TODAY PANAMA NEWS — Fitch Ratings highlighted as a recurrent weakness of the Panamanian fiscal policy the inability to limit the growth of debt as a percentage of GDP.

From the statement by Fitch Ratings:

Fitch Ratings-London-03 October 2014: The Panamanian government’s request to raise the 2014 non-financial public sector deficit ceiling highlights the persistent use of waivers of the country’s Social and Fiscal Responsibility Law (LRSF), Fitch Ratings says. This is a recurring weakness in the country’s fiscal framework as fiscal consolidation becomes more important in maintaining favourable debt dynamics. However, Panama’s ratings continue to be supported by the country’s relatively healthy growth rates and macroeconomic stability, its growing economic diversification and the decline in government indebtedness over recent years.

President Juan Carlos Varela has requested approval from the National Assembly to amend the LRSF to raise the ceiling to 3.9% of GDP from 2.7%.

The deficit ceiling has frequently been raised in recent years. Previous governments have invoked escape clauses in response to the global financial crisis and national emergencies. Waivers last year that allowed the authorities to meet the cost of flood-related damage while maintaining high investment increased the non-financial public sector deficit to 2.9% of GDP in 2013.

The Varela administration, which took office following elections in May, has justified the latest hike due to the budget gap inherited from the outgoing Martinelli administration, which totalled 3.2% of GDP in the first half of 2014 alone. This resulted from revenue underperformance (in taxes, Panama Canal fiscal contributions, and land sales), higher-than-anticipated electric subsidy costs, and supplemental spending authorisations of USD600m.

In light of the fiscal deterioration in 1H14, the government secured congressional approval in late September for fiscal containment measures of USD550m (1.1% of GDP), mainly capital spending cuts, which reflects the government’s commitment to contain the deficit. The government is also requesting approval for a tax amnesty program to raise additional revenues for this year.

Further consolidation in the coming years could face some challenges. Slowing growth is already weighing on tax revenues. Projections of the eventual fiscal windfall from the expanded Canal have also been cut, meaning the country’s sovereign wealth fund (FAP) may not accumulate savings as intended unless the threshold above which these revenues must be saved (3.5% of GDP) is lowered. Current spending pressures remain, as reflected by the new government’s increased social spending on school scholarships and pension hand-outs. An additional fiscal constraint will be the payments due on “turnkey” projects (deferred financing), built and financed privately by construction companies and paid for by the state on completion.

A combination of slower (although still healthy) growth and fiscal deterioration in 2014 could bump up the level of general government debt, from around 37% of GDP in 2013, reversing a trend of consistent decreases over the past decade driven by rapid economic growth and moderate deficits.
Nevertheless, Panama’s debt burden remains slightly below the ‘BBB’ median of 40% of GDP. The high level of capital spending means that Panama has some room to cut or slow such spending to confront shocks.

We affirmed Panama’s ‘BBB’/Stable rating in March. Fitch will monitor the Varela administration’s fiscal consolidation strategy as part of our sovereign credit assessment.

Source: Fitch Ratings, Central America Data

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