By Raúl Markos
Panama has received significant coverage from Western Media in the past few years. Unfortunately, reports have fixated on the notorious elements of the Central American nation, covering only the ‘Panama Papers’ and its Panama City-based component Mossack Fonseca. The country’s international reputation has suffered as a result, perpetuating the conception that Panama is rife with unscrupulous practices. Why operate an offshore account in Delaware or Switzerland when the true experts are sitting down by the canal?
Panama deserves closer attention, both because of a lack of awareness about the country’s true economic activities and its importance to the region.
Panama has achieved remarkable economic success in the last 10+ years, recording a CAGR of more than 18% alongside moderate inflation rates (1-4 %) and a fully USD linked economy. Pegged with the US dollar at par, the short-handed Panamanian Balboa (PAB) has remained a non-paper currency since its inception in 1904. Panama’s completely market-driven money supply – with the absence of a central bank and the USD as its de facto currency – has proven an excellent strategic choice. Monetary-related financial downturns have remained a novelty in Panama’s history.1
After completing the Panama Canal Treaty and the Neutrality Treaty on December 31, 1999, the Panamanian economy took off, posting impressive growth figures from 2004 (7.52%) onward. The country took less than three years to recover from 2008’s global financial crisis. Annual GDP growth dropped from an historic record high 15.32% in 2007 to 1.6% in 2009, but bounced back to superior rates in 2010 and even double digits in 2011.
Panama’s ability to leverage its significant canal revenues and associated Free Trade Zones, and direct it towards further economic diversification has fueled Panama’s recent economic success.
In fact, the ‘small’ Isthmus nation has created a service industry unparalleled in Central America, with services accounting for 77.3% of GDP. While worldwide trade in services made up for 63.5% of global GDP in 2016, Central America has struggled to shift its economies towards the more sophisticated activities of the service sector. From Guatemala to Nicaragua, value added and innovative client services have been limited to the leisure/tourism and transportation sectors, and constitute smaller shares of each country’s GDP.2 Agricultural and commodities exports are still a core element for most Central American and Caribbean economies. Bananas and Plantains (8% of exports), raw sugar cane (8%) and unroasted coffee (6%), are among the main export goods of Central America’s biggest economy, Guatemala, in Harvard’s Atlas of Economic Complexity. Exports from El Salvador, Honduras and Nicaragua show similar concentrations in agricultural and less-processed goods, such as textiles.
Panama, however, strove for an ‘I did it my way’ solution.
It’s 2007 MHQ (special regime for the establishment and operation of Multinational Companies Headquarters) legislation helped turn the country into a vital hub for foreign (direct) investment over the last decade. Joint efforts by the government and private sector to create favorable tax and immigration incentives succeeded in attracting more than 130 global corporations (mostly in the form of local subsidiaries) and 92 local and international banks.3
Additionally, subsidiaries of global industry leaders (e.g. Nike, Huawei and P&G) have had a fruitful impact on domestic logistics, trade, and financial sectors, all of which rapidly expanded and contributed to Panama’s massive job growth. Panama’s superior job creation rate in the service sector, in turn, spurred further demand for construction, infrastructure, and energy supply.4
The construction industry in particular has seen the highest contribution to GDP growth by sector from 2005 to 2015. The capital’s dense skyline along the artificially created ‘Cinta Costera’ Ocean drive and the upscale neighborhood of ‘Punta Paitilla’ are perfect illustrations of Panama’s continuing construction boom, which has largely been financed by domestic and regional banks. The relatively low real lending rates (with a declining tendency) on a regional scale have positively influenced the trend.5
Furthermore, massive public infrastructure investments such as the Panama Metro Line 1 (completed) & 2 (under construction), the successful USD 5.25 billion expansion of the Panama Canal, and the expansion and modernization of the Tocumen Airport underline Panama’s increased regional competitiveness.6
However, the country’s infrastructure and construction boom has already revealed some gray shades in this colorful picture, and development institutions such as the World Bank have raised concerns over the following:
The current economic boom, which has declined since 2012, is unlikely to sustain similar growth rates in the mid to long term.
Social developments (e.g. primary, secondary and higher education, water quality, and poverty reduction) have struggled to keep up with Panama's fast-paced economic growth and still ranked among the lowest in regional and international comparison. The boom has absorbed and attracted large numbers of low-skilled working-class Panamanians (and other Latin Americans), many of whom lack access to an integrated social-economic model.
Panama has compensated for its shortage in human capital by importing a much needed technically qualified foreign workforce, which has spurred nationalist sentiments among middle and lower-class Panamanians.
Panama’s trade balance, despite showing improvements due to further service exports, remains negative.
Panama’s favorable business climate still suffers from the chronic Latin American disease of corruption and administrative inefficiency.
Fortunately for Panama, its USD 19.5 billion strategic public investment plan launched by the Ministry of Economics and Finance in 2014 addresses a wide range of these concerns.7 The government has signed off on investments in economic, social, environmental, infrastructure, and human development sectors, while also expressing a political commitment to narrow the current trade deficit. The government has also sought to promote a model of sustainable and inclusive economic growth, while achieving improvements in social equality and better living standards for the entire population.
Despite attracting over USD 5.2 billion in foreign direct investment in 2016 (a 15.9% increase over the previous year), substantial socioeconomic work lies ahead for Panama. Reducing significant income disparities, improving education quality, and winning the battle against public misconduct and corruption are unlikely to be quick wins. However, in light of yet another case of misused public funds at the executive level, Panamanian authorities should seriously address social and administrative constraints.
Increased attention to social development could pave Panama’s road towards a sustainable and transparent economic model in the long run, truly justifying its ‘the Dubai of the Americas’ moniker.
Raúl Markos has worked in Latin America extensively and has closely followed the region over the last 10 years. He holds a B.A. in Latin American Studies and Social Studies, an M.A. in International Business, and an M.A. in Asset Management.
Deloitte University Press, Reescribiendo las reglas para la era digital, Tendencias Globales en Capital Humano 2017.
Harvard Kennedy School: Shifting Gears: A Growth Diagnostic of Panama, Faculty Research Working Paper Series, Ricardo Hausmann, Luis Espinoza, Miguel Angel Santos, December 2016. https://growthlab.cid.harvard.edu/files/growthlab/files/panama_growth_diagnostics_wp_325.pdf
Harvard CID Atlas of Economic Complexity
The Global Findex Database 2014, Measuring Financial Inclusion around the World, Policy Research Working Paper, Asli Demirguc-Kunt Leora Klapper Dorothe Singer Peter Van Oudheusden, World Bank Development Research Group Finance and Private Sector Development Team, April 2015. http://documents.worldbank.org/curated/en/187761468179367706/The-Global-Findex-Database-2014-measuring-financial-inclusion-around-the-world
Additional Sources Consulted: