The Big Idea
Panama | Next steps
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Markets are anxious for progress on Panama’s efforts to permanently reopen the Cobre Panama mine. The sovereign debt has lagged investment grade peers, trading at a risk premium to proxies like Peru. Debate continues over the costs and benefits to the economy in terms of jobs, growth and fiscal revenues. Now comes efforts to build political support for re-opening and define a legal and financial framework. This is consistent with a base case where Panama’s investment grade rating gets reaffirmed at year-end and the risk premium unwinds, consolidating credit spreads in Latin American investment grade sovereigns.
Panama’s mining task force held its first press conference as part of the process for resolving the mining sector. The kickoff followed release of results from an environmental audit. Tight credit spreads reflect expectations of a formal re-opening over the next few months. The relatively high score on the environmental audit allow for some corrective measures and provide political leverage to proceed with re-opening. The political strategy is critical to effectively socialize and minimize the fallout. This may explain the more cautious approach at this week’s press conference.
There were no specific recommendations from the task force of the Finance, Commerce and Environmental Ministers on their first press conference. Instead, it was more of an opportunity to discuss the environmental audit results and the economic damage over the past two years. This represents the logical progression to first tackle the primary reason for the mine shutdown and then discuss the environmental and economic tradeoffs of the mining operations. The task force tallied the cumulative economic damage including:
- $6.5 billion in losses (5% of GDP) with a 65% decline in FDI, less inflows into the social security fund, 75% decline in exports,
- Higher regional unemployment (from 4% to 13% in impacted regions) and,
- The closure of 2,000 businesses (70% small and medium-sized).
Commerce Minister Molto provided some indirect guidance on a solution that respects the judiciary framework while sustaining sovereign control and explicitly stating that “turning off the lights and closing the door isn’t the solution.” The social acceptance of mine re-opening should also logically require administrative corrective measures recommended from the environmental audit.
The task force confirmed a year-end targeted deadline to present a proposal to President Mulino. This coincides with the two-year maximum review on the Moody’s negative outlook for the ‘Baa3’ rating. The rating agencies and markets alike will probably need to see confirmation and execution of the permanent re-opening well ahead of the November 2026 deadline. The economic benefits would also arrive sooner the confirmation of the official commitment to re-open the mine.
The consistent communication from the task force should gradually narrow the spread premium over the next few months. There is no room for error to sustain Panama’s investment grade rating and the virtuous cycle of higher trend GDP growth and lower trend fiscal deficit. This reflects higher fiscal revenues and incremental jobs, higher investment and lower borrowing costs. The next announcements should quickly pivot to the specific environmental, legal, and financial framework recommendations of the permanent re-opening.
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