| Mireya Moscoso | ||||||
In terms of recognition by foreigners, international finance in Panama has taken something of a back seat to its famous canal and its role as a shipping hub. But while its small stock exchange may not have inspired investors over the years, the country has made itself into a safe haven in Latin America for sovereign debt investors.
Offering tidy rates of return of 9% and above on Panama global and Brady bonds and supported by a stable, dollarized economy, the country has always been an option should things go awry in Latin America’s big economies, such as Mexico, Brazil and Argentina.
Panama’s propensity to borrow has also meant there has always been healthy supply. The country has around $5 billion in debt issued on international markets.
Debt getting out of hand
But this inclination to borrow could be Panama’s downfall, analysts say, and could risk destroying the country’s reputation as a safe haven in Latin America.
Panama’s public debt is around $8 billion, 80% of GDP. It is also running a fiscal deficit of over 2%, prompting more government borrowing and less for debt service.
Government attempts to raise value-added tax and to close the loopholes in excise tax have recently stalled, dampening hopes that tax reform would bring in new government revenues.
With the economy this year expected to post growth similar to last year’s 0.3% after a decade of average growth at 4.5%, the Panamanian government under president Mireya Moscoso is coming under attack for poor economic management and a lack of fiscal policy.
“This situation of a declining political, economic and fiscal outlook could certainly wear out perceptions of Panama as a safe haven in the not too distant future,” says Mauro Leos, senior credit officer for Panama at rating agency Moody’s, which rates Panama’s sovereign debt one notch below investment grade at Ba1.
For analysts, the crunch point came in March when Moscoso failed to push through a plan to use a $1.3 billion trust fund to repurchase external debt to improve Panama’s fiscal footing.
The government had wanted to use $600 million of the fund to buy back and cancel its Brady bonds. But labour unions, which the government was obliged to consult on the use of the fund, said the money should be used for public spending on hospitals, schools and job creation.
This failure to reduce debt has already undermined investors’ confidence, according to Marco Fernandez, economist at think-tank Indesa in Panama City.
“Earlier this year investors were buying Panama bonds on the expectation that progress on the trust fund would be forthcoming. But no buy-back has been made and I think we will see a gradual sell-off,” says Fernandez.
Under the government’s new plan Panama is expected to use the fund to invest $1 billion in global bonds later this year. It says it will buy back the bonds from foreign investors to hold them as an investment, effectively paying itself interest, something that many say is unlikely to boost investor confidence.
