with maturity in 2038 and an 8% coupon; and bonds for $750 million, due in 2057, with a coupon rate of 8.25%.

Álvaro Naranjo, financier and columnist of La Prensa, added that he is concerned that, “by mandate,” many global, pension and foreign investors can only invest in countries with an investment degree.

This could make some capitals initially have to leave the exhibition they have in Panama, he said.

Naranjo warns that one of the challenges is to take care of the degree of investment that the country has left with the other two ratings: Moodys and S&P.

“It is clear that the state’s finances are going through difficult times and the new government will have a great economic challenge.”

Álvaro Naranjo, financier

From a political and strategic point of view, he considered that the reduction of the qualification announced by Fitch could have been made after the country’s general elections, so that it was not a factor that could affect the results.

The Government reacted

President Laurent Cortizo’s administration reacted to Fitch’s rating.

In a statement, the Ministry of Economy and Finance (MEF) expressed its disagreement, because it does not reflect a correct assessment of the macroeconomic and social situation in Panama, giving greater relevance to the closure of the mine and political considerations.

Fitch certainly warned about the effect of the mining crisis and political risks, given party fragmentation and governance by recent social tensions.

But in the same way he spoke of the lack of control of spending and fiscal pressures with high debt and the water crisis. These points were overlooked in the government’s claim.

The economic fundamentals of the Republic of Panama that underpin the country’s credit rating remain solid, with robust economic growth, low inflation, a reduction in the level of unemployment and compliance with fiscal targets. Our economy grew by 7.3% in 2023 and we have met the decreasing fiscal limits, established in the Law on Fiscal Social Responsibility since 2020, the Government said. 

This article has been translated from the original which first appeared in Prensa