JPMorgan Downgrades Panama Bonds Amid Trump's Canal Threat

Summary:

* JPMorgan has downgraded its recommendation on Panama's bonds following President Trump's renewed threats to "take back" the Panama Canal.
* Panama's bonds have been struggling since Trump first made the pledge during his election campaign, but JPMorgan analysts say its prominence in his inaugural address on Monday has raised the stakes.
* The canal, once owned by the US but handed over to Panama decades ago, offers ships a much shorter route between the Caribbean Sea and the Pacific Ocean.
* While the two nations may ultimately resolve the issue, "the potential noise associated with the path to get there should leave markets increasingly sensitive to headline risk," the analysts warned.
* Combined with a "lack of clarity on the ultimate objective" from Trump, they cut Panama's bonds to "market weight" from "overweight," effectively telling investors to reduce their exposure.

Impact on Panama:

* Others have also warned of serious consequences for Panama if Trump's threat becomes reality.
* Research firm Tellimer points out that canal-related transfers are the country's single largest source of revenue, contributing just over 13% of total government income.
* Although affected last year by drought, which limited the number of ships able to transit the 51-mile (82-km) channel, it hit a record $2.54 billion in 2023, equivalent to 3.2% of the country's GDP.
* At full capacity, the waterway handles up to 14,000 vessels per year and accounts for 2.5% of global seaborne trade.

Investors' Perspective:

* For bond investors, the concern is that if Trump's actions reduce the amount of money Panama earns from the canal, its already shaky sovereign credit rating could be downgraded further.
* Fitch already cut Panama to "junk" status, and if Moody's, which has it on downgrade watch, or S&P Global follow suit, its bonds would be ejected from major indices that only accept investment-grade debt.
* This, in turn, could trigger further selling.

JPMorgan's Outlook:

* JPMorgan said that "all else being equal," and with Panama's economy expected to grow almost 5% this year, its ratings should avoid that fate.
* However, with the canal now firmly in Trump's sights, they acknowledged that "all things may not remain equal."