Given its dollarized economy, a stable democratic government, the Panama Canal, the world’s second largest free trade zone, a network of free trade agreements, and a strategic geographical location, Panama attracts high levels of foreign direct investment from around the world and has solid potential as a foreign direct investment (FDI) magnet and regional hub for a number of sectors. Panama attracts more U.S. FDI than any other country in Central America, closing 2019 with $5.27 billion, according to the U.S. Bureau of Economic Analysis.
Over the last decade, Panama had been one of the Western Hemisphere’s fastest growing economies. However, 2020 was a difficult year for Panama, which saw a GDP contraction of 17.9 percent, 18.5 percent unemployment, government revenues down by a third, and downgrades in its investment grade sovereign bond rating. Analysts forecast 4-5 percent GDP gains for 2022-2025. The global crisis hit many of Panama’s key industries, including tourism, construction, real estate, aviation, and services ancillary to trade. However, key industries such as banking, mining, the maritime sector, and Canal operations have remained stable throughout the crisis.
Panama faces structural challenges even beyond those caused by the COVID-19 pandemic, including corruption, an inefficient judicial system, an under-educated workforce, and an inflexible labor code, which often discourage additional foreign investments or complicate existing ones. With a population of just over four million, Panama’s small market size is not worth the perceived risk of investment for many companies. The World Bank classified Panama in July 2018 as a “high-income” jurisdiction in its annual country classifications, after its Gross National Income per capita moved past the threshold for high-income classification. Nevertheless, Panama is one of the most unequal countries in the world, with the 17th highest Gini Coefficient and a national poverty rate of 18 percent, with pockets of 90 percent poverty in indigenous regions.
The Cortizo administration has addressed investment challenges by prioritizing key economic reforms required to improve the investment climate and passing a new investment incentives measure for the manufacturing industry. It also created a new Minister Counselor for Investment position that reports directly to the President, with the aim of attracting new investors and dislodging barriers that confront current ones. Unfortunately, the pandemic has caused the government to pivot to crisis management and basic economic recovery, although efforts to attract investment continue. Panama also remains on the Financial Action Task Force’s grey list for systemic deficiencies that impede progress in combatting money laundering and terrorist financing.
|TI Corruption Perceptions Index||2020||111 of 180||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2020||86 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2020||73 of 131||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, historical stock positions)||2019||$5,272 million||https://apps.bea.gov/international/factsheet/|
|World Bank GNI per capita||2019||$14,950||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
3. Legal Regime
Transparency of the Regulatory System
In 2012, Panama modified its securities law to regulate brokers, fund managers, and matters related to the securities industry. The Superintendency of the Securities Market is generally considered a transparent, competent, and effective regulator. Panama is a full signatory to the International Organization of Securities Commissions (IOSCO).
Panama has five regulatory agencies, four that supervise the activities of financial entities (banking, securities, insurance, and “designated non-financial businesses and professions (DNFBPs)” and a fifth that oversees credit unions. Each of the regulators regularly publishes on their websites detailed policies, laws, and sector reports, as well as information regarding fines and sanctions. Panama’s banking regulator began publishing fines and sanctions in late 2016. The securities and insurance regulators have published fines and sanctions since 2010. Law 23 of 2015 created the regulator for DNFBPs, which began publishing fines and sanctions in 2018. In January 2020, the regulator for DNFBPs was granted independence and superintendency status similar to that of the banking regulator. Post is not aware of any informal regulatory processes managed by nongovernmental organizations or private sector associations.
Relevant ministries or regulators oversee and enforce administrative and regulatory processes. Any administrative errors or omissions committed by public servants can be challenged and taken to the Supreme Court for a final ruling. Regulatory bodies can impose sanctions and fines which are made public and can be appealed.
Laws are developed in the National Assembly. A proposed bill is discussed in three rounds, edited as needed, and approved or rejected. The President then has 30 days to approve or veto a bill the Assembly has passed. If the President vetoes the bill, it can be returned to the National Assembly for changes or sent to the Supreme Court to rule on its constitutionality. If the bill was vetoed for reasons of unconstitutionality, and the Supreme Court finds it constitutional, the President must sign the bill. Regulations are created by agencies and other governmental bodies but they can be modified or overridden by higher authorities.
In general, draft bills, including those for laws and regulations on investment, are made available on the National Assembly’s website and can be introduced for discussion at the bill’s first hearing. All bills and approved legislation are published in the Official Gazette in full and summary form and can also be found on the National Assembly’s website: https://www.asamblea.gob.pa/buscador-de-gacetas.
Accounting, legal, and regulatory procedures in Panama are based on standards set by the International Financial Reporting Standards (IFRS) Foundation, including financial reporting standards for small and medium-sized enterprises (SMEs). Panama is a member of UNCTAD’s international network of transparent investment procedures. Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations, including the number of steps, the names and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing times, and legal bases justifying the procedures.
Information on public finances and debt is published on the Ministry of Economy and Finance’s website under the directorate of public finance, but it is not consistently updated: https://fpublico.mef.gob.pa/en.
International Regulatory Considerations
Panama is part of the Central American Customs Union (CACU), the regional economic block for Central American countries. Panama has adopted many of the Central American Technical Regulations (RTCA) for intra-regional trade in goods. Panama applies the RTCA to goods imported from any CACU member and updates Panama’s regulations to be consistent with RTCA. However, Panama has not yet adopted some important RTCA regulations, such as for processed food labeling.
The United States and Panama signed an agreement regarding “Sanitary and Phytosanitary Measures and Technical Standards Affecting Trade in Agricultural Products,” which entered into force on December 20, 2006. The application of this agreement supersedes the RTCA for U.S. food and feed products imported into Panama.
A 2006 law established the Panamanian Food Safety Authority (AUPSA) to issue science-based sanitary and phytosanitary (SPS) import policies for food and feed products entering Panama. Since 2019, AUPSA and other government entities have implemented or proposed measures that restrict market access. These measures have also increased AUPSA’s ability to limit the import of certain agricultural goods. The Panamanian Government, for example, has issued regulations on onions and withheld approval of genetically-modified foods, limiting market access and resulting in the loss of millions in potential investment. In March 2021, President Cortizo signed a new bill that eliminated AUPSA and replaced it with the Panamanian Food Agency (APA). The APA intends to improve efficiency for agro-exports and industrial food processes, as well as increase market access.
Historically, Panama has referenced or incorporated international norms and standards into its regulatory system, including the Agreements of the World Trade Organization (WTO), Codex Alimentarius, the World Organization for Animal Health (OIE), the International Plant Protection Convention, the World Intellectual Property Organization, the World Customs Organization, and others. Also, Panama has incorporated into its national regulations many U.S. Food and Drug Administration regulations, such as the Pasteurized Milk Ordinance.
Panama, as a member of the WTO, notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT). However, in the last four years it has ignored comments on its regulations offered by other WTO members, including but not limited to the United States.
Legal System and Judicial Independence
When ruling on cases, judges rely on the Constitution and direct sources of law such as codes, regulations, and statutes. In 2016, Panama transitioned from an inquisitorial to an accusatory justice system, with the goal of simplifying and expediting criminal cases. Fundamental procedural rights in civil cases are broadly similar to those available in U.S. civil courts, although some notice and discovery rights, particularly in administrative matters, may be less extensive than in the United States. Judicial pleadings are not always a matter of public record, nor are processes always transparent.
Panama has a legal framework governing commercial and contractual issues and has specialized commercial courts. Contractual disputes are normally handled in civil court or through arbitration, unless criminal activity is involved. Some U.S. firms have reported inconsistent, unfair, and/or biased treatment from Panamanian courts. The judicial system’s capacity to resolve contractual and property disputes is often weak, hampered by a lack of technological tools and susceptibility to corruption. The World Economic Forum’s 2019 Global Competitiveness Report rated Panama’s judicial independence at 129 of 137 countries.
The Panamanian judicial system suffers from significant budget shortfalls that continue to affect all areas of the system. The transition to the accusatory system faces challenges in funding for personnel, infrastructure, and operational requirements, while addressing a significant backlog of cases initiated under the previous inquisitorial system. The judiciary still struggles with lack of independence, a legacy of an often-politicized system for appointing judges, prosecutors, and other officials. Under Panamanian law, only the National Assembly may initiate corruption investigations against Supreme Court judges, and only the Supreme Court may initiate investigations against members of the National Assembly, which has led to charges of a de facto “non-aggression pact” between the two branches.
Regulations and enforcement actions can be appealed through the legal system from Municipal Judges, to Circuit Judges, to Superior Judges, and ultimately to the Supreme Court.
Laws and Regulations on Foreign Direct Investment
Panama has different laws governing investment incentives, depending on the activity, including its newest law intended to draw manufacturing investment, the 2020 Multinational Manufacturing Services Law (EMMA). In addition, it has a Multinational Headquarters Law (SEM), a Tourism Law, an Investment Stability Law, and miscellaneous laws associated with particular sectors, including the film industry, call centers, certain industrial activities, and agricultural exports. In addition, laws may differ in special economic zones, including the Colon Free Zone, the Panama Pacifico Special Economic Area, and the City of Knowledge.
Government policy and law treat Panamanian and foreign investors equally with respect to access to credit. Panamanian interest rates closely follow international rates (i.e., the U.S. federal funds rate, the London Interbank Offered Rate, etc.), plus a country-risk premium.
The Ministries of Tourism, Public Works, and Commerce and Industry, as well as the Minister Counselor for Investment, promote foreign investment. However, some U.S. companies have reported difficulty navigating the Panamanian business environment, especially in the tourism, branding, imports, and infrastructure development sectors. Although individual ministers have been responsive to U.S. companies, fundamental problems such as judicial uncertainty are more difficult to address. U.S. companies have complained about several ministries’ failure to make timely payments for services rendered, without official explanation for the delays. U.S. Embassy Panama is aware of tens of millions of dollars in overdue payments that the Panamanian government owes to U.S. companies.
Some private companies, including multinational corporations, have issued bonds in the local securities market. Companies rarely issue stock on the local market and, when they do, often issue shares without voting rights. Investor demand is generally limited because of the small pool of qualified investors. While some Panamanians may hold overlapping interests in various businesses, there is no established practice of cross-shareholding or stable shareholder arrangements designed to restrict foreign investment through mergers and acquisitions.
The Ministry of Commerce and Industry’s website lists information about laws, transparency, legal frameworks, and regulatory bodies.
Competition and Antitrust Laws
Panama’s Consumer Protection and Anti-Trust Agency, established by Law 45 on October 31, 2007, and modified by Law 29 of June 2008, reviews transactions for competition-related concerns and serves as a consumer protection agency.
Expropriation and Compensation
Panamanian law recognizes the concept of eminent domain, but it is exercised only occasionally, for example, to build infrastructure projects such as highways and the metro commuter train. In general, compensation for affected parties is fair. However, in at least one instance a U.S. company has expressed concern about not being compensated at fair market value after the government revoked a concession. There have been no cases of claimants citing a lack of due process regarding eminent domain.
ICSID Convention and New York Convention
Panama is a party to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention and the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards).
Investor-State Dispute Settlement
Panama is a signatory to several agreements and Bilateral Investment Treaties (BITs) in which binding international arbitration of investment disputes is recognized. Panama has a total of 11 Free Trade Agreements (FTA), including with Singapore, Peru, Central America, Mexico, South Korea, and Israel, as well as the Trade Promotion Agreement (TPA) with the United States. Panama also has more than 20 BITs with different countries around the world, such as Germany, Italy, the Netherlands, Qatar, Sweden, Switzerland, and the United Kingdom, among others. Panama also has a BIT with the United States. There have been four claims by U.S. investors under these agreements under the ICSID.
Resolving commercial and investment disputes in Panama can be a lengthy and complex process. Despite protections built into the U.S.-Panamanian trade agreement, investors have struggled to resolve investment issues in court and have often reverted to arbitration. There are frequent claims of bias and favoritism in the judicial system and complaints about inadequate titling, inconsistent regulations, and a lack of trained officials outside the capital.
There have been allegations that politically connected businesses have received preferential treatment in court decisions and that judges have “slow-rolled” dockets for years without taking action. Panamanian law firms often suggest writing binding arbitration clauses into all commercial contracts. Local courts recognize and enforce foreign arbitration awards issued against the government. Post is not aware of any extrajudicial actions against foreign investors.
International Commercial Arbitration and Foreign Courts
The Panamanian government accepts binding international arbitration of disputes with foreign investors. Private entities are increasingly reaching out for Alternative Dispute Resolution (ADR) in Panama, primarily due to a lack of confidence in the national judicial system and the attractiveness of a quick turnaround for the settlement of disputes. Two organizations handle most arbitration cases in Panama: the Chamber of Commerce of Panama and the International Chamber of Commerce, via their affiliations with the Panamanian Center for Conflict Resolution and Arbitration (Centro de Conciliación y Arbitraje de Panamá (CeCAP)).
Panama is a party to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, as well as to the similar 1975 Panama OAS Convention. Panama became a member of the International Center for the Settlement of Investment Disputes (ICSID) in 1996. Panama adopted the UNCITRAL model arbitration law as amended in 2006. Law 131 of 2013 regulates national and international commercial arbitrations in Panama.
The World Bank 2020 Doing Business Indicator currently ranks Panama 113 out of 190 jurisdictions for resolving insolvency because of a slow court system and the complexity of the bankruptcy process. Panama adopted a new insolvency law (similar to a bankruptcy law) in 2016, but the Doing Business Indicator ranking has not identified material improvement for this metric. The Panamanian Government has proposed a bill that would significantly improve bankruptcy proceedings. As of the writing of this report the bill was awaiting the President’s signature.
6. Financial Sector
Capital Markets and Portfolio Investment
Panama has a stock market with an effective regulatory system developed to support foreign investment. Article 44 of the constitution guarantees the protection of private ownership of real property and private investments. Some private companies, including multinational corporations, have issued bonds in the local securities market. Companies rarely issue stock on the local market and, when they do, often issue shares without voting rights. Investor demand is generally limited because of the small pool of qualified investors. While some Panamanians may hold overlapping interests in various businesses, there is no established practice of cross-shareholding or stable shareholder arrangements designed to restrict foreign investment through mergers and acquisitions. Panama has agreed to IMF Article VIII and pledged not to impose restrictions on payments and transfers for current international transactions.
In 2012, Panama modified its securities law to regulate brokers, fund managers, and matters related to the securities industry. The Commission structure was modified to follow the successful Banking Law model and now consists of a superintendent and a board of directors. The Superintendency of the Securities Market is generally considered a competent and effective regulator. Panama is a full signatory to the International Organization of Securities Commissions (IOSCO).
Government policy and law with respect to access to credit treat Panamanian and foreign investors equally. Panamanian interest rates closely follow international rates (i.e., the U.S. federal funds rate, the London Interbank Offered Rate, etc.), plus a country-risk premium.
Money and Banking System
Panama’s banking sector is developed and highly regulated and there are no restrictions on a foreigner’s ability to establish a bank account. Foreigners are required to present a passport and taxpayer identification number and an affidavit indicating that the inflow and outflow of money meets the tax obligations of the beneficiary’s tax residence. The adoption of financial technology in Panama is nascent, but there are several initiatives underway to modernize processes.
Some U.S. citizens and entities have had difficulty meeting the high documentary threshold for establishing the legitimacy of their activities both inside and outside Panama. Banking officials counter such complaints by citing the need to comply with international financial transparency standards. Several of Panama’s largest banks have gone so far as to refuse to establish banking relationships with whole sectors of the economy, such as casinos and e-commerce, in order to avoid all possible associated risks. Regulatory issues have made it difficult for some private U.S. citizens to open bank accounts in Panama, leaving some legitimate businesses without access to banking services in Panama. Panama has no central bank.
The banking sector is highly dependent on the operating environment in Panama, but it is generally well-positioned to withstand shocks. The banking sector could be impacted if Panama’s sovereign debt rating continues to fall. In early 2021, Fitch downgraded four private banks and one state-owned bank, based primarily on concerns about Panama’s pandemic-related weakening of public finances. As of this writing, three banks have been downgraded to non-investment grade. Approximately 4.7 percent of total banking sector assets are estimated to be non-performing. The four largest banks have total assets of $54.5 billion, which represents 47.07 percent of the National Banking System.
Panama’s 2008 Banking Law regulates the country’s financial sector. The law concentrates regulatory authority in the hands of a well-financed Banking Superintendent (https://www.superbancos.gob.pa/).
Traditional bank lending from the well-developed banking sector is relatively efficient and is the most common source of financing for both domestic and foreign investors, offering the private sector a variety of credit instruments. The free flow of capital is actively supported by the government and is viewed as essential to Panama’s 68 banks (2 official banks, 39 domestic banks, 17 international banks, and 10 bank representational offices).
Foreign banks can operate in Panama and are subject to the same regulatory regime as domestic banks. Panama has not lost any correspondent banking relationships in the last three years.
There are no restrictions on, nor practical measures to prevent, hostile foreign investor takeovers, nor are there regulatory provisions authorizing limitations on foreign participation or control, or other practices that restrict foreign participation. There are no government or private sector rules that prevent foreign participation in industry standards-setting consortia. Financing for consumers is relatively open for mortgages, credit cards, and personal loans, even to those earning modest incomes.
Panama’s strategic geographic location, dollarized economy, status as a regional financial, trade, and logistics hub, and favorable corporate and tax laws make it an attractive destination for money launderers. Money laundered in Panama is believed to come in large part from the proceeds of drug trafficking. Tax evasion, bank fraud, and corruption are also believed to be major sources of illicit funds in Panama. Criminals have been accused of laundering money through shell companies and via bulk cash smuggling and trade at airports and seaports, and in active free trade zones.
In 2015, Panama strengthened its legal framework, amended its criminal code, harmonized legislation with international standards, and passed a law on anti-money laundering/combating the financing of terrorism (AML/CFT). Panama also approved Law 18 (2015), which severely restricts the use of bearer shares; companies still using them must appoint a custodian and maintain strict controls over their use. In addition, Panama passed Law 70 (2019), which criminalizes tax evasion and defines it as a money laundering predicate offense.
In June 2019, the Financial Action Task Force (FATF) added Panama to its grey list of jurisdictions subject to ongoing monitoring due to strategic AML/CFT deficiencies. FATF cited Panama’s lack of “positive, tangible progress” in measures of effectiveness. Panama agreed to an Action Plan in four major areas: 1) risk, policy, and coordination; 2) supervision; 3) legal persons and arrangements; and 4) money laundering investigation and prosecution. The Action Plan outlined concrete measures that were to be completed in stages by May and September 2020. Due to the COVID-19 pandemic, FATF granted Panama two extensions, pushing the deadline to January 2021. At its plenary in February 2021, FATF left Panama on the grey list and noted its progress so far, but also pointed to Action Plan items that still need to be addressed.
Panama is only beginning to accurately track criminal prosecutions and convictions related to money laundering and tax evasion. Law enforcement needs more tools and training to conduct long-term, complex financial investigations, including undercover operations. The criminal justice system remains at risk for corruption. However, Panama has made progress in assessing high-risk sectors, improving inter-ministerial cooperation, and passing (though not yet implementing) a law on beneficial ownership. Additionally, the GoP and the United States recently signed an MOU to provide training to combat money laundering and corruption, through judicial investigations, prosecutions, and convictions.
Foreign Exchange and Remittances
Panama’s official currency is the U.S. Dollar.
Panama has customer due diligence, bulk cash, and suspicious transaction reporting requirements for money service providers (MSB), including 18 remittance companies. Post is not aware of any time limits or waiting periods for remittances. In 2017, the Bank Superintendent assumed oversight of AML/CFT compliance for MSBs. The Ministry of Commerce and Industry (MICI) grants operating licenses for remittance companies under Law 48 (2003). There have not been any changes to the remittance policies in 2020.
Sovereign Wealth Funds
Panama started a sovereign wealth fund, called the Panama Savings Fund (FAP), in 2012 with an initial capitalization of $1.3 billion. The fund follows the Santiago Principles and is a member of the International Forum of Sovereign Wealth Funds. The law mandates that from 2015 onward contributions to the National Treasury from the Panama Canal Authority in excess of 3.5 percent of GDP must be deposited into the Fund. In October 2018, the rule for accumulation of the savings was modified to require that when contributions from the Canal exceed 2.5 percent of GDP, half the surplus must go to national savings. At the end of 2020 the fund had $1.38 billion in equity, compared to $1.39 billion at the end of 2019, with less than 3 percent invested domestically. Panama withdrew $105 million from the FAP in 2020 for pandemic relief. The fund had a gross income of $96 million in 2020.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
|Host Country Statistical source*||USG or international statistical source||USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other|
|Host Country Gross Domestic Product (GDP) ($M USD)||2019||$43,061||2020||$54,843||www.worldbank.org/en/country|
|Foreign Direct Investment||2018 $58,023 million||USG or international statistical source||https://www.inec.gob.pa/publicaciones/Default3.aspx?ID_PUBLICACION=973&ID_CATEGORIA=4&ID_SUBCATEGORIA=25
|U.S. FDI in partner country ($M USD, stock positions)||N/A||N/A||2019||$5,272||BEA data available at https://apps.bea.gov/international/factsheet/|
|Host country’s FDI in the United States ($M USD, stock positions)||N/A||N/A||2019||$2,965||BEA data available at https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data|
|Total inbound stock of FDI as % host GDP||N/A||N/A||2019||7.2%||UNCTAD data available at
* Source for Host Country Data: https://www.contraloria.gob.pa/assets/informe-del-contralor-2019.pdf
Panama reports its GDP numbers as compared to a benchmark of $21.296 million from 2007. The 2019 figures from the table are measured from this benchmark and correspond to a 3 percent increase from 2018.
Table 3: Sources and Destination of FDI
Outward Direct Investment data is not available. No countries designated as tax havens are sources of inward FDI.
|Direct Investment from/in Counterpart Economy Data|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||34,124||100%||Total Outward||N/A||100%|
|United States||9,132||27%||Country #2||N/A||X%|
|United Kingdom||3,007||9%||Country #5||N/A||X%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Table 4: Sources of Portfolio Investment
The data is from June 2020.
|Portfolio Investment Assets|
|Top Five Partners (Millions, current US Dollars)|
|Total||Equity Securities||Total Debt Securities|
|All Countries||13,553||100%||All Countries||929||100%||All Countries||12,624||100%|
|United States||10,013||74%||United States||545||59%||United States||9,467||75%|
|Costa Rica||274||2%||Luxembourg||71||8%||Costa Rica||273||2%|