Fitch: Panama Canal Expansion A Chance for Sovereign Uplift

NEW YORK--(BUSINESS WIRE)-- The expansion of the Panama Canal, inaugurated Sunday, presents an opportunity for Panama to bolster the robust performance of its economy and improve its sovereign credentials, according to Fitch Ratings.

The Panama Canal Authority (ACP) projects a 50% increase in tonnage by 2025, which will directly boost GDP. However, the expansion could have an even larger indirect impact on related logistics, maritime and commerce activities, which represent around 25% of GDP. Major investments and new concessions in ports are already under way.

Fitch expects these factors could support growth rates above 6% in the coming years, well above the 'BBB' median of 2.8%. This would continue a trend of economic outperformance relative to peers, implying further divergence in Panama's per-capita GDP above the 'BBB' median.

Flagging global trade volumes present downside risks to Panama's favorable growth outlook. However, the Canal could buck this trend to some degree as it is well positioned to benefit from trade segments poised for growth, including US energy exports to Asia.

The expansion could also enhance Panama's external metrics, which have already improved on lower energy costs and cooler domestic investment. The end of the expansion will imply higher export receipts and reduced capital imports. We project this could help lower Panama's high current account deficit to around 5% of GDP by 2018 from an average of 10% between 2010 and 2015.

The expanded Canal will also have important fiscal benefits for Panama, as a wholly state-owned asset that contributes to the treasury via toll fees and an annual dividend payment. The Canal's fiscal transfers are projected to rise to $1.8bn (2.7% of GDP) in 2018 and $2.9bn by 2025 (3% of GDP) from $1.1bn in 2015 (2% of GDP).

However, the fiscal windfall will fall short of what was expected in 2006 when the project began and in 2012 when a sovereign wealth fund (SWF) was set up. The fiscal law requires Canal transfers in excess of 3.5% of GDP to be saved in the SWF, but it now appears unlikely that this threshold will be reached and that funds will accumulate. The law also provides an extra borrowing allowance for the shortfall in Canal transfers below the threshold, effectively permitting legal deficit limits to be exceeded.

The authorities have acknowledged this shortcoming in the fiscal framework, but no reform appears forthcoming. Nevertheless, official medium-term fiscal projections and Fitch's own forecasts expect the higher Canal revenues will help further the fiscal consolidation under way and put the public debt-to-GDP ratio back on a downward trajectory.

Fitch's special report, "Panama: Canal Expansion Poised to Boost Sovereign," published on June 21, 2016, provides a more detailed description of the Canal expansion and potential implications it could have on sovereign credit metrics. The report is available at www.fitchratings.com.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

Related Research

Panama: Canal Expansion Poised to Boost Sovereign

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=883216

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Source: Fitch Ratings

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