The Big Idea
Panama | Financing plan
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The market has focused a lot on Panama’s budget but less on the financing options. Maybe this is because local markets don’t worry about a budget that they don’t finance. The financing strategy for next year relies almost fully on external markets with a purposeful shift away from locals. The amount of external funding represents a significant $8.6 billion with bias to the upside if revenues disappoint and officials don’t downsize spending. Favorable supply-and-demand explain Panama’s resilient bond performance this year, but this could shift dramatically next year. The debt could underperform into next year’s large funding program.
There has been unusual relief this year on the strategy shift to short-term bank loans. This funding diversification was critical to relieve pressure from the Eurobond curve and prioritize a lower cost of funding as a critical input to credit rating sovereign models. The local treasury bills have provided generous funding capacity above the initial limits and compensates for the lower than programmed local note issuance. The overall local funding this year is around 35% of the program with the 65% majority from external sources. There has been almost no funding from multilaterals and no Eurobond issuance with all of the external funding from bank loans. The gross issuance on bank loans is now close to the $6 billion shelf ceiling.
How long will the bank loan market continue to fund the budget? The next steps will be interesting on whether Panama chooses bank loans or reenters Eurobond markets. The bank loans are not typically a substitute for Eurobonds, especially for those countries with larger borrowing needs. The intrinsic problem is a buildup of short maturity amortizations and higher rollover risk that dampens demand and increases the cost of funding. The ~9% of GDP in gross funding needs (with upside bias on larger fiscal deficit) comprises a larger proportion of amortizations from 2026 through 2029 with 35% of the debt stock rolling over in the next 5 years. This would suggest a logical return to the Eurobond markets next year with longer tenors to lengthen the debt maturity profile and lower rollover risks.
The hefty $8.6 billion in external funding needs might be slightly lower on some multilateral loans; however, this would still leave around $8 billion to fund from the external markets. This would make Panama one the largest sovereign issuers in the region even exceeding the upsized funding plans from Colombia. This upsized funding could also meet lower demand from deindexation of crossover investors and divestment from real money investors. There are only a few options:
- Decrease the gross funding needs (fiscal restraint),
- Diversify funding away from Eurobond markets to broaden supply options (collateralized external issuance/repos like Colombia) or
- Seek incremental domestic demand via financial repression (broaden pension funding or local bank funding capacity like El Salvador).
The incremental demand from locals seems like the least likely option with CSS assets dominantly invested in sovereign and quasi-sovereign holdings and local banks unwilling to much increase their sovereign exposure this year. What does it say when the 2026 budget assumes almost zero issuance from local markets? This suspends prior efforts to develop local markets. If we assume no political capital or budget flexibility for fiscal restraint and minimal if any domestic demand, then funding diversification is the next realistic challenge There could be some temporary relief from additional diversification to broaden financing alternatives and limit the supply penalty on Eurobonds. However, the muddling through on incremental financing diversification is typically a short-term strategy that doesn’t avoid consecutive rating downgrades on the larger debt stock from chronic fiscal deficits. The only feasible longer-term solution is lower gross funding needs on compliance with the fiscal rule. There is no obvious substitute for Eurobonds as the primary funding vehicle with large gross financing needs of maybe 9%-10% of GDP over the next few years through the spike in amortizations through 2029. This will merit an increasing liquidity penalty for Eurobonds unless Panama tackles its fiscal deficit.
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