Fitch Ratings-New York/London-21 May 2024: Jose Raul Mulino, Panama’s president-elect, faces a tough path to address the fiscal and institutional challenges that contributed to Fitch Ratings’ downgrade of the country’s sovereign rating to ‘BB+’/Stable from ‘BBB-’/Negative in March, says Fitch in a new report.

Mulino takes office on July 1, following victory in the May 5 elections. He will inherit a weak fiscal position; a ballooning deficit in one of the pension subsystems; persisting uncertainties around the Minera Copper mine, which was forced to close last year; water-supply issues affecting the Panama Canal; a weak labor market; and simmering popular discontent after years of protests.

The pronounced deterioration in the sovereign’s fiscal profile over the past five years was an important factor in our March downgrade. Narrow fiscal space poses a particular vulnerability for Panama given dollarization and heavy reliance on external funding, constraining its ability to manage future shocks.

Mulino has pledged to tackle these issues, but has yet to provide detail on his plans to do so. The tense social backdrop, fragmented legislature and difficult policy trade-offs may constrain his ability to deliver large and rapid improvements.

Panama Debt Metrics Versus Ratings Peers

The president-elect’s fiscal ambitions should become clearer this year, as the 2025 budget and a five-year strategic plan are due by year-end. Rebuilding fiscal space is likely to require difficult legislative reforms that have eluded previous administrations.

A deterioration in governance was another driver of our downgrade, and we view the fraught events surrounding the Minera Panama mine closure as a manifestation of this rather than an anomaly. Mulino has pledged a constitutional re-write and other efforts to improve governance, but this could be challenging. The path to reopening Minera Panama is thorny, amid still heightened social sensitivity and pending arbitration cases.

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