Panama risks losing investment grade

2,088Views 0Comments Posted 07/12/2023

Panama faces several economic scenarios that worry the financial system such as a possible loss of investment grade due to fear that it will not be able to manage the fiscal deficit, address public spending, and manage the issue of the actuarial deficit in the Social Security Fund, mainly with the Disability, Old Age and Death (IVM) program.

In addition, the resources provided for mining exploration and exploitation will not be available as the contract between the State and Minera Panamá is declared unconstitutional if analyzed from a strictly economic point of view.

These scenarios are considered by the Superintendency of Banks of Panama in a report published this week titled 'Analysis of macrofinancial Threats for the National Banking System ', in which it warns about the risks that the country and the banking industry have.

Specifically, the banking regulator states that the effects of the possible loss of investment grade would change the entire panorama, bringing consequences to the banking system, such as reduction of the domestic portfolio, increase in delinquencies, greater provisions, losses in the income statement, effects on the solvency of banks.

“If there is a downgrade of the sovereign rating, as a result of the deterioration of economic and social indicators, our country could suffer the impact of the increase in the cost of funds that would be received from abroad, as well as a reduction in direct external investment,” warns the Superintendency.

The regulator explains that the consequences are a kind of escalation that begins by affecting the cost of financing for the Government, but also for banks and companies, as well as the impact on investments. “External financing would not only become more expensive but could also be reduced since, being more expensive, smaller amounts would be requested. By decreasing the amount of financing that would be received, government investments would be reduced. This, on the one hand, would impact unemployment and, on the other, the money that would circulate in the economy,” he says about the cascading effect in a possible loss of the country's investment grade.

The regulator indicated that the revocation of the mining contract “could deteriorate the perception of Panama as a favorable destination for business, increasing the risk that the country loses its investment grade rating in the short term.”

Impact of mine closure

The banking regulator also analyzed the impact on banking and the economy of the closure of the mine operations.

The Superintendency specifies that considering that Minera Panamá contributes $4,683 million annually to the country's Gross Domestic Product (GDP), 4.8% of the total, while the multiplier effect on income (remunerations) is estimated at $447 million, that is, 2.6% of the national total. By not having these resources, the effect on the economy will be a fall.

“Without a doubt, the repercussions, resulting from the possible fall in GDP, reduction in tax revenue, deterioration of finances, would have consequences that could lead to the loss of investment grade,” warns the regulator.

It indicates that in addition, the jobs associated (direct, indirect, and induced) with the mining operation are estimated at 40,793, which is equivalent to 2.3% of the country's total employment, which will also lead to fewer jobs and therefore many people will even have problems. to meet their financial commitments and delinquencies will rise.

According to the banking regulator, there are 3,094 clients of the financial system who work at Minera Panama and maintain loans in various banks for mortgages and consumption for 146 million dollars.

In detail, these employees owe an average of 89.7 million in mortgage loans, 047% of the total loans in the system; 17.69 million dollars in auto loans, 29.58 million in personal consumption, and 8.60 million dollars in credit card debt.

The regulator reveals that 26 banks have lent money to this group of clients and 6 banks classified as large, taking into account the size of their assets, concentrate 72% of the weight of the mining portfolio with 104 million dollars, which would represent within of total personal consumption and mortgage around 0.44%.

The Superintendency indicates that the financial system could absorb these risks, although the situation regarding the country's economy is still worrying. “The level of exposure, both of consumer banking debtors, and the projected exposure of suppliers, are not financing levels that could cause a collapse, as a result of short-term defaults,” indicates the regulator.