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Panama

Panama
Score Rank
Financial Standards Index 36.67 out of 100 58
Business Indicator Index 9.73 out of 12 39

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Overall Standards Summary

Panama achieves low overall compliance with international standards and codes, with a score of 36.67 out of 100 in our Standards Compliance Index. The compliance with macroeconomic policy and data transparency fundamentals is mixed, since Panama has a specific macroeconomic scenario. Panama has used the dollar as the country’s de facto currency throughout the entirety of its modern history, therefore, it has never established its own central bank, and its monetary policy is determined by the United States Federal Reserve. In 2008, Panama put in place a new Social and Fiscal Responsibility Law, along with other significant requirements. While these measures should increase fiscal transparency, there is insufficient information addressing Panama’s fiscal framework. Thus, the country achieves a high level of compliance with monetary policy transparency, but cannot be assessed against fiscal policy transparency. Regarding Panama’s compliance with institutional and market infrastructure standards, the country has made progress in areas such as corporate governance, anti-money laundering, and auditing practices. In Panama there is no real-time gross settlement system, and not all types of companies are required to adopt International Financial Reporting Standards. Regarding financial regulation and supervision standards, although Panama has a high degree of compliance with banking supervision principles, it has significant shortcomings pertaining to securities regulations practices, and shows a weak compliance with the Insurance Core Principles, although a draft law is expected to address some of the shortcomings.

Choose a standard for a detailed compliance report:
12 Key Standards for Sound Financial Systems

Compliance Level
Special Data Dissemination Standard
ID
Code of Good Practices on Transparency in Monetary Policy
FC
Code of Good Practices on Transparency in Fiscal Policy
II
Effective Insolvency and Creditor Rights Systems
II
International Financial Reporting Standards
NC
Principles of Corporate Governance
EN
International Standards on Auditing
EN
Anti-Money Laundering/Combating Terrorist Financing Standard
EN
Core Principles for Systemically Important Payment Systems
II
Core Principles for Effective Banking Supervision
CP
Objectives and Principles of Securities Regulation
ID
Insurance Core Principles
NC
II = Insufficient Information | NC = No Compliance | ID = Intent Declared | EN = Enacted | CP = Compliance in Process | FC = Full Compliance

Macroeconomic Policy and Data Transparency

IDSpecial Data Dissemination Standard

Panama has been a participant in the International Monetary Fund’s (IMF) General Data Dissemination System since December 2000 and is working towards becoming a subscriber to the IMF’s Special Data Dissemination Standard. The IMF states that Panama has achieved significant progress towards this end, and currently disseminates high-quality statistics in a competent and professional manner. The Fund states that some aspects of Panama’s fiscal data are in need of improvement, as is coordination between agencies in charge of statistical compilation. Panama has implemented the National Strategy for Statistical Development in order to better align its data dissemination with international best practices.

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FCCode of Good Practices on Transparency in Monetary Policy

Panama has used the dollar as the country’s de facto currency throughout the entirety of its modern history. This policy has been in place for over 100 years, and is the result of close political ties to the United States. Since Panama has never established its own central bank, its monetary policy is therefore determined by the United States Federal Reserve. Foreign banks with operations in Panama serve as domestic banks’ lender of last resort. As long as the dollarization appears credible, Panama is assigned the level of compliance of the United States for the monetary policy standard. While no formal third-party assessment on the transparency of U.S. monetary policy and the Federal Open Market Committee (FOMC) of the Federal Reserve ("the Fed") has been published, the U.S. Treasury and the Fed conducted a self-assessment in 1999, comparing Fed practice against the Code of Good Transparency Practices for Monetary Policy issued by the IMF. The self-assessment found the U.S. to be in full compliance with the IMF's code. This finding is supported by various IMF reports which have characterized the Fed's monetary policy as "highly transparent" and pointed out that improvements have been made over recent years, such as increased transparency of FOMC members’ views and faster publishing of minutes from FOMC meetings. Overall, the IMF found that the Fed's communications strategy "has been highly effective."

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IICode of Good Practices on Transparency in Fiscal Policy

Overall, there is insufficient publicly available information that directly addresses Panama’s compliance with the IMF Code of Good Practices on Fiscal Transparency. In 2008, Panama put in place a new Social and Fiscal Responsibility Law, setting fiscal rules such as a maximum fiscal deficit of one percent and a reduction of national debt to 40 percent. It also requires new administrations to publish a medium-term fiscal framework upon entering office. These measures should certainly increase fiscal transparency. Areas in need of improvement include the quality of fiscal data. Panama is not a subscriber to the IMF’s Special Data Dissemination Standard but adheres to the Fund’s General Data Dissemination System. According to the IMF, Panama entered 2009 in a strong fiscal position, despite the concurrent global recession. Fiscal discipline over the previous years, coupled with the beginning of a major expansion of the Panama Canal, has contributed to Panama’s relatively healthy state. Still, the Fund identifies areas of improvement to enhance transparency, particularly in the government-owned Panama Canal Authority (PCA). Currently, the finances of the PCA are not included in the country’s fiscal accounts; the IMF believes including this data would improve accuracy.

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Institutional and Market Infrastructure

IIEffective Insolvency and Creditor Rights Systems

A 2009 Country Commercial Guide by the U.S. Department of Commerce indicates that Panama's bankruptcy law is outdated and weak. Furthermore, according to an article on Panama written by Mario Fabrega Llinas for the Americas Restructuring and Insolvency Guide 2008/2009, Panama lacks a formal mechanism that allows for reorganization of companies under the direction of a bankruptcy court. Liquidation is often the only alternative to resolve a bankruptcy situation, with the exception of an informal out-of-court restructuring process, so far as it has the agreement of all creditors and debtors. Thus, the company continues its operation only if that decision is in line with the creditors' interests or else it is forced into liquidation. Beyond this information, however, there is insufficient information publicly available as to Panama's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank.

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NCInternational Financial Reporting Standards

Accounting standards in Panama are adopted by the Accounting Technical Board (JTC). According to a website dedicated to the history of International Financial Reporting Standards (IFRSs) in Panama, since mid 1990s, the JTC has made numerous attempts to adopt IFRSs. However, these attempts failed due to the lack of legal authority of the JTC to set accounting standards. Finally, Law No. 6 of 2005 gave the JTC the legal authority to adopt accounting standards and to include in the Registry of Accounting Standards all IFRSs in effect. As a result, all companies in Panama, with the exception of banks, are required to follow IFRSs in preparation of financial statements. A 2008 Bulletin of the Financial Reporting Standards Commission clarifies that IFRSs in Panama are adopted as issued by the International Accounting Standards Board. Banks are required to follow standards set forth by the Superintendency of Banks which permits the use of either IFRSs or the United States Generally Accepted Accounting Principles. As far as the enforcement of financial reporting requirements is concerned, a 2007 International Monetary Fund working paper by Shah et al. notes that although regulations require the use of IFRSs, compliance in practice appears to be low.

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ENPrinciples of Corporate Governance

Corporate governance in Panama has made much progress since the late 1990s, and the quality of periodic reporting has come in line with international best practice, according to the 2004 World Bank Report on the Observance of Standards and Codes (ROSC), benchmarking practices in Panama against the Organization for Economic Co-operation and Development's Principles of Corporate Governance. Corporate governance guidelines were introduced by the National Securities Commission of Panama (CNV) in 2003 based on the “comply or explain” principle. Still, the development of corporate governance in Panama is at an early stage. In particular, the ROSC identifies the enforcement of main legislation and minority shareholder protection as weak. Also, a 2007 IMF working paper by Shah et al points out that disclosure requirements, such as timely disclosure of insider and substantial holdings, and the independence of directors need to be further strengthened. The World Bank makes various recommendations to improve the corporate governance framework, practice, and enforcement in Panama. The CNV’s jurisdiction and regulatory powers should be clarified and strengthened; disclosure requirements on insider and substantial holdings, as well as on related party transactions, need to be enhanced; fiduciary duties and liabilities of directors should be clarified; and audit committees should be mandatory for all listed companies. In addition, the World Bank recommends creating an effective audit oversight mechanism and a director training organization. A 2007 IMF report notes that the CNV has adopted some recommendations from the 2004 World Bank report, including the creation of the Investors Education Unit which carries out academic activities and discloses important information regarding the securities market in Panama. In addition, in 2006, the Institute for Corporate Governance – Panama was created, providing directors with training, and disseminating good corporate governance practices.

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ENInternational Standards on Auditing

According to a 2007 self-assessment prepared by the Institute of Certified Public Accountants of Panama, International Standards on Auditing (ISAs) as issued by the International Federation of Accountants (IFAC) were adopted for application in Panama through laws/regulations that directly refer to the text of the IFAC’s pronouncements. A brief by Deloitte Touche Tohmatsu highlighting the financial reporting regime in Panama states that the companies required to file audited financial statements with the financial regulatory agencies are the banks, insurance and reinsurance companies, and companies regulated by the National Securities Commission. Entities operating in the Colon Free Zone and other duty free zones are only required to maintain but not to file their records. Further, an International Monetary Fund working paper by Shah, H. et al. stated that the tax authorities require all companies with capital over $100,000 or annual sales over $50,000 to submit audited financial statements, but noted that such tax filings are not available to the public.

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ENAnti-Money Laundering/Combating Terrorist Financing Standard

The IMF in its 2006 detailed assessment of Panama's anti money laundering/combating the financing of terrorism (AML/CFT) regime against the Financial Action Task Force's (FATF) forty recommendations and nine special recommendations concludes that the country is either compliant or largely compliant with the FATF's core and key requirements. As a member of the Caribbean Financial Action Task Force, Panama is committed to adhere to all of the FATF's recommendations. Similarly, a 2008 annual report by the FATF lists Panama as one of the jurisdictions which has undertaken to implement the FATF's recommendations. Deficiencies, however, were identified with the effectiveness of the implementation process of AML/CFT measures such as collection of statistics and guidelines and feedback by the supervisors. Also, designated non financial businesses and professions in Panama do not comprehensively apply AML/CFT measures as required by the FATF. A major shortcoming identified by the 2006 IMF assessors is the non compliance of Panama with the FATF's recommendation on legal person (beneficial owners) as, among other things, company service providers are not subject to any AML/CFT measures. Also, the potential misuse of bearer shares by corporations is not addressed in Panama's AML/CFT law or regulations. A more recent report in 2009 by the U.S. Department of State also considers the issuance of bearer shares a concern in the country and recommends that the authorities in Panama take adequate steps to ensure that these instruments are not used for money laundering. Panama has criminalized money laundering through Articles 389 to 393 of the Penal Code. Panama’s Law No. 50 of 2003 criminalizes the financing of terrorism as stipulated by the United Nations Security Council Resolution 1373. The Financial Analysis Unit (UAF) is the financial intelligence unit (FIU) in Panama and was established in 1995. By various accounts the UAF is a well functioning body with an able staff. The UAF is part of the Egmont group of FIUs.

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IICore Principles for Systemically Important Payment Systems

Cirasino et al. note in their 2007 book that there is no real-time gross settlement (RTGS) system in Panama. There is no central bank in the country and the U.S. dollar is the legal tender. Large-value inter-bank payments are mainly handled by two mechanisms: (1) funds transfers through correspondent banks in the U.S., and (2) the clearinghouse operated by the National Bank of Panama (BNP). There is no publicly available information that specifies Panama’s systemically important payment system and its compliance with the Core Principles for Systemically Important Payment Systems (CPSIPS).

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Financial Regulation and Supervision

CPCore Principles for Effective Banking Supervision

The financial system in Panama is dominated by its banking sector, the largest in Central America, according to the IMF 2007 Report on the Observance of Standards and Codes (ROSC) for banking supervision. The 2007 ROSC, based on the IMF’s 2007 detailed assessment of Panama, concludes that the Superintendency of Banks (SBP) has reached "a high degree of compliance” with the Basel Core Principles for Effective Banking Supervision. The reports are a follow-up to the 2001 IMF assessment, which identified weaknesses in the area of offsite monitoring and investment activities. These shortcomings have since been addressed. However, according to the IMF, improvements are still needed with regards to the legal protection of supervisors, and the supervisory framework for nonbank deposit–taking institutions, namely credit cooperatives and saving and credit institutions. Key recommendations of the IMF's 2007 reports include providing legal protection for SBP staff; developing clear guidelines for remedial measures; and strengthening regulatory reporting information for nonbank deposit–taking institutions. The IMF further recommends amending the Banking Law to cover the consolidated supervision of bank holding companies, as well as developing policies and procedures to address country risk and market risk in line with Basel II. The “New Banking Law,” which entered into force in August 2008, as reported in the IMF’s 2009 Article IV Consultation report, has strengthened consolidated supervision of financial conglomerates; improved the bank resolution framework; and enhanced risk-weighted capital requirements. The Law has also provided the SBP with stronger remedial measures.

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IDObjectives and Principles of Securities Regulation

The IMF 2007 Report on the ROSC for securities regulation concludes that the legislative framework for securities markets is on balance effective. However, the ROSC, based on the IMF’s 2007 detailed assessment of Panama, cites significant operational issues that lead to "weak compliance” with the International Organization of Securities Commissions’ (IOSCO) Objectives and Principles of Securities Regulation. These operational issues, according to the IMF, result from insufficient operational independence of the CNV, and its lack of staffing, financial resources, and technical capacity. Furthermore, the CNV does not have the authority to share information with foreign counterparts on information obtained during the course of inspections or investigations. The IMF goes on to note that the frequency of reporting and monitoring is insufficient to deal with the failure of a market intermediary. Finally, the CNV does not have in place a meaningful compliance program for capital adequacy standards. Key recommendations of the IMF's 2007 reports include strengthening the CNV's budgetary and administrative autonomy; amending the Securities Market Law to avoid adverse judicial decisions against the CNV, and allow for information sharing with foreign counterparts in market abuse investigations. Legal protection should also be provided to CNV staff. The CNV is listed in Annex B of the IOSCO multilateral memorandum of understanding (MMoU), signifying that it is working towards bringing its legal framework in line to become a full signatory to the MMoU.

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NCInsurance Core Principles

The insurance sector in Panama is relatively small, and highly concentrated, according to the IMF 2007 Report on the ROSC for insurance supervision. The 2007 ROSC, based on the IMF's 2007 detailed assessment of Panama, concludes that compliance with the Insurance Core Principles promulgated by the International Association of Insurance Supervisors is "weak," due to “the outmoded legal regime, and underdeveloped supervisory and regulatory framework.” The legal framework for the insurance industry has not been updated since 1996. Shortcomings also remain with regards to the operational independence of the supervisory authority, the Superintendency of Insurance and Reinsurance of Panama (SSRP). Key recommendations of the IMF's 2007 reports include strengthening the supervisor's financial autonomy from the Ministry of Commerce and Industry (MICI), and providing more resources to the SSRP to ameliorate the on-site and offsite supervisory function. Improvements are also needed in the areas of corporate governance, internal controls, audited financial statements, asset-liability management, solvency requirements for reinsurance companies, on-site inspections, and cooperation with foreign supervisory authorities. A draft insurance law, dated April 2005, was under preparation at the time of the IMF’s 2007 assessment. The draft law is expected to address some of the shortcomings mentioned above. However, under the draft law, market conduct requirements would continue to be more favorable to the industry and brokers; and accounting and disclosure standards for insurance firms would not meet international best practices. Furthermore, the SSRP would remain dependent on the MICI, as a representative of MICI would continue to be on the board of the SSRP.

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Business Indicators

With an overall score of 9.73/12, Panama is at standard on the economic, legal, and political indicators that make up our Business Index. Panama is a market-based economy in which market competition has a strong institutional framework. The Panamanian capital market has two unique features: (1) the economy is fully dollarized, with no central bank or national monetary policy; and (2) the country has a large international banking sector, representing 10 percent of total GDP. In Panama, payments, transactions, transfers, repatriation of profits, and capital transactions face no restrictions or controls. Also, foreign currency bank accounts are permissible without restrictions both domestically and abroad, and both residents and non-residents can hold foreign exchange accounts. Panama maintains a liberal regime for foreign investment and actively encourages it Although investments need to be registered, there is no government approval process, and national treatment is granted to foreign investors. Panama has a constitutionally independent judiciary which is, however, influenced by the executive. While the sanctity of contracts is generally upheld by Panamanian courts, there have been allegations of corruption within the judicial system. In terms of legal framework for the protection of intellectual property rights, significant progress has been made in recent years. Ricardo Martinelli, a pro-business conservative and leader of the four-party opposition Alliance for Change, won the April 2009 presidential election with a landslide victory. Political violence in Panama is uncommon, and corruption is perceived to be a problem.

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Global Indices & Quick Facts

Panama is ranked from the 1st to the 3rd quintile in global indices measuring economic, political, business, and human development, as shown below. Panama scores relatively well in political openness and business freedom. Panama’s independence and modern history have been entwined with the United States, due to the latter’s construction and administration of the Panama Canal. Despite veering between democracy and military dictatorship during the 20th century, Panama is now an electoral democracy with high ratings for political rights and civil liberties. Panama earns high marks in business freedom due to its open economy and position as a hub for international finance. Still, other areas have drawbacks. Enforcing contracts, paying taxes, and employing workers are all perceived as serious difficulties in Panama. Meanwhile, corruption is a significant problem, with the citizenry perceiving it to affect all levels of government. Furthermore, the dichotomy between the relatively affluent urban class employed in industries related to the Panama Canal and the much poorer rural population creates difficult social divisions. This inequality contributes to Panama’s somewhat low ranking in the UN's Human Development Index.

Name Year Rank Score Quintile
Bertelsmann Transformation Status Index 2010 22/128 7.49/10 1
Heritage Foundation Economic Freedom Index 2010 60/179 64.8% 2
Economic Freedom of the World Index 2009 14/141 7.65/10 1
World Economic Forum Global Competitiveness Index 2009 59/133 4.21/7 3
Milken Institute Capital Access Index 2009 38/122 5.56/10 2
World Bank Ease of Doing Business Index 2009 77/183 N/A 3
UNDP Human Development Index 2009 60/177 0.84/1 2
Transparency International Corruption Perceptions Index 2009 84/180 3.4/12 3
Freedom House Index 2009 Free 1.5/7

Credit Ratings

BB+/Positive Fitch

Ba1/Stable Moody's

BB+/Stable Standard & Poor's

Macroeconomic Data

2009 GDP (Current Prices): 24.8 billion USD (IMF)

2009 GDP (Per Capita): 7,145 USD (IMF)

2010 GDP (Growth Forecast): 3.7% (IMF)


2009 Inflation (CPI): 2.3% (IMF)

2008 Unemployment: 5.6% (CIA)


2008 Foreign Direct Investment

FDI (Inward): 2.4 billion USD (UNCTAD)

FDI (Outward): 2.10 billion USD (UNCTAD)


2007 Official Development Assistance

ODA (Received): -135 million USD (OECD)

ODA (Disbursed): N/A million USD (OECD)

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