The government’s huge payroll, rising civil servant pay, the need to reform the social security system, whose reserves are expected to run out in 2024, and paying interest on a mounting debt were factors that led to . Moody’s will change Panama’s outlook from stable to negative on its sovereign rating and maintain its Baa2 investment grade.
The rating agency’s decision came as no surprise to economists Ernesto Bazán and Raúl Moreira, who, speaking to Bloomberg Línea, agreed that Panama still has time to get on track.
“Lack of progress on pension reform and measures to increase tax revenues indicates weak policy effectiveness, an element related to governance, according to Moody’s ESG analytical framework.
Although Panama’s economic growth prospects remain favorable compared to its counterparts,” the agency’s report quotes.
According to Bazan, an expert in risk analysis, this “means that the rating agency considers that in the future, the most likely scenario is a downgrade.”
There are three possibilities: the rating will increase, remain the same, or decrease.
“If it is more likely that the rating will increase, then the outlook is set as positive; if the rating will be maintained, the outlook is stable, and if the probability is that it will be lowered, a negative outlook is assigned.
“The negative view serves to give a warning; even though we can’t guarantee that it will go down, the message is that it will most likely go down,” Bazán explained.
Panama would be placed at the minimum level of the investment grade and with the threat of losing credit quality, which allows the country to be financed at lower levels.
The economist added that this would hurt all Panamanians because the country would have to pay more interest on the debt, which would mean lower spending and citizens receiving fewer services.
“There is a worrying degree of uncertainty about how the government will deal with situations that will put strong pressures on our fiscal structure.
“The government congratulates itself on its ‘good’ results compared to other countries, without warning from within about worsening situations such as its fiscal structure and price level, among others,” Moreira said.
In its report, Moody’s expects GDP growth in the coming years to be lower than before the pandemic.
In this context of lower growth, “the inability of the authorities to address fiscal pressures would hinder the improvement of Panama’s debt metrics”, a feature that the agency has identified as “critical” to support the credit profile, “after the sharp deterioration in fiscal power that occurred during the pandemic”.
But apparently, all is not lost. According to Bazan, the good news is that we are in time to correct the course, which means reducing spending and implementing a real austerity policy.
“We are a country that is spending more and investing less, that’s what the report says, so that’s a trend we need to reverse.
“We need to develop more investments in infrastructure as they are an important source of job generation” instead of increasing the state payroll, Bazán stressed.
The public sector payroll records a total of 255,184 civil servants and a gross salary of $412 million, according to the latest official figures, as of July 2022.
The July 2022 payroll compared to July 2021 increased by 6,196 civil servants or 2.5%, and a US$15.3 million (3.8%) increase in gross pay.
With information from Bloomberg
