The closure of a major copper mine, as well as the increase in public spending during the covid-19 pandemic, is taking its toll on Panama. The analysis company Fitch Ratings announced on Thursday that it cut the rating of its sovereign bonds one notch, from BBB- to BB+. The next Government, to be elected in the May elections, will have a restricted margin in its public finances, the rating agency warned.
“The downgrade of Panama's rating to 'BB+' reflects fiscal and governance challenges that have been exacerbated by the events surrounding the closure of the country's largest mine,” said Fitch's statement released Thursday. At the end of last year, citizens organized massive protests to reject a contract extension that the Canadian mining company First Quantum Minerals had achieved. The discontent was such that it led to its cancellation and the definitive closure of the mine, which contributed 1% of the world's copper production.
“Large fiscal deficits and poor revenue performance have driven some of the largest increases in public debt/GDP and interest/revenue among peer countries since 2019 before the pandemic,” Thursday's report said. “This has limited the space for countercyclical policies that was already more limited in the context of dollarization, and poses greater vulnerability in light of the Government's strong dependence on external markets for its financing. The closure of the Minera Panamá copper mine further complicates the fiscal outlook and highlights growing governance challenges, in Fitch's opinion,” added the analysts who authored the report.
While S&P Global rates the country's debt BBB, Moody's Ratings gives it the lowest level of investment grade, Baa3. Markets consider two out of three “junk” ratings to constitute a downgrade from official investment grade. Countries seek to have their sovereign debt bonds, which are listed on global markets, rated investment grade since it translates into lower interest rates.
The closure of the mine will significantly affect growth this year, given that it represents around 5% of the Gross Domestic Product and 7% of current external income, Fitch estimates. It will also deprive the government of 0.5% of GDP in expected annual royalties and raises the threat of costly arbitration. The country will hold presidential elections in May.
“Regardless of the election outcome, it remains uncertain if and when the mine will be able to reopen,” Fitch specialists wrote. “And this is unlikely to happen quickly, as it would require a new administration to achieve a major shift in popular sentiment and overcome legal hurdles, such as overturning a recently enacted mining moratorium.”
The country is suffering a second crisis since drought hit last year. The Panama Canal, through which products valued at $270 billion transit each year, has had to limit the number of ships crossing each day due to low water levels. The Canal Authority has advanced that income losses in 2024 due to the crisis will be between 500 and 700 million dollars (between 462 and 648 million euros).