Panama’s ‘good problem’ — too many credit offers

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Panama has turned to JP Morgan for a $1bn three year loan, which its finance minister said was symptomatic of “a good problem to have” — it has more offers of credit on good terms than it needs.

It is highly unusual for Latin American governments to use commercial bank loans like this, except when they have nowhere else to turn. But that is not Panama’s case.

The country took the loan last week to help finance its budget needs, paying 150bp over the six month Secured overnight financing rate (Sofr). The New York Fed quotes the 180 day Sofr average as 5.3%, suggesting an initial all-in cost of around 6.8%. This is higher than the yield its three year bonds are trading at — 5.38%, according to MarketAxess.

The difference is caused by the steep inversion at the short end of the dollar yield curve, as the market is pricing in rate cuts. The loan has an upfront fee of 50bp and an arrangement fee of 1%.

Bond market specialists interpreted Panama’s move as meaning the government did not want to raise its global bond funding costs by issuing more paper.

Felipe Chapman, who took office in July after conservative José Raúl Mulino became president, told GlobalMarkets : “We are receiving more offers of credit than we need, and on much better terms and conditions than when we initiated this administration.”

He outlined the government’s main financing tools as the global bond market, domestic bonds and commercial bank loans.

In February, Panama issued its most expensive international bond since 2009 — on both a spread and all-in yield basis. A month later, Fitch spoiled its full house of investment grade ratings by downgrading it from BBB- to BB+, citing “fiscal and governance challenges”.

Still, the minister said Panama had received “a lot” of offers from commercial banks, including immediately after it signed the JP Morgan facility.

Pushed on whether this meant the government would continue to take out bank loans, Chapman said: “not necessarily”. “It’s dynamic,” he said. “Our plan is to combine all sources of funding, and decipher the best terms, conditions and cost.”

EM bond analysts told GlobalMarkets they believed the government had wanted to keep a pledge not to return to the international bond market in 2024. But they think Panama is likely to refinance the JP Morgan loan with a bond next year.

Chapman said it would be refinanced “in due time”, and that his goal was to “achieve better terms and conditions and a lower cost as time goes by”, helped by better fiscal policy taking effect.

“Panama taking a loan from JP Morgan was a surprise, and is expensive funding, but it is prepayable if they tap the [bond] market,” said Nathalie Marshik, a sovereign credit analyst at HSBC in New York. “It can be an incentive for the government to do the fiscal work, to negotiate with the Assembly to achieve the budget it wants and see its bond spreads fall. It is in the interest of the government to refinance this loan quickly.”

When Chapman took office he inherited a budget plan of $36bn, which he called “completely unachievable”. The new government’s adjusted budget is $26.8bn, which he said was “more realistic in terms of revenues, expenses and fiscal balance”.

“It’s a very powerful message that we’re sending the people of Panama and global markets,” he said.

Fitch downgraded Panama in March after it had suffered one of the largest increases in debt-to-GDP and interest-to-revenues among its peers since 2019. This was then exacerbated by the closure of Cobre Panama, the country’s largest mine, in November 2023 after the Panamanian Supreme Court declared its contract unconstitutional.

Chapman said that what happened with First Quantum, the Canadian firm that operated the mine, was “extremely unfortunate” and the responsibility of both the previous government and the company. But he said the economic impact was a “one time event”.

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