Interview with Panama's Minister of Finance, Dulcidio de la Guardia

Panama’s GDP growth rate has slowed under this administration; why is that?

Panama has not just maintained one of the highest economic growth rates in Latin America for a long time, as confirmed by international organisations such as the International Monetary Fund, the World Bank and the Economic Commission for Latin America (CEPAL), but also shown that this growth rate is sustainable for at least the medium term. The annual growth projections range between 5.7% and 6%, in an environment of low inflation, in a stable financial system and a falling current account deficit. The fiscal outlook is consistent with a reduction of the debt-to-GDP ratio.

Of course part of the economy is related to the world economy, which today finds itself in uncertainty or instability. These sectors have suffered and have not maintained the rhythm of growth that they had in previous years. Nonetheless the fact that Panama has a diversified economy has helped as the growth other sectors of the economy, such as construction and finance, have compensated. As a result the Panamanian economy maintains its position as a leader in Latin America.

Panama’s dollarization means that its economy has lost competitiveness compared to its neighbours; how has that hit the economy?

It’s true that the rising dollar has impacted the competitiveness of some export-focused industries. For example, in the farming sector the non-traditional exports, especially the fruits sent to the European market, have earned less per tonne. In tourism there has been a fall in the spend of tourists from Central and South America, where currencies have depreciated. Nevertheless the appreciation of the dollar has made imports cheaper. Combined with the fall of commodities that has generated huge savings, for example in fuels, where $200million was saved in 2015.

Panama recently completed the expansion of the Canal; what impact has this mega infrastructure project had on the wider economy?

In 2006 the Panamanian people voted to expand the Canal and the construction began in 2007 with a cost of $5.25billion. The project had two phases that have in a multiplier effect for the economy in terms of investment and consumption. During the construction stage we saw increased demand for building materials. There was also a significant impact on labour services with approximately 30,000 people employed. There was also a boost for tourism as people came to see the inauguration of this incredible project in June 2016.

According to the Panama Canal Authority the expanded canal has already served 200 ships, with 204 more booked in for future crossings. That shows that the Canal is living up to expectations and we can be optimistic that traffic will grow. Moreover it improves the competitive advantages of Panama as a strategic location for other types of services, such as: transport and logistics, marine, tourism, financial, legal and telecommunications. All of which will lead to a boost in our exports. So the Canal remains a key motor in the Panamanian economy.

Looking further forward; how will Panama use the Canal expansion to add more value and create new sectors in the economy?

On a global level it will produce a reduction of prices for international trade owing to the lower costs and times for transport, which should help boost world trade and shipping activity. So there is a positive impact inside and outside the country. The expansion of the Canal will create new business opportunities, principally in the logistics sector. There is also lots of potential for energy with the transport of LNG from the Caribbean to Asia, and the centre of liquid fuels developed by Chevron and Vopak. All of these investments will push the role of Panama as a principal actor in international commerce.

Where are the opportunities in Panama for British investors?

Panama is looking to attract more British investment to our country. At the moment the UK is the third-largest foreign direct investor in Panama, with around 50 British companies operating in our territory and investments worth $3billion. One reason British investors like the country is that we are, along with Chile, the most competitive country in Latin America, according to the World Economic Forum. The geopolitical position, economic stability, availability of financial services and our envied logistics platform make Panama the hub of the region, for excellence and the perfect destination for UK firms that want to connect with the rest of the region.

Our strong attraction to investors is reflected in the statistics. In 2015 FDI grew by 15% compared to 2014 and these capital flows represented 45% of the total to Central America in the same period. So far in 2016 FDI has remained strong, growing 8.2% in the second quarter of the year.

How did the ‘Panama Papers’ incident impact Panama’s global reputation and status as an international financial centre?

As of today the economic indicators suggest that this incident has not had the impact that some anticipated. Financial intermediation grew by 4.6% in the first quarter of 2016 but after the Panama Papers it grew by 9% in the second quarter. The same can be seen in the financial system, where assets grew $4.4billion by June 2016 – 4.6% more than in the same period of the previous year. We saw similar behaviour in bank deposits, which grew 5.3% in the first quarter of the year. Panama’s sovereign bonds have also held up strongly and are outperforming the bonds of similarly rated Latin American peers. And, as I mentioned before the inward FDI rose by 8.4% in the second quarter of the year, which is even better that the 4.2% growth seen in the first quarter.

"This attack on the image of our country has not caused the major credit agencies to change their outlook on Panama…"

This attack on the image of our country has not caused the major credit agencies to change their outlook on Panama. Indeed our investment grade rating means that we are having the cheapest financing in our history. All of these indicators that I have mentioned show that international investors continue to see the potential in Panama’s economy.

How has Panamanian government responded to the Panama Papers?

We have launched a diplomatic and media push to protect the reputation of our country and clarify the facts to a global audience. Also we have continued our drive for fiscal and financial transparency, which has been underway for several years.   For example we have taken various steps to modernise the regulations governing financial services and we have signed up to bilateral tax exchange agreements that have made the system more transparent and have allowed, among other things, for Panama to be removed from the ‘Grey List’ of GAFI. The removal from the list shows that the government has taken concrete steps to prevent Panama being used as a hub for money laundering.  Another fundamental step is the move to end bearer shares and the creation of the Superintendence for the Supervision and Regulation of Non-Financials.

Do you think that Panama is treated unfairly by global authorities and press, given that loopholes, such as Delaware, exist in other jurisdictions?

The Republic of Panama respects the sovereign decisions that countries take for the development of their economies. Nevertheless we feel that when it comes to ensuring the fulfilment of these obligations of financial conduct on an international level, the same criteria should be used for all.