The Big Idea
Panama | Trip notes
This material is a Marketing Communication and does not constitute Independent Investment Research.
My recent trip to Panama came at a moment of rising optimism about reopening the Cobre Panama copper mine this year. This no longer seems like a distant reality, with increasing motivation to find legal and political solutions. This would be a game-changer for the country’s fiscal accounts. Holding onto an investment grade rating would not only sustain current valuations but maybe even take spreads tighter. My nervous neutral shifts to a more confident neutral or maybe even a slight overweight based on a favorable combination of technicals and fundamentals.
There was a clear mood shift following Panama’s fiscal adjustment last year. This optimism may pick up momentum with the administration of President Jose Raul Mulino motivated to avoid the loss of an investment grade rating during the extended Moody’s review this year. There has been debate about policy options over the multi-year adjustment to reduce the non-financial public sector deficit from 4% of GDP to 2%. The mine re-opening seemed like a distant reality with more frequent references last year on fiscal reform. However, this may now be shifting as motivations align for a “fast-track” re-opening of the mine.
There hasn’t yet been a proposal from the economic team on fiscal reform. Minister of Economy and Finance Felipe Chapman suggested last year that he’d present a fiscal reform to congress in the first quarter this year. This reform would attempt to reduce budget rigidity by lowering the mandated funding in education and other earmarked sectors like public salaries. This doesn’t come without political costs. There is a history of social unrest that may require a larger instead of a smaller budget. It’s also not clear whether President Mulino has the majority support to tackle this controversial reform, with political fragmentation and lower political capital after the pension reform last year. There is still the possibililty of presenting budget reform over the next two months; however, many local market participants are now shifting towards a Plan B scenario of the mine re-opening for a subsequent positive shock to growth and the fiscal accounts.
The key change from November 2023 to February 2026 has been a clear turnaround on motivations across various sectors:
- The government needs revenues after a serious cutback on the budget with decreasing flexibility
- The labor union strength has weakened through the disqualification of the powerful SUNTRAC construction union.
- The opinion surveys have shown a more supportive shift at 50% to 60% for re-opening the mine with social appreciation for employment opportunities and budgetary relief.
The anecdotal evidence shows no significant social pressures at CAMIPA (Panama Mining Chamber) conferences and an effective public relations strategy to advertise for employment at the mine. The “care maintenance plan” offers a unique opportunity to temporarily re-open the mine to process the unfinished concentrate stockpile and address the maintenance issues that would expedite full production under a permanent re-opening scenario at the end 2026 or in mid-2027.
The release of the clean environmental audit in early April would kick off the public debate about the mine re-opening. This would hopefully diffuse the social and legal tensions. President Mulino has said that he would like to resolve the mine situation before June 2026. There has been reference to informal discussions over the past few months about a specific proposal for a legal framework. This would convert the invalidated concession into a different legal structure with a state-owned entity (Codemin) that would contract First Quantum as the mining operator. This would provide maybe a temporary solution until they seek congressional support for an industry-wide legal framework. There are serious budget motivations for Panama to negotiate better profit-sharing terms that would then imply much higher royalties at much high copper prices ($8K/t to $13K/t). It’s not unrealistic to think 0.5% of GDP in annual royalties could reach maybe 1.5% to 2% of GDP for budget support.
This would be a game-changer for the budget and the investment grade rating. The political and social acceptance of the mining sector would provide ideal timing to coincide with the Moody’s rating review window through May and latest through November 2026. The investment grade criteria hinges on a multi-year adjustment process with a clear path towards a lower NFPS fiscal deficit from 4% to 2% of GDP necessary to reduce the debt ratios (65% of GDP in 2025). The mine re-opening would provide a less controversial budget adjustment that would also coincide with upside growth potential (mine represents 5% of GDP and 30,000 jobs). This growth momentum may also benefit from the ambitious Panama Canal Authority’s $8.5 billion capital expenditure program on Indio River project, concession of two new ports, LPG gas pipeline and land canals that maybe boosts 4% trend GDP growth to 5% in 2027.
This supportive fundamental backdrop comes with supportive positioning across the investor community. The $3 billion debt issuance on new 8- and 12-year benchmarks is solely for financing the debt buyback operation with net zero issuance. This is unusual and defends the strong demand-and-supply technicals of the US dollar Eurobond market with no new supply since February 2024. This new issuance doesn’t provide the opportunity for investors to cover their underweight positions with prospects for even tighter yields that may feed into the halo effect for sustaining their investment grade rating.
It may seem premature to launch a pure debt liability management operation without first completing the financing program. However, this maybe reflects the confidence of sustaining their investment grade rating while benefiting from strong external appetite with unprecedented demand on record emerging markets issuance this year. This debt liability and funding strategy may reinforce the optimism on lowering the cost of funding as well as seeking some liquidity and solvency benefits on targeting higher coupons on the front end and lower cash price bonds on the long end of the curve. The possibility of positive headlines and higher conviction sustaining the investment grade rating may still compress yields tighter and align closer to Peru as the best regional comparison.
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