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by Investors Offshore editorial staff, April 2013
12 April, 2013
Ask most people around the world their thoughts on Panama and you would probably be met with the same one word reply: canal. However, after a small amount of further investigation you would find that this country at the gateway of Central and South America certainly isn't as one dimensional as that. Aided by stable, pro-business governments using the invaluable canal as a catalyst, Panama's friendly tax and regulation system has helped to established the country as one of the most modern and respectable business and financial centres outside the established 'onshore' countries, and ranks as probably the most important trading and business hub in the region.
Around 400 miles long and between 30 and 115 miles wide, Panama appears on the map as a narrow isthmus running from east to west, forming an important land bridge between continental South America and North America, dividing the North Atlantic and Pacific Oceans. Its strategic advantages in terms of trade were recognised as far back as the first Spanish colonisers, prompting them to establish their first permanent settlement in the New World at Panama City in 1513.
Panama remained a Spanish colony for approximately three hundred years to 1821 before it was annexed by Colombia. This state of affairs endured until 1903 when the US helped win the modern day country its independence in return for a slice of land that would eventually see the Americans building and operating the famous canal, completed by the Army Corp in 1914.
However, over the last two decades, the United States has gradually scaled back both its military presence and political influence in Panama, and a second treaty signed by the former President Torrijos (father of the more recent President) and US President Carter in 1977 set in train a 25-year transition period that saw the administration and running of the canal pass back to the Panamanians.
Alongside the Canal, another legacy from the country's interdependence with the United States that has played an equally vital part in Panama's recent economic successes has been its peg to the dollar at par. Since there is no government-controlled central bank printing notes, Panama has had very little problem with inflation, unprecedented in the region, and with the dollar the effective currency in all but name (the balboa is the 'official' currency), investor confidence has not been the issue that perhaps it has in other parts of the region. However, high international commodity prices, combined with Value-Added Tax (VAT) and minimum wage increases, have pushed inflation above historical averages, with inflation in 2011 projected to be above 6 percent, according to the International Monetary Fund's (IMF) annual review of the Panamanian economy, published in April 2012.
Under President Torrijos, Panama enjoyed something of a boom; growth was 8.1% in 2006, exceeded 10% in 2007 and was 8.3% in 2008. The rate of growth fell to 2.3% in 2009; but Panamaâ€™s economy rebounded quickly following the 2008â€“09 global crisis. Supported by strong fundamentals, political stability, and prudent fiscal management, real GDP growth rates have been among the highest in the region. Macroeconomic stability and policies to foster greater social inclusion have reduced unemployment to historic lows.
Following the 2009 slowdown, output grew by 7.5% in 2010, and is expected to have grown by 10% in 2011. Construction, commerce and transportation have been the most dynamic sectors, while canal traffic has been buoyed by strong demand from emerging Asia and South America. Crucially, the strength of the financial system also helped to buffer Panama against the worst effects of the financial crisis in 2008/9. Robust economic growth and steady fiscal consolidation have also contributed to lowering the public debt ratio, which fell from 43.3% of GDP in 2010 to 37.8% in 2011.
The IMF suggests that Panama's macroeconomic outlook is "favourable", with future growth likely to be underpinned by the vast Panama Canal expansion project, and other large public investment projects.
The IMF also commended Panamaâ€™s success in establishing a strong banking center, which has become an important regional hub. However, to compete globally and in a broader range of investment and wealth management services, the Fund believes that the country will need to upgrade its financial sector supervision and infrastructure.
GDP per head was USD13,600 (2011 est) at Purchasing Power Parity and unemployment levels are at 4.5% (2011 est). As of 2011, Panama's GDP at Purchasing Power Parity was valued at USD50.25bn.
Obviously, it is hard to understate the importance of the canal in terms of its advantages both for world trade and as an asset for Panama (even though the canal itself is technically neutral territory). Around 12% of the United State's seaborne trade in tonnage terms passes through the canal every year, which in total sees 13,000 ship movements annually, carrying 192 million tons of cargo. And by navigating the 40-mile waterway, a cargo vessel bound from Japan to the eastern seaboard of the United States can reduce its journey by some 3,000 miles. By the end of 2010, more than 1 million vessels had transited through the canal since its opening 1914.
Shipping then, has grown to be one of the most important industries in Panama, which has the world's largest registered merchant fleet, and a recent investment programme has seen billions of dollars used in the building of four more container ports and the widening of the canal to accommodate more 'Panamax' ships.
In October, 2006, 79% of Panamanian voters approved a USD5.25bn plan to expand the Panama Canal even further. Panama's then President Martin Torrijos said that the vote on expansion of the Canal was the most important national vote since Panama gained its independence.
Under the expansion plans, two 3-chamber locks are being constructed at both ends of the canal. This will create a third lane of traffic wide enough to handle the largest of modern container ships and tankers. New approach channels will also be prepared, whilst existing channels will be dredged to ensure large craft can enter the system.
The project will take about seven years and employ up to 8,000 people. In December, 2008, President Torrijos and Panama Canal Authority (ACP) Administrator/CEO, Alberto Aleman Zubieta, signed a USD2.3bn agreement with leaders from five multilateral and development agencies to finance the waterway's expansion project. The final three bids to undertake the dredging and excavation of the Pacific Access Channel entrance were received from international contractors in August 2010, representing the last major expansion programme contract to be awarded. Once completed, the new access channel will also link the new Pacific Locks with the Gaillard Cut (the narrowest stretch of the Panama Canal).
The expansion project was said by the Panama Canal Authority to be 15% complete by October 2010 and the canal's expansion is said to be on schedule following the recent completion of the permanent concrete works for the new locks, and the Authority hopes that work on the waterway will be completed by the end of 2014. The third phase of the dry excavation project in the construction of the Pacific access channel was completed in October 2011.
On October 19, 2011, Panamanian President Ricardo Martinelli witnessed a new milestone in the expansion project with the filling of a segment of the new access channel that will allow the transit of Post-panamax vessels between the new locks and the Culebra Cut.
Panama Canal Authority Board of Directors Chairman and Canal Affairs Minister RÃ³mulo Roux said at the time that the expanded Canal "will be able to meet the demands of world trade and will change shipping patterns which will translate into more opportunities for Panama and the region".
Panama Canal Authority Administrator Alberto AlemÃ¡n Zubieta added that "the Canal continues to focus on enhancing the value of Panama as a world trade route as our country offers all kinds of geographic and competitive advantages. TodayÂ´s act of filling part of the channel is one more step in that direction."
On December 31, 2009, Panama celebrated the tenth anniversary of nationalized operations at the Canal. A statement from the Canal noted that â€œthe canal has long stood as one of the world's most recognized and respected engineering marvels and a crucial link in the global supply chain. Building on this, the decade of Panamanian stewardship and leadership has been evidenced by change, achievement and growth. By nearly every measure, the Canal's role in world trade and value to global commerce has increased significantly in the past 10 years.â€
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