The Big Idea
Panama | Tough going
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The mechanics of finding a compromise between the US and Panama look complicated. The first high-level diplomatic meeting between the two countries occurs during the imminent arrival in the region of US Secretary of State Marco Rubio. There are no obvious proposals on the table between the countries with the political tensions representing an inconvenience and a distraction from Panama’s still active domestic policy agenda, and ultimately, requiring higher policy risk premium on credit spreads.
The recent tensions between the US and Colombia didn’t last long, with the tariff retaliation threat from the Trump administration getting an immediate response. It also shows a much more activist stance from the Trump administration to follow-through on some of more radical proposals. The region is now quickly dividing between countries fully aligned to the US policy ideology such as Argentina and El Salvador, countries proactively cooperative such as Guatemala and Ecuador and then everyone else forced to cooperate. Panama’s situation is maybe the most worrisome as it’s not about immigration but rather the control of the canal.
It’s not clear what’s on the agenda in the first diplomatic Panama-US meeting with the arrival of Secretary Rubio. From the Panama perspective, there is no legal, political, economic, or social flexibility to concede any control of the Panama Canal. The canal is integral to the identity and the economy of Panama with huge revenues at 3% of GDP to finance the annual budget. It’s a nonstarter to negotiate any takeover of canal operations. There is also no realistic criticism of the integrity and the neutrality of the canal management under the Panama Canal Authority. The logical strategy from Panama is to reassure the operational independence and safeguard the control of the Panama Canal Authority.
There have been no whispers of any possible concessions by Panama. Instead quiet lobbying continues across various international agencies to safeguard the control of the canal. Panama President Jose Raul Mulino may try to offer immigration concessions as a first offer and attempt to shift debate away from the canal. It’s not clear if this first diplomatic engagement will lower the tensions and allow for a reasonable discussion. It’s not encouraging that the Senate is holding a hearing on the Panama Canal’s impact on US trade security. If the Trump administration insists that Panama is in violation of the neutrality of the treaty, the next options are not ideal. The impasse may force retaliation from the Trump administration and quickly force negotiations on the HK concessions of the two ports aligned to the canal. The Mulino administration has already conducted a recent audit of the ports. There has been a clear US political strategy to discourage China influence throughout the region.
The initial proposals emerging from the Senate hearing include a joint task force for canal security and an end of Chinese control of the two ports. Neither of these proposals are favorable for Panama, with high political costs and potential economic costs if a divestment of China-related foreign direct investment discourages future foreign direct investment inflows. The potential stalemate may also encourage the near-term risk of US economic retaliation. The final compromise may include some indirect US oversight that reassures neutrality as well as Chinese divestment. However, these high stakes should require lengthy negotiations. This implies a higher policy risk premium and a distraction from more constructive plans to re-open the First Quantum copper mine and tackle a high structural fiscal deficit. Colombia underperformed on the tariff threat headlines with the markets yet to anticipate the implications across the region with Panama next on the frontlines. This suggests still a risk of relative underperformance, and distinct to Colombia, not the same quick solution.
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