Panama Pays $2.293 Billion In Interest: Fiscal Crisis And 2024 Risks

(MENAFN- Newsroom Panama) Panama's fiscal deterioration in 2024 exceeded the worst-case scenarios predicted by two risk agencies that assess the country's finances and indebtedness. Fitch Ratings, which withdrew the country's investment grade rating last March, recently indicated that it projects that debt will end the year representing 63% of gross domestic product (GDP), while interest payments will be equivalent to 19% of projected income for this year. For the rating agency, this ratio is“worse than it expected for the end of the year, after downgrading the rating at the end of the first quarter of the year.” For its part, Moody's, which at the end of November changed its perception of Panamanian debt from negative to stable, indicated that this year“Panama's fiscal accounts and debt metrics have deteriorated significantly, exceeding our projections at the time of our last rating action in October 2023.” For both rating agencies, the fact that President José Raúl Mulino's government failed to approve a budget significantly smaller than that of 2024 shows the challenge the country will face next year to improve its fiscal profile. The Mulino administration initially presented a budget of 26.084 billion dollars, but the proposal met with strong opposition in the National Assembly. After several attempts, the deputies approved an amount of 30.111 billion dollars, a figure lower than the 30.690 billion dollars approved for 2024. For Fitch and Moody's, the figure approved for next year is a step forward on the path the country must take to strengthen its finances, but they believe it will be insufficient to achieve a significant change in the short term.

Esteban Tamayo, chief economist for Central America and the Andean countries at Citi, said that the change in outlook made by Moody's should be seen as a wake-up call, because technically the country has 12 months left to achieve a significant change before the rating agency carries out a new review of the fiscal profile.“We already have Fitch below investment grade, and if Moody's lowers the country's rating, two of the three major rating agencies would be below investment grade, and that is what the market understands as losing investment grade,” said Tamayo.
For René Quevedo, a business consultant, the market and investors already treat Panama as a country without investment grade. He cites the high interest rates that are being requested to acquire the country's debt, which currently amounts to 53.809 billion dollars.
“We went from rates below 3% in 2019 to paying interest above 8% at the end of the last five years, and we are currently around 6%. We are seen as a high-risk country,” Quevedo said.
To improve the country's fiscal profile, the government is betting on increasing tax revenue in 2025, relying heavily on electronic invoicing. However, for Fitch, the task appears complicated.
“We believe that achieving such a large improvement will be difficult. Panama's tax collection has been underperforming economic growth for a long time. The authorities hope that their efforts to combat tax evasion will reverse this trend. Previous efforts have failed to do so, including electronic invoicing and penalizing tax evasion,” Fitch said.
On this point, Moody's considers that a materially worse than projected fiscal situation this year, combined with fiscal rigidities that impair the government's ability to quickly reduce the deficit, increases the risks that Panama's fiscal strength will weaken materially below its previous expectations.

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