Introduction

Panama is, and will continue to be, an attractive destination for foreign direct investment (FDI), which has continued to flow into the country at a significant rate throughout 2023. Last year, GDP grew by 7.5%, surpassing the expectations set by the International Monetary Fund for the third consecutive year. This impressive growth was accompanied by significant improvements in the country’s legal and regulatory framework for anti-money laundering (AML) and countering the financing of terrorism (CFT). Indeed, Panama’s removal from the Financial Action Task Force (FATF) grey list in October 2023, followed by its delisting from the “high-risk countries” category in March 2024, once again solidified Panama’s status as a reliable international business hub.

However, the sudden government closure of the First Quantum (FQ) copper mine in Panama, which began its export operations in 2019, presents a challenge to the country’s economic landscape. FQ’s operation accounted for approximately 5% of the country’s GDP and 7.5% of exports of goods and services. Partially due to this factor, GDP growth is expected to decrease to 2.5% in 2024, marking a sharp deceleration compared to 2022 and 2023. Nonetheless, the mine’s closure is widely considered a suis generis event.

In 2022, Panama witnessed a record-breaking number of M&A deals, catching up on transactions delayed by the pandemic. Subsequently, and in line with global trends, 2023 faced a slowdown in the number and size of deals, and this has persisted into the first half of 2024. Panama is now in an election year, however, and each of the frontrunner candidates has pledged (and is widely expected) to maintain Panama’s business-friendly course by fostering and facilitating policies to further secure investment and attract international cross-border capital. There is anticipation of a resurgence in M&A activity once the new government takes office, especially considering the recent positive trends in Panama’s international standing; a continued post-election, business-friendly climate; and the new public works and investment projects expected with any new incoming government.

Notable Acquisitions

The majority of M&A transactions taking place in Panama are cross-border, due in part to the flexibility and familiarity of its corporate law (modelled after 1927 Delaware law), its dollarised economy and proximity to the US market. Coupled with its central geographical position and territorial system of taxation, this makes Panama an ideal home base and strategic entry point for many multinational and regional companies’ operations and forays into Latin America. Notable acquisitions in 2023 spanned various sectors, including logistics, finance, and energy, reflecting the diverse investment landscape in Panama. For instance, PSA Marine expanded its presence in Panama by acquiring a 45% stake in Meyers Tug, a leading tug fleet company offering towage services between the Pacific and Atlantic coasts. EnfraGen, through its affiliate Fontus Spain, strengthened its market presence in Panama by acquiring, from Celsia, the energy arm of Grupo Argos, a portion of its Panamanian and Costa Rican generation assets, including hydroelectric, solar and wind farms. Similarly, Fanatics, a prominent global digital and licensing sports platform, bolstered its market presence by acquiring Panama-headquartered Fexpro, a top wholesaler of licensed sports and branded apparel in Latin America.

In the finance and banking sectors, Inversiones Atlántida, one of the largest financial services groups in Central America, acquired Pacific Bank in its entirety, a privately held general licence bank in Panama, strengthening its position in the Panamanian banking sector. Furthermore, Moody’s acquisition of SCRiesgo, a reputable group of risk rating agencies operating in Central America and the Dominican Republic, had significant implications for the Panamanian financial sector. SCRiesgo’s operations in Panama merged with Moody’s Local Panama, underscoring Panama’s importance as a strategic market for Moody’s regional expansion efforts.

Navigating Economic Challenges

The recent closure of the First Quantum copper mine in Panama has posed challenges to the country’s economic landscape, as evidenced by the revised downward credit rating by S&P Global and Fitch Ratings, and the IMF’s adjustment of GDP growth projections for 2024 to a modest 2.5%. Concerns exist regarding further potential investment downgrades due to budget deficits and rising debt. However, the international market appears to have already factored this risk into Panamanian sovereign bond spreads. Furthermore, Panama’s financial sector remains robust as Moody’s recent stable outlook for Panama’s banking system gives testament, citing expectations that the banks’ strong performance will counterbalance the country’s expected economic contraction in 2024. Despite the near-term uncertainties, there is a sense of optimism as Panama gears up for the latter part of the year, particularly post the presidential elections, with the anticipation of a centrist administration favourable to business.

Furthermore, in July 2023, the United States and Panama forged an alliance to explore opportunities aimed at strengthening and diversifying the global semiconductor landscape. Panama and Costa Rica were the only Latin American countries selected to be part of these strategic partnerships, which are part of the International Technology Security and Innovation Fund, created by the CHIPS Act of 2022. This collaboration with the United States, along with the recent implementation of the EMMA regime, which provides special tax incentives to companies offering manufacturing services, is expected to drive nearshoring in Panama and encourage foreign investment in the coming years.

Regulatory Developments in the Financial Sector

Following diligent efforts by the current administration in recent years, Panama achieved a significant milestone by being removed from the FATF grey list in October 2023, and subsequently, from the list of “high-risk countries” of the European Union in March 2024. Each of the frontrunner presidential candidates is committed to further strengthening transparency and information exchange commitments so as to also soon remove Panama from the EU list of non-cooperative jurisdictions for tax purposes. Panama’s commitment to enhancing financial transparency is expected to generate greater agility in the closing of transactions and continue to improve the image and reputation of the country.

Moreover, Panama made a significant stride towards a Basel III-compliant capital buffer framework by introducing the capital conservation buffer (CCB) regulation last year. This regulation is being implemented progressively, starting in 2024, and mandating banks to establish, by July 2026, a capital conservation buffer equivalent to 2.5% of risk-weighted assets. This regulatory framework is expected to stimulate consolidation within the banking sector and pave the way for increased M&A activity among small and mid-sized players in the latter half of 2024, and beyond.

Sectors Poised for Increased M&A Activity

Panama’s M&A market shows encouraging signs for the second half of 2024. The most active sectors for M&A activity in 2024 will likely be in the hospitality, logistics and commodities sectors, followed by energy (renewables) and further consolidation in the banking industry.

The substantial revenue contribution of approximately USD900 million from the tourism industry to Panama’s economy in 2023 is expected to significantly boost M&A activity in the hospitality sector. By some figures, Panama’s successful tourism promotion efforts abroad have resulted in more than a 70% increase in travel to the country, compared to 2022. Occupancy rates in Panama City during 2023 reached 90%, while Panama’s other provinces, with only an estimated 3,000 hotel beds, are substantially underdeveloped. To that end, Hotel Panamonte, a renowned establishment in the highlands of Boquete, has announced a strategic alliance with local investors aimed at expanding its services and facilities, potentially boosting economic growth in the region. Additionally, prominent hospitality groups have expressed interest in expanding their presence in some tourist destinations in Panama, particularly through the potential acquisition, renovation and restoration of renowned hotels in the countryside.

Consequently, a boost in investments and M&A activity in the hospitality sector is expected, in particular in areas outside the capital city, driven by an increase in tourism, attractive pricing of previously under-performing real estate assets, and government incentives and tax benefits related to capital-intensive tourism projects.

Growth of Fintech Start-ups

As highlighted in last year’s edition of this guide, Panama is home to a rapidly growing fintech ecosystem. According to the Finnovating Fintech Global Vision 2023 report, Panama hosts over 201 start-ups spanning various sectors, including electronic payments, investment platforms and online lending.

Finnovating, an international platform connecting fintech businesses and investors, ranks Panama as having a maturity index of 46% and a collaboration index of 79%. These ratings highlight a conducive environment for fintech companies to flourish in the region, and underscore a robust culture of teamwork and co-operation within Panama’s fintech industry. The majority of start-ups in Panama focus on B2B solutions, with many offering payment services and others specialising in lending and financial solutions. It is anticipated that the local fintech scene in Panama will continue to gain ground, attracting interest and investments both locally and internationally. This growth trend underscores Panama’s potential as a burgeoning hub for financial technology innovation, further solidifying its position as an attractive destination for stakeholders seeking opportunities in the fintech sector.

Outlook for 2024 and Beyond

At Panama’s 2024 general elections in May, there is anticipation that a centrist, pro-business administration will assume office, which is expected to sustain a positive investment environment for FDI and emerging market players, barring any unexpected developments.

Since the peak of the pandemic, Panama has undertaken significant fiscal consolidation, with the non-financial public sector (NFPS) reducing its fiscal deficit from 10.2% of GDP in 2020 to 3.0% in 2023. This consolidation was driven by increased revenues and reduced public investment, although interest payments saw a rise. Looking ahead to 2024, the government aims to further decrease the fiscal deficit to 2.0% of GDP, despite authorising a notable increase in spending, particularly allocated to higher investment, interest payments, and mandated education expenditures.

Long-term solutions require a multi-year plan to further reduce the deficit, likely through tax reforms. The upcoming government is expected to focus on improving tax collection efficiency, broadening the tax base by reducing exemptions, and potentially raising tax rates such as VAT and fuel taxes. The social security system also faces a funding shortage and will require drastic reforms in the very near future to ensure its sustainability.

Investing in infrastructure will be a key component of any future government’s plan to stimulate economic growth. Major projects like the construction of the Fourth Bridge over the Panama Canal and the first public-private partnership (PPP) project exemplify this commitment. The first PPP contract, signed in February 2024, involves the rehabilitation and improvement of a critical 246 km stretch of the Pan-American Highway. This project is expected to directly benefit over 145,000 people, create 1,300 jobs during construction, and contribute significantly to the development of agriculture, commerce and tourism in the region. This initiative is part of a broader programme that aims to maintain 2,000 km of roads and highways across the country, through the PPP regime. Additionally, some of the main infrastructure investment proposals of the leading presidential candidates include the construction of a railroad from Panama City to Chiriquí and the creation of a logistics corridor between Panama and Colón, connecting ports and airports, expanding key infrastructures with the building, for example, of a third airport runway, and developing cargo carrying and employment potential.

Looking ahead, Panama’s economic recovery, coupled with an upcoming centrist, pro-business government and the market’s confidence in its stability, will create a fertile ground for continued growth in FDI and M&A activity in 2024 and beyond. While deal flow might not reach the extraordinary levels witnessed in 2022, sustained activity is still anticipated.