Panama’s debt tumbled this week, approaching its lowest level in 14 years, on mounting speculation that the Central American nation is heading for a downgrade.
(Bloomberg) — Panama’s debt tumbled this week, approaching its lowest level in 14 years, on mounting speculation that the Central American nation is heading for a downgrade.
Fitch Ratings assigned the Central American nation a negative outlook last week, citing fiscal pressures — from subsidies to costlier debt service — and uncertainty over the government’s ability to address the issues. A reduction would leave the nation with its first junk rating since 2010.
The report added to worries after lawmakers suspended a debate over a key mining contract last month with First Quantum Minerals Ltd. And while that is happening, a drought has forced the government to cut traffic through the Panama Canal.
“News like that makes you wonder what sort of creative measures they might have to take to meet their fiscal targets,” said Kate Moreton, an analyst at Columbia Threadneedle in New York. “Then you get this negative outlook, and things start to look a little more precarious.”
A note due in 2036 has sunk 9 cents to 95.9 cents on the dollar since the end of August, near the lowest since 2009, according to indicative pricing compiled by Bloomberg. Meantime, notes due in 2054 have fallen 14 cents over the same period to 88.3 cents on the dollar.
Fitch scores Panama just one notch above junk, while S&P Global Ratings and Moody’s Investors Service have it a level higher. If two of the three major credit assessors cut it to junk, it becomes a so-called fallen angel, forcing funds that only invest in higher quality debt to ditch the notes.
The extra yield investors demand to hold Panama bonds over similar US Treasuries has jumped more than 30 basis points since the end of August, as the drought first forced authorities to restrict traffic on the canal. The JPMorgan Chase & Co. gauge for investment-grade sovereign spreads narrowed almost the same amount in that same period.
Jared Lou, a money manager at William Blair International in New York, said the debt is becoming more interesting after the recent rout, but the threat of a downgrade looms.
“There’s a chance that this one does eventually become a fallen angel,” he said.
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