Country In Focus: PANAMA

23 April 2012


Panama has a problem that many other countries would envy: economic growth is so high, and competition for workers so intense, that firms are stealing workers from each other.

Panama’s unemployment is currently 4.4%, and may go down even further as the economy grows 10% in 2012, repeating 2011’s performance as the fastest growing economy in Latin America. The country currently has BBB- / Baa3 ratings from S&P and Moody’s respectively, with a stable outlook from S&P and a positive outlook from Moody’s on general future creditworthiness.

Investors should pay close attention to this Central American nation of 3.3 million, as there could be substantial upside for bond investors. Panama uses the U.S. Dollar as its currency, and has no central bank. The economy is fairly large for a country of its size: 33.3 billion U.S. dollars and services account for about 77% of the economy.

As the home of the Panama Canal, the country plays a crucial role in global trade, linking Latin America, Asia, North America and Europe. Shipping volumes through the Panama Canal reached 299.1 million metric tons in 2009. The high trade volumes are reflected in Panama’s economic statistics: International Trade as a percentage of GDP is always higher than 100%, and has been as high as 198% in recent years.

The Panama Canal is currently undergoing a 5.25 billion U.S. dollar expansion, which is due to be complete in 2015. This will allow longer and wider ships to pass through the Canal, opening up even more trade between the Atlantic and Pacific basins, as currently there are several ship models that are too large for the existing Canal infrastructure. Other drivers of the economy include financial services—Panama being a major offshore banking centre—and tourism.

Panama enjoys favourable credit metrics. Debt as a percentage of GDP is around 45%, which is moderately high but is down from the early 2000s, when average Debt to GDP was in the 70% – 80% range. Total debt service as a percentage of exports is 5.69%, and 4.43% of the overall economy. This is extremely low, especially for a Latin American country.

However, international currency reserves are fairly low, at 2.7 billion U.S. dollars, or around 24% of external debt. Therefore, Panama has enough cash to service the debt, but would have to rely on economic growth and or additional financing to meet many of its financial obligations.

The surge in financing is related to Panama Canal improvements, as well as other infrastructure spending as the country seeks to cement its role as a hub in Americas, as well as for global trade. Most of the expenditure is going toward these ends, which are investments that will yield fruit for the country and ultimately increase employment, government revenue, and foreign investment in the medium term—all of which would ultimately lead to the necessary growth for Panama’s credit position to improve.

Options for bond investing in Panamanian corporate or sovereign credits are not as extensive relative to many Latin American peers. Nevertheless there are a number of compelling opportunities for savvy bond investors to gain an advantage.

Panama has two sovereign bonds that offer considerable appreciation potential while also offering competitive yields: the 2020 bond has a yield of 4.18%, while the 2023 yields 4.47%. These bonds have potential to appreciate due to Panama’s improving credit profile and potential economic growth in the next 3-7 years resulting from the Canal expansion.

Another play on increased Panama Canal traffic could be Panama Canal Railway 2026 (Ba2 / BB) bonds. The bonds have taken something of a hit in recent years due to the perception that increased maritime traffic on the improved canal could diminish demand for the supplementary rail service that PCR operates. However, an argument could be made that additional maritime capacity will generate additional maritime traffic, with demand reaching a saturation point where it could spill over into PCR. Because of the uncertainty, we rank PCR as having moderate risk.

Bladex (Baa2 / BBB) is a regional trade finance bank that is based in Panama, and has an excellent reputation in the global financial industry, playing a key role in financing Latin America’s position as a region of basket cases to a global trade powerhouse. As more and more nations within Latin America begin to trade with each other, and continue to acquire companies in and export to new markets beyond Latin America, Bladex stands to benefit by providing letters of credit and loans. Bladex 2017 bonds yield 3.90% at the moment.

AES Panama (Baa2 / BBB-) is a subsidiary of the American utility group, AES, and is the leading power generation company in Panama, operating several hydroelectric dams in that nation. With Panama’s high growth rates and industrial expansion, power demand is likely to increase, which would ultimately lead to solid cash flow and revenue growth for AES Panama.

Panama offers an excellent opportunity to invest in a politically stable, high growth Latin American country. Firstline can facilitate investments in these securities and others that may fit your risk tolerance. Please feel free to reach out to us at info@nullfirstlinesecurities.com to start a conversation about how you can benefit from Panama’s growth going forward.

Michael J Cooper
Trading & Investment Strategist

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