Cablegate: Panama: Scenesetter for Codel Hagel, Aug. 27-28

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TAGS: PGOV PREL PM
SUBJECT: PANAMA: SCENESETTER FOR CODEL HAGEL, AUG. 27-28

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Summary
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1. (SBU) You will be arriving in Panama in the middle of a
long election campaign, due to take place amidst record
economic growth, but growing economic uncertainty. Panama has
been one of the fastest growing economies in Latin America
for the last few years (11.2% growth in 2007), and there are
signs of wealth throughout Panama City. But Panama is also
struggling with growing inflation, especially in basic food
goods, and stubbornly high poverty. Despite the problems,
Panama has a promising economic future, as it gets ready to
manage the huge Canal expansion project, which will cost over
$5 billion, and potentially effect global trade patterns.
Amidst this economic background, the campaign for the
Presidential and legislative elections, due in May 2009, is
in full swing. The ruling Democratic Revolutionary Party
(PRD) will hold its primary on September 7, one week after
you leave. Besides the economy, crime is also increasingly an
important electoral issue here, as Panamanians' fear rising
crime as gang violence escalates. The government's proposed
security reforms are being criticized by civil society
leaders as an attempt to return to the militarism of the
past. The USG and the GOP continue to cooperate very closely
on a wide variety of issues, and enjoy excellent relations.
President Torrijos will travel to the U.S. in mid-September
to principally meet with members of Congress to push for
passage of the Panama-US Free Trade bill. End Summary.

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Booming Economy, But Problems Linger
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2. (SBU) Your visit comes at a time when Panama's economic
boom contrasts starkly with sustained high levels of poverty,
continuing wide income disparities, persistent corruption,
and woeful educational and healthcare systems. Panama's 11.2
percent GDP growth in 2007 topped the region, driven largely
by significant growth in construction, ports and maritime
services, banking and financial services, and tourism.
Foreign investment, which topped USD 1 billion in 2007,
continues to pour into Panama, as U.S. multinationals such as
Procter and Gamble, Hewlett Packard, 3M, and Caterpillar move
into Panama. Occidental Petroleum and Qatar Petroleum will
soon decide whether to proceed with their proposed USD 8-9
billion refinery project in the Puerto Armuelles area of
western Panama, which would be a significant addition to
Panama's USD 19 billion economy. With the country's strong
economic growth over the past five years, Panama has cut
unemployment by about half, dropping from about 14 percent in
2003 to just over 6 percent today.

3. (SBU) Panama also maintains one of the most liberalized
trade regimes in the hemisphere. As Panama's largest trade
partner (with two-way trade of USD 4.1 billion in 2007, an
increase of 33 percent over 2006), the U.S. consistently runs
a huge trade surplus with Panama, exporting almost ten times
more than it imports. The U.S. and Panama signed a bilateral
Trade Promotion Agreement (TPA) last June that the Panamanian
National Assembly (NA) ratified two weeks later by an
overwhelming vote. However, U.S. ratification remains on
hold as a result of the NA's September 2007 election of Pedro
Miguel Gonzalez, who is under federal indictment in
connection with the 1992 slaying of a U.S. soldier, as its
president. It now appears certain that Gonzalez will be
replaced as NA President on September 1 by a little known
Deputy personally chosen by President Torrijos. The GOP hopes
this will help pave the way for approval of the TPA.

4. (SBU) Despite being one of Latin America's fastest
growing economies over the past 15 years, Panama's poverty
rate has persisted at nearly 40 percent overall and has
exceeded 80 percent in rural indigenous areas. 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 from attaining more
broadly shared prosperity.

5. (SBU) After some twenty years of enjoying low inflation
(ranging between 1.5 and 2 percent), Panamanians now face an
upward spiral in the cost of living. Annual inflation
reached 4.7 percent by the end of 2007 and is now running at
about 9.6 percent. Increases in the price of food have run
at nearly twice the overall inflation rate. The monthly cost
of a "basic basket" of foodstuffs defined by the GOP as the
minimal amount needed by a typical Panamanian has skyrocketed
by more than 20 percent over the past year, reaching nearly
USD 250 per month. This means that workers earning the
minimum monthly wage of USD 310 must spend more than 80
percent of their income on food, while those earning the
average wage of USD 400 spend more than 60 percent of their
earnings just to buy the basic food items. This, combined
with fast-rising electricity and gasoline prices, has
tightened the squeeze on low and middle-income families.

6. (SBU) Despite spending about 12 percent of the GOP's
budget on education, Panama suffers from a poorly educated
workforce. About half of prospective University of Panama
students fail their entrance exams, prompting university
authorities to lower the threshold for entrance. About
one-third of the applicants to GOP worker training programs
are rejected because they lack the requisite literacy and
math skills. Panamanian and multi-national firms must draw
from a labor pool that is poorly equipped to compete in the
global economy. One U.S. multi-national found that less than
1 percent of some 200 prospective Panamanian employees passed
the firm's qualifying examination. By comparison, the firm
found that pass rates elsewhere in the region typically
ranged from 15 to 20 percent. This dynamic is exacerbated by
laws that require foreign firms to staff 90 percent of their
local operations with Panamanian employees

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Panama Canal Expansion Underway
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7. (U) In September 2007, the Panama Canal Authority (ACP)
formally launched its eight-year, USD 5.25 billion program to
expand and modernize the Panama Canal. This project is due
for completion in 2014. The ACP plans to finance the project
through a combination of Canal revenues, increased tolls, and
USD 2.3 billion in bridge loans. U.S.-based engineering and
law firms have won initial contracts to provide project
management and legal advisory services to the ACP. Four
consortia, one led by Bechtel, are preparing to bid in late
2008 on the design/build contract for the new, much larger
sets of locks that will be built in parallel to the existing
locks. With an estimated contract value of about USD 3.5
billion, this represents the largest share of
expansion-related work. The winning consortium will have to
contend with the upward spiral in fuel and construction
materials costs, Panama's shallow pool of skilled labor, and
constraints on housing, transportation, and other
infrastructure.

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Panama's Politicos Jockey for 2009 Elections
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8. (SBU) Ten months from the end of his five-year term,
President Torrijos has seen his public approval rating erode
considerably, declining, according to some polls, by as much
as 60 percent. His Revolutionary Democratic Party (PRD)
dominates Panama's unicameral National Assembly and other
governmental institutions. Torrijos is constitutionally
prohibited from a consecutive term, and his former Housing
Minister and long-time PRD figure, Balbina Herrera, looks
likely to win the PRD primaries, which will take place on
September 7, over Panama City mayor Juan Carlos Navarro.
Opposition parties seem to be forming into two rival blocks,
and a grand alliance does not look likely unless one of the
two sides begins to poll very poorly. One of the two blocks
is forming around the Panamenista Party, the largest
opposition party, that elected Juan Carlos Valera as its
Presidential candidate in primary elections on June 6. He has
since risen substantially in the polls, making a grand
alliance between the Panamenista party and the other major
opposition block less likely. The other main opposition block
is led by maverick Ricardo Martinelli of Democratic Change
(CD), which recently formed an alliance that gives this block
a roughly equal number of loyalist as the Panamenistas.

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Security Issues Come to the Fore
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9. (SBU) Over the past eight months, security concerns have
become one of the top issues on the minds of Panamanian
voters. Panama experienced a significant up-tick in crime,
not only in Panama City but also across the country, leading
to an increasing clamor that the GOP do something to improve
law and order. The increase in crime seems to be tied to
increased drug dealing within Panama. Continued record
seizures of illegal narcotics in Panama serve to underscore
that Panama remains a cross roads for illicit trade. For
example, of the 120 metric tons of cocaine seized by
authorities in the hemisphere during 2007. So far in 2008,
law enforcement authorities have seized some 30 metric tons
of cocaine.

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Torrijos' Legislative Powers on Security Matters
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10. (SBU) Before going into recess on June 30, the NA
granted Torrijos extraordinary powers to enact legislation
from that date until the NA reconvened on September 1. The
GOP in planning to use those powers to enact legislation
which would: establish the National Aero-Naval Service
(SENAN) by combining Panama's air and sea forces; establish
the National Frontier Service (SENAFRONT) by breaking an
existing force off from the Panamanian National Police (PNP);
establish the National Intelligence and Security Service
(SENIS) by breaking an existing organization off from the
Council for Public Security and National Defense (CSPDN);
reorganize the CSPDN into a Panamanian version of the NSC;
and enable the President to name a uniformed officer to head
the PNP and the Institutional Protection Service (Panama's
Secrete Service), where present law requires that both posts
be held by civilians. Numerous government officials have
indicated that the GOP sees these reforms as necessary to
prepare Panama for the potential increase in criminal
activity in Panama by international criminal networks as a
result of the Colombian government's offensive against the
FARC, and the likely effects of the Merida Initiative in
Mexico.

11. (SBU) These proposed reforms have been strongly
criticized by civil society leaders and the local press as
potentially opening the door to a return to militarism. Many
commentators have tried to find a connection between these
proposed reforms and the Merida Initiative, and some have
accused the USG of trying to re-militarize Panama. The matter
of the security reforms will likely come to a head in the
next two weeks, as President Torrijos is likely to act before
his special powers expire. The opposition effort to stop this
may have crested by then, but the issue is likely to become a
political issue during the elections.

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Panama at the UN Security Council
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12. (SBU) In late 2006, Panama emerged as Latin America's
consensus candidate for a two-year seat on the UN Security
Council (UNSC). This followed a prolonged deadlock between
Venezuela and Guatemala in the voting for non-permanent
members in the UN General Assembly. Panama has consistently
voted with the U.S. and has played a constructive role on the
UNSC. In other foreign policy matters, Torrijos has pursued
a policy of maintaining friendly relations with all countries
that seek friendly relations with Panama, including Cuba and
Venezuela.
STEPHENSON

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