Moody’s: Mine closure impacts Panama’s deficit and growth outlook

The rating agency Moody’s said this Wednesday that the cancellation in Panama of the exploitation contract of the largest open pit copper mine in Central America, “makes it very likely” that the Central American country does not meet the deficit objective this year and in 2024 and that it affects the growth perspective of the gross domestic product (GDP).

The ruling of the Supreme Court of Justice (CSJ) that declared unconstitutional the law contract that renewed for 20 renewable years the concession for the exploitation of the Cobre Panamá mine, operated by the company Minera Panamá, a subsidiary of the Canadian First Quantum Minerals (FQM). ), can also impact “in the confidence of investors”indicated the risk rating agency.

The Cobre Panamá mine is an investment of around US$ 10,000 million that generates around 7,000 direct and 40,000 indirect jobs, an operation that represents the 4.8% of GDP and 75% of the country’s exports, according to company data.

Law 406, of the mining contract law, approved on October 20 by the unicameral Parliament and by the Executive of President Laurentino Cortizo, violated 25 articles of the Constitution of Panama, according to the ruling of the Supreme Court released on Tuesday, a day after it was unanimously approved by the plenary session of nine magistrates.

On the same Tuesday, President Cortizo announced that once the court ruling is formally received, the Government will begin the transition process for the closure of the mine, Moody’s recalled.

The rating agency indicated that the Cortizo Executive counted on Cobre Panamá “became their second largest source of income after Panama Canal”, with projected revenues of US$770 million or 0.9% of GDP in 2023 and US$375 million annually from 2024 (0.4% of the GDP of that year).

But “without this revenue, the Government will have difficulty reaching the target deficit limit of the 3% of GDP” in 2023, and it is likely that the indicator “overcome the ceiling of 2% in 2024″said the rating agency.

The cost of the mining conflict

The widespread rejection of the mining contract plunged Panama into a serious crisis that broke out on October 23, leaving losses estimated at US$1.7 billion due to the blockade of roads that broke the national logistics chain and affected the Central American chain.

“The protests disrupted economic activity and caused more than $1.7 billion in losses, potentially reducing GDP growth by 1% in 2023″, said Moody’s, which recalled that its growth forecast for the country this year was 6% of GDP before the crisis.

The economic consequence of the contractual dispute “It can affect the longer term” to Panama, given the recent approval of a mining moratorium, he added.

On October 31, Moody’s downgraded Panama’s rating to Baa3 from Baa2 and changed the outlook from negative to stable, the latter based on the “solid economic growth” preview for “the next few years, with annual rates in the range of 4% – 5%”which offered key support to the country’s credit profile.

“The cancellation of the contract is negative for the government’s credit,” the rating agency indicated this Wednesday.