Written by Valentine Hilaire and Elida Moreno
PANAMA CITY (Reuters) – Panama's business-friendly reputation has been tarnished by recent moves to close copper mines that account for 5% of gross domestic product (GDP), and the country's president-elect has vowed to flatten the economy. They will face unusually tough choices in order to return to normal.
But while economists and even some politicians want the winner of the May 5 election to pursue unpopular policies to replenish depleted financial resources, such as a struggling national pension system, the five front-runners are spending The focus is squarely on the surface.
“It's becoming increasingly common in election campaigns around the world for candidates to avoid touching on financial issues. Voters don't want to hear that message,” Citi analyst Esteban Tamayo told Reuters. “No one wants to talk about taxes or spending because of that.”
Investors with more than $33 billion in Panama government debt are watching the situation closely, as are businesses that have flocked to Panama in recent years, attracted by relatively low taxes and laissez-faire economic policies.
Fitch Ratings recently downgraded Panama's debt to speculative grade, citing fiscal and governance pressures exacerbated by First Quantum Minerals' move to close its giant copper mine following nationwide protests. did.
If S&P and Moody's follow suit, Panama could become a so-called fallen angel and raise borrowing costs as some funds have to repay their debt. Both agencies told Reuters they would monitor the incoming government's initial steps and investor confidence before acting.
Todd Martinez, co-head of America Sovereigns at Fitch Ratings, said tax collections have only increased by an average of about 1.5% per year over the past decade, despite nominal GDP growth averaging 6%. Panama said it needed to increase revenue.
Fitch forecasts the country's fiscal deficit in 2024 to be 4.7% of GDP, up from 2.95% last year, supported by one-time gains.
Last year, the termination of a copper mine contract following widespread protests eliminated one of its easy sources of $375 million in annual revenue.
Meanwhile, contributions to the Panama Canal's treasury are expected to decline by 2.9% this year, primarily due to lower traffic and capital reserves for future projects, the administration's statement said. .
Carla Gonzalez, an associate director at S&P, told Reuters that S&P recently priced in the canal's drying up as a downside risk.
Three of the five candidates to replace outgoing President Laurentino Cortizo say they can address the budget shortfall without raising taxes. The other two avoided the topic entirely.
“We are not going to raise taxes on Panamanians,” presidential candidate Romulo Lu, who is ranked second in most opinion polls, told Reuters.
Mr Lu said he would work to attract private investment in projects he claimed would create 500,000 jobs, and vowed to make tax collection more effective and cut spending in areas such as the parliamentary budget.
Former diplomat Ricardo Lombana, who is running for his second presidential election and has been swinging between second and fifth place in the latest opinion polls, told Reuters that while he has ruled out raising taxes, he wants to eradicate corruption and eliminate unnecessary measures. He said he would increase revenue by cutting expenses.
Many experts agree that while the candidates have not been able to come clean about the necessary deficit reduction measures, it would be political suicide to debate them so close to a vote.
Former Economy and Finance Minister Frank de Lima said Panama had overlooked sectors that were shining before the arrival of the first quantum, making the road to recovery tougher.
Some say the country's problems are largely surmountable and that investors who have sold the country's bonds since Fitch's downgrade may have overreacted.
The Central American country's total debt is $49.8 billion, equivalent to more than 50% of its GDP.
Former president and candidate Martín Torrijos, who remains in third place in the race in most opinion polls, told Reuters that his government would manage national resources with fiscal austerity, reducing the debt from 70% of GPD to 40%. %, but said he would do the same thing again without funding. He provided details about what spending cuts he would make in his new term if elected.
The country's national pension fund is dangerously underfunded, and all five front-runners recognize the need to rescue it. Still, no one has publicly proposed raising the retirement age or increasing contribution requirements.
Lu and Lombana said cutting benefits or raising the retirement age were off the table, and Torrijos vowed to hold a national dialogue to decide how to salvage the system.
What does the candidate do?
Even if details about potential austerity measures are scarce, campaigns will be more aggressive around large spending plans.
Mulino replaced convicted former president Ricardo Martinelli and promised to roll out the “biggest road reconstruction program in history” and build hospitals and a new railway.
According to most polls, he is the favorite to win the next election. His campaign did not respond to requests for comment from him.
Torrijos aims to spend $19 billion on 40 different projects, including new subway lines and canal reservoirs.
Some companies are targeting spending on projects ranging from tourism promotion to port infrastructure and prisons.
“Panama doesn't need Millay walking around with a chainsaw, but we need a strong leader,” Domingo Latraca, a former deputy economy minister, told Reuters, referring to Argentina's austerity-minded President Javier Millei. Ta.
But the next government will need to clearly explain to rating agencies, bondholders and investors how it plans to recover from the “terrible” one-off move of mine closures.
As of now, there is little sign that this will happen.
(Reporting by Valentine Hilaire and Elida Moreno; Editing by Christian Plumb and Alistair Bell)
