The economic development Panama has experienced over the past decade has had a lasting impact on the tourism sector. Buoyed by expanded connectivity and increasing investment in hotels and convention centres, the sector has experienced unprecedented growth in the past few years. Today, it is a pillar of Panama’s 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 Ministry of Tourism. The sector’s estimated direct contribution to GDP surpassed $2.6bn in 2014, according to the Tourism Authority of Panama (Autoridad de Turismo de Panamá, ATP), while its total contribution reached close to $5.5bn, or around 11.7% of GDP. Tourism’s role in employment is equally important – according to the ATP, the industry was responsible for an estimated 134,000 jobs in 2014.
Because of its ability to drive economic growth in areas of the country generally not impacted by other sectors, such as logistics and finance, authorities have begun to view tourism as a way to promote rural development. The government’s policy of diversification is set to usher in a host of new developments outside the capital, which is likely to strengthen key tourism sub-sectors, especially the ecotourism and “sun, sea and sand” segments. Meanwhile, investment in new infrastructure is set to drive growth in the market for meetings, incentives, conventions and exhibitions (MICE).
By the Numbers
According to the ATP, visitor numbers have grown every year since 2002, save for a slight contraction of 0.8% in 2009. Total arrivals exceeded 2.3m in 2014, up 4.7% on 2013. Of that total, 15.9% (365,664) were cruise passengers and 8.4% (193,908) were day travellers. 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. According to the World Travel & Tourism Council, the international market far outweighs domestic contributions, accounting for 79.3% of sector revenues in 2013. Even so, domestic spending on travel and tourism reached some $1.2bn in 2014, up 4.6% from $1.15bn in 2013, and it is expected to continue to grow at a stable annual average growth rate of 3.7% in the 2014-24 period.
The average tourist stay was 8.5 days in 2014 with an average daily spend of $280, up from $248 in 2013, according to the ATP. The largest share of tourists (75.6%) visited for leisure, looking to take advantage of Panama’s cultural, ecotourism, and beach offerings. Of these visitors, a growing segment from Latin America and the Caribbean is attracted by the country’s multiplying retail outlets. In addition, decade-long economic growth continues to attract a significant number of business travellers to the capital, who account for 9.6% of total arrivals, more than the proportion that came for conventions and events (1.5%) or to visit relatives (0.4%) but less than came for other reasons (12.9%).
Markets
According to the ATP, South America remained the largest source market for tourists to Panama in 2014, accounting for 48.1% of total arrivals, followed by North America (24.3%), Europe (12.7%), Central America (9.3%), Asia (2.6%) and the West Indies (2.5%). Tourist flows from South America increased by 2% year-on-year (y-o-y), totalling 774,090 visitors, with the largest shares coming from Colombia and Venezuela, with 281,775 and 187,776, respectively. The number of arrivals from North America, meanwhile, grew at a faster rate of 4.9% y-o-y to reach 391,301 tourists, most of them from the US (269,965) and Mexico (68,340). In the case of Mexico, this figure represented growth of 13.3% on the previous year. Of all regions, Europe registered the highest growth in arrivals in 2014, increasing by 20.5% to reach 169,542. Though Spain continues to lead the source markets from that continent, with 661,596 visitors, tourists from Germany and Italy increased by 23.4% and 20.5%, respectively, contributing a total of 19,563 and 21,098 visitors. Panama City’s Tocumen International airport remains the main point of entry, accounting for 69.8% (1.6m) of total arrivals in 2014, having risen by 5.4% on the previous year.
Growth Drivers
The sector’s sustained growth is due to a range of factors, chief among which are increased efforts to promote Panama as a tourist destination and the improvement of tourism infrastructure. At the international level, since late 2012 the ATP has run a campaign called “Panama: The Way” showcasing the country’s rich combination of tourist offerings. The campaign contrasts the cosmopolitan side of Panama City with its Caribbean beaches and its indigenous and colonial cultural heritage. Improving tourism infrastructure has also been an important part of the ATP’s work to develop the sector. Out of its budget of $52m in 2014, some $38.4m was allocated for investment in infrastructure improvements and marketing efforts. The ATP’s budget for 2015 reaches $57.5m, of which roughly $18m is earmarked for marketing, $4m for the development of Panama as a MICE destination and $2m for the development of the country brand.
Connectivity
Increasing connectivity is another factor supporting sector growth. As a growing regional hub, Panama City’s Tocumen Airport continues to play a key role in the sector’s expansion. The airport, which already offers connections to some 70 international destinations, is currently undergoing an expansion that will add a new terminal and 20 gates. The upgrades are scheduled for completion in 2016, at which point the airport will have a capacity to handle 18m travellers a year. Panama’s network already includes 13 other airports, connecting Panama City with provinces such as Chiriquí, Coclé, Los Santos and Bocas del Toro.
New airports have facilitated tourist arrivals to other parts of the country and should help spread the benefits of the growing sector throughout Panama. For example, the new $17.3m Scarlet Martinez International Airport, also known as the Río Hato airport, is just 10 minutes away from the beach resorts of Coclé, and the area is already seeing a surge in hotel investment, according to the ATP. Río Hato began receiving flights from Canada in 2014, and several South American airlines have shown interest in making the facility one of their destinations. Similarly, the new $27.4m Enrique Malek airport in David, Chiriquí grants visitors access to a growing tourist offer in that province, which combines a strong sun, sea and sand segment with a cultural and retail shopping experience in the city of David. The $58.3m Colón airport will likewise facilitate access to Panama’s Caribbean coast.
In the short term, the country’s connectivity is set to continue improving with the arrival of new airlines and increased flight frequencies. In December 2014, AirCanada began three direct fights a week from Toronto to Panama City. Aeroméxico began running daily direct flights from Mexico City to Tocumen Airport in May 2015. Lufthansa will operate five flights a week between Tocumen and Frankfurt starting in November 2015. There are also plans to increase flight frequency with Spanish airline Iberia and Air France – Iberia increased its frequency from five to seven weekly flights between Madrid and Panama City in July 2014, and Panamanian authorities are looking to add a second daily flight. Air France, which began flights to Panama in November 2013 with three per week, is now operating five per week, and state authorities are looking to increase this to seven. According to the ATP, negotiations to establish new flights are on-going with several other airlines, including Alitalia, Emirates Airlines, Turkish Airlines, Japanese airline All Nippon, Korea Air and Hong Kong’s Cathay Pacific. To encourage airlines to offer more flights, the ATP subsidises part of the risk associated with flying a new route.
Investment Incentives
The sector has further benefitted from its regulatory environment and investment incentives. The country’s robust framework earned it a competitive spot in the World Economic Forum’s “Travel and Tourism Competitiveness Report 2013”, which ranked Panama’s policy rules and regulations 18th out of 140 countries assessed. The sector’s regulations and basic incentive framework are set out under Law 8 of 1994, which includes benefits such as 20-year, duty-free imports and a 20-year exemption from property tax on hotel investments of at least $50,000 (not including the cost of land). Investments of at least $100,000 that are undertaken to enhance the attractiveness of historical landmarks receive a 10-year tax exemption on improvements made to real estate, as well as a five-year exclusion from income tax payments on company profits. Other tourism-related benefits include incentives for mass transport projects, restaurants and even nightclubs, as long as they are registered with the National Tourism Registry.
The most recent change to the sector’s incentive framework came in November 2012 with the introduction of Law 80, which seeks to promote investment in tourism outside the capital. Law 80 introduced five-year, duty-free imports on materials that cannot be sourced locally, and a 15-year income tax exemption on investments of $250,000 or more in new construction – or $100,000 if the investment is for improvements to an existing structure. This special regime will be in place until 2020. For investments in Panama City, the law grants five-year, duty-free imports on construction materials and 10-year ones for furniture and equipment investments of at least $8m, as well as exemptions from income tax stemming from payments made due to interest earned by creditors. The law further expands incentives to include marine services, convention centres and projects related to agro-tourism, rural tourism, ecotourism, as well as to initiatives in sporting and cultural offerings. This incentive framework has attracted a significant amount of fresh investment in recent years: according to the ATP, from 2010 to 2014 investment under Law 8 and Law 80 totalled $1.2bn.
Hotels
Most of the private investment in the sector has been channelled into Panama City’s growing cadastre of three-, four- and five-star hotels, with the capital experiencing a surge of international hotel chains in recent years. According to the Panamanian Hotel Association (Asociación Panameña de Hoteles, APATEL), between 2010 and 2013, 63 new hotels were built in Panama City, representing an investment of $1.75bn. In 2014 the entrance of nine new hotels, including the Hilton Panama, Ramada Fontanella, Hyatt Place and Hampton Inn, raised Panama City’s room stock by 1554 rooms to reach 11,091, according to APATEL. As of early 2015, the capital city accounted for some 62% of the country’s hotel room stock.
With offerings growing much faster than demand, hotel occupancy rates have been declining since 2010. According to the ATP, in 2014 the average occupancy rate for Panama City was 56%, down from 67% in 2010. Increased competition following the arrival of international chains has also put downward pressure on hotel rates, making Panama City’s hotel industry generally less profitable. Hotel growth in the capital is expected to slow in 2015, although five new hotels are already set to open, including the 283-room Las Americas Golden Tower and the 144-room Crown Plaza Airport Panama hotel. Together, these five will add 729 rooms.
Meanwhile, new incentives under Law 8 are beginning to have an impact, with new hotel investment increasingly flowing into the interior of the country, a trend expected to intensify in the coming years. “Though there are many hotels, very few have been able to successfully integrate the beach and city elements,” Jorge Loaiza, former president of APATEL, told OBG. “I believe this will be key moving forward. We don’t have enough rooms in the beaches, so combining a retail experience with a beach experience is where the market is moving to.” An increase in connectivity outside of the capital is also bolstering investment in new areas. According to the ATP, the hotel offerings at the beaches near the new Río Hato airport is set to reach 4000 rooms in 2015, a significant increase from 2500 at the end of 2013, with international chains such as Riu and Marriott having already shown interest.
Regulatory Compliance
One issue facing the hotel industry is the proliferation of illegal accommodations, which could affect occupancy rates by 6-8%, according to La Estrella de Panamá, a local daily. Authorities have intensified efforts to prevent such practices by introducing Article 21 of Law 80 in 2012, which forbids the rental of accommodations for less than 45 days without a permit, and imposes fines of $5000-50,000 for non-compliance. In early 2015 the ATP announced it would be doubling its awareness campaign on the risks and consequences associated with this activity.
Challenges
Despite the progress seen in recent years, the sector also faces a number of challenges, the most important of which is the lack of human resources and, more specifically, the lack of bilingual workers. In July 2014, Jesús Sierra, former director of the ATP, told local media that an estimated $10m would need to be invested to train human resources for the tourism sector. This skills shortage affects the hotel industry in particular. “I estimate we lack around 5000 workers in the hotel industry,” Loaiza told OBG. “The competition between establishments is fierce and is driving wages up, and this is not sustainable in the long term.”
With the shortage affecting a number of different sectors, authorities are keen to expand the educational offer at the post-secondary level, and the tourism sector is set to benefit from these changes in the medium term. In February 2015 the current government oversaw the tender for the design and construction of the first Bilingual Technical Institute, to be located in the Tocumen area. The institute, which will have a capacity for 10,000 students, is one of many expected to be built in the coming years. The Panama Bilingüe programme, aimed at improving bilingual education, was also established in 2014 and will remain in place until 2019 with an annual investment of $10m.
Policy Priorities
Along with logistics and agriculture, the tourism sector was designated as a key pillar of economic growth in the country’s Strategic Economic Plan 2015-19. According to the plan, the sector is set to receive a total of $222m in public investments during the five-year period. Because sector development has been concentrated in the capital and around the Farallon beaches, the plan calls for diversification in the tourist offerings, with a greater focus on the interior of the country, where the government hopes to promote private investment and extend the economic benefits generated by the sector. The plan envisages the development of specific touristic routes in the country’s interior – specifically in protected areas and indigenous territories – and along the Atlantic coast. Another area specifically targeted for development is MICE segment, and through increased promotional efforts the plan aims to attract more visitors from new source markets, particularly the EU. Also highlighted in the plan is the need to improve the quality of services and human resources and to strengthen public-private partnerships to drive development.
Diversification
To further diversify the tourism offer, the ATP is working on a series of projects outside the capital. For example, it intends to develop the site of the Baru volcano, in Chiriquí Province, with the installation of a cable car that would run a distance of 10 km, connecting a parking lot below with a natural park above, including retail shops. The project, which represents an investment of $30m, is expected to be tendered in 2016, according to the ATP. The province’s MICE capacity is also set to receive a significant boost. The ATP announced plans for the construction of a new convention centre in Chiriquí, representing an investment of another $30m. The province will further benefit from improved connectivity, following the establishment of a new Panama City-David route by Copa Airlines, inaugurated in January 2015.
In Colón, public beaches are being made more tourist-friendly, with the installation of basic infrastructure and access ramps. In addition, the ATP is building a 26-km road connecting Cuango to Santa Isabel, on the Caribbean coast, which will provide access to the beach areas. The tender for this project was awarded in late 2013 to the consortium RPL-CSI Panama for $19.5m. The ATP expects the new road to attract significant investment to the area, which already has planned investments in the amount of $50m. The ATP also announced plans to make the Inter-American Highway more tourist-friendly, with stations every 80 km that will feature restroom facilities, restaurants and retail spaces for sales of artisanal goods.
Ecotourism
Diversification efforts are likely to see further strengthening within the ecotourism segment, already a major component of Panama’s offering. Of the roughly 1400 registered tourist attractions in Panama, 1005 (71.8%) are natural sites. Home to three World Heritage Natural Sites – the Darien National Park, La Amistad International Park and the Coiba National Park – plus another 111 protected areas, the country’s eco-tourism offering is full of variety. Panama has 49 natural parks, reservations and shelters, and other attractions including the Smithsonian Tropical Research Centre and the new Bio-diversity Museum in Panama City. According to Proinvex, the state trade and investment agency, this segment represented roughly one-quarter of Panama’s tourism market in 2012, having grown at an average rate of 12% a year over the previous decade. Proinvex estimates the segment will post average annual growth of 16-19% in the short term, contributing $700m-900m a year to GNP and generating 55,000-80,000 new jobs.
To strengthen this segment, the ATP, in conjunction with the Environmental National Authority, the Smithsonian Institute, the Panamanian Tourism Chamber and the Nature Conservancy, is working on the $4m Ecotur project. With its funds donated by the Global Environment Fund and administered by the Inter-American Development Bank, the project aims to develop protected areas by installing basic infrastructure, such as signs, trails and restrooms. This is expected to benefit rural communities, with significant ecotourism, cultural tourism and agro-tourism potential.
Cultural Magnetism
The cultural segment is another important component of the tourism sector, with 28.1% (or 393) of the country’s registered tourist attractions. The country’s main cultural attraction is Casco Antiguo, the capital city’s historic downtown area. Designated a World Heritage Site by UNESCO in 1997, this area has been undergoing a major renovation since 2011 to preserve and rehabilitate the historic district, which has significantly increased its tourist appeal.
Part of the project has consisted of extending the coastal beltway, known as Cinta Costera. Despite concerns that this would reduce the historic purity of the district, the third stretch of the Cinta Costera was inaugurated in April 2014. Built by Brazilian contractor Odebrecht, the 1.9-km extension consists of three lanes in each direction for vehicles and a separate lane for pedestrians and cyclists. Designed to help de-congest traffic in the capital, the extension connects the neighbourhoods of El Chorrillo, Barraza, San Felipe and Santa Ana, and incorporates a range of tourist-friendly features, including open spaces with food vendors, a 1500-sq-metre skating rink, sports areas, playgrounds, viewing binoculars, entertainment areas for concerts, a football stadium with a 5500-person capacity and a series of pedestrian bridges. In December 2014, the ATP and the National Cultural Institute established a strategic alliance to reinforce the development of cultural tourism in Casco Antiguo with the installation of a series of visitor centres. The first one will be built at the entrance of Casco Antiguo, and will feature mockup versions of buildings with detailed information.
The widening of the Panama Canal, which celebrated its 100th anniversary in 2014, has also driven renovations along its banks, including the addition of parks, trails and restaurants to make these areas more appealing to tourists. At the Pacific entrance to the canal, the new Gehry Museum, a $100m investment and designed by Frank Gehry, celebrates Panama’s bio-diversity and strategic location at the crossroads between the Americas. Close to the museum, also at the Pacific entrance, the new $194m Amador Convention Centre is being built, which will triple Panama City’s existing convention centre capacity and provide a significant boost to the MICE segment (see analysis).
Improving Services
To enhance the quality of services and improve the sector’s competitiveness, the ATP is developing a quality-certification process for entities providing tourism-related services. As of early 2015, standards for the certification of hotels, travel agencies and tourist guides had been established. “We are starting with two pilot projects in Chiriquí and Los Santos, and hope to have them certified in 2016,” Nadgee Bonilla, director of the ATP’s department of tourism development and investment, told OBG. “Meanwhile, we are working on developing another three sets of standards for restaurants, tourist transport and family hotels, which we hope to have ready in 2016.” A total of 12 sets of standards will be developed, covering a range of services in the sector.
The ATP is also working to increase professionalism among sector workers with the establishment of a national programme for tourist culture. Geared towards improving visitors’ experiences in the country, the programme aims to increase knowledge among sector professionals of the country’s tourism products.
Outlook
Despite concerns surrounding falling hotel occupancy rates in Panama City, the sector’s short-term outlook remains positive. Raising hotel occupancy rates in the capital will remain a priority in 2015 and beyond, and this is likely to prompt efforts to market the country at the international level, especially in the MICE segment. The sector is expected to post growth of more than 10% in 2015, according to the ATP, with growth in tourist spending set to exceed 15%. Increased connectivity arising from the expansion of the Tocumen airport and the opening of the Río Hato airport is likewise expected to drive growth in tourist arrivals. The ATP forecasts that this will have a more pronounced impact on European source markets, especially France (75%), Portugal (60%), Germany (23%) and Italy (21%).
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