Doing Business in Panama 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. We also recommend that Americans interested in purchasing property in Panama review the U.S. Citizens Services note here.
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. Panama’s recognition of the U.S. sanitary and phytosanitary system and the creation of a new Food Safety Authority have essentially eliminated the previous slow and arbitrary procedures for issuing phytosanitary permits for U.S. food products.
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. 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 larger 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. When completed, the project will have a significant impact on U.S. ports, which are already positioning themselves to take advantage of the expansion.
An interesting area for foreign investment is in the former Canal Zone and associated military bases. One of the largest facilities, the former Howard Air Force Base, is being developed into a “new town” with offices, light warehousing, apartments, homes along with shops and restaurants, all within a special economic incentive zone. A number of anchor U.S. clients, e.g. Dell, 3M, Caterpillar, and W.R. Grace, have established growing operations in this area.
Panama is on record as being in favor of free trade agreements (FTAs) and is currently working to implement a Trade Promotion Agreement (TPA) with the U.S. that will result in tariffs immediately dropping to zero for approximately 87% of U.S. exports, with the remainder phased out over time. Panama has full FTAs with El Salvador, Taiwan, Singapore, Chile, Costa Rica, Honduras, Guatemala, Peru and Nicaragua; and partial FTAs with Mexico, Dominican Republic and Cuba. Panama is in the process of implementing an FTA with the European Union while an FTA with Canada is pending ratification by the Canadian Parliament.
Market Entry Strategy
Due to its open economy, Panama has few market access problems. One of the more common market entry options is to appoint an agent or distributor. Another option is to find a local partner who can provide market knowledge and contacts. Other businesses have been successful via licenses or franchises.
The U.S. Commercial Service offers U.S. companies market entry assistance through a variety of services, any of which can be tailored to suit your needs. We also will work to defend your business interests in Panama if the need arises. We measure ourselves on our ability to help you do more business in Panama.
Given the ease of air travel between the U.S. and Panama, our Gold Key Service (GKS) is our most popular offering. This service connects you with qualified representatives, distributors, partners, or customers. The U.S. Embassy will conduct background checks, set up the meetings, and provide translation and driving services as part of the package.
To learn more about how we can assist you in doing more business in Panama, please visit our website at www.export.gov/panama. You can also call us at 011-507-317-5000 or email us at daniel.crocker@trade.gov.
