Panama Bonds Jump as Traders Cheer Win of Pro-Market Mulino

(Bloomberg) -- Panama’s government bonds were the biggest gainers in Latin America on Monday after Jose Raul Mulino won the presidential election and pledged a “pro-private enterprise” government in his victory speech.

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Bonds due in 2063 rose 1.2 cents to 64.8 cents on the dollar, according to indicative pricing data collected by Bloomberg. Mulino, who ran as the substitute for the pro-business former leader Ricardo Martinelli, received just over a third of the vote and his party will have a minority in congress.

Read More: Panama Elects Leader Pledging to Restore Lost Economic Boom

Mulino will need to navigate a fragmented congress to shore up the economy and the public finances — and ultimately to keep a second credit rating company from lowering the grade on the nation’s debt to junk.

“The next administration will be working against the clock,” Barclays strategist Nestor Rodriguez wrote in a note Monday. “The focus from day 1 will be on Mulino’s economic agenda, with focus on fiscal and pension reforms, and his ability to reach consensus amid a fragmented Congress.”

The sudden closure last year of First Quantum Minerals Ltd.’s Cobre Panama mine sparked bets the lost government revenue could force credit-rating firms to push the country’s rating below investment grade. Fitch Ratings cut its grade to junk in March, warning that weaker growth and a “tense” social backdrop should limit room for the next president to implement fiscal reforms.

Here’s what analysts are saying about Panama:

More from Barclays’ Rodriguez

  • “Although there could be a path in Congress to pursue modifications to the moratorium law and mining code, we believe the popular vote supports our view that the incoming administration might need to take some time to pursue any changes regarding the mine, as it would require substantial political capital amid the need for other potential reforms”

Steven Palacio, Gorka Lalaguna and Ben Ramsey, strategists at JPMorgan Chase & Co.

  • “We hold our OW stance on Panama as additional downgrades to HY are well priced, and the process should be a grinding one after the election dust settles”

  • “Given the different constraints that surround policy-making, on its own, the election results don’t change our fundamental assessment of the credit”

  • “The new administration would not only have to signal a path towards fiscal consolidation, but display execution capabilities within a context of weak growth, a fragmented political landscape, and social tension”

Emma Cerda, strategist at Morgan Stanley

  • “These results were in line with our base-case scenario where we see headwinds to the passage of key legislature, namely due to relatively low public support entering office and a lack of a clear majority in the National Assembly so far”

  • Although Mulino has been “the candidate that has been least supportive of the closure of the Cobre Panama mine,” and that could be seen as positive, he “has not detailed a policy plan to address key agenda items”

Ramiro Blazquez and other Banctrust analysts

  • “Constructing governability is likely to be challenging going forward”

Fernando Losada, managing director at Oppenheimer & Co.

  • “Almost always there is a relief rally after elections. What’s more, in this case, there was a lot of uncertainty before the vote. Now we’ll have to watch for Mulino’s first announcements after the vote when it comes to fiscal adjustment, pensions and mining.”

Sergey Goncharov, money manager at Vontobel Asset Management

  • “Mulino is a more market-friendly option and he won despite some challenges. So, in this sense, it’s good news. That said, governability challenges coupled with a number of economic issues that accumulated over years, still keep rating downgrade risks on investors’ radars.”

(Updates with JPMorgan as second firm in comments.)

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