By Elida Moreno -  Reuters 

Panama expects economic growth of at least 5 percent next year and is planning fiscal reform measures as it works to obtain an investment-grade rating on its debt, the finance ministry said.

The reforms "will make tax collection more equitable and maintain ideal levels of spending and the deficit," Deputy Finance Minister Dulcidio de la Guardia told a news conference on Friday.

Standard & Poor's said this month that it could raise Panama's debt rating to investment grade, citing solid growth prospects and an improving fiscal outlook.

S&P said on Nov. 9 that the tax reforms were expected to boost government revenues by about 0.75 percent of gross domestic product. For the first time, the reforms could extend Panama's tax reach into the business activities of a major free trade zone.

De la Guardia said the government will present its fiscal plan to Congress in December.

While many Latin American economies have been in recession this year, Panama's economy will grow about 3 percent, Finance Minister Alberto Vallarino said at the same news conference

Next year, the economy will grow "no less than 5 percent," Vallarino said.

Panama is currently rated BB-plus by S&P as well as Fitch Ratings. Moody's Investors Service has a Ba1 rating. All three are one notch below investment grade status.

Panama's economic growth rate has slowed sharply after averaging above 8 percent in recent year. Traffic passing through the Panama Canal, a driver of the economy, has fallen due to a worldwide recession.

The slowdown has in turn cooled inflation. Consumer prices in Panama rose 0.2 percent in October from the previous month, bringing 12-month inflation rate to 0.7 percent, the national statistics agency said.

Consumer prices had risen 8.7 percent in 2008.

Panama made the list of the10 Best Retirement Havens by Forbes. The list took into consideration many factors such as the safety, retiree-friendly visa requirements and decent medical care, among others.

"If you're a sun-worshiper determined to protect your assets from overreaching Western governments, consider countries like Panama or Malaysia.

But there is a means, on our list, to eliminate even the currency risk, if that is your priority. Exotic Panama, that sunny nation in Central America, gateway between the Pacific and Atlantic oceans, has adopted the U.S. dollar as its official currency. Move there and your assets and liabilities are matched."

By Kathryn G. Rooney -  Latin Business Chronicle

Panama has weathered the global economic storm better than even we forecasted and we think that 2009 GDP expansion will be stronger than our previous already above consensus call of 2.0 percent. Indeed, GDP expansion will likely come in more than a full percentage point higher at 3.2 percent, the highest growth rate in Latin America this year. We think average annual growth in the second half will be at least 4 percent.

THE NEXT INVESTMENT GRADE - The Panama sovereign capitalized on positive market sentiment after the recent move to positive outlook from S&P, indicating that the sovereign is on the verge of an investment grade rating from that agency. Panama has had a positive outlook from Fitch since January of 2008 and is currently rated high double-B by all three major rating agencies (Ba1/BB+/BB+). This move by S&P does not come as a surprise, as Panama is one of the strongest names in the region and one on which we have been bullish for much time. [On November 16] Panama issued $1 billion of a 10-year bond of an approved amount of $2.5 billion. The use of the proceeds will be primarily for the refinancing of internal debt obligations as well as for other general budgetary purposes.

INFRASTRUCTURE AGENDA - President [Ricardo] Martinelli’s administration has a significant infrastructure agenda as well, for which the proceeds are likely to be used. The bond was issued at a spread of 187.5bps over 10-year USTs and is trading wide to comparable maturities in Peru, Mexico, and Brazil. We think there is room for Panama to converge on some of these names over the longer term. Comparable 10-year bonds are: Peru at a bid spread of 166bps, Mexico at 163bps, Colombia at 193bps, and Brazil at 133bps.

We view this emission favorably as Panama is a strong fundamental credit and at the same time has been a generally illiquid name, so we recommend adding to a portfolio when there is the opportunity. We view the current spread levels in the 10-year region versus peers as fair in the short term with a longer term bias for spread compression versus comparables as Panama is upgraded by at least two of the three main rating agencies over the next year and in the run-up to the successful completion of the canal expansion. Issued at par, according to our trading desk these bonds are now trading at 100.75-100.95 at mid-day today.

STRONG ECONOMY - On the economic front, Panama has been posting relatively strong economic growth numbers. Second quarter GDP growth came in better than expected at +1.9 percent with first quarter revised up to +3.0 percent, bringing first half growth to 2.4 percent year-over-year. First half growth, as is usual for Panama, was spread across several sectors, including construction at 12 percent year-over-year, transportation and communications (canal-related and port activity) at 8 percent year-over-year, and mining at 13 percent year-over-year.

Panama has weathered the global economic storm better than even we forecasted, and we think that 2009 GDP expansion will be stronger than our previous already above consensus call of 2.0 percent. Indeed, GDP expansion will likely come in more than a full percentage point higher, at 3.2 percent, the highest growth rate in Latin America this year. We think average annual growth in the second half will be at least 4 percent.

CANAL EXPANSION - According to the Panama Canal Authority (ACP), the canal expansion project is on time to be completed by 2014 if not earlier and under budget (on average some $300 million below budget in every phase so far). The canal offers a $50 million incentive to finish six months early and there is a $50 million disincentive if it runs more than six months late, according to the ACP. There is very low risk of any delays due to labor issues: There are six labor unions working in the expansion project and all of these contracts have been negotiated through 2014 and 2015.

Canal revenues for the period of January through July 2009 were up 9% annually despite the global economic crisis. Traffic though the canal, however, dropped off during that time period (-4.5 percent year-over-year) but pre-set increases in toll fees have compensated for lower volume. Nonetheless, in the middle of the crisis last year the canal was able to get $3 billion in multi-lateral loans to finance the expansion with a 10-year grace period and 20 years to pay the loan. There is no government guarantee on the loan; it is to the ACP itself. As global trade activity rebounds, so too will canal revenues.

The canal is a key revenue contributor for the government and we think this is only set to grow in importance in coming years. According to the ACP, for every Panama Canal ton, $1 is paid to the government. Some $760 million will be given to the government this fiscal year, which has been the average contribution to the government over the last four years. Meanwhile, a minimum of $528 million must be paid to the government per year during the construction phase. The canal is clearly a key part of the fundamentally strong Panama story; indeed, in our view, after this expansion, Panama will become the logistical hub of the Americas. The Panama Canal already accounts for 5 percent of global trade activity. It is a massive and unique asset to the sovereign and its benefits will be reaped over the course of many years.

After a low point in tourism at mid year it looks like the number of visitors to Panama this year will be similar to those of 2008, according to Salomón Shamah, administrator of the Panama Tourism Authority (ATP). “We are not going to surpass last year but we will come in with a tie, which is quite an accomplishment,” Mr. Shamah continued.

The year 2008 set a record for tourists coming to Panama – about 1.6 million. In July of this year Panama had recorded 900,000 tourists, a drop of 1.2 percent. Tourism officials blame it on the global economic crisis. Another factor, the ATP noted, is the reduction in travel caused by the influenza scare earlier this year.

From 2003 to 2008 Panama saw yearly increases in tourism, more than doubling the number of tourists per year from about 865,000 in 2003 to around 1.6 million in 2009. Mr. Shamah credits actions of the new administration to encourage operators and service providers to give discounts of 25 percent for the anticipated recovery in tourist numbers in the later half of 2009.

The new administration is also urging the construction of a new convention center in the capital with 15,000 square meters floor space, three times the space of the ATLAPA Convention Center. Mr. Shamah also noted that he is working on another list of incentives to drive more tourism to all parts of Panama. This effort would be in line with the Master Plan for Tourism 2007 - 2020 from Ruben Blades’ sojourn as head of the Ministry of Tourism. That plan calls for an airport in the interior to facilitate travel to more remote locations as well as developing more facilities for potential destinations in the interior.