The Report: Panama 2015

Despite slower GDP growth of 6.2% in 2014, according to the Ministry of Economy and Finance, Panama remains one of Latin America’s fastest growing economies, a trend set to continue in coming years with the IMF forecasting average annual growth of around 6.5% over the next five years.

Country Profile

Though one of Latin America’s fastest growing economies, Panama’s political situation stands in contrast to its economic performance. The past decade has seen sustained economic growth, while institutional development struggled to keep pace. Though more than two decades of peaceful democratic transfers of power have facilitated economic development, Panama is now faced with the challenge of maintaining steady growth while overcoming a number of hurdles, in particular marked social inequality and a lagging education system. The government of Juan Carlos Varela has placed particular emphasis on social programmes and the fight against corruption, a move expected to lead the country to improved governance and less social inequality. Though it is too soon to judge the overall effectiveness of the current administration’s efforts to create a more transparent government, by and large the encouraging trajectory of the Central American republic looks set to continue in the future.

This chapter features interviews with Isabel de Saint Malo de Alvarado, Vice-President and Minister of Foreign Affairs; Victoria Marina Velásquez de Avilés, Secretary General, Central American Integration System (SICA); Gina Montiel, Manager, Central America, Mexico, Panama, and the Dominican Republic, Inter-American Development Bank.

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Panama’s sustained economic growth continued in 2014, with the economy expanding by 6.2%, according to the Ministry of Economy and Finance. The figure represented a slowdown from average annual GDP growth of 7.8% over the six years to the end of 2014 – including double-digit growth in 2011 and 2012 – and was partly due to the impact of a weaker global economy, the completion of major public works and slowing public sector spending. Even so, Panama’s construction boom continued in 2014, with that sector expanding by 14.9%, while the real estate and services sector expanded by 9.7% and the transport, storage and communications sector by 6%.

This chapter features interviews with Dulcidio De La Guardia, Minister of Economy and Finance; Melitón Arrocha, Minister of Commerce and Industry; and Erick Campos, Managing Director, Fitch Central America.

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A pillar of the economy, the Panama Canal’s contribution to the national treasury exceeded $1bn in the 2014 fiscal year, while its direct contribution to GDP reached $2.7bn (6%). The canal saw 325.8m PC/UMS tonnes of cargo pass through the same year, an increase of 2% on 2013, driven primarily by the dry bulk segment, which grew by 20% year-on-year. The Panama Canal Authority estimates its indirect contribution to GDP to be 29%. The canal’s eight-year expansion project, which reached 90% completion in June 2015, will double the waterway’s capacity and have a wide impact on the Panamanian economy. Beyond an increase in toll revenues, it is expected to impact areas as varied as the supply chain, trans-shipment activity and industrial real estate space. Ultimately, it should help Panama retain the importance in global shipping the country has enjoyed for the past century, while solidifying its status as a regional hub.

This chapter features interviews with Jorge Luis Quijano, CEO, Panama Canal Authority; and Juan Carlos Croston, President, Maritime Chamber of Panama.

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With a dollarised economy, low inflation and relative political stability, Panama remains a highly attractive regional financial centre. Recording strong performance in 2014, the country’s International Banking Centre, which contributes 7.5% to Panama’s GDP and comprises the national banking system and international banks, is well capitalised with total assets of some $111.4bn as of March 2015. In light of the country’s inclusion in the grey list of the Financial Action Task Force, authorities are currently taking steps to adapt sector legislation to enhance transparency and improve its anti-monetary laundering/counterfinancing of terrorism regime. The banking sector’s outlook is positive, with Panama’s economic environment likely to remain strong with steady growth in loans, deposits and overall assets, while the competitive landscape is likely to see the entrance of new players.

This chapter features interviews with Rolando de León de Alba, General Manager, Banco Nacional de Panamá; and Robert Williams, General Manager, Scotiabank Panama.

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Capital Markets

Panama’s capital markets are highly internationalised, with the financial stability of a dollarised economy helping attract global firms looking to expand their Latin American footprint. Though the country has already established itself as a regional banking hub, Panama’s non-bank financial sector still has room to grow. While insurance sector assets nearly tripled in the decade to 2013, from $704.2m to $2.05bn, their share of GDP remained virtually unchanged, at 5-5.5%. Similarly, the total market capitalisation of the Panama Stock Exchange stood at $13.44bn at end-2013, equivalent to 33.3% of GDP, down from 42.8% in 2005 and 36.3% in 2010, and still below the 46.7% recorded on Brazil’s BOVESPA. Panama’s financial markets are expected to benefit from continued growth in 2015 with reasonably low inflation, as efforts toward greater transparency, efficiency and global integration continue.

This chapter contains interviews with Felipe Chapman, President, Bolsa de Valores de Panamá; and Jorge Vallarino Miranda, Executive Vice-President, Global Bank.

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In global terms Panama ranks as a small but dynamic national market for insurers. According to the Superintendency of Insurance and Reinsurance of Panama, general insurers wrote gross premiums of $791m in 2014, 6.2% more than in 2013, while life/health insurers wrote gross premiums of $552m, up 10.8%. Total insurance penetration was 3.07% that same year, with total density at $342 per capita. Though these figures are high in the context of Central America, where penetration varies from a low of 1.2% per capita in Guatemala to 2.2% in El Salvador, they remain low by the standards of OECD member states such as Chile (with penetration of 4.2% of GDP and density of $678 per capita), Spain (5.6% and $1591), Portugal (6% and $1716) and the US (11.6% and $5499). With significant room for organic growth, the micro-insurance, health insurance and life insurance markets continue to offer the best opportunities.

This chapter contains an interview with Mauricio de la Guardia, CEO, Internacional de Seguros.

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Transport & Logistics

Making up 18.5% of Panama’s GDP at a value of $6.6bn in 2014, the transport, storage and communications sector has historically been a pillar of Panama’s growth. The solid performance of the transport and logistics sector, which grew more than 17% annually between 2007 and 2014, is set to continue, driven in large part by planned substantial public investment. According to the Strategic Government Plan 2015-19, investment in transport and logistics will total some $6.5bn in that period, with $3.28bn earmarked for logistics projects and $3.21bn for urban transport. The $2bn second metro line in Panama City is one of the plan’s flagship projects for the sector. Beyond the opportunities that this will generate for private players, the increased investment is expected to enable Panama to maintain regional leadership in the highly competitive sector.

This chapter contains an interview with Aitor Ibarreche, CEO, Panama Ports Company.

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Profiting from stable economic growth, Panama’s retail sector has continued to expand over the past two years. The entry of luxury brands to the local market has diversified the retail landscape while growing demand for retail space has also fuelled the construction boom. The sector’s outlook is promising, with a number of indicators pointing toward continued growth in retail consumption. Between 2007 and 2010 poverty levels decreased by 11%, while the middle class, which now represents nearly 40% of Panamanian society, according to World Bank statistics, grew by 10%. The country also boasts the lowest level of inflation in Central America, with a rate of 2.6% at end-2014. Moreover, it has experienced a significant increase in the number of foreign residents, which have become an important high-end target for retail chains. Buoyed by the rising popularity of e-commerce among local consumers, the online retail market is particularly promising.

This chapter features an interview with Abdul Waked, President, Grupo Wisa.

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Construction & Real Estate

Buoyed by a combination of factors, including the country’s prime geographic location, sustained economic growth and the influx of foreign investment in recent years, Panama’s real estate market has seen unprecedented growth since 2006. Today it is a key component of Panama’s economy, amounting to $4.6bn or 12% of GDP in 2014. Though fast growth has led the cost of land to skyrocket, sometimes as much as three-fold, a growing middle class and a significant housing deficit, coupled with thriving industrial and retail segments, make for a positive outlook for the real estate sector. Meanwhile, representing $5.1bn and 14% of the nation’s growing GDP, the construction sector is another dynamic component of the economy. According to the Panama Construction Chamber, the sector grew by 14% in 2014 and is set to expand by 10% in 2015, with the residential market offering the most potential for dynamic growth. This chapter contains an interview with Ramón Arosemena, Minister of Public Works; and Alberto Vallarino, President, Grupo Verdeazul.

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Energy & Utilities

Panama’s energy and utilities sector could be poised for a comeback. With a vision to turn Panama into an energy hub, the administration of Juan Carlos Varela is looking to strengthen the existing electricity and hydrocarbons market and its infrastructure, using both public and private investment. Multimillion-dollar investments in fossil fuel power generation, network infrastructure and renewables are in the pipeline over the coming five years. The electricity segment is set to undergo significant expansion in the coming years, with a 700-MW extension of the fossil fuel generation base under way. On the hydrocarbons front, various new terminals and special economic areas for oil are planned. The possibility of larger vessels crossing the canal, like LNG carriers, has also generated renewed interest. The addition of power through renewables and connectivity to networks in Central America and South America could drive Panama to become an energy hub for export in the region.

This chapter contains an interview with Rafael Pérez-Pire, General Manager, Unión Eólica Panameña.

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Panama’s dynamic ICT sector has been a key enabler of the country’s high-growth, services-based economy. Strong technical infrastructure coupled with a robust legal regime make for favourable conditions for local and international technology companies. The “Global Information Technology Report 2015”, published by the World Economic Forum, ranked Panama 51st among 143 countries in terms of the quality and potential of its ICT infrastructure. With this score, Panama is among Latin America’s leaders in the field, outranked only by Chile (38th) and Costa Rica (49th). With a favourable location, good ICT infrastructure and attractive fiscal policy, the country is in a prime position to establish itself as a call centre outsourcing hub for the region. As efforts to enhance the e-government system and introduce initiatives for the full digital inclusion of Panama’s citizens continue, the sector’s outlook remains robust.

This chapter contains interviews with Jorge A Motta, National Secretary of Science, Technology and Innovation; and Agustín de la Guardia, Executive Vice-President and General Manager, Cable & Wireless Panama.

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Buoyed by expanded connectivity and increasing investment, Panama’s tourism sector has experienced unprecedented growth in the past few years. Today, it is a pillar of economic development, generating more revenues than transit fees from the Panama Canal ($1.92bn) or the Colón Free Trade Zone ($1.9bn). According to the Tourism Authority of Panama, visitor numbers have grown every year since 2002, save for a slight contraction of 0.8% in 2009, with total arrivals exceeding 2.3m in 2014. Sector revenues have followed a similar upward trend, growing by 7.3% in 2014 to nearly $5.5bn, up from $5bn in 2013 and a five-fold increase on the $1.1bn generated in 2005. The current’s government’s policy of diversification is set to usher in a host of new developments outside the capital likely to strengthen key tourism subsectors, in particular the ecotourism and “sun, sea and sand” segments.

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Though agricultural development in Panama has historically been hampered by a series of structural issues, including fragmented ownership of land, limited access to financing and deficient transport infrastructure, efforts are now under way to boost agricultural output. According to Panama’s National Institute of Statistics and Census, agriculture and livestock GDP increased steadily over the 2010-13 period, rising from $764.4m to $863.1m. The upward trend came to a halt in 2014, however, with the sector’s GDP falling 0.2% to $861.3m. The sector’s contribution to overall GDP has declined rapidly in the past decade, alongside the continuing industrialisation of the economy; in 2014 it stood at 2.4%, down from 8% in 2000. Soon after assuming office in 2014, President Juan Carlos Varela unveiled a multimillion-dollar plan to boost domestic agricultural production and enhance food security, a move expected to contribute to the revitalisation of the sector in the coming years.

This chapter features an interview with Carlos Fernández, President, Chamber of Commerce, Industries and Agriculture of Panama.

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Despite notable achievements in the past decade, including reaching universal coverage at the primary level, by international standards the quality of Panama’s education system continues to lag significantly. Panama ranked 83rd out of a total of 144 countries for the quality of its education system in the World Economic Forum’s “Global Competitiveness Report 2014-15”, down eight places from 75th in the previous year’s report (out of 148 countries) and behind regional neighbours Costa Rica (21st) and El Salvador (63rd). Curricular reform introduced in 2010 has increased pertinence and retention rates, while a strengthening of the accreditation process for universities has also brought about improvements at the tertiary level. However, a disconnect between the educational offering and labour market needs remains a concern. A rising budget and push to expand the post-secondary offer are indicative of the current government’s commitment to improve education outcomes, a move which has become key to ensuring sustainable economic growth.

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Despite a number of setbacks, Panama’s health care sector has seen significant advancement in recent years. The former administration of Ricardo Martinelli oversaw a period of significant infrastructure expansion, and the country is now closer than ever to achieving universal coverage. Meanwhile, the government of Juan Carlos Varela has remained committed to improving access and increasing efficiency, while maintaining the previous government’s emphasis on expanding public infrastructure. The administration now faces the task of addressing the myriad of challenges that continue to affect the health care sector, in particular capacity and health personnel shortages, while leading the country through the transition to a prevention-focused health care model. Though the recent rise in sector infrastructure is an encouraging step to improving access, reducing waiting lists and improving health outcomes, the severe skill shortage remains an obstacle to the sector’s development, and one that will require a multi-faceted approach.

This chapter features an interview with Francisco Javier Terrientes Mojica, Minister of Health.

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This chapter provides an overview of Panama’s tax regime, covering areas of particular interest to investors such as corporate and individual income tax, dividend tax, taxation treaties and import duties, among other areas. In addition, it features a viewpoint by Luis Laguerre, Partner at KPMG Panama, on tax treaties and Panama’s international financial services cluster.

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Legal Framework

Featuring an interview with Eduardo Morgan Jr, Principal Partner and Chairman of the Board at Morgan & Morgan, this chapter provides an overview of Panama’s legal framework, covering a range of topics from intellectual property rights to labour laws and investment incentives, among others.

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The Guide

This chapter contains information on hotels, government agencies and other listings, as well as useful tips for visitors on a range of topics such as visa requirements, currency and communications.

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Table of Contents

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