Fitch: Panama's Varela Makes Some Fiscal Progress in First Year

NEW YORK--(BUSINESS WIRE)-- After doubling to 4.1% in 2014, Panama's deficit should fall to 3.6% in 2015 on modest fiscal consolidation efforts taken by President Juan Carlos Varela's administration in its first year, Fitch Ratings says. Varela was elected in 2014 on a platform of improving government accountability and transparency and addressing social demands in the context of fiscal discipline. In our view, fiscal consolidation consistent with a reduction in government indebtedness, enhanced fiscal credibility, and preservation of a favourable growth trajectory would be positive for the country's rating.

The first quarter of 2015 showed initial progress towards those goals. Capital expenditures fell 41% (year over year) as the government has been slow to advance some projects and others have been completed. The decline in capital expenditures more than offset a dip in tax revenues (due to ongoing management issues in the tax agency) and pension and scholarship increases. Lower energy prices and targeted electricity rate hikes will lower subsidy payments later in the year. In our view, the main short-run risks to the fiscal progress include revenue underperformance from slower economic activity or continuation of tax administration issues and current spending pressures as capital investment projects come online.

The administration's updated medium-term fiscal projections aim for a gradual reduction in the deficit to 1.2% of GDP by 2020, consistent with the ceilings in Panama's fiscal law. The intended consolidation relies on cuts to subsidies and investment, along with a revenue boost in 2017 from the opening of the Panama Canal expansion. Capital spending is a large part of the country's budget and has been an important source of fiscal flexibility. However, capital spending may offer less flexibility as plans to invest a sizable USD19.5 billion by 2019, mainly to improve basic infrastructure in rural areas. The authorities plan to eliminate the major electricity subsidy in July, one of the largest elements of a subsidy bill that was 3.5% of GDP in 2014. Lowering other socially sensitive subsidies (like public transportation) could be more difficult and pledges to improve social programmes and public services could push spending up. The authorities have not outlined major revenue-enhancing reforms to advance fiscal consolidation.

Fitch projects that this gradual consolidation could stabilize the public debt burden at approximately 40% of GDP (in line with the 'BBB' median) and put it back on a moderate downward trajectory beginning in 2017. Compliance with the legal deficit ceilings could help improve the credibility of the fiscal law as anchor for fiscal policy, following repeated revisions to the ceilings in recent years.

The Varela administration was able to make some legislative progress in its first year despite its party's minority in the legislature. The passage of anti-money laundering laws in April was a top priority to keep the country on track for removal from the Organisation for Economic Co-operation and Development's gray list, which poses reputational risks to Panama's financial sector. The administration successfully confirmed strong individuals to key anti-corruption and accountability posts and investigations into alleged corruption by public officials have advanced. These developments are positive in our view as Panama's governance standards rate low relative to 'BBB' peers in the areas of control of corruption and rule of law.

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.

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Source: Fitch Ratings

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