Foreign investors are showing confidence in Panama's ability to navigate social unrest and political threats, particularly from Donald Trump regarding the Panama Canal. This is evident as the Central American country's bonds are performing better than many investors anticipated, despite a crisis that previously jeopardized its economy. The premium Panama pays over U.S. Treasuries has significantly narrowed from as much as 3.5 percentage points in 2023 and 2024 to approximately 1.5 percentage points currently, reflecting a stronger demand for its bonds.
This renewed investor confidence is supported by several factors. Panama's economy grew by 6.4% year-on-year in the second quarter, following a 4.8% growth in the first quarter, driven by strong performance in construction, tourism, and canal-related activities. The fiscal deficit has also been reduced from over 6% in 2024 to 3.7% last year, and officials indicate it has narrowed further. Finance minister Felipe Chapman attributes this rebuilding of confidence to the government's fiscal restraint, noting that a February bond sale priced at about 145 basis points over Treasuries, exceeding expectations.
Despite the positive bond market performance, significant challenges persist. Social tensions remain, with unemployment reaching 10% last year, and opposition to reopening the First Quantum copper mine, which previously accounted for 5% of Panama's GDP. Additionally, Panama faces external pressure from Donald Trump's threats to reassert U.S. control over the canal due to perceived Chinese influence, and international arbitration claims worth billions of dollars linked to cancelled canal terminal concessions. While Fitch downgraded Panama to junk status in 2024, S&P Global and Moody's have maintained investment-grade ratings, albeit at the lowest levels.
