The Report: Panama 2014
For the past decade Panama has registered impressive economic growth. According to the World Bank, GDP growth averaged 6.8% from 2000 to 2012, while government figures show double-digit growth for four of the past seven years. Economic development has been fuelled by heavy public sector spending on infrastructure, particularly the $5.25bn expansion of the Panama Canal, which should ensure long-term growth. With GDP growth expected to decelerate but still average 7-9% from 2013 to 2015 and 6-8% through to 2020, Panama is set to remain a unique and exciting destination for investment in the short to medium term due to its solid macroeconomic record, importance to global trade and strong investment framework. Public sector spending has emerged as the primary driver of economic growth in the past few years as the country prepares for the post-Panamax era of the Panama Canal. The canal’s impact, both domestically and internationally, will expand substantially upon the completion of a third set of locks scheduled for 2015. Putting exact figures on the domestic impact of the expanded waterway is a tall order, though further capitalising on the country’s status as a major trade route will most certainly be crucial to future economic progress.
Country Profile
Panama’s geostrategic location has historically granted it an influence on a regional and global level that often surpasses its small stature. Since the turn of the millennium it has been diversifying its contribution to regional and global business through the expansion of its status as an international finance, transportation and business centre. Today, with the Panamanian government spending on a multitude of infrastructure-related projects of all sizes – most notably the expansion of the canal – driving the nation’s pace-setting economic expansion, it appears to be a historic moment for the country. Yet, several obstacles hamper Panama’s seemingly clear path to development, including a struggling education system, the existence of stark inequalities in rural areas and a political system that belies its economic prowess. This chapter features interviews with President Ricardo Alberto Martinelli Berrocal; Ed Fast, Canadian Minister of International Trade; and Enrique García Rodríguez, Executive President, Development Bank of Latin America.
Explore chapterEconomy
Since gaining control of the Panama Canal in 1999, the country has recorded impressive economic expansion. GDP growth averaged 6.8% from 2000 to 2012, according to the World Bank, and double-digit growth for four of the past seven years, government data show. Public sector spending on national infrastructure has emerged as the primary driver of expansion in the past few years as the country prepares for the post-Panamax era of the canal. The canal’s impact both domestically and internationally is set to expand substantially upon the completion of a third set of locks, guaranteeing long-term economic progress. The already-established logistics and financial sectors will continue to play leading roles in the wider economy in the long term, while nascent sectors such as tourism and mining show significant potential for growth. Bureaucracy and poor human resources development remain the main hindrances to national economic development. This chapter includes interviews with Frank de Lima, Minister of Economy and Finance; Nicolás Ardito Barletta, Director-General, National Centre for Competitiveness; and José Pacheco Tejeira, Vice-Minister of Foreign Trade.
Explore chapterThe Canal
At $5.25bn, the Panama Canal expansion project is the largest single investment in the country’s history. The annual contribution of canal tolls to the national treasury has more than quadrupled from $201m in 2000 to $981.8m in 2013. The new set of locks will accommodate post-Panama ships, which can carry up to 13,000 twenty-foot equivalent units (TEUs), compared to the current maximum of 5000 TEUs. Just as the nationalisation of the Panama Canal changed the country’s long-term economic competitiveness, so too will the completion of its expansion project. Not only are revenues from the canal expected to double by 2020, fuelling continued public sector spending on infrastructure and social programmes, the expansion will secure what is now one of Panama’s primary economic resources for the long term. This chapter includes an interview with Jorge Quijano, Administrator, Panama Canal Authority; and a viewpoint from Søren Skou, CEO, Maersk Line.
Explore chapterFinancial Services
High economic growth over the past few years has benefitted Panama’s banking sector, which has shown a strong and stable performance. From the third quarter of 2012 to the same period in 2013 there was a 12% increase in total assets, with liquid assets registering the highest growth, at 22%. Assets, deposits and credit continue to grow, although profitability indicators are showing signs of deceleration. With a dollarised economy and free mobility of capital flows, Panama’s highly internationalised capital markets are also showing signs of expansion. In 2013 the traded volume of stocks increased 7% compared to the previous year, reaching $120m. The public sector plays a central role, with a volume of issuance that can make the market vacillate between good and bad years, as happened in 2012-13. Even so, Panama has significant potential to serve as a regional base for international financial institutions operating in global financial markets. This chapter features interviews with Rubens V Amaral Jr, CEO, Banco Latinoamericano de Comercio Exterior; Augusto Restrepo, Vice-President, Bancolombia; and Raúl Alemán, General Manager, Banco General.
Explore chapterInsurance
Following the heavy investment in infrastructure projects of the past few years, the insurance sector has enjoyed a prosperous period. The industry is estimated to be managing assets of around $1.9bn, of which investments comprise $1.3bn, or 70% of the total. As a result of Law 12 of 2012 a new legal framework was created to regulate the sector, bringing it more in line with international standards and offering consumer protection clauses for the first time in Panama. The economy’s recent positive performance has also attracted new insurance companies and reduced the market’s concentration. However, the end of infrastructure projects and uncertainties related to the Panama Canal’s expansion could slow down growth, while strong competition, higher-than average inflation and lower returns on investments are putting downward pressure on insurance companies’ profits. This chapter includes interviews with Dino Mon, Director, MAPFRE-Panama; and Gabriel de Obarrio, CEO, Generali Panama Branch.
Explore chapterTransport & Logistics
Growing at double-digit rates in each of the past five years apart from 2009, the transportation and logistics sector contributed 24.1% to GDP in 2012 and is identified as one of four pillars of economic growth in the Strategic Economic Plan 2010-14. To secure the future of the sector the administration is investing $9.6bn, equivalent to 70% of public sector investment, from 2010 to 2014 in infrastructure upgrades. Public spending on infrastructure extends well beyond the flagship $5.25bn Panama Canal expansion and includes construction of the Panama City Metro, an overhaul of the road network and upgrades to maritime and airport infrastructure. With a business-friendly regulatory framework and the canal’s ability to attract global trade, Panama is set to continue developing the transport and logistics hub. This chapter includes interviews with Rafael Barcenas, Director-General, Civil Aviation Authority; Daniel Isaza, President, Logistics Business Council; Roberto Roy, Minister for Canal Affairs, and CEO, Metro de Panamá; and Pedro Heilbron, CEO, Copa Airlines.
Explore chapterRetail & Distribution
Double-digit GDP growth for four of the past seven years, moderate inflation and high employment have had a positive impact on Panama’s retail sector. According to the National Institute of Statistics and Census, retail revenues increased 19.1% between 2011 and 2012, outpacing those of other service segments, and attracting growing interest from potential foreign entrants, particularly from the US. The sector has been an essential economic contributor, accounting for 14% of GDP in 2012. However, developing new facilities will be crucial for the country to compete with regional shopping destinations. While a gradual reduction in infrastructure investment and salary growth is likely to ease the retail boom of the past three years, sound economic growth is likely to sustain the continued expansion of both purchasing power and retail revenues. This chapter includes an interview with Leopoldo Benedetti, General Manager, Colón Free Trade Zone.
Explore chapterConstruction & Real Estate
A major driver of GDP growth over the past decade, the construction sector generated more than $2.5bn in 2013, accounting for around 9% of GDP, a year-on-year (y-o-y) increase of 30%, according to the Panamanian Chamber of Construction. Public infrastructure works are leading this surge, but the private sector is also playing a significant role through residential and commercial developments. The real estate sector is also experiencing a boom supported by real demand and increased purchasing power among the local population. Preliminary data released by the National Institute of Statistics and Census indicates that real estate, corporate and leasing activities expanded by an average of 10.3% y-o-y during the third quarter of 2013. While prices are slightly on the rise in both residential and commercial segments, indicators suggest that the market is cooling off and reaching a healthy equilibrium. Even so, tax incentives are set to maintain demand and continue to attract foreign investment. This chapter includes an interview with Victor Alberola, President, Fomento de Construcciones y Contratas Central America.
Explore chapterEnergy & Utilities
With demand for power estimated to grow around 7.5% per year until 2016 and maintaining annual averages of 5.6% in the following 10 years, managing the balance between demand and supply is a key concern for Panama. In other utility segments, such as water, rising consumption levels are exposing decades-long underinvestment in infrastructure networks. As a result, ambitious investment plans – from both public and private sources – are being rolled out across the utility spectrum. Meanwhile, commercial oil finds in the country’s south-eastern region have led to a preliminary set of rules and regulations to govern oil extraction in years to come. Plans for the diversification of the energy mix include renewables such as wind, solar and biofuel facilities, while the country also seems eager to expand other resources such as gas and, to a lesser extent, coal. This chapter features an interview with Fernando Marciscano, General Manager, Empresa de Transmision Electrica Panamena.
Explore chapterICT
According to the National Public Services Authority, ICT revenues rose from $743m in 2007 to $957m in 2013, maintaining a contribution to national GDP of around 3%. Much of this growth has been generated through the expansion of mobile services and broadband, which continue to offer significant room for growth. Fixed-line connections also registered significant expansion, rising 14% year-on-year in 2012, with the installation of 80,000 new lines. Thanks to Panama’s location, foreign investment incentives and connection to the continent’s primary fibre-optic networks, it is well placed to become a regional ICT centre. The biggest challenge facing the sector is capacity, primarily in human resources. A combination of expatriate employment and longer-term educational efforts will be required for the sector to overcome a shortage of skilled ICT professionals and reach its full potential.
Explore chapterTourism
One of four key pillars of economic growth in the Strategic Economic Plan 2010-14, the tourism sector has experienced rapid development in the past decade. According to the World Travel & Tourism Council, the sector contributed an estimated 13.1% to national GDP and was responsible for 12.4% of total employment. Panama City has seen a surge of international hotel chains enter the market in recent years, while the high-end beach and luxury segment is set to receive significant government investment. Moreover, Panama’s strong biodiversity lends itself to a nascent ecotourism sub-sector. Although hotels in Panama City are facing short-term pressure in the form of lower occupancy rates and reduced prices, this is expected to be temporary. Increased investment and major infrastructure projects promise to boost visitor numbers to the capital and ensure long-term growth, especially as incomes rise throughout South and Central America. This chapter features an interview with Ernesto Orillac, Deputy Minister of Tourism.
Explore chapterAgriculture
According to the National Institute of Statistics and Census, the agriculture sector grew 6% in 2011 and 3.9% in 2012. However, its contribution to GDP fell from 8% at the start of the millennium to 2.5% in the third quarter of 2013. One of four key pillars of economic growth in the Strategic Plan 2012-14, the sector has faced a number of challenges. The rapid pace of urbanisation, accompanied by a surge in real estate, has led to a gradual reduction of cultivated surface area and a rise in land prices. Delays in road infrastructure development have also affected profit margins. This has been further compounded by adverse climatic conditions and a rise in crop disease. Government initiatives to improve financial support for local farmers, as well as efforts to expand trade agreements with strategic markets, should bring some dynamism to the sector. Meanwhile, regulations mandating the use of biofuels should encourage new investments and add to the country’s export portfolio.
Explore chapterEducation
As Panama enters a new stage of economic maturity, the quality of its education system has claimed a pivotal role for authorities and the private sector alike. Curricular reform has significantly improved performance across the board: coverage for initial education rose 12.1% from 2011 to 2012, while coverage for primary and pre-middle school education rose 2.1% and 0.8%, respectively. In the World Economic Forum’s “Global Competitiveness Report 2013-14”, the quality of Panama’s education ranked 75th out of 148 countries, a notable leap from the previous year’s ranking of 112th. A new accreditation procedure is expected to address poor institutional quality among universities, while heightened public spending for the sector should not dissipate even with a change of government in 2014. Economic growth should continue to drive demand for higher education, a more diverse curriculum and increasing opportunities to use technology in the classroom.
Explore chapterHealth
At the height of its economic success, Panama seems to be seizing the opportunity to expand medical infrastructure. Funding for health in both the public and private sectors is rising along with spending per capita on medical services. Five new hospitals under construction are expected to add 1500 new beds and benefit some 658,000 patients, boosting the quality of health care in areas outside of the capital. A new medical city, known as Ciudad Hospitalaria, will consist of a 31.9-ha, $587.5m facility that will provide 1700 beds, 40 surgery rooms and 200 emergency room beds. Successful expansion of the sector will nevertheless depend on overcoming its most fundamental setback – a lack of medical staff, which could cause significant operational deficits. Indeed, Panama lags behind regional averages in its ratio of medical professionals to population. A new law allowing foreign medical professionals to work in specific jurisdictions could alleviate some of the pressure for the time being.
Explore chapterTax
The tax chapter provides an overview of the Panamanian tax regime, highlighting accounting and reporting procedures as well as the main types of taxies levied. This chapter also provides a look at international agreements and the establishment process for various types of firms, and features an interview with Carlos Karamañites, Partner, KPMG Panama.
Explore chapterLegal Framework
Recent economic, social and infrastructure developments have brought along changes in key legislation. This chapter provides an overview of current legal changes, highlighting areas such as business licences and employment contracts, as well as intellectual property protections and rules and regulations for maritime firms and vessels. In addition, it features a viewpoint from Francisco González-Ruiz, Partner, Icaza, González-Ruiz & Alemán.
Explore chapterThe Guide
In addition to an article on the expanding domestic film industry in Panama, this chapter contains useful tips for business and leisure travellers, including hotel listings and contact information for ministries, embassies and more.
Explore chapterTable of Contents
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