PANAMA - 2006 INVESTMENT CLIMATE STATEMENT

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SUBJECT: PANAMA - 2006 INVESTMENT CLIMATE STATEMENT

Ref: 05 State 202943

A.1. OPENNESS TO FOREIGN INVESTMENT


1. The resolution of a number of investment dispute cases
in recent years opened the way for the April 2004 start of
bilateral negotiations for a free trade agreement between
the United States and Panama.


2. Traditionally, Panama has maintained a rather liberal
regime for foreign investment and investment in financial
instruments. The government and the Panamanian business
community actively encourage foreign direct investment
(FDI). Laws in general make no distinction between domestic
and foreign companies. In 1998, the GOP enacted the
Investment Stability Law, which, among other things,
guarantees foreign investors, who invest at least two
million dollars in Panama, equal treatment under the law to
that of their domestic competition.


3. The Panamanian Vice Ministry of Foreign Trade (VICOMEX)
is the principal entity responsible for promoting foreign
investment. It provides investors with information,
expedites specific projects, leads investment-seeking
missions abroad, and supports foreign investment missions to
Panama. However, depending on the character of the planned
investment, several different governmental entities may have
a passive or active interest in the investment in terms of
setting its parameters of operation, particularly within
relevant regulations, land use, employment, special
investment incentives, business licensing, etc. There is no
formal investment screening process by the GOP, although the
government does tend to monitor large foreign investments.


4. The GOP does impose some limitations on foreign
ownership, such as in the retail and media sectors where
ownership must be Panamanian. Foreign retailers, however,
have been able to work within the confines of Panamanian law
primarily through franchise arrangements. Some professions,
such as medical practitioners, lawyers, and custom brokers,
are reserved for Panamanian citizens. The GOP also requires
foreigners in various sectors to obtain from the government
explicit permission to work, but to Embassy's knowledge
these restrictions have not hindered U.S. firms operating in
Panama. The U.S. government is seeking to achieve
meaningful market openings for the provision of services
within the context of the ongoing free trade negotiations.


5. There is no de jure discrimination against U.S. or other
foreign investors in most sectors. A domestic investment
protection law was enacted in 1991 and remains in force;
however, it has not yet been invoked or used in
contravention of U.S. investment. There is a constitutional
prohibition against foreign land ownership within ten
kilometers of the national border or on an island. Neither
Panamanian citizens nor foreigners may own beaches or the
shores of rivers or lakes. Law 2 was enacted in 2006 to
foster tourism investment on islands, beachfront and
government properties through a concession, requiring
projects to have an environmental impact study, financial
support, bonds, etc. Builders and investors may rent such
lands for 40 years, via the Ministry of Economy and Finance,
extendable for an additional period of 30 years. When there
is a major investment with potential job creation, this
tourism incentive law expands this period for up to 90
years.


6. Panama experienced a boom in foreign investment between
1996 and 1998 as a result of former President Balladares'
privatization and modernization program. Foreigners,
including U.S. firms, participated actively and successfully
in the privatizations of ports, electrical generators, and
telecommunications firms. The conduct of major public bids
and tenders for some public sector projects raised concerns
about the openness and transparency of the process and the
responsiveness of authorities to participants. U.S.
companies complained that some bidding processes lacked
transparency.


7. The Panamanian government has "corporatized" Tocumen
International Airport as a private entity with all shares
owned by the GOP. The airport is undergoing a $70 million
expansion of the passenger and cargo terminals. The
government has pledged not to privatize its inefficient
water and sewage utility, its electric transmission company,
or the Caja de Seguro Social (Social Security System).


8. Panama's privatization framework law does not
distinguish between foreign and domestic investor
participation in prospective privatizations. The law calls
for pre-screening of potential investors or bidders in
certain cases to establish technical viability, but
nationality and Panamanian participation are not criteria.


9. Following the privatizations of the late 1990s, Panama's
FDI dropped to only $98.6 million in 2002, primarily as a
result of losses by major banks and the drop-off in
privatizations. However, FDI rebounded dramatically to
nearly $800 million in 2003 and over by $1 billion in 2004
as a result of major investments in port expansions, Colon
Free Zone profits, the sale of shares of a telecommunication
company, dividends from the electrical companies, as well as
a resurgence of the banking sector. There are announced
projects in the energy sector, golf courses, residential and
commercial construction (including the planned 102-story
"Ice Tower," which would be the tallest building in Latin
America),and a new megaport near the Pacific entrance of
the Panama Canal. A major challenge for the Panamanians is
scheduling a referendum for the canal expansion and
achieving a positive outcome.


10. The Panamanian government developed some of the U.S.
government properties transferred to Panama by the United
States from 1979 through December 1999. The commuter
airport development at the former Albrook Airfield, now
known as Marcos A. Gelabert Airport, has been one of the
most successful ventures. Other projects now underway
include major tourist projects at the former Fort Amador and
at Farfan on the Pacific, as well as a museum of ecology
designed by world-renowned architect Frank Ghery. On the
former Howard Air Base, Dell Corporation opened a customer
service call center in August 2003 that employs about 2000
people. Progress in the academic and research community
(City of Knowledge) has been slow but steady. Several U.S.
universities have located campuses in various former
military installations as well as international and regional
organizations.


11. Panamanian Law forbids monopolistic and anti-
competitive behavior. The Government of Panama passed in
February 1996 an Antimonopoly Law, designed to prevent
monopolistic practices and create a consumer protection
authority. Although Panama's Free Competition and Consumer
Affairs Commission (CLICAC) was set up to protect consumers
against practices such as the sale of expired products to
price gouging, it was widely viewed as ineffective and under-
funded. In February 2006 the Torrijos Administration
enacted by "decree law" the elimination of CLICAC and
creation of a new "Authority for Consumer Protection and
Defense of Competition." The GOP's aim is to create a more
agile entity with greater autonomy and stronger capabilities
to protect consumer rights by combatting false advertising,
monopolistic practices, and unfair competition. The
effectiveness of this new entity remains to be seen.

A.2. CONVERSION AND TRANSFER POLICIES


12. Panama has no legal restrictions on the transfer abroad
of funds associated with or capital employed in an
investment. There are no restrictions on capital outflows
or convertibility. Panama uses the U.S. dollar as legal
tender. Currency conversion therefore is not an issue.
There is, therefore, no independent monetary policy in
Panama. Inflation, bound by the U.S. dollar, is low and
predictable. According to the IMF, "dollarized Panama has
had significantly lower inflation (and inflation volatility)
at a cost of more volatile GDP growth." Although inflation
topped 3.5% during 2005, Panama's annual inflation averaged
less than 3.2% over the previous 30 years. This apparent
predictability enhances the attraction of foreign
investment.

A.3. EXPROPRIATION AND COMPENSATION


13. The Embassy is unaware of any outright expropriation of
property by the Panamanian government in recent years. Very
few U.S. investors have alleged that irregular or illegal
actions of some government entities, past and current, have
resulted in "de facto" expropriation of their property. In
October 2005, some 150 U.S. citizen residents of the Bocas
del Toro area feared that a proposed new land titling law
(Law 2) would strip them of the rights of possession they
had acquired for lands where they build homes, hotels, and
other improvements. Under previous law, rights of
possession were transferable in this and other regions where
formal land titles were either non-existent or problematic.
Following concerns raised by various residents of the area
and by the U.S. Embassy, the GOP subsequently enacted a
revised Law 2 stipulating that none of the law's provisions
shall affect rights of possession granted under previous
law. It remains to be seen whether implementation of Law 2
ultimately avoids any "de facto" expropriation of lands held
by U.S. citizens with rights of possession.

A.4. DISPUTE SETTLEMENT


14. Panama has a court and judicial system built around a
civil code, rather than the Anglo-American system of
reliance upon case law and judicial precedent. Fundamental
procedural rights in civil cases are broadly similar to
those available in U.S. civil courts, although some notice
and discovery rights, particularly in administrative
matters, may be less extensive than in the U.S. Judicial
pleadings are not always a matter of public record, nor is
the process always transparent.


15. The business community lacks confidence in the
Panamanian judicial system as an objective, independent
arbiter in legal or commercial disputes, especially when the
case involves powerful local figures with political
influence. When disputes with foreign investors arise, as
they do from time to time, the investors often choose not to
pursue remedies available to them via the court system. In
a few cases the appearance of corruption has been so widely
accepted as to constitute conventional wisdom. The decision
by investors to avoid the court system is understandable,
given massive case backlogs and the specter of corruption.


16. An increasingly popular and viable alternative for
settling disputes is the Center for Mediation and
Arbitration established by the Panamanian Chamber of
Commerce. Depending on the issues there are other dispute
resolution centers as the Pananamian Construction Chamber,
and the Supreme Court. Rulings by arbitrators are generally
fair and reasonable. In 1998, these rulings were given
status as judicial rulings.


17. The GOP accepts binding international arbitration of
disputes with foreign investors. Panama became a member of
the International Center for the Settlement of Investment
Disputes (ICSID) in 1996. The United States and Panama
signed an amendment to the Bilateral Investment Treaty to
incorporate Panama's membership into ICSID on June 1, 2000.
This amendment took effect in May 2001. Panama also became
a member of the World Bank's Multilateral Investment
Guarantee Agency (MIGA) in 1997.


18. Panama's bankruptcy law is antiquated and is under
review to be adapted to modern business practices.

A.5. PERFORMANCE REQUIREMENTS/INCENTIVES


19. There are no legal performance requirements such as
minimum export percentages or significant local procurement
rules. There are special tax and other incentives for
manufacturers to locate in an export-processing zone (EPZ).
Official support for investment and business activity is
especially strong for the Colon Free Zone (CFZ),the banking
sector, the tourism sector, and EPZs. Companies in the CFZ
pay no income taxes. Banks in Panama pay no tax on interest
or other income earned outside Panama and withhold no tax on
savings or fixed time deposits in Panama. Individual
depositors do not pay taxes on time deposits. EPZs offer
tax-free status, special immigration privileges, and license
and customs exemptions to manufacturers who locate there.


20. Law 8 of 1994 offers tax and other incentives to
investors in tourist industries. In 1997, the Panamanian
government enacted legislation to promote the restoration of
historical buildings and sites Panama City's old downtown
area known as "Casco Viejo." Tourism incentive laws
provide, among other measures, tax exemptions for vehicles
and other designated goods imported for use in, or to build
infrastructure for, the tourist sector. Similar incentives
exist for the mining sector. Legislation affecting the
mining sector is under review. Law 28 of 1995 extended
national industry and export incentives. However, contracts
that were created prior to Law 28 continue to receive the
benefits of the previous incentives. In 1997, the GOP
eliminated tariffs on fuel imported by electricity
generators to promote privatization of the former state
electric company. The government has gradually phased out
tariff incentives that favor the importation of raw
materials for further processing in Panama. The Torrijos
Administration is also reviewing fiscal incentive programs
as part of its overall fiscal reform.

A.6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT


21. With the exception of retail trade, the media, and a
few professions, foreign and domestic entities have the
right to establish, own, and dispose of business interests
in virtually all forms of remunerative enterprise.
Foreigners need not be legally resident or physically
present in Panama to establish corporations or to obtain
local operating licenses for a foreign corporation.
Business visas (and even citizenship) are readily obtainable
for significant investors. Banking, financial services, and
the legal regime are receptive toward attracting foreign
business.

A.7. PROTECTION OF PROPERTY RIGHTS


22. Some of Panama's business, corporate, and banking codes
have been modernized and are, in general, enforced so as to
strengthen confidence in property rights. Mortgages, liens,
and other security interests are recognized. The public
property registry is undergoing expansion and modernization.
Unique features of Panamanian law and practice in specific
areas (including but not limited to banking, accounting
requirements, formation and functioning of corporations, and
taxation) make retention of local legal counsel highly
advisable.

Intellectual Property Rights
--------------


23. Panama is a member of the World Intellectual Property
Organization (WIPO),the Geneva Phonograms Convention, the
Brussels Satellite Convention, the Universal Copyright
Convention, the Bern Convention for the Protection of
Literary and Artistic Works, the Paris Convention for the
Protection of Industrial Property, and the International
Convention for the Protection of Plant Varieties. In
addition, Panama was one of the first countries to ratify
the WIPO Copyright Treaty and the WIPO Performances and
Phonograms Treaty, although the government has yet to
introduce implementing legislation to put these treaties
fully into force in Panama. Panama is not a signatory to
the Patent Cooperation Treaty, Trademark Rights Treaty and
the Madrid Protocol. Should Panama conclude a Free Trade
Agreement with the United States, Panama would become a
signatory to these agreements.


24. The legal framework for the protection of intellectual
property rights (IPR) in Panama has improved significantly
in recent years. The government passed an Anti-Monopoly Law
in 1996 mandating the creation of commercial courts to hear
anti-trust, patent, trademark, and copyright cases
exclusively. Two district courts and one superior tribunal
began to operate in June 1997 and have been adjudicating
intellectual property disputes. IPR policy and practice in
Panama is the responsibility of an Inter-institutional
Committee for Intellectual Property (CIPI). This committee
consists of representatives of six government agencies and
operates under the leadership of the Vice-Minister of
Commerce, who has delegated chairmanship to the head of the
industrial property office. CIPI coordinates enforcement
actions and develops strategies to improve compliance with
the law, including organizing training and public awareness
seminars, among other activities. In January 2003, the GOP
designated an IPR-specific prosecutor with national
authority, which has consolidated and simplified prosecution
of those cases.

Copyrights
--------------


25. The National Assembly in 1994 passed a comprehensive
copyright bill (Law 15),based on a World Intellectual
Property Organization model. The law modernizes copyright
protection in Panama, provides for payment of royalties,
facilitates the prosecution of copyright violators, protects
computer software, and makes copyright infringement a
felony.


26. The Copyright Office has yet to introduce long-promised
improvements to the Copyright Law to implement the new WIPO
treaties (the WIPO Copyright Treaty and the WIPO
Performances and Phonographs Treaty) and to establish new
offenses, such as those needed for internet-based copyright
violations and to enhance border measures.

Patents
--------------


27. Panama's Industrial Property Law (Law 35) went into
force in 1996 and provides 20 years of patent protection
from the date of filing. The Industrial Property Law
provides specific protection for trade secrets. However, at
least one pharmaceutical company has raised the alarm that
these protections are not being respected by the office of
the Ministry of Health that registers generic medicines,
though the Ministry is attempting to address the concerns.

Trademarks
--------------


28. Law 35 also provides trademark protection, simplifying
the process of registering trademarks and making them
renewable for ten-year periods. The law's most important
feature is the granting of ex-officio authority to
government agencies to conduct investigations and to seize
materials suspected of being counterfeited. Decrees 123 of
November 1996 and 79 of August 1997 specify the procedures
to be followed by Customs and Colon Free Zone (CFZ)
officials in conducting investigations and confiscating
merchandise. In 1997, the Customs Directorate created a
special office for IPR enforcement, followed by a similar
office created by the CFZ in 1998. The Trademark
Registration Office continued to undertake significant
modernization in 2005 with the introduction of imaging and
workflow automation of their processes and on-line
application processing. This includes a website that allows
applicants to track the status of their Trademark and Patent
applications. A Customer Service Center is planned for

2006. The Trademark Registration Office claims to be the
most advanced in the region, with 90% automation. This
office reports that it cut trademark registration processing
time in half during 2005, down from one year to six months.
This office also reports that it has conducted classes on
the importance of IPR protection at the Technical University
of Panama and recently sponsored a National Inventor's
Competition that brought inventors together with prospective
investors and customers.

A.8. TRANSPARENCY OF THE REGULATORY SYSTEM


29. Panama's 1997 accession to the WTO, wholesale
privatization, and overhaul of various laws that regulate
economic activity created a fluid regulatory climate.
Panamanian regulators have been exposed only recently to
complex issues, many of them technical. Regulators'
responsiveness to the concerns of those they regulate has
been mixed, depending on the sector. U.S. businesses have
complained of arbitrariness or a lack of responsiveness by
officials responsible for issuing sanitary/phytosanitary
(SPS) permits for the importation of agricultural products.
They have also complained about unannounced and costly
sanitary controls imposed upon arrival of various shipments
of agricultural products that had previously been pre-
cleared for importation. The application of new SPS
requirements, based on re-interpretation of old regulations,
has led to unforeseen increased costs on the part of
importers and delays in bringing goods to market. Such SPS
issues are being addressed through current bilateral free
trade agreement negotiations between the U.S. and Panama.
In response to complaints from the U.S. and several other
agricultural exporters, the Torrijos Administration
initiated steps in early 2006 to create an independent,
entity to handle SPS and import permitting procedures in a
science-based way consistent with Panama's WTO obligations.


30. Public Utilities and telecommunications industries long
complained of slowness of Panama's Regulatory Entity ("Ente
Regulador") in responding to competitive concerns or
requests for information. In February 2006, the Torrijos
administration enacted by "decree law" the elimination of
the Ente Regulador and creation of a new "National Public
Services Authority." The GOP's aim is to provide more
effective oversight by separating administrative and
regulatory functions related to water, electricity, and
telecommunications providers. It is too early to tell
whether this new Authority will, in fact, deliver improved
regulation of public utilities. In the banking and finance
sector, private entities generally give good marks to the
Panamanian entities that regulate them, such as the
Superintendent of Banks.

A.9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT


30. Panama's 1998 Banking Law regulates the country's
financial sector. The law, which concentrates regulatory
authority in the hands of a powerful and well-financed
Superintendent, transforms the previously inadequate regime
into one that is by and large able to meet international
standards.


31. Traditional bank lending from the well-developed
banking sector is relatively efficient and is the most
common source of financing for both domestic and foreign
investors, offering the private sector a variety of credit
instruments. Panamanian interest rates closely follow
international rates (i.e., the London Interbank Offered Rate
- LIBOR),plus a country-risk premium. The rate on a
domestic commercial loan averaged 8.2% in 2004 and increased
slightly for 2005 (through September) to 8.5%. The six-
month domestic deposit rate was 2.2% in 2004 and 2.7% in
2005 (through September). Total assets in Panama's banking
system topped $29 billion in December 2004 and grew to $30.1
billion as of September 2005.


32. Early in 1999, Panama passed a securities law that
established a National Securities Commission to regulate
brokers, fund managers, and all matters related to the
securities industry. The Commission began to function in
early 2000. Some private companies, including multinational
corporations, have issued bonds in the local securities
market. Companies rarely issue stock on the local market
and, when they do, they often try to issue shares with no
voting rights. As a result, these stocks are less
attractive than those with voting rights. Moreover,
investor demand is generally limited because of the small
pool of persons, companies, and investors with the resources
to invest.


33. Interest from fixed bank deposits and certain bonds are
tax-exempt. There is a 10% withholding tax on dividends,
although capital gains from the sale of equities listed on
the Panamanian exchange are tax exempt. Cross-shareholding
or stable shareholder arrangements, designed to restrict
foreign investment through mergers and acquisitions, do not
exist. There are no restrictions on, nor practical measures
to prevent, hostile foreign investor takeovers, nor are
there regulatory provisions authorizing limitations on
foreign participation or control or other practices to
restrict foreign participation. There are no government or
private sector rules to prevent foreign participation in
industry standards-setting consortia.


34. Financing for consumers is also relatively open, as
mortgages, credit cards and personal loans, even to those
earning modest incomes, are widely available on terms
similar to those in the U.S.

A.10. POLITICAL VIOLENCE


35. Panama's Constitution provides for the right of
peaceful assembly, and the Government generally respects
this right. No authorization is needed for outdoor assembly,
although prior notification for administrative purposes is
required. Throughout much of the year, police showed
restraint and professionalism while monitoring large
protests by students, political activists, and workers.


36. Political violence in Panama since the end of the
Noreiga era in 1989 is not common, but there are exceptions.
Between April and June 2005, Panamanian police forces
peacefully subdued large, potentially violent nation-wide
protests against Social Security reforms with few complaints
of use of force. A local protest against utility rate hikes
in Bocas del Toro in October 2004 left 24 PNP officers
wounded and ended with charges of police brutality by the
protests. September 2003 protests spurred by the ouster of
Social Security Director Juan Jovan turned violent when
construction workers led by SUNTRACS labor union attacked
police. In 2002, there were several public demonstrations,
including a major public protest against corruption in
Panama City. Several times during the year, rural groups
protested against the presence of Panama Canal authorities
in the watershed and potential expansion of the Canal. In
August 2002, rioting broke out in Colon for two days,
ostensibly to protest persistently high unemployment,
halting commerce and causing minor property damage.


37. Two high-profile incidents in 2001 were triggered by
the government's decision to allow bus owners to raise fares
and by the delay in raising the minimum wage (which was
raised in August 2003). The former led to weeklong riots
that caused over 20 injuries, hundreds of arrests, and
sporadic looting in the capital. Opposition to the proposed
privatization of the state water utility in 1998 also led to
vociferous, but generally nonviolent, protests. The lack of
economic opportunities, a high unemployment rate (officially
at 9.6% as of late 2005, but much higher in certain areas),
and a growing use of illicit drugs have been cited as the
chief causes of crime.

A.11. CORRUPTION

38. Panama is a member of the Organization of American
States (OAS) Inter-American Convention Against Corruption
(IACC),but not a signatory to the OECD Convention on
Combating Bribery. Panama's submission to the IACC lacks
empirical examples of how its anti-corruption laws have been
applied. The suspicion that anti-corruption laws are not
applied rigorously feeds the concern that government
enforcement bodies, such as the Comptroller General's and
the Attorney General's offices, have historically been
ineffective in pursuing and prosecuting those accused of
corruption, particularly in high-profile cases. However,
the Torrijos Administration has taken steps to permit
official investigation of corruption cases involving public
officials and the public release of information regarding
government activities and expenditures. Constitutional
reforms that permit the Supreme Court to decide whether to
investigate or indict legislators while in office were
implemented on November 15, 2004. The government has not
acted to dismantle Panama's dictatorship-era libel and
contempt laws, which often are used to punish
whistleblowers, while those accused of acts of corruption
are seldom prosecuted and almost never jailed. Panama's
government lacks strong systemic checks and balances that
incentivize accountability. The lack of a strong
professionalized career work force in Panama's public
offices also hinders systemic change.


39. Allegations of corruption have been a habitual aspect
of the political give and take in Panama throughout its
history. However, complaints by American firms about
allegedly corrupt judicial and governmental decisions
prejudicial to their interests remain problematic. In 2005,
the Torrijos Administration successfully reversed a deal
struck between the Moscoso Administration to Panama Ports
Company (PPC) that would have enabled PPC to walk away from
$1.4 billion in payments to Panama as part of a 40-year port
concession agreement. Amid allegations of corruption in the
Moscoso-PPC deal, the Torrijos Administration successfully
renegotiated new terms for the agreement with PPC that
effectively erased the Moscoso-PPC deal.


40. Since taking office in September 2004, the Torrijos
Administration has taken several steps toward following
through on its "zero tolerance" anti-corruption campaign,
including the launch of investigations into the finances of
several prominent figures in the Moscoso Administration. The
GOP rescinded former President Moscoso's June 2002 decree
that impeded enforcement of the January 2002 Transparency
Law. Moscoso's decree imposed regulations that hindered
access to information on public entities. In addition,
President Torrijos established a "National Council for
Transparency Against Corruption" that makes recommendations
to the President, but the Council's influence on the
administration is not strong. Meanwhile, several high-
profile cases remain unresolved by the Panamanian courts.
The Torrijos Administration also passed a package of fiscal
and social security reforms through the National Assembly
that included increased transparency measures.


41. Corruption in Panama's Supreme Court remains a source
of public concern. In March 2005, four Court magistrates
hurled accusations of corruption against each other,
provoking wide-spread public demands for the dismissal of
all nine justices. In response, President Torrijos created
a State Justice Commission to recommend improvements to the
administration of justice, mainly in the areas of
transparency, efficiency and public accessibility. The
Commission released its report in October 2005, but thus far
no long term substantial changes have been made. In
November 2005, the National Assembly's Judicial Affairs
Committee dismissed a complaint filed by NGO Alliance for
Justice against eight of the nine magistrates for
questionable rulings. Coincidentally, a day later the U.S.
government revoked the visa of Supreme Court magistrate
Winston Spadafora under section 212(f) of the Immigration
and Nationality Act (regarding public corruption).


42. Although the GOP's efforts to combat public corruption
have been lackluster, President Torrijos has appointed a
number of technocrats and business people to several key
cabinet-level positions, including the First Vice President
and Foreign Minister (who signed an APEC declaration against
corruption at the 2005 South Korea summit),the Attorney
General (who serves a 10-year term),the Ministers of the
Presidency; of Economy and Finance; of Commerce and
Industries and the Comptroller General. Both the Attorney
General and Comptroller General have made great efforts to
improve the transparency of their organizations and pursue
public corruption. For example, the Comptroller General
launched a new website in late 2005, "Panama Compra"
("Panama Buys"),through which all GOP agencies are required
to post their solicitations for procurement of goods and
services.


B. BILATERAL TRADE AND INVESTMENT AGREEMENTS


42. Panama currently has two bilateral free trade
agreements in force: one with El Salvador that entered into
force on April 11, 2003, and the second with Taiwan that
entered into force on January 1, 2004 (Taiwan's first such
accord). In the 1990s, Panama had negotiated a framework
for free trade negotiations with all five countries of
Central America, although many of these are on hold. The
GOP is currently negotiating a bilateral free trade
agreement with the United States. Panama has concluded free
trade agreement negotiations with Singapore and Chile. The
GOP hopes to sign both pacts before April 2006. The
Torrijos Administration also seeks to deepen Panama's trade
integration with Andean and Mercosur countries. By regional
standards, Panama has been a strong advocate of trade
liberalization. Most recently, Panama joined with the U.S.,
Mexico, and Chile in pushing for progress on a Free Trade
Area of the Americas (FTAA) at the November 2005 Summit of
the Americas in Mar del Plata, Argentina. Panama's strong
international thrust was also evidenced by the fact that it
served as Secretariat for the Free Trade of the Americas
from 2001-2003. On November 5, 2004, Panama announced it
would start negotiations to join the G-3 consisting of
Colombia, Venezuela, and Mexico. However, negotiations to
formally join the G-3's commercial framework have not begun.


43. Panama has bilateral investment agreements with the
United States, the United Kingdom, France, Switzerland,
Germany, Taiwan, Canada, Argentina, Spain, Chile, Uruguay,
the Czech Republic, Netherlands, Cuba, and Korea. Panama
also has signed bilateral investment agreements with the
Dominican Republic, Mexico and Ukraine but these have not
yet entered into force. Commerce Ministry officials have
said that there have been some exploratory talks toward
investment agreements with other countries, but they
acknowledge that these discussions have a lower priority
than ongoing free trade negotiations. In 2000, the United
States and Panama amended their Bilateral Investment Treaty
to reflect Panama's joining the International Center for the
Settlement of Investment Disputes (ICSID).


44. The governments of the United States and Panama signed
a comprehensive Overseas Private Investment Corporation
(OPIC) agreement in April 2000. Since the signing, some new
investment has come to Panama aided by either OPIC's
political risk insurance or its direct financing. Post
expects that OPIC financing and political risk insurance
will amplify any future investment growth trend, albeit
currently stagnant, in the Panamanian market.


C. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS


45. The Overseas Private Investment Corporation (OPIC) has
a bilateral agreement with Panama. OPIC offers both
financing and insurance coverage against expropriation, war,
revolution, insurrection, and inconvertibility for eligible
U.S. investors in Panama. OPIC can insure up to US $200
million per project for U.S. investors, contractors,
exporters, and financial institutions. Financing is
available for overseas investments that are wholly owned by
U.S. companies or that are joint ventures in which the U.S.
firm is a participant. Panama is a member of the
Multilateral Investment Guarantee Agency (MIGA).


D. LABOR


46. Panamanian labor law, in requiring the Labor Ministry's
permission to dismiss employees for "economic reasons" may
act as a legal barrier to a firm wishing to reduce its
workforce or repatriate its capital. If a firm is
insolvent, the law also gives workers priority over all
other non-secured creditors.


47. According to the GOP figures, Panama's non-indigenous
labor force in 2003 was approximately 1.25 million, with 85%
employed in the private sector and 15% in the public sector.
Non-indigenous unemployment in 2003 officially declined from
14.1% to 13.4%, but Embassy believes this rate may be
underestimated. Pockets of chronic high unemployment,
notably in Colon, Panama's second city, continued. In
February 2006, the GOP hiked Panama's minimum wage by 8%
raising the monthly minimum wage from $263 per month to
$284.


48. Labor unions hold some political influence in

Panamanian society and often protest in order to further
their objectives.


49. While the Government of Panama has periodically revised
its labor code, including a modest revision in 1995, it
remains highly restrictive. Several sectors, including the
Panama Canal Authority, the Colon Free Zone, public sector
employees, and export processing zones/call centers are
covered by their own labor regimes and all or portions of
the Labor Code may not apply. Employers outside of these
areas such as Tourism have called for greater flexibility,
easier termination of workers, and the elimination of many
constraints on productivity-based pay.


E. FOREIGN TRADE ZONES/FREE PORTS


50. Law 25 of 1996 provides for the development of "export
processing zones" (EPZ's) as part of an effort to broaden
the Panamanian manufacturing sector while promoting
investment in former U.S. military bases transferred to
Panama. The law also includes specific labor and
immigration provisions that are more favorable than the
current Panamanian labor code. The government also provides
numerous tax incentives to companies that operate in EPZ's.
Companies operating in these zones may import inputs duty-
free if products assembled in the zones are to be exported.
Of the thirteen registered EPZ's, most remain small and
underdeveloped with only a few tenants. They are said to be
facing difficulties combating Panama's high relative wages,
low industrial base, and weak infrastructure particularly
outside the Panama-Colon Corridor. Law 25 also provides for
the development of call centers. There are 19 call center
licenses to date; however, there are only one third
operating call centers most of them U.S. companies. Law 41
of 2004 provides for the development of "Panama Pacific
Special Economic Area" in the former Howard Air Base to
encourage investment, specifically regarding logistics, in
the area.


F. FOREIGN DIRECT INVESTMENT STATISTICS

See Appendices.

MAJOR FOREIGN INVESTORS

- AES Corporation
- American Airlines
- American Life Insurance Co.
- Banco Do Brasil
- Banco Cuscatlan
- Bavaria
- Boeing
- Bristol Laboratories International Corp.
- Burger King Corp.
- Cable and Wireless (U.K.)
- Chiriqui Land Company (Chiquita)
- Chevron-Texaco
- Citibank, N.A.
- Clientlogic
- Coastal Power
- Coca-Cola Bottling Co.
- Colgate Palmolive
- Compania Recreativos S.A. (CODERE)
- Continental Airlines
- Decameron Hotels
- Dell Computers
- Delta
- DHL
- El Paso Energy
- Exxon Corp.
- Evergreen Corp.
- Federal Express
- Glidden
- Goldstar Corp
- Grupo Poma (Salvador).
- Hong Kong Shangai Bank Corp. (HSBC)
- Hospital Corporation of America
- Hutchison Port Holdings (Hong Kong)
- ICA (Mexico)
- Influent
- Johnson and Johnson
- Kansas City Southern Railway
- Kraft Foods, Inc.
- Maersk-Sealand
- Mail Boxes Etc.
- McCann-Erikson
- McDonald's Corporation
- Microsoft
- Mi-Jack Products
- Nabisco Brands Inc.
- NARS - National Asset Recovery Services, Inc.
- Nestle Company
- Chas. Pfizer & Company, Inc.
- Panasonic Latin America
- Phillip Morris, Inc.
- PSINet
- PYCSA, S.A.
- Samsung Electronics
- Schering Corp. International
- Shell Co. (WI) Ltd.
- SITEL
- Sol Melia
- Sony Corporation
- Sterling Drugs International
- Stevedoring Services of America
- Swift and Company
- Swiss Bank Corp.
- Technoserve Inc.
- Union Fenosa, S.A. (Spain)
- UNISYS USA

ECONOMIC AND TRADE STATISTICS

APPENDIX A: Country Data - Panama

Population: 3,172.30 (2004 est.)
Population Growth Rate: 1.8% annual (2003 est.)
Religion: 82% Roman Catholic, 10% Evangelical, also has large
populations of Jews, Hindus, Muslims and Buddhist. (Complete
religious freedom)
Government: Republican, Representative, Democratic, Unicameral
Legislature
Language: Spanish, English widely spoken in business community.
Work Week: Monday-Friday and Saturday mornings depending on
business

APPENDIX B: Domestic Economy (in millions of dollars unless
otherwise indicated)

2003 2004 2005 (E)
Current GDP (nominal) 12,933 14,204 15,125
Real GDP Growth Rate (%) 4.2% 7.6% 5.9%
Current GDP Per Capita (base 1996 3,913 4,084 N/A
U.S. Dollar)
Central Government Spending (as a 20% 20%(2) 27%
% of GDP)
Inflation (CPI) (%) 1.2% 1.5% 2.9%
Unemployment (%) 12.8% 11.8% 9.6%
Foreign Exchange Reserves (4) 1,012.6 484.6 1,170
Balance of the Trust Fund (5) 1,260 1,216 1,164
Average Exchange Rate (Balboas to 1.00 1.00 1.00
U.S. Dollars)
United States Government 28.8 38.9(2) 30.5
Assistance (2)
Debt to GDP ratio 67% 70% 66%

Source: GOP Contralora and Ministry of Economy and Finance
(1) Embassy estimates based upon official and private
sources.
(2) Embassy estimates.
(3) Although no official 2004 estimate has been released,
Embassy anticipates unemployment to be at or near 2003
levels.
(4) According to the IMF definition, since Panama does not
have international reserves as conventionally defined, this
includes Panama's reserve position at the IMF.
(5) The Trust fund contains the proceeds from the
privatization of government enterprises.


APPENDIX C: Trade
2003 2004 2005 (thru
Sept.)
Total Country 5,072 891.1 756.7
Merchandise Exports
Total Country 3,069.1 3,592.2 2,988.6
Merchandise Imports
U.S. Share of Panama 34.12% 28.9% 27.7%
Imports
U.S. Share of Panama 50.4% 48.6% 42.8%
Exports

Source: Ministry of Commerce and Industry; Comptroller
General; 2005

The figures above do not include trade to/from the Colon
Free Zone (CFZ),which the GOP keeps separate from official
GDP figures. In 2004, the CFZ imported USD 4.8 billion and
re-exported USD 5.2 billion. These levels reflect an
increase in free zone imports of 17.1 percent, and an
increase in exports of 18.9 percent, compared to 2003. The
total net contribution of the CFZ to the Panamanian trade
balance for 2004 (Exports-Imports) was USD 571.8 million, up
from 2003, when the surplus was USD 420.4 million.

APPENDIX D: Investment Statistics

Foreign Direct Investment (FDI) in Panama
1997-2005
(In US$ millions and as percent of GDP)

Year FDI GDP Stock/GDP
1997 1,300.2 9,730 13.36%
1998 1,218.7 10,935 11.14%
1999 517 11,391 4.54%
2000 623.8 11,938 5.23%
2001 467.1 12,272 3.81%
2002 98.6 12,862 0.77%
2003 791.5 12,933 6.12%
2004 1,012.3 14,204 7.12%
2005 507.9 15,125 3.36%



Foreign Investment in Panama
By Country or Area of Origin 2002

US$ Percent of total
Thousands
United States $142,156 37.6%
Germany $35,362 9.4%
Colombia $26,048 6.9%
Spain $25,539 6.8%
United $20,760 5.5%
Kingdom
France $19,254 5.1%
Taiwan $16,899 4.5%
Switzerland $3,940 1.0%
South Korea $2,587 0.7%
Italy $737 0.2%
Sweden $323 0.1%
Others $84,457 22.3%
Total $378,062 100%

Foreign Direct Investment
By Sector 2004

US$ Millions Percent of Total %
Colon Free Zone 212.3 21%
Businesses
Banks, Int'l 38.8 3.8%
License
Banks, General 326.0 32.2%
License
Other Businesses 435.2 43%
Total 1,012.3 100%

Source: GOP Comptroller's Office