If you had to name the country that bond investors consider to be the best credit in all of Latin America, which would you guess?
Chile, many of you will be inclined to blurt out. Or perhaps Mexico. The more adventurous among you may even offer up one of the rising powers in the region like Peru or Colombia.
The answer, it turns out, is none of these usual suspects. It is tiny Panama, home to just 4 million people but also to a booming economy that’s being propelled by the expansion of its namesake canal, the construction of a rapid-transit system in the capital and the opening of its first natural-gas plant. This growth — projected to reach 5.6 percent this year, more than double the regional average — is in turn swelling tax receipts and leaving the country with a budget deficit equal to less than 2 percent of gross domestic product.
“The country’s strong and stable fundamentals make it a positive story in the region,” said Emilia Matei, an analyst for Standard Life Aberdeen based in London. “The expanded canal benefited from acceleration in global growth and trade, and the fiscal and external accounts keep improving. As such, investors find it an attractive market to get involved in.”
So many investors have piled in that a benchmark measure of borrowing costs — JPMorgan’s EMBIG calculation of the yield premium its sovereign and quasi-sovereign bonds pay over Treasuries — has fallen to 108 basis points, compared with 114 for Chile, 125 for Peru, 164 for Colombia and the low 200s for the region’s behemoths, Mexico and Brazil. It isn’t the first time that Panama has been treated as a better credit than all its bigger peers, but it’s a rare occurrence.
To be sure, there are some limitations to the data and important caveats: The JPMorgan index includes state companies, which inflates Chile’s spread because so much of its debt is from the copper miner Codelco. And Panama’s BBB grade from S&P Global Ratings is four full steps below Chile’s A+ designation. On another measure of credit worthiness, the cost to insure against debt defaults for five years with credit default swaps, Chile is still perceived as safer than Panama, though the gap has been narrowing since early 2016.
That’s the year the Panama Canal opened a new set of locks, allowing bigger ships to transit the waterway that links the Pacific and Atlantic Oceans, helping boost cargo tonnage 22 percent in the first fiscal year of operation. President Juan Carlos Varela has also sought to bolster trade with China, announcing in June that he intended to establish diplomatic ties and sever its relationship with Taiwan. He visited China in November to pursue trade talks.
Panama’s economy will “remain among the most dynamic in the region, with stable and low inflation, sustainable public debt, a declining current account deficit, and a stable financial sector,” the International Monetary Fund said in a report on the country in May.
The current impressive growth numbers are actually relatively slow compared to the breakneck speed of the recent past, when Panama posted annual GDP increases of as high as 11 percent in 2011 and 2012. Expansion was over 6 percent in 2013, 2014 and 2015.
The pace of growth is still plenty impressive to international investors, according to Sean Newman, a senior money manager at Invesco Ltd. in Atlanta.
“This, coupled with less political risk, an improving deficit, and lower dollar funding needs, has compressed spreads of Panama relative to peers,” Newman said. “I wouldn’t be surprised to see the sovereign upgraded to A in 2018.”