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���������ֳ�-New York/London-03 March 2025: Panama’s large 2024 fiscal deficit was partly due to transitory factors, but mainly highlights a deep underlying imbalance, ���������ֳ� says. The deficit will narrow this year but likely overshoot the target of President Jose Raul Mulino’s government without structural consolidation measures, prospects for which are unclear.

The 7.4%-of-GDP (USD6.4 billion) non-financial public-sector (NFPS) deficit reported for 2024 was far above the 4.7% we projected when we downgraded Panama to ‘BB+’ in March 2024. It would have been even larger without the reversion of some accounting decisions that flattered the 2023 deficit, resulting in its upward revision by 1pp to 4.0%.

One-off contributory factors included settlement of USD650 million of prior-year arrears (0.8% of GDP) in April and lower Panama Canal contributions due to a drought (0.3% of GDP). The Mulino government registered another USD730 million (0.8% of GDP) of arrears after it took office in July, but put much of this into the 2023 deficit without specifying how much went into the 2024 deficit. A tax amnesty yielded 0.1% of GDP.

However, the underlying deficit net of these one-offs was high at more than 6% of GDP. A significant consolidation effort would therefore be required to achieve the 4% revised target for 2025.

The government plans to achieve this via efforts to reduce tax evasion, and says it expects to increase collections by 42%, or 2.3% of GDP. We believe such a jump is unrealistic without broader tax reform, and that deficit reduction therefore hinges on spending cuts. These are not envisioned in the 2025 budget, which was increased substantially in the legislative process, and would thus require executive action.

The scope for such cuts is unclear, in our view. The education sector is likely to significantly under-execute its legally mandated 7%-of-GDP budget, but this already happened in 2024, and thus would not drive consolidation. Mulino plans to maintain a robust public works pipeline to lift employment. And the budget could be increased further, for example, to cover a shortfall of funds for scheduled “turnkey” project payments by the Panama City Metro.

Given these uncertainties, we expect NFPS deficits to narrow to 4.5% in 2025 and 4.0% in 2026, above their targets. This would lift gross debt/GDP to 66.0% in 2025 and 67.3% in 2026, from 62.8% in 2024. This contrasts with the authorities’ projection that debt/GDP will stabilize this year and decline thereafter.



���������ֳ�’s higher debt/GDP projections reflect wider expected deficits, settlement of arrears recognized but unpaid as of end-2024, and borrowing to support the pension system. Government transfers to the pension system are neutral for the targeted NFPS deficit but add to the central government (CG) deficit that determines sovereign borrowing. The authorities project lower CG deficits relative to NFPS deficits, and thus lower borrowing. But ���������ֳ� projects CG deficits will be higher, as observed historically.

A pending pension reform could widen this differential. The authorities’ proposal calls for higher retirement ages and employer contributions and increases the government contribution to USD960 million. The legislature has diluted the parametric adjustments and increased the government contribution to USD1.5 billion.

The executive has threatened to veto the bill in response. Regardless of the outcome, we believe significant government support of the pension system is likely, keeping borrowing needs high and debt/GDP rising. And the outcome could be important for market sentiment and financing conditions.

We affirmed Panama’s rating with a Stable Outlook in December 2024 despite the greater-than-expected fiscal deterioration, indicating some headroom at ‘BB+’. Further fiscal slippage that steepens the projected rise in debt, or weakening in financing conditions, could put downward pressure on the rating.

Contacts:

Christopher Dychala
Associate Director, Sovereigns
+1 646 582 3558


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300 W. 57th Street
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Todd Martinez
Senior Director, Sovereigns
+1 212 908 0897


Mark Brown
Senior Director, Credit Commentary & Research
+44 20 3530 1588




Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@thefitchgroup.com
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