economy

S&P rates Panama's bonds investment-grade
by Eric Jackson

So, what's the difference between BB+ to BBB-? If it's a Standard & Poor's sovereign bond rating, it's the crossing of a frontier between junk and investment-worthy securities. It's the government's ability to borrow money at lower interest rates. It's Panama being rated by most of Wall Street now as part of  a club that includes Brazil, Mexico, Chile, Peru and by some measures Colombia and Uruguay, and that excludes the rest of the countries in the region.

So why does Standard & Poor's, like Fitch earlier this year and very likely Moody's in the months to come, rate Panama's bonds as less risky? It's for a variety of reasons, some solid, some questionable.

The Panama Canal expansion is a large injection of money that's rippling through the economy and will be until 2014 or so. It kept our economy from contracting with that of the rest of the region in the immediate aftermath of the US financial crisis --- even though, unlike the bankers assured us, we were affected. There are also a bunch of other public works projects --- the Metro commuter train project, the Cinta Costera extension, the finishing of the autopista into Colon city, the metro area sewer system, some contemplated new airports, the controversial "anti-drug aeronaval bases" and so on --- to bolster the economy.

On the private side, far more questionable is the housing construction boom. At the upper end there are some Colombian and Venezuelan buyers, but what's mostly happening now is that overpriced buildings are being finished and left nearly empty. To some of the investors this does not matter because it's all an elaborate way to launder drug money, but by and large the bubble has burst and the consequences of it have been felt throughout other related economic sectors like advertising. On the other hand, there still is some activity building houses for a growing young working class and middle class population in the matchbox housing tracts outside the city centers. To the extent that bond raters or other observers take the Panama City skyline as a major indication of our economic condition, they err.

Slowly recovering, along with the rest of the surrounding region, from a major hit in the past couple of years, are the ports, railroad and Colon Free Zone import/export wholesaling and warehousing industries. Because the price of oil is down our best customers, the Venezuelans, are buying less. Brazil's economic rise means they are buying more. But what repercussions we will feel from the Euro zone crisis remain to be felt. (On the public sector side of this, canal usage is down to the same extent the regional economy is, but higher tolls have kept PanCanal revenues up. But those higher tolls have driven a few shippers to other routes, and as Arctic routes thaw look for that tendency to grow.)

So, in an economy led by public spending, shouldn't debt be a big concern? Now we get to the most questionable postulates of the bond rating agencies' forecasts. There are hydroelectric dams being built, which have a generating capacity of more than three times what Panama consumes. Some of the power may be exported to nearby countries, but the bet is based on two assumptions:

And then there are the mining projects.  The lawless Petaquilla gold mine is now exporting gold, mainly to Canada. Panama takes a small cut that would not cover the costs of fixing the environmental damage --- but the Martinelli regime has no intention of cleaning up the pollution or enforcing environmental laws. Several other mining projects are on Martinelli's front burner, including the most controversial of all, the concession of Cerro Colorado in the Ngobe-Bugle Comarca to a South Korean copper mining company.

S&P and the other bond rating agencies expect that state revenues from the dam and mine concessions will more than offset the expenditures for all of the public works projects and drive the public debt down in terms relative to the Gross Domestic Product. So S&P is projecting healthy overall growth, moderate government spending deficits and an overall reduction of the public debt load.

But the dams and mines entail rural people being driven off of their lands with little or no compensation for real estate taken or made unsuitable for traditional uses by way of the appropriation or contamination of water supplies. Most of these projects are in traditionally indigenous areas and thus have the extra added aspects of racial and cultural conflict.

President Martinelli apparently figures that the police state measures inherent in the expropriation of indigenous people and subsequent social costs of refugees from the comarcas flooding into the urban areas can be handled without substantial expenditures, or that foreign powers will lend a hand with the military force needed to restore order if he sets off an Indian uprising. He apparently figures that there will not be big financial costs to a more generalized political and social meltdown that a successful dispossession and repression of indigenous communities may provoke in the wider Panamanian society. However, he can't even get violence under control in the capital at this point. The bond rating services may be equating Martinelli's relatively high current standing in the opinion polls with social and political stability, and this may be a mistake.

But then, with the canal expansion and all the rest ongoing for the rest of his term, Martinelli has opportunities to ameliorate many situations. (Whether it's in his nature to do so is another question.) And if today he's indelibly branding into the mind of some 12-year-old that "government" means the bastards who ran the family out of its home and humiliated the parents before the eyes of the kids, Martinelli will be out of office before he faces the fury of an 18-year-old.

And the Standard & Poor's analysis is, after all, by its own description "medium term." It is, by its nature, a service for people with a lot of money looking to make a good profit over a three- to five-year term and then move on to something else. S&P and the other bond rating services are usually pretty good at this, or else they would not exist.