Investment Climate Panama

Background

The mainstay of Panama's economy rests on a large, well-developed, and diversified services sector. Lying at the crossroads of the North and South American continents and the Atlantic and Pacific oceans, Panama benefits from its strategic location, with the offshore finance, insurance, shipping registry, and tourism industries generating jobs and revenue. The services sector accounts for over 70 percent of GDP, including the operation of the government-owned (since 2000) Panama Canal, the Colon Free Zone, a large banking system integrated with international financial markets, and tourism. The fastest growing services are transport, communications, tourism, and wholesale trade. Panama also plans to construct a metro system in Panama City, valued at $1.2 billion and scheduled to be completed by 2014.

Panama enjoyed robust economic growth in recent years led by a boom in construction and export-oriented services supported by the favorable external environment. While affected by the global downturn, Panama has faced the global economic crisis from a position of strength underpinned by its sound public finances and a strong banking system. Although real GDP growth slowed substantially in 2009, it remained positive thanks to the government's timely implementation of policy measures that contributed to the rapid recovery in economic activity. Meanwhile, the fiscal position remained strong with a modest deficit, and the external position improved significantly due to lower oil prices and very strong export growth from the Colon Free Zone. Economic growth picked up strongly in 2010, supported by an improved world economy, a large increase in public investment (notably from the Panama Canal expansion project that started in September 2007), and a recovery of private demand. The new government since taking office in July 2009 has committed to a medium-term fiscal consolidation plan through tax reforms aimed at increasing revenues and improving the efficiency of the tax system. Poverty dropped by 10 percentage points between 2006 and 2010 and unemployment was slashed in half - 12 percent to 6 percent of the labor force. Panama's booming transportation and logistics services sectors, along with aggressive infrastructure development projects led the economy to continued growth in 2011.

As of November 2011, Panama was among the fastest-growing countries in the Western Hemisphere. Several years of strong growth combined with successful fiscal consolidation had led to a rapid decline in debt ratios and in upgrades of its sovereign debt credit rating. Although Panama has established itself as an important regional hub for banking services, as of 2011, it still faced challenges going forward, as banks gradually moved toward a more sophisticated business model and capital markets continued to develop. As part of its effort to seek removal from the Organization of Economic Development's gray-list of tax havens, Panama signed various double taxation treaties with other nations.

After seeing double digit growth in 2011, the growth outlook for 2012 was favorable, underpinned by large scale public investments. In July 2012, Panama's economy grew by 11.6 percent compared to the year before slowing to about 6.8 percent in August. Gains in construction and mining as well as an ongoing expansion of the Panama Canal and other public infrastructure projects led growth in August. The country also saw a rise in tourism as well as strong performances by the hotel and restaurant industries. In October 2012, Panama's government said it could give up on plans to sell state-owned land in Colon and instead raise commercial rents in the wake of violent protests. " If the opinion of Colon is to cancel the sale of the land, that is what we will do, " Finance Minister Frank de Lima said in an email to Reuters. "We need to have peace and calm return to Colon."

Overall, Panama's booming transportation and logistics services sectors, along with aggressive infrastructure development projects, led the economy to continued high growth in 2012. Foreign investment, at around 10 percent of GDP in both 2011 and 2012, has continued to be a source of growth. However, strong economic performance has not translated into broadly shared prosperity, as Panama has the second worst income distribution in Latin America. As of 2012, about 30 percent of the population lived in poverty; however, from 2006 to 2012 poverty declined by 10 percentage points, while unemployment dropped to 4.4 percent from 12 percent of the labor force in 2012. Also, a successful fiscal consolidation brought gross public debt to 39.2 percent of GDP in 2012 from 66.2 percent of GDP in 2005. The US-Panama Trade Promotion Agreement was approved by Congress and signed into law in October 2011, and entered into force in October 2012. Panama also achieved removal from the Organization of Economic Development's gray-list of tax havens by signing various double taxation treaties with other nations.

Growth was robust in 2012 and by March 2013, the International Monetary Fund had declared Panama to be the fastest-growing country in Latin America with per capita GDP more than doubling over the previous decade. The IMF cited a steady rise in public and private investment in a stable economic environment along with prudent policies for the impressive growth.

Panama's economy continued to grow strongly in 2013, lifted by the ongoing Panama Canal expansion and large public infrastructure projects. Following an upgrade by Moody's, Panama had become among the highest-rated emerging markets, on par with Brazil, Mexico, and Peru. Looking ahead, the IMF and Panama's economy minister projected GDP growth would decline slightly in 2013 and noted that the country remained vulnerable to external shocks as it is closely linked to both the U.S. business cycle as well as to global trade. As of October 2013, the global slowdown had dampened trade and a delay in the opening of the expanded canal led to some shippers using alternative routes such as the Suez Canal.

Economic growth will be bolstered by the Panama Canal expansion project that began in 2007 and was estimated to be completed by 2015 at a cost of $5.3 billion. Panama is also constructing a metro system in Panama City, valued at $1.2 billion and scheduled to be completed by 2014. Unemployment dropped from 12 percent to 4.5 percent of the labor force in 2013.

Growth during the first quarter of 2014 was the slowest rate recorded since 2009, when the economy grew at a 4 percent annual rate in the aftermath of the global credit crisis. In September 2014, Reuters reported that Panama's economy had expanded 6.3 percent during the second quarter of the year compared with the same period last year. The country saw gains in mining, construction, retail and transport sectors during the April-June period. Meanwhile, electricity output and agriculture sector activity fell during the second quarter. Overall, economic growth has been cooling in Panama after the $15 billion of infrastructure projects helped boost economic in recent years. Over the past five years, annual growth has averaged 8.5 percent.

On average, as of 2015, economic growth in Panama topped 8 percent in the previous five years. The country's prosperous financial sector was in part behind the boom, as well as the government's construction binge which included a new subway, an oceanfront highway and a long-awaited $5.2 billion expansion of the Panama Canal, according to NPR. Still, some were concerned about the fact that the country's debt topped $23 billion as of mid-2015, a staggering amount for a country with fewer than four million people.

Panama's economy grew at its slowest rate in five years in 2015, according to data cited by Reuters. Still, Panama remained one of the fastest-growing economies in the region despite being dragged down by stalled infrastructure projects and lower activity at the Colon Free Trade Zone.

The economy grew 5.8 percent, driven by financial services, the Panama Canal and tourism. This compared with a nearly 1 percent drop for Latin America as a whole.

The government was projecting growth of 6.2 percent in 2016, driven by large projects such as an extra metro line in the capital Panama City and commercial operations using the new third set of locks in the canal. In late June 2016, the Panama Canal's expanded locks slid open after years of anticipation and more than $5 billion later. The new locks provide access to a wider lane for vessels: 180 feet across, compared with 109 feet in the original locks. The canal now offered double the shipping capacity. It remained to be seen the economic impact the expanded canal would have on the country.

Panama was believed to still be suffering from corruption although efforts were being made to fight it.

Economic growth moderated to 4.9 percent in 2016 in the face of external headwinds, and inflation and unemployment remained subdued but have since risen slightly.

In June 2017, Panama established diplomatic relations with China and cut its long-standing ties with Taiwan. At the time, Taiwan's government expressed sorry and anger over Panama's decision. It said also it would not compete with China in what it described as a "diplomatic money game".

But Panama's president Juan Carlos Varela said the decision had nothing to do with "checkbook diplomacy."

"I just think it was the right thing to do for my country, for the people of Panama and for the future of a strong relationship between China and Panama," he was quoted by Reuters as saying.

Updated in 2017

Supplementary Sources: International Monetary Fund, NPR and Reuters

Foreign Investment Assessment

Panama's central geographic location in conjunction with its limited manufacturing and agricultural sectors means that the government of Panama, as well as the business community, must aggressively advance foreign direct investment. In this regard, Panama has developed a reputation for being a center of international trading, banking, and services. The dollar-based economy has resulted in low inflation and very little foreign exchange risk. Foreign investors can procure information related to investing procedure, as well as knowledge about expediting projects through the Panamanian Vice Ministry of Foreign Trade.

Agriculture and Industry

Agriculture: bananas, rice, corn, coffee, sugarcane, vegetables; livestock; shrimp
Industries: construction, petroleum

Import Commodities

capital goods, crude oil, foodstuffs, consumer goods, chemicals

Import partners

Japan 33.2%, US 11.4%, China 9.1%, South Korea 7.7%, Singapore 7.1%

Export Commodities

bananas, shrimp, sugar, coffee, clothing (1999)

Exports partners

US 13.9%, Nigeria 9.8%, Germany 8.1%, South Korea 7.8%, Peru 5.1%, Costa Rica 4.9%, Belgium 4.8%, Japan 4.5%

Ports and Harbors

Balboa, Cristobal, Coco Solo, Manzanillo (part of Colon area), Vacamonte

Telephone System

general assessment - domestic and international facilities well developed; cellular mobile usage extensive and on the increase; international: country code - 507

Internet Users

120,000 users estimated in recent years; internet usage on a notable increase

Labor Force

1.19 million; note - shortage of skilled labor, but an oversupply of unskilled labor; labor force by occupation - agriculture 20.8%, industry 18%, services 61.2%

Legal System and Considerations

Legal system is based on civil law system; judicial review of legislative acts in the Supreme Court of Justice. A problem for foreign investors in the fact that judicial pleadings are not always a matter of public record, nor is the process always transparent. Powerful locals with political influence can sometimes be a factor and so objectivity of rulings can be suspect. The court system also suffers from case backlogs and so the judicial process is not swift. One alternative mechanism for the settlement of disputes is via the Center for Reconciliation and Arbitration established by the Panamanian Chamber of Commerce. Finally, Panama became a member of the International Center for the Settlement of Investment Disputes (ICSID) in 1996.

Corruption Perception Ranking

See full list, as reported by Transparency International, elsewhere in this Country Review.

Cultural Considerations

Western norms predominate. Punctuality, although not strictly adhered to in daily living, is expected in business circles, particularly with foreigners. As in all parts of Latin America, formality is the norm. Always address people by their title and last name until invited to do otherwise.

Country Website (s)

N/A