Doing Business in Panama 2012

An Expert's View about Business Environment in Panama

Posted on: 26 Apr 2012

Market Overview
Panama has historically served as the crossroads of trade for the Americas. Its strategic location as a 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. Given the higher educational requirements for the service sector jobs Panama’s economy created, 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 underemployment 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 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, Panama’s economy grew 2.9% and 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 the capacities of its ports on both the Atlantic and Pacific coasts, will solidify Panama’s global logistical advantage in the Western Hemisphere.

This logistical platform has aided the success of the Colon Free Zone (CFZ), the second largest in the world after Hong Kong, which has become 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, primarily to regional markets. Because of this product mix, U.S. brand market share is significant, even if most of those products are made in Asia. Hong Kong is the CFZ's biggest supplier, while Colombia and Ecuador are the two largest destinations for exports from the CFZ.
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. In 2011, U.S. exports to Panama jumped 34% to $8.25 billion – in no small part due to the fact that Panama’s economy grew 10.5%. However, international competition for sales is strong across sectors including telecommunications equipment, automobiles, heavy construction equipment, consumer electronics, computers, apparel, gifts, and novelty products.

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 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 fiscal reform, anticorruption and transparency improvements, and reform of the Social Security system. With the exception of fiscal reform, however, there has been little to no progress on these fronts. Continued improvements in the areas of educational and judicial reform will be critical for Panama to improve its business competitiveness standing in the region.
International indexes generally rate Panama as one of the best countries in Latin America for business and investment. At the same time, however, U.S. investors have voiced concerns about corruption and inconsistent treatment. For these reasons we encourage U.S. companies interested in investing in Panama to read our report on Investing in Panama thoroughly and to contact us for more information.

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Posted: 26 April 2012

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