Panama is being closely observed by the international financial community due to the changes advanced by President Martin Torrijos’ Government to strengthen public finances, and to guarantee the future viability of the social security regime, through an overhaul of its social security system.

The investment bank, Credit Suisse First Boston (CSFB), predicted today that the passing and ultimate implementation of a legal reform that oversees the retirement and pension system could accelerate an improvement in Panama’s risk rating.

Panama’s CSFB analyst observed that Standard & Poor’s Ratings Services gave the signal when it revised its outlook on Panama to stable from negative, by announcing on Friday February 18 that it would keep its ‘BB’ long-term sovereign credit rating on Panama. This rating is only two steps away from investment grade category.

Last week, CSFB maintained Panama in a “strategic overweight” based in their “positive view of the likely improvement in long-term fundamentals”, and recommended its clients to broaden their investments in Panamanian bonds. This reassessment placed Panama as the second best country of all emerging markets for investment purposes, only surpassed by Russia.

Moody’s Investors Service already rates Panama at only one step below the investment grade category (Baa1). It is expected that once the country’s social security system reform is approved, Moody’s could raise the country’s credit to the investment grade category. The Minister of Economy and Finances, Ricaurte Vasquez M., has pointed out that the current administration’s goal is to attain the investment grade category for Panama before its government period is over.

The improved rating allows the Government as well as the private sector players to obtain financing at much lower interest rates, in addition to enhancing local as well as foreign investments.

“Given the congressional support fiscal reform package and the strong popular support enjoyed by the administration (of President Martin Torrijos), we expect the pension

reform to be approved by Congress during the second quarter of 2005”, states the CSFB in its Emerging Markets Economics Daily Report.

At the beginning of February, another investment bank, Wachovia Securities, returned Panama to the market weight level. In its February 7 bulletin, five days after the Fiscal Equity Law was enacted, Wachovia Securities recognized the progress attained (by Panama)”in addressing our concerns”, and expressed its confidence ithat the government will “soon proceed with the necessary social security reform”.

On the other hand, Standard & Poor’s Ratings Services announced on February 18 that “it revised its outlooks on its long-term sovereign credit ratings on the Republic of Panama to stable from negative”. In its rationale on the improvement, S&P analyst Lisa Schineller explainst that, “the outlook revisions reflect expected improvement in the government fiscal deficit and debt dynamics, following the recent passage of a fiscal reform package and prospects for social security reform.”

On Monday, February 21, the Emerging Markets Bond Index (EMBI) of Panama, which reflects the country risk level, reached its lowest level since October 1997, placing itself at only 279 basic points (2.79%) over the United States Treasury Bonds, which implies a better interest rate level, for the government as well as for the private sector.

It is worth pointing out that, before the beginning of the discussion on the fiscal package signed on February 2 by President Martin Torrijos, Panama bonds were close to 328 basic points (3.28%). This is equivalent to a sturdy drop of almost half a percentage point (0.49%) of the country risk level, according to the EMBI, during a very short period.