Should investors depend on Panama's Fitch ratings?

Today Fitch rating agency came out with a BB+ positive rating on Panama mostly weighted on the canal expansion project driving the economy. This of course helps Panama in borrowing money for the canal and any other projects it may want. Don't get me wrong, it is great to have good credit and I applaud Panama if they indeed deserve the rating but, given the track record of Fitch over the past year I question how much due diligence they do on the countries they rate. After all, Lehman Brothers, Bear Stearns, AIG and Merril Lynch were among the financial companies which went bankrupt even after being positively graded by Fitch.

""Credit-rating agencies use their control of information to fool investors into believing that a pig is a cow and a rotten egg is a roasted chicken. Collusion and misrepresentation are not elements of a genuinely free market " - US Congressman Gary Ackerman"

"The smooth functioning of global financial markets depends, in part, upon reliable assessments of investment risks, and Credit Rating Agencies play a significant role in boosting investor confidence in those markets.The above rhetoric, although harsh, beckons us to focus our lens on the functioning of credit rating agencies. Recent debacles, as enunciated below, make it all the more important to scrutinize the claim of Credit Rating Agencies as fair assessors."

When we read the martketwatch press release from Fitch on Panama we get these statements:
Panama's macroeconomic and structural strengths will continue to set it apart from 'BB' peers.
Higher savings and investment, partly due to the ongoing Canal widening project, should help Panama maintain stronger economic growth this year relative to the global slowdown in 2001/02 and also compared to regional peers. As such, Fitch believes that Panama should be able to absorb future increases in public debt related to the expansion of the canal without precipitating downward pressure on the ratings given its growth prospects and the expectation that fiscal discipline will be maintained even during an election year.

They go on to say;
"Panama's key credit metrics continue to strengthen, with growth averaging 8.8% for the five years ending in 2008, one of the highest rates in the world," according to Theresa Paiz Fredel, Senior Director in Fitch's Sovereign Ratings team. This has contributed to the convergence of per capita income with that of low investment grade sovereigns. "As a result of Panama's robust growth performance, as well as its improved fiscal and external position, the country is well situated to face a reduction in external demand and international capital flows," added Paiz Fredel.

Ms. Fredel obviously is not looking beyond government provided date and press releases to come up with these and other such statements.

She must not be considering the fact that Panama's debt stands at $11 billion and the canal expansion will easily raise this by between 50-100% within 7 years. All the while the world economy is sinking further and shipping is dropping dramatically. The canal commission promised the people during the referendum that the money would come from higher tolls and an ever increasing demand for transits. Now it all will have to come from borrowing which will put a severe crimp on public spending on important areas such as health and education for the population of the country. All this when cracks are showing in just about every segment of the countries financial landscape. The real estate market is dead, layoffs in construction will begin in earnest in the coming months. Projections of growth have been cut in half twice and defaults on consumer credit are climbing fast. All of these billboards are clear for any ratings agency to see if they took the time to look beneath the official B.S. coming from the ACP and PRD.

Here is what Senator Pementil from the Phillipines had to say about the recent Fitch ratings for their country.

Pimentel: How reliable are credit rating agencies?
Senate Minority Leader Aquilino Q. Pimentel, Jr. (PDP-Laban) said the people should not be lulled into believing that the national economy is in a fine shape just because it received positive marks from international credit agencies.

Pimentel made this comment following reports that the London-based Fitch Ratings has maintained its stable outlook for the Philippines, saying its economy is "reasonably healthy" despite the crisis in global finance.

Pimentel said this comment smacks of an unfounded flattery considering that the Arroyo administration was forced to abandon its zero budget deficit goal in 2008 due to the failure of revenue agencies to meet collection targets.

He said the amount of public debt hardly decreased even if the government was religiously repaying its loans because it kept on contracting new borrowings.

Sounds like Panama to me.