Panama at a Crossroads: Credit Downgrade Shakes Market Confidence

Fitch Ratings has downgraded Panama’s credit rating to BB+, removing its investment grade status due to the closure of a major copper mine last year.

This event heightened fiscal worries and could dampen growth prospects. The nation’s rating now matches that of Vietnam, Colombia, and Serbia.

Morgan Stanley’s Emma Cerda anticipates a similar move from Moody’s later this year.

Such “junk” status from two leading agencies might force a $4.5 billion bond sell-off, especially affecting bonds maturing in 2031, 2034, and 2036.

Just before Panama’s presidential elections, the downgrade’s timing startled investors, triggering a sharp decline in bond prices.

This has placed Panama’s bonds among the worst-performing in emerging markets.

Panama’s financial challenges have been mounting since protests led to First Quantum’s shutdown of the Cobre Panama mine.

Yet analysts have recently softened their stance on the bonds, awaiting clearer signals post-election.

Fitch notes that Panama’s fiscal and governance issues have worsened due to the mine’s closure, pointing to significant fiscal deficits and poor revenue performance.

The upcoming presidential elections offer a chance for fiscal reform, but Fitch sees limited room for maneuver due to slow growth and social tensions.

Rebuilding fiscal credibility will be a lengthy process. Since 2010, Panama has maintained an investment-grade rating with Fitch.

Moody’s still rates it at the investment-grade threshold, whereas S&P has slightly higher.

Background

First Quantum’s market value plummeted by over half after Panama unexpectedly ordered the Cobre Panama copper mine to shut down last November.

Among the globe’s largest, this mine was crucial for First Quantum, generating around 40% of its revenue.

After the Panama court ruling, First Quantum sought $20B arbitration after protests, shaping a new strategy.

This amount mirrors the original investment’s market value, with Pascall suggesting the potential for even higher claims.

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