Panama Outlook:
2010
1
Panama Outlook: 2010
TABLE OF CONTENTS Introduction: Why Panama? Economic Review....................................................................................................................................................
page 4
Growth ....................................................................................................................................................................
page 7
Outlook ...................................................................................................................................................................
page 8
Panama Canal Expansion .....................................................................................................................................
page 10
Banking: Is Panama Offshore? .............................................................................................................................................. page 14 Money Laundering .................................................................................................................................................. page 15 Doing Business in Panama - A world view .............................................................................................................
page 16
An interview with former Panamanian president: Dr. Nicolás Ardito Barletta. ........................................................
page 21
Due Diligence in Panama .......................................................................................................................................
page 25
Real Estate: Investment Opportunities .......................................................................................................................................
page 28
Areas to watch........................................................................................................................................................
page 28
Casco Viejo: Panama City’s Old Quarter................................................................................................................
page 30
GSL Real Estate’s Navigating the Property Market...............................................................................................
page 32
Commodities: Panamanian Teak Investment ................................................................................................................................ page 38 Geisha coffee .........................................................................................................................................................
page 42
Business Directory .................................................................................................................................................
page 46
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Introduction
P
anama is a country of 3.4 million people living on the land bridge that connects North and South America. In the opinion of Alternative Latin Investor, Panama is developing a credible reputation as an international centre for business in Central America. The Latin America Offshore Banking report produced by Alternative Latin Investor in 2009, highlight-
ed Panama’s emergence as a regional centre for business, particularly in the opinion of its range of contributors. In that report, Xavier Borja of Loyal Bank Ltd. explained that he believed Panama had developed a compelling proposition as a stable financial centre, with strategical access to Latin American markets. His assessment has recently been supported by a range of internationally recognised measures, with the country highlighted by the International Monetary Fund as being well positioned to outperform the LatAm region over the next five years. At Alternative Latin Investor, we believe that the key issues deserve a more detailed analysis. With independent research sparse and often deal-driven in the region (notoriously within the real estate sector), we provide insight from seasoned professionals in the sectors central to determining Panama’s successful reinvention as a strategic hub for international financial services and technology businesses.
Economic Review Panama has a stable economy that has delivered strong and resilient growth over the recent period since 2001. Whilst the global financial crisis of 2007-2010 has undoubtedly left a profound and lasting impression on the economies of developed countries, Panama avoided slipping into recession and continues to be in the leading pack of LatAm countries; with Latin America a key emerging market. Fig 1. Economic Growth It can be seen that Panama’s economy is highly reliant on the services sector, which accounts for almost 80% of GDP. Statistics from the Economic Commission for Latin America and the Caribbean provide an overview of the composition of Panama’s GDP (see Fig 1).
Gross Domestic Product by Kind of Economic Activity – 2008 (Millions of dollars)
5 730.3 4 259.1
TRANSPORT, STORAGE AND COMMUNICATIONS
4 073.8 3 158.8
COMMUNITY, SOCIAL AND PERSONAL SERVICES
1 548.2
TAXES ON PRODUCTS
1 483.5
CONSTRUCTION
FINANCE, INSURANCE, REAL ESTATE & BUSINESS SERVICES WHOLESALE AND RETAIL TRADE, RESTAURANTS & HOTELS
1 411.1 1 171.0
MANUFACTURING AGRICULTURE, HUNTING, FORESTRY & FISHING
547.8
ELECTRICITY, GAS AND WATER
527.1
COMPUTED COMMISSION FOR BANKING SERVICES
327.4
0
MINING AND QUARRYING
1000
2000
3000
Source: Economic Commission for Latin America and the Caribbean
4
4000
5000
6000
Fig 2 shows GDP contribution from industry sectors since 1990. •
Decline in manufacturing trade
•
Sustained growth of construction industry
•
Increases in the overall contribution of services to GDP
•
Increases in the relative contribution of tax receipts
•
Steady and GDP growth from 1990-2003
•
More rapid expansion in GDP from 2004 onwards
•
A quarter of the country’s GDP has been generated by the finance, insurance, real estate and business sectors, consistently over the last 30 years
YEAR
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
1424.4
1549.0
1858.4
1980.5
2075.3
2088.4
2283.0
2450.2
2720.4
2920.7
3102.0
3225.6
3415.8
3536.9
3701.3
4053.4
4437.0
5074.3
5730.3
842.6
881.7
935.2
964.7
1034.9
1110.5
1138.7
1288.1
1456.1
1509.5
1541.9
1612.4
1706.0
1855.4
2165.5
2409.9
2940.0
3386.1
4259.1
846.5
928.9
1196.1
1411.9
1638.0
1567.4
1585.3
1877.3
1917.8
1873.0
1871.2
1927.9
1899.9
1930.1
2235.2
2566.2
2929.9
3430.2
4073.8
1178.8
1189.9
1301.7
1336.0
1438.2
1470.4
1541.3
1610.6
1755.1
1863.7
1932.0
2008.7
2120.3
2155.0
2324.3
2388.8
2529.0
2865.5
3158.8
Taxes on products
135.6
140.3
167.7
236.4
250.0
253.0
634.7
644.5
725.2
763.3
685.4
680.2
773.1
845.1
903.4
1041.8
1051.2
1339.2
1548.2
Construction
54.8
138.7
203.9
290.5
309.0
334.1
326.5
349.0
399.7
554.0
575.2
459.4
426.4
593.5
677.1
692.2
845.8
1072.8
1483.5
Manufacturing
780.9
871.8
965.6
997.3
1034.3
1079.4
1105.7
1078.0
1134.8
1167.3
1099.6
1033.8
973.6
969.4
1023.4
1072.4
1137.5
1225.8
1411.1
530.9
553.5
568.7
591.5
618.3
634.6
649.1
689.1
760.3
746.4
791.3
860.1
887.4
961.1
987.8
1006.6
1049.8
1098.2
1171.0
201.6
223.8
214.9
260.8
265.2
266.8
295.4
317.3
316.1
342.2
340.0
325.5
350.1
362.9
422.6
504.5
495.6
518.8
547.8
130.8
59.4
118.0
157.1
234.1
190.0
268.7
275.8
323.8
371.8
397.1
402.9
370.3
404.0
404.0
422.2
467.7
452.2
527.1
6.8
11.2
19.8
26.4
32.0
30.4
31.2
55.8
70.7
88.0
79.1
76.8
90.1
127.8
142.7
151.1
188.9
235.0
327.4
Finance, insurance, real estate & business services Transport, storage and communications Wholesale and retail trade, restaurants & hotels Community, social and personal services
Agriculture, hunting, forestry and fishing Electricity, gas and water Computed commission for banking services Mining and quarrying
Source: Panama Annual National Account from 1990, Economic Commission for Latin America and the Caribbean
Currency Panama’s official currency is the balboa, however the country is dollarized with United States notes used for all paper currency, as has been the norm since the country’s independence in 1903 when the balboa was fixed at parity with the US dollar (with one exception, see ‘The Seven Day Dollar’). The Seven Day Dollar In 1941 President Arnulfo Arias printed banknotes denominated in balboas. However, the currency was recalled days later giving rise to the name ‘The Seven Day Dollar’. Whilst the returned notes were incinerated, a number of balboa notes remain in existence, predominately held by collectors.
5
The balboa replaced the Colombian peso in 1903 following Panama’s independence. However, the balboa notes printed by President Arias were the only banknotes ever to have been issued by the country.
Inflation Dollarization of the Panamanian economy has undoubtedly contributed to the country’s enviable record of longer term financial stability in the LatAm region. Panama is often cited as having a stable low inflationary environment – with the exception of the inflationary spike witnessed in early 2008 which was generally attributed to higher transportation and fuel costs and factors rooted in the wider global economic recovery. Available data for 2010 supports the contention that Panama’s historically robust inflationary record is back on track. Fig 3: Panama Inflation
15% 12% 9% 6% 3% 0%
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
Source: International Monetary Fund - 2009 World Economic Outlook
-3 The US Influence More detailed analysis of long run average inflation highlights the expected correlation with the US, however there is clear evidence of real deprecation, with long run inflation rates in Panama not only lower than those of other developing countries but consistently lower than the US as well. While this has been explained by lower productivity growth or relative sectoral disparities, the jury is out on that analysis. What is clear is that dollarization inextricably ties Panama’s economy to the effects of US monetary policy. The stable low inflationary environment is a key support for Panama’s sustained economic growth and compares favourably with many of its Latin American counterparts.
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Geographical Location Gateway to Latin America The county’s location is a significant advantage which has been leveraged throughout the county’s history; demonstrated in the prosperity of gold trail port towns, the considerable contribution of the canal trade and Panama’s current positioning as a launch pad to key Latin American markets. Throughout our extensive travels in Panama, we were continually reminded of the country’s strategic position, straddling the emerging markets of Central and South America (coveted by multinational brands) and of the country’s other unique draws, whether that be the abundant biological diversity, the Pacific ‘Tuna’ Coast or Calle Uruguay nightlife.
Current Economic Environment Since 2001 and up until the global downturn, Panama has delivered an impressive expansion of economic growth. Fig 4: Economic Growth – Panama vs the United States
11.5
8.7
8.6
7.6
7.3
7.2
6.5
4.5
4.2
2.4
4.4 3.8
4.2
3.7 2.7
2.2 1.6
3.6
2.5
3.1
2.9 2.2
0.4
0.6
Source: International Monetary Fund - 2009 World Economic Outlook Latin America Bounces Back Resilience to the global financial crisis has been robust with Panama’s growth rate falling to just 3.3% in 2009 and the country avoiding falling into recession. Emerging and developing economies have rebounded from the global financial crisis at a much faster rate than heavily indebted developed countries (principally driven by domestic demand) and Latin America is well positioned to offer the potential for strong economic growth going forward.
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Figure 2.11. Latin America and the Caribbean: Latin America and the Caribbean: A Robust Recovery1
Leading the Region
A Robust Recovery
Growth in Latin America and the Caribbean has rebounded, led by strong domestic consumption. Production levels have increased sharply, especially in Brazil. The ongoing recovery has been supported by improving financial conditions. Equity prices have reversed their declines and even exceeded precrisis levels in some countries. Despite accommodative monetary policies, good fundamentals are helping the region reattract capital flows, leading to currency appreciation in some cases.
By most recent forecasts, Panama is expected to grow by 5% in 2010, leading the Central American region where average growth of 2.7% is anticipated. The International Monetary Fund (IMF) predicts that Panama’s economy will grow by 6.3% in 2011 and by more than 7% in 2012. Consensus economic forecasts support this forecast for grow-
Latin America: Contribution 2 15 to Growth (annualized quarterly percent change) 10 5
Industrial Production (annualized three-month percent change of three-month moving average)
40 20
World
-5 -10 -15 -20
2006
07
09: Q4
150 Equity Prices (Jan. 2008 = 100) 120
-40
Brazil
08
2007
08
09
-60 Feb. 10
Bond, Equity, and Loan Financing4 (billions of U.S. dollars)
Chile
Brazil
-20
Latin America3
Real output growth Total consumption Gross investment Net exports
Brazil Mexico Other
lation living in poverty to be approximately 30%. During the Torrijos administration, poverty was reduced from 40% to 30% and unemployment fell from 12% to 6%.
60
According to statistics provided by Nationmaster, which
20
aggregates country statistical information sourced principally from the CIA World Factbook, Panama has the fastest growing economy and the largest per capita consumer in Central America.
Peru 09
Apr. 10
Policy Rate5 2 (change from Sep. 2008 to Mar. 2010; percent) 0
2007
08
09: Q4
Exchange Rate per U.S. Dollar (Jan. 2008 = 100) Brazil Chile
0
The country has an impressive record in the region, having 160
delivered robust growth within a stable and secure econom-
140
leading economic growth in the LatAm region over the next
Mexico
-2
120 -4
Peru
-6 -8
Current statistics estimate the proportion of the adult popu-
Outlook
Colombia
2008
ma consistently rated among the worst in Latin America.
80
40
Mexico
30
shared prosperity, with the distribution of income in Pana-
100
90
60
Shared Prosperity? Strong economic performance has not translated into
0
0
ing economic growth trend.
100
ic framework. The IMF’s latest analysis points to Panama five years (2010-2015). Panama joined Brazil, Chile and Mexico in an exclusive Latin American club, when Fitch Ratings agencies upgraded Panama’s debt to investment grade status (BBB-minus) in
Colombia BRA
CHL
COL
MEX
PER
2008
09
80 Apr. 10
Sources: Bloomberg Financial Markets; Dealogic; Haver Analytics; IHS Global Insight; and IMF staff calculations. 1Latin America includes Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay, and Venezuela. 2 Latin America excluding Uruguay. 3 Latin America excluding Ecuador and Uruguay. 4 Total issuance. 5 BRA: Brazil; CHL: Chile; COL: Colombia; MEX: Mexico; PER: Peru.
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March 2010. This followed an announcement from Moody’s in February 2010 placing Panama’s credit rating under review for an upgrade. In May 2010 Standard & Poor raised its rating of Panama’s debt to BBB-minus (from BB-plus) with a stable outlook, commenting “The upgrade reflects our assessment that continued economic growth -- combined with moderate fiscal deficits -- should reduce the government’s debt burden.”
Fig 6: Panama Leading the Region
Figure 2.10. Latin America and the Caribbean:
Latin America and the Caribbean: Average Real GDP Growth in 2010-11 (percent) Average Real GDP Growth in 2010 –11 (Percent)
Below 1 Between 1 and 3 Between 3 and 5 Above 5 Insufficient data Source: IMF staff estimates.
These investment grade awards represent an important milestone and reflect widespread confidence in the Panamanian economy and the Martinelli government. In the opinion of Alternative Latin Investor, Panama is extremely well positioned to outperform in the Latin America region in the coming years.
9
Panama Canal Expansion
T
he current Panama Canal Expansion Pro-
Lake and the deepening of Culebra Cut. One of the world’s
gram, scheduled for completion in 2014,
biggest transport projects, the expansion “will cost $5.25
will be an event almost as big as the canal’s
billion, more than a fifth of Panama’s GDP last year. Of this,
opening in 1914. The project aims to double
$3 billion will come from retained earnings, the rest from
the channel’s capacity and allow for more
bilateral and multilateral lenders, led by the Japan Bank for
traffic and the passage of larger vessels. Initiated by the
International Cooperation, the European Investment Bank
Panama Canal Authority (ACP), an agency of the Panama-
and the Inter-American Development Bank” [Economist
nian government, the expansion consists of the construc-
2009].
tion of two new sets of locks to create a new lane of traffic. A new lock complex will be created on both the Pacific
The strategic importance of the Panama Canal, shipping
and the Atlantic side of the Canal. Each lock will have
and port services not only makes Panama's economy
three chambers and each chamber will have three water
highly dependent on world trade trends, but also vulner-
reutilization basins. The program also entails the widening
able to fluctuations in the global economy. The growth in
and deepening of existing navigational channels in Gatun
Panama Canal usage over recent years has been almost
Panama Canal Toll Revenues
$1,500,000 $1,200,000 $900,000 $600,000 $300,000 $0
2005
2006
Source: Panama Canal Authotiy - Audited Financial Statements
10
2007
2008
2009
exclusively a result of increasing export trade from China to
the next twenty years, cargo volume transiting the Canal will
the US consumers.
grow an average 3% per year, duplicating 2005’s tonnage by 2025.” The expansion of the canal with its new, improved
Many suspect the canal expansion project will have windfall
locks will open the Panama route to new markets that, due
success for the Panamanian people and economy estimat-
to the present size of Canal locks, have not been able to
ing the creation of up to 50,000 direct and indirect jobs,
develop. Among these new markets is “the transport of coal
an increase in investment in the Canal Zone by 40 %, and
from the U.S. and Colombia to East Asia, oil from Venezu-
over $1 billion in annual revenues in its first eleven years of
ela to East Asia, natural gas from Peru to the U.S. East and
operation. According the ACP’s original proposal, “during
South Coasts, as well as *post-Panamax cruise ships. Other
11
than representing an important competitive advantage for the
perity, only to find a continued lack of jobs and a metro
Canal, post-Panamax vessel transits will allow the Panama
area unprepared for such a surge in population. Further-
route to handle growing cargo volumes with fewer transits.
more, with Panama being known for an uneven distribu-
This, in turn, will allow the Canal to maximize revenues, re-
tion of wealth, the country could find itself slipping even
duce operating costs and water utilization, while maintaining
further into debt. Finally, the increase in tolls due to the
more leeway in its operational and water capacity.” In 2006,
expansion has forced many cargo companies to consider
when the Panamanian President at the time, Martín Torrijos,
alternate routes and inspired other passageways such as
presented the plan, citizens approved it in a national referen-
Egypt’s Suez Canal, to lower their toll prices.
dum by 76.8% of the vote. This percentage alone reflects the hope that the new and improved Canal will generate enough
It goes without saying that an undertaking of this magnitude
wealth to transform Panama into a First World country.
brings with it inevitable social, economic and environmental concerns. This impact, be it negative or positive will surely be
Despite the overwhelming support for the project, skep-
felt by not only Panama but also the 120 maritime routes and
tics are ready with a laundry list of social and environ-
80 countries that use it’s canal to conduct their daily business.
mental concerns. From an environmental perspective the fear is that this project, which basically destroys Panama’s greatest freshwater reserve, will pave the way for other industrial projects that have been pining to install their plants within the canal, without having to take full blame for polluting an essential global resource. The biggest social concern is related to the fact that Panama already suffers from a very high rate of unemployment. The false sense of hope created by the canal expansion may lead to an influx of people arriving in search of pros-
12
*A "Panamax" ship is the largest size ship that can pass through the Panama Canal. This is currently 1,050' long by 110' wide with a draft (depth) of 41'. Any ship larger is called "post-Panamax". However, a new set of locks under construction will allow larger ships to pass through - up to 1,400' long by 180' wide, with a drafts up to 60'. These will be called "Panamax II" ships and the term "post-Panamax" will eventually refer to ships larger than Panamax II. (http://www.workingharbor.com)
Aguero Peninsula’s Hotel La Luna: For Sale Details
Rooms: 10 each 24sq meters
Details
Lot : 2003 sq meter
Rooms: Pool:
10meter each 54 cubic
24 sq meters
Lot : 2003 sq meters Restaurant: 70 sq meter fully licensed (includes bar) Pool: 54 cubic meters Additional: Manager and Stand Alone Reception Restaurant: 70 sq Apartment meter fully licensed (includes bar) Additional: Manager Apartment Private 5000 gallon back-up water tankand Stand Alone Reception Private 5000 gallon back-up water tank Affiliations: ATP member, Panama Tourism Association Beach: 20 meters from hotelfrom hotel Beach: 20 meters AfďŹ liations: ATP member, Panama Tourism Association
Area: Playa Uverito
Area: Playa Uverito Playa Uverito is 2 miles outside Las Tablas, the number one place in Panama for the yearly Carnival celebrations. Once a year this town of 30,000 swells by 400,000 with no decent hotels in the area. A few generously rated 2-star establishments which charge a minimum of 200USD a night during Carnival. Playa Uverito itself is just now being discovered by expats moving to Panama with property prices doubling over the past three years and foreigner population growing even faster. Paved road and telephone is being introduced this year, making it a perfect time to invest. In addition, 30 minutes away in Pedasi, two very large real estate developments, with 1hr flights to Panama city started in May of this year. These multi-million dollar investments will have a substancial effect on property values in the region.
Owner/Designer: Luca Varisco Born in Milan, Luca studied at an institute focused on hotel/restaurant management spending the last 30 years in the industry perfecting his craft. His projects in the region include: Developed Stella Restaurant and Hotel Tamalimo: The restaurant has won on a national level, three golden spoon awards, 3 star Michelin ranking, Opened Hotel, La Pagoda, a Japanese style construction with 5 suites. Built The Hotel Estrellas de Bocas, Built Hotel La Luna and the Eclipse Restaurant. The architecture of the hotel is unique, and in 2008 it won a national award as the best building of a commercial micro-enterprise.
For more information please contact Nate Suppaiah at 202-905-0378, or nate@caprg.com
13
Banking
T
he financial services sector is a key con-
With the very competitive deposit rates offered by local
tributor to economic growth and Panama is
banks it is perceived to be difficult for international institu-
Latin America’s largest banking centre. We
tions to penetrate the retail banking market that is continu-
spoke to Gareth Boardman, a Private banker
ing to benefit from the country’s growing middle classes
based in Panama, and Peter Macfarlane, an
and sustained economic growth. However, whilst the
international banking expert to determine their views on a
foreign private banks are decidedly less visible than their
range of issues.
local counterparts, they conduct a substantial capital management operation representing a significant sector of the
Gareth Boardman, private banker based in Panama offers
economy in their own right.
Swiss Private Banking to clients in the Central American, Caribbean and Andean Pact region. Gareth has also
Panama offers a compelling proposition to international
worked in Private Banking in London, Hong Kong, New
investors. It is politically and financially stable and has a
York and Geneva.
sophisticated banking infrastructure. Growth of the private banking sector is being driven by investors in the region
Peter MacFarlane is the joint editor of The Q Wealth Report
that are seeking a geopolitically secure, safe haven envi-
(www.qwealthreport.com) a leading privately published
ronment that offers attractive interest rates, and increas-
newsletter covering how to preserve, create and enhance
ingly important following the financial crisis; Panama’s dol-
your freedom, wealth and privacy in a secure international
larized economy. Moreover the banking sector is reliant on
environment.
continuing economic growth in the region with the banks’ wealth inextricably linked to that of their customers.
Is Panama Offshore?
The Venezuela Connection
Panama has a territorial tax system and provided income is not earned in the local economy, it is tax free. This is similar
Gareth Boardman explained that expansion in the private
to the territorial systems operating in Costa Rica, Uruguay
banking sector has been driven predominately by clients
and a number of other Latin American countries.
based in Latin America and the United States. In the prevailing economic climate investors are seeking a secure
Panama is forging its reputation as a financial services
economic environment and a stable currency, such as the
hub and banking represents an important sector of the
US dollar.
economy. With this in mind the government is doing everything possible to improve Panama’s international stand-
Historically Colombian investors represented a key market
ing, including the signing of free trade agreements and tax
in the Central American, Caribbean and Andean Pact bank-
treaties.
ing region that stretches from south of Mexico and excludes Brazil. Gareth revealed that although still significant, demand
Growth of the Banking Sector
growth from Colombia was slowing as the political backdrop improved. Venezuela is currently the most important market
The banking sector in Panama can be easily divided into two
for foreign bankers in Panama and a market for private banks
distinct market segments: domestic institutions providing retail
globally. Panama is strategically positioned to service the Ven-
banking to Panamanian nationals and international private
ezuelan market and there is a continuing movement of Ven-
banks offering wealth management to international investors.
ezuelans relocating to Panama to live and set up business.
14
Gareth believes that Panama’s Central American neigh-
world stage and he is a popular figure inside with a legend-
bours look more towards North America to meet their pri-
ary no-nonsense, straight talking business style. Martinelli
vate banking needs and sees little demand from the Central
has signed a Free Trade Agreement with the US which now
American block in Panama.
awaits approval by the senate and his record in office to date has been encouraging, including well judged eco-
Money Laundering
nomic appointments, steps taken to cut the national debt, to reduce corruption and improve infrastructure. Observers
It can prove difficult for individuals to open an account in
believe that the signing of a free trade agreement with the
Panama because of the administrative requirements to sat-
United States will function as an economic stimulus as both
isfy anti-money laundering legislation. The banking system
US and Panamanian firms increase business activity in
in Panama is heavily regulated and benefits from a world
each others’ territory.
class infrastructure and well capitalised institutions.
Banking in Panama - Shortcomings As Gareth Boardman highlighted, no Panamanian banks went bust during the global financial crisis (with the excep-
We asked industry figures to identify areas for the improve-
tion of Stanford Bank). However Gareth believes that the
ment in the banking sector and whilst simplification of bu-
onerous bureaucracy can prove a hindrance to business
reaucratic process (eg anti-money laundering) was popular,
in Panama. One such example is the requirement for new
on balance institutions were similarly mindful of the need
account openings to present evidence of two existing bank
to maintain high levels of regulation and capital adequacy.
accounts. Whilst this can be troublesome for individuals
Another area for potential improvement cited was customer
who have historically dealt with one institution, both in-
service; HSBC were publicly criticised over failings, but
terviewees welcomed the heavily regulated nature of the
observers have since commended the bank for having
banking sector and were quick to confirm that Panamanian
invested heavily in their IT infrastructure to overhaul their
banks should not be seen as potential home for clients
service. Internet offerings should also be enhanced to bring
seeking to conceal funds from worldwide tax authorities.
them into line with more sophisticated European systems.
The Martinelli Effect
Foreign Currency – Panamanian
On July 1, 2009 Ricardo Martinelli was sworn into office
Gareth Boardman also recognised foreign currency as an-
having won the national elections held in May by a land-
other area for innovation where there was the potential for
slide. Martinelli recorded over 60% of the votes against his
banks to develop their offering to meet the changing needs
closest rival Balbina Herrera, who received about 36%; this
of investors.
was the largest margin of victory recorded since 1989. Despite the developed range of services on offer from the Martinelli is one of the country’s most successful business-
banking sector, sophisticated investors are increasingly
men having built the country’s largest supermarket chain
asking to diversify their cash assets across currencies in
Super 99. He completed his undergraduate studies at the
order to manage and hedge relative currency exposures.
University of Arkansas and was awarded an MBA from the
In this area banks have been slow to react to demand and
Costa Rica INCAE School of Business affiliated with Har-
typically are not good at holding currency other than the US
vard University. Mr Martinelli’s election made news on the
dollar. Indeed only a small number of institutions deal with a
15
limited range of other currencies. There is an acute need to
of annual reports investigating the regulations that enhance
widen the offering and we expect the market to react.
business activity and those that constrain it. The report was produced by the International Finance Corporation (IFC),
Financial services are a cornerstone of the Panamanian
part of the World Bank Group, and presented quantitative
economy and due to the country’s strategic location and
indicators on business regulations and the protection of
stable monetary and fiscal environment, is well placed to
property rights allowing comparisons across 183 econo-
thrive in the region.
mies included in the study. A set of regulations affecting 10 stages of a business’s life were measured: starting a busi-
Doing Business in Panama – A World Bank View
ness, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts
Doing Business 2010 Panama was the seventh in a series
and closing a business.
Fig 1 Change in Ranking
2010 Agregate Rating
Starting a Business
-10
27
Dealing with Construction Permits
+4
68
Employing Workers
0
177
Registering Property
+11
65
Getting Credit
-3
30
Protecting Investors
-4
109
Paying Taxes
+1
173
Trading Across Borders
-2
10
Enforcing Contracts
-2
119
Closing a Business
0
75
Overall Ease of Doing Business
+6
77
Source: Doing Business 2010 Panama, International Financial Corporation (World Bank Group) Panama is well positioned among the 32 Latin American countries represented in the report (Colombia is ranked higher than Panama and Singapore is the highest ranked country). The charts that follow show Panama’s relative position amongst the 32 Latin American and Caribbean countries represented in the report as well as the OECD average.
16
Starting a Business The challenges of launching a business. Including: the number of steps entrepreneurs can expect to go through to launch, the time it takes on average, and the cost and minimum capital required as a percentage of gross national income (GNI) per capita. Fig 2 Indicator
Panama
Latin America & Caribbean
OECD Average
Procedures (number)
6
9.5
5.7
Time (days)
12
61.7
13.0
Cost (% of income per capita)
10.3
36.6
4.7
Min. capital (% of income per capita)
0.0
2.9
15.5
Dealing with Construction Permits The procedures, time, and costs to build a warehouse, including obtaining necessary licenses and permits, completing required notifications and inspections, and obtaining utility connections. Fig 3 Indicator
Panama
Latin America & Caribbean
OECD Average
Procedures (number)
20
16.7
15.1
Time (days)
116
225.0
157.0
Cost (% of income per capita)
107.2
210.8
56.1
Employing Workers The difficulties that employers face in hiring and firing workers. Each index shown below assigns values between 0 and 100, with higher values representing more rigid regulations. The Rigidity of Employment Index is an average of the three indices. Fig 4 Indicator
Panama
Latin America & Caribbean
OECD Average
Difficulty of hiring index (0-100)
78
34.4
26.5
Rigidity of hours index (0-100)
60
21.2
30.1
Difficulty of redundancy index (0-100)
60
24.1
22.6
Rigidity of employment index (0-100)
66
26.6
26.4
Redundancy costs (weeks of salary)
44
53.0
26.6
Registering Property The ease with which businesses can secure rights to property. Including the number of steps, time, and cost involved in registering property. Fig 5 Indicator
Panama
Latin America & Caribbean
OECD Average
Procedures (number)
7
6.8
4.7
Time (days)
32
70.4
25.0
Cost (% of property value)
2.4
5.9
4.6
17
Getting Credit Measures on credit information sharing and the legal rights of borrowers and lenders. The Legal Rights Index ranges from 0-10, with higher scores indicating that those laws are better designed to expand access to credit. The Credit Information Index measures the scope, access and quality of credit information available through public registries or private bureaus. It ranges from 0-6, with higher values indicating that more credit information is available from a public registry or private bureau. Fig 6 Indicator
Panama
Latin America & Caribbean
OECD Average
Strength of legal rights index (0-10)
6
5.5
6.8
Depth of credit information index (0-6)
6
3.3
4.9
Public registry coverage (% of adults)
0.0
10.0
8.8
Private bureau coverage (% of adults)
45.9
33.2
59.6
Protecting Investors The indicators below describe three dimensions of investor protection: transparency of transactions (Extent of *Disclosure Index), liability for self-dealing (Extent of Director Liability Index), shareholders’ ability to sue officers and directors for misconduct (Ease of Shareholder Suits Index) and Strength of Investor Protection Index. The indexes vary between 0 and 10, with higher values indicating greater disclosure, greater liability of directors, greater powers of shareholders to challenge the transaction, and better investor protection. Fig 7 Indicator
Panama
Latin America & Caribbean
OECD Average
Extent of disclosure index (0-10)
1
4.0
5.9
Extent of director liability index (0-10)
4
5.3
5.0
Ease of shareholder suits index (0-10)
9
6.0
6.6
Strength of investor protection index (0-10)
4.7
5.1
5.8
Paying Taxes The data below shows the tax that a medium-size company must pay or withhold in a given year, as well as measures of the administrative burden in paying taxes. These measures include the number of payments an entrepreneur must make; the number of hours spent preparing, filing, and paying; and the percentage of their profits they must pay in taxes. Fig 8 Indicator
Panama
Latin America & Caribbean
OECD Average
Payments (number per year)
59
33.2
12.8
Time (hours per year)
482
385.2
194.1
Profit tax (%)
17.1
20.4
16.8
Labor tax and contributions (%)
22.6
14.7
24.4
Other taxes (%)
10.4
13.2
3.3
Total tax rate (% profit)
50.1
48.3
44.5
18
Trading Across Borders The costs and procedures involved in importing and exporting a standardized shipment of goods are detailed under this topic. Every official procedure involved is recorded - starting from the final contractual agreement between the two parties, and ending with the delivery of the goods. Fig 9 Indicator
Panama
Latin America & Caribbean
OECD Average
Documents to export (number)
3
6.8
4.3
Time to export (days)
9
18.6
10.5
Cost to export (US$ per container)
729
1,243.6
1,089.7
Documents to import (number)
4
7.3
4.9
Time to import (days)
9
20.9
11.0
Cost to import (US$ per container)
879
1,481.0
1,145.9
Enforcing Contracts The ease or difficulty of enforcing commercial contracts. This is determined by following the evolution of a payment dispute and tracking the time, cost, and number of procedures involved from the moment a plaintiff files the lawsuit until actual payment. Fig 10 Indicator
Panama
Latin America & Caribbean
OECD Average
Time (years)
2.5
3.3
1.7
Cost (% of estate)
18
15.9
8.4
Recovery rate (cents on the dollar)
32.4
26.8
68.6
Closing a Business The time and cost required to resolve bankruptcies. The data identifies weaknesses in existing bankruptcy law and the main procedural and administrative bottlenecks in the bankruptcy process. The recovery rate, expressed in terms of how many cents on the dollar claimants recover from the insolvent firm, is also shown. Fig 11 Indicator
Panama
Latin America & Caribbean
OECD Average
Procedures (number)
31
39.7
30.6
Time (days)
686
707.0
462.4
Cost (% of claim)
50.0
31.3
19.2
There are a number of areas highlighted in the report, in which Panama is seeing improved outcomes, such as the reduction in the length of time and the number of procedures involved to register a property. Conversely Panama continues to score poorly on taxation, unsurprisingly given the recent increases in tax rates. Whilst the range of indicators used in the IFC report are constructive in analyzing economic outcomes and to identify where and why reforms have worked, the quantitative methodology employed has its limitations. The report does not consider other areas important to business such as an economy’s proximity to large markets, the quality of its infrastructure services (other than those related to trading across borders), the security of property from theft and looting, the transparency of government procurement, macroeconomic conditions or the underlying strength of institutions.
19
Latin Business Index Other indicators have added weight to Panama’s reputation as the place to do business in the region with its supportive business environment and pro US administration. In May 2010 Panama replaced Chile as the Latin American country with the best business climate, according to the fifth annual Latin Business Index from Latin Business Chronicle. The Latin Business index consists of 19 countries and is a broad measure of business climate in Latin America. The index considers five key categories and 27 subcategories to measure recent, current and future business environment. These are Macro Environment (GDP growth and inflation), Corporate Environment (corporate tax rates, access to capital for entrepreneurs, ease of doing business and economic freedom), Globalization & Competitiveness (globalization, competitiveness, tariffs, education/health and security for companies and business executives), Technology Level (PC, Internet, broadband, wireless and fixed telephone penetration) and Political Environment (political freedom, political stability, political outlook, business policies of government and corruption).
Economic Freedom
The 2010 Index of Economic Freedom was produced by The Wall Street Journal and The Heritage Foundation, a Washington’s think tank. The influential index tracks 10 key indicators of economic freedom – from property rights to entrepreneurship – in 183 countries. Panama’s economic freedom score was 64.8, making its economy the 60th freest in the 2010 Index. Its score has increased by 0.1 point since last year, reflecting notable improvements in property rights and freedom from corruption. Panama is ranked 13th out of 29 countries in the South and Central America/Caribbean region, and its overall score is above the world and regional averages. The increase in Panama’s score reflected government structural reforms to improve the entrepreneurial environment and enhance legal transparency. The survey acknowledges high levels of trade freedom and fiscal freedom, with average annual growth rates of over 9 percent over the past five years. The report believes that Panama’s overall economic freedom is limited by lingering institutional weaknesses. Despite reform efforts to reduce corruption, the judicial system remains vulnerable to political interference, burdened with backlogged cases, and lax in the enforcement of contracts. It is clear that Martinelli’s administration needs to address the significant challenges in fighting money laundering, narcotics trafficking, the illegal arms trade and in revitalizing a government-run education system that is not preparing Panama’s youth for jobs in banking and the services sector, which accounts for 80 percent of the economy.
20
An Interview with Dr. Nicolás Ardito Barletta
A
lternative Latin Investor had the privilege to
economy is 77% services and 76% of exports are services.
speak with former President of the Repub-
The main service exports are the Canal, tourism, the Colon
lic of Panama Dr. Ardito Barletta, who is
Free Trade Zone, the container ports, banking services,
currently the President of Asesores Estra-
and a combination of maritime, logistics, legal and tele-
tegicos, S.A., Chairman of Panama De-
communication services. Construction growth has also
velopment Corp, and Director General of the NGO Centro
been significant, a percentage of which is exports (sales to
Nacional de Competitividad. His previous posts include
foreigners) and fruits exports.
Minister of Planning and Economic Policy, Administrator of the Interoceanic Region Authority, Chairman of the Panama
There is a dynamic cluster of services growing in the stra-
Banking Commission and Negotiator and economic
tegic geographic location around the canal. That cluster
aspects of the Panama Canal Treaties.
is similar to those areas developed in Singapore or Rotterdam. Its activities already have some international
What should the international investment community know about Panama?
relevance. 4.2% of world maritime trade goes through the canal. Container ports transshipped 4.6 million containers (Teu´s in 2008). The Free Trade Zone had a total turnover
Panama, with 3.4 million people, is an exports-led growth
of $19.0 billion the same year; both were the largest in
economy. During 2003-08 Panama GDP grew by over
Latin America. The Transithmian railroad, along the canal,
8% yearly and exports grew by 14% annually. Panama’s
moved 360,000 containers, bunker fuel sales to passing
21
ships was 3.3 million metric tons, one of the largest in the Hemisphere. Some 230 cruise ships with half a million passengers stopped in Panamanian ports. The merchant
How will Panama maintain its cultural identity and control while providing such an attractive base for foreign business?
marine registry (202 million tons) is by far the largest in the world. The international airport had 4.6 million passengers
Control is achieved by the application of the law of the land to
of which 1.6 million were transits. Air cargo was 86,000
locals and foreigners alike. The policies and the rules of the
tons. The regional banking center has 91 banks with 71 bil-
game, set by the Panamanian government are applied equally
lion dollars in assets. Eleven of the largest shipping compa-
to all. The training of Panamanians to fill executive, profes-
nies in the world have local offices doing logistics opera-
sional and labor jobs in those activities is an important compo-
tions. More than 26 legal offices provide international and
nent for international business done from Panama.
maritime services from Panama. More than 12 insurance companies do business from Panama. International com-
Panama’s cultural identity, ever since the Europeans’ discov-
munications with submarine optic fiber cables is growing
ery of the isthmus by Columbus and Bastidas and Balboa’s
fast. Canal and commercial tourism is a high percentage of
discovery of the Pacific Ocean via the canal, Panama’s pop-
total tourism. Multinational Corps, mostly from the USA, are
ulation has been a mixture of races and cultures. There is
locating regional offices in Panama. The number of offices
great tolerance for diversity. The cultural identity developed
for research, academic, and multilateral organizations is in-
alongside the use of the geographic location for international
creasing in the “City of Knowledge”. The number of foreign
activities, mostly transit. Panama is a small population with
residents in Panama is growing fast.
a national identity, located in a strategic geographic location – desired by the most powerful countries. It struggled over
The international connectivity of Panama by sea, air, land,
time to consolidate a National State that now runs the canal
telecommunications, banking, is among the best in the
to serve the world trade needs efficiently and peacefully and
Hemisphere. The lands bordering the canal are excellent
benefit the development of its people welcoming foreigners
locations for service, processing, manufacturing and logis-
to work along side with the Panamanians.
tics companies doing business in the Hemisphere.
What is the outlook for coastal development?
Please explain how Panama has become one of the region’s most politically stable countries.
The outlook for coastal tourism development is good in
Since 1990 Panama reestablished the full operation of
Panama. There are several beach areas of international
democratic institutions that had evolved and functioned
class. Places such as Bocas del Toro and San Blas in the
through most of its Republican history. The army was
Caribbean and the Pearl Islands, Pedasí, the Chame-Bue-
abolished and replaced by a police force. Five times since
na Ventura coastline and Veraguas, in front of Coiba island
then Governments have been elected freely and openly
(a sanctuary) have large unfolding potential for tourism and
as the democratic institutions gain in strength. The main
retirement communities.
political parties have alternated in government with the support of the electorate. The main political parties represent
What is the time line for coastal infrastructure development?
moderate, left and right of center politics with a capacity to achieve compromises over public policies. Policy continuity has been achieved for fundamental issues such as the
The Government five-year strategic plan has given high pri-
Canal, the cluster activities described above, the monetary
ority to develop coastal infrastructure on those areas cited
system, attracting foreign investment and basic freedoms.
above. Much of it is needed for unfolding projects.
Today there are no significant political parties representing extreme ideological positions.
22
How is the current administration doing?
vestment program and the budget. It has defined an ambitious public investment program to satisfy the needs for develop-
The current administration has an ambitious program to
ment of four strategic areas (logistics, tourism, agribusiness
improve and modernize services guided by a strategic five-
exports, banking and finance) and other areas such as location
year plan. It has taken strong actions to maintain solid pub-
of international business offices, telecommunications and social
lic finances, reducing the debt profile, increasing taxes and
development. In order to finance it and maintain within the pa-
enlarging the public investment program in infrastructure.
rameters of fiscal responsibility defined by law, the government
As a result of the performance of the previous government
has just passed new tax legislation concentrating on lowering
and the continuity of the present one Panama has achieved
income taxes, increasing consumption taxes, and increasing
investment grade by Fitch, just announced the past week.
coverage of taxes to sectors that have paid little taxes, for a net
The government is very keen in achieving the same recog-
increase of revenues of approximately 12% for 2010.
nition by the other outstanding risk grading companies. The Panamanian government is trying to address the main public concerns at present such as security, transportation, education, and employment. The focus of priorities is appropriate. The style of doing things has been questioned
Regarding the Kuna Indians: will the government continue to leave regional power with tribes (considering pressure from developers, etc.)?
in some quarters. The present government is classified as
Government will not be able to alter the agreements and
center-right with concerns for the well being of the very poor.
traditions of the Kuna Indians or manage the affairs of the San Blas islands they inhabit (an outstanding paradise)
There is an ongoing learning curve process for managing
The Indians will participate, as they have up until now, in
the public business.
whatever developments are made on the islands, as joint or solo ventures. In any case, such developments should
What is the forecast for Panamanian politics?
not alter the natural environment, which is what makes San
Although it could be bumpy in the treatment of some key
How have the actions of Chavez affected Panama?
issues for policy making, the stability of the main political
Blas such an outstandingly beautiful area.
parties is secured and that should provide stability. The public at large wants the democratic institutions to work.
There is no significant evidence showing any activity of the
The economic prospects of Panama are better than most.
Venezuelan government affecting local affairs. It is said that
With the expansion of the canal and other opportunities, a
they support some extremist labor unions, but they don’t have
lot will depend on the ability to provide basic services to the
much support or recognition with the public at large. There
population at large, both in urban and rural areas, that have
have been many Venezuelans of high professional and eco-
high expectations for their basic problems to be resolved
nomic level settling in Panama over the last two years.
and for their opportunities to improve.
How the is current administration’s fiscal policy? Will it provide for economic stability and AND growth? The current government is following the guidelines of the Fiscal responsibility law, which requires low fiscal deficits, lowering of the debt as percentage of GDP, a five-year strategic public in-
Offshore Haven: Mis-labeled, incorrect, myth? Is Panama trying to move away from such a classification, has it never been an offshore center, please define the Panamanian banking system and its benefits for foreign investors. Panama is not an offshore haven as such. The law of the
23
land applies equally to Panamanians and foreigners. There
It was absorbed through a reduction in exports, in Foreign
are no special concessions to foreigners that are not also
Direct Investment and a slow down in credit, although both
available to Panamanian citizens. Panama has a dollarized
credits and deposits continued increasing. The prospect is
monetary system with and open banking system, part of
4.1% growth in 2010, dependent on the strength of large
which does offshore business, and the banking system is
public investment (the canal expansion and other projects)
integrated to the international dollar market, providing the
and the gradual recovery of local and foreign investment.
immense stability the system has. Panama also defines its
Sectors such as canal activity, tourism and the Free Trade
taxes territorially, meaning that any Panamanian company,
Zone are already showing signs of recovery.
locally or foreign owned, does not pay taxes for business transactions done outside Panama. The banking law and the
The slow down was cushioned by the fact that service exports,
Banking Superintendency have won praise from abroad for
the main export, did not go down abruptly in volume or prices
the implementation of the Basilea agreements to improve
as did primary goods for other countries. Also the banking
safety and reduce banking risks. There is a requirement for
system maintained high liquidity through conservative banking,
the banks to “know their clients” and to be vigilant about their
not contaminated by toxic foreign assets, by strong supervision
use of international accounts. Panama is more rigorous than
and by the dollarized monetary system with full integration to
Miami in regards to opening international bank accounts.
the dollar markets. No incentives to deposits to flow out of the
Banking secrecy as such does not exist for any person or
country. The construction boom also slowed down gradually as
company that may have done something illegal in its country
many ongoing buildings would be finished once started.
of origin. Corporation Law, a copy of the Delaware corporation law, does allow anonymous stockholders, but the legal offices are also required to “know their clients” and to main-
What are sectors to watch in terms of investment?
tain a registry of who the stockholders are. Direct foreign investments in 2006 and 2008 were the highest The Panamanian banking system is made up by three types of
per capita of any Latin American country and 2007 was close.
banking: a general banking license permits banks to do local and offshore business, an international license only permits
The main sources of growth in Panama are the activities
banks to do offshore business and a representation license only
of the geographic location logistics and maritime cluster
allows just that, “representation” without doing business.
described above, tourism across the country, agricultural exports, especially fruits and meat, international banking, bio-
Only banks with a license given by the Superintendencia
energy forestry, mining, fisheries (both natural and cultivated)
de Bancos can do banking business in Panama or call
construction for foreign offices and residents, telecommunica-
itself a bank. The Superintedencia has a strong supervision
tions, energy (hydro generation). Those sources of growth
program based on strict regulations following the Basilea
have a long term potential and the canal expansion project
recommendations.
($5.2 billion over the next four years) will be a natural stimulus.
Panama is aggressively negotiating bilateral tax agree-
Is there any development of ‘green’ technology/ energy in Panama?
ments with the 12 main OECD countries to be taken off of the so-called gray lists. They should be finished this year.
Yes, there are initial moves in that direction. Reforesta-
How was Panama affected by the crisis and what is the recovery looking like?
tion projects with sustainable bio-energy generation have a good potential, alcohol production for energy is being explored, there are some eolic energy projects being ex-
The crisis slowed down growth from 9.2% in 2008 to 2% in
plored, bio-diesel from African palm projects has potential,
2009, still the highest growth of any Latin American country.
and some solar energy pilot projects have been successful.
24
Due Diligence in Panama
W
hen considering foreign investment in
registry and that taxes and fees are current thus ensuring it
Panama, or any other LatAm region,
is in good standing with the government. Additionally, many
it is essential to know whom your
of these legal and investigatory firms also have access to
dealing with. The term due diligence
databases for civil cases, which would show if someone is
is somewhat vague, however refers
suing, or being sued. This information may be useful for ex-
to the process of finding out as much as possible in regards
ample, if a background check is being done on a potential
to the person or corporation you are considering investing
employee and he or she has been found to be constantly
in. There are various private investigation and law firms
suing his or her employer, they may not be worth hiring -
available in Panama to help you to ascertain if the person
despite a stellar resume.
or corporation in question has any known history of fraud and what their reputation is in the market. Whether you are
In regards to the division of services, more investigations
purchasing land, starting a business venture or contacting
are conducted on people than on corporations. Thanks to
a bank you may be in the market for something more than
the internet, if you have a corporation in mind and know
just a background check. ALI investigates some tips on do-
a bit about how corporations are established in Panama,
ing your due diligence in Latin America.
all you would need to do is go to the public registry online and see how it’s set up, look for it on the internet, see if it
Due Diligence: Methods
has physical locations or if it’s just a paper company. Once this basic research has been done, many investors still feel
In the past if you wanted to work with someone in Panama,
hesitant to commit to a corporation, and this is why a lot
you would just go down to the local registry and pull up
of people will focus less on investigating the company and
their police record or “récord policivo”. At a certain point in
more on investigating the person or people behind it.
time this became linked with invasion of privacy as people felt that if someone committed a crime at age 18 and years
Due Diligence in Latin America
later they wanted to be involved in a new venture, that they should not be penalized for their previous actions. It is
With the US and Middle East claiming to be more transpar-
now illegal to get information on someone via local police
ent when it comes to the availability of information, and
enforcement. Fortunately, investigators have found ways
Latin America being infamous for withholding information,
around this roadblock. Some commonly used methods in
if follows that doing due diligence in Latin America is more
investigations aside from standard online and database
difficult which is what makes it a bit more costly. While, do
checks are to check newspaper archives - for example
to public registry, you can go online and pull up corporate
if someone is busted for drugs it will almost always be
documents, with a personal investigation this is not an op-
recorded in the local media. Another common practice is
tion. You have to actually go down to the registry and do a
neighborhood searches, getting in the community, asking
physical search and wait in line, which is both tedious and
around at local shops. If you are buying something involv-
time consuming.
ing title an investigation may help you to verify that the title is clear and free of stumbling blocks and that any taxes due
Working with a company designed to handle complicated
are paid current. A local investigator would be able to verify
investigations will save you both time and hassle. Outside
that a corporation or foundation is registered in the public
of Panama, most investigative companies have access to
25
databases, which allow them to put someone’s name in
may hire a maid from Nicaragua because she “seems like a
and one hit get a tributary number, a cedular number (coun-
great girl” – when things start disappearing they realize that
tries equivalent to an ID number) all previous addresses,
perhaps having invested a bit of money on some simple
a list of properties, and vehicles. In Panama, however, this
due diligence would have saved them thousands of dollars
system is not always an option. You have to go to “specific”
in stolen goods and non-rendered services.
departments of “certain” registries to pull up “particular” records – for example if you wanted to check and see if a
Foreign Due Diligence
person has a legitimate shipping license, which should be public information, the company you hire may have to go to
In regards to foreign due diligence, Europeans tend to pur-
the registry repeatedly to try to obtain proof of this license.
sue background investigations more frequently than Ameri-
Something that should take ten minutes could take a month
cans. If a foreign contact appears trustworthy, one must
of phone calls and visits. Welcome to Latin America. Which
also take into account their counterparts and involvements,
makes the need for hiring a third party to conduct your due
and the whole operation must be speculated under the
diligence all the more apparent .
bright light of an investigation. In security, the worst factor is the human factor. This unpredictability can lead to various
There are a few cases in which due diligence may appear
mishaps, and thus looking into someone’s background is
necessary but it is actually superfluous. If a person is physi-
essential when considering handing over your dollars to an
cally in Panama and they want to make certain investments
individual.
and they have actually seen the physical location and met with the partners involved then due diligence may not be
Investigative companies in Panama do not merely conduct
necessary. With that being said people investing in appar-
due diligence on entities based solely in the region, but
ently legitimate operations have found themselves faced
throughout all of Latin America. Many Colombians and
with strange laws, merely do to the fact that they didn’t
Venezuelans are currently coming into the country and it’s
know enough about the company – in these cases, doing
important to know who they are in their prospective coun-
due diligence and learning as much as possible about the
tries.
company, policies and local laws can be helpful.
Corporate Due Diligence There are a lot of people in Panama who have opened up businesses or investments, and there are horror stories of
For large-scale corporate investments the ideal time to do
people sending their money abroad only to find that they
due diligence is fairly early in the process. For example,
will never see a cent of it. Many of these situations could be
if a corporation has visited Panama and they want to buy
avoided with just a few simple phone calls.
produce for example, they should set up meetings and decide whom they might want to do business with. At that
Domestic Due Diligence
point they should begin the process of doing due diligence, furthermore they should alert the company that they are go-
Within panama due diligence is standard practice. It’s
ing to begin the process of investigating them and tell them
something that a lot of the larger international corpora-
that any information they can offer up front will be helpful in
tions are well aware that they need to do. The extent of the
the process. Within a months time the client can be certain
research typically correlates to the size of the company.
that the company they have chosen to do business with is a
Large corporations, i.e. those in the petroleum industry,
stable and trustworthy entity.
the major fruit companies, and the airlines - will go as far as employing polygraph tests on all of their employees.
Competition
Conversely, the average “Joe” millionaire wouldn’t think to run a background check when hiring a housekeeper. They
26
There are various Panamanian companies and individu-
als who conduct private investigations. Oftentimes these
sociations – one such organization is called the Council
businesses offer additional services such as security
of International Investigators. They hold a very high stan-
operations. There are companies, however, who are strictly
dard for their members and there are only a mere several
involved in the investigation aspect of due diligence and
hundred who are accepted into the council. Contacting this
focuses solely on that and not on surveillance operations.
organization may be helpful when seeking a company to manage your investigation.
Internationally there are several private investigative as-
27
Real Estate
Flipping is Dead
T
The Commercial Market is Robust and Growing
here is unanimous consensus in declaring
The commercial property market has weathered the global
that the market has fundamentally changed
financial meltdown better than the residential sector, prin-
as a result of the global financial crisis. The
cipally due to the resilience of Panama’s economy, and the
practice of ‘flipping’ properties – or buy-
drivers which have underpinned continued growth also serv-
ing and selling within a short time frame to
ing to support the commercial property market. Commercial
exploit rising prices and preconstruction discounts - is no
units are still being completed and absorbed at a stable rate
longer viable. The market is acutely aware that foreign
with a good majority of preconstruction buyers also commit-
investors are no longer able to raise capital against their
ted end users, whether that be to occupy or lease.
assets to fund these property investments and during the last two years, with demand disintegrating, the market has
Looking to the longer term, commercial property should of-
corrected 15% to 30% accordingly.
fer good potential for growth with the Panamanian economy developing to meet the increasingly sophisticated needs of
The impact of global financial conditions has been felt most
the aspirational growing middle classes and the expanding
acutely in the new build high rise condo sector. According
economy associated to the canal widening project.
to Nensi Wong Chan of the Two Oceans Fund, there is some evidence that the demand for older apartments (usu-
There is a dynamic cluster of services growing in the
ally bigger in size than new developments) has remained
strategic geographic location around the canal and whilst
more resilient. The market perceives that demand dynam-
comparisons have been made with Hong Kong in terms of
ics and the scope to add value through remodelling will
its status as a regional financial hub; ex President Nicolás
lend greater support to this sector over the longer term.
Ardito Barletta instead cites the examples set by Singapore or Rotterdam in his exclusive interview with Alternative
Investment Opportunities
Latin Investor.
Media speculators have signaled that now could be the
Coastline
time to buy property in Panama and as the credit markets repair themselves, prices at the top end of the market are
Indisputably Panama’s Caribbean and Pacific coastlines
bouncing back. Robert O’Neill, Consultant with Overseas
offer potential for development.
Assitance, believes that in some cases, the new constructions could be entering the market priced at a discount
Jaime Figaroa Navarro, CEO of Panama All in One who
of 15%-20% below 2006 prices, offering the potential for
was involved in the creation of the Martinelli coalition
significant growth over the next three to five years.
agreement plans to develop tourism industry in Panama.
28
Jaime explained that was significant investment in the
Trump Ocean Club extension, yacht clubs etc. What
transport network that was deemed the first requirement
remains to be tapped is a handful of islands and Isla del
of the administration to stimulate development of coastline
Rey which is by itself a little bigger than Aruba.
areas. The government has since started this process with the Caribbean highway that is to stretch from Colon at the
- Penenome
Caribbean coast to the Coast Rican border already under construction. In a project that is reminiscent of the intra
Farms around the Penenome area are proving popular
state highway programme developed by Eisenhower, the
with those interested in seclusion or sustainable living
Pacific highway will also to improve the Pacific route with
concept. The area is about 20 minutes from the major
connections between the two roads implemented at strate-
beach resorts on the Pacific side and land is well priced
gic points.
compared to many of the other growing cities (about $0.15 to $0.75 per square metre). About 15 minutes
With the programme to improve transport infrastructure un-
north of Penenome, is La Pintada, an interesting area for
der way, the government will turn its attention to the regional
investment with some of the best infrastructure in provin-
utilities networks, electricity and water to open up the devel-
cial Panama thanks to the Petequilla gold mining opera-
opment of the coastline for the tourism and property markets.
tions located there.
Areas to Watch
- Boquette
- Costa Arriba
The small town of Boquete is nestled in the green mountain highlands of Panama, in western-most Chiriquí
Costa Arriba in the Colon Province is clearly one of the
Province, about 60 kilometres from the border with Costa
best underdeveloped coastlines at the moment in Pan-
Rica, where the mountainous atmosphere, cool breeze
ama. Costa Arriba is spectacular for those who want to
and a relaxing way of life are a big draw. The interna-
be swimming in the Caribbean within an hour of leaving
tional community there is seeing an influx of foreigners
Panama City and includes the Maria Chiquita, Portobello
and the area was recently voted the third best location to
and Isla Grande areas.
retire.
- Isla Las Perlas
However there are reports of unscrupulous developers limiting the choice of building contractors within contract
The Isla Las Perlas archipelago has some of the biggest
small print. Generally these “preselected” contractors
untapped ocean property. The islands have some of the
can be 3 to 4 times more expensive than others of same
best beaches in the country and access to one of the
quality. Construction costs can be relatively modest in
most fertile game fishing waters in the world. We are
Panama with material and labour costs reasonable and
seeing a couple projects emerge on some of the smaller
competition between contracting firms to win business.
islands in the chain – Jack Nicolas Signature golf course,
29
Casco Viejo: Panama City’s Old Quarter mercantile trade) as well as the start of construction on the French Canal. The arrival of the French also heralded a change in the area’s architectural style, with the emergence of European style constructions inspired by the French. The 1960 and 1970’s saw the proliferation of private car ownership in Latin America and this movement devastated the Casco, with car owning families moving out of the zone and to suburbia. Following this exodus
P
of the affluent, development was neglected and by the end atricia Pinzon is the President and Co-
of the military dictatorship Casco had degenerated into a
Founder of Arco Properties, a commercial
notorious slum.
and residential real estate brokerage based in Casco Viejo. As Patricia explained to
Emerging from the Dark Period
us, whilst now celebrated as the charming
historic centre of Panama City, Casco Viejo has a more
UNESCO World Heritage Site designation in 1997 acknowl-
colourful past.
edged Casco Antiguo’s importance as the oldest European settlement on the Pacific Coast of the Americas. The Salón
A Notorious Slum
Bolivar was cited as being of outstanding historical importance as the venue for Simón Bolivar’s visionary attempt
The ‘Casco’ was originally founded in 1673 after Pirate
to create a Pan-American congress in 1826, more than a
Henry Morgan’s destruction of the settlement of Panama
century before such institutions became a reality.
Viejo. To protect settlers from future siege the new settlement, Casco Antiguo (also known as Casco Viejo, San Fe-
UNESCO designation changed the fortunes of Casco
lipe or more simply ‘Casco’) was built on a peninsula near
Viejo and ever since the area has undergone a continu-
to Panama City and fortified with a surrounding wall. During
ing transformation. After the initial wave of domestic and
the late 1800’s and early 1900’s the area thrived, with the
foreign investment, the area embarked on a process of
discovery of Gold Mines in California (and the subsequent
reinvention, spearheaded by vibrant community groups and
30
supported by the private sector as well as the government,
ciation in property prices, as well as a boosting of the tourist
who enacted laws to protect the area. The ongoing consid-
sector, when the hotels open their doors for business.
erate restoration of Casco’s breathtaking colonial buildings, cobbled streets and plazas brought about a resurgence in interest from foreign investors in the mid 2000’s with the
Key recommendations for investing in Casco Viejo
area now hosting the city’s best restaurants and bars. •
Upside potential
Strongly consider buying a property which has already been restored. Buying and restoring a listed building carries with it a range of onerous responsibilities.
As the only example of true urban regeneration in Panama, Casco Antiguo is already the second largest touristic desti-
•
nation in Panama City, second to the Panama Canal.
If you are considering a tower skyscraper apartment, then it’s likely that the bohemian, eclectic neighbourhood of Casco Viejo is not for you.
Patricia believes that central to Casco’s future ambitions and sustained prosperity is the continued development of the tour-
•
ism industry. One such example is the project launched in late
The neighbourhood has an active community so be prepared to get involved.
2008 by the World Bank and the Oficina del Casco Antiguo. By investing in the creation and promotion of cultural activi-
•
Infrastructure is improving, but this process is progress-
ties in partnership with local entrepreneurs, art schools and
ing on a block-by-block basis as restored properties are
artisans, it is hoped to develop the tourist trade further.
connected into the central grid. Despite the community’s efforts to forward their proposals for a new infrastructure
Despite the zone’s reinvention, ‘Casco Viejo’ still holds
network to service the whole area, it is important to con-
some stigma with Panamanians, although as Patricia
sider when key services will come online.
accounted there is strong interest, with a generation of Panamanians ‘rediscovering’ the barrio. However Patricia
•
Prices are likely to maintain their value. Casco Viejo is
believes that it is not domestic demand, but another factor
compact and there are a limited number of properties,
that will drive a further appreciation in real estate prices.
only 900 or so apartments in total.
One of the biggest changes in last five years has been the
Designation as a UNESCO World Heritage Site has trans-
start of construction on several hotel complexes. With it typi-
formed Casco Viejo into one of the most exciting areas
cally taking up to a year for construction projects to be granted
of Panama City. With the continued determination of the
approval, a number of the smaller developers have been
zone’s dedicated community to further improve infrastruc-
granted planning and started construction, which itself may
ture, to develop the tourist industry and to continue to hold
take a further two to three years. In all, there are currently two
the Government to account over its commitments; Patricia
large sites (60-100 rooms) and several small hotels (10-20
firmly believes that the real estate market represents an
rooms) under construction. Patricia expects a wave appre-
exciting investment and lifestyle opportunity for investors.
31
GSL Real Estate’s Navigating the Property Market Due to its good retirement benefits, nice climate, tax
(driving) from the airport in David (from Panama city - David
breaks, sustainable growth, and wonderful, affordable
is about 50 minutes in an aircraft and about $150 as a
health care – Panama has proven to be a hotspot for real
return ticket).
estate investment. Other mountain communities: Stuart Greatbanks, founder of GSL Real Estate offers his
•
El Valle - many shops and restaurants
advice for anyone looking to rent or buy in Panama:
•
Altos de Maria - gated community - 30 min drive to
a major supermarket
•
Cerro Azul - 30 minutes to Panama
1. Choose the area where you want to live – do you prefer the beach, the cool mountain air or the city life?
Bocas del Toro (Isla Colon)
2. Establish a budget.
Island located on the Caribbean side – close to the border
3. Think of the amenities that you consider essential –
with Costa Rica. Fantastic fishing, scuba diving and yacht-
do you need to be close to the airport? Hospitals?
ing due to calmer seas than on the Pacific side. There are
Shopping malls?
beautiful beaches some of which are only accessible by boat. Unfortunately it rains a little more there than it does
GSL meets with all of their clients individually in a question
in the city. Located a 10-hour drive or 75 minute flight from
and answer session to find out what the wants and needs are
Panama City.
and then they take a look at what is available. Most people looking to invest in Panamanian real estate visit the country
Pedasí
with an idea of what they are looking for and typically 40% of
The up and coming area for tourism – currently booming.
investors change their minds after seeing what’s available.
This area has some of the best world class fishing any-
Locations
where. The weather is dryer than the city and beaches are beautiful light brown sand. New airport under construction with daily flights planned for the near future.
Panama City Largest variation of social activities and nightlife.
Penonome This location is central in the country and approx. 1 hour
Boquete
45 minutes from Panama City. Lots of land available at
Quiet and preferable for older retirees looking for peace
very inexpensive prices, the area is in close proximity to
and tranquility. There is much more greenery and wildlife,
land earmarked for the new international airport. Appeals to
cooler more temperate climate. Boquete has been devel-
those who like the mountain greenery with lots of running
oped considerably over the past year. Located 30 minutes
water and waterfalls.
32
Renting in Panama
people are looking at retiring in 5-6 years but want to capitalize on the current buyers market. With this strategy, by
Some people prefer to rent short term to cover costs,
the time owners are ready to retire the house will be mostly
however the majority of the lease contracts managed by
paid off. GSL offers a full property management service.
GSL are long term, at least one year, and are to corporate clients who have staff here on a contract. GSL has an in
Some people prefer to keep their homes for their own use.
house lawyer who prepares all contracts for buying, selling
This decision will determine how they furnish their property.
and leasing. These contracts are fairly standard in Pana-
Someone who’s renting will furnish it more sparsely - like a
ma. Although it’s possible to rent everywhere in Panama
hotel room. GSL offers the service of furnishing apartments
- it’s actually cheaper out of the city than within the city.
in the city when it is for a rental. There are dozens of furni-
There are 5-6 new hotels that have just opened up rang-
ture stores to choose from now, many more than just a few
ing from cheap bed and breakfasts to luxury hotels both in
years ago, catering to all tastes and budgets
Bocas del Toro and Pedasí. 50 % of the people who buy at the beach visit their homes for a few months out of the
In Panama city an apartment that would suite any western-
year, depending on their schedule.
ized person coming would start at around $125,000 – for a standard two bedroom/two bath - 88-90 square meters, 950
Buying in Panama
square feet – that price can range up to several million dollars. And you can pay 2 million for a penthouse that’s 9,000
If you want an investment where you are going to see a
square feet in Punta Pacífica.
consistent return , buy an apartment in the city and rent it out full time. Renting an apartment in the city provides a
If you go out to Coronado you can get an apartment close
solid return on investment – typically around 7-8%. Some
to the golf course with mountain and ocean views from –
33
rently very cheap and has been selling to many Canadians. There is going to be a new international airport built six miles outside of the town in Agua Dulce (construction has already begun). The airport will make this area much more financially viable and provide jobs and stimulate the development of restaurants and activities. In this area, you can purchase 10-15 acres for $100,000 – one popular option is to split up the lots and sell them - ending up with a nice house and a profit. In terms of reselling or flipping property, people are bargain hunting right now as sales are way down compared to where they used to be. If you bought at the right price there is no problem selling. Within two years you should see a very good return on your investment. Another buying option is the developing communities cur$175,000 or a beach mansion for 3 and 4 million dollars.
rently under construction, i.e. Andromeda, Costa Pedasi, and Playa Blanca. These areas will surely double in value
Pedasí has less appeal than Coronado as it is a flight or
over the next few years. The communities are growing
a long drive from Panama City, you are looking at places
quickly and they are ideal for an investment or retirement.
ranging from $85,000 – 2 million dollars for some real
Playa Blanca is a cheap and cheerful option – they do rent
luxury villas close to the ocean with every amenity you
quite well because they are close to the hotel. A more solid
could imagine 4-5,000 square feet.
investment may be something a bit nicer and closer to better beaches – Andromeda would fall in that category. There
In Bocas del Toro what people tend to do is buy their own
will be ten houses completed in Andromeda by the end of
land and build their own rustic property – you’re looking at
the year. Also, Buena Ventura which is only about a mile
$300,000 if you want a house on the water. You can get a piece of land on the beach for as little as $40-50,000 The mountain regions can be estimated as followed: Boquete – average price $200,000 nice – 2,000 square feet El Valle – reasonable nice house from $200,000 Altos del Maria - $175,000 half an acre of grounds, gated community Cerro Azul - $175- $200,000 Penonome is new on the market and is really going to boom over the next few years. Land in this area is cur-
34
Pedasí Coastline
from Playa Blanca is a more exclusive resort – which has just built a new location there and there is a Jack Nicklaus golf course – it’s a gated community right on the beach and aimed at a more exclusive crowd. These communities will have a positive affect on Panamanian real estate in general. The more foreign investment comes in the better, as it will stimulate development in the surrounding areas. GSL recommends another current project in Bocas del Toro, Sunset Point. Buyers purchase a lot then build a house –properties are directly on the water and buyers can have a mooring on the back of their property to put their boats – an alluring feature to people in the boating community.
tion will reflect what you’re willing to pay for. There are talented and efficient builders who cost a bit more but build
Some Typical Roadblocks When Investing in Panama
to western standards and get the job done right.
Getting Money In and Out
In some Panamanian locations, you may have a right of possession problem and although you could start building
You don’t necessarily need a local bank account. However
it might be years before you actually own the title. Property
the process for getting one can be completed with two ref-
breaks down into ‘Title’ where the property is entirely yours,
erence letters from financial institutions that you deal with
and ‘Right of Possession’ which is similar to long-term lease.
now, and local references (from GSL) If it’s for a mortgage,
Bocas del Toro, for example, has been around a long time –
a credit check and bank account are also required.
the problem is that a lot of the land has rights of possession (ROP). There is a conversion program that was introduced
As far as getting money into the country, GSL has a ‘Cli-
in January but hasn’t been converted into the legal system
ent holding account’ for those clients who do not have an
yet. It’s a lengthy but not costly process. Like everything else
account here in Panama. This gives them added peace
in Latin America – these things take time. The silver lining
of mind that their funds are controlled and only paid to the
is Panama´s total transparency, nearly all records can be
seller at the right time.
viewed at the Public Registry on computer. The same rules apply to locals as they do to foreigners; there is no distinction
Mortgages/Financing is available from most of the large
when buying or selling property. At present the majority of
banks here, 30% down as a minimum and current interest
property sold by GSL is fully titled.
rates between 6.5% and 7.5%. This option is only available up to the age of 75 years and has a requirement for a life
Do your own due diligence – employ a lawyer. Since every-
insurance policy issued by a Panamanian Insurance Com-
thing is computerized and very transparent, it can be checked
pany for the duration of the contract.
out easily by an attorney who knows what to look for. Home owners/rental insurance depends on the value of the Many homeowners choose to buy property and then save
property and contents. Insurance ranges between $350
costs by hiring a cheap builder to construct their home. One
and $500 per year on average.
thing to note is that in Panama the quality of the construc-
35
36
Standard agency fees for selling are 5% real estate com-
proximity to Panama City. Coronado has everything you
mission, 2% Government Transfer Tax and 3% Sales Tax.
could wish for (other than a movie theatre) – including
Rental commission is equivalent to the first month of rent.
equestrian, golf, restaurants, galleries. Dealing with ser-
When buying there is a registration fee for the issue of the
vices i.e. – cable and Internet is fairly straightforward and
new Title Deed.
GSL has a team of people to help clients with all of the utilities and services. The average Internet (speed) for
The process legally for selling the property is very simple
the city and populated areas is 1mb with up to 5mb avail-
and straightforward. Funds can be taken out of the country
able. There are 150 cable channels available, including
immediately. There will always be scammers in every coun-
film channels in English with Spanish subtitles. Blackouts
try; it is necessary to work with experienced and licensed
are virtually non-existent in the city, however, in outlying
people to make sure that your investment is safe.
areas there can sometimes be power failures and water shortage, but in many of the mountain regions it is possi-
Services and Utilities
ble to dig your own well. Drinking water can be consumed straight from the tap in Panama City; in outlying areas it
The infrastructure of each town is based mainly on its
may require filtration.
GSL Founder: Stuart Greatbanks Seven years ago, 49 year-old Stuart Greatbanks visited Panama with his wife seeking a better climate, new opportunities in business, lower cost of living and less taxation. Panama fit the bill and they stayed. After living there for 7 months and not being quite sure what business sector to become involved in, Stuart was approached by one of the property developers who had become a good friend. He suggested that Stuart start a real estate business and attract foreigners looking to invest in the country. He put together a web site and started marketing his services to American and Canadian clients. Very soon Stuart was established and introduced himself to the other local developers. They all welcomed the clients that he was bringing to them, realizing that his level of service was above what they were offering, and the business grew from there. Later he began marketing to other areas including Europe and South America. Mr. Greatbanks then took things to the next level and employed his own attorney. GSL is now able to offer the full range of legal services from within the office, ranging from purchase and sale contracts, leasing contracts, immigration and setting up of corporations. Currently, GSL serves clients from all over the world and has a very good track record of customer satisfaction. They do not profess to be one of the largest companies in Real Estate, but they pride themselves on providing solid service and being honest and straightforward with all of their clients. As Mr. Greatbanks states “I have instilled in all of my staff that the most important thing is customer service. We now get as many clients through word of mouth recommendations as any other form of advertising. It is very rewarding to see people happy with their investment and the advice we have given them. We are very good listeners and pay attention to the needs of the client, not just forcing a sale upon them.” GSL is on the ground and in the know as far as property investment is concerned.
37
Panamanian Teak Investment The teak industry is still very small in Panama, but the
included a reforestation residency provision. Reforestation
potential is great, the government is stable and Panama is
companies began to promote and sell small plots of teak to
in a prime-growing zone. Timber is a slow, steady industry
foreign investors, who bought these properties primarily to
that, like its product, grows over time. Panama has a large
obtain Panamanian resident status. Programs promoting
quantity of underutilized agricultural land and great weather
sales of these teak plots were more focused on the refores-
for many types of agriculture and forestry. Grass will grow
tation residency visa than on teak as an investment option.
an inch a day during the wet season. So will teak trees.
But these visa “investment” programs were marketed heav-
The annual bio mass growth rates of the tropical regions
ily via the Internet and they certainly brought an awareness
are unmatched. Unfortunately, due to widespread misman-
of the possible benefits of investing in Panamanian teak to
agement and lack of agro-forestry education, Panama has
a worldwide audience.
not yet maximized its agro-forestry potential. Potentially fertile soil is often degraded due to poor agricultural practices.
Panama’s penetration in the global teak market has been
Panama is currently a net importer of agricultural products,
very limited as of 2010, but that will change. It is well situ-
when it could easily be a net exporter. The government has
ated for product distribution with the canal and its associ-
a number of incentives in place for the agro-forestry indus-
ated commodity export infrastructure already in place. This
tries and is trying to increase awareness of sound practices
all being said, Teak is an industry that takes 25 to 30 years
in rural areas. As the government improves agricultural
to start production and Panama started developing its plan-
education and makes it easier for new agro-forestry busi-
tation timber industry less than 20 years ago. It may well be
nesses to go into production, Panama can become a major
another 15 years before Panama’s plantations produce the
producer of timber and agricultural products.
quantity of market-ready teak necessary for it to become a force in the global teak market.
Large-scale planting of teak began when the Panamanian government instituted tax laws favorable to the teak
The global teak market involves China and India, whose
industry. These laws allowed a company to deduct all the
business cultures are significantly different from those of
expenses of starting a reforestation from its annual taxable
Latin American and Europe. The international teak business
income. In addition, all items for reforestation projects could
(growing, processing, buying, and selling) as any business
be imported duty free. A lot of the original teak plantations
is a real world mix of cultures that requires understand-
were started solely to take advantage of these tax incen-
ing and careful navigation. For example, Indian business
tives and were not well planned and managed from an
people buy a lot of the teak grown in Panama. According
investment point of view. Much of the teak planted during
to some sellers, one of their favorite strategies with small
this early period has little or no value currently, but these
plantation owners is to offer a price for the logs, which the
early efforts did lay the groundwork for the timber industry
owner accepts prior to harvest but when the trees are cut
in Panama. Due to the excellent returns available from
and stacked by the side of the road ready for pickup and
professionally managed operations, a number of European
the wet season is fast approaching the buyer reduces the
companies have established well-run and potentially very
agreed-upon purchase price by 50%. With no safe place to
profitable plantations. However, these businesses were
store the harvested trees during the wet season the small
historically not open to individual investors. The first individ-
plantation owner is now stuck and will probably sell his teak
ual investment programs for teak production were started
at half-price. This is just one of many techniques used by
when Panama instituted its resident visa program, which
international timber buyers to maximize their profits. An-
38
other example of cultural differences can be seen in China,
such as the Panama Teak Forestry have now made teak
for example, where oftentimes a contract may be meaning-
and timber investments in Panama more available to
less. Jeff Duda, president of Panama Teak Forestry, relays
the smaller private investors and high net worth individu-
one such example, ”while working with a friend...trust or a
als worldwide. This company was established by a small
contract had little to do with it”.“While working with a friend,
group of timber industry professionals from Canada and
who is Chinese, on a project for a Chinese company, I
the United States. Its goal is to provide maximum return to
asked how the contract was going to protect him the United
shareholders (both Panamanian residents and foreigners)
States”, I asked how the contract was going to protect him.
through successful investment in teak and agro-forestry.
He said, “I do not need a contract; when they send me the
Panama Teak Forestry is a teak investment company, not a
check that is the contract.” I said, “So you don’t trust them
teak promotion company; it is owned and run by the inves-
at all?” He just laughed and explained that the principles
tors with a focus on responsible teak investment programs
of this company would do what makes the most business
currently open to individuals. Furthermore, it was the first
sense, i.e. what would bring them the most profit. Trust (or
successful teak investment company open to individual
a contract) had little to do with it. This actually makes per-
investors and unrelated to the reforestation resident visa
fect sense on a certain level. The check in the bank is the
program. There are a few other Panamanian teak invest-
true commitment, not the signature on a contract. In Pan-
ment programs currently open to individuals, however most
ama, the timber investor in search of land for new planta-
are based on selling small plots of teak for two or three
tions gets a lesson – or rather a master class in cultural dif-
times their original cost with the profits going primarily to
ferences. Buying land at the right price requires patience, a
the promoters of the investment.
Vegas-ready poker face, and a good sense of humor. There is always another person with more money than you who is
For the uninitiated, the regulation and paperwork of
“this close” to buying every piece of land in Panama. The
Panama can make doing business in the region somewhat
asking price often has very little to do with the actual value
cumbersome and more expensive than is often originally
of the land or market price, or even the price that the seller
projected. Presently, there’s simply no substitute for expe-
will ultimately take. Furthermore, just because a piece of
rience in dealing with the government bureaucracy. While
property is said to be for sale does not mean that the owner
there are many incentives, there are also many hurdles
is actually willing to sell it; sometimes, he or she is just
that a business must overcome in order to be successful.
wondering what it might be worth and doesn’t want to pay
Examples abound. Suffice it to say that many of the incen-
for an appraisal. If the owner wants a new truck, the price
tives lose their value if the paperwork and regulations are
of the land may be based on what a Toyota Hilux is sell-
not handled efficiently and effectively by someone savvy
ing for in Panama City rather than the land’s actual value.
in regards to working with the bureaucracy. The present
Buying logs from a small plantation owner is often based
government is doing a lot to streamline the system and the
on the same set of parameters. Tomorrow’s price probably
agencies in charge. As competency grows on both sides of
will have more to do with what is going on in the seller’s life
the business/government equation, the incentives available
than it does with last week’s price.
will certainly encourage the industry to prosper.
Presently, there are both domestic and foreign entities
Timber has very diverse investor demographics and over
involved in the Panamanian teak industry. Large Panama-
time it has out-performed all other commodity investment
nian companies such as Empresas Bern and Super 99 own
classes. Teak is one of the best classes of timber invest-
teak plantations. Overall however, there is more long-term
ments, but is too small to attract the large institutional
investment money available outside of Panama than within
investors and multinational corporations. As a result small
Panama. Since teak is a long-term investment more foreign
companies and groups of individual investors dominate
than domestic investors are interested. Many companies
the field. Economies of scale certainly apply to the teak
39
industry, and it is a long-term investment. It is difficult for
the most useful investment comparisons consider what assets
individuals to invest directly in teak unless they can spend
you’re getting for your investment dollar rather than what your
about $1 million annually over 10 or 15 years.
dollar will be worth at some point in the future. To put it another way, determine how much of your investment is actually going
Foreign investment Opportunities:
into the company’s products and assets.
Timber is one of the safest and steadiest growth investments
Time line of Teak Investment:
available, protecting an investor in times of inflation and providing returns that have beaten almost every other investment sec-
Teak and timber are long-term investments. Buying shares
tor over the past 40 years. Teak is one of the best values with
of a timber company offers better liquidity, safety, and a
the highest yields in the timber sector. It is a small niche seg-
shorter ROI time frame than direct investment in a new
ment of the timber industry and is managed by smaller, privately
plantation. Because the company holds stands of trees of
owned companies rather than by big institutional operators.
various ages, the investor will see returns as soon as the
There are a number of ways to invest in teak with small very
oldest trees are harvested. Companies that own several
reputable timber companies. How you invest and with which
teak plantations with varied maturities should provide a
company can have a significant effect on your returns. The key
steady ROI over time. In contrast, a direct investor who
question you must ask is: “What assets am I buying with the
owns a few hectares of teak will realize just a few cash
funds that I invest?” As you research the returns and opportuni-
returns (during the thinning years and the harvest year)
ties in teak investments, you will find that companies use many
over the course of 20 to 25 years, with very limited liquid-
different ways to calculate return on investment. As you com-
ity. This type of investment is heavily marketed as the type
pare investments and predicted returns, be sure that you apply
of investment required to qualify for Panama’s reforesta-
the same standards to each investment opportunity. There are
tion visa program. Investing for the best ROI is better done
different ideas concerning what teak will be worth in 25 years,
through a company that focuses on teak investing rather
as well as many different predictions of how much teak will be
than residency visas.
available and what condition it will be in over time. Therefore,
40
Finished Products Versus Raw Materials:
product. Because there are no fine furniture manufacturers in Panama and because kiln-dried wood is not available,
There is a significant difference in the price paid for logs
most of the country’s locally crafted teak furniture comes
versus finished products. There are also many middlemen
from small roadside shops. Most of it is rather crude, prone
involved in selling a small quantity of teak logs, which signifi-
to split and warp. Panama Teak Forestry is currently build-
cantly reduces ROI on small-scale log sales. Properly mar-
ing a small kiln that will be used to produce kiln-dried teak
keted, mature trees are currently bringing about $500 dollars
lumber. This wood will probably be exported, since the
per cubic meter of wood measured using hoppus. Basically,
U.S. and European markets generally pay a higher price for
one 25-year-old tree will contain about 1 cubic meter of mar-
high-quality kiln-dried wood than the local market.
ketable wood. If you have a small plot, however, you can only expect to get about $300 per cubic meter, because you
A well-managed timber company should also consider
have to pay someone to find a buyer for the wood.
co-cropping as a revenue source. Properly executed, co-cropping adds near-term cash flow. Co-cropping can
At maturity, the average hectare of teak contains about 230
also add to the growth rate of the timber through the use
trees or 230 cubic meters of marketable logs. Processed
of symbiotic plant and animal relationships. For example,
lumber in Panama sells for about $1,500 per cubic meter;
planting nitrogen-fixing plants of some commercial value in
in the U.S. the same lumber sells for $3,500 to $4,000 per
the under story of the teak plantation enhances teak growth
cubic meter. There is a significant benefit to processing the
and provides an additional cash crop for the company. The
teak prior to sale rather than selling the logs. By building a
same may be said of cattle.
mill to process all its harvested logs, Panama Teak Forestry expects to increase ROI to its investors significantly.
Managing teak plantations with a whole land management perspective adds revenue streams and results in a more
This is another advantage of investing in a teak company over
sustainable industry. A well-managed forestry company, in
a direct investment in a small teak plantation. Shareholders
Panama or anywhere else in the world must do more than
own the mill and share in the profits from selling processed
grow high-quality timber. Company managers need to practice
lumber. The owner of a small teak plot, on the other hand,
sound land management and optimal harvesting and process-
has few options for processing and marketing harvested teak
ing of the product to maximize returns for their investors.
and is limited to the less profitable small-scale sale of logs. Of course, a company must do a thorough cost/benefit analysis
ALI would like to thank Jeff Duda for contributing his
to ensure its production warrants investment in a mill.
information and expertise regarding the teak industry in Panama.
Additional Avenues of Revenue: Jeff Duda is the president and a managing director of Teak is one of the most dimensionally stable woods avail-
Panama Teak Forestry. He is also involved in other asset
able commercially, which is one of the reasons it is so
class investments: Jeff is the founder of Maricuda Services,
popular with manufacturers of boats and outdoor furniture.
a private asset management company, and Panama Casa,
The marine industry requires a very high grade of mature
the leading property management company in Panama
teak. At this time, there are no significant amounts of
City. He has over 25 years of experience in the timber,
mature teak in Panama, so the marine market is one for the
investment, and real estate industries.
future rather than the present. Virtually all the teak coming out of Panama currently is from thinning younger trees and
(Disclaimer: The comments made regarding the business
is best suited for use in furniture.
practices of India and China are the sentiments of the interviewee and in no way reflect the opinion of Alternative Latin
Processing teak into furniture adds a lot of value to the
Investor)
41
Geisha Coffee: An Overview of Specialist Coffee Farming in Boquete Coffee has been widely traded as an agricultural investment commodity for decades and is often quoted as the second most valuable exported commodity on earth. Although coffee cultivation is subject to the unpredictability of seasonal climate conditions and other cyclical risks, production and consumption statistics remain robust, with 2009 consumption estimated at 132 million bags; this compared to 130 million bags in 2008. Since 1990 the annualised growth rate for consumption has been 2.26%.
Export in thousand bags
Total worldwide 0.07%
0.05%
Panama Panama as % of worldwide
21,000
34,000 49,369
2008 - 2009 42
44,650
2009 - 2010
Almost three quarters of worldwide commercial coffee cultivation is of the Arabica coffee bean, with the hardier Robusta variety (from the Canephora bean) also widely cultivated. The Robusta strain has less complex flavours, is more caffeine heavy and often used as alternative to Arabica in the production of commercial blends. By pure production metrics, Panama’s current contribution to global coffee trade is paltry. In 2009 the country exported 21,000 bags of coffee; accounting for 0.05% of global production and the country grows less than 10% of the volume of commercial green washed Arabica beans than neighbouring Costa Rica. However Panama’s status in the specialist coffee arena is internationally acknowledged.
Production in Thousand Bags
150 120 90 60 30 0
2006
2007
2008
2009
The Geisha coffee variety is lauded by coffee connoisseurs. Although originally grown in Ethiopia, Panama now supplies the bulk of Geisha coffee to the world’s coffee connoisseurs. The bean is farmed principally in the Western town of Boquete - the centre of the Geisha cultivation community. Farming of Geisha coffee was pioneered by the Petersen family who in 1996 bought an old coffee farm in the Jaramillo area above the Western town of Boquete. The cup known as ‘Esmeralda Special’ was grown in a small valley at the high end of the farm and its sweet jasmine flavours have gone on to win a host of prestigious awards including 1st Place Specialty Coffee Association of America Roasters Guild Cupping Pavilion for an unprecedented three consecutive years.
A Taste of Geisha The Geisha has a distinct Ethiopian character. It is prized for its jasmine and lemony floral notes. The coffee is incredibly aromatic and the flavours are described as somewhere between lemon grass and sweet jasmine (with a little citrus).
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Unsurprisingly since the Petersen’s success, Boquete has seen an explosion of interest in local commercial farming of the bean, with the investment and export potential for cultivation projects palpable. In May 2007, the Esmeralda Special sold for an unprecedented $130 a pound at online auction, breaking the previous coffee auction record of $50.25 a pound, also held by the Esmeralda Special3. Incidentally, at the March 2009 auctions the highest bid recorded for Esmeralda Special was $117.50. •
1st Place Specialty Coffee Association of America Roasters Guild Cupping Pavilion (2007, 2006, 2005)
•
2nd Place Coffee of The Year (2009, 2008)
•
1st Place “Best of Panama” (2009, 2007, 2006, 2005, 2004)
•
1st Place Rainforest Alliance Cupping for Quality (2009, 2008, 2007, 2006, 2004)
Source: La Hacienda Esmeralda However from the investor’s perspective, the business of Geisha cultivation is far from straightforward. Alternative Latin Investor spoke to Stephen Kaczor who provided local insight into cultivation of the Geisha bean. Steven charted the Geisha bean’s journey from Africa to Central America for us. The bean was first imported into Costa Rica, where it did not catch on with local growers. Following government initiatives, the variety was promoted to Panamanian farms. However this again didn’t catch favour with the farmers who were notoriously sceptical of government ‘suggestions’. And so it was the Petersen’s who became Geisha’s pioneers. The Geisha Bean’s Journey from Ethiopia to Boquete Ethiopia (1931)
According to Blore cited by Miller 1931 (also a mission report by the British Council in 1936).
Kenya (1931-32)
Seeds were exported to Kitale Center, Kenya under both names of Abyssinian and Geisha.
Uganda & Tanzania (1936)
Progenies were planted in Kawanda station, Uganda in 1936 and in Lyamungu station, Tanzania (according to Millor). The “Geisha” of CATIE, Costa Rica has been introduced at different times from differ-
Costa Rica (1953)
ent countries. The first introduction (under the accession T02722) was in July 1953 as a progeny of the tree (VC496) from Lyamungu (according to CATIE database).
Panama
(unknown)
The outstanding Geisha cup from the Hacienda Esmeralda estate was the product of years of considerate and dedicated cultivation. After the Petersen’s purchase of the farm, the family increased plantings (reconverting a dairy) and ‘overhauled’ the farm. As Kaczor explained, the Geisha varietal is extremely sensitive to micro climate and soil conditions; the crop takes longer to produce than other strains (it takes four years and the normal is three years) and the yield is much lower than other coffees. Anecdotal support for the growth of the specialist and rare coffee market is growing with an expansion in the number of retailers of specialist coffees and increasing consumer demand for specialist beans and green varieties. Stephen cited www.gourmetcoffee.com as an example of one such specialist independent online retailer (North America based) who has reported strong demand from consumers and experienced rapid growth.
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However trustworthy statistics supporting a broader trend of increasing (boutique coffee) consumption are scant and those available often based on small and unreliable customer surveys. Panama holds a significant role in the history of global coffee trade, with the opening of the Panama Canal in 1914 permitting exports from the previously unreachable Pacific Coast of Colombia. This transformed the importance of the Colombian port town of Buenaventura and heralded the subsequent popularity of Colombian coffee with European and North American consumers. In the coming decade will we see if Panama can stake its name again in coffee history. Following the success of the Esmeralda Special, the Boquete region is synonymous with the prestige Geisha cup and the bean was planted widely in the area as a direct result of the accomplishments of the Esmeralda Special. More recently a number of other estates have been achieving notable successes which leads us to believe that there could be further commercial potential for specialist coffee cultivation in the region. In the coming years, Geisha plantations sowed in the wake of the Petersen’s success will be preparing to cup and only then will the true value of these investments be determined. Boquete provides all the ingredients in terms of altitude, micro climate and soil conditions required to cultivate the sensitive Geisha bean although the financial and emotional investment required to farm the variety successfully, even after taking into account the four year lead in, is substantial and was also said by some we interviewed to be a lifestyle, rather than financial choice. However further successes can only add support to Boquete’s claims to have reinvented itself as the boutique coffee capital of Panama and under these conditions, the commercial potential could likely be significant, providing prices can maintain their ‘boutique’ premium and connoisseurs their thirst for the distinctive Geisha.
Stop Press: Another Geisha World Record Hacienda La Esmeralda’s Geisha has again broken world coffee sales records. On 25 May 2010 the varietal sold for $170.20 a pound in the Best of Panama online auction when 400 pounds of the Esmeralda Special were purchased for $68,080 by Japanese bidder Saza Coffee. Second place at the auction was taken by another Geisha varietal, the Panacoffee Special Geisha, which sold at $26.20 a pound. The online auction lasted two hours, with lots of Panama’s best coffee varieties offered to buyers from for Japan, Korea, Switzerland and the United States. A total of $148,190 was raised, at an average price per pound of $12.45.
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ALI: Business Business DirectoryDirectory rentals completely furnished. Specially designed to satisfy your needs; whether you are initiating a business, expanding your operations to new markets or developing a short, medium or long term project www.oceanbusinesscenter.com (507) 340-0200 / jabernathy@oceanbusinesscenter.com Executive Car Service is focused on providing quality transportation services throughout Panama. Whether it be mobilization to Executives, VIP clients or visitors coming to Panamรก / www.ecspanama.com / (507) 393-7924/25 / reservaciones@ecspanama.com We are a full service real estate brokerage specialized in Casco Antiguo, a colonial UNESCO World Heritage Site, in Panama. We seek to attract residents who share our passion to see Casco Antiguo realize its potential to become a beautiful, economically vibrant and socially diverse part of Panama / www.ArcoProperties.com /(507) 211-2548 patrizia@arcoproperties.com We are the business unit from Grupo Semusa Corp., dedicated to provide support to the relocation projects of we were awarded with prestigious prizes for our commitment to excellence worldwide www.gsrelocationpanama.com / (507) 322-5076 / info@gsrelocationpanama.com
Metropolitan's elegant and professionally decorated vignettes showcase the beauty of the renowned European www.metropolitanfurniture.com.pa / 507 2631380 / metropolitan@cwpanama.net Founded in 2007 to develop and promote residential, comercial and industrial real estate in Panama. A Family owned business created to consolidate over 40 years of development history and 3 million sq ft of Construction www.dreamproperties.com.pa / (507) 302-0797 / dream@dreamproperties.com.pa Q Wealth is a research service for entrepreneurs seeking to protect freedom, wealth and privacy. Learn how to ship programs. Q Wealth regularly covers Panama and also other attractive investment and living havens. Visit
Our focus as Panama-based destination experts is creating unforgettable adventures in Latin America. We can provide guides or self-guided itineraries. We relieve you of the pressure to pick the perfect destination, creating journeys tailor-made to suit your unique interests / www.ChangesInLatitude.org
- (507)-209-3600 / dbtesh@pacificpointpanama.com tions, Private Interest Foundations, Business Licenses, Title Searches, Escrow Services, Real Property Development, Purchase Contracts, Visas, and more / argon@argonlaw.com / (507) 264-4456 / 264-9076 High Yield Teak Investments - Long-term capital growth in safe ecologically sound investment that grows every year. A timber investment company built by investors for investors, producing sustainable forest products using environmentally friendly methods and co-cropping to maximize the overall return on investment www.PanamaTeakForestry.com / US (702) 505 4494 / (507) 6581-4520 From a championship golf course to a beach club and gourmet restaurant to a planned resort and spa, you will www.vistamarresort.com /(507)-832-0577 / realestate@vistamarresort.com
contracts, immigration and setting up of corporations. Currently, GSL serves clients internationally. They pride themselves on providing solid service and being honest and straightforward with all of their clients www.gslre.com / (507) 263-2243 / stu@gslre.com
Sources Econonic Overview Economic Commission for Latin America and the Caribbean International Monetary Fund (IMF) Organisation for Economic Cooperation and Development Indesa The World Bank Nationmaster Standard and Poor’s Fitch Ratings Moody’s AM Best Full Dollarization: The Case of Panama by Goldfajn and Olivares Full Dollarization: The Pros and Cons Andrew Berg Eduardo Borensztein, International Monetary Fund
Doing Business The Heritage Foundation Latin Business Chronicle International Financial Corporation (World Bank Group)
Real Estate Nensi Wong Chan is House Counsel and Panama Manager for The Two Oceans Fund which invests in Panamanian real estate. Nensi is an attorney specializing in Real Estate Law, Panamanian Legal Structures, General Practice and Legal Counselling and was also an advisor to the General Director for International Economic Relations of the Ministry of Foreign Affairs of the Republic of Panama, participating in the preliminary negotiations for an Association Agreement between the European Union and Central America, which includes a free trade agreement. Jose Goldner is Managing Director of Briggs Capital Real Estate and the owner of several successful businesses, including the largest investment portal in Panama, a fishing charter business and a real estate company. He is a regular consultant to the Panamanian Government. Jaime Figaroa Navarro is Managing Director and CEO of Panama All in One as well as Vice Chairman of the Tourism Committee at the American Chamber of Commerce, a member of the Panama Canada Chamber of Commerce and the prestigious Union Club in Panama City. Robert O’Neill is an International Consultant at Overseas Assistance.
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