Doing Business in Panama 2011

An Expert's View about Business Environment in Panama

Last updated: 25 Apr 2011

Market Overview
Panama has historically served as the crossroads of trade for the Americas. Its strategic location as a land bridge between two oceans and the meeting of two continents has made Panama not only a maritime and air transport hub, but also an international trading, banking, and services center. Panama’s global and regional prominence is being enhanced by recent trade liberalization and privatization, and it is participating actively in the hemispheric movement toward free trade agreements. Panama's dollar-based economy offers low inflation in comparison with neighboring countries and zero foreign exchange risk. Its government is stable and democratic and actively seeks foreign investment in all sectors, especially services, tourism and retirement properties.

Due to the country's historic evolution, which focused resources overwhelmingly on services and transactions, the assembly and manufacturing sectors – largely comprised of production of items such as processed foods, chemical products, construction materials and a small and declining clothing sector - remain severely underdeveloped. This distortion has contributed to great income disparities, with social and economic inequalities marked by a high percentage of the population living at or near the poverty level, with significant unemployment and limited education and other social benefits.

In 2010 the three major credit rating agencies – Standard & Poor’s, Moody’s, and Fitch - all raised their credit ratings for Panama to investment grade, granting the Government of Panama instant international recognition for recent tax reforms and its record of steady GDP growth while keeping its deficits under control (even in 2009, a dismal year for the world economy, the Government of Panama’s deficit was only 1% of GDP). Not only does the investment-grade rating lower the cost of borrowing for the Government of Panama, but it sends a strong market signal that Panama, even while carrying a debt ratio that is relatively high, is one of only five Latin American countries to achieve this distinction.

Panama's economy is based primarily on a well-developed services sector, accounting for about 75% of GDP. Services include the Panama Canal, banking, the Colon Free Zone, insurance, container ports, and flagship registry. Panama is currently engaged in the Panama Canal expansion project. This project, in conjunction with the expansion of its port capacities on both the Atlantic and Pacific coasts, will solidify Panama’s unique global logistical advantage.

The U.S. is Panama's most important trading partner, with about 30% of the import market, and U.S. products enjoy a high degree of acceptance in Panama. However, international competition for sales is strong across sectors including telecommunications equipment, automobiles, heavy construction equipment, consumer electronics, computers, apparel, gifts, and novelty products.

The Colon Free Zone (CFZ), the second largest in the world after Hong Kong, is a vital trading and transshipment center serving the region and the world. CFZ imports – a broad array of luxury goods, electronic products, clothing, and other consumer products - arrive from all over the world to be resold, repackaged, and reshipped. Because of this product mix, U.S. market share is somewhat lower in the CFZ than in Panama. Hong Kong is the CFZ's biggest supplier, while Colombia and Ecuador are the two largest destinations for exports from the CFZ.

Market Challenges
Panama’s inflexible labor laws are a source of concern for prospective investors. Firing practices are excessively regulated, reducing labor mobility and inhibiting hiring. While inexpensive in global terms, Panama's minimum wage is relatively high in a Central American context. In addition, competent technical employees fluent in English may be hard to find. These labor issues, coupled with relatively high costs for electricity, result in higher than average unit production costs in Panama.

Instances of questionable government practices continue to affect large U.S. investors in Panama. These include bidding procedures, contract obligations, and a slow and imperfect judicial system. The current administration has announced an ambitious agenda of financial reform, anticorruption and transparency, and reform of the Social Security system. However, progress on these fronts appears sporadic at best. Continued improvements in the areas of educational and judicial reform will be critical for Panama to improve its business competitiveness standing in the region.

Market Opportunities
Panama has no restrictions on the outflow of capital or outward direct investment. Its accession to the World Trade Organization in mid-1997 opened up trade and lowered tariffs across the board, giving Panama the lowest average tariff rate in Latin America. The Food Safety Authority has largely eliminated slow and arbitrary procedures for issuing phytosanitary permits.

Consumer attitudes and many brand preferences are similar to the U.S. U.S. television, radio and magazines are all available and popular in Panama. Panamanians frequently travel to the U.S. for vacation, medical treatment, study and business. Their buying patterns and tastes are similar to those of U.S. consumers.

U.S. goods and services enjoy a reputation for high quality and are highly competitive. Panama has in recent years established itself as a regional competitor to Miami for consumer retail, which may result in a larger market than its domestic population would indicate. The country boasts the highest per capita GDP in the region at an estimated US$ 16,235 in 2010 according to the Economist Intelligence Unit. However, income distribution is highly skewed toward a relatively small, consumer goods-oriented, economically powerful class. This class enjoys a very high level of disposable income. They prefer high quality trend-setting goods where price is a secondary determinant in the purchasing decision.

The expansion of the Panama Canal – a US$5.25 billion project that will double capacity and allow passage of post-Panamax vessels - was approved in a national referendum in 2006 and started in 2007. The Government of Panama sees this project as essential to maintaining its stature in global transport and hopes to complete it in 2014. Although there have been slight delays in the startup, we believe that the project will be completed at some time close to this date and will have a significant impact on U.S. ports, which are already positioning themselves to take advantage of the expansion.

Read the full market research report

Posted: 24 April 2011, last updated 25 April 2011

See more from Business Environment in Panama

Expert Views    
Selling U.S. Goods and Service in Panama   By U.S. Commercial Service
2010 Exporter Guide   By Foreign Agricultural Service
Infrastructure Projects   By U.S. Commercial Service
Doing Business in Panama 2011   By U.S. Commercial Service
Trade Regulations and Standards   By U.S. Commercial Service