The recent decision by Moody’s of placing Panama on negative watch is further evidence of the lagging action of rating agencies relative to the deterioration of fundamentals, in our view. As we have indicated in previous reports, Panama’s fiscal space has narrowed, increasing the risks that once again the government breaches the deficit limits established in the Fiscal and Social Responsibility Law. Such an event could be the trigger for a downgrade, not only by Moody’s but also by S&P, who back in August had reaffirmed the rating but cut the outlook to negative.
Even if it is true that Panama's de-rating is running in slow motion, we reaffirm our UW recommendation on this credit. We think that the balance of risks is skewed to the downside while the risk-reward equation is not enticing. In addition, the long-awaited actuarial report from the International Labour Organisation that was released last month portrayed a gloomy picture of social security sustainability. Thus, the country will have to embrace the discussion on such a socially and politically sensitive topic at a moment when social tensions are still palpable and when the race for the next presidential election is about to start. A weak labour market and the difficulties of the Panamanian society to reach consensus around key issues further complicate the outlook.