Panama has long stood out as a stable economy in Latin America, with strong GDP per capita and a positive inflow of foreign investments. This enviable record is today at risk from an avalanche of arbitration claims arising out of recent measures affecting foreign-owned investments in mining and other sectors.
Panama faces arbitration claims worth substantially more than half of its GDP
One of Panama's largest foreign investment projects in recent decades has been the Cobre Panamá mine. Since it started production in 2019, the giant mine has accounted for 75% of Panama's exports and about 5% of the country's GDP.
A Canadian corporation, First Quantum, owns 90% of the mine and reportedly invested close to US$10 billion in its development. When following several years of renegotiation, First Quantum finally announced a deal to renew the mine's license for 20 more years, it sparked countrywide protests. In November 2023, in a judgment that some say was politically motivated, the Supreme Court of Panama deemed the renewed license unconstitutional. Since then, one of the largest copper mines in the world (representing 1% of global copper production) has stayed idle, contributing to global copper shortages and price surges.
First Quantum has taken Panama to international arbitration, commencing a US$30bn case before the International Chamber of Commerce in Paris and threating a further US$20bn arbitration under the Canada-Panama Free Trade Agreement (FTA).
Other foreign investors affected by the cancellation of the license have followed suit, including Canadian streaming and royalty company Franco-Nevada, which is seeking US$5bn in compensation also under the Canada-Panama FTA, South Korean state-owned mining company KOMIR, which is seeking US$2bn for its 10% stake in the mine in arbitration under the Panama-Korea FTA, and machinery supplier Liebherr, which is seeking US$133 million under the France-Panama bilateral investment treaty.
In total, Panama is currently facing US$57bn in liabilities – more than half of the country's GDP – in connection with Cobre Panamá alone. While the case has captured the headlines, Cobre Panamá is not the only foreign investment in Panama that has run into trouble and resulted in substantial claims for compensation.
Canadian gold miner Petaquilla Minerals filed for arbitration at the World Bank's International Centre for the Settlement of Investment Disputes (ICSID) in May 2024, also under the Canada-Panama FTA, seeking US$2.8bn for the cancellation of its gold mining concession for the Molejón project.
Another Canadian gold miner, Orla Mining Ltd, announced last week that it had commenced arbitration against Panama following the rejection of the gold mining permit for the Cerro Quema gold mine in Los Santos province. Orla seeks compensation of at least US$400mn under the Canada-Panama FTA.
Panama is also facing billions of US dollars in arbitration claims at ICSID from construction contractors WeBuild and Sacyr in connection with the work for the expansion of the Panama Canal. ICSID has also registered additional cases from foreign investors Banesco, IBT Group, Campos de Pesé SA and Dominion Minerals.
Argentina as a cautionary tale
The burden of this wave of claims for the Panamanian economy is staggering and unlikely to be sustainable. Panama has already seen its credit rating downgraded to "junk" status ('BB+') in March, and even that rating could be in jeopardy, as the Panamanian economy is projected to slow down to 2.5% this year (from 7.5% in 2023).
In fact, Panama is especially sensitive to credit rating downgrades as its dollarized economy means it cannot just print money to stave off an economic crisis; and it is also heavily reliant on the sovereign bond market to fund the state budget. Panama has US$1-2bn of debt maturing each year over the next 14 years, while Barclays recently estimated that the new government will need to tap the bond market for up to US$1.5bn per year over the next couple of years.
But the economic impacts may be even wider, when considering the chilling effect that massive, unresolved claims are likely to have on the willingness of other foreign investors to invest in the country and fund its debt and capital investments.
The recent history of Argentina, which too faced its own wave of claims from foreign investors, is cause for concern. Following the economic crisis of 2001, Argentina adopted a number of emergency measures targeting foreign investors, including removing legislated guarantees of stable peso-to-dollar exchange rates and mandating the renegotiation of long-term concession contracts, as well as pushing for an overly aggressive restructuring of its sovereign debt that many saw as breaking all established conventions.
Multiple arbitration claims under investment treaties followed, as well as lawsuits brought by foreign bondholders in courts in the US and elsewhere. Between 2001 and 2009, a total of 46 arbitration cases were filed against Argentina, which was found liable for billions of US dollars and saw its preferential trade access to the US market suspended when it failed to pay awards rendered in favor of US investors, becoming an international financial and economic pariah and struggling for years to attract the foreign capital needed to support its economic ambitions.
Ultimately, Argentina capitulated and was required to pay billions to compensate foreign investors in order to re-enter the international capital markets and regain its preferential trade access to the US market, and today it continues to suffer from the damage to its international reputation.
Conclusion
The Argentina precedent should serve as a cautionary tale for Panama. The cost of defending against numerous arbitration claims, the exposure to billions of dollars in liabilities and the growth shortfall due to an unstable investment environment are bound to have significant economic and social impacts.
The fact that the claims faced by Argentina, as a proportion of its GDP, were only a fraction of those faced today by Panama ought to be a sobering thought for politicians and investors alike. The case for a swift and amicable resolution of the current investment disputes is obvious and compelling when seen against the alternative of years of protracted legal proceedings playing out overseas and fueling economic uncertainty and distress at home.
The article was first published on the BNAmericas. For further information please visit the BNAmericas website.
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