Fitch: Panama Canal Referendum a Positive Development

NEW YORK--(BUSINESS WIRE)--Fitch Ratings stated today that the approval of the Panama Canal expansion referendum could yield positive results for the country in the long term in terms of higher external and fiscal receipts and GDP growth prospects. However, the referendum itself will not have an immediate impact on Panama's sovereign ratings, as uncertainties remain about debt financing, future revenues from tolls, and Panama's ongoing fiscal consolidation. Currently, Fitch maintains a Foreign Currency Issuer Default Rating (IDR) of 'BB+' for Panama with a Stable Outlook.

Panamanians voted yesterday on the referendum to expand the Panama Canal. With about 96% of the votes counted, 78% of voters approved the referendum. While Fitch views the approval of the canal expansion as a favorable development for maintaining the country's competitiveness, the project is not without risks. As such, Fitch will closely monitor the project's impact on debt levels and GDP growth.

'Panama's key rating weakness relative to other Fitch-rated 'BB' sovereigns continues to be its high level of public debt,' according to Theresa Paiz Fredel, lead analyst for Panama and Director of Latin American Sovereign Ratings at Fitch. At a projected 34% by year-end 2006, Panama's ratio of net public external debt to current external receipts is among the highest in the 'BB' category, and its ratio of government debt to GDP of 57.6% is above the 'BB' median of 40%. However, fiscal consolidation and good prospects for the continuation of strong export and economic growth have put debt dynamics on a downward trajectory. As a result, Fitch believes that Panama should be able to absorb any future increase in public debt related to the expansion of the canal. Currently, the cost of canal expansion is estimated at US$5.3 billion, including a contingency to cover the cost of any risks and unforeseen events. Furthermore, the Panama Canal Authority could finance a portion of the construction costs through higher tolls. Additional external financing is not likely to occur before 2008, to cover the peak years of construction between 2009 and 2011. While a significant increase in public debt could potentially constrain upward momentum of Panama's credit ratings, Fitch believes that over the longer term, canal expansion, if managed appropriately, could yield economic benefits that outweigh the medium-term costs of increased public debt.

Longstanding dollarization, a stable financial system, moderate debt service needs, and the government's considerable financial and land assets support the sovereign's IDR of 'BB+'. Despite fiscal slippage in 2004, Panama's ratings have been underpinned by a strong economic response to global growth, as well as the efforts of the administration of President Torrijos to strengthen public finances, as demonstrated by the prompt passage of fiscal reform, more recently social security reform, and improvements in fiscal transparency. Output expanded 6.4% in 2005, strong by regional standards, and the prospects for 2006 are even better, with growth likely to exceed 7%.

Given fiscal consolidation and growth, the non-financial public sector deficit (NFPS) declined to 3.2% of GDP in 2005 from 4.9% of GDP in 2004. In light of higher than expected revenues and economic growth this year, the NFPS deficit is likely to be less than the budgeted 3.0% of GDP.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.


Fitch Ratings, New York
Theresa Paiz Fredel, 917-378-5409
Roger M. Scher, 212-908-0240
Christopher Kimble, 212-908-0226 (Media Relations)

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