Durrant Pate/Contributor

Latest economic data is showing a significant weakening of Panama’s fiscal accounts since the COVID-19 pandemic, with the headline deficit having widened from an average of 2.3% of gross domestic product (GDP) over 2015-2019 to around 7.0% as of 2024.

International ratings agency Fitch cites that higher debt servicing costs can only account for a small share of this deterioration (0.8% of GDP) with the bulk instead explained by a sharp fall in revenue collection that appears to be a function of rising labour market informality and increased avoidance, facilitated by the introduction of special tax regimes that have complicated the existing system.

A recent Organisation for Economic Co-operation and Development investigation found that tax revenues accounted for just 11.9% of GDP in 2023, which is estimated to have dropped by 0.3% in 2024, the second-lowest share in the region, where the average stands closer to 21.3%.

Major ratings agency cuts investment grade to junk

Panama retains its investment-grade status for now, with Fitch Ratings the only major agency to have cut to junk (BB+, Moody’s: Baa3, S&P: BBB-). However, markets have begun to move to price in fallen angel status, with spreads having widened markedly over the past two years.

In response, the Mulino administration has changed its approach to debt management, avoiding the Eurobond market and instead relying heavily on bill issuance and loans from international lenders. This will help Panama avoid locking in higher borrowing costs now, but it has translated into a material deterioration in the maturity profile.

Fitch reports that roughly US$20 billion (or 20% of GDP) of debt will come due between 2025-to-2029, up from US$12Bn over the same window a year prior. The government is simultaneously embarking on an ambitious fiscal consolidation programme with the revised Fiscal Responsibility Law obliging the Mulino administration to narrow the deficit to below 4.0% this year and by an additional 0.5 percentage point in each subsequent year until 2029.

The government’s strategy for hitting these targets, however, is ambitious, ruling out significant tax reform and instead guiding that efforts to improve tax collection, focused largely on digitalisation, can boost revenues by 3.5% of GDP.