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Panama - Economy

As the home of the Panama Canal, the world’s second largest free trade zone, and sophisticated logistics and finance operations, Panama attracts relatively high levels of foreign direct investment from the region and around the world. Panama boasts one of the Western Hemisphere’s fastest growing economies, good credit, a strategic location, and a stable, democratically elected government.

For years, Panama has had the fastest-growing economy in Latin America, but it also has one of the highest rates of inequality in the western hemisphere. The Panamanian population is very aware that wealth is poorly distributed. Poverty and inequality are particularly evident in rural areas, and especially in the 12 semi-autonomous indigenous territories known as comarcas. World Bank data from 2015 revealed a poverty rate of 6.5 percent in urban areas, 26.6 percent in non-indigenous rural areas, and more than 86 percent in comarcas.

Panama’s official unemployment rate is 4.5 percent, close to what most economists consider full employment. Economists in Panama estimate that the unemployment rate for skilled workers is negative, indicating a shortage of workers for skilled jobs including accounting, IT, customer service, and specialized construction skills. Employers frequently cite the lack of skilled labor and English language speakers as a limiting factor on growth. Panama's non-agriculture labor force is approximately 1.5 million persons. Forty-one percent of workers are employed in the informal sector, with a lower rate of informal employment in Panama capital area (37 percent) compared to the indigenous areas (80 percent).

Panama’s Ministry of Economy and Finance predicted the economy would grow by 6.2 percent in 2016, following expansion of 5.8 percent in 2015 and 6.1 percent in 2014. Panama’s sovereign debt rating is investment grade, with ratings of Baa2 (Moody’s), and BBB (Fitch and Standard and Poor’s). The Panama Canal Authority will inaugurate the $5.25 billion expansion project of the Panama Canal in June of 2016, which in turn is expected to increase investment in port systems operations, storage facilities and logistics. Panama’s President, Juan Carlos Varela, has sought to improve Panama’s image and investment climate profile. Overall foreign investment was up 17 percent in 2015, and Panama retains one of the highest “FDI to GDP” ratios in Latin America. The Varela administration has also presided over a series of anti-money laundering reforms that resulted in Panama’s removal from the Financial Action Task Force “Grey List” in 2016.

Import Partners of Panama take two forms, those exporting directly into Panama and those exporting to the Colon Free Zone (CLZ). The export partners mentioned are those exporting directly into Panama. Please bear in mind that as much as 11% of all imports into Panama come from the CLZ and are not broken down by country of origin.

Historically one of the most stable economies in Latin America, Panama has a well-developed services sector accounting for 80% of GDP. This is centred around the Canal, the related Colon Free Zone and the International Banking Centre. As a result average incomes are high by regional standards. However, income distribution is heavily skewed with 1 million citizens if not more (estimated at approximately 40% of the population) living at or below the poverty level, according to the UNDP. As a fully dollarised economy, heavily dependent on trade, the economy will always be vulnerable to external shocks. Fiscal deficits and growing public debt in recent years have increased this vulnerability. However, if managed correctly the Panama Canal expansion is expected to have a profound effect on the economy, with a boom predicted following an increase in oreign investment and employment in canal expansion and related projects.

Panama's economy is based primarily on a well-developed services sector that accounts for nearly 70% of GDP. Services include the Panama Canal, banking, the Colon Free Zone, insurance, container ports, flagship registry, tourism, and medical and healthcare.

In October 2006, Panamanians voted overwhelmingly in favor of a $5.25 billion Canal expansion project to construct a third set of locks, which is expected to be completed in 2014. The Government of Panama expects the project to be a transforming event for Panama that will provide 7,000-9,000 direct new jobs during the peak construction period of 2009-2011 and increase economic opportunities for years to come. The expansion is financed through a combination of loans from multilateral institutions and current revenues.

In July 2009, the Panama Canal Authority (ACP) awarded the contract to build the locks to an international consortium led by Spain’s Sacyr Vallehermoso. The locks would be 60% wider and 40% longer than the existing locks so the Canal can handle all but eight of the world’s container vessels, along with supersize tankers and bulk carriers of ores and grains.

GDP growth in 2009 was 2.4%, reflecting a slowing of the robust growth of 11.0% seen in 2008. Although growth slowed in 2009, due to the global economic downturn, it has improved in 2010 and is still one of the most positive growth rates in the region. Growth has been fueled by the construction, transportation, maritime, and tourism sectors and Panama Canal-related activities. As a result of this growth, government deficit as a percentage of GDP dropped to 43% in 2009, and government-issued debt is classified as the lowest rung of investment grade. A recent United Nations report highlighted progress in poverty reduction from 2001 to 2007--overall poverty fell from 37% to 29%, and extreme poverty fell from 19% to 12%.

Panama has bilateral free trade agreements (FTAs) in force with Chile, El Salvador, Taiwan, Singapore, Guatemala, Honduras, Nicaragua, and Costa Rica. Panama signed an FTA with Canada in May 2010, but it has not yet entered into force. Panama is exploring free trade negotiations with Mexico, Colombia, the Mercosur countries, the Andean Community, the European Union, and CARICOM. The U.S. and Panama signed a Trade Promotion Agreement (TPA) in June 2007. The agreement was overwhelmingly approved in July 2007 by the Panamanian National Assembly, but has yet to be ratified by the United States Congress. Once implemented, the agreement will promote economic opportunity by eliminating tariffs and other barriers to trade of goods and services and will provide a framework for any trade disputes.

Gold mines, such as the Santa Rosa, an open pit, heap leach gold mine in Veraguas Province, contaminate local surface water with cyanide and mercury. Illegal gold mining in the Darien and Portobello National Parks also has contaminated surface and ground water sources. Cyanide and mercury are used to separate gold from rock and subsequently are released into water and soil. Although tailings dams are most often in place, they lack proper construction and monitoring, resulting in environmental contamination.