From a bright economic history to the current negative narrative: the case of Panama in 2021-2022

PANAMA - Report 01 Mar 2021 by Marco Fernandez and Alex Diamond

February´s IMF country report analyzes the Panamanian economy in the context of the approval of the Precautionary and Liquidity Line (PLL) of US$ 2.7 BB. The IMF usually is bullish concerning Panama, and the document follows that pattern, describing its macroeconomic trajectory and its growth potential, but demonstrating concern about the weak situation of the public sector finances, with its large deficits and high debt ratios. However, the IMF report's main point relates to the PLL line of credit. It has a conditionality clause but not one in the strict sense: The Republic of Panama must exit the GAFI/IMF list of jurisdictions that do not fully comply with the international norms of anti-laundering and financing of terrorism.

Other critical documents published during the previous month were the downgrading of Panama's Long-Term Issuer Default Risk to BBB- from BBB (negative outlook), still investment grade, but only a notch above it. Several quasi-sovereigns (ACP, ENA and AITSA) were downgraded, as well. The sovereign risk valuation is at the edge of the abyss. The main reasons are the same as other analysts have clearly stated: the weak position of the public finances, the increase in debt and the unsustainability of the debt ratios if the country does not grow soon and fast, with tax revenues increasing sharply and expenditures decreasing, might mean the country's losing its investment grade, which would be a negative legacy for the Cortizo Administration​.

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