Cablegate: Scenesetter for Secretary of State Rices' June 4 Visit To


DE RUEHZP #0910/01 1521632
R 011632Z JUN 07




E.O. 12958: N/A

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1. (SBU) Welcome and Summary. Embassy Panama extends a warm
welcome to you and your delegation. Your engagement in Panama can
help strengthen our excellent bilateral relationship, solidify
support for the U.S.-Panama Trade Promotion Agreement (TPA),
reinforce U.S. support for, and interest in, the $5.25 billion
Panama Canal expansion project, and advance broader U.S. economic
and social interests. Your visit comes at a time when Panama enjoys
an economic boom while, at the same time, it endeavors to overcome
stubbornly high levels of poverty, yawning income disparities, high
unemployment, widespread corruption, and poor educational and
healthcare systems. Public support nonetheless remains solid for
both the Torrijos Administration and the TPA. Panamanians have
noted that the FY08 elimination of U.S. foreign assistance for
Panama will end our direct assistance for good governance programs,
anti-corruption efforts, and other basic development work. You

- have the opportunity address the Organization of American States
General Assembly (OASGA);
- hold informal discussions over lunch and in a private dialogue
with FMs and other leaders from this hemisphere's thirty-four
- hold separate bilateral meetings with the Peruvian FM and the
Ecuadoran FM;
- meet with Panamanian President Martin Torrijos; and
- conduct two television interviews with U.S. Spanish-language

Your visit follows President Bush's March 2007 Latin America tour
and President Torrijos' February 2007 Washington visit. Your visit
will also come on the heels of Transportation Secretary Mary Peters'
May 6-9 visit and Deputy Secretary of State John Negroponte's May 11
visit. Deputy U.S. Trade Representative John Veroneau visited
Panama March 15-16. While Secretary of Health and Human Services
Mike Leavitt will also be traveling with you, he will engage in a
separate program in Panama. CODEL Skelton will also be in Panama
during your visit for bilateral discussions on security matters, and
CODEL Meeks will have departed the day before your arrival. End

Panama Sees Boom in GDP and Investment

2. (U) With 8.1% GDP growth in 2006, Panama's economy saw its
fastest growth in 14 years, topping solid levels of 6.9% in 2005 and
7.5% in 2004. Panama's dollarized $15 billion/year economy is based
primarily on a well-developed services sector that accounts for
roughly 80% of GDP. Services include the Panama Canal, banking and
financial services, legal services, container ports, the Colon Free
Zone (CFZ), and flagship registry. The Panama Canal accounts for
approximately 5% of Panama's GDP directly, and between 23% and 35%
indirectly. The maritime industry accounts for approximately 20% of
Panama's GDP.

3. (U) The GOP estimates that inflows of Foreign Direct Investment
(FDI) exceeded $2.4 billion in 2006, more than double that of 2005.
However, this result was skewed by HSBC's $1.8 billion purchase of
Banistmo (Panama's largest bank) in November 2006. The stock of
U.S. FDI in Panama, which currently totals about $5.2 billion, is
concentrated primarily in the maritime, energy, and financial
sectors. Growing numbers of U.S. and other foreign retirees have
helped drive Panama City's skyline upward, boosted the country's
impressive construction boom over the past several years, and
prompted closer ties between U.S. and Panamanian real estate
industries. Although the GOP has tightened its banking supervision
considerably over the past decade, money laundering remains an
ongoing challenge and is increasingly of concern in other sectors,
such as real estate and the gaming industry.

4. (U) Panama also maintains one of the most liberalized trade
regimes in the hemisphere. The U.S. is Panama's largest trade
partner, with two-way trade reaching nearly $3.1 billion in 2006, an
increase of 24% over 2005's trade of nearly $2.5 billion. With 2006
exports of $2.7 billion and imports $378 million, the U.S. continued
to maintain its huge trade surplus with Panama. Panama has existing
free trade agreements in place with El Salvador, Taiwan, and
Singapore, as well as partial trade agreements with Mexico,
Colombia, and the Dominican Republic. In December 2006, the
National Assembly unanimously approved a bilateral free trade deal
with Chile. On March 1, 2007 Panama and Honduras concluded their
FTA negotiations. Panama continues to negotiate separate FTAs with
Costa Rica, Guatemala, and Nicaragua.

--------------------------------------------- ---------

Persistent Poverty, Unemployment, Corruption and Lack of Skilled
Labor Cloud the Horizon
--------------------------------------------- ---------

5. (SBU) At $4,600, Panama's per capita GDP ranks among Latin
America's highest. President Torrijos hopes that sustained growth
resulting from the Panama Canal expansion project and the TPA will
help push Panama into "first world" status. However, neither the
Canal nor the TPA is a panacea, as cronyism and weak institutions
(especially the notoriously corrupt judiciary and troubled health
and education sectors) have kept Panama's solid GDP growth from
translating into broadly shared prosperity. Panama is second only
to Brazil in having Latin America's worst income distribution.
Poverty persists at nearly 40% overall (higher than 80% in some
rural areas), and unemployment remains high (officially about 8.6%,
with more than 20% underemployed) despite showing some signs of
improvement in the past two years. The Embassy is focused on
working with Panamanians to promote good governance and to help them
better address the risks posed by public mismanagement, corruption,
and persistent urban poverty and hopelessness. With the FY08
elimination of U.S. foreign assistance for Panama, our USAID mission
has begun to plan for an orderly close-out of its programs,
including those that have helped to promote good governance,
empowered anti-corruption NGOs, advanced sustainable development,
and boosted trade capacity building for small and medium-sized

6. (SBU) Corruption is widespread in the Panamanian judiciary.
Despite campaign promises by President Torrijos to eradicate
corruption, there have been no significant indictments or
prosecutions for official corruption. In December 2005, the USG
revoked the visa of sitting Panamanian Supreme Court Justice Winston
Spadafora. In September 2000, the USG revoked the visa of
ex-President Ernesto Perez Balladares.

7. (SBU) Despite spending 12% of the national budget and 5% of GDP
on education, Panama suffers from a poorly educated workforce.
About half of prospective University of Panama students recently
failed their entrance exams, prompting university authorities to
lower the threshold for entrance. Acutely aware of the political
blow-up the could result from filling the Panama Canal expansion
project with skilled foreign workers, the GOP is spending $85
million to train Panamanian workers hoping to work on the project.
However, about one-third the training program's applicants cannot
begin the program because they lack the basic literacy and math
skills required.

U.S.-Panama TPA Enjoys Solid 62% Support

8. (U) On December 19, 2006, the USG and GOP announced closure of
TPA negotiations subject to resolution of certain labor issues. On
March 30, 2007, President Bush notified Congress of the
administration's intent to sign the TPA. USTR and Congressional
leaders recently agreed on the labor portion of the TPA, opening the
way for a signing in late June. .

9. (U) Following the December 19, 2006 closure of TPA negotiations
in Washington, the GOP intensified its campaign to promote the
agreement throughout the country, touting the TPA as the "best deal"
negotiated by a Latin American country with the U.S. Through an
aggressive media campaign and hundreds of seminars with business
chambers, labor unions, civic groups, and communities around the
country, the GOP has gained the support of 62% of Panamanians. This
is substantially higher than the 39% level of support reported in a
May 2006 poll. (Note: The 2006 poll reflected uncertainties and
fears generated by former Agriculture Minister Laurentino Cortizo's
flamboyant resignation at the outset of the ill-fated ninth round of
negotiations in January 2006.)

10. (SBU) Despite some anti-TPA noise from extreme left-wing
quarters, TPA opponents are currently sparse and disorganized.
Since December, leaders of various political opposition parties have
told Embassy officers that they expect Panama's National Assembly to
pass the deal by a wide margin. One prominent opposition party
leader noted that virtually all business sectors have lined up for
the TPA and that any politician opposed to the agreement would fear
being associated with Panama's most extreme leftists. Moreover,
many of Panama's political leaders also have business interests that
stand to benefit from the TPA.

--------------------------------------------- -----
$5.25 Billion Panama Canal Expansion Gets Underway
--------------------------------------------- -----

11. (U) Since the December 31, 1999 handover of the Panama Canal by
the U.S., the Panama Canal Authority (ACP) has proven itself an able

administrator, turning the Panama Canal into an efficient and
profitable business. During the past five years, the ACP has
reduced average Canal transit times, accidents in Canal waters, and
has overseen large-scale upgrade and maintenance projects. The ACP
also has tripled Canal revenues since the handover, topping $1.5
billion in 2006. In 2006, the ACP remitted to the national
government $570 million. To protect the Canal's vital water
resources, the Panama Canal Authority (ACP) has matched a $2.5
million fund that USAID put in place to better manage the Canal

12. (SBU) In October 2006, Panamanians voted overwhelmingly (78% to
22%) in favor of the proposed expansion of the Panama Canal. This
project is due for completion in 2014 and will entail primarily
construction of a "third lane" and two new sets of locks. The GOP
expects the project will be a transforming event for Panama that
will provide jobs and set the tone economically for years to come.
Given growing trade between East Asia and the U.S. eastern seaboard,
the expansion is central to maintaining the Canal's future
viability. The ACP plans to finance the project through a

combination of Canal revenues, increased tolls, and $2.3 billion in
bridge loans. The Embassy has consistently stressed the USG's
desire for clear and transparent contracting rules that offer fair
opportunities to U.S. bidders. Bidding on the construction manager
contract is scheduled for third quarter of 2007. This contract will
account for approximately 50% of the entire project cost.
Prospective bidders worry that Panama has nowhere near the number of
skilled workers necessary for the expansion project, particularly
English-speaking workers.

13. (U) On February 2, 2007, the ACP announced toll increases of 10%
over the next three years commencing in July 2007. Chile, Peru,
Japan and Ecuador have vigorously opposed the toll increases. The
ACP pricing policy is to charge what it perceives to be the market
value of its services.

--------------------------------------------- ---
Health Diplomacy: HHS-GOP Launch Regional Center
--------------------------------------------- ---

14. (SBU) HHS Secretary Leavitt and Panamanian Health Minister
Camilo Alleyne have gained solid support from Central American
partners to create in Panama the "Regional Healthcare Training
Center" announced by President Bush in March 2007. Although this
Center is to be formally inaugurated on June 4, HHS and Alleyne
successfully launched its first course on April 16, drawing more
than 50 participants from the region for training on Avian Flu
preparedness and response. HHS has devoted $4 million and the GOP
$1.5 million to lay the groundwork for what HHS and the GOP envision
as a permanent, hemispheric training center for community health
workers, nurses, and other health professionals. (Note: Alleyne has
been embattled for several months following the late 2006 deaths of
more than60 Panamanians from contaminated GOP-produced medicines.
He has also taken heat for promoting Cuba's "Operation Miracle"
program in Panama and for a controversial healthcare system reform
proposal. End note.)

--------------------------------------------- -----
Despite Challenges, Torrijos Enjoys Solid Approval
--------------------------------------------- -----

15. (SBU) Since taking office for a five-year term in September
2004, the Torrijos government set its principal priorities as canal
and maritime security, economic development, job creation, poverty
alleviation, investment, fiscal reform, and "eradicating
corruption." Torrijos faced large challenges from the outset: a
serious budget shortfall; a near-bankrupt national retirement and
medical system (the Social Security Fund); and faltering public
confidence in government institutions and the rule of law. Although
pressures from entrenched interest groups slowed GOP fiscal reform
efforts, Torrijos' 2005 fiscal reform package - together with tax
revenues driven by impressive economic growth - brought the GOP into
a fiscal surplus (0.5% of GDP) by early 2007, Panama's first such
surplus in ten years.

16. (SBU) Midway through his term, Torrijos enjoys high public
approval ratings (over 60%) despite weathering bruising battles over
fiscal and social security reforms, the Canal referendum, crises in
healthcare and transport sectors, and having little to show for his
promise to eliminate corruption. His Revolutionary Democratic Party
(PRD) controls Panama's unicameral National Assembly and other
governmental institutions. With opposition parties remaining
fractured and so far unable to coalesce into an effective
counterweight, the PRD appears well positioned to control Panama's
political agenda going into the 2009 elections. As Torrijos is
constitutionally prohibited from a consecutive term, various PRD
members - including former President Ernesto Perez Balladares, First
Vice President/Foreign Minister Samuel Lewis Navarro and his cousin,

the Mayor of Panama City Juan Carlos Navarro- have already begun to
jockey for position as the PRD's 2009 candidate.

Panama Active on Global and Regional Stage

17. (SBU) In late 2006, Panama emerged as Latin America's consensus
candidate for a two-year seat on the UN Security Council. This
followed a prolonged deadlock between Venezuela and Guatemala.
Faced with a steep learning curve at the UNSC, Panama has thus far
played a responsible and constructive role. Panama will also host
the Organization of American States (OAS) General Assembly in June
2007, which will focus on "energy for development." President
Torrijos has pursued a policy of maintaining friendly relations with
all nations, including hemispheric neighbors such as Cuba and

--------------------------------------------- -
Good Cooperation on Security & Law Enforcement
--------------------------------------------- -

18. (SBU) As a key link in the global supply chain and a vital
transit point for U.S. trade (about two-thirds of the Canal's
traffic is bound to or from the U.S.), the Canal presents an
attractive and vulnerable terrorist target. Moreover, despite
significant progress, Panama continues to be an important transit
point for drug smugglers, money launderers, illicit arms merchants,
and undocumented immigrants heading north thanks to its proximity to
drug-producing neighbors and its status as an important, dollarized,
financial center. With USG assistance, Panama has strengthened its
ability to detect illegal money and narcotics shipments through
Tocumen International Airport. Several GOP agencies participate as
part of a Joint Task Force that averages several seizures of
narcotics and/or money each week. For example, Embassy law
enforcement agencies and the Task Force recently conducted two joint
operations that seized at total of $1.5 million in cash and gold.
In March 2007, Panamanian authorities, with critical USG law
enforcement support, conducted the largest ever maritime narcotics
seizure on the Pacific Coast of Panama. Authorities confiscated a
ship containing approximately 20 tons of cocaine with an estimated
value of $500 million. A USG built checkpoint near the Costa Rican
border that is manned by various GOP agencies has also made
consistent narcotics seizures and interdictions of undocumented

19. (SBU) The GOP recognizes that securing the Canal requires a
mature, collaborative bilateral relationship. The Torrijos
government is focused on Canal and maritime security and combating
terrorism and transnational crime, although it has not yet found the
resources to adequately patrol Panama's long Caribbean and Pacific
coastlines and to secure Panama's porous border with Colombia
against guerrilla infiltration. The GOP is moving ahead with plans
to merge its National Maritime Service and its National Air Service
into a single "Coast Guard" type of operation. U.S.-Panamanian
cooperation in law enforcement and security has steadily improved in
recent years. This has led to increasing narcotics seizures, better
investigations, active maritime law enforcement, more specialized
units, and better detection of money laundering and illicit
financial flows. While the USG-GOP relationship is good, Panama's
law enforcement institutions are weak and suffer from limited
resources and professionalism.

20. (SBU) The GOP is acting to end abuses in Panama's open ship
registry and mariner identification documents. Panama's ship
registry, the world's largest, comprises one-quarter of the world's
ocean-going fleet (over 5,000 large commercial vessels). About 13%
of the U.S. ocean-going cargo transits the Canal each year.
Panama's seafarer registry currently licnses over 300,000 crew
members. Port services have grown dramatically in the past decade,
as Panama now boasts the leading complex of port facilities in Latin
America. In February 2007, the GOP and U.S. Department of Homeland
Security executed a "Container Security Initiative" agreement aimed
at enhancing the security of container traffic between our two
countries. CSI equipment will first be installed this June at the
U.S.-run Manzanillo International Terminal (MIT) in Colon.


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