WHAT A YEAR

Panama 2017 | DIPLOMACY | YEAR IN REVIEW

Still in damage-control mode following the Panama Papers and Waked scandals, and wondering how the growing reality of trade protectionism could play out, Panama's government is keen to remind the world of its status as a reliable gateway to the Americas.

Panama has suffered from what can only be described as a PR nightmare over the last couple of years, rocked by the Panama Papers and Waked scandals, both examples of the endemic financial irregularity the country would like to leave behind. Public protests have also targeted embattled Brazilian constructor Odebrecht, which is charged with bribing its way to public contracts, while discontent rises over uneven wealth distribution, with one-quarter of the country's population of 4 million living below the poverty line.

Looking to restore Panama's battered reputation, the government is working on ensuring transparent tax and other financial disclosures. But efforts to clean up the system began years before the Panama Papers leaked 11.5 million documents relating to offshore entities. Just five years ago, Panama had not signed a single double taxation agreement; today it has 25. Efforts since resulted, in February 2016, in Panama's removal from the Financial Action Task Force on Money Laundering's (FAFT) gray list after introducing anti-money laundering legislation and legislation to prevent terror-related funds from passing through the Panamanian financial system.

All being said, Panama remains a popular destination for investment. It ranked 70th among 190 economies in The World Bank's 2016 Ease of Doing Business report, slipping three places from 2015. The country enjoys 20 FTAs, and is a highly liberal business environment in general, with virtually no currency restrictions in place—Panama is also a dollarized economy—no limits to foreign ownership, and no curbs on M&As or JVs. Official data reveals that in 1Q2015 alone, FDI totaled USD1.7 billion, soaring 32% YoY. Around 65% of FDI derives from reinvested profits, with 22% accounted for by purchases of the shares of Panamanian companies by overseas investors. In 2016 Panama saw the incorporation of 25 new international companies, raising the total to 134

As an economy, Panama is driven, predictably, by its services sector (80% of GDP), including banking, commerce, and shipping. It enjoys some diversity, mainly at its Colón Free Trade Zone, a large export and re-export hub on the Atlantic entrance to the Panama Canal dealing in goods as diverse as electrical appliances and jewelry. Its success is derived mainly from its location, at the mouth of one of the world's most famous waterways. And in 2016, a vast USD5.7 billion expansion of the canal went into operation, allowing the larger New Panamax-type vessels—1.5 times larger than the old Panamax size—to traverse the locks. The project, which spiked public debt to USD20.2 billion in 2015, was such a significant undertaking that it was first deemed necessary to obtain a public mandate through a national referendum back in 2006. Construction later began in 2007. But for all the effort, the benefits are already becoming evident—official data for January 2017 showed economic activity growing at its fastest pace in six months, with cargo movements at Panamanian ports up over 12%. When the canal's fiscal year ended on September 30, 2016, it announced a hefty income of USD1.93 billion. Of that, USD1.01 billion entered state coffers, with the Panama Canal Authority (ACP) estimate for 2017 at a contribution of USD1.6 billion.

Interestingly, the first ship to pass through the newly expanded canal was a Chinese freighter, laden with 9,500 metal cargo containers. Panama went on to adopt the "One China" policy in June 2017, severing ties with Taiwan despite having hosted its president, Tsai Ing-wen, on her first foreign trip in the position just a year before.

Yet overall the completion of works on the canal points to a positive future for the nation, allowing it to crack on in terms of social issues. The government is currently investing approximately 3.5% of national GDP into the education sector, with a target to raise that figure to at least 6% over the medium term in order to equalize opportunity, especially in long-suffering rural areas. The Varela administration, now fully settled in since election in mid 2014, is keen to up healthcare investment, with the USD2.2 billion budget for 2017 a full USD70 million more than in 2016, with both public- and private-sector initiatives on the table. Another key area of focus must be agriculture, which despite accounting for 16% of total employment only contributes 3% to GDP, the sector beleaguered by extreme elements and the competition brought on by increased importation.
Another important sector, lest we forget Panama is a land of vast tropical beauty, is tourism, an industry that contributes almost 7% of GDP, or USD3.7 billion. The WTTC expects this to rise to USD4.044 billion in 2017 on the back of an international promotional campaign. Thanks to travel and tourism 131,000 jobs were generated in 2016, representing 7.1% of total employment. The WTTC forecasts this number to grow by 5.3% in 2017 to 138,000, and contribute to 7.4% of total employment.