Fitch Upgrades Panama´s Investment Grade
Development: On 23 March the international credit ratings agency Fitch upgraded Panama from BB+ to BBB-.
Significance: The upgrade is a victory for the rightwing government of President Ricardo Martinelli, making Panama the fifth Latin American country to reach this category, alongside Brazil, Mexico, Chile and Peru.
It follows Martinelli’s recent tax reform which was aimed at increasing access to finance and reducing the cost of doing business in Panama. The reform, which takes effect in July, raises VAT from 5% to 7%, cuts income tax and reduces the corporate tax rate from 30% to 25%. That VAT increase move has been lambasted as regressive by unions and popular movements. As well as simplifying the tax code by abolishing over 30 duties, the reform cuts taxes on banks with assets of between US$100m and US$750m but raises taxes on those with assets of over US$750m.
Fitch singled out the tax reform as one of the reasons for the upgrade, along with Panama’s ability to weather the recent global financial crisis. The agency noted that despite the fact that Panama’s real annual GDP growth rate slowed to 2.4% in 2009, from 10.7% in 2008, it still had one of the highest growth rates in the region and amongst other BBB rated countries.
The upgrade could help Panama in its efforts to secure a Free Trade Agreement (FTA) with the US, which has been ratified by Panama but is pending approval by the US congress. Panama’s lack of tax transparency has been a major concern for the US.
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