The pending investment grade will spur more foreign investment and better financing terms for Panama, experts say.
BY LATIN AMERICA ADVISOR
Panama's credit rating could be on the verge of investment grade. In November, S&P raised its debt rating outlook for Panama to positive, saying the expansion of the Panama Canal will aid the economy and that President Ricardo Martinelli's tax reforms will increase revenue, allowing the government to boost investment. Fitch Ratings also has positive outlook on the country and Moody's [recently] placed Panama on review for an upgrade. Will Panama make investment grade, and if so, when? What would that mean for the country's economy?
Jaime Alemán, Panama's ambassador to the United States: The achievement of investment grade would signify the culmination of a painstaking and lengthy process begun in the 1990's to establish a solid macroeconomic framework for the country. Although the specific timing of such a decision is beyond our control, the positive outlooks by rating agencies, banks and financial institutions speak highly of the confidence in our economic position and of the prospect for growth and stability in Panama in the long term. Improvements in our fiscal accounts coupled with strong economic growth in the last decade have allowed the country to maintain manageable levels of debt, which in turn have permitted us to responsibly meet our credit obligations, both domestically and internationally. By 2009, Panama had significantly decreased its levels of debt to 43 percent of GDP and our sovereign bonds were already trading on par with countries like Brazil that held investment grade status. Panama today continues to have one of the better-performing economies in Latin America. The four major sectors of our economy—logistics and transportation, financial services, tourism and construction—continue to experience solid growth. Panama continues to be a major destination for foreign direct investment, attracting more FDI as a proportion of GDP than most countries in the hemisphere. The Panama Canal expansion project, which will double the canal's capacity by its completion in 2014, will in time increase canal contributions to the National Treasury fourfold. Moreover, the government of President Martinelli has recently committed $12 billion for a five-year investment plan to improve the competitiveness of our economy, of which $4 billion has been set aside for national infrastructure projects. The investment grade would be a milestone for our county and an acknowledgement of the country's sound economic standing, but more importantly, in practice it would allow us to lessen the burden of our debt obligations by gaining access to cheaper financing.
Roldan Trujillo, general manager of the Corporación Interamericana para el Financiamiento de Infra-estructura in Arlington, Va.: Attaining an investment grade will gain Panama entrance into an exclusive Latin American club. With an investment grade rating, Panama will improve on its recognized reputation as a financial and logistical center for Latin America and the Caribbean. By improving the country's sovereign rating, issuers of international debt instruments stand to gain by avoiding the need to pierce the sovereign rating in order to achieve their own investment grade rating. In addition to attaining a rate increase, the Martinelli administration should move quickly to implement the tax standards necessary to remove Panama from the OECD's 'gray list.' Coupled with an investment grade rating, this will serve to attract more international players to its shores who seek an efficient and effective location to serve the region.
Ambler H. Moss, Jr., professor of international studies at the University of Miami, of counsel to Greenberg Traurig in Miami and former U.S. ambassador to Panama: It should be no surprise that Moody's and other rating companies have placed Panama's credit rating on the edge of investment grade. With a solid growth rate even in difficult times, all of the country's political and economic signs are favorable. Panama now has 20 years of unbroken electoral democracy. President Ricardo Martinelli is U.S.-educated and comes from a highly respected business background. The Panama Canal, entirely in Panamanian hands since 2000, has been hugely successful. Since the turnover, it has experienced increased revenues, added to daily ship transits and maintained a low accident rate. For that reason, Panama was able to raise $5.25 billion on the private capital market to expand the canal, while offering no government guarantees. This is impressive for a country of 3.4 million people. The expanded canal works will be finished well before the 100th anniversary of the canal's opening in 1914. Panama has been experiencing an investment boom in construction and tourism, and the new canal works will add significantly to the economy. Panama has signed and fully approved a free trade agreement with the United States, which is now awaiting approval by the U.S. Congress. President Martinelli has emphasized the country's need for a metropolitan transport system and other infrastructure, better education and health facilities, low-cost housing, and police protection. During the past few years, the country has reduced overall poverty from 37 percent to 29 percent and extreme poverty from 19 percent to 12 percent, though it still has the second-most unequal income distribution in Latin America. An investment grade rating, perhaps soon to come, will help the country meet its challenges.
Joaquín Jácome Diez, senior partner at Jácome & Jácome in Panama City and former trade minister of Panama: This promises to be an important year for Panama in several aspects. In trade matters, the U.S. Congress will most likely ratify the stalled free-trade agreement with Panama once Panama fulfills some requirements that already are being taken care of. Several major projects will bring record amounts of foreign direct investment into the country, contributing greatly with a tight employment market. Becoming one of the Latin American countries with an investment grade is one of Panama's long-held aspirations. That could be a reality before the end of this year or early next year, after President Martinelli's administration enforces ambitious tax reforms that will be submitted to the National Assembly later this month. Panama's GDP last year grew 2.9 percent and was among the economies in the region that best coped with the global financial crisis. For this year, the forecast is for 4.5 percent growth and there is great optimism with the expansion of the Panama Canal entering in full force this year. Securing investment grade presents a possibility that major projects in the works can obtain financing at favorable conditions, thereby strengthening our country's position as one of the Western Hemisphere's most attractive destinations for foreign direct investment.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.