PANAMA 2007 INVESTMENT CLIMATE STATEMENT

UNCLAS PANAMA 000307

SIPDIS

SIPDIS

FOR WHA/CEN TELLO
ALSO FOR EB/IFD/OIA - HATCHER
STATE PASS USTR
STATE PASS TO CIMS NTDB WASHDC

E.O. 12958: N/A
TAGS: EINV ECON EFIN ETRD OPIC KTDB USTR
SUBJECT: PANAMA 2007 INVESTMENT CLIMATE STATEMENT

REF: STATE 178303

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. The negotiations concluded
successfully in December 2006. As of early 2007, the
re-named &Trade Promotion Agreement8 remained subject to
final approval by the U.S. Congress and the Panama,s
National Assembly.


2. Traditionally, Panama has maintained a rather liberal
regime for foreign investment and investment in financial
instruments. The Government of Panama (GOP) 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 currently 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. Once ratified and implemented, the TPA
Panama will accord substantial market access to Panama,s
retail sector and across its entire services regimes, subject
to very few exceptions.


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 and bonds, as
well as other requirements.
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, Law 2 expands this
period for up to 90 years.


6. Land titling continues to be an issue for foreign
investors. Outside of Panama City and a few selected areas,
there is no formal land titling system. The Embassy is aware
of several cases where American citizens have had their real
estate title contested or where they have purchased land
without obtaining the requisite land title. Embassy is aware
of various schemes to defraud foreign real estate buyers in
such popular areas as Bocas del Toro. Law 2 of 2006
clarified ownership rights for Panamanian coastal and island
properties. Law 2 confirmed the validity of existing
&Rights of Possession8 (ROP) ownership rights (a concept
similar to squatter,s rights) and established a process to
convert ROP to a title (similar to a property title deed).
The underlying regulations remain in draft form and some are
concerned that indigenous holders of ROPs may be financially
unable to convert their ROPs to titles. Under Law 2, those
not in possession of a ROP for island property must now
obtain a concession from the GOP to continue occupying such
property. Some U.S. investors find themselves having to
defend their ROP rights against claims of previous title and
various spurious claims. The Panamanian courts are slow and
at times arbitrary in resolving property disputes.


7. Panama experienced a boom in foreign investment during
the late 1990s as a result of GOP privatization and
modernization efforts. 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.


8. 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. Historically,
the GOP pledged not to privatize its inefficient water and
sewage utility, its electric transmission company, &Atlapa8
(Panama,s primary convention center and the largest such
facility in Central America),or the Caja de Seguro Social
(Social Security System). However, in October 2006, GOP
officials began to discuss the possible privatizations of
various state-owned enterprises in order to lower the level
of public sector indebtedness.


9. 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.


10. 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 $1 billion in 2004 and
2005 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). A $600 million new megaport near
the Pacific entrance of the Panama Canal was announced by the
GOP in 2006. However, despite GOP efforts to attract bidders
in late 2006 for a contract to design, build and operate the
megaport, only five firms (including one US firm) bid on the
project. The project is currently being scaled back and its
future is uncertain.


11. On October 22, 2006, Panamanians voted by a margin of
78% to 22% to approve a $5.25 billion project to expand the
Panama Canal by constructing a new third set of locks, along
with new access navigational channels and deepening the
existing navigational channels and the depth of Gatun Lake.
In addition, voters approved the construction of a $300
million bridge over the Caribbean entrance to the Panama
Canal which was added to the canal expansion project by the
Panamanian legislature. Construction will begin in 2008 and
continue for seven to eight years. The project will be
financed through increased tolls and a budgeted $2.3 in debt
financing. Given the size of the project and the Panama
Canal Authority,s announced policies, foreign companies will
be able to bid on such contracts on the same terms and
conditions as Panamanian companies. Moreover, once ratified
and implemented, the TPA will ensure that U.S. suppliers are
granted non-discriminatory rights to bid on purchases of
Panamanian government ministries and other entities,
including the Panama Canal Authority. The TPA,s government
procurement provisions include the purchases of all of
Panama,s first-tier sub-central entities (comparable to U.S.
states); and requires fair and transparent procurement
procedures, including advance notice of purchases, and timely
and effective bid review procedures.


12. 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, as well as
a museum of ecology designed by world-renowned architect
Frank Ghery. In December 2005, the luxury resort, Playa
Bonita, was completed in the Farfan area on the Pacific
coast. On the former Howard Air Base, Dell Corporation opened
a customer service call center in August 2003 that employs
about 2,000 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.


13. Panamanian Law forbids monopolistic and anti-
competitive behavior. The GOP 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
combating false advertising, monopolistic practices and
unfair competition.

A.2. CONVERSION AND TRANSFER POLICIES


14. 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% in Panama during 2005 owing to high fuel prices,
it has since fallen to 2% as of late 2006. 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


15. 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.

A.4. DISPUTE SETTLEMENT


16. 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 are the processes always
transparent.


17. 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 the
investors often choose not to pursue remedies available to
them via the court system. The court system is slow and
prone to massive case backlogs and corruption.


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


19. 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.


20. Once ratified and implemented, the TPA will solidify the
legal framework for U.S. investors operating in Panama. All
forms of investment will be protected under the agreement,
including enterprises, debt, concessions and similar
contracts, and intellectual property. With very few
exceptions, U.S. investors will be treated as well as
Panamanian investors (or investors of any other country) in
the establishment, acquisition, and operation of investments
in Panama. The TPA draws from U.S. legal principles and
practices to provide U.S. investors in Panama substantive and
procedural protections that foreign investors currently enjoy
under the U.S. legal system. The TPA,s investor protections
are backed by a transparent, binding international
arbitration mechanism, under which investors may, at their
own initiative, bring claims against a government for an
alleged breach of the TPA,s investment chapter. Submissions
to investor-state arbitral tribunals will be made public, and
hearings will generally be open to the public. Tribunals
will also be authorized to accept amicus submissions from
non-disputing parties.



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

A.5. PERFORMANCE REQUIREMENTS/INCENTIVES


22. 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 and individuals in Panama pay no
tax on interest or other income earned outside Panama. No
taxes are withheld 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.


22. Law 8 of 1994 offers tax and other incentives to
investors in tourist industries. As part of the Torrijos,
Administration,s review of all fiscal incentive programs,
the GOP has decided to eliminate certain incentives contained
in Law 8. The GOP will remove the incentives granted to
investments in new casinos, shopping malls, and night clubs.
It is contemplated that the GOP will maintain the incentives
related to residential projects, such as hotels,
apartment-hotels, hostels and time shares.


23. 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


24. With the current 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. Once
ratified and implemented, the U.S.-Panama TPA Panama will
accord substantial market access across its entire services
regimes, subject to very few exceptions, using a "negative
list" approach. Under the TPA, Panama agreed to dismantle
significant services and investment barriers, such as lifting
restrictions on investment in retail trade, ensuring access
to contracts related to the Panama Canal, and providing new
access in professional services that previously had been
reserved exclusively to Panamanian nationals. This will
allow U.S. firms to take full advantage of the benefits of
the TPA across all sectors, including, but not limited to
express delivery, logistics, energy, audiovisual, computer,
construction, wholesaling, health, education, and
environmental services. U.S. financial service suppliers have
full rights to establish subsidiaries or branches for banks
and insurance companies. Portfolio managers in the U.S. will
be able to provide portfolio management services to both
mutual funds and pension funds in Panama. 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
profession are receptive toward attracting foreign business.

A.7. PROTECTION OF PROPERTY RIGHTS


25. 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
--------------


26. 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.


27. 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 comittee
consists of representatives of six government agencies and
operates under the leadership of the Vice-Minister of
Commerce. 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. The
U.S.-Panama TPA provides for improved standards for the
protection and enforcement of a broad range of intellectual
property rights, which are consistent with both U.S.
standards of protection and enforcement, and with emerging
international standards. Such improvements include
state-of-the-art protections for digital products such as
U.S. software, music, text, and videos and; stronger
protection for patents, trademarks and test data, including
an electronic system for the registration and maintenance of
trademarks.


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


28. 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.


29. 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
--------------


30. 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
--------------


31. 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 and the creation of a
Customer Service Center. The Trademark Registration Office
claims to be the most advanced in the region, with 90%
automation. This office reports that it has reduced
trademark registration processing time in half, 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


32. 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 had
complained for several years of arbitrariness or a lack of
responsiveness by officials responsible for issuing
sanitary/phytosanitary (SPS) permits for the importation of
agricultural products. They 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. In December
2006, the U.S. and Panama signed a bilateral agreement on SPS
measures in which the Panamanian government agreed to
recognize the equivalency of the U.S. food safety inspection
system and to require only USDA Food Safety Inspection
Service &Certificates of Wholesomeness8 (or other
applicable export certificates of U.S. authorities) for the
importation and sale of meat and poultry products from the
U.S. In February 2007, Panama,s Health and Agriculture
Ministries published resolutions formally granting this
equivalency. In early 2006, the Torrijos Administration
created the Panamanian Food Safety Authority (&AUPSA8),
which assumed control over the inspection of all food imports
into Panama as of November 15, 2006. AUPSA established an
online system to ensure transparency and prompt processing
for the importation of food products into Panama.


33. 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. The National Public Services
Authority,s director has taken steps to resolve regulatory
disputes in the electricity and telecommunications sectors.
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.


34. On July 12, 2006, Panama enacted Law 27 which allows the
Government of Panama to create enterprises to conduct oil and
gas exploration, distribution, production, storing,
industrialization, commercialization, importation,
exportation and refining activities. Certain American
companies have expressed concern that Law 27 is ambiguous and
may result in greater government intervention and
restrictions on the energy sector.

A.9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT


35. 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, transformed the previously inadequate regime
into one that is by and large able to meet international
standards. The Bank Superintendent has worked since 2004
toward bringing Panama,s bank supervision up to &Basel II8
standards. In July 2006, the Bank Superintendent reported
that Panama largely complies with the international standards
for effective bank supervision. However, the Superintendent
determined that, to fully meet Basel II standards, Panama
needs to bolster and modify its regulatory framework for
banks in areas such as capital adequacy; liquidity, market
risk, and loan and investment portfolio ratings.


36. 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 8.3% in 2005 and increased to 9.00% as of December
12, 2006. The six-month domestic deposit rate was 3.0% as of
December 12, 2006. Total assets in Panama's banking system
topped $44.8 billion in December 2005 and grew to $49.5
billion as of September 30, 2006.


37. 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.


38. In 2006, Panama, El Salvador and Costa Rica entered into
an agreement to develop a regional, centralized stock
exchange in 2007. The goal of the exchange is to provide
greater liquidity to the existing exchanges. The new
exchange will be U.S. dollar-denominated, trade equity and
debt issues, and will operate in addition to, and not
replace, the existing national exchanges.


39. 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 is 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.


40. 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


41. 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 2006, police showed restraint and professionalism
while monitoring protests by retirees, students, political
activists, and the teachers, union.


42. Political violence in Panama since the end of the
Noriega 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
protesters. The charges were subsequently dismissed when the
police presented video evidence that they acted in
self-defense. September 2003 protests spurred by the ouster
of Social Security Director Juan Jovane turned violent when
construction workers led by the 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.


43. 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 increased
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 overall unemployment rate (officially
at 8.6% as of late 2006, but much higher in certain areas),
increasing gang-related activity and a growing use of illicit
drugs have been cited as the chief causes of crime.

A.11. CORRUPTION


44. 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 general perception is that anti corruption laws
are not applied rigorously and that the government
enforcement bodies, such as the Comptroller General's and the
Attorney General's offices, have 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. However, the
Torrijos Administration has since rescinded some of its
anti-corruption measures. In July 2006, President Torrijos
signed Law 25 which restored some of the legislative
immunities eliminated in earlier constitutional reforms. 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 sector
also hinders systemic change.


45. Allegations of corruption have been endemic for many
years. 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 and 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.


46. Since taking office in September 2004, the Torrijos
Administration took 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.


47. Corruption in Panama's Supreme Court remains a
significant 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).


48. Although Panama's overall efforts to combat public
corruption have been lackluster, both the Attorney General
and Comptroller General have worked to improve the
transparency of their organizations and pursue public
corruption. The GOP has also launched new websites, such as
"Panama Compra" ("Panama Buys"),to foster greater
transparency. All GOP agencies must now post procurement
solicitations online and will only be able to receive online
bids. Awards will be posted on the website. The GOP has
also launched &Panama Tramita8 (&Panama Transacts8) and
&Panama Emprenda8 (&Panama Undertakes8) and other online
systems to simplify and increase transparency in government
bureaucratic processes and in establishing new businesses.


B. BILATERAL TRADE AND INVESTMENT AGREEMENTS


49. The U.S. and Panama concluded negotiations on a &Trade
Promotion Agreement8 (TPA) in December 2006. As of early
2007, the TPA remained pending signature and final approval
by the U.S. Congress and Panama,s National Assembly. Panama
currently has bilateral free trade agreements with El
Salvador, Taiwan (Taiwan's first such accord),and Singapore.
In December 2006, Panama,s National Assembly unanimously
approved the Panama-Chile free trade agreement. 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 bilateral free trade agreements with Guatemala
and Costa Rica. 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. For example, 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.


50. 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 (BIT) to reflect
Panama's joining the International Center for the Settlement
of Investment Disputes (ICSID). Once the U.S.-Panama TPA is
ratified and implemented, it would supersede the BIT.


C. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS


51. The United States and Panama signed a comprehensive
Overseas Private Investment Corporation (OPIC) agreement in
April 2000. 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


52. 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.


53. According to the GOP figures, Panama's non-indigenous
labor force as of August 2006 was approximately 2.14 million,
with 85% employed in the private sector and 15% in the public
sector. As of August 2006, non-indigenous unemployment
officially declined to 9.1% from 10.3% in 2005, however, the
GOP reports underemployment to be at 22.7% as of August 2006.
Pockets of chronic high unemployment continue, notably in
the provinces of Colon and Panama, where several districts
have unemployment rates in excess of 10%. In February 2006,
the GOP hiked Panama's minimum wage by 8% raising the monthly
minimum wage from $263 per month to $284.


54. Labor unions hold some political influence in Panamanian
society and often protest in order to further their
objectives.


55. While the GOP 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. Employers frequently cite the lack
of skilled labor as a constraint to growth. In connection
with the Panama Canal expansion and in recognition of the
skilled worker shortage, the GOP, through the National
Institute for Professional Formation and Training, has
embarked on a $55 million worker training program.


E. FOREIGN TRADE ZONES/FREE PORTS


56. 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. Of the 39 companies
licensed to operate call centers, only 16 have begun
operations. The call centers are operated mostly by U.S.
companies and employ approximately 10,000 persons. 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. In 2006, Singapore Technologies Aerospace entered
into an arrangement to use the facility to provide aircraft
heavy maintenance services. Also in 2006, IP Leather and
River Latin-America announced an $18 million investment using
the Howard Air Base facilities.


F. FOREIGN DIRECT INVESTMENT STATISTICS

See Appendices.

MAJOR FOREIGN INVESTORS

- AES Corporation
- American Airlines
- American Life Insurance Co.
- Ashmore Investment Ltd.
- Banco Azteca
- Banco Do Brasil
- Banco Cuscatlan
- Boeing
- Bristol Laboratories International Corp.
- Burger King Corp.
- Cable and Wireless (U.K.)
- Chiriqui Land Company (Chiquita)
- Chevron-Texaco
- Citibank, N.A.
- Clientlogic
- Coca-Cola Bottling Co.
- Colgate Palmolive
- Compania Recreativos S.A. (CODERE)
- Continental Airlines
- Decameron Hotels
- Dell Computers
- Delta Airlines
- DHL
- Dunkin Donuts
- El Paso Energy
- ENEL
- Exxon Corp.
- Evergreen Corp.
- Federal Express
- General Electric Consumer Finance
- Glidden
- Globeleq Ltd.
- Goldstar Corp
- Group Mall
- Grupo Olloqui
- 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
- Kentucky Fried Chicken
- Kraft Foods, Inc.
- Maersk-Sealand
- Mail Boxes Etc.
- Marriott Hotel Corporation
- McCann-Erikson
- McDonald's Corporation
- Microsoft
- Mi-Jack Products
- Nabisco Brands Inc.
- NARS - National Asset Recovery Services, Inc.
- Nestle Company
- Office Depot
- Chas. Pfizer & Company, Inc.
- Panasonic Latin America
- Pepsi Co., Inc.
- Phillip Morris, Inc.
- PriceSmart
- Produbank
- PSINet
- PYCSA, S.A.
- SAB Brewing
- Samsung Electronics
- Schering Corp. International
- Singapore Technologies Aerospace
- Shell Co. (WI) Ltd.
- SITEL
- Sol Melia
- Sony Corporation
- Starwood Hotels
- Sterling Drugs International
- Stevedoring Services of America
- Swift and Company
- Swiss Bank Corp.
- Technoserve Inc.
- Union Fenosa, S.A.
- UNISYS USA
- Universal Fidelity corp.
- Wendys Restaurants

ECONOMIC AND TRADE STATISTICS

APPENDIX A: Country Data - Panama

Population: 3,280.00 (2006)
Population Growth Rate: 1.4% annual (est. 5 year average)
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 U.S. dollars
unless otherwise indicated)

2004 2005 2006
Current GDP (base 1996 U.S. Dollar) 13,099 14,005(1)
15,125(2)
Real GDP Growth Rate (%) 7.5% 6.9% 8.0%
Current GDP Per Capita (base 1996 U.S. Dollar) 4,131 4,318
4,611
Central Government Spending (as % of GDP) 19.8% 19.0% 27.7%(3)
Inflation (CPI, end of period) (%) 2.0% 3.5% 2.5%
Unemployment (%) 11.8% 9.6% 8.6%(4)
Foreign Exchange Reserves (5) 634(1) 1,218(2)
1,168(2)
Balance of the Trust Fund (6) 1,216 1,151 1,136(7)
Average Exchange Rate (Panamanian Balboa to U.S. Dollar)
1.00 1.00 1.00
Public Debt to GDP ratio 70% 66% 60%

Source: GOP Comptroller General and Ministry of Economy and
Finance
(1) Preliminary figure.
(2) Estimated.
(3) Superintendent of Banks
(4) As of August 2006.
(5) According to the IMF definition, since Panama does not
have international reserves as conventionally defined, this
includes Panama,s reserve position at the IMF.
(6) The Trust Fund contains the proceeds from the
privatization of government enterprises.
(7) Unaudited as of June 30, 2006.
APPENDIX C: Trade (in millions U.S. Dollars)
2004 2005 2006 (thru Sept.)
Total Country Merchandise Exports 891.1 963.2 797.9
Total Country Merchandise Imports 3,592.2 4,152.8
3,613.3
U.S. Share of Panama Imports 28.9% 27.3% 26.6%
U.S. Share of Panama Exports 48.6% 43.5% 38.7%

Source: GOP Ministry of Commerce and Industry; Comptroller
General; 2006

The figures above do not include trade to/from the Colon Free
Zone (CFZ),which the GOP keeps separate from official GDP
figures. In 2006, the CFZ imported USD 7.04 billion and
re-exported USD 7.52 billion. These levels reflect an
increase in free zone imports of 13.3 percent, and an
increase in re-exports of 12.9 percent, compared to 2005.
The total net contribution of the CFZ to the Panamanian trade
balance for 2006 (Exports-Imports) was USD 480 million, down
from 2005, when the surplus was USD 689 million.

APPENDIX D: Investment Statistics

Foreign Direct Investment (FDI) in Panama
1997-2005
(In nominal 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 11,456 4.51%
2000 623.8 11,620 5.37%
2001 467.1 11,807 3.95%
2002 98.6 12,272 0.80%
2003 817.5 12,933 6.32%
2004 1,003.9 14,179 7.08%
2005 1,027.0 15,483 6.63%

Source: GOP Comptroller General,s Office


Foreign Investment in Panama
By Country or Area of Origin 2004(1)

US$ Thousands Percent of total
Net FDI
Spain 253,196 25.22%
Hong Kong $72,106 7.18%
United States $70,804 7.05%
South Korea $66,175 6.59%
Japan $61,200 6.09%
Switzerland $52,824 5.26%
Venezuela $35,712 3.55%
Taiwan $20,929 2.08%
Argentina $18,895 1.88%
Costa Rica $12,737 1.27%
Ecuador $3,228 0.32%
Canada $1,549 0.15
Others $683,802 68.12%
Mexico ($27,538) (2.74%)
United Kingdom ($39,221) (3.90%)
Colombia ($282,550) (28.15%)
Total $1,003,848 100%

Source: GOP Comptroller General,s Office
(1) Preliminary figures.

Foreign Direct Investment
By Sector 2005

US$ Millions Percent of Total %
Colon Free Zone Businesses 440.9 42.9%
Banks, Int,l License 110.6 10.8%
Banks, General License 169.7 16.5%
Other Businesses 305.8 29.8%
Total 1,027.0 100%
Source: GOP Comptroller General,s Office
Eaton