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PANAMA: An Introduction

Contributors:
Alemán, Cordero, Galindo & Lee Logo
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Chambers Global 2019
Panama Country Overview
Law firm: Alemán, Cordero, Galindo & Lee

The Republic of Panama is strategically located at the juncture between North and South America. Furthermore, it is the narrowest stretch of land dividing the Atlantic and Pacific Oceans and, simultaneously, hosts the only channel that joins them within the American continent. This privileged geographical position has helped define the country's expansive role in the world economy as a multidisciplinary hub. As one of the main gateways to global commerce, the Panama Canal is the country's foremost landmark, accounting for almost 10% of the country’s overall GDP. This feature of Panama's economy plays an increasingly important role in the country's overall success. The Canal recently underwent a massive expansion, which was considered one of the biggest and most complex engineering endeavours since the construction of the original Canal. The third set of locks, which was inaugurated in June, has doubled the waterway’s capacity. With costs of nearly USD6 billion, this expansion project is estimated to quadruple its annual revenues from USD1 billion to approximately USD4 billion.

Complementing the Canal in matters of world trade and transportation, the country also boasts Latin America's largest container port terminal and is home to the second largest free trade zone in the world, the Colón Free Zone. Moreover, throughout the last decade, Copa Airlines and Tocumen International Airport have cooperated in the development of Panama City's main airport into the 'Hub of the Americas,' which now offers direct flights to over 80 international destinations. The connectivity that resulted from this commercial crossroads, along with the political stability and pro-business legislation characteristic of the country, have made Panama an attractive space for financial institutions and multinational corporations from all over the world to establish their regional headquarters.

There are other prospects that differentiate the country from the rest of the region, such as a fully institutionalised dollarisation, no exchange controls or restrictions on the movement of capital, readily accessible credit and increasingly sophisticated and liquid capital markets. When choosing Panama, international investors also look at the country's outstanding international banking system (with over USD86 billion in assets), which is home to more than 80 domestic and/or international banks. This financial sector boasts solid balance sheets, with little to no exposure to complex financial instruments originated abroad (although critics correctly point to significant exposure to domestic real estate). As for multinationals, Panama is now host to almost 100 major international corporations, including Brinks Regional Services, APR Energy, HP, Procter & Gamble, Caterpillar, VF Group, Sanofi-Aventis and Maersk, to name a few. In addition, several new companies will be establishing regional headquarters in Panama, including Visa Inc., Panalpina World Transport (Holding) Ltd., Hankook Tire Co., Ltd., McKinsey & Company, Inc., Isuzu Motors Limited, China Railway International Group CO, Boeing, and Shanghai Gorgeous Investment Development Co.

As a result, Panama’s economy has been one of the fastest growing in Latin America and its economic growth is among the highest in the world, with an average GDP annualised rate of 7.23% over the past decade. In spite of the global economic crisis, Panama has emerged as a regional powerhouse, showcasing outstanding economic dynamism as compared to many of its peers. Panama's recent affluences include near full employment, a rising average household income, a considerable decrease in its debt-to-GDP ratio and a positive overall macroeconomic outlook. Furthermore, the country has been awarded an 'investment grade' rating by all three major credit rating agencies (1).

Panama also enjoys solid political stability. The current administration is committed to upgrading the quality of life of Panamanian citizens by providing them with better access to services and by expanding economic opportunities for the poor. It is also focused on strengthening political institutions, encouraging the independence amongst them and empowering the Justice Department. Previous governments enacted several important pieces of legislation to ensure that the aforementioned advantages translate into economic prosperity, and the current administration has continued down the same path. Among the most recent legislations aimed at facilitating public and private investments are:

• Law No. 41 of 2004: established the Special Economic Zone Panama-Pacífico, a free economic zone with a special legal, fiscal, customs, labour and immigration framework. Companies established in this zone are exempt from a series of taxes including dividends, income, withholding, imports and sales taxes.

• Law No. 41 of 2007: created a special regime for the establishment and operation of Multinational Corporation Headquarters. After being granted a special licence, these corporations would be exempt from income tax for services offered to entities domiciled abroad that do not generate income in Panama, and their employees would be eligible to obtain work visas for up to five years.

• Law No. 438 of 2012: created the National Savings Fund/Sovereign Wealth Fund, a forward-looking initiative aimed at safeguarding the country against future negative shocks (e.g. natural disasters, tail risk events, economic recessions, etc.).

The Fund Law seeks to provide the Panamanian government with a sophisticated and transparent investment vehicle to manage the country's surpluses. In the medium term, Panama has been benefiting from the recent ratification of its free trade agreement with the United States, and the signing of several other free trade agreements including those with Taiwan, Singapore, Chile and Mexico. Panama has also engaged in a rigorous effort to negotiate and ratify Double Taxation Agreements around the globe, further bolstering the jurisdiction's attractiveness from both an inbound and outbound perspective. Public investment will remain high in the upcoming years after the completion of major infrastructure projects such as the Canal expansion, the second metro line in Panama City (worth USD2 billion) and a plan to build a fourth bridge over the Panama Canal, all of which are either recently completed or underway.

In addition, there is no indication of a downturn in private investment and Panama continues to be an attractive country for foreign direct investment. The prospects of sustained high growth are also supported by emerging opportunities in transport and logistics, mining, financial services and tourism. Besides the solid services industry, which has been the traditional driver of the Panamanian economy, other industries that remain on the lookout are the mining sector, as a target of multi-billion dollar investment, as well as the underdeveloped logistics industry, which has vast potential and has awakened the interest of both domestic and foreign corporations.

In sum, several factors have contributed to Panama's continued success. On the one hand, the country has wisely seized the opportunities that geography and history have placed in its path. On the other, it has further enhanced those opportunities by enacting investment-oriented legislation, rolling out massive infrastructure investment plans and, more recently, committing to increase fiscal cooperation and transparency with the international community. As a result, there is good reason to expect that the Panamanian economy will continue to grow at a steep rate in the near future and that foreign companies and individuals will continue to choose Panama as their home within Latin America.

(1) Moody's rates Panama at Baa2 with a positive outlook; Standard & Poor's rates Panama at BBB with a positive outlook; and Fitch rates Panama at BBB with a stable outlook.