PANAMA’S WELCOMING BUSINESS CLIMATE
Panama is a bastion of free-market principles and practices in a world listing decidedly to the socialist left. The country’s prevailing business, regulatory, and tax laws are business friendly and foster a climate that is conducive to hiring, investing, and starting a business. Income derived from commercial activities outside of the country, for example, are exempt from income tax [the grubby IRS, on the other hand, taxes the individual or corporation for any income generated on a worldwide basis]. In-country activities are taxable at a maximum rate of 25%. For individuals, there is a property tax exemption of twenty years’ duration thus nullifying what is sometimes the greatest expense item of owning investment property. Capital gains tax rates are negligible for most transactions and there is no estate tax.
Panama imposes a minimum of regulation and affords much privacy to foreign individuals and businesses. At last count, there were over 350,000 foreign companies registered in Panama. The recent media storm over the hacking and leaking of Panamanian law firm Mosack Fonseca’s data records, revealing the inappropriate use of tax havens by some individuals, fails to properly frame the benefit of the nation’s privacy laws. Using Panamanian, or another jurisdiction’s, offshore structure to anonymously hold property and bank accounts for reasons of inheritance or estate planning is entirely lawful and legitimate.
A SERVICE ECONOMY FIRING ON ALL CYLINDERS
Panama is a tiny nation, about the size of South Carolina, but with huge developmental promise. The nation of just under four million people is the economic envy of Latin America. Panama’s GDP growth has recently slowed to 6% per year from a decade’s-long average in excess of 8%. The capital, Panama City, is modern and urban. The streets are clean and buildings devoid of graffiti.
The economy is dollar-based and therefore has no need of a central bank. The balboa [named after Vasco Nuñez de Balboa, a Spanish explorer, who was the first European to set eyes on the Pacific Ocean] is the Republic of Panama’s official currency but it trades at par with the U.S. dollar. As a result, there is no currency exchange expenses to deal with. The economy also enjoys little or no inflation. This is largely because there are no mandarins at a central monetary authority who can simply print money on the fly. Panama’s money supply can only grow the old-fashioned way: the economy must produce real goods or services. What inflation does exist is due to U.S. Federal Reserve policies!
The economic engine of Panama is services. Roughly 80% of the country’s GDP comes from logistics, tourism, banking, insurance, the Colon Free Trade Zone [the second largest after Hong Kong], oil pipeline transport, and canal revenues. The canal was begrudgingly ceded by the United States to Panama on December 31, 1999 [President Ronald Reagan famously quipped about the canal that, “we built it! we paid for it! it’s ours! and we’re going to keep it!”]. The canal is clearly essential for global trade and accounts for approximately 10% of Panama’s GDP. It is also undergoing an expansion which, when completed by mid-year 2016, will triple its current capacity.
Watching a ship negotiate the Miraflores locks of the canal is something to behold. The locks do their job by raising or lowering the water level sufficiently to equalize the vertical distance between the Pacific and Atlantic oceans. If the canal was an engineering marvel in 1914 when it was completed it continues to be to this day. The top cargo haulers through the canal are the United States followed by China. The Chinese, for their part, are seriously toying with the idea of building their own canal through Nicaragua in a poorly veiled attempt to nullify American influence in the region.
A COUNTRY STILL IN DEVELOPMENT
On a recent visit to Panama we stayed at the Trump International Hotel and Tower in Panama City a stone’s throw from the financial district. The hotel’s slick structure rises over seventy stories above Panama Bay with a unique architectural style that evokes a sailing vessel in full downwind splendor. The hotel’s adjoining tower includes condominiums and a casino the glitziest of which is on the sixty-six floor of the tower. The Trump Hotel is also said to be the tallest building in Latin America. Other major hotels in the city include the Hilton, the Waldorf-Astoria, the Hard Rock, Starwood, the Westin, and the recently completed Ritz Carlton. Restaurants also are plentiful. If you want to savor the local cuisine you can do so very affordably at numerous eateries. At the high end, restaurants like Maito, La Casa de Marisco, Acha, Las Clementinas, and Tejas at the Trump Hotel rival elegant and refined dining experiences anywhere.
Tourism, however, is not as finely honed as it should be. This sector of the economy accounts for approximately 6% of GDP and attracts fewer than two million visitors a year. Las Vegas, a city with a similar population of just under two million, attracts over forty million visitors a year. Retail, too, seems wanting as a casual stroll through upscale shopping malls anchored by the likes of Gucci, Hermes, Cartier, and Chanel impresses the observer with its less than teeming crowds.
Panama’s sustained economic run has resulted in low unemployment. Unfortunately, the consequent shortage of trained native workers has made the nation a magnet for foreign workers from neighboring countries such as Nicaragua, Venezuela, Colombia, and Costa Rica who are ubiquitous in restaurants, hotels, and shops. It must be said, however, that regardless their country of origin service workers are very polite, professional, and well spoken. Where I part company, however, is with the so-called professional classes. Attorneys, accountants, and finance types do not yet understand that service to the customer is as important as the technical knowledge they dispense. As an added plus, almost everyone you meet speaks English as a second language.
The extremes of wealth and poverty are also hard to miss. In Casco Viejo, a Spanish colonial neighborhood that is being smartly gentrified, plenty of seedy characters walk the brick streets especially at night. In this charming area of the city small boutique hotels, churches, restaurants, dancing halls, museums, shops, and beautiful period buildings like the French Embassy stand shoulder-to-shoulder with squatters’ slums. Fortunately, but also discomfiting, the area is patrolled by heavily armed police and National Guardsmen.
The Cinta Costera, a waterfront boulevard leading to the downtown area, is also dotted by some of the worst slums to be seen in all of Latin America. The waterfront itself is not very attractive due to the huge tidal variations of the Pacific Ocean which render the water a murky brown for hundreds of yards from the shore.
WHAT DOES THE FUTURE HOLD FOR PANAMA?
Panama’s political stability over the long run has yet to be demonstrated. Since General Manuel Noriega was apprehended and removed from power by the U.S. for drug trafficking on December 20, 1989 there have been six consecutive free general elections. This bodes well but the trend line is short.
As a merchant of free-market policies it is clear that Panama will only solidify its position as a leader of progressive economic reforms. For this reason, I believe Panama’s future is bright and full of promise. On the other hand, for all of the progress Panama has made, the country is still ranked 69 out of 189 on the World Bank’s Ease of Doing Business Index. Even allowing for methodological defects in the index – and there are plenty – it does suggest that Panama has its work cut out as it strives to join the top tier of dynamic world economies.