No surprise in recent risk evaluations: keep an eye on fiscal consolidation! …and the possible consequences of the virus in a logistics-oriented economy
Two rating agencies and the IMF visited Panama at the beginning of the month. Fitch revised the outlook of the Republic to “negative” from “neutral”, concluding that public sector finances might weaken in the medium term, but the agency maintained its investment grade valuation for the Republic. We consider that there is no objective reason to assume a scenario of default in the future, according to the five-year plan published by the Ministry of Economy and Finance. However, the warning about the need to maintain the promised fiscal discipline was opportune.
In addition to the price effect of the coronavirus on the value of copper exports, the main risk to economic growth this year could be the disruption of international trade, the primary element in the “logistics sector” (more than twenty percent of GDP). The comparative advantage of Panama is, precisely, the provision of efficient linkages in the global value chain: the Canal, the ports, the railroad, the pipeline, and the inter-oceanic roads. Therefore, the economic concern is not only the lower level of the price of copper, but the reduction in the movements of goods ‒ the core of Panama's national competitiveness.
If profound reforms are not enacted soon, the solidarity program of the Social Security Agency (one of the two pillars of the pension system) will require direct subsidies from the Central Government (a pay-as-you-go mechanism) equivalent to 1.7 percent of GDP as soon as 2023-2024. The "pension problem” could soon become a “fiscal problem” as well. The options for the government are few and politically costly.
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