PANAMA: An Introduction to Corporate/M&A

Following the global trend imposed by the COVID-19 pandemic, Panama kicked off 2021 facing significant challenges. After witnessing an impressive economic growth, that over the last decade averaged around 5% and saw unemployment rates going as low as 4.1%, Panama’s economy fell by 17.9% in 2020, and unemployment closed at a record 18.5%. COVID-19 related restrictions imposed by the authorities to control the spread of the deadly disease took Panama back many years on its macroeconomic statistics. Poverty rates jumped approximately 2% and the national debt, which stood at approximately 41% of GDP prior to the pandemic, skyrocketed to 63.5% of the country’s GDP.

Despite the complicated road to recovery, there are reasons to remain optimistic. Following more than a decade of aggressive infrastructure projects aimed at growing the economy, President Laurentino “Nito” Cortizo has announced an important and high-profile infrastructure plan that will hopefully help to rebuild the economy and bring back lost jobs. Number one on the list is the design and construction of Line 3 of the Metro of Panama City, the only one of its kind in Central America. After successful completion of Lines 1 and 2, the Government expects to deliver approximately 24.5 kilometres of new railway that will help to connect downtown Panama City with the suburbs west of the metropolitan area. The project was already awarded to a joint venture formed by Hyundai Engineering and Construction Co. and steelmaker Posco, both Korean companies. Works formally started in February 2021 and are expected to last 4 years. At a price tag of USD2.8 billion, Line 3 of the Metro of Panama City is expected to be the single biggest infrastructure project that the country will undertake during the next few years. An important component of the ambitious project will involve an underwater tunnel that will extend for approximately 5.43 kilometres below the waters of the Panama Canal. All of this will have a cascade effect on the economy and will help to boost jobs and economic growth.

To add to the expansive network of the Panama City Metro, the Government has also awarded contracts for the expansion of Lines 1 and 2, with the latter connecting all the way to the Tocumen International Airport, also known as the “Hub of the Americas”. Following the trend of strengthening Panama’s connectivity and transportation infrastructure, the Government is expecting to take formal and complete delivery of Terminal 2 of the Tocumen International Airport, which will double capacity at an airport that, prior to the pandemic, saw more than 16 million passengers transiting through it. Panama should also be receiving two additional projects that will help to place the country on the regional tourism map. China Harbour Engineering Company (CHEC) and Jan De Nul will finish and deliver the Amador Cruise Terminal, the first of its kind facility in Panama City and conveniently located next to the Panama Canal’s Pacific entrance. This will act not only as a port of call but will also serve as homeport for cruise ships based in Panama. Close to the new Cruise Terminal, China Construction of America will also deliver the new Panama Convention Center, an impressive 58,000 square metre facility with the capacity to hold up to 25,000 people.

Foreign investment continues to be key for the Cortizo Administration, the same way it has been for prior administrations, helping to solidify Panama as a strong, predictable, and stable place to invest. In 2020 the new Multinational Manufacturing Law was passed, creating tax, labour and immigration benefits for multinational companies seeking to establish manufacturing activities in the country. Free Trade Agreements with Israel and Korea were ratified in 2019 and 2020, respectively. Panama also approved a new Visa for Qualified Investors, passed an Agropark Law, implemented a real estate financial leasing regime, and enacted positive changes to its logistics sector legislation. Panama is confident that it will recover the remarkable 61% of direct foreign investment it lost in 2020 due to the pandemic.

But there are warning sides along the road. In addition to COVID-19's economic and social impact, Panama’s biggest challenge may be its recurring inclusion in denominated “tax haven” lists or its perception as a jurisdiction that is not fully tax-cooperative. In November 2019, the OECD’s Global Forum rated Panama as “Partially Compliant” and classified it as a country that needs to improve enforcement on its tax exchange regime, and subsequently other multilateral institutions, including the European Union and the Financial Action Task Force, followed suit. As part of its efforts to be excluded from these lists, Panama has approved significant changes to its corporation regime. Most importantly, Panama approved Law 129, which creates the ultimate beneficial owner registry. In essence, this will be a registry managed and operated by the Government in which all ultimate beneficial owners of Panamanian corporate vehicles will have to be identified and recorded. With this initiative, Panama will be joining other modern offshore jurisdictions that have improved their reporting regime to the satisfaction of the international community. Although the Government is running behind schedule with the implementation of the registry, it is expected that once it becomes operative it will help to mitigate the risks of future inclusion of Panama in denominated “grey” or “black” lists. Panama is also in the process of approving other key changes that will apply to entities incorporated in the country, such as a law that will enhance and make more rigorous the existing requirements for all Panamanian companies to keep accounting records.

Panama also has a long road ahead when it comes to the improvement of its judicial system and the strengthening of its anticorruption rules. The Government recognizes that a reliable and efficient judicial system is key to foreign investment. Likewise, good, strong, and reputable foreign investment is attracted to countries with low or non-existent corruption. Panama has not earned good marks on its judicial system, with some international publications qualifying Panama’s courts as corrupt, ineffective, and simply taking too long to issue decisions. The country has an opportunity to make its case to the international arena about its seriousness to change, as two new justices are on track to be replaced later this year. The Cortizo Administration has already signalled its intent to carry out a competitive, transparent, and participative process to reach consensus on who the new justices should be.

As with any other country, Panama has its challenges and weaknesses. But the country continues to be full of opportunities. One of Panama’s biggest assets may be its stable political system, which every 5 years brings to the people transparent elections that have always been conceded by the losing candidates. Panamanians are accustomed to knowing who their new president is within hours of the last poll closing, followed by a peaceful transition of power. Its US dollar-based economy, strong banking and financial sector, the Panama Canal, its maritime and air infrastructure and connectivity, good safety records and quality of life, alongside clear laws that create incentives for a multiple number of investments and industries, help to make Panama an attractive place to invest. This is the vision that the country has had for many years, and there is no visible threat that would change the way that Panama wants to project itself to the world and investors. President Cortizo has a little over three years left in office, so he has time to recover some of the time lost due to COVID-19. Hopefully, the IMF’s projection that Panama’s economy will grow to 12% in 2021, or the World Bank’s expectation that it will be one of the leading economies in Latin America throughout 2022, will become a reality.

Alejandro Alemán Ferrari
Partner
Alfaro, Ferrer & Ramírez
July 19, 2021