Panama is likely to be upgraded to investment grade by at least two of the three main rating agencies over the next year.
BY KATHRYN G. ROONEY
Panama has weathered the global economic storm better than even we forecasted and we think that 2009 GDP expansion will be stronger than our previous already above consensus call of 2.0 percent. Indeed,
GDP expansion will likely come in more than a full percentage point higher at 3.2 percent, the highest growth rate in Latin America this year. We think average annual growth in the second half will be at least 4 percent. (…)
THE NEXT INVESTMENT GRADE
The Panama sovereign capitalized on positive market sentiment after the recent move to positive outlook from S&P, indicating that the sovereign is on the verge of an investment grade rating from that agency. Panama has had a positive outlook from Fitch since January of 2008 and is currently rated high double-B by all three major rating agencies (Ba1/BB+/BB+). This move by S&P does not come as a surprise, as Panama is one of the strongest names in the region and one on which we have been bullish for much time.
[On November 16] Panama issued $1 billion of a 10-year bond of an approved amount of $2.5 billion. The use of the proceeds will be primarily for the refinancing of internal debt obligations as well as for other general budgetary purposes.
President [Ricardo] Martinelli’s administration has a significant infrastructure agenda as well, for which the proceeds are likely to be used. The bond was issued at a spread of 187.5bps over 10-year USTs and is trading wide to comparable maturities in Peru, Mexico, and Brazil. We think there is room for Panama to converge on some of these names over the longer term. Comparable 10-year bonds are: Peru at a bid spread of 166bps, Mexico at 163bps, Colombia at 193bps, and Brazil at 133bps.
We view this emission favorably as Panama is a strong fundamental credit and at the same time has been a generally illiquid name, so we recommend adding to a portfolio when there is the opportunity. We view the current spread levels in the 10-year region versus peers as fair in the short term with a longer term bias for spread compression versus comparables as Panama is upgraded by at least two of the three main rating agencies over the next year and in the run-up to the successful completion of the canal expansion. Issued at par, according to our trading desk these bonds are now trading at 100.75-100.95 at mid-day today.
On the economic front, Panama has been posting relatively strong economic growth numbers. Second quarter GDP growth came in better than expected at +1.9 percent with first quarter revised up to +3.0 percent, bringing first half growth to 2.4 percent year-over-year. First half growth, as is usual for Panama, was spread across several sectors, including construction at 12 percent year-over-year, transportation and communications (canal-related and port activity) at 8 percent year-over-year, and mining at 13 percent year-over-year.
Panama has weathered the global economic storm better than even we forecasted, and we think that 2009 GDP expansion will be stronger than our previous already above consensus call of 2.0 percent. Indeed, GDP expansion will likely come in more than a full percentage point higher, at 3.2 percent, the highest growth rate in Latin America this year. We think average annual growth in the second half will be at least 4 percent.
According to the Panama Canal Authority (ACP), the canal expansion project is on time to be completed by 2014 if not earlier and under budget (on average some $300 million below budget in every phase so far). The canal offers a $50 million incentive to finish six months early and there is a $50 million disincentive if it runs more than six months late, according to the ACP. There is very low risk of any delays due to labor issues: There are six labor unions working in the expansion project and all of these contracts have been negotiated through 2014 and 2015.
Canal revenues for the period of January through July 2009 were up 9% annually despite the global economic crisis. Traffic though the canal, however, dropped off during that time period (-4.5 percent year-over-year) but pre-set increases in toll fees have compensated for lower volume. Nonetheless, in the middle of the crisis last year the canal was able to get $3 billion in multi-lateral loans to finance the expansion with a 10-year grace period and 20 years to pay the loan. There is no government guarantee on the loan; it is to the ACP itself. As global trade activity rebounds, so too will canal revenues.
The canal is a key revenue contributor for the government and we think this is only set to grow in importance in coming years. According to the ACP, for every Panama Canal ton, $1 is paid to the government. Some $760 million will be given to the government this fiscal year, which has been the average contribution to the government over the last four years. Meanwhile, a minimum of $528 million must be paid to the government per year during the construction phase. The canal is clearly a key part of the fundamentally strong Panama story; indeed, in our view, after this expansion, Panama will become the logistical hub of the Americas. The Panama Canal already accounts for 5 percent of global trade activity. It is a massive and unique asset to the sovereign and its benefits will be reaped over the course of many years.
Kathryn G. Rooney is Senior EM Macroeconomic Strategist at Bulltick Capital Markets. This column is based on an excerpt of a commentary she wrote to clients. Republished with permission.