First Quantum mine, economic slowdown, Panama Canal water problems.

BY JOACHIM BAMRUD

Panama’s government bonds were the biggest gainers in Latin America on Monday after Jose Raul Mulino won the presidential election and pledged a “pro-private enterprise” government in his victory speech, Bloomberg reports. Meanwhile, Canada-based First Quantum Minerals will seek talks with Panama’s incoming president in an effort to resolve the dispute that shuttered the Cobre Panama copper mine, Bloomberg reports.

Mulino will succeed Laurentino Cortizo, a critic of both First Quantum and the US-Panama free trade agreement, who has been in power since 2019.

Panama’s new president is a founding partner of the Fábrega, Molino y Mulino law firm who has held several top government jobs, including security, justice and foreign minister. He is a graduate in Law and Political Science from the Santa María La Antigua University in Panama and holds a master’s degree in Maritime Law from Tulane University.

The election victory ends months of political uncertainty after former president Richardo Martinelli was convicted of money laundering and ended up seeking asylum at Nicaragua’s embassy in Panama City. Mulino was Martinelli’s running mate and replaced him as the presidential candidate. Many voters saw Mulino as a proxy for former  Martinelli, Reuters reports.

Will Mulino, who assumes office on July 1, be able to reach a deal with First Quantum to keep its mine despite local pressure from opponents? What will be Mulino’s key economic challenges? To what degree will Mulino be able to return Panama to its pre-Cortizo investment-friendly status?

Latinvex asked two experts: Jose Enrique Sevilla-Macip, country risk analyst, S&P Global Market Intelligence and Jolyn Debuysscher, Country & Sector Risk Expert for European credit insurance group Credendo.

THE FIRST QUANTUM MINE

Latinvex: Will Mulino be able to reach a deal with First Quantum to keep its mine despite local pressure from opponents?

Sevilla-Macip: S&P Global Market Intelligence currently maintains our assessment that First Quantum’s mine in Panama will not reopen at least for the remainder of 2024. During the campaign trail, Mulino said several times that he wouldn’t go against the Supreme Court’s ruling nor the social opposition against the mine, meaning he is unlikely to proactively seek the mine’s reopening. Since he is essentially in favor of private investment as the main engine of growth, we believe he would be willing to reach a deal with First Quantum if there is a significant perceived shift in public opinion on the issue, but so far we do not see any indicators pointing that way. 

In addition, since any new mining concession is now banned by law, a new contract with FQ will probably require legislative action, and Mulino has only 13 out of the 71 seats in the National Assembly, so passage would require significant compromises with opposition parties and independent lawmakers.

Debuysscher: Mulino has not shared his views on if he wishes to re-activate the mine during the election campaign. Given the economic benefits of the copper mine, I believe he will at least engage in a discussion with First Quantum. The copper mine has significant economic benefits for Panama: it was the country’s second largest source of exports and accounts for a tenth of total current account revenues and around 4% to 5% of GDP. In addition, it carried significant fiscal advantages, such as annual royalties amounting to 0.5% of the GDP while the potential costs of international arbitration with the Canadian company could be substantial, although no specific figures have been revealed. Therefore, the most likely scenario is that negotiations will start. However, considering the intense resistance from the public (which led to the most significant unrest in decades prior to the mine being declared unconstitutional), the chances of the mine being reactivated in the near future appear slim.

KEY ECONOMIC CHALLENGES

Latinvex: What will be Mulino’s key economic challenges?

Debuysscher: The low water levels in the Panama canal will be a top priority. The canal typically serves as the country’s largest source of exports, contributing to a fifth of the current account revenues. Unfortunately, due to climate change, reduced ship transit caused by low water levels is likely to become a frequent phenomenon. Climate change is expected to bring more extreme El Nino´s in the future – as witnessed in the last year – which lead to very low water levels in the Panama Canal. Currently, there are two main plans proposed to curate the problem: a $3 billion pipeline to transport water from Lake Bayano or a $1 billion new dam in the Indio River basin. If Mulino picks one of both options, it will likely pass through parliament and Congress given the importance of the project.

Another key challenge will be compensating for the decrease in current account revenues due to the suspension of the copper mine. As a result, the country’s solvency ratios (particularly the ratio of total external debt to current account revenues) are showing signs of deterioration. Moreover, partly because of the losses in current account revenues, the current account balance is expected to fall into a moderate deficit of -2% of GDP  this year compared to a surplus of 2% of GDP last year. On top of that, the halt of the copper mine has also contributed to a slowdown in economic growth, which is projected to be 2.5% this year, compared to 7.3% last year.

Sevilla-Macip: Mulino pledged to return to the accelerated growth years under former president (and his mentor) Ricardo Martinelli (2009-2014), when Panama’s economy grew by an average 7.7% per year according to S&P Global Market Intelligence data (compared to 3.7% yearly average from 2014 to date). His plan to do so is by boosting large infrastructure projects. The most relevant are already under way – Panama City’s third metro line and a fourth bridge over the Panama Canal. In addition, he would be likely to push for a quick legislative approval for a project to expand the Canal’s watershed (most likely a new dam, which the Panama Canal authority estimates would cost $900 million) and reduce its exposure to drought conditions. Most opposition parties also favor this project, so passage in the Assembly shouldn’t be much of an issue.

INVESTMENT CLIMATE

Latinvex: To what degree will Mulino be able to return Panama to its pre-Cortizo investment-friendly status?

Sevilla-Macip: Beyond the issue with the FQ mine, which turned out against the government’s plan, we do not assess that Cortizo branded an unfriendly policy towards investment. The main indicators to watch would be Mulino’s capacity of building working majorities in the Assembly to push legislation forward, as well as if he is able to maintain the backing of Martinelli’s support base (and thus a strong political capital).

Debuysscher: The episode surrounding the unconstitutionality of the copper mine has hurt Panama’s standing with international investors. How Mulino will tackle the copper mine will be important for many investors. That being said, Panama still has important advantages. It is a relatively stable country with a low political violence risk (Panama is classified in category 1/7 for Credendo´s political violence risk, the best risk category). The expropriation risk is also still relatively good with expropriation risk classified in category 3/7 (category 7/7 is the worst risk classification). This risk classification takes into account the risk of policy change, risk of legal protection and risk of expropriation sensu stricto. The outlook of this risk classification is currently stable as Mulino has promised to run a pro-business and pro-investment administration as his predecessors. Lastly, Panama has relatively sound macro-economic fundamentals, public finances are still deemed manageable and the economy is relatively diversified (explaining why the country has a moderate medium to long term (MLT) political risk classification of category 4/7). That being said, the MLT political risk rating (4/7) has a negative outlook. A possible downgrade will depend on the duration of the mine’s closure and of the canal’s low water levels, among others, and highlight the importance of tackling these key economic challenges in my view.

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