Investment Climate in Panama
Panama’s investment climate is generally positive. The country’s sterling economic success is based on a strong macro-economic policy and excellent management of the Panama Canal and associated transportation services. Panama has enjoyed some of the highest economic growth in Latin America in the past decade, and most observers predict continued strong growth in the years ahead due to stable and consistent macro-economic policies. Growth tallied 10.5% in 2011 and 7.5% in 2010, after a deceleration to 3.2% in 2009. The Government of Panama (GOP) has promoted economic growth over the last decade through open market policies and by encouraging trade. 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 this report thoroughly and to contact us for more information.
The GOP maintains a liberal regime for foreign investment and investment in financial instruments while, with cooperation from the Panamanian business community, actively encouraging foreign direct investment (FDI). Panama became the fifth country in Latin America to obtain investment grade rating for its sovereign debt in spring 2010, indicating that the three major credit rating agencies have confidence that the Government of Panama has the willingness and ability to manage its debt obligations. With few exceptions, Panamanian law makes no distinction between domestic and foreign companies.
International indexes generally rate Panama as one of the best countries in Latin America for business and investment. Key Panamanian strengths are considered to be cross border trading and access to finance. Weaknesses are poor rule of law, lack of judicial independence, a shortage of skilled workers, corruption, and poorly staffed government institutions that are susceptible to influence. The U.S. Government has received numerous reports of fraud and corruption in connection with titles to property purchased by U.S. persons. In addition, some of Panama’s largest U.S. investors have complained about inconsistent treatment of their concessions and nontransparent government procurements.
In 1998, the GOP enacted the Investment Stability Law, which, among other things, guarantees foreign investors who invest at least two million dollars in Panama, equal treatment under the law to that given to their domestic competition. Under Law 41 (2007), Panama encourages multinational companies to open regional headquarters in Panama by offering various tax incentives. 63 international companies have been established under this law as of January 1, 2012.
On June 28, 2007, the United States and Panama signed the United States – Panama Trade Promotion Agreement (TPA). Panama approved the TPA on July 11, 2007. The US Congress approved implementing legislation on October 12, 2011, and President Obama signed it on October 21, 2011. Presidents Obama and Martinelli have agreed to implement the TPA as quickly as possible, but no date has been set for it to enter into force.
The TPA is a comprehensive free trade agreement. When the TPA enters into force, it will result in significant liberalization of trade in goods and services, including financial services. The TPA also includes important disciplines relating to customs administration and trade facilitation, sanitary and phytosanitary measures, technical barriers to trade, government procurement, investment, telecommunications, electronic commerce, intellectual property rights, and labor and environmental protection.
Under the TPA, U.S. firms will have better access to Panama’s services sector than Panama provides to other WTO Members under the General Agreement on Trade in Services. All services sectors are covered under the TPA, except where Panama has made specific exceptions. Panama agreed to provide improved access in sectors like express delivery, and to grant new access in certain professional services that previously had been reserved exclusively for Panamanian nationals. Moreover, Panama agreed to become a full participant in the WTO Information Technology Agreement. Panama is unique in Latin America in that it is predominantly a services-based economy. Services represent about 80 percent of Panama’s GDP.
The office of Panama’s Vice Minister of International Commerce within the Ministry of Commerce and Industry is the principal entity responsible for promoting foreign investment and exports. Through Proinvex (http://proinvex.mici.gob.pa), it provides investors with information, expedites specific projects, leads investment-seeking missions abroad, and supports foreign investment missions to Panama. However, depending on the character of the planned investment, multiple governmental entities may have a passive or active interest in the investment in terms of ensuring that its parameters of operation are consistent with relevant regulations and requirements for land use, employment, special investment incentives, and business licensing. There is no formal investment screening by the GOP, although the government does monitor large foreign investments.
The GOP does impose some limitations on foreign ownership, such as in the retail and media sectors where ownership must be Panamanian. Foreign retailers, however, have been able to work within the confines of Panamanian law primarily through franchise arrangements. Once the TPA comes into force, U.S. ownership of consumer retail will be allowed. Currently, the exercise of approximately 55 professions is reserved for Panamanian nationals only. In particular, medical practitioners, lawyers, accountants, and custom brokers are occupations currently reserved for Panamanian citizens. The GOP also requires foreigners in various sectors to obtain explicit permission to work. However, the Embassy has not received reports of such restrictions hindering U.S. firms operating in Panama.
The United States – Panama Bilateral Investment Treaty (BIT) entered into force in 1991 with additional amendments in 2001. The BIT ensures that, with some exceptions, U.S. investors receive fair, equitable, and nondiscriminatory treatment, and that both Parties abide by international law standards, such as for expropriation and compensation and free transfers. Once in force, the investor protection provisions in the TPA will supplant those in the BIT. Nevertheless, the BIT preserves for ten years the option for investors to invoke dispute settlement under the BIT with respect to investments covered by the Treaty as of the date of entry into force of the TPA, in the case of disputes that arose prior to the date of entry into force of the TPA, and for disputes arising on or after the date of entry into force of the TPA out of an investment agreement that was in effect before the date of entry into force of the TPA.
The U.S. Government has received numerous property dispute complaints from U.S. investors and individual property holders. The complaints include broken contracts, demands for extra payments, fraud perpetrated by organized crime rings, corruption, and occasional threats of violence. In some cases, these disputes resulted in the loss of the property. Many of these complaints appear to stem from the general lack of titled land in Panama, along with inadequate government administration of the property system and a weak judiciary. The majority of land in Panama - and almost all land outside of Panama City - is not titled; a system of rights of possession exists, but the Embassy is aware of multiple instances where such rights have been successfully challenged. The World Bank’s Doing Business 2012 report notes that Panama has slipped from 113 to 120 out of 183 countries on the Registering Property measure – and remains at 119 for the Enforcing Contracts measure.
The judicial system’s capacity to resolve contractual and property disputes is weak and open to corruption, as illustrated by the most recent World Economic Forum’s Global Competitiveness Report, which rates Panama’s judicial independence as ranking 133 out of 142 countries. Americans should exercise greater due diligence in purchasing Panamanian real estate than they would in purchasing real estate in the United States. Engaging a reputable attorney and licensed real estate broker is strongly recommended, as is including the option for mediation in any contract. Please contact us for a list of qualified professionals in both areas.
Panama enacted Law 80 (2009) which attempts to address the lack of titled land in certain parts of the country; however, it does not cure deficiencies in government administration or the judicial system. In 2010, the National Assembly approved the creation of the National Authority of Land Management (ANATI) to administer land titling; however, decisions taken by ANATI have reinforced investors’ concerns regarding government administration, corruption, and the ability of the judicial system to resolve these issues.
Panama's privatization framework law does not distinguish between foreign and domestic investor participation in prospective privatizations. The law calls for prescreening of potential investors or bidders in certain cases to establish technical viability, but nationality and Panamanian participation are not criteria. The Government of Panama privatized many entities starting in the mid-1990s, but there has not been a privatization in several years. There were press reports of the water authority, convention center, and some functions of the public health system being privatized, but the current government has not indicated a desire to proceed with these or any other privatizations.
Panama has attracted more than one billion dollars per year in Foreign Direct Investment (FDI) since 2006, and for the third time in the past six years has broken the $2 billion dollar mark in FDI, having received $2.1 million in the first nine months of 2011, $205 million more than the same period in 2010. FDI was over 10% of GDP from 2006-2008, although FDI subsequently fell slightly as a percentage of GDP, anecdotally related to the world economic downturn. FDI levels have been driven by investments in the Colon Free Zone, logistics, energy, financial, maritime, construction and transportation sectors.
The Panama Canal Authority started a seven year, $5.25 billion expansion project of the Panama Canal in September 2007. The project entails the building of a third, much larger set of locks, the deepening of Lake Gatun, and deeper dredging of channels. All major contracts have been awarded, but there are opportunities to supply goods and services to the principal contractors. The Panama Canal Authority also procures approximately $250 million in goods and services annually for its daily operations and maintenance. Foreign companies can bid on such contracts under the same terms and conditions as Panamanian companies.
The Government of Panama has ambitious infrastructure investment plans that could run up to $15 billion in the next five years. As part of this effort, the Government of Panama started the process to construct a $1.5-2 billion metro line. The requirements for the project were publicized in early 2010, and an initial line is planned to be completed before the May 2014 elections.
Panamanian Law 22 of 2006, as amended by Law 48 of 2011, among others, regulates government procurement and other related issues. Law 22 was intended to streamline and modernize Panama’s contracting system. It requires publication of all proposed government purchases.
Law 22 also established PanamaCompra, an Internet-based procurement system (http://www.panamacompra.gob.pa) through which the Government of Panama evaluates proposals and monitors the procurement process and holds consultations for public bids, including technical specifications and tender documents. Panama has an administrative court to handle all public contracting disputes. The rulings of this administrative court are subject to review by Panama’s Supreme Court.
Many observers believe political interests are having a greater influence on procurement decisions. Panamanian business leaders have requested that sole-source contracting be used only on an exceptional basis, and U.S. firms have expressed concern about how the Government of Panama establishes and evaluates the criteria used to select a procurement winner. From January to September 2010, PanamaCompra adjudicated over $1.7 billion in over 75,000 contracts, of which $206 million in over 2,000 contracts were sole source. For the same period in 2011, PanamaCompra adjudicated 65,000 contracts valued at over $1.7 billion of which $208 million were sole source; between January 1 and April 15, 2011, the government of Panama procured approximately $32 million in goods and services through approximately 360 sole-source contracts, the majority of which the government justified on grounds of “urgency,” unique service or provider, or to benefit local interests.
There have been numerous news articles – in both Italy and Panama – about alleged corruption involving Italian company Finmeccanica, and the sole source purchase of radar equipment and helicopters for reportedly inflated prices. Separately, the Ministry of Economy and Finance reportedly canceled an almost $300 million loan agreement with the Compagnie Francaise D'Assurance Pour Le Commerce Exterieur (COFACE) after a dispute between the governments of Panama and France regarding Panama’s commitment to increasing tax transparency.
In other instances, U.S. companies have pointed to machinations that appear to favor one company in particular. Examples include extraordinary requirements for prior experience, exclusion of competing technologies through the use of specifications that appear lifted from one company’s brochure in particular, government resolutions that limit even private procurements of a certain technology, lengthy delays in ratification of a contract award that result in two-hour window or sole source procurements, and simply cancelling the procurement and reissuing it with little justification. U.S. companies have also alleged that Panamanian government officials may ask outright for payments to guarantee an award, or more indirectly may insist that they partner with a favored local firm.
Under the TPA, Panama’s procuring entities will be required to use fair and transparent procurement procedures, including advance notice of purchases and timely and effective bid review procedures, for procurement covered by the TPA. U.S. suppliers will be permitted to bid on procurement above certain thresholds of most Panamanian government entities, including key ministries and state-owned enterprises, on the same basis as Panamanian suppliers.
The TPA would also help to strengthen rule of law and fight corruption by requiring Panama to ensure under its domestic law that bribery in matters affecting trade and investment, including in government procurement, is treated as a criminal offense or is subject to non-criminal penalties where criminal responsibility is not applicable. While Panama committed to become a party to the WTO Government Procurement Agreement at the time it joined the WTO, to date, it remains an observer.
Currently, importing entities are required to hold a commercial or industrial license to operate in Panama, which can be obtained through Panama’s online business registration service (http://www.panamaemprende.gob.pa). This website, in which a prospective business owner may register his or her business in 15 minutes, has reduced dramatically the number of opportunities for corruption from the former process which took 60 days and involved numerous interactions with local officials. Importing entities are not required to have a separate import license, with the exception of certain controlled products such as weapons, medicine, pharmaceutical products and certain chemicals.
Panama has no legal restrictions on the transfer abroad of funds associated with or capital employed in an investment. There are no restrictions on capital outflows or convertibility. Panama uses the U.S. dollar as legal tender. Currency conversion therefore is not an issue.
There is no independent monetary policy in Panama, as Panama uses the U.S. dollar for its currency and does not have a Central Bank. Inflation has historically been relatively low and predictable, with a rise to 6.5% in 2011.
The Embassy is unaware of any current international arbitration cases alleging direct expropriation of property by the Panamanian government. Panamanian law recognizes the concept of eminent domain. However, U.S. companies have voiced concern about being reimbursed at fair market value in a case where the government’s issuance of a concession appears to have affected access to their property.
Panama has a court and judicial system built around a civil code, as opposed to the Anglo-American system of case law and judicial precedent. Panama started in September 2011 a four year conversion to the accusatory system which is expected to simplify and expedite criminal judicial cases. Fundamental procedural rights in civil cases are broadly similar to those available in U.S. civil courts, although some notice and discovery rights, particularly in administrative matters, may be less extensive than in the U.S. Judicial pleadings are not always a matter of public record, nor are the processes always transparent.
Many lack confidence in the Panamanian judicial system as an objective, independent arbiter in legal or commercial disputes, especially when the case involves powerful local figures with political influence. For example, Panama ranked 133rd out of 142 countries in judicial independence in the September 2011 World Economic Forum report. Over the last few years, the majority of disputes involving U.S. investors have been related to land purchasing and/or titling issues. Such disputes have been difficult to resolve due to the lack of adequate titling, inconsistent regulations, lack of trained officials outside of Panama City, and a slow and cumbersome judiciary. Some of these disputes have resulted from U.S. investors being unfamiliar with the Panamanian titling system. The court system is slow and prone to massive case backlogs and corruption. For this reason, Panamanian legal firms typically recommend that companies write arbitration clauses into contracts.
Panama’s commercial law is comprehensive and well-established. Its bankruptcy law is antiquated and remains under review to be adapted to modern business practices.
The GOP accepts binding international arbitration of disputes with foreign investors. Panama became a member of the International Center for the Settlement of Investment Disputes (ICSID) in 1996. The United States and Panama signed an amendment to the Bilateral Investment Treaty (BIT) to incorporate Panama's membership into ICSID on June 1, 2000. This amendment took effect in May 2001. Panama also became a member of the World Bank's Multilateral Investment Guarantee Agency (MIGA) in 1997.
There are no legal performance requirements such as minimum export percentages, significant local requirements of local equity interest, or mandatory technology transfer. There are no established general requirements that foreign investors invest in local companies, purchase goods or services from local vendors or invest in R&D or other facilities. There are special tax and other incentives for manufacturers to locate in an export-processing zone (EPZ), which include call centers. Official support for investment and business activity is especially strong for the Colon Free Zone (CFZ), the banking sector, the tourism sector, and EPZs. Companies in the CFZ pay basic user fees and a 5% dividend tax (or 2% of net profits if there are no dividends). Banks and individuals in Panama pay no tax on interest or other income earned outside Panama. No taxes are withheld on savings or fixed time deposits in Panama. Individual depositors do not pay taxes on time deposits. EPZs offer tax-free status, special immigration privileges, and license and customs exemptions to manufacturers who locate there. Investment incentives offered by the GOP are available equally to Panamanian and foreign investors. The incentives do not discriminate or distinguish between Panamanians and foreign investors.
With the current exceptions of retail trade, the media, and several professions, foreign and domestic entities have the right to establish, own, and dispose of business interests in virtually all forms of remunerative enterprise. Foreigners need not be legally resident or physically present in Panama to establish corporations or to obtain local operating licenses for a foreign corporation. Business visas (and even citizenship) are readily obtainable for significant investors. Banking, financial services, and the legal profession are receptive toward attracting foreign business. Once implemented, the TPA will grant U.S. financial service suppliers full rights to establish subsidiaries or branches for banks and insurance companies. Portfolio managers in the U.S. would be able to provide portfolio management services to both mutual funds and pension funds in Panama.
In the banking and finance sector, private entities generally give good marks to the Panamanian entities that regulate them, notably the Superintendent of Banks. U.S. businesses are concerned about the responsiveness and transparency of most regulating agencies. Authorities often fail to consult with affected parties before enacting new policies or implementing new legislation. In late 2008 and then again in 2011, the GOP started to change the rules governing the import and sale of refined petroleum products. Fuel importers did not consider the process to be fair and transparent.
In addition, regulatory uncertainty has become a hindrance to investment in the power generation sector. In late 2011, an American power generating firm had their concession revoked. In the last half of 2009, several U.S. companies believed regulatory agencies were seeking additional fees/taxes that were not contained in original contracts/concessions or were seeking to impose new taxes retroactively; for one American company, Standard and Poor’s lowered the corporate credit and senior unsecured debt ratings, and also lowered the rating on $300 million senior notes to 'BB+' from 'BBB-'. S&P stated the downgrade was due to Panamanian government changes in the regulatory framework.
Efficient Capital Markets and Portfolio Investment
Panama's 1998 Banking Law with amendments from the 2008 Banking Law regulates the country's financial sector. The law, which concentrates regulatory authority in the hands of a powerful and well-financed Banking Superintendent (http://www.superbancos.gob.pa), transformed the previously inadequate regime into one that approaches international standards.
Traditional bank lending from the well-developed banking sector is relatively efficient and is the most common source of financing for both domestic and foreign investors, offering the private sector a variety of credit instruments. The free flow of capital is actively supported by the GOP and is viewed as essential to Panama’s large banking sector.
Panamanian and foreign investors are treated equally vis-à-vis government policy and law with respect to access to credit. Panamanian interest rates closely follow international rates (i.e., the London Interbank Offered Rate - LIBOR), plus a country-risk premium.
Panama passed a securities law that established a National Securities Commission to regulate brokers, fund managers, and all matters related to the securities Industry in 1999 which started its activities in 2000. Law 67 of 2011 made amendments and created a securities superintendent similar to the banking sector. Some private companies, including multinational corporations, have issued bonds in the local securities market. Companies rarely issue stock on the local market and, when they do, they often try to issue shares with no voting rights. Moreover, investor demand is generally limited because of the small pool of persons, companies, and investors with the resources to invest. Interest from time deposits and certain bonds are tax-exempt. There is a 10% withholding tax on dividends, although capital gains from the sale of equities listed on the Panamanian exchange is tax exempt. While wealthy Panamanians may hold overlapping interests in various businesses, Post is unaware of any established practice of having cross-shareholding or stable shareholder arrangements, designed to restrict foreign investment through mergers and acquisitions.
There are no restrictions on, nor practical measures to prevent hostile foreign investor takeovers, nor are there regulatory provisions authorizing limitations on foreign participation or control or other practices to restrict foreign participation. There are no government or private sector rules to prevent foreign participation in industry standards setting consortia.
Financing for consumers is also relatively open, as mortgages, credit cards and personal loans, even to those earning modest incomes, are widely available on terms similar to those in the U.S.
The Panamanian Stock Exchange (http://www.panabolsa.com) conducted $3.4 billion in transactions in 2011, up 27% from the previous year. Corporate bonds ($1.4 billion) and government paper ($1.2 billion) were the leading categories.
The rupturing of the governing alliance in August 2011 has increased political tension in the country. Panama's Constitution provides for the right of peaceful assembly, and the Government generally respects this right. No authorization is needed for outdoor assembly, although prior notification for administrative purposes is required. Unions, student groups, employee associations, elected officials, and unaffiliated groups frequently attempt to impede traffic and commerce in order to force the government or business to agree to demands.
In June 2010, the President signed a new law, Law 30, which the National Assembly had approved rapidly behind closed doors. The controversial law revised several aspects of the Labor Code and eight other laws. Labor leaders, environmentalists, the media, and business groups opposed the law. In early July 2010, the Sitrabana union in the province of Bocas del Toro began a strike against Law 30. The strike and related protests turned violent as police intervened. Authorities acknowledged that at least two deaths were the result of police action in response to the strike/protest, and authorities initiated investigations into five other deaths. In the wake of the violence, the government agreed to pursue a formal process of dialogue with labor, businesses and civil society groups. The dialogue led to a series of revisions to Law 30 in October 2010, under which the law was divided into six individual bills with amended provisions acceptable to all the participants.
In early February 2011, the Government of Panama passed Law 8, which would have allowed foreign investment by allowing foreign government-owned companies or sovereign wealth fund equity investments to hold equity shares in mining concessions, among other amendments to the mining code. Indigenous, environmental, media, and student groups sought the revocation of the law through a concerted political campaign, which included daily protests and blocking of major roads and highways. The government repealed the law in March 2011.
In the most recent edition (2011) of the Transparency International Corruption Perceptions Index, Panama fell thirteen spots, to 86 out of 183 countries. The Panamanian judicial system continues to pose a problem for investors due to poorly trained personnel, case backlogs, and a lack of independence from political influence. Panamanian law provides that only the National Assembly may initiate corruption investigations against Supreme Court judges and that only the Supreme Court could initiate investigations against members of the National Assembly, thereby encouraging, in effect, a “non-aggression pact” between these two branches of government. Supreme Court judges are typically nominated to their 10-year terms on the basis of political and personal considerations.
The Martinelli administration campaigned in 2009 on a promise to “eradicate corruption.” Although the Panamanian government asserts its commitment to combating corruption as part of its overall agenda of institutional reform, it has not yet delivered concrete results and was beset by a number of land and influence scandals in 2011. The President began 2012 by taking a harder rhetorical line on businesses that he said were not paying their taxes. The GOP has not acted to dismantle Panama's dictatorship-era libel and contempt laws, which can be used to punish whistleblowers, while those accused of acts of corruption are seldom prosecuted and almost never jailed.
Domestic anticorruption mechanisms exist, such as asset forfeiture, whistleblower and witness protection, and conflict-of-interest rules. However, the general perception is that anticorruption laws are not applied rigorously, and that government enforcement bodies and the courts have lacked effectiveness in pursuing and prosecuting those accused of corruption, particularly in high profile cases. Panama’s government lacks strong systemic checks and balances that incentivize accountability. The lack of a strong professionalized career civil service work force in Panama's public sector also hinders systemic change.
Panama ratified the United Nations’ Anti Corruption Convention in 2005 and the Organization of American States’ Inter-American Convention Against Corruption in 1998. However, there is a perception that Panama could do more to implement the conventions and respond to official recommendations.
Complaints by American investors about allegedly corrupt judicial and governmental decisions prejudicial to their interests remain common and problematic. However, despite allegations of corruption, other than cases involving drug trafficking, GOP officials, judges, and legislators are seldom investigated, much less convicted on corruption charges.
Panama has bilateral investment agreements with the United States, the United Kingdom, France, Switzerland, Germany, Taiwan Canada, Argentina, Spain, Chile, Uruguay, the Czech Republic, Netherlands, Cuba, Mexico, Dominican Republic, Korea, Ukraine, Sweden, Qatar, Finland, and Italy. Commerce Ministry officials have said that there have been some exploratory talks toward investment agreements with other countries, but they acknowledge that these discussions have a lower priority than ongoing free trade negotiations. The U.S.-Panama Bilateral Investment Treaty (BIT) entered into force in 1991 with additional amendments in 2001 to reflect Panama's joining the International Center for the Settlement of Investment Disputes (ICSID).
The BIT and the TPA further the U.S. investment policy by establishing rules to protect investors from a Party against wrongful or discriminatory government actions when they invest or attempt to invest in the other Party’s territory, and by providing a mechanism for an investor of a Party to submit to binding international arbitration a claim for damages against the other Party. The BIT and TPA commitments draw from U.S. legal principles and practices to provide U.S. investors in Panama many of the substantive and procedural protections that foreign investors currently enjoy under the U.S. legal system. They use traditional standards incorporated in earlier U.S. bilateral investment treaties, previous trade agreements, and customary international law to improve transparency, reduce barriers to investment, and improve the dispute settlement process, which will address key concerns about the investment climate in Panama.
All forms of investment will be protected under the BIT and TPA, including enterprises, debt, concessions and similar contracts, and intellectual property. With very few exceptions, U.S. investors will be treated as well as Panamanian investors (or investors of any other country) in the establishment, acquisition, and operation of investments in Panama. The investor protections are backed by a transparent, binding international arbitration mechanism, under which investors may, at their own initiative, bring claims against a government for an alleged breach of the TPA’s investment chapter. Submissions to investor-state arbitral tribunals would be made public, and hearings would generally be open to the public. Tribunals would also be authorized to accept amicus submissions from non-disputing parties.
Once in force, the TPA will suspend the BIT, but preserves for ten years the option of invoking dispute settlement under the BIT with respect to investments covered by the Treaty as of the date of entry into force of the Agreement, in the case of disputes that arose prior to the date of entry into force of the Agreement, and for disputes arising on or after the date of entry into force of the Agreement out of an investment agreement that was in effect before the date of entry into force of the Agreement.
The United States and Panama signed a comprehensive Overseas Private Investment Corporation (OPIC) agreement in April 2000. OPIC offers both financing and insurance coverage against expropriation, war, revolution, insurrection, and inconvertibility for eligible U.S. investors in Panama. OPIC can insure up to $200 million per project for U.S. investors, contractors, exporters, and financial institutions. Financing is available for overseas investments that are wholly owned by U.S. companies or that are joint ventures in which the U.S. firm is a participant. Panama has been a member of the Multilateral Investment Guarantee Agency (MIGA) since 1996.
A frequent concern for American businesses in Panama is the labor code, specifically the cost and time of training or laying off or firing an employee. Panama's non-agriculture labor force is approximately 1.5 million with 4.5% unemployment as of August 2011. Approximately 41% are employed in the informal sector, with a lower rate of informal employment in Panama capital area (37%) compared to indigenous areas (80%). While the GOP has periodically revised its labor code, including a modest revision in 1995, it remains highly restrictive. Several sectors, including the Panama Canal Authority, the Colon Free Zone, and export processing zones/call centers are covered by their own labor regimes. Employers outside of these areas, such as the tourism sector, have called for greater flexibility, easier termination of workers, and the elimination of many constraints on productivity-based pay. Employers frequently cite the lack of skilled labor as a constraint to growth. The GOP has issued waivers to the regulations on an ad hoc basis in order to address employers’ needs, but there is no consistent standard for obtaining such a waiver.
Despite spending approximately 16% of the central government budget and 4.1% of GDP on education, approximately half of the students fail their university entrance exam. The September 2011 World Economic Forum Global Competitiveness Report ranked Panama 133 out of 142 countries for quality of education. This poor showing underscored the 2010 OECD Program for International Student Achievement (PISA) analysis, which ranked Panama second worst among participating Latin American countries. The lack of skilled labor is of serious concern to both Panamanian and foreign investors. The problem with the lack of skilled Panamanian labor is compounded by the Panamanian law that mandates 90% of an employer’s staff must be Panamanian. A recent study claimed that 80% of Panama’s management positions are held by non-Panamanians or Panamanians who studied outside of Panama.
According to the World Bank’s Doing Business 2010 Report, Panama’s “Employing Workers” rank was 177 out of 183 based on difficulties in hiring and firing workers. Panamanian labor law, in requiring the Labor Ministry's permission to dismiss employees for “economic reasons,” may act as a legal barrier to a firm wishing to reduce its workforce or repatriate its capital. If a firm is insolvent, the law also gives workers priority over all other non-secured creditors. The monthly minimum wage varies based on the region of Panama and the industry; the range is between $432 and $490.
Foreign Trade Zones/Free Ports
Law 18 of 1948 established the Colon Free Zone (CFZ), which is now the second largest free trade zone in the world, after Hong Kong. Most merchandise (clothing, footwear, electronics, pharmaceuticals, medicines, perfumes, cosmetics, liquor, cigarettes, textiles, bedding, linens and fine jewelry) is transshipped from the Far East (particularly China, Hong Kong, and Taiwan) through the CFZ to other parts of the Western Hemisphere (particularly Venezuela, Colombia, and Panama). Through the first half of 2011 (most recent figures available), the CFZ imported/exported $11.8 billion, an increase of 31% from the same period in 2010. Almost 3,000 companies operate within its 450 hectares.
Law 41 of 2004 provides for the development of “Panama Pacific Special Economic Area” in the former Howard Air Base to encourage investment in the area, particularly in the logistics sector. The process for the establishment of a company in the area takes approximately 4 to 6 months. Dell, WR Grace, Singapore Technologies Aerospace, and Caterpillar are among the 120 multinational companies which are located there. London & Regional, the overall developer, will invest a minimum of $705 million for the development.
Law 32 of 2011 provides updated regulations for the development of free trade zones (not including the Colon Free Zone) in an effort to broaden the Panamanian economic development while promoting investment in former U.S. military bases transferred to Panama. The law also includes specific labor and immigration provisions that are more favorable than the current Panamanian labor code. The government also provides numerous tax incentives to companies that operate in Free Trade Zones. Companies, whether Panamanian or foreign, operating in these zones may import inputs duty-free if products assembled in the zones are to be exported. There are currently 14 free zones with 95 companies registered. They face difficulties due to Panama's higher-than-regional-average wages, limited existing industrial base and weak infrastructure, particularly outside the Panama-Colon Corridor. Law 25 of 2006 also provides for the development of call centers; 78 companies are currently licensed to operate call centers.
Source: GOP Comptroller General’s Office http://www.contraloria.gob.pa/.
Note that 2011 figures are preliminary and from January 1–September 30, 2011.
The stock of U.S. foreign direct investment (FDI) in Panama was $7.8 billion in 2009 (latest data available), up from $6.2 billion in 2008. U.S. FDI in Panama is led by the nonbank holding companies and the banking sectors.
Disclaimer: The information provided in this report is intended to be of assistance to U.S. exporters. While we make every effort to ensure its accuracy, neither the United States government nor any of its employees make any representation as to the accuracy or completeness of information in this or any other United States government document. Readers are advised to independently verify any information prior to reliance thereon. The information provided in this report does not constitute legal advice. The Commercial Service reference to or inclusion of material by a non-U.S. Government entity in this document is for informational purposes only and does not constitute an endorsement by the Commercial Service of the entity, its materials, or its products or services
International copyright, U.S. Department of Commerce, 2012. All rights reserved outside of the United States.