Caribbean & Central America - December 2023

Panama’s supreme court (CSJ) has struck down a revised contract between the Panamanian government, led by President Laurentino Cortizo, and Minera Panamá S.A. (MPSA), the subsidiary of Canadian mining company First Quantum Minerals (FQM), regarding the copper mine Cobre Panamá, the country’s biggest mine. Ahead of the 28 November ruling, international ratings agencies had already downgraded Panama’s outlook amid uncertainty sparked by major unrest in response to the new contract.

Cobre Panamá is Panama’s biggest single private foreign investment, representing some 5% of the country's GDP and most of its export revenue. Wrangling over a new contract for the mine has been rumbling for years following an earlier 2017 CSJ ruling against the mine, which nonetheless had been permitted to continue operating while a new deal was being negotiated.  

An updated version of the contract was finally approved on 20 October by the 71-member unicameral legislature which guaranteed a minimum annual revenue of US$375m for the government from the mine and gave MPSA the rights to the mine for 20 years, with the possibility of extending it for a further 20 years. However, this led to nationwide protests beginning 23 October as civil society organisations called for the contract to be revoked citing environmental fears and other concerns (for more discussion of this unrest see our sister Weekly Report).

This led the country to be downgraded by various international credit ratings agencies. Most recently, on 7 November, Standard & Poor’s revised its outlook to negative from stable, citing uncertainty around Cobre Panamá and the moratorium on new mining concessions approved on 2 November by congress in a bid to placate protesters. The new law orders the government to reject all current and future requests for metal mining permits and renewals but would not have applied to the new contract. S&P was clear that “the uncertainty generated by these events could pose risks to the country's still favourable medium-term GDP growth prospects, potentially weakening its economic resilience”.

S&P predicts average growth of 4.4% over the next few years thanks to “a diversified economy and a robust pipeline of private- and public-sector projects.” The agency also forecasts a fiscal deficit of slightly more than 3% of GDP through 2026 and government debt of around 52% of GDP, underlining that these forecasts “incorporate the hit to government revenues from the potential cancellation of the contract with Minera Panamá”.

At the end of September, Fitch also downgraded Panama’s ratings outlook to negative from stable, citing “persistent fiscal pressures and uncertain prospects for consolidation”. Fitch highlights that the government has relied heavily on one-off measures and accounting manoeuvres to reduce the fiscal deficit in the last 12 months, with further pressure to come due to fuel and electricity subsidies and a rising interest bill. Fitch also predicts a wide 2024 budget that will break fiscal rule targets, as well as a gradual increase in debt in the coming years. And while the agency says it is forecasting “robust economic growth” of 6.5% of GDP this year, driven by continued high investment in sectors such as construction, it raises concerns of downside risks in the medium term as “uncertainty remains as to what other economic sectors will continue to drive high growth rates as the construction boom fades”.

While a negative outlook could be considered a downgrade warning, which would make it more expensive for the Panamanian government to borrow money on the international markets, Fitch analyst Carlos Morales told Reuters that Panama’s investment grade credit rating remains safe for now. “We would have to take a broader view of the government's capacity to improve its fiscal deficit,” Morales said in an article published 2 November, highlighting that the negative outlook took into account what he called “noise” around Cobre Panamá. Agencies like Fitch can take one to two years before making another move, according to Reuters.

However, another major ratings agency, Moody’s, also downgraded Panama’s debt to its lowest investment-grade rating on 31 October, citing social and political unrest as well as structural fiscal issues. A report by the UK’s Financial Times published on 4 November cites investment bank JPMorgan as saying that there was now a “sizeable risk” that Panama would lose its investment-grade rating. The FT cites JPMorgan analysists as saying that “If the contract is revoked, we think that the probability that Panama loses its investment-grade rating in the short term rises significantly, as lower trust in the country’s institutional framework would likely drive in lower investment and lower medium-term growth”.

Since the CSJ ruling on 28 November which deemed the new contract to be unconstitutional, the Cortizo government has announced that the mine will be closed. This has raised major questions given its significant contribution to the country’s economy. FQM has previously noted that the mine contributes “approximately 5% of Panama’s GDP and makes up 75% of the country’s export of goods” as well as “accounting for over 2% of Panama’s total working population”. On 20 November Economy & Finance Minister Héctor Alexander also warned that “necessary adjustments” to the proposed 2024 state budget were being made to reflect the expected drop in revenue.

• CSJ ruling

In the unanimous decision, the supreme court (CSJ) found that the new contract violated 25 articles of Panama’s constitution. These include, among a string of others, the right to live in a pollution-free environment, the obligation of the state to promote the economic and political engagement of indigenous and rural communities, and the state’s obligation to protect the health of minors.

It also leaves the country facing the prospect of international arbitration. Even ahead of the ruling, on 26 November the government revealed that FQM had informed it of its intention to start arbitration against Panama before the World Bank’s International Centre for Settlement of Investment Disputes (Icsid) under the Panama-Canada free trade agreement (FTA). This followed FQM’s announcement days earlier that it would be halting production at the mine, citing disruption to supplies as a result of unrest. In response to the ruling, on 1 December FQM announced that it had initiated arbitration before the International Court of Arbitration (ICC) to protect its rights under the 2023 concession agreement to which the Panamanian government had agreed. An FQM statement notes that Cobre Panamá has invested US$10bn in the mine and associated infrastructure, including a power plant, cross-country transmission lines, roads, and a port.

With the Partido Revolucionario Democrático (PRD) government having come under fire over its handling of the contract, it has increased the likelihood that the opposition will win general elections scheduled for 5 May 2024, with former president Ricardo Martinelli (Cambio Democrático, 2009-2014), who is running for his new party Realizando Metas, the current frontrunner, despite being sentenced in July to 10 years in jail on money laundering charges, which he continues to appeal. The charges relate to the acquisition of the Editora Panamá América media group, which prosecutors allege was purchased with money made from state contracts.

Martinelli called the current government “dysfunctional and non-existent” in a post on X on 16 November. “What Panama is going through is not an environmental problem or a contractual one linked to mining,” he wrote. “This is just the beginning of a huge social and political crisis stemming from the progressive decline in Panamanians’ quality of life. The current system is not working and either we change it ourselves or they will make us do it.” However, Martinelli has not released details on how he plans to deal with either the mining contract or the wider issues with the economy.

If Martinelli is elected it could raise further questions around Panama’s business climate due to his conviction. On the other hand, efforts to boost financial transparency have seen the country removed from the Organisation for Economic Cooperation and Development (OECD)’s Financial Action Task Force’s (FATF) grey list which could improve perceptions of corruption.

Money laundering watchdog rewards Panamanian efforts

On 27 October the FATF removed Panama from its grey list, which denotes countries with deficiencies in these areas. In a statement, the Panamanian government said that the FATF determined that it had “strengthened its anti-money laundering and counter-terrorist financing prevention system and implemented substantial regulations and actions that have allowed the country to take an important step forward in international transparency.”

Panama had been on the grey list since June 2019, and its removal means that the country could see increased foreign investment, as well as an uptick in activity in the insurance and securities industry as firms can establish offices in the country, according to the government statement.

Panama Canal

In its revised outlook published on 7 November, Standard & Poor’s also highlights potential shortfalls in dividends from the Panama Canal due to the impact of drought on the Canal's revenues. It highlights that the Canal recently announced it will gradually reduce the number of guaranteed booking slots per day, with 18 slots by February 2024, down from a previous expected cap of 31 slots (and compared with the Canal's maximum sustainable capacity of 38-40 transits per day). However, it notes that transfers from the Panama Canal Authority - which represented about 19% of general government revenue in 2022 - are likely to remain resilient at over US$2bn.