Panama 2014-2015 Preview by Strategy Business Group

100th Anniversary PANAMA CANAL

A new outlook in Latin America Vicente Fox Quesada

Founder of Centro Fox President of Mexico (2000-2006) — p. 14

“There is a direct connection between what we do and what happens in the rest of the world.” Stanley Motta Chairman of Copa Holdings — p. 26

FOREWORD Dynamic, Resilient Latin America......... 11

38 |Planning, Policy, and Prosperity Mark Latin Americaâ&#x20AC;&#x2122;s Financial Hub

COUNTRY OVERVIEW Local Initiative, Global Impact.............. 12 INTERVIEW: A

New Outlook in Latin America Vicente Fox Quesada.................... 14

INTERVIEW: From

Fragmented to Formidable: A New Latin America? Samuel Urrutia..................................... 17

PANAMA

TABLE OF CONTENTS

20 | The Fastest-Growing Economy in the Americas Builds for the Future

ECONOMY

INTERVIEW: Potential

The Name of the Game in Panama Is Connectivity Dr. Nicolás Ardito Barletta............................... 18

INTERVIEW: The

INTERVIEW:

The Fastest-Growing Economy in the Americas Builds for the Future........................................ 20 INTERVIEW: Colón:

Marketplace to the World David Hanono.......................................... 22

INTERVIEW: Outside

the Box Ricardo E. Galindo................................... 26

New Administration’s Goals Embrace Change While Shoring Up Key Industries Dulcidio De La Guardia.................................... 27

INTERVIEW:

30 | Pro-Business Panama: Keys to Doing Business

for Continued Success Stanley Motta................................................... 28 Long Run: How Will Panama Develop New Resources? Luis José Varela Jr............................................ 29 Pro-Business Panama: Keys to Doing Business..................................... 30

INTERVIEW: Panama: The

Economic Boom That Just Keeps Booming Jaime R. Sosa................................................... 33

INTERVIEW: Putting

the Value in Family Guillermo de Saint Malo Eleta......................... 34

INTERVIEW: Panama’s

Location Is Crucial, But Not the Only Key to Success Domingo Latorraca M....................................... 35

INTERVIEW: Dedicated

to Free Trade: Business-Friendly Law in Panama Fernando Cardoze Fabrega.............................. 36 FINANCE & BANKING Planning, Policy, and Prosperity Mark Latin America’s Financial Hub.................................. 38

INTERVIEW: Panama’s

Financial System Matures Raúl Ardito Barletta......................................... 42

STRATEGY

TABLE OF CONTENTS

INTERVIEW: Balancing

the Equation: Panamaâ&#x20AC;&#x2122;s Banking Environment Robert A. Williams............................................ 44 Strength from Adversity Rubens V. Amaral Jr.......................................... 46

80| INNOVATION HUB: ICT Key to Panamanian Development

FINANCIAL INCLUSION: Mobile Inclusion Changing the Face of Commerce...................... 47

Latin America is the fastest-growing internet market in the world

INTERVIEW: Latin America:

Territoriality and Openness to Foreign Investment: An Overview of the Panamanian Tax System...... 48 Panama: Financial Freedom of Choice Roberto Brenes.................................................. 50

INTERVIEW:

From Micro to Multi: Changing the Insurance Game in Panama Robb A. Suchecki................................................ 51

INTERVIEW:

INTERNET LAPTOPS DESKTOPS TABLETS SMARTPHONES

5.6% access with smartphones & tablets, 2.2% use tablets 91% of Latin American internet use is dominated by the personal computer, of all access to the web

147 million unique visitors in the year preceding March 2013 12 percent increase over the previous year

52 |Commemorating the Centennial: The Panama Canal

PANAMA

TABLE OF CONTENTS

54 |The Panama Canal Centenary: Panama Looks to the Next 100 Years

PANAMA CANAL Commemorating the Centennial: The Panama Canal..................................................................52 The Panama Canal Centenary: Panama Looks to the Next 100 Years.............................................54 Canal Expansion Project: “Post-Panamax” Ships Signal New Era in Shipping................................60 TRANSPORTATION & LOGISTICS Panama’s Service Economy Leans on Logistics.....62 Building the Gateway Carlos Urriola.....................................................67

INTERVIEW:

Panama’s Aviation Industry Takes Flight Alfredo Fonseca Mora.........................................68

INTERVIEW:

Free Zones: Driving Global Trade.......................69 Panama’s First Metro Line Signals a New Era in Transit Roberto R. Roy....................................................70

INTERVIEW:

62 |Panama’s Service Economy Leans on Logistics

METRO PROJECT: A Metropolis on the Move...................................72 TOURISM Tourism in Panama: A Canal, a Bridge, and a Gateway..............................................................74 INNOVATION HUB ICT Key to Panamanian Development................80 One Word: Opportunity Moises N. Abadi.......................................84

INTERVIEW:

Creating a Knowledge-Based Economy Dr. Jorge Motta...................................................85

INTERVIEW:

CONSTRUCTION & REAL ESTATE Building Infrastructure, Building a Future...............................................86 Building on Panama’s Strengths Ing. Nicolás Corcione..........................................91

INTERVIEW:

STRATEGY

TABLE OF CONTENTS

ENERGY Seeking Energy Solutions................................. 92 Powering Economies Ana Amicarella................................................. 96

Baker Tilly Panamá........................................ 103 ProFuturo....................................................... 103

INTERVIEW:

Power in Panama: Hydro and Thermal Shape a Still Uncertain Future Fernando Tovar................................................ 97

INTERVIEW:

The Matrix of Change Ricaurte Vasquez.............................................. 99

INTERVIEW:

COMPANIES TO WATCH.................................. 100 Empresas Galindo.......................................... 101 Alcenit............................................................ 101

COMPANY PROFILES Panama Ports Company (HPH Panama)......... 104 City of Knowledge........................................... 106 Parque Logístico Panama............................... 108 Aggreko.......................................................... 110 Grupo Semusa................................................ 112 SFC Investment............................................... 113 Varela Hermanos............................................ 114 Digicel............................................................. 115 INDEX.............................................................. 118

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STRATEGY

FOREWORD

Dynamic, Resilient Latin America hile the global economic crisis that began in 2008 inflicted deep wounds on many nations, the dynamic and resilient economies of Latin America suffered less and rebounded more quickly. Signs of recovery are positive, owing in part to widespread adoption of sound macroeconomic practices. In addition, Latin American nations have implemented significant social initiatives and achieved remarkable success lifting people above what is considered the poverty line for advanced economies (an income of $12 per day per capita). The population making this economic ascent is more than six times higher in Latin America than it is in the rapidly expanding economies of East Asia. However, the average income of a Latin American is still lower than the world average, and adjusted income levels in 2009 compared to 1965 are essentially unchanged, suggesting the region is stuck economically. Growth, though still positive, has slowed each of the past five years. In order to achieve sustainable levels of social and economic development, the region must address important structural challenges. These include vast social disparities between the regionâ&#x20AC;&#x2122;s peoples, low levels of domestic saving and investment, excessive emphasis on exports of raw materials and other low-value-add commodities, and relative lack of competitiveness of the regionâ&#x20AC;&#x2122;s industries compared with other regions. Among the keys to addressing these challenges are education, to lift the skill base of the work force; catch-up technology, which supports shifting resources from lower to higher productivity activities; and of course, reliable basic infrastructure for communications, transportation, and power. In addition, fiscal responsibility and government transparency can deliver tremendous impact in terms of improving competition and spurring economic development. Signs are positive for Panama with its thriving services sector, its strong connectivity both within the region and with other continents, and stable political environment. Government and private industry have joined forces to construct world-class infrastructure and stimulate both foreign and domestic investment.

PANAMA

COUNTRY OVERVIEW

Country at a Glance OFFICIAL NAME Republic of Panama

CAPITAL

Panama City

MAIN CITIES

Panama • David • Colón • Chitré • Santiago

LANGUAGE

Spanish (official) English (second language)

CURRENCY

Balboa (PAB) US Dollar (USD)

CLIMATE

Local Initiative, Global Impact

Tropical

GOVERNMENT TYPE Constitutional democracy

PRESIDENT

Juan Carlos Varela

INDEPENDENCE 3 November 1903 (from Colombia)

CONTINENT

Americas Central America

BORDER COUNTRIES Colombia Costa Rica

easuring only 50 kilometers across at its narrowest point, the slim ribbon of land that makes up Panama is at once a powerful connector of two vast continents and a stalwart divider of colossal oceans. Although it is slightly smaller than the U.S. state of South Carolina, Panama’s existence at the confluence of enormous land and sea masses preordained a mighty destiny for this young nation.

Having passed from one government to another for centuries, the area that is now Panama finally attained sovereignty in 1903 and control over all territory within its borders in 1999. A mere decade and a half after taking control of the canal, the country has bootstrapped itself into one of the world’s most vital and important economies, encompassing the globe’s second-busiest interoceanic canal (after Suez), the secondlargest free trade zone (after Hong Kong), and a significant regional banking center. These accomplishments are exceeded only by Panama’s ambition to be a global center of innovation and new business incubation.

A seismic event

About 4.5 million years ago, massive geologic forces caused an isthmus to form between the continents of North and South America. The Isthmus of Panama, as it is now known, immediately made its presence felt by blocking the flow of water between two previously conjoined oceans, rerouting ocean currents and trade winds in both the Atlantic and Pacific Oceans, shifting the climates of continents bordering these oceans and changing their rainfall patterns. This in turn altered their landscapes in what many

STRATEGY

COUNTRY OVERVIEW

scientists consider one of the most important geologic events in 60 million years. Prehistoric hunter-gatherers migrating from North to South America were the first to explore the isthmus. They were followed by the Spanish explorer Rodrigo de Galván Bastidas in 1501 and by Christopher Columbus the following year. Subsequently, Spanish settlers began migrating to the isthmus, which remained in Spanish hands until 1821, when the colony broke from Spain and joined Colombia, Ecuador, and Venezuela in the Republic of Gran Colombia. When the latter dissolved in 1830, Panama remained part of Colombia.

A political earthquake

In 1903, with support from the United States, Panama seceded from Colombia and signed a treaty with the United States allowing construction of a canal and establishing U.S. sovereignty over the Panama Canal Zone, a strip of land on either side of the waterway. The canal was constructed by the U.S. Army Corps of Engineers between 1904 and 1914. In 1977, amidst growing discontent from Panamanians over their inability to control and derive maximum benefit from their own territory, U.S. President Jimmy Carter signed an agreement with the Commander of Panama’s National Guard, General Omar Torrijos, who also served as head of state,

PANAMA

“I long to see this country grow equally, fairly … an honest government working for the people, not people working for the political class.” — President Juan Carlos Varela

to transfer the canal from U.S. to Panamanian control by the end of the century. Certain portions of the Panama Canal Zone and increasing operational responsibility for the canal passed to Panama over the decades until 1999, when the Panama Canal itself, the remainder of the Canal Zone, and U.S. military bases were handed over to complete the transition. Panama’s subsequent stewardship of the canal has been outstanding, particularly given the ambitious expansion plan sanctioned by voters in October 2006 to double its capacity by 2016 at a cost of more than $5 billion. Obviously, security of the canal is paramount not just to Panama but to the entire region, as the economic benefit of the canal ripples far beyond Panama’s

COUNTRY OVERVIEW

A New Outlook in Latin America

borders. Since 2003, Panama, the United States, and more than a dozen other countries from the region have collaborated annually in the PANAMAX defense exercises focused on ensuring security of the canal and, by extension, of Panama.

Out of chaos

During the past century, Panama has been governed by a variety of military officials, tribunals, dictators, and elected presidents. Leadership has changed hands by virtue of elections as well as political and military coups, both violent and peaceful, by natural death and otherwise. In short, rule has been chaotic; however, since 1999, Panama has settled into a representative democracy headed by a president and has held four presidential elections followed by orderly transitions of government. The political structure of Panama is modeled largely on that of the United States and includes three main branches—executive, legislative and judicial. The president, vice-president, and the president’s cabinet comprise the executive branch, with the president and vice-president elected on a single ballot by popular vote to fiveyear terms and the cabinet appointed by the president. Likewise, the 71 deputies of the Legislative Assembly are elected by popular vote to five-year terms. The judicial branch consists of a Supreme Court with nine magistrates and nine alternates appointed by the president to ten-year terms, subject to legislative approval, and a tiered system of local tribunals and circuit courts with judges at each level appointed by the judges of the next higher level.

Multiplicity breeds stability

Panama has a multi-party system with more than ten similarly sized political parties, none of which is large enough to gain power on its own. Consequently, the various parties must collaborate in

Vicente Fox Quesada Founder of Centro Fox, President of Mexico (2000-2006)

In the ebb and flow of global economic development, regional engines for growth form around strong nation-states that are tuned in to the needs of the market and work to change with them. The United States and Europe spurred the world economy forward throughout the latter 20th century, but former Mexican President Vicente Fox Quesada envisions a shift away from the hegemony of Western superpowers in the new century.

The “old engines of world activity and economy are tired and not performing anymore,” says Fox as he reviews the exceptional rates of growth in what were, until recent years, considered to be developing nations. Large states like Mexico and Brazil have matured into their roles as keystones of the Latin American economy, while Panama, Columbia, and others embrace strategies that infuse the region with high-speed growth. Fox sees the future of the global economy in the “new economies” of this part of the world, as well as in East Asia and Africa.

“We have been successful, but we need to be better. We need to fine-tune this model. The real challenge is how we make this cluster successful through technology and by being more focused on the creation of a unique product.”

President Roosevelt discussing America’s task with workmen at Bas Obispo, Panama Canal, on November 31, 1906.

The former president has continued to cultivate a more integrated and globally competitive Latin America since leaving office in 2006. He is an outspoken advocate of development through better technology in the region, and he advocates for education and leadership through Centro Fox, his policy center in Guanajuato. Centro Fox partners with major corporations and universities to create the next generation of Latin American leaders.

STRATEGY

COUNTRY OVERVIEW

order to achieve leverage and, surprisingly, rather than breeding disruption, the system has fostered stability. It is standard for opposing parties to band together forming coalition governments and voting blocks. The relatively even balance across many parties has yielded a blend of policies and helped encourage the businessfriendly ecosystem to which the republic aspires. Currently there are two major political coalitions—the right-leaning Alliance for Change and the left-leaning One Country for All.

A new administration

On May 4, 2014, incumbent Vice President Juan Carlos Varela of the Panameñista Party won the presidential election, succeeding former President Ricardo Martinelli. In that election, Alliance for Change parties also captured 44 of 71 seats in the Legislative Assembly, giving the coalition both the presidency and a 62 percent majority in the legislature for the next five years. Policies of the Alliance for Change (AFC) are a mix of conservative and liberal-progressive. The coalition is business-friendly and has advanced the causes of mining, dam building, the free trade zones, and infrastructure upgrades to roads, the Metro, buses, the canal expansion, and coastal parks. Their policies also include additions to the welfare state and education systems aimed at addressing poverty and illiteracy among the nation’s poorest and indigenous peoples. The AFC’s most recent political decisions disfavor unions and support fiscal responsibility.

The next five years

President Varela ran on a pro-business platform with campaign rhetoric highlighting the need to improve living conditions for all citizens amid the economic and financial prosperity of recent years, which has benefited many Panamanians, yet has also bypassed a significant portion of the population. Varela promised to prioritize education, public health, and Panamanians’ purchasing power. He faces a mandate to clean up government by cutting red tape, increasing bureaucratic transparency, and strengthening

accountability in the use of state resources after falling out with former President Martinelli over these issues while serving as Martinelli’s Vice President. Clearly Varela has heard the criticisms of Panama’s government. The World Economic Forum’s report on global competiveness shows that corruption is viewed by business executives as the biggest problem for doing business in Panama. According to the report, while Panama has improved its overall competitiveness, public trust in politicians is low and judicial independence is judged among the lowest in the region.

Bright business outlook

These challenges notwithstanding, Panama will remain the fastestgrowing economy in the developing Americas over the next 18 months, though the pace of expansion will decelerate, with real gross domestic product projected to increase by only 6.5 percent in 2015 (compared with an 8.6 percent average annual growth rate over the past decade). Growth is driven by a number of factors. For one, Panama has a fully dollarized monetary regime, and the economy is strongly influenced by the direction of the U.S. dollar, which is steadily appreciating against most major currencies. In addition, Panama has developed into a regional logistics services hub, a structural factor that will be further accentuated once the expanded canal begins operations in early 2016. Finally, the government is investing heavily in infrastructure projects aimed at improving transportation, power, education, and health in addition to the canal expansion project. Over the next decade, as these construction ventures are completed, drivers of expansion will evolve, yielding a more diversified economic structure based on canal traffic, mining, tourism, and logistical services. What lies ahead for this nation that stands sentry between two continents and two oceans, overseeing one of the seven wonders of the modern world? One thing is certain—Panama is committed to a path toward stability, modernity, and global integration.

STRATEGY

COUNTRY OVERVIEW

Success is all about associations and connections. Countries that have been struggling to find their individual voices are now looking at the benefits of cooperation. New trade blocs are creating new opportunities. Can Latin American states achieve more prominence on the world stage through local and international alliances? “Latin America has yet to explore its integrated potential,” says Samuel Urrutia, president of The Business Council of Latin America (CEAL). But the region is making strides: A new trade bloc, the Pacific Alliance, represents Chile, Colombia, Mexico, and Peru, and Panama may join soon. Urrutia sees Panama’s inclusion in the alliance as a significant advantage for regional integration and for Panama.

Samuel Urrutia President, CEAL CEO, Semusa Group

Challenges remain

Regional integration will add value

rrutia believes that Latin America has been too focused on pursuing the limited agendas of individual countries. “We’ve been highly dependent on the price of commodities and have little leverage in the world market.” Latin America can compete with the world by shifting its dependency on world markets and creating an economic integration in which each country leverages its competitive advantage. Urrutia views the Latin America of the near future as an economy exporting manufactured goods, not commodities, to the world. “The good news is that throughout Latin America we are convinced that it is worthwhile investing time and resources to further regional integration,” says Urrutia. “But as young democracies, we are in the process of devising the best way to integrate.”

Latin America has been too focused on pursuing the limited agendas of each individual country and not focused enough on the big picture.

Networks and alliances are key

EAL, Urrutia notes, has had an important role in connecting Latin American businesses to each other and to the global economy. A network of 537 powerful and influential entrepreneurs in Latin America, the United States, and Europe, CEAL serves as a space for modern Latin American businesspeople to interact and discuss the boundless possibilities for synergistic efforts between the private sector and development. CEAL’s members are most interested in educational efforts that are aligned with the creation of an environment in which innovation and entrepreneurship can flourish. The group aspires to reinvent the Latin American entrepreneur into a social entrepreneur.

PANAMA

Latin America also enjoys the benefits of several integrative market organizations, including the Pacific Alliance, Mercosur, CARICOM, ALADI, and CAN, all of which Urrutia sees as a testing ground for working out “the best way to achieve regional integration.”

erious challenges for integration remain, primarily from politics. “Political discourse persists in eroding any advancement at the institutional level. It looks like a more divisive agenda may prevail over an integrative scheme,” Urrutia says. “In addition, our lack of foresight has diminished the window of opportunity to avoid repeating history; there is little time to act before unfavorable conditions affect the region. We should waste no more time in providing for better physical infrastructure—it is key to integrating with the world—and in committing as a region to adopting best practices in terms of environmental sustainability, social inclusion, and preventing corruption. “The 21st century holds new opportunities—our region is rich in natural resources, arable land, a young population, and endless opportunities for growth.” But, Urrutia asks, how best to achieve this growth?

There is a lot Latin America can do: “The region is in need of more economic and regulatory integration, large investment in start-ups, R&D, and education.” The region must better prepare the workforce, foster its start-ups and research centers, and achieve information exchange through profound regional integration, adds Urrutia. “There is an urgent need for adequate forums of discussion, so that every actor understands his or her role and responsibility in creating a more prosperous Latin America.” Despite the challenges, Urrutia is optimistic. “The Pacific Alliance inspires new hope. The Pacific Alliance can serve as the flagship for integration efforts over political discourse.”

INTERVIEW

From Fragmented to Formidable: A New Latin America?

ECONOMY

INTERVIEW

The Name of the Game in Panama Is Connectivity A glance at a map tells the story. There’s Panama, a narrow strip of land connecting two continents and separating two oceans. If location is destiny, it seems likely that Panama’s central location will translate into an outsized role for the tiny country on the world stage. “Let me speak with you about the nature of this economy. I want you to understand that the name of the game is connectivity.” Dr. Nicolás Ardito Barletta, former president of Panama and Director General of the National Center for Competitiveness, is a man who is passionate about Panama’s destiny, and he sees Panama’s position as a central, connected hub as critical to that destiny.

Dr. Nicolás Ardito Barletta Director General, National Center for Competitiveness (CNC) President, Republic of Panama (1984–1985)

Connectivity and logistics

f course, the canal is all about connectivity. Since its completion in 1914, Panama has been a bustling maritime center. It currently accounts for the transit of 4.7 percent of the world’s maritime commerce. “There are 13,000 to 14,000 transits through the canal each year from all the main ports in the world, and 39 percent of Asian exports to the east coast of the U.S. go through the Panama Canal.” The canal also allows other industries to thrive in its shadow. “It has opened the opportunity for many maritime businesses, such as the container transshipment ports at both entrances to the canal. The container ports have 7 million container transshipments per year. By 2025, we may be at 20 million.” The Colón Free Trade Zone, an offspring of the canal, is a commercial center in its own right. “Colón has a $30 billion turnover, some 2,900 companies that employ 30,000 people. It would not be here without the canal, and it has grown because of the banking center and because of the credit it provides to their clients.”

Synergy begets synergy …

r. Ardito Barletta thinks what’s happening in Panama is illustrative of Harvard Business School professor Michael Porter’s cluster theories: the synergy between businesses in a geographical location can create a sustainable competitive advantage. Witness Panama’s thriving banking and investment sectors: “We have built a dollarized economy and a banking center, which is fully integrated to the dollar market and has a special connotation for the stability of the monetary and credit system,” he says. “The banking center has US $96 billion in assets and more than 90 banks.”

… and success begets success

T Panama has been classified as the second most competitive economy in Latin America for two years in a row by the World Economic Forum.

The air cargo business is also moving goods; it shipped 120,000 tons last year and is growing. In addition, Copa Airlines, the national airline of Panama, now has daily flights to 69 destinations in 33 countries. It’s one of the world’s fastest-growing airlines. Through an alliance with KLM, Copa offers access to destinations in Europe, Africa, and the Middle East. Projects such as the expansion of the canal are enhancing Panama’s position as a logistics hub. Dr. Ardito Barletta observes, “Logistics is the future of Panama. We have been growing at an average of 8.5 percent per year for 10 years, and four of those years were over

10 percent.” This rapid pace is difficult to sustain because bottlenecks exist and infrastructure is lacking, but he says, “If we do the right things, we can grow from 5 to 8 percent per year for the next 15 years.”

he synergy includes Panama’s business-friendly environment as well as the success of the multinationals—both of which keep attracting more companies and investment. Dr. Ardito Barletta describes Panama as having “open trade and special incentives to investors. If you do business from Panama, outside of Panama, you do not pay taxes in Panama,” he points out.

He says investment is booming. The construction industry is exploding, largely because of the canal expansion, foreign investment, and local private and public investment. Office buildings are being built for international companies, and hotels are needed to accommodate visiting tourists and businesspeople. Even residential construction is fueled by the many international retirees who are coming to Panama. Outside demand accounts for 35 percent of construction. “As far as foreign investment goes, per capita it has been the highest in the region for some three years. Mostly in banking, mining, ports, construction, tourism, energy, hydroelectric plants, and telecommunications.” Dr. Ardito Barletta says, “We have attracted 96 multinationals to Panama. P&G brought 1,000 employees. Dell has 2,500 employees. Caterpillar has located a center here.”

STRATEGY

ECONOMY

Main Service Exports Form the Panama Canal Cluster

*In Millions of Dollars

Tourism

Canal Services

Free Trade Zone

Air Cargo

Bunker Fuel

Port Services

Telecommunications

Banking Services

Maritime Services

2262

1871

1491

994

700

550

486

430

391

Panama’s growth potential

he boom does not rest solely on foreign investment. Panama is contributing from within, too. Dr. Ardito Barletta points out, “We are expanding the canal, the ports, and services to passing ships, and improving logistics, the airport hub, tourism, the banking and financial center.” Another potential growth industry for Panama is agriculture. “Agribusiness has the potential to increase exports. Fruit exports from 2003 to 2008 grew 25 percent per year.” Dr. Ardito Barletta notes that Panama has the best gourmet coffee in the world. Another example is the recent production of peppers for export. In his opinion, there are ways to further develop the Canal Zone. “Industry has an export potential beyond what they have done. In my opinion, with all the free trade agreements, connectivity, and logistics, export assembly lines can be built around the canal.” Singapore has found ways to maximize the profit potential of its transportation hub, and Ardito Barletta thinks Panama can do more in this area. “To summarize, you have at least seven sources of export growth, the engines of growth for Panama: maritime and air logistics, tourism, international commerce, banking, agribusiness, mining, fisheries, industry. Of course, technology also represents an attractive opportunity. I think we may have a source of growth as a location for technology companies.”

The challenges

ack of infrastructure creates problems, especially in a country that’s growing so rapidly. “The emphasis of this government on infrastructure has been good, but we will need more. The country is currently expanding highways and airports.” However, Panama has the best communication connectivity in Latin America, with six large fiber optic submarine cables going across the isthmus.

Unfortunately, poverty is also a problem, with 25 percent of the population classified as poor, although this number has improved from 40 percent in 2000. Dr. Ardito Barletta considers programs addressing the needs of the indigenous population to be particularly lacking. “We need to provide better health, education, nutrition, electricity. The basics.” Among the country’s poor, 57 percent are younger than age 20, and Dr. Ardito Barletta believes they could benefit from significant improvements. “If we can provide these young people with better education and opportunities, that’s what it’s all about. Singapore, Taiwan, Korea—they’ve all done a great job at that.”

Fiscal responsibility pays off

anama may yet be able to provide the kind of job possibilities for its young people that Dr. Ardito Barletta envisions. As a service-based economy, Panama has done well compared to countries whose fortunes rise and fall with wildly fluctuating commodity prices. “Why is Panama stable? Our exports are

PANAMA

services,” Dr. Ardito Barletta says. “If you look at the international trade data, service values change much less than commodity prices.” In commodities, fluctuations are massive, but a service economy enjoys a reasonably predictable income. “Demand for services tends to be stable and fluctuates less in the international business cycle than commodity prices.” Panama also puts a high value on fiscal responsibility. “One of the most important things the past administration did was to pass a fiscal responsibility law.” The new law is quite conservative regarding the deficit. “It limits the annual deficit to 1 percent of GDP, except in special occasions.” And the bottom line is improving. “Public investment grew from 12 percent to 45 percent of the budget. Debtto-GDP was 70 percent in 2004, but now it is down to 39 percent.” Tying its currency to the dollar has given Panama monetary stability. “With a dollarized system, no central bank, and the banking center integrated to the dollar market, we do not devalue. The dollar itself devalues, but very slowly.” Panama avoids the problems that having its own currency would create, such as speculative attacks and foreign exchange risk.The international banks mediate between the local and international financial systems, creating good financial integration. As Dr. Ardito Barletta points out, “There are no interest rate differentials that might trigger sudden inflows or outflows of capital.” The presence of international bankers in Panama and their ability to evaluate and manage local risk has prevented financial distortions and volatility. “There are no economic incentives for bank deposits to rush in or out, so if these factors are stable, everything works.” Everything works? Today that would be the last thing you’d say about many economies, but somehow Panama is managing to pull it off.

Direct Foreign Investment MAIN SECTORS • Energy • Ports 3500

• Construction • Tourism

• Banking • Mining

• Telecommunications

*In Millions of Dollars

3132

3000 2500

2407 1907

2000 1500

2887

2734 2497

1019

1000

1259 917

500 0 2004

2005

2006

2007

2008

2009

2010

2011

2012

ECONOMIC OVERVIEW ECONOMY

Panama at a Glance 2014 ESTIMATE $

45.6 BILLION

GDP

6.8% GDP $

12,038

GDP/Capita

3.7M

Population $

3.0 BILLION

FDI Inflow

4.4%

Unemployment

3.8%

Inflation Source: IMF, General Controllership of Panama

Panama is celebrating the centenary of the canal that made it a maritime, logistics, and trade hub—the 20th-century synonym for global connectivity—while rapidly expanding and refining the core components of 21st-century connectivity: updating its infrastructure, reforming its financial sector, expanding free trade agreements, and rolling out business-friendly government initiatives.

n the 20th century, Panama connected east and west via the canal and became a crucial trade hub. As the country seeks to be the logistics platform to the world in the 21st century, it is capitalizing on additional assets in data and finance to solidify its position for the future. In a 2014 report from the World Economic Forum, Panama ranked 48th in the world—and third in Latin America—in global economic competitiveness. The economy is dollarized, open, and stable; the Colón Free Trade Zone is second only to Hong Kong in volume; infrastructure building—the canal expansion and construction of the Panama City Metro top the list—is booming; unemployment is low; and the country continues to negotiate both bilateral and multilateral free trade agreements that weave it ever more tightly into global commerce.

A three-tier economy

The fastest-expanding economy in all of the Americas has maintained robust annual growth in its gross domestic product (GDP) for the past decade. Real GDP increased at an average of more than 8 percent from 2006 to 2012, peaking at 12 percent in 2008 and bottoming out at around 3 percent in 2009. Panama’s 2013 GDP growth clocked in at 8.4 percent, down from 10.2 percent in 2012. According to the World Economic Outlook, released by the International Monetary Fund (IMF) in April 2014, Panama’s GDP was projected to grow at a rate of 6.5 percent in 2014, the highest in the Americas. Experts agree that growth will slow as Panama’s major infrastructure projects ramp down

STRATEGY

ECONOMY

RANKINGS Fitch & Moody’s

BBB

Tax Burden

136

Investor Protection

Corruption

Red Tape

Personal Freedom

Monetary Freedom over the next few years. However, predictions for GDP increases of more than 5 percent through 2018 seem credible and sustainable. Continued growth will depend on maintaining ties to old partners while constantly working to build new trade relationships. Those who are unfamiliar with Panama’s economy may assume the country’s wealth is principally derived from the canal, but there is much more to the country’s success. “Panama’s economic diversity is an important element to understand,” notes Raymond Gatcliffe, General Manager of Citibank Panama. “That obviously has happened over an evolutionary experience, which is different from what you would first imagine Panama to be. At first glance, you would just be very zoomed in on the canal or the Free Zone.” In fact, more than 75 percent of GDP derives from the service sector: canal revenue, associated logistics facilities, and container ports; banking and insurance; tourism; and flagship registry. Growth in the services sector slowed to 6 percent in 2013, down from nearly 10 percent in 2012. Panama’s small but vital agriculture industry grew more slowly in 2013 as well, but it remains a key pillar in the country’s economic strategy.

Trade Freedom

Technology

Sources: World Bank, CIA factbook, The Heritage Foundation, Transparency International.

The high level of public infrastructure spending should keep growth strong in the short to medium term. Completion of the canal expansion project, now slated for early 2016, will slow this trend, although other infrastructure projects such as new metro lines and highways will continue to provide stimulus. In fact, in 2013 the construction sector grew by more than 30 percent, a number that should continue to increase over the next few years. Panama’s financial system is the largest in Latin America. Banks, which make up over 80 percent of Panama’s financial assets, dominate the sector; securities firms come in second at around 17 percent. The IMF puts the financial sector’s total assets at more than three times GDP and bank credit to the private sector at more than 90 percent of GDP.

Free zones a crucial asset

Recent governments in Panama have made a sustained effort to maintain a business-friendly

PANAMA

ECONOMY

business accelerator, as “a strategic focal point for regional operations of international organizations.” The Multinational Enterprises Headquarters Act, better known as “Law 41,” is an adjunct to the free trade zones, but it operates without geographic restriction. Companies opening a regional headquarters and meeting other specified criteria can enjoy similar tax, immigration, labor, and regulatory advantages throughout the country. Remy Swaab, the executive director of WTC Panama, observes, “One of the impacts of the foreign influx of companies and professionals is that it has allowed for market equalization during Panama’s rapid economic surge as well as for the creation of additional supporting industry opportunities for the local work force.”

Mexican President Enrique Peña Nieto (L) and his Panamanian counterpart Ricardo Martinelli during a signing ceremony of a Free Trade Agreement in Playa Bonita, near Panama City, on April 3, 2014

GDP Growth 10% 9%

Panama

Latin America

Global

Panama maintains or is seeking bilateral and multilateral free trade agreements (FTAs) with partners across the Americas, Europe, and Asia. Agreements already in force include pacts with the United States, most of Panama’s Caribbean and Central American neighbors, Taiwan, and Singapore. Signed but not yet ratified are agreements with Canada, the European Union, and Mexico. The treaty with Mexico was signed in Panama City April 3, 2014, at the World Economic Forum on Latin America by then-Panamanian president Ricardo Martinelli and Mexican president Enrique Peña Nieto. The treaty sets the table for Panama to join the Pacific Alliance—which includes Colombia, Chile, and Peru, in addition to Mexico—as soon as it meets all membership requirements.

7% CAGR,%

FTAs open the channels

6% 5% 4% 3% 2% 1% 0%

2006-12

2013-32

Since 2006, Panama’s GDP growth has been the highest in Latin America, even though it is expected to slow over the next 20 years. The projected annual growth will average 4.7% over the next two decades, compared with 3.2% for Latin America and 3% for the world economy. Source: Oxford Economics / IMF / Deloitte

environment. Free trade zones have long been a part of those plans. Panama has three principal free trade zones, designed to work synergistically, along with a patchwork of smaller regional or highly specialized variants, such as the Hydrocarbon Free Zones, which service both canal traffic and other vessels using Panamanian ports: • The Colón Free Trade Zone, at the Atlantic terminus of the canal, is the largest free port in the Americas and serves as a market to Central and South America as well as the Caribbean. • The Panama Pacifico Special Economic Area, on the west coast, is an international transportation and logistics hub that also houses high-tech and other specialized manufacturing facilities. • The City of Knowledge focuses on science, academics, cultural activities, and human development. ProInvex, Panama’s National Agency for the Attraction of Investment and Promotion of Exports, describes the City of Knowledge, which includes the International Technopark and a

“We trade over a billion dollars with Panama. We sell them about $960 million worth of goods and they sell about $60 million worth of goods. But that has much more potential for the growth of trade,” says Ildefonso Guajardo Villareal, Mexico’s Secretary of Economy. He goes on to note, “For Panama, it is very important because signing the agreement with Mexico is the last requirement in order to apply for integration into the Pacific Alliance. And that is the main objective of completing this bilateral agreement.” Panama’s free trade agreement with the United States went into effect October 31, 2012, dropping Panama’s import tariff on goods and products manufactured in the United States to 0 percent and giving a significant advantage to U.S. companies doing business in Panama. Finally, in 2011 Panama became a member of The Latin American Integration Association, an agreement that seeks to establish a Latin-American common market. Stressing the importance of a diversity of trading partners, Domingo Latorraca, the former Vice Minister of the Economy for Panama’s Ministry of Economy and Finance and a current partner at Deloitte LATCO, noted, “The Panamanian economy must be kept well mixed. We should not have all eggs in one basket.”

Infrastructure, construction buttress economy The Panama Canal expansion

The opening of the Panama Canal in 1914 transformed the

STRATEGY

ECONOMY

Colón: Marketplace to the World

Central American country into a strategic hub for commerce and security in the Americas and around the world. Sole responsibility for operating the canal was handed over by the United States on December 31, 1999. In 2007, Panama broke ground on its ambitious plan to double the canal’s capacity by 2016. Rising concern about the growing size of the global cargo fleet spurred the Canal Expansion Project, which will allow passage of larger ships, including tankers carrying liquefied natural gas (LNG). Producers on the U.S. Gulf Coast have been eager to sell LNG in the Asian market. The project will also increase the efficiency of the lock system, recycling 60 percent of the water from each trip.

Rapid transit and highways

In April 2014, Central America’s first rapid transit system came online, as the initial segment of Panama’s Metro—just under 14 kilometers of rail—opened in Panama City. The first line was built at a cost of more than $2 billion. Under the master plan for the Panama City Metro system, more than $10 billion in projects are to be completed by 2035, including three more lines and a tram. Funding is currently being lined up for the 24-kilometer, elevated second line, which is projected to cost around $2 billion and will connect to Tocumen International Airport. In addition to the Metro, the government is currently planning the construction of five major highways that are designed to reduce congestion and increase connectivity between strategic areas like the Colón Free Trade Zone, Tocumen International Airport, and the new transit stations.

Regional air hub

Tocumen International Airport, the home airport of Panama’s flag carrier, Copa Airlines, is the largest intra-Latin American traffic hub in the region, flying approximately 220,000 seats per year; Lima is a distant second with 140,000. Copa has direct flights to 69 destinations in 30 countries around the Americas and the Caribbean, flying as far north as Toronto, Canada, and as far south as Montevideo, Uruguay. Tocumen is the only airport in Central America with two runways. It has been upgraded to handle the Airbus A380, and its 83,000-square-foot cargo facility—the largest in Central America—serves as a hub for DHL.

A booming office market

In addition to the large infrastructure projects currently underway, Panama is in the midst of a boom in office construction, particularly in the capital. Seventy percent of investment in the private sector comes from construction. Panama City is the 11th-largest office market in Latin America, and its annual production ranks with much larger cities like Santiago, Chile, and Lima, Peru. Office rents, however, are among the lowest in region.

New sectors bolstering growth GDP powered by communications

The growing contribution of information and communications technology (ICT) to the Panamanian economy rests on several pillars: The Multinational Enterprises Headquarters law has been a factor in inducing companies like Dell and Hewlett-Packard to make the country their regional headquarters; incubators like City of Knowledge have attracted academic expertise from entities such as Georgia Tech and the Smithsonian Institution; and the

David Hanono CEO CIF Express, S.A

David Hanono, CEO of cargo consolidator and dispatcher CIF Express, S.A., believes in Panama. The government is stable, and the dollarized economy is strong. The banking system is robust and growing, which has led to a burgeoning insurance industry. And Panama is diversifying, putting new resources into virgin agricultural territory.

There is one element of Panama, however, that Hanono lives and breathes: the Colón Free Zone (CFZ). Touted as the world’s second-largest free zone after Hong Kong, Hanono argues that it is actually number one, thanks to its “zero tax on income produced from work of the free zone.”

With nearly 30,000 employees benefiting as many as 150,000 people indirectly, the free zone also supports many ancillary businesses and employees, including gas stations and truck and taxi drivers. Hanono describes the approximately 600-acre CFZ, located at the Atlantic Ocean entrance of the Panama Canal, as a “master stocker,” with warehouses holding everything from electronics, silverware, and sundries to clothing, shoes, and fabric. The system is held together by loyalty, trust, and conocer a tu cliente—knowing your customer. President Enrique Jiménez created the Colón Free Zone in 1948 to foster employment following the semi-boom of the World War II years. Mission accomplished: With nearly 30,000 employees benefiting as many as 150,000 people indirectly, the free zone also supports many ancillary businesses and employees, including gas stations and truck and taxi drivers. Hanono cites a number of factors contributing to the country’s economic success, particularly the canal, the CFZ, the nation’s connectivity, and easy access to markets like Chile, Peru, and Brazil. Panama is “a pathway of anything and everything,” he says. “People, merchandise, ideas.”

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country is at the nexus of six fiber-optic broadband networks. This connectivity is part of the impetus behind Panama’s status as an up-and-coming innovation hub for the Americas. The International Telecommunications Union (ITU) estimates that Panama’s telecommunication sector accounted for 3 percent of GDP in 2012 and was directly responsible for nearly 16,000 jobs, or 1.2 percent of domestic employment. The ITU also states that broadband indirectly contributed more than 11 percent of all growth in GDP from 2006 to 2010.

Strong e-government leads business, municipalities

The Panamanian government is in the midst of rolling out a range of e-government initiatives. The 2013 Global Information Technology Report from the World Economic Forum cites one such initiative, PanamaEmprende, as cutting the time to set up a company from five days to 15 minutes. Other programs aim to create a Paperless Panama, deliver connectivity to every municipality, and implement a nationwide 311 Citizen Service Center. The progress in both the public and private sectors rests in part on a collaboration that gave birth to a clear, cohesive, long-term, national ITC strategy: the approach brought together resources and knowledge from Panama, the Americas, and as far away as Asia. In 2008, the government facilitated the funding of the working group that put together Panama’s “National ICT Strategy 2008-2018,” which cites Korea as an explicit model.

Projected Industry Share of Panama’s GVA to 2032 Government Other Services Health Education Business Transport Tourism Distribution Construction Utilities Manufacturing

2012

2032

Mining Agriculture 10%

20%

Source: Oxford Economics / Have Analytics/ Deloitte

PANAMA

Calling Korea “one of the most innovative, competitive, and successful ICT sectors in the world,” the strategy aims to emulate that country’s success by boosting private investment, strengthening human capital, promoting innovation and technological transfer, and enhancing the technical capacity of local companies in Panama.

Natural resources and new sources of power

Panama’s chief mineral resources are gold, silver, copper, and molybdenum. Mining accounts for just over 2 percent of GDP, but the sector grew at a blistering rate of more than 30 percent in 2013. Continued growth is expected, given that several projects are not yet fully operational. The government estimates that the country has $200 billion in proven mineral reserves, including what the Panamanian Mining Chamber calls the largest known, unexploited copper reserve in the world at Cerro Colorado. Raymond Gatcliffe describes the development of the copper industry as a “significant opportunity” that has not yet factored into the plans of many investors. Electricity rates in Panama remain high amid attempts to diversify supply, increase availability, and make transmission networks more robust. Hydroelectric dams account for about 60 percent of power generation, while oil-fired plants supply 40 percent. Panama is working with the United States and the Energy and Climate Partnership of the Americas to diversify the supply of biofuels being used to supplement or replace hydrocarbons.

Finance

Panama is the probable next member of the Pacific Alliance, which encompasses more than 210 million people and would end 90 percent of tariffs among member states.

30%

40%

Investment target: tourism

Data from the World Travel and Tourism Council indicates progress in Panama’s tourism and travel sectors and points to further improvement in years to come. The direct contribution of travel and tourism to total national employment has increased from

ECONOMY

Outside the Box

around 3 percent in 2004 to approximately 6 percent in 2014. As a percentage of GDP, tourism and travel constituted 13.9 percent, a number that is expected to continue to rise. The Panamanian government has targeted tourism as a growth sector; Law 481 offers incentives to investors who contribute at least $250,000 to the construction and operation of hotels and other lodging built outside the capital city.

Balanced growth ahead

IMF Managing Director Luca Antonio Ricci, during his mission to Panama in February 2014, praised the country’s economic performance, while stressing the need for further streamlining of financial governance; better data collection from all financial institutions; and more intensive macro-prudential policies—that is, attention to “whole system risk,” in addition to monitoring individual institutions. The country continues to maintain a low deficit, mandated at 3.1 percent by the Fiscal Responsibility Act. External debt in the nonfinancial public sector exceeds $16 billion, but that number has dropped significantly over the last decade. Inflation will be moderate as well. IMF projections forecast a slight slowdown in growth that will keep consumer prices rising at an annual rate of about 3.8 percent. The expansion of the Panama Canal is certainly a boon to the country, as more ships and tonnage will be able to make the passage. However, even as the expansion prepares to go online, leading global shippers are beginning to use larger cargo vessels that will not fit through the expanded canal. On the other hand, American shipbuilders are constructing larger vessels specifically to make the transit. Panama’s poverty rate and wealth imbalance remain problematic, although according to the World Bank, between 2002 and 2011, the poverty rate fell from 48.5 percent to 27 percent, with extreme poverty decreasing from 21 percent to 11 percent. Ongoing government support efforts have targeted the poor, the elderly, and children, with the goal of boosting access to such basics as nutrition and medical care. Grants to help families keep children in school seek to build a better educated workforce, and employment programs are focused on developing sustainable means of support across all sectors and regions of the country. With a 10-year track record of growth behind it and riding a wave of infrastructure building, the Americas’ fastest-growing economy is expected to remain strong. Unemployment is low, at just over 4 percent in 2013. President Juan Carlos Varela has vowed to continue the country’s infrastructure program and has promised increased transparency in government spending. While the canal will continue to be the backbone of the economy, upgrades in other parts of the logistics and finance sectors—the free trade zones, the airport, the energy grid, the innovation centers—provide important synergies and support. The communications, mining, and tourism sectors represent areas of potentially substantial future growth. The fundamentals are already in place; with economic development diversifying into new sectors, expanding global partnerships, and a government committed to conservative, measured, but ongoing investment, Panama continues to bring together the pieces that will make the country a global leader.

Ricardo E. Galindo

When Ricardo Galindo, President of Panama-based Empresas Galindo, thinks outside the box, he literally goes beyond his industrial carton and container fabrication business to address the broader implications of the country’s current economic and institutional conditions.

Galindo recognizes the importance of a stable government. He points out, “We haven’t had the same government since dictatorship twice in a row. It’s been healthy for the country.” As a businessman, he certainly appreciates the pro-business stance of the previous and current five-year governments of Panama and sees steady growth ahead.

CEO Empresas Galindo

The logistics industry will see a business increase once the third set of locks is in operation. Tourism will be bolstered by the expansion of Tocumen International Airport. Construction will continue to be a powerful force within the economy, driven mainly by public spending in infrastructure. What sectors does Galindo see as successful? He points to the logistics industry, mainly the ports, which will see a business increase once the third set of locks of the Panama Canal is in operation. Another important sector is tourism, which will be bolstered by the expansion of Tocumen International Airport, resulting in greater capacity of hotel rooms not only in the city, but also in the interior of the country. Construction will continue to be a powerful force within the economy, driven mainly by public spending in infrastructure. As current head of a family business that has operated in Panama since the 1950s, Galindo observes: “I believe that this government will be a successful one, mainly by protecting the separation of institutional powers, which should help us maintain a healthy economy.”

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Does the ascending administration mark a sea change in the politics of the Central American nation, or merely a mild corrective to a working system? The new Minister of Economy and Finance discusses the philosophy and priorities that will guide policy over the next five years. Following the victory of Juan Carlos Varela in Panama’s 2014 presidential election, many investors are anxious to know what this shift in the political wind will mean for the country’s economic climate. A sit-down with Dulcidio De La Guardia, Panama’s Minister of Economy and Finance, reveals the new administration’s plan to sustain the country’s rapid growth, while expanding infrastructure and investing in the Panamanian people.

Dulcidio De La Guardia Minister Ministry of Economy and Finance

Breaking new ground …

he promise to expand services and build infrastructure to benefit ordinary Panamanian citizens was an important factor in the election. Minister De La Guardia is optimistic about the government’s ability to help its citizens “benefit from the huge economic growth that Panama has experienced over the last few years and basically improve the life of the people.” He sees four principal areas of development as key to reaching this goal: water and sanitation, mass transit, education, and the ongoing development of the logistics hub.

The rise of a new politics in 2014 is a catalyst for change across Panama. An administration insider answers questions about business, investment, and the goals of the new government.

Providing clean water and sanitation to the entire population is a top priority, according to De La Guardia, and will be reflected in the government’s new budget. The people will gain better access to jobs and resources through highway improvement and a substantial expansion of Panama City’s Metro, which has already seen great success in its first line. In education, the minister points to Singapore as the model for an invigorated system that stresses vocational learning and English-language proficiency.

… And revitalizing the old

onnectivity has historically been the key to Panama’s growth, and it will continue to play a central role in the country’s strategy for the future, says De La Guardia. The Panama Canal, always a focal point of the country’s economy and national

PANAMA

identity, has made Panama a global logistics hub, and the canal expansion is redefining trade patterns around the world. Minister De La Guardia compares the current canal to a highway built for small cars and local traffic; he expects the post-reconstruction canal to be more like a superhighway, accommodating much larger vehicles at a higher rate. The canal expansion should be up and running in early 2016. Panama has served as the regional financial center for more than three decades, and there is fresh concern that the strategies of the 1970s are no longer optimal for today’s global business environment. Many of the members of the new administration, including the president himself, came from the private sector and understand the importance of maintaining the country’s business-friendly attitudes. As public servants, they now find themselves in a unique position to promote the mission of Panama’s financial sector, Toward those ends, the Ministry will continue to support free-trade policies while encouraging the development of value-added logistics and the growth of legal and future use services. One of the minister’s goals is to turn over an improved economy at the end of his term that allows his successors to “have a healthy government that can actually continue to invest for the benefit of the country in coming years.”

Sound investments

inister De La Guardia is confident that his administration’s attention to the country’s people and infrastructure will continue to draw investors from around the world. Logistics and the comparatively new industry of Panamanian tourism are “the key areas where Panama has a competitive advantage” at this time, but he sees potential for broader growth in the country’s future as the administration works toward ambitious yet achievable goals.

INTERVIEW

New Administration’s Goals Embrace Change While Shoring Up Key Industries

ECONOMY

INTERVIEW

Potential for Continued Success Panama’s success rests on several factors, but its future will rely on continued investment in education and commitment to corporate social responsibility.

As someone who long ago perceived the benefits of alliance, Stanley Motta has relied consistently on the theme that defines Panama—connectivity. The chairman of Copa Holdings, Motta is in a unique position to appreciate how that connectivity works to Panama’s advantage. He sees the many factors that have contributed to the success of Panama, but he also understands that the country’s commitments to education and corporate social responsibility are competitive benefits that will buttress its future achievements.

Stanley Motta Chairman Copa Holdings

A social framework

Location, connection, and synergy

omeone once told Motta that people can build companies, but they cannot build geography. Because of Panama’s strategic location, the nation has been able to capitalize on linking not just oceans but also continents—by air. This advantage has led to growth for Panama and the region. Motta observes, “There is a direct connection between what we do and what happens in the rest of the world. We buy engines from one country, planes from another, and we fly passengers to still other countries, where they contribute to trade and tourism, thereby producing additional jobs.”

“There is a direct connection between what we do and what happens in the rest of the world.”

He goes on to explain that as “the airline industry is providing meaningful employment, it is getting more weight at the table.” The economic stimulus generated by air travel in turn invites governments to reinvest in the industry. One of the most important drivers of the economy, however, is the Panama Canal. Even though the canal expansion will be complete in early 2016, business through the channel will not change overnight, cautions Motta. “You need to measure this through time,” he notes, pointing out that the number of ships transiting the canal is fairly stable; rather, it is the tonnage that is increasing over time because ships are getting larger.

One area for growth exists in moving goods overland to reach the canal. Although the ports are quite sophisticated, the system for getting exports from the rest of Central America to Panama is not. Motta believes that Panama’s connectivity can take another step as more overland routes are created throughout the region.

otta is passionate about the role of education in Panama’s future: “In Panama, education is not just a social priority, it is an economic necessity.” An educated workforce is a requirement to attract multinational corporations. Though the Panamanian government offers numerous incentives to attract business, companies struggle to fill jobs, not because the work force is too small or unmotivated, but rather because candidates lack minimum skills. Improving the situation requires two components, according to Motta: “We must design a better school system, and we must convince our people that education is a priority.”

“What can we do for the future?” Motta asks. Rather than trying to solve pieces of the problem one at a time, there must be a “national agreement” regarding education, one that equals the attention and consensus accorded the canal. Many industries have soared. Now it is time for Panama’s education system to follow. Equally important to Panama’s evolution as a participant in the global economy is its commitment to corporate social responsibility. “Businesses must conduct themselves in an ethical and transparent way that contributes to the health and welfare not just of business but also of society,” Motta declares. Panama’s economic success has astounded the world over the last decade. With a continued focus on education and corporate social responsibility, this nation’s future may indeed be limitless.

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Short-term economic growth has sustained Panama for more than a decade now, but at least one business insider is emphasizing development for Panama’s future. According to Luis José Varela Jr., education and training will be key to economic development, as well as stronger institutions, in particular a robust and reliable judicial system. As the CEO of Varela Hermanos, the nation’s leading producer of spirits, Luis José Varela Jr. certainly appreciates the explosive growth of the Panamanian economy. Businesses around the nation have benefited, but Varela looks at the long term, something that hasn’t always been a priority in Panama.

Luis José Varela Jr. CEO Varela Hermanos

Looking outside for the future

As he sees it, Panama excels at planning for today but falls short when it comes to the future. For example, Panama produces half the rice it did ten years ago, making the commodity an overpriced import. With abundant space for rice production, this situation was unnecessary. “If you want to help people in the countryside, why don’t we work on establishing a more agricultural society?” Varela asks.

uilding a strong export base is one key to the economy. In a country with two coasts, Varela asks why fishing and aquaculture exports are not more prominent. The Japanese, for instance, represent an enormous market for seaweed. The aquatic delicacy grows well in the sea at Bocas del Toro, an area on the Caribbean coast far from Panama City—just the sort of location that is primed for development.

Looking inside for growth

hen the CEO looks at development, he sees not only the canal and the capital city, but the country’s interior as well. Tourism in the interior has a lot of potential. The nation has some work ahead, however, to make it happen. Panama’s service economy focuses on finance and logistics, not hospitality, and there is an important need for trained personnel. “You take a head waiter from a good restaurant in Bogotá, for example, you bring him here, and the guy is like a genius. He’s a rock star here,” he said, noting the disparity in experience in the hospitality industry.

“Panama is not only about Panama City. Panama is about the Pearl Islands, it’s about Chiriquí, it’s about San Blas, the Azuero Península, and many other fascinating places. There are a lot of things that Panama represents, and our biodiversity is unique.

The canal links the Pacific and the Caribbean, a geographic asset that Panama will never lose, but the country is also at the heart of the Americas. Travelers from two continents pass through Panama on their way to other locations, but only a small percentage stay over. Panama has a surplus of hotel rooms and is building a new, state-of-the-art convention center, but Varela points out that the industry must get its house in order to land not only the business traveler that is so crucial to a thriving hospitality industry, but also visitors looking for high-end service.

PANAMA

Education and training are crucial, and Panama’s Ministry of Labor has already moved to put new policies in place. A recent roundtable with industry, labor, and students began work on a plan to provide now for growth and continuity into the future.

Panama continues to pursue trade agreements around the globe, but with some countries in the region, the rules change with frequency, making trade “like a roller-coaster” for Panamanian exporters. Varela believes that, regardless of trade agreements, companies must commit to long-term investment and promotion in foreign markets in order to be successful.

Doing it on day one

t is a time of change for Panama. Clear rules for business, development, and planning are the order of the day. The long view permeates Varela’s thinking—a growing economy provides short-term returns, but development serves both the present and the future.

“How do we do it best for the Republic of Panama?” Varela asks. “We should start on day one, not one year later or three years later or five years later.” In his view, the focus on the instant gratification of fast economic growth must give way to long-term structural changes. “Growth,” he says, “is a good thing, but development is much better.”

INTERVIEW

The Long Run: How Will Panama Develop New Resources?

SBG