Panama Credit Rating Cut to Junk by Fitch Amid Mine Spat
(Bloomberg) -- Fitch Ratings stripped Panama of its investment-grade credit rating as the closure of a key copper mine last year added to the country’s fiscal worries and risks undermining growth prospects.
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The Central American nation’s credit score was cut to BB+ from BBB- on Thursday, with a stable outlook. That’s in line with Vietnam, Colombia and Serbia.
A downgrade by Moody’s Ratings is expected for the second half of the year, according to Morgan Stanley strategist Emma Cerda.
A junk rating from two out of the three major rating companies would trigger about $4.5 billion in forced selling by investment-grade dedicated funds, with notes due in 2031, 2034 and 2036 being the most vulnerable to such move, she said.
The timing for the Fitch downgrade — Panama holds presidential elections in May — surprised investors and sent bonds slumping, with notes issued by the country occupying all 10 spots among the worst performers in emerging markets. Debt due in 2036, some of the most liquid, fell 1.5 cents on the dollar.
Bonds from the Central American nation had been lagging peers since widespread protests led to the shuttering of the $10 billion Cobre Panama, which is owned by First Quantum. Some analysts had been turning less negative on the notes more recently as they waited for more clarity ahead of the vote.
‘Tense’ Backdrop
Fiscal and governance challenges “have been aggravated by the events surrounding closure of the country’s largest mine,” Fitch said in a statement, citing large fiscal deficits and disappointing revenues.
While the winner of the nation’s presidential elections in May should make efforts to address the fiscal challenges, Fitch warned of an expected slowdown in economic growth and a “tense” social backdrop likely constraining scope for action. “Re-building fiscal space and credibility would take time,” it added.
Panama had been rated investment grade by Fitch since 2010. Moody’s rates the country’s debt Baa3, the lowest investment grade level, while S&P Global Ratings scores it a notch higher, at BBB.
“I’m a bit surprised by the timing so close to the election,” said Katrina Butt, a senior economist at AllianceBernstein in New York. The downgrade, though, was “inevitable given the trajectory of economic fundamentals,” she added.
--With assistance from Maria Elena Vizcaino.
(Corrects to reflect corrected estimate from Morgan Stanley in fourth paragraph of story originally published March 28.)
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