Panama’s sovereign bonds climbed on Monday after voters chose former public security minister José Raul Mulino to be the country’s next president, amid expectations his government will pursue pro-business policies to revive an economy hobbled by the forced closure of a major copper mine last year.

Mulino, a close ally of Panama’s popular former president Ricardo Martinelli, was declared the winner on Sunday after receiving 34% of the vote with more than 90% of ballots counted and holding a lead of more than 10% over his closest competitor, according to news reports.

“We can expect the tradition of growth focus and respect for market forces to continue in Panama under Mulino,” said Armando Armenta, a senior economist for Latin American fixed-income and currency markets at AllianceBernstein.

“Mulino is viewed as relatively market-friendly having served under former president Martinelli’s administration and having campaigned on a pro-investment platform,” said Nathalie Marshik, an emerging markets sovereign analyst at HSBC.

Mulino, who is set to take office on July 1, has pledged to spur investment in the tourism sector and build a rail line that would connect the capital city with the country’s interior to create new jobs. He will face political challenges, however, given his party will lack a majority in a fragmented Congress.

Mulino ran in place of Martinelli, a businessman who governed Panama from 2009 to 2014 and who was disqualified from seeking a second term earlier this year due to a money-laundering conviction.

BOND BOUNCE

The sovereign’s US dollar-denominated bonds due 2037, which it issued in February, rose to 103.875 on Monday from 103.000 on Friday, pushing down the yield by 10 basis points to 7.58%, according to Refinitiv data.

“Markets in general do not like uncertainty and as such his solid victory and last week’s supreme court ruling confirming the constitutionality of [Mulino’s] candidacy help cement the positive bond price move,” Marshik said.

Fitch Ratings stripped Panama of its investment grade credit rating in March, saying that the country’s fiscal and governance challenges have been aggravated by the closure of the Minera Panama copper mine following protests last year. The mine was opened in 2019 by Canada’s First Quantum and its output accounted for 5% of the country’s GDP.

S&P rates the country BBB, the second-lowest investment grade, and changed the outlook on the rating to negative in November given the risk the mining dispute could jeopardize future investment.

“We could lower the rating during the coming 12 months if we see weakened investment that could hurt the country’s long-term growth prospects or fiscal policies that fail to contain recent weakening in public finances,” the agency said in a statement on Monday. “Lower GDP growth could also result in weaker public finances, hurting creditworthiness.”

NEW DOWNGRADE

AllianceBernstein’s Armenta said another rating cut would not come as a surprise. Current bond prices “are already discounting a downgrade from one more credit rating agency,” he said.

“The new administration will need to send a strong fiscal consolidation message in the second half of 2024 not only to avoid the downgrade to below investment grade, but to try and decrease the rise in debt service that has been constant for the past few years amid persistent fiscal deficits,” Armenta added.

HSBC’s Marshik said Moody’s, which rates Panama Baa3, is likely to wait to see Mulino’s plan before making a decision on its rating, said. “This could give Mulino and his Cabinet at least 12 months to deliver on needed reforms,” she said.

Panama’s Supreme Court invalidated the mining contract between the government and First Quantum in November, leading the company to start international arbitration proceedings.

“Mulino is perceived as a friendly counterpart for First Quantum, which would rather find a solution where copper exploitation resumes than face an arbitration case,” said HSBC’s Marshik. The new president “may choose to set the issue aside” and reopen the mine in an effort “to decrease deficit financing and the sovereign’s dependence on external markets, the social security deficit, water shortages,” she said.