Investing in Panama: A Rising Star that Still has Plenty of Imperfections

The Solace Group No one talks much about sourcing Panama, but the country aspires to be a global provider. Government and  business leaders have a dream of transforming Panama …

The Solace Group No one talks much about sourcing Panama, but the country aspires to be a global provider. Government and  business leaders have a dream of transforming Panama into a services “hub of the Americas.” Healthy economic growth, increasing investment, the burgeoning skyline of Panama City, and other positive signs abound. But, as with any dream, many obstacles will present themselves along the way.

One of the most endearing traits of Panamanians is their pride in creating a country with opportunities for all its citizens. But like other countries in Latin America, Panama has its idiosyncrasies that can, at times, make investing in the country difficult. (More on these later.) Still, it is a land of opportunity where investors and developers, if they are willing to take the time to build relationships, can be very successful.

Here are some of the positive factors working on the country’s behalf.

At its core, Panama is a service-based economy. Services account for 77.6% of GDP with the main source of revenue coming from the Panama Canal. Other important services include banking, logistics, container ports, and tourism. The economy is one of the fastest growing in Latin America, with the real GDP growth rate increasing by 7.5% in 2010. Even during the global recession the Panamanian economy grew by 10.1% in 2008 and 3.2% in 2009. Panama was left relatively unscathed from the global financial crisis due to a simplified banking structure that was not tied into the major North American and European banks.

Economists are forecasting the Panamanian economy will have the highest growth in Latin America at 8-9% in 2011. Foreign direct investment also plays an important role, with 2010 figures estimated at $2.362 billion, marking a 33% growth over 2009. For the past two years inflation has been low, with 2009 at 2.4% and 2010 at 3.5%.

Notably, Panama achieved investment grade status from the three major ratings agencies between March and June of 2010. Fitch Ratings, which upgraded Panama on March 23, 2010 stated, “The upgrades reflect a sustained improvement in public finances, underpinned by recent tax reforms, and the economy’s resilience to the global financial crisis and associated recession.”

Unfortunately, it’s not all peaches and cream. One of the biggest issues facing Panama is the large disparity of wealth. According to the CIA World Factbook, “Panama has the second worst income distribution in Latin America.” Current figures show over 25.6% of the population lives below the poverty line. As Panama continues to grow, the country needs to improve upon its large disparity of wealth and build a middle class with skilled workers.

Where the Money Is

Currently, infrastructure is dominating the investor landscape in Panama. The largest project is the expansion of the Panama Canal. As of August 2010, awarded contracts totaled $3.95 billion, with the final cost of the project estimated at $5.3 billion. Expected to be completed in 2014, the expansion will more than double the current capacity of the canal, allowing larger ships. Considering 2010 toll revenue reached $1.466 billion, expansion should have a major impact on the Panamanian economy.

Excluding the Canal expansion, infrastructure projects will be funded with $13 billion in state investments, creating an estimated 34,000 jobs in the next three years. Many of these projects are aimed at improving education, healthcare, public safety, transportation, and roads an highways.

The government is also initiating the Panama City and Bay Sanitation Project designed to improve sanitary conditions in low-income neighborhoods, reduce the pollution of urban streams, and environmentally recover the Bay of Panama. Another example is the Panama City Metro Project, which will create a four-line railway to transport passengers throughout the greater urban area. Panama is also planning to construct five state-of-the-art hospitals in various locations throughout the country for $358 million.

There is significant need for investment in the private sector. Energy, more specifically renewable energy, is being developed throughout many areas of Panama, mostly hydro and wind projects. In December of 2011, permits are expected to be approved for construction of two wind farms ($720 million). With the heavy annual rainfall, hydro energy projects are also popular among developers. However, reliable sources have confirmed the Panamanian government is considering a law requiring developers to provide energy at cost to all residents living within 10Km of a hydro energy plant. This legislation would obviously negatively impact the development of hydro projects.

An Opportunity to Learn Patience

Despite the many opportunities, expect various difficulties when doing business in Panama. The most glaring problem is the pace of business. When I first moved to Panama I knew things would move slower than I had become accustomed to in the United States; however, the speed at which things happen can be extremely frustrating. Often, information is provided days, if not weeks, after the date it was promised to be delivered. This can make interaction between American/European firms with Panamanians difficult. If anything, Panama will teach you patience.

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Another issue for foreign investors is the law restricting foreign labor in Panama. Current labor laws dictate only 10% of a workforce for a Panamanian company can be comprised of foreigners. Ninety percent must be Panamanians. The Ministry of Labor can authorize an exception; however, there is no guarantee.

Given the dearth of skilled laborers in the country, this could present significant problems for someone trying to establish a business.

An additional problem we have encountered with the laws in Panama is they can quickly change. The tax laws for businesses have changed multiple times since 2009, leaving accountants and lawyers confused. Furthermore, as evidenced by the possible change in legislation to hydroelectric plants mentioned earlier, the government can pass laws that would drastically affect free enterprise.

Corruption in the economic sector has not been a major issue recently. While there have been accusations of corruption in the handling of the Canal expansion, I have not seen any overt corruption in day-to-day business. The era of providing handouts to key officials to get a project off the ground seems to be over. As a whole, business leaders in Panama are aware of the stigma they have among Americans and Europeans, and will go out of their way to make sure you are aware they do business in an ethical manner.

With that said, conducting business in Panama is based more on who you know than what you know. In order to enter the Panamanian market it is essential to have a team on the ground that can navigate the political and business landscape and provide contacts to meet the necessary people. A great idea or project will not go anywhere if you do not have the wherewithal and resources to contact the proper people.

President Martinelli’s dream is to make Panama the “hub of the Americas”—by 2020. The goal is to become a world-class center for logistic services, tourism, and agriculture.

In order to make this a reality, Panama must focus on improving the disparity of income and build a middle class of skilled laborers. The current administration understands this problem and is working to improve upon the poverty level in Panama. This is evident in the construction of infrastructure and the legislation passed to build social housing projects.

With all of the development in Panama, there is an opportunity for foreign investors to earn a high rate of return on investments. The dream of Panama will not only help build a country, but will also be lucrative for savvy investors.

 

Brendan Wolters currently lives in Panama City, Panama. He works at The Solace Group, which helps foreign investors identify opportunities and invest in Central America. Contact him at [email protected].

 

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