The credit rating agency Moody’s Ratings has maintained Panama’s sovereign rating at Baa3 while keeping the country’s economic outlook negative. This decision, announced this week, reflects ongoing concerns about Panama’s fiscal consolidation process despite acknowledging some recent government progress. The agency specifically cited budget rigidity and low revenue collection as primary risks to the nation’s financial stability.
Moody’s analysis indicates that while the administration of President Jose Raul Mulino has reduced the fiscal deficit for 2025, more substantial government action is required. The agency’s report states that Panama’s debt-to-GDP ratio will continue increasing until at least 2027. This persistent debt growth threatens to undermine the economic strengths that have traditionally supported the country’s investment-grade status.
“The decision to maintain the negative outlook reflects that risks persist for the fiscal consolidation process, mainly due to budget rigidity and low revenue collection,” [Translated from Spanish] the rating agency stated in its official assessment.
Government actions must achieve faster and more effective fiscal consolidation to reverse the increasing debt trend. Moody’s emphasized that this need aligns with the Mulino administration’s own stated plans. The agency now waits to see if Panama can translate those plans into concrete legislative victories.
Structural Challenges and Political Hurdles
Moody’s turned Panama’s outlook negative back in November 2024, pointing to that year’s significant fiscal deterioration. Analysts identified clear risks to the consolidation initiatives proposed by the incoming administration. Those risks included increased spending rigidity, limited revenue collection, and contingent liabilities linked to the pension system and litigation from the cobre panama mine closure. While the contingent liability risks have since diminished, the government has not yet effectively tackled the underlying structural pressures creating fiscal deficits.
Budget rigidities stem from several entrenched issues. Persistent pension pressures, legislation mandating education spending at 7 percent of GDP, laws dictating wage increases, and inefficient subsidy allocation all contribute to the problem. Together these elements have increased spending inflexibility and limited the government’s capacity to make effective fiscal adjustments. These spending constraints are aggravated by the government’s reduced revenue base, which is driven by widespread tax exemptions and evasion.
Tax revenues have declined steadily to less than 7 percent of GDP in 2024. That figure represents a sharp drop from 11 percent back in 2010. This combination of spending and revenue trends has increased Panama’s fiscal vulnerability to external crises. It has also limited the nation’s ability to finance public investment and social programs adequately.
Pension Reform Provides Some Relief
The confirmation of Panama’s Baa3 rating does reflect some positive developments. Moody’s acknowledged the reduction of contingent liability risks, the smaller fiscal deficit in 2025, and the expected support that economic strength will continue providing to the sovereign credit profile. The approval of pension reform in March 2025, alongside the agreement reached with companies linked to the Cobre Panama mining project, has substantially mitigated risks that otherwise would have negatively affected the state’s fiscal position.
“The government managed to partially address a historical problem of the pension system, which previous administrations had not resolved,” [Translated from Spanish] Moody’s recognized. “Without the implementation of the pension reform in March, the cash flow deficit of the previous defined benefits program would have required a transfer from the central government exceeding 1 percent of GDP in 2025.”
Projections indicated those transfers would see continuous increases, potentially reaching between 2 and 3 percent of GDP by the end of the decade. The reform has therefore provided crucial breathing room. Senior Vice President and lead analyst for Moody’s sovereign rating of Panama, Renzo Merino, discussed these developments during the recent Moody’s Inside LatAm Panama 2025 conference. He noted that the government’s proactive measures have improved the credit profile following the pension system deterioration and mine closure litigation.
These actions have substantially mitigated the risk of further structural weakening of fiscal strength. The Fiscal consolidation achieved in 2025 will slow the pace of debt growth and stabilize the interest burden. Panama’s rating continues to be well supported by the country’s economic strength, with favorable growth prospects and an absence of significant macroeconomic imbalances that benefit from dollarization.
The Road Ahead for Panama’s Economy
The maintained negative outlook signals that Panama remains on watch for a potential future downgrade. Moody’s Ratings explicitly warned that implementation risks persist due to the government’s limited political capacity and its need for legislative support. Authorities have stated that adjustment measures will be debated early in 2026. The success or failure of those legislative efforts will likely determine Panama’s future credit rating direction.
Moody’s confirmation of the rating reflects an improved credit profile following proactive government measures to address contingencies. These stemmed from the deterioration of pension system finances and litigation related to the 2023 closure of the Cobre Panama mining project. The agency concluded that these actions have substantially mitigated the risk of further structural weakening of fiscal strength. The nation’s Debt-to-GDP ratio trajectory remains the central concern moving forward.
Panama now faces a critical period of economic management. The government must navigate complex political waters to implement the structural measures Moody’s says are necessary. The country’s fundamental economic strengths provide a solid foundation, but fiscal pressures continue to build. The world will be watching closely in early 2026 to see if Panama’s legislature can pass the reforms needed to secure its financial future and maintain its hard-won investment-grade status.