As a new government takes office, there is growing optimism that economic expansion will resume in Panama. But the budget problems and the problems in the mining sector indicate caution.
Shortly after taking office on July 1, new President José Raúl Mulino confirmed one of his biggest campaign promises: the launch of the 391-kilometer Panama-David rail project that will connect the country’s disparate regions.
At an estimated cost of $5 billion, Mulino described the railroad as “the most important work of my administration.” Construction is expected to take six years and create 6,000 jobs.
An even pattern of development is desperately needed in the Isthmian republic. Panama experienced double-digit growth between 2007 and 2011 thanks to canal expansion and other infrastructure projects. In 2013, GDP growth fell to 6.9% after these projects were completed. Corruption and deficiencies in governance were also a factor in this decline. Foreign direct investment (FDI) fell from $5.01 billion in 2017 to a low of $588.7 million in 2020, down $3.7 billion from 2019. This can mainly be attributed to the pandemic, but poor governance played a role.
| Vital statistics |
|---|
| Location: Central America |
| Neighbors: Colombia, Costa Rica |
| Capital: Panama City |
| Population: (2023): 4,468,087 |
| Official language: Spanish |
| GDP per capita (2023): $18,662 |
| GDP growth (2023): 7.3% |
| Inflation: (2023): 1.5% annually |
| Unemployment rate (estimated): 6.7% |
| Currency: Balboa (PAB) and USD |
| Investment Promotion Agency: ProPanama |
| Investment incentives: special tax rates for hospitality/tourism businesses in areas outside the District of Panama; special tax rates for exporters and imports of machinery; assistance with business accreditation, licensing and visas, especially for the energy sector. Including discounts and exemptions on income tax, access fees and distribution or transmission rights. |
| Corruption Perceptions Index (2023): 108 (out of 180 countries) |
| Political risk: The new government must address pension and social security reforms following the 2023 nationwide demonstrations against the Minera Panamá contract. The new Minister of Finance has warned of the need for cuts. |
| Safety risk: Nearly 200,000 migrants have crossed the Darién Gap so far in 2024, leading to an increase in opportunistic crime, with narcotics and human trafficking posing an increasing risk due to the presence of Colombian gangs. Petty crime remains a problem in major cities, especially Panama City and Colon, and mainly involves pickpocketing and theft. |
| Positives |
|---|
| Geographic position open to all international markets |
| Panama Canal forms the basis for a logistics hub |
| Mature banking sector; Robust regulation means that bankruptcy is unlikely |
| Conditions for nearshoring and technological boom |
| Free trade zones |
| Actively seeking opportunities for direct foreign investment |
| Optimism for new government |
| Significant incentives for foreign direct investment in a range of sectors |
| Submarine cables provide telecom connectivity |
| Cons |
|---|
| Government finances in the red; The Ministry of Finance has warned of cuts |
| Pensions and social security require reforms |
| Recent nationwide social unrest, mainly due to the Minera Panamá contract |
| Future of mining uncertain |
| Moody’s has downgraded Panama to below investment grade; other reports expected in the second half of 2024 |
| Public perception of corruption is a major electoral issue |
| Inconsistent application of existing laws and regulations |
| Very restrictive labor law; foreign workers can make up 10% to 15% of the workforce |
| In 2023, more than 500,000 migrants crossed the Darién Gap; Panama recently reached an agreement with the US to return ‘illegals’ to their home countries. |
After a particularly difficult 2023, the landscape is grimmer.
A new concession to Minera Panamá, the country’s largest exporter, to operate one of the largest copper mines in the world, responsible for an estimated 5% of Panama’s GDP, was declared unconstitutional. The social conflict that broke out last year, mainly over the Minera Panamá contract, flared up again and ended in nationwide protests, sector-wide strikes and violence.
The scale of the task facing the new government became clear after a transition meeting of the Ministry of Economic Affairs and Finance on June 12. Mulino told reporters: “All the numbers are in the red.”
In March, Fitch downgraded Panama’s government bonds to BBB– with a negative outlook (below investment grade); Ratings from Moody’s and Standard & Poor’s are expected in the second half of this year.
“The situation is complicated because we are not coming from a time of great growth,” says René Quevedo, business integration expert and consultant. “We have to put on a good face in bad weather.” Addressing legal uncertainty, slow job creation and shaky international trust will be crucial, he argues.
Panama can still rely on the canal, a favorable geographical position as a global trade hub, decades of experience as a logistics hub and a high-tech banking system. The Panama Canal Authority (ACP) expects to return to the previous standard of 38 ship passages per day by 2025, which was halved during the 2023 drought.
Sound banking and an abundance of projects
The Panamanian banking system remains attractive to potential investors. The country has a dollarized economy, with the balboa pegged to the dollar at a one-to-one ratio.
That doesn’t mean there aren’t clouds hanging over us. In its June Article IV conclusion, the International Monetary Fund stated: “In the absence of a lender of last resort and deposit insurance, it is imperative that the banking system remain well capitalized and liquid. The Panamanian banking system appears generally resilient to severe downturn scenarios, but risks have increased amid higher interest rates and a slowing economy.”
Currently, Panama is home to 55 banks: two state-owned banks, 40 domestic, 13 international and 10 bank representative offices. The state-owned Banco Nacional de Panamá performs a number of functions at the central bank and also offers commercial services. Overall, they present a healthy picture.
“Panama has a capital adequacy ratio regulation of 8%; currently it is 15%,” says Patricio Mosquera, head of the Financial Studies Department of the Superintendencia de Bancos de Panamá (SBP). “The settlement levels are also well above what is necessary; 30% is the norm, but we are currently around 58% to 60%. This means that the banks are well capitalized, well regulated and have sufficient liquidity, both for operational issues and also for the issue of regulatory comparisons.”
Along with a solid banking sector, Panama is pinning its hopes on a series of development and industrial projects now underway or soon to take place.
Many of these medium-term projects have an environmental, social and governance element, given the impact of the drought on the canal and the consequences of climate change. News on compliance from international lenders on Panama’s ability to issue green bonds is expected in early July. Along with Bhutan and Suriname, Panama is one of three countries that describe its emissions as ‘carbon negative’. In April 2024, Panama issued its first blue bonds for $50 million, backed by Ecuador’s Banco de Austro.
Latinex, the Panamanian stock market linked to El Salvador and Nicaragua, expects to issue the first joint Caribbean and Central American blue bond this year. Panama’s Ministry of the Environment – MiAmbiente – is also working with Latinex on the country’s voluntary carbon market.
Funded by $11.5 million in government investment, the Panama Digital Gateway data center opened in June 2023; it is one of two free technology zones, the other being the Tech Valley Free Zone, which the state hopes will eventually attract 620 companies, adding to the more than 2,000 companies in the country’s more than two dozen other free trade zones.
“The free zones are supervised as a non-financial sector,” Mosqueda notes. “They delivered a very positive performance. The Colón Free Zone has seen significant growth, by more than 20% per year.”
Together with Costa Rica, the US selected Panama in July 2023 for a semiconductor partnership worth up to $500 million, a product of the US CHIPS and Science Act of 2022, which aims to boost global manufacturing and research.
“There has been no company that has applied for the US government grant to finance the creation of semiconductor facilities and factories,” says Quevedo. “Maybe that could be a first?”
In May, Ansberto Cedeño, an associate professor of computer science at Florida State University’s campus in Panama, estimated that semiconductors could add $7 billion to the Panamanian economy by 2029.
Keeping the growth going
All told, Panama is home to some 199 multinational companies and several multilateral institutions. Part of the attraction is the Sede de Empresa Multinacional (SEM), a 2007 initiative aimed at attracting administrative activities such as payroll and accounting. In August 2020, this was supplemented by Empresas Multinacionales Para La Prestación De Servicios Relacionados Con La Manufactura (EMMA), which aims to attract foreign direct investment in production, maintenance and repair. Companies that have an SEM license are automatically eligible for EMMA.
CAF – the Development Bank of Latin America and the Caribbean – chose Panama as its regional headquarters in 2023; over the next five years, it plans to invest at least $2.5 billion in the country.
In May, Huawei selected Panama for its first Cybersecurity and Transparency Center. On the other hand, however, telecom operator Digicel announced in March that it would close its operations in Panama. The following month, Sinclair Oil closed its concession in Darién, which had been operating since 1923.
Given this mix of developments, voters hope that Mulino’s new government will be a link to Panama’s recent “golden age” of economic growth, when foreign direct investment regularly reached $3.4 billion to $4.4 billion a year. By 2023 this had fallen to $2.2 billion and a KPMG report last year ranked Panama as the ninth most attractive for foreign direct investment in Latin America, after Argentina.
“We have to reverse the damaged image, but we will do that,” says Quevedo.
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