The Panamanian Economy: Ten Engines for Growth

Panama’s GDP grew 11.2% in 2007 after increasing 8.7% during 2006. The driving forces behind this growth have been the ports, construction, internal demand and consumption of consumer goods, and the export of goods and services. In fact, the strong growth in exports compensated somewhat for the rapid rise in the cost of oil in 2006 and 2007. Growth in 2008 is expected to continue strong as the canal expansion and the refinery projects continue to grow.

Panama is working hard at attracting new companies and new investment into Panama. In August 2007, it enacted Law 41, which gives new immigration, fiscal and tax incentives to companies seeking to bring regional or global headquarters operations into Panama. This law, coupled with the geographic position of Panama in the center of the hemisphere and the continuing difficulties in getting visas to the US for training and consultation, is enticing large multinationals such as Caterpillar, Procter & Gamble and Hewlett-Packard into setting up regional training and coordination centers in Panama. The ease of travel to and from Panama, the well-developed communications, banking and hospitality sectors and the availability of goods and services in general make Panama an ideal business center for multinational corporations.

Areas that are expanding and are likely to continue to fuel expansion in the near term:
• The project for the expansion and modernization of the Panama Canal has begun and is
adding new demand for investment in the economy.
• The overall economic growth in Latin America bodes well for the Colón Free Zone, which is dependent on the transfer of goods from the Far East to markets in Central and South America.
• Ports on both sides of the Canal are expanding to handle the increased trade being brought to and through the Canal and the Free Zone. The larger container ships are finding Panama a useful waypoint for dropping off containers for consolidation and rerouting to regional destinations. New port projects have already begun construction.
• This will in turn, continue to fuel the growth in office and housing construction, as more people and businesses arrive to work on Canal and port expansion.
• Part of this sector’s boom is fueled by increased interest in Panama as a retirement home for US and Canadian baby boomers that are coming down in increasing numbers. Their arrival is also creating a growing demand for US-style services, including restaurants, shopping malls, consumer goods, and medical and hospital services.
• The former Howard Air Base is finally taking off, with a Singapore aircraft maintenance company moving in with a large program and London & Regional Properties receiving the concession to develop the area as a fully functioning community. This will drive increased demand for services on the west side of the Canal.
• Tourism is growing rapidly, taking the hotel industry along with it. Panama City high-end
hotels are frequently at 100% occupancy. Ecotourism projects are on the rise, as are the number of cruise ships stopping in Panama each year.
• Telecommunications grew 17% in the last quarter and is sure to continue growing thanks to the excess digital storage capacity, favorable conditions for call centers and back-office operations, and ease of connection and communication through five major fiber optic cables.
• The banking sector is expanding internally and externally in Panama. A process of consolidation of operations and the growth of debt-intensive projects in other sectors of the economy is attracting foreign banks to do business here. The construction projects, expansion of the Panama Canal and growth in maritime and port services will continue to fuel the growth in banking services.
• All of the factors above are creating a strain on infrastructure in Panama (and new opportunities). Projections suggest that there could be a shortage of electricity and water in the larger cities of the country within a few years, and road and highway congestion is growing. However, new power and water projects are in the works, and there is room for expansion in both of these areas. The government is working on modernization of the road system, including the completed North and South Corridors ringing the city of Panama. Extension of the North Corridor to reach the Tocumen International Airport, construction of the highway from Panama City to Colón and the proposed littoral thruway along Panama Bay will help alleviate congestion and creating jobs.
There have been concerns about the slowness of the courts in Panama and the effect of political influence on court decisions. Panama has improved in these areas in recent years, and there are provisions in the pending Trade Promotion Agreement with the United States that help companies circumvent these problems through the use of international arbitration. The TPA has all the right elements in it to help level the playing field for foreign investors and ensure fair and equal treatment in business transactions and dispute settlement. TPA will also lower import duties for US goods and services entering Panama. (Almost all Panamanian goods and services currently enter the US duty-free thanks to the Caribbean Basin Initiative, but the TPA would make these provisions bilateral and permanent instead of unilateral.)

The US-Panama TPA was signed on the 28th of June 2007 and ratified by the Panamanian National Assembly on July 11th. Until September, it appeared that the TPA would easily pass both houses of the US Congress and enter into effect. However, the election as President of the Panamanian National Assembly of an individual indicted in the US for the alleged murder of a US serviceman 15 years ago has stopped the ratification process in the US for the moment. The Chairmen of the relevant committees in both the US House and Senate have indicated that deliberation on the TPA will not move forward until the “problem” is resolved.

Despite this contretemps, prospects for 2008 are bright, with the government projecting somewhere between 8 and 9 percent growth for the year based on the factors just described. In fact, the projection is for growth to continue above 8% annually through at least 2011 due to the long-term nature of many of the construction projects that are being started and the infrastructure that will exist when the new facilities come on line.

Source: American Chamber of Commerce & Industry: www.panamcham.com