This report does not constitute a rating action.
Panamanian President Jose Raul Mulino's administration introduced in October 2024 a reform to the Social Fiscal Responsibility Law to gradually reduce the country's fiscal deficit and stabilize public finances. The government's ability to reach its fiscal targets will depend largely on the rate of economic growth. But events in recent years, including the closure of the large copper mine Minera Panama in 2023, have raised doubt about whether Panama can sustain its historically high GDP growth, which has well exceeded that of other sovereigns at the same level of economic development.
Below, S&P Global Ratings answers frequently asked questions from investors on the challenges facing Panama's creditworthiness.
Frequently Asked Questions
What are the main challenges to sovereign credit quality facing Mulino's administration?
Fiscal correction and sustained economic growth are both key to maintaining Panama's creditworthiness, and the Mulino administration's ability to reduce the fiscal deficit is critical to stabilizing public finances. The administration's multiyear plan for fiscal correction aims to cut the fiscal deficit of the nonfinancial public sector to 3% of GDP in 2027 from above 7% in 2024.
Nearly a year into his administration, in March 2025, Mulino secured the passage of a pension reform through the National Assembly, where his political party lacks a majority. This passage demonstrated the administration's commitment to the announced sequencing of reforms, and future reforms will depend on maintaining or building this political capital.
While the new administration has maintained Panama's traditionally pro-investment economic policies, ongoing global uncertainty, along with localized social protests that have recently disrupted some economic activity, could pose downside risk in the short term to the country's historically strong economic growth.
Our 'BBB-' long-term and 'A-3' short-term sovereign credit ratings reflect Panama's stable democracy and generally predictable economic policies, diversified economy, and robust economic growth. The ratings also reflect a weak external profile and lack of monetary flexibility. Panama lacks a central bank or a formal lender of last resort, which constrains our ratings.
We lowered the long-term rating from 'BBB' in November 2024 following a weakening in Panama's fiscal flexibility and performance that worsened the government's interest burden, increasing its vulnerability to adverse economic conditions.
What are Panama's economic growth prospects?
Although social unrest could slow growth in 2025, we expect Panama's diversified economy, strategic trade location, and generally predictable economic policies to sustain long-term GDP growth above the peer average. However, while we expect some public investment to support growth, private construction is likely to remain sluggish. Our base-case scenario also does not include the resumption of mining activities after the moratorium introduced in 2023.
What could lead to a change in rating or outlook?
We could lower the ratings in the next 12-24 months if policy setbacks prevent a reduction in fiscal deficits, translating into a faster-than-expected debt buildup. Amid uncertain global conditions, slower-than-expected economic performance could also weaken creditworthiness.
On the other hand, we could raise the ratings in the next 12-24 months if Panama's external profile strengthens or if its fiscal performance improves beyond our expectations. This could be achieved through spending control measures and revenue strengthening.
How does the approved pension reform affect the rating?
The impact on Panama's public finances and fiscal stance is positive but modest. The pension reform will gradually increase employers' contributions and reduce the pension system's shortfalls in the short to medium term. It also merges two distinct pension systems, one based on contributions made to individual accounts and another that is pay-as-you-go.
However, it touches only lightly on the structural challenge of sustainability over the long term. Despite the reform, the pension system will still rely on budgetary support from the government, which will transfer $966 million annually (nearly 1% of GDP) to strengthen the system's reserves. The reform includes a review in the sixth year to assess the situation and potentially incorporate a parametric change that would require the National Assembly's approval.
How could the Minera Panama closure affect the sovereign's finances?
Minera Panama began proceedings to seek compensation from the government for the mine's closure through international arbitration, which could result in a substantial contingent liability for the sovereign if the company wins its case. However, following some negotiations, the company has agreed to suspend the arbitration case while awaiting further developments with the mine. Our projections do not assume that the copper mine will reopen, nor that the moratorium against mining will be reversed.
Related Research
- Research Update: Panama Ratings Lowered To 'BBB-/A-3' On Higher Interest Burden; Outlook Stable, Nov. 26, 2024
- Bulletin: Panama's President-Elect Faces Difficulties In Restoring Growth And Stopping Fiscal Slippage With A Fragmented Assembly, May 6, 2024
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