Moody’s Warns of Future Challenges as Panama Reduces its Fiscal Deficit

• Panama managed to stabilise its public finances during 2025 thanks to fiscal consolidation measures implemented by the government, according to Moody’s Ratings’ most recent periodic review report. However, the agency warned that the fiscal adjustment relied heavily on a sharp reduction in capital spending, a strategy that poses challenges to long-term economic sustainability.  The report confirms that the deficit of the Non-Financial Public Sector (NFPS) was reduced to 3.7% of Gross Domestic Product (GDP), a significant improvement compared to the 6.2% recorded in 2024 and below the legal limit of 4.0% established by Panamanian fiscal regulations.
• The rating agency believes that the fiscal performance reflects a greater management capacity on the part of the Panamanian authorities and a partial recovery of budgetary discipline. The adjustment brought Panama’s fiscal indicators closer to those observed in countries with a similar credit rating, temporarily strengthening the State’s financial position.
• Technical analysis reveals that the reduction in public spending exceeded the equivalent of 2% of GDP and was mainly concentrated on the halting of new state infrastructure projects and the restructuring of works that were already underway. 
• Despite the warnings, the rating agency maintained Panama’s sovereign rating at Baa3, the lowest level within investment grade.  However, the outlook remains negative, reflecting the existence of risks that could affect the country’s credit rating if the fiscal progress achieved is not consolidated. 
• The report also highlights that public finance started 2026 with favourable results.  During the first quarter of the year, the fiscal deficit stood at just 1.4% of GDP, driven by strong tax collection and strict control of current spending.  This performance strengthens expectations that Panama can meet the 3.5% deficit target set by the fiscal rule by the end of the year.
• Despite the progress, Moody’s warns that Panama faces significant structural challenges related to budget rigidity and limited capacity to generate tax revenue. The agency concludes that the evolution of tax reforms and the government’s ability to maintain budgetary discipline will be determining factors in preserving the country’s investment-grade rating.  Although it acknowledges significant progress in fiscal consolidation, Moody’s believes that Panama must demonstrate that it can sustainably reduce the deficit without compromising the public investment needed to boost long-term economic growth

(Source: Newsroom Panama)