The financial sector represents 9.2% of Panama's GDP and has had a major role in the country's development, which makes it a high priority, according to the government's 2010-14 strategic plan.
However, the government will not take significant action regarding the sector as the government's capacity to influence the sector's growth, and the sector's potential to create jobs and improve the distribution of wealth, is limited, the plan reads.
OUTLOOK FOR FINANCIAL SUB-SECTORS
The challenges in consumer and corporate banking include a competitive and relatively saturated market, as well as inadequate balance sheets to compete with large regional or global institutions.
The government predicts that higher volumes and sophistication in consumer products, checks and savings instruments and banking services for SMEs will develop to serve the growing internal market, while corporate banking including loans, transactional banking and commerce financing, will develop to serve the needs of companies that come to the country due to its proactive offering of incentives.
Panama could establish itself as a center for private banking in the region, the report reads. A private banking sub-sector could leverage the country's favorable taxation laws, confidentiality, political and monetary stability and solid banking system. On the other hand, changes to the tax law could create temporary problems due to existing foreign investors losing their current tax benefits.
The current lack of sophisticated financial products, quality service and risk management contribute to high net worth individuals sending their funds elsewhere.
Finally, private insurance companies in the country are not big enough to have economies of scale, and the use of brokers is nascent. The use of securities - stocks and bonds - is limited in the country, and stock market activity is concentrated in more liquid markets like Brazil, Mexico and the US, the plan reads.
Consumer banking currently represents 83% of the financial sector, according to the report.
ROLE OF GOVERNMENT
Panama has the opportunity to improve competitiveness in the financial sector in the long term through the application of a number of measures:
The government will seek to strengthen higher-level financial services education in the country, improve regulation to guarantee transparency and reduce the perception of corruption, improve credit bureaus to offer a more solid base for consumer banking, continue with the strategy to obtain investment grade and rekindle negotiations with Organization for Economic Co-operation and Development's (OECD) member countries, like Mexico and Italy, towards the end of being removed from the organization's "grey" list.