Situated on the isthmus between Costa Rica and Colombia, Panama is the transcontinental port connecting the Pacific and Atlantic Ocean. However, there is more to the country than its famous canal, as it provides a highly regarded business environment and impressive infrastructure. While its reputation for transparency suffered as a result of the leaking of the Panama Papers in 2016, today Panama performs better than both the US and UK on the Tax Justice Network’s Financial Secrecy Index.
Panama has a population of four million and boasts a competitive high-income economy. Beyond its canal is a growing tourism and construction industry, as well as a total gross domestic product (GDP) of $63bn (B63bn), based on 2021 figures. The country’s largest export is copper, which makes up approximately 3% of its total GDP. Panama is slowly climbing back up to pre-pandemic levels of foreign direct investment (FDI), with the top industries outside of logistics being tourism, construction, tech and renewable energy.
Can sustainable mining bring Panama an FDI gold rush?
Panama has one of the highest concentrations of copper and gold in Latin America, although the country's mining industry is coming under heightened scrutiny due to the environmental impact of extractive industries. In March 2023, Panama’s national mining chamber announced it will be embracing the Towards Suitable Mining system, which will require the country to assess not only the environmental consequences of its mining activity but also mining companies’ treatment of local and indigenous communities.
According to World Economics, Panama has an Emissions Index score of 99.7, giving it a respectable grading of 'B'. Panama’s Guide of Good Practices for Business Sustainability, as reported by GFL, was also released in 2022. Meanwhile, the World Bank approved a development policy loan for Panama in April 2023 to fund energy-efficient policies and increase internet access to the population.
Sustainability is paramount to Panama since it is highly vulnerable to the effects of climate change, according to Adaptation Fund, with extreme weather conditions potentially having a negative effect on many areas related to FDI in the country, including:
- quality of life
- agriculture and energy production
- construction and real estate
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More extreme weather conditions could also threaten Panama’s substantial logistics industry, as the Panama Canal is vulnerable to environmental events; for example, the size restrictions of ships was lowered in 2023 in response to drought conditions in the country. Given this very visible demonstration of climate change in Panama, it is perhaps no surprise that so many renewable energy FDI projects have been launched there, such as Enel Green’s Madre Vieja solar panel plant.
What does Panama's population have to offer investors?
Panama has a population of approximately 4.4 million, offering a relatively small domestic market within Latin America. The country does offer an improving quality of life, however, and with a 0.8 score on the Human Development Index, Panama is one of the better-performing countries in the region. This score takes into consideration factors such as average life expectancy, education rates and average household income.
Given that children in Latin America were found to have missed the most hours of school due to lockdowns caused by the Covid-19 pandemic, some fears are being voiced that countries such as Panama could be at a disadvantage when it comes to the talent that foreign investors need in future years. Wider global issues have also caused unrest within Panama, with the country facing a wave of protests in mid-2022, as protesters blocked highways and took to the streets to campaign against the rising inflation and cost of living crisis. This prompted food and medicine shortages.
How much does Panama rely on the US?
Following its independence from Colombia in 1903, Panama has enjoyed strong diplomatic relations with the US, which funded the building of the Panama Canal. However, as was the case with many countries, the Covid-19 pandemic hit Panama hard, and its FDI inflows suffered as a result, which has led to the country tilting slightly more towards China for foreign investment.
These closer ties with China can be traced back to the reputational damage Panama suffered in the aftermath of the Panama Papers leaks. Chinese president Xi Jinping visited Panama in 2018, and Chinese businesses have since helped build infrastructure in the country, as well as the Hyatt Hotels, which have been an important factor in Panama's rise as a tourist location. Chinese company Huawei also uses Panama’s free trade zone for distribution purposes. Given the trade tensions between China and the US, particularly when it comes to the manufacturing of semiconductors, Panama could well find itself torn between the two global behemoths in years to come.
Indeed, Panama's historic relations with the US may come under further threat if talks of a new Latin American currency come to fruition. As of today, Panama uses both local currency the balboa and the US dollar.
What impact did the Panama Papers scandal have on FDI?
Panama's reputation as an offshore finance hub took a major hit in the aftermath of the Panama Papers scandal. Indeed, after the news broke the Panamanian Government registered an objection to the name of the country being used to describe the leak, claiming that it made Panama the scapegoat of the affair, rather than the law firms and shell company owners, who were more accountable.
The country does seem to have staged something of a reputational recovery in the intervening years, however. In 2021, Panama became the first Latin American country to sign a digital country partnership with Mastercard. As well as educating Panama’s citizens on cybersecurity, this deal will also boost financial inclusion in the country by making digital payments available to a wide range of local and small businesses. This allows Panamanians employed in the informal economy, approximately 55% of the total employed population, to acquire a digital history related to their money and earnings.
With money in the country becoming more traceable, Panama is hopeful that it will be removed from the Financial Action Task Force’s 'grey list' of countries considered to be taking insufficient action to tackle financial crimes.
Panama remains a popular place to invest for financial services companies, and since 2019, both Banco Ficohsa and AIS Financial Group have opened new branches in Panama City. However, Panama’s financial privacy laws remain strict and offshore companies remain exempt from many taxes, meaning that critics of the country's record when it comes to transparency have some ammunition.