U.S. investment bank JPMorgan has downgraded its recommendation on Panama's bonds after U.S. President Donald Trump ramped up his threat this week to "take back" the Panama canal.
The Central American country's bonds have been struggling since Trump made the pledge during his election campaign, but JPMorgan's analysts said its prominence during his inauguration speech on Monday had ratcheted up the stakes.
The canal, which was once owned by the United States but was handed over to Panama decades ago, gives vessels a much shorter route between the Caribbean Sea and Pacific Ocean.
While the two countries could end up resolving the issue, "the potential noise associated to the path that could get us there should cause markets to be increasingly sensitive to headline risks," the analysts warned.
Combined with "little clarity on the endgame" for Trump, they cut Panama's bonds to "market weight" from "overweight" - effectively a signal to exposed investors to scale back.
Others have also warned that Trump's threat may have serious consequences for Panama. Research firm Tellimer has highlighted that canal-related transfers are the country's main earner, providing just over 13% general government revenues.
Though they were curbed last year by drought which limited the number of ships that could travel through the 82-km (51-mile) channel, in 2023 they reached an all-time high of $2.54 billion, equivalent to 3.2% of the country's GDP.
At full capacity the waterway allows up to 14,000 ships to cross per year and accounts for 2.5% of global seaborne trade.
For bond investors, the worry is that if Trump's tactics end up reducing the amount of money Panama earns from the canal its already-teetering sovereign credit rating could be downgraded.
Fitch has already cut its Panama score to 'junk' and if either Moody's, which has it on a downgrade warning, or S&P Global follow suit, Panama's bonds would get ejected from key investment grade-only bond indexes. That in turn is likely to trigger further sell-offs.
JPMorgan's said that "all things equal" and given that Panama's economy is expected to grow almost 5% this year, its rating should avoid that fate.
Although with the canal now squarely in Trump's crosshairs they acknowledged that "all things aren’t equal".
