Credit Rating Agencies

On August 2, the agency Standard & Poor's (S & P) affirmed Panama’s Sovereign long-term credit rating at BBB with investment grade. Our country has maintained such rating since June 2011.

The report highlights that the areas of greatest impact on the Panamanian economy are public investment in infrastructures, mainly through tenders, as well as the services sector which benefits from the country's role as a regional hub for trade, finance and transportation, and estimates an economic growth of 6% to 7% up to 2016, including this year.

Earlier this year in May, Fitch Ratings ratified Panama’s credit rating at BBB with a stable outlook. The Agency also noted in its assessment factors such as circulation of the dollar as legal tender, soundness of the financial sector and strong growth of the Panamanian economy.

Credit Rating Agencies (CRAs) are companies that rate certain financial products or assets on behalf of a client, whether these are companies, states, regional governments, etc. Ratings are letters with grades that determine or explain the level of creditworthiness of the entity under evaluation. The BB rating and lower ratings are considered non-investment grades or speculative grades.

The factors that influence risk assessment are: political risk, income, economic structure, economic growth prospects, fiscal flexibility, public debt burden, price stability, external debt and liquidity, among others.

Panama’s relationship with CRAs is quite old. The pioneer in this practice was Henry Varnum Poor, who entered into the business of ratings in 1860. In that year a document was published entitled "History of Railroads and Canals in the United States" which contained the rating of Panama railroad. In 1918, Moody's released its first government credit rating in a book entitled "Governments and Municipals Handbook 1918". By 1922, an evaluation on Panama was included with an AA rating.

However, CRAs have also received negative publicity in previous years for giving investment grade status to companies that shortly after evaluation encountered serious financial problems. Some examples are Enron, Executive Life, Leman Brothers, AIG, Freddy Mac, Fanny Mae, Bank of America, and products such as the Collateralized Debt Obligation and the Banking crisis in Iceland, among others.

The two main actors in these rating processes are loan applicants (e.g. governments) that seek CRAs to facilitate their own access to international capital.

On the other hand, foreign investors rely on credit ratings for the purpose of obtaining information on the probability of default, right price and hedge against financial instruments traded in exchange markets.

Regulation in Panama

In Panama the regulation of these ratings is governed by Law No 97 of 1998 whereby the Ministry of Economy and Finance was created. Its Article 2 paragraph C of public finances, number 7 indicates that subject to prior approval by the Cabinet Council, The Directorate of Public Credit may propose and issue, place or grant custody, recover and keep track of the country’s securities in local and international financial markets, as well as trade in the secondary market in order to obtain the best conditions for these securities.

This Article authorizes the Minister of Economy and Finance to establish a trading system to place securities and define the rules and procedures for such trading in the best interest of the country.

CRAs provide credit rating assessment services to Panama to rate short, medium, and long term issuance in local and foreign currencies. In addition, the rating agency’s performance includes giving its views relating to the financial capacity of the Republic of Panama to meet its obligations.

It is important to mention that Panama has local and foreign debts. Each comprised of different components, with long-term and short-term maturity, this being their main difference. Panama’s local debt is the result of the public sector sources (Social Security Fund) (Financing from Official Banks) and private sources such as private financing, Treasury notes, Treasury bills and local bonds, among others.

The auction procedure for these debt securities may be seen in detail in the Resolution of the Ministry of Economy and Finance No. 002-2010-DDCP of January 29, 2010, GO 26463-B. For addition information on the concentration risk monitored by the Securities House and regulated by the National Securities Commission (NSC), please read Agreement No 4 of June 2011 of the Superintendency of Securities (SMV for its acronym in Spanish), GO 26836-C and its amendments.

Since the creation of credit rating agencies in the nineteenth century, our country has obtained positive evaluations. In 2010 Panama received a BBB credit rating. In 2011, Panama was assigned a BBB credit rating and on 2nd August this credit rating was affirmed. Chile is the only country in the region with a credit rating higher than Panama’s, having received an AA-. Peru, Brazil and Mexico have received a BBB credit rating, as is the case with Panama, but Peru has been assigned the lowest rating (BBB-) followed by Colombia and Uruguay. Finally, one of our goals as a nation is to continue raising our credit rating levels to eventually reach the highest attainable credit score.