Gateway to the Americas: Discover Panama’s strategy to be in pole position in Latin America

In 1513, Vasco Núñez de Balboa, a Spanish conquistador, climbed a small mountain in Panama and looked out on an unexpected expanse of blue. He was the first European to see the Pacific Ocean from the New World. The short distance between the Atlantic and Pacific Oceans, as little as 30 miles (48 kilometers), also caught the attention of Simón Bolívar, a Venezuelan military and political leader who led much of Latin America’s independence from Spain. In 1815, he predicted that, in time, Panama would become “the emporium of the universe” by reducing the distances for global trade.

Laurentino Cortizo, Panama’s current president, is taking steps to realize this potential to make the country the most attractive hub and gateway for business, e-commerce and trade in Latin America.

“We want to consolidate as the best business center for services and logistics in Latin America,” he said in his inaugural speech on July 1, 2019.

He has his work cut out for him. The Panamanian economy slowed to 3.7% growth in 2018 and then 3% in 2019, its worst performances since 1.2% in 2009, according to statistics agency INEC.

The economy took a harder hit in 2020. Before the pandemic, the World Bank had forecast a 4.2% rebound for the year. But the COVID-19 crisis instead cut that to a 2% contraction, and caused the expected recovery not only to be delayed until 2021, but also to be reduced from 4.6% to 4.2%. Dulcidio De La Guardia, a former minister of economy and finance in Panama and a partner at the law practice Morgan & Morgan Group, points out that, while copper production should rise, the impact of the pandemic on government infrastructure spending and tourism is dampening growth prospects.

Panama’s misfortunes, however, are not as dire as those of other countries in the region, which could see a contraction of 7.2% in 2020, one of its worst on record, led by its three biggest economies – Argentina, Brazil and Mexico. And De La Guardia says that Panama “has all the key ingredients for multinational companies to set up their headquarters,” – from air connectivity and logistics efficiency to a business-friendly process for bringing in foreign staff. This should add incentive for companies who are betting on Panama as a more stable hub and economy for doing business in Latin America.

Cortizo’s initiative to up Panama’s profile as a hub follows on nearly two centuries of infrastructure works to harness the geographical advantages of the isthmus for world trade – from the construction of an interoceanic railroad in the 1850s to the opening of the 82-kilometer Panama Canal in 1914. The canal slashed transit costs and times, giving ships a welcome shortcut and alternative to the long and treacherous journey around the southern edge of South America and the even less popular Arctic routes.

Traffic has surged from fewer than 1,000 crossings in the first full year of activity to surpass 13,700 in 2019, according to the Panama Canal Authority (ACP). Its growth was augmented by a more than $5 billion expansion of the canal from 2007 to 2016 to accommodate the increasing number of supertankers in global trade – including those transporting soybeans, sugar and other products in bulk. The amount of cargo shipped through the canal increased by 38% – from 340.8 million Panama Canal/Universal Measurement System (PC/UMS) tons in fiscal year 2015 to 469.5 million PC/UMS tons in 2019, according to the ACP.

The project also fueled economic growth of an average of 7% per year between 2010 and 2017, one of the fastest rates in the region, which has helped make Panamanians some of the wealthiest Latin Americans in 2019, according to Latinex.

With the bustling economy boosting a rise in tax revenue, the government poured money into building the first two lines of the Panama Metro – easing traffic in Panama City – and the construction of a second terminal at Tocumen International Airport, the country’s busiest. In the pipeline are a third metro line, a widening of the Inter-American Highway and a fourth bridge over the Panama Canal. A $4.1 billion high-speed railway, which would be the first in Central America, has also been proposed.

Panama’s 2030 National Logistics Strategy, approved in 2017, calls for enhancing infrastructure to make the country even more competitive in trade. Projects call for the construction of multipurpose port facilities as well as solutions to bottlenecks and over-capacity challenges in the ports, helping to speed up logistics.

According to the World Bank’s most recent Logistics Performance Index, published in 2018, Panama has the best logistics services in Latin America and is ranked 38th in the world. Its ports are the largest in Latin America. The Colón Free Zone on the Atlantic is the second-largest free trade zone in the world after Hong Kong, with another substantial free trade zone, Panamá Pacífico, on the other side of the slender country. And Copa Airlines, the flag carrier, has direct flights to 80 destinations.

“All of this together makes for amazing connectivity in the region,” says John Otto Knohr Guardia, Country Manager, Panama, DHL Global Forwarding. “That’s the key factor for having a hub.”

According to the Ministry of Commerce and Industry, more than 150 multinational companies have set up regional headquarters in Panama since 2007, including the world’s largest pharmaceutical companies – such as Pfizer, Hoffmann-LaRoche and Sanofi Aventis – and major consumer and technology brands – such as Adidas, LG Electronics, Huawei, Red Bull and Samsung.

This makes sense. “Instead of having a warehouse and inventory in each country in the region, you have one warehouse in the free zone in Panama, and you’re only one day away from each market in the region,” Knohr Guardia says.

This consolidation cuts distribution and inventory costs, and makes it easier to meet the different regulations around the region, he adds. A pharmaceuticals manufacturer, for example, can stock its inventory in Panama and use inkjet printing to tailor the product labels for each market. If there is a change in the regulations in Ecuador, for example, but the product is already in transit from Germany with a label, then adaptations will take longer, he says. “If you have the product in Panama without the specifics, then you can add the specifics and send it out at the last minute to the destination market.”

It’s similar with technology products, which can become obsolete fast, and automotive spare parts that can be slow to sell. Instead of stocking them in each country, where the goods can sit for months, “it’s better to have the inventory in one place and to send the right product at the right time to the right market,” Knohr Guardia says. “You can save a lot of money on inventory.”

President Cortizo wants to expand the warehousing and distribution business by encouraging more companies to do light assembly, customization, repairs and updates locally, helping to sustain economic and job growth over the long term.

By way of illustration, Knohr Guardia points out that footwear-makers are starting to do this by bringing in shoes, opening the boxes, putting on the label and sales price for each country, then loading them into containers segmented by store for easy delivery.

According to Mike Parra, CEO DHL Express Americas, Panama has an opportunity to become “a specialized location for product assembly and value-added services, such as a repair hub for the tech industry,” or a distribution hub for smaller quantities of temperature-controlled biologics and personalized medicine.

“Stock orders and emergency orders can be fulfilled within 24 to 48 hours,” he says.

To speed up the process even more, the government plans to build warehouses at the end of the runway at Tocumen Airport, part of its strategy to make the country the best hub for e-commerce in Latin America. Having storage capacity right at the airport – as opposed to kilometers away – makes aircraft delivery cheaper and faster than bringing goods in through traffic from off-site warehouses.

This is key for e-commerce, a fast-growing business in Latin America – and vital to the post-COVID-19 economy. The world’s biggest e-commerce marketplaces, such as Amazon and Alibaba, are looking at how to fulfill cross-border sales to meet the rising demand. Panama is the best positioned to capture their business thanks to its easy and fast connectivity, free trade zones and professional support, according to Americas Market Intelligence. The research firm has found that Panama City’s readiness to become a hub for drop shipping into the region beats that of Miami, Montevideo and Los Angeles – and labor costs are 30% to 40% lower than in U.S. cities.

More companies are looking at Panama as a strategic geographic location for consolidating their warehousing and cross-border distribution to Latin America. “It’s a strategic point for forwarding,” says Parra. “Once you bring products in by ocean and you stock them in a free trade zone, you can immediately turn around and have them delivered to the end consumer within 24 to 48 hours.”

Other advantages of using Panama as a hub are fiscal incentives; a stable, U.S.-dollar-based economy; a large financial services sector; and major fiber-optic cables. Whereas in much of the region plans and policies change with each government, Panama has “a long-term view on logistics,” Knohr Guardia says.

Cortizo is also focusing on cleaning up politics after a spate of corruption scandals over the past decade or so, helping to improve the business climate.

“This is a new beginning, to rescue Panama,” Cortizo said at his inauguration of his proposal to improve the country’s image.

He also wants to tackle the country’s high inequality: 14.1% of Panamanians live in poverty despite the economic boom, according to the World Bank. Although this is a substantial reduction from the 40.5% poverty rate in 2001, a further reduction must come from improving education and health care, the president says.

He has a lot to do. According to the latest results from PISA, an international assessment of  performance, Panama was in the bottom 10 in 2018.

De La Guardia maintains the education system must be overhauled “to sustain economic growth in the long term,” as it will be key for training the future workforce to meet demand from businesses who want to use Panama as a hub. Other challenges include improving the rule of law and providing more checks and balances on the branches of government.

“Everybody is aware that these are issues that we should tackle,” he explains. “It’s just a matter of getting them done. It will take a while, but I’m optimistic that they will get done.”

DHL’s Parra concurs: “We’ve seen growth in Panama since the pandemic started. I see a bright future for the country. The connectivity is good and you have a strong infrastructure. Now it’s time to leverage it for growth.” — Charles Newbery

Published: December 2020

Images: Kathy Tuite/EyeEm/Getty Images; Sergi Reboredo/Alamy/mauritius images; Bertrand Rieger/hemis.fr/ddp; Adobe Stock; Daniel Slim/AFP/Getty Images