Nov. 9 (Bloomberg) -- Panama’s credit-rating outlook was raised to positive by Standard & Poor’s, putting the Central American country on the cusp of an investment-grade rating, as tax increases and faster economic growth help keep the budget deficit in check.

S&P boosted the outlook from stable on the nation’s BB+ rating, which is one level below investment grade and in line with countries including Egypt and Romania.

The Panama Canal, which is undergoing a $5.25 billion expansion project through 2014 to handle larger vessels, will help propel the country’s economy, S&P said. President Ricardo Martinelli’s tax reform will boost revenue by about 0.75 percent of gross domestic product, helping fund the country’s “ambitious program of public investment,” according to S&P.

The improved outlook is a result of Panama’s “fiscal responsibility and its strong growth prospects that are underpinned by the expansion of the Panama Canal,” said Boris Segura, a Latin America analyst at RBS Securities Inc. in Stamford, Connecticut. He forecasts Panama’s economy will expand 2 percent this year and 4 percent in 2010.

Panama’s general government deficit may shrink to 1.8 percent of GDP in 2010 from an estimated 2.2 percent this year, S&P said.

Credit-default swaps, contracts investors use to protect against non-payment, show Panama trading as investment grade.

Credit-Default Swaps

The cost of protecting Panama’s debt against default for five years is 1.42 percentage points, according to data compiled by CMA Datavision. By comparison, it costs 1.46 points to protect securities issued by South Africa and 1.50 points to protect bonds sold by Greece, countries that S&P rates at least three levels above Panama.

A basis point equals $1,000 on a swap protecting $10 million of debt against default. Credit-default swaps, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

“Panama could be the next sovereign in Latin America to obtain an investment-grade rating,” S&P said in a statement. “The positive outlook reflects our expectation that further fiscal consolidation and continued GDP growth could merit” an increase.

To contact the reporter on this story: Andrea Jaramillo in Bogota at ajaramillo1@bloomberg.net

Last Updated: November 9, 2009 16:25 EST