Cablegate: Martinelli Not Meeting Pro-Business Rhetoric Or

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C O N F I D E N T I A L PANAMA 000757

SIPDIS

STATE PASS TO COMMERCE/ITA/MAC GAISFORD, TREASURY/JOHN
HARRINGTON, AND USTR/AMERICAS OLIVER

E.O. 12958: DECL: 10/04/2029
TAGS: ECON PREL PGOV PM
SUBJECT: MARTINELLI NOT MEETING PRO-BUSINESS RHETORIC OR
EXPECTATIONS

REF: A. PANAMA 711
B. PANAMA 657
C. PANAMA 756

Classified By: Ambassador Barbara J. Stephenson for reason 1.4 b and d

1. (C) Summary: The distinguishing feature of the Martinelli
Administration's economic policy has been that there does not
appear to be a coherent or consistent policy. It has made
one major positive decision, which is to maintain sound macro
economic policies. It has made one major negative decision,
which is to continue to resist U.S. and OECD pressure to
increase financial transparency. And it has taken a series
of apparently ad hoc actions against certain business sectors
which has threatened Panama's reputation as a good place to
invest. Finally, widely spread rumors that Martinelli plans
to appoint two cronies to the Supreme Court will further
erode investment confidence and judicial independence.
Martinelli campaigned on a pro-business platform and comes
from the private sector, but his performance to date calls
into question expectations that he will govern in a manner
that provides business predictability and certainty.
However, we believe that the Martinelli Administration can
correct its course by embracing predictability and
transparency. End Summary.

The Good
--------

2. (SBU) The 2010 budget for $10,280 million, up 5.3 percent
from the 2009 budget, is dominated by social services, which
accounts for almost half of public spending. However, unlike
many countries which have had to cut social spending or face
large deficits, Panama will run only a small deficit, $511.7
million, or 1.9 percent of the annual nominal GDP, resulting
in a total public debt of 42 percent of the GNP. The
continued macro economic stewardship points to the Martinelli
government being able to achieve either its ambitious
spending goals (such as the expected $1 billion metro system
for Panama City) or investment grade bond rating. See reftel
A for more on the budget.

The Bad
-------

3. (C) However, the Government of Panama appears to be
divided about whether and how to address demands by the OECD
on tax havens and the U.S. for an effective Tax Information
Exchange Agreement (TIEA). Vice President and Foreign
Minister Varela told the Ambassador on October 2 that he
supports constructively engaging the U.S. and OECD, but that
Minister of Economy and Finance Vallarino is not yet on
board. In a separate meeting, Presidnt Martinelli told
Varela to "make it happen" (referring to getting off the OECD
black list), but then asked the Ambassador to weigh in with
Vallarino, illustrating the division.

4. (SBU) As a result, and as former Vice President Al Gore
put it to Minister Vallarino on September 30, Panama is
worsening its reputation in global financial services by
continuing to be called a tax haven. BNP Paribas announced
on September 27 that it is pulling out of Panama and all
other OECD black listed countries due to the increasing risk
of doing business in those countries. The stubbornness of
the GOP also leaves it open to abuses within the Colon Free
Trade Zone, which harbors significant legitimate business but
also is the route for illegitimate money and products.

5. (SBU) Additionally, the government's actions against US
firms AES and MIT call into their commitment to maintaining a
strong investment climate. AES has been hard hit by the GOP
threat to unilaterally change the contracted price of water
for hydroelectric generation plants owned by AES. The result
of this ongoing dispute, which still has not been resolved,
has been to reduce AES, bond rating in Panama to below
investment grade. See reftel B for more information on AES.

6. (SBU) This is not the first time that the government took
aim at a sector without regard to existing contracts. The
GOP introduced a bill that would have eliminated contract
concessions changes by reverting contracts back to their
original agreement if the company harmed the people of
Panama, thereby eliminating years of business predictability
to contract holders. This clause appears to have been aimed
at port concessions, including the US firm Manzanillo

International Terminal (MIT) which operates in Colon. The
renegotiations between MIT and the GOP also have not
terminated, but MIT has expressed optimism that resolution
will come soon and be acceptable. The result of these two
actions, plus other actions which did not directly impact
American firms, has been to negatively affect business
perspective on the investment climate. AES told us that
plans to construct a second hydro plant in Panama valued at
$600 million have been shelved, and MIT has told us that the
US owner no longer considers the Port of Colon a good place
for future investment. The major change in the investment
climate is that now investors are not certain that political
calculations will not play a role in how contracts will be
enforced; every contract could now be valid for only the
five-year presidency term.

The (Possibly) Ugly
--------------------

7. (C) The increase in political interference with
contractual matters is possible due to the historically weak
judiciary system. In October, Martinelli will appoint two
supreme court magistrates to take seats in January. The
names floated do not give us optimism: Gerardo Solis, who is
widely considered to be corrupt, and Jose Almengor, who is
believed to be in line for a position in order to keep him
from talking about Martinelli secrets. Several leading
newspaper editors told the Ambassador and DCM that President
Martinelli's honeymoon with the local press would end if he
nominated these two to the Court. See reftel C for more
information.

8. (C) Comment: Post will continue to monitor the
Administration's activities on investment climate, financial
transparency, and judicial independence. While it is clear
from the actions it has taken that the Martinelli
Administration has not lived up to its promises or its
pedigree, post believes a nuanced message to the GOP can end
certain negative trends and prevent future erosion of
predictability from occurring. We are cautiously optimistic
that the worst - at least regard to ad hoc actions against
businesses - is over. End comment.

STEPHENSON

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