UPDATE 3-S&P raises Panama credit to investment grade

* Panama wins second investment grade rating on its debt

* S&P says canal expansion will support growth

* Gov’t says to strengthen domestic capital markets
(Adds Panama government comment)

By Sean Mattson and Daniel Bases

PANAMA CITY/NEW YORK, May 25 (BestGrowthStock) – Panama won a
second investment-grade rating on its debt on Tuesday,
rewarding the Central American country for years of rapid
economic growth, trim budgets and tax system overhauls.

S&P hiked Panama one notch to BBB-minus from BB-plus and
said the outlook for the credit rating is stable.

The upgrade, a victory for conservative President Ricardo
Martinelli, came as some Southern European countries struggle
with debt problems and could attract more investment to
Panama.

A tiny nation best known for its transoceanic canal and a
banking industry (Read more about the banking industry recovery.) criticized for asking too few questions of
depositors, Panama joined Brazil, Mexico and Chile in the
investment-grade club when Fitch ratings upgraded its debt to
BBB-minus in March.

“The upgrade reflects our assessment that continued
economic growth — combined with moderate fiscal deficits —
should reduce the government’s debt burden,” S&P said.

Panama’s Deputy Economy Minister Frank De Lima said ratings
agencies responded favorably to tax hikes and fiscal discipline
under Martinelli, who took office last July.

“Our policy has also been to strengthen our own domestic
market, issuing notes, letters in Panama to diversify our debt
ratio between external and internal debt,” De Lima told
Reuters, noting Panamanian debt has been 90 percent external.

“We want to change that ratio and have a more diversified
debt profile. That’s something that the ratings agencies also
have viewed very positively,” he added.

Panama, which uses the U.S. dollar as its currency and
straddles a narrow strip between the Atlantic and Pacific
oceans, has been a big winner from the growth in global trade.

About 4 percent of international commerce flows through the
Panama Canal, and the country also ships goods by rail from
ports on one coast to another. Shipping prowess helped Panama
average 8 percent annual growth between 2000-09 — the fastest
pace in Latin America.

Panama’s economy even grew during the global recession and
a $5.25 billion project under way to expand the canal bodes
well for future growth.

“The ongoing expansion of the Panama Canal, an ambitious
public infrastructure investment plan and an expanding services
sector that benefits from the country’s emerging role as a
regional hub for trade, finance and transportation will support
Panama’s growing economic resilience and diversification,” said
S&P.

Moody’s Investors Service rates Panama one notch below in
speculative territory at Ba1. It said in February the country
was on review for a possible upgrade.

“Moody’s upgrade to investment grade now looks more like a
formality,” said RBS economist Boris Segura.

S&P said it expects Panama’s economy to grow at an average
rate of 5 percent between 2010 and 2015 versus an average of 8
percent between 2004 and 2009.

The expansion of the Panama Canal zone will create a steady
increase in revenue while tax reform and more efficient tax
administration should provide ample resources to fund its
investment plans without eroding fiscal flexibility or
reversing the decline in its debt burden, S&P said.

The general government deficit is forecast to drop to 1.4
percent of GDP for 2010 and then drift to around 1.2 percent in
the period between 2011 and 2015, S&P said.

After running a deficit equivalent to 4.9 percent of GDP in
2004, Panama ran surpluses between 2006-08. Last year, when
growth slowed, it went into the red for 1 percent of GDP.

Investing
(Writing by Jason Lange)

UPDATE 3-S&P raises Panama credit to investment grade