Panama’s foreign investment appeal seems to retain its shine despite the governance and transparency issues that keep tarnishing the Central American country’s reputation. And while not without technical hiccups, the expanded Panama Canal is gradually catching up with original expectations.

This is giving an extra boost not only to state coffers, but also to the country’s investment proposition as a whole, as growing cargo traffic translates into higher transshipping and logistics opportunities. Panama has one of the highest GDPs among major Latin American countries and has now widened its horizon by establishing diplomatic relations with China.


Corruption concerns

If opportunities still outweigh risks, the quality of Panamanian governance and rules is under scrutiny. After the country hit the headlines for the Mossack Fonseca scandal (largely known as the ‘Panama Papers’), president Juan Carlos Varela admitted that his electoral campaign for the vice-presidency received funds from Brazilian construction company Odebrecht, which is at the heart of a regional graft scandal. Even though he denied any wrongdoing, Mr Varela’s involvement has weakened his anti-corruption platform and narrowed the space for reforms in his last year and a half in charge.

“[The Odebrecht affair] will make life increasingly difficult for [Mr Varela],” says Gavin Strong, an associate director for global risk analysis at consultancy firm Control Risks.

“Even before the scandal came out, he was already seen as a pretty unpopular president. Part of that has to do with the poor management of his government. But also there seems to be an absolute perceived lack of transparency in his government since he took over. At the same time, it’s not unusual for a president in Panama to be the subject of corruption allegations.”

Mr Varela was elected in 2014 on a platform to rejuvenate the country’s democracy after years of mismanagement. He championed a zero-tolerance approach on corruption, and publicly accused predecessor Ricardo Martinelli of taking kickbacks during his presidency (Mr Martinelli is now in custody in the US facing possible extradition to Panama).  

However, Mr Varela himself is now at the centre of a new corruption probe as he admitted receiving money from Odebrecht to fund the 2009 vice-presidential campaign (which he would eventually lose), though he denied any wrongdoing, saying the money constituted a legitimate political donation. A few weeks later, the local press leaked an investigation by the national police that alleged Odebrecht paid millions to both his and Mr Martinelli’s parties to gain “preferential treatment” in the country. Both parties denied any wrongdoing.

The investors' favourite

Corruption in Panama is the flip side of an economy that has been growing at a sustained pace in the past two decades and generating plenty of opportunities for foreign investors, which in turn made it their favourite location in Central America, as well as one of the largest recipients of foreign investment in Latin America.

“Ultimately, the risk associated with investing in Panama is significantly less than investing in other countries in the region,” says Mr Strong. “First, it doesn’t have the security risks of other countries in the region. Then obviously its position makes it a major transport and logistics hub, a perfect place for companies looking to use Panama as a regional base or headquarters.

“There are risks associated with doing business in Panama. Corruption is a problem, lack of transparency in government affairs is also a problem, not to mention the reputational risks associated with Panama’s status as an offshore tax haven, but I think all of this is outweighed by the fact that Panama is a regional trade and logistics hub and the country has enjoyed a great economic growth and resilience.”

Channelling opportunities

Panama received FDI worth $5.2bn in 2016, up from $4.5bn the previous year and its highest ever annual figure, according to Unctad. FDI income now stands at 9.4% of GDP, the highest level among major Latin American countries. Today, Panama hosts the operations of about 140 multinational corporations, according to figures from the country’s finance ministry, with an expanded Panama Canal at the heart of its investment proposition. Strong investment inflows are also shoring up economic growth, which is expected to be 5.8% in 2017 and 6.1% in 2018, the IMF estimates.

“Our investment attraction strategy is founded upon Panama’s connectivity and how the country extracts the most value out of its most significant asset: its geographical position,” says Alberto Alemán, head of national investment promotion agency Proinvex. “Panama is playing an increasingly important role as an economic integrator. We heavily invest in whatever enables [multinational firms] to use Panama as a platform. It’s not about Panama itself, but the regional market of 1.3 billion consumers it grants access to.”

The country has just pulled off a multi-billion-dollar expansion of the Panama Canal, which now allows the transit of mega post-Panamax vessels and has closed the competitive gap with other global trade routes. The expanded canal is already contributing significantly to state coffers, with a 60% increase in toll revenues in its first year of operation. 

On top of this, the new set of locks will double the canal’s share of global trade to an estimated 6%, according to insurance firm Allianz, giving authorities an extra chance to capture part of the goods that transit through the canal and add value to its offer through transshipping and other logistics services. Initiatives such as the Colón Free Trade Zone (FTZ) have already flourished around the traffic and the shipping opportunities generated by the canal.

Transparency push

Beyond the canal, the skyscrapers crowding the skyline of Panama City are a testament to the service-based nature of the country's economy. “Even though the canal will continue to be an important part of the economy, we are going to a place where we need to develop other sectors such as tourism or make Panama an innovation and technological hub where the data is stored,” says Augusto Arosemena, Panama’s commerce and industries secretary.

However, Panama retains a stigma for being an offshore tax haven and a money-laundering centre. This creates a reputational risk that prevents it from upgrading its services to a truly global level, particularly in the financial sector.

“We have passed more than 14 new pieces of legislation to protect our financial system and international services sector from money laundering or corruption... we also created a new legislation for stricter ‘know your client’ policies to services providers,” says Mr Arosemena.

“We signed a multilateral agreement convention on tax exchange, and we are negotiating bilateral agreements for automatic exchange, not only upon request. We have also made considerable amendments to the internal revenue service, so that we can have the proper civil servants, and [we are] reinforcing and increasing the budget of these authorities so that it can have the ability to comply with these international standards.”

Among other things, Panama has signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, making it the 105th jurisdiction to join the world’s leading instrument for boosting transparency and combating crossborder tax evasion, the OECD announced in October 2016. “The signing shows that Panama is now implementing its commitment to fully co-operate with the international community on transparency,” the OECD said.

Eastern ties

With these reforms in the pipeline, Panama is also looking to strengthen its ties with Asian countries, particularly China, with whom it established diplomatic relations in mid-2017 after ending relations with Taiwan. “The future is also [in] integrating with Asia, particularly with China,” says Proinvex’s Mr Alemán, highlighting that as much as 30% of all imports for re-exports in the country’s FTZs are Chinese goods. “From a distribution and logistics perspective, Panama is a strategic place for Chinese companies interested in expanding their footprint across [Latin America],” he adds.

Having ditched plans to build an alternative canal in Nicaragua, China may now opt for Panama as its local base in the region, bringing new opportunities and challenges – but the final outcome will also rest on the upgrades of Panamanian institutions and governance.