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Panama’s reputation as an investor-friendly haven is at risk from attempts to shut a giant Canadian-owned copper mine, the latest case of a commodities project triggering social unrest in Latin America.

Faced with an explosion of popular rage that paralyzed the country last week, the government caved to protesters’ demands for a referendum on whether to scrap a multibillion dollar deal with First Quantum Minerals Ltd., which it had approved just days earlier.

Panama has been one of Latin America’s biggest success stories this century, transformed by a economic boom that has given it a standard of living similar to Poland’s, and a financial center whose glass skyscrapers resemble Miami’s.

Foreign investors were drawn by its dollarized economy, English-speaking business elite and, until recently, by its predictable rules. But that may change.

“This definitely affects us as a safe place for investment,” said Frank de Lima, a former finance minister. “We are talking about the biggest private investment ever in Panama, and almost at the level of the Panama canal expansion. There’s not legal security or investment security.”

First Quantum shares plunged 28% on Monday, as investors priced in the possibility that the company might lose its biggest source of revenue. Panama’s dollar bonds due in 2036 fell 1.4 cents on the dollar to 95.7 cents, according to indicative pricing data by Bloomberg.

Tear gas and rocks

First Quantum’s troubles are playing out in a country led by one of the most pro-business governments in the region. But faced with growing disorder and with a general election half a year away, President Laurentino Cortizo was pressured into calling for a referendum.

It failed to quell the protests. On Monday evening, demonstrators in the capital launched rocks and fireworks toward congress and ripped down barricades, while police fired tear gas back. Some businesses boarded up their windows, while graffiti tags such as “no to mining” and “Panama is not for sale” were sprayed on walls throughout the city.

Demonstrator Patricia Miranda, 30, held a sign saying “without water there is no beer”, and explained that her biggest concern is water contamination.

“We’ve been living years of corruption, lockdowns and pandemic mismanagement. This is about the mine, but also all the corruption,” she said.

Oil and mining projects face increased hostility across Latin America, a major source of commodities producer from iron ore to soybeans, over concerns about environmental damage. In August, Ecuador’s voters backed referendums to close a major oil project in the Amazon and also restrict gold and copper mining.

Gustavo Petro won Colombia’s 2022 election on a pledge to halt new oil exploration contracts, while Mexico nationalized its lithium deposits and froze new hydrocarbon licenses for private investors. In Brazil, mining has come under greater scrutiny from environmental authorities and has been met with public opposition after two deadly dam disasters since 2015.

Loss of faith

Panama’s economy has expanded at an average annual rate of more than 6% over the last two decades, one of the fastest rates in the Americas, led by public works projects and real estate. But the loss of faith in the country over its treatment of the mine may make those growth rates harder to sustain, according to JPMorgan Chase & Co.

“If the contract is revoked we think that the probability that Panama loses its investment grade rating in the short term rises significantly, as lower trust in the country’s institutional framework would likely drive in lower investment and lower medium-term growth,” JPMorgan strategist Steven Palacio wrote in a note.

Panamanians were already angry about corruption, rising living costs and high unemployment. The mine deal was “the straw that broke the camel’s back”, according to former finance minister de Lima, who is an opponent of the government.

The protests have been backed by labor unions, environmental campaigners and students, among others.

Opposition lawmaker Walkiria Chandler D’Orcy said the call for a referendum isn’t enough to stop the protests. She said the deal is unconstitutional and demanded its repeal.

On Monday, the electoral court said it couldn’t hold the referendum until congress passed a law. The government then said it planned to introduce a bill to enable the vote.

In the meantime, the Supreme Court is considering two suits to declare the First Quantum deal unconstitutional.

Panama holds general elections on May 5, with Cortizo ineligible for a second term due to a rule against consecutive terms. Cortizo’s Revolutionary Democratic Party is likely to do poorly, according to polls.

Former President Ricardo Martinelli, another pro-business politician who presided over soaring growth when he led the country from 2009 to 2014, is ahead with more than 40% support, even though he spent time in jail on corruption charges.

Deficit ceiling

If the country does vote to revoke the mining contract in the Dec. 17 referendum, the government will need to figure out how to fill a large hole in its fiscal accounts.

First Quantum’s mine produces about 1.5% of all the world’s copper output, and provides the government with revenue equivalent to about 0.9% of gross domestic product. Without those funds, Panama will likely breach its deficit ceiling of 3% of GDP, said Ramiro Blazquez, head of research and strategy at BancTrust & Co. in Buenos Aires.

First Quantum’s CEO Tristan Pascall said on a call with investors last week that the company is aware of the protests and will work harder at communicating the benefits that mining can provide to communities in Panama.

Earlier this year, Fitch Ratings said a deal between the government and First Quantum over royalty and tax payments would make the mine the nation’s largest tax contributor after the Panama canal.

Fitch rates the county BBB-, one notch above junk, while Moody’s Investors Service and S&P Global Ratings rate it two notches above.

The vote threatens “permanent lost revenues” and the government doesn’t appear to have a plan B for its budget in that event, said Siobhan Morden, head of Latin America Fixed Income Strategy at Banco Santander SA.

That puts the nation’s investment grade credit rating “at serious risk”, she said.

(By Michael McDonald and Zijia Song)