This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 PANAMA 000929 
 
SIPDIS 
 
 
FROM AMBASSADOR LINDA WATT TO AUSTR REGINA VARGO 
 
 
E.O. 12958: N/A 
TAGS: ETRD PREL PM ECONOMIC AFFAIRS
SUBJECT: SCENESETTER: AUSTR VARGO'S TRIP TO PANAMA FOR THE 
FIRST ROUND OF U.S.- PANAMA FTA NEGOTIATIONS (APRIL 26-30) 
 
 
This message is sensitive but unclassified.  Please protect 
accordingly. 
 
 
¶1. (U) I warmly welcome your April 25-30 visit to Panama. 
The USDEL's visit marks the culmination of a long campaign by 
the GoP to move forward on an FTA with the U.S.  You will 
have the opportunity to reiterate USG commitment to expanding 
trade and investment between our two countries, and to press 
for continuing focus on predictability for investors and 
transparency and anti-corruption within Panama's 
institutions.  Your visit highlights our governments' mutual 
interest in the strategic issues of expanding open markets 
throughout the hemisphere and strengthening democracy. 
Panama's upcoming May 2 national elections will reign 
paramount in the minds of many of your interlocutors.  It is 
worth noting Panama was an early member of the Coalition of 
the Willing, has signed and ratified a bilateral Article 98 
Agreement, is a strong anti-narcotics ally, a strong 
supporter of U.S. maritime security/trade-security 
initiatives, and has sided with the USG in regional and 
multilateral trade fora.  Panama has proven itself a good 
friend and ally. 
 
 
--------------- 
A Brief History 
--------------- 
 
 
¶2. (U) From its founding in 1903 until 1968, the Republic of 
Panama was a constitutional democracy dominated by a 
commercially oriented oligarchy focused on Panama as an 
entreport for international trade.  In October 1968, Dr. 
Arnulfo Arias Madrid -- the deceased husband of current 
Panamanian President Mireya Moscoso -- was elected to and 
deposed from the presidency for the third time.  General Omar 
Torrijos  (d. 1981) -- the deceased father of current 
opposition leader and leading presidential candidate Martin 
Torrijos -- became dictator in 1969 and was succeeded in 
infamy by General Manuel Noriega.  On December 20, 1989, 
President George H.W. Bush ordered the U.S. military into 
Panama to restore democracy, protect AmCits and their 
property, fulfill U.S. treaty responsibilities to operate and 
defend the Canal, and bring Noriega to justice.  Noriega is 
still serving a 30-year sentence in Miami for drug 
trafficking.  Since 1989, Panama has twice held free and fair 
elections, transferring power from/to opposition parties in 
1994 and 1999. 
 
 
------------------ 
May 2004 Elections 
------------------ 
 
 
¶3. (U) Panama will hold national elections on May 2, 2004, 
with the incumbent Moscoso Administration leaving office 
September 1.  Four campaigns are vying for the presidency, 78 
legislative seats, and all mayoral and local representative 
positions.  Democratic Revolutionary Party (PRD) candidate 
Martin Torrijos maintains a substantial lead over third-party 
candidate and former Panamanian President Guillermo Endara 
(1989-1994).  The ruling Arnulfista party candidate, former 
Foreign Minister Jose Miguel Aleman (1999 to 2003), seems to 
be closing the gap with Endara.  Minor Democratic Change (CD) 
party candidate Ricardo Martinelli is a distant fourth.  A 
recent poll shows Torrijos with 47 percent support, followed 
by Endara with 27 percent, Aleman with 19 percent, and 
Martinelli with 6 percent.  Panama's elections are expected 
to be free and fair and should not warrant extensive 
monitoring or observation.  All candidates want to maintain a 
close and cooperative relationship with the US and are 
strongly supportive of an FTA with the US; however, the 
agricultural lobby and Panama's rural populace weighs 
particularly heavy with Endara. 
 
 
---------------------------- 
Towards a Democratic Culture 
---------------------------- 
 
 
¶4. (SBU) My September 29 speech to Panama's Chamber of 
Commerce, Industry and Agriculture, launching Embassy's Good 
Goverance Initiative (GGI), resonated with Panamanians and 
generated front-page headlines.  Venality, conflict of 
interest, nepotism, and lack of transparency are ingrained in 
Panama's political culture and institutions.  Panama's 
"spoils system" allows politicians to use the entire state 
bureaucracy as a patronage base.  The country's criminal 
libel laws, left over from military rule, impose enormous 
costs and risks on journalists and whistle-blowers. 
Legislative immunity is often abused, as elsewhere in the 
region.  The Embassy currently supports good goverance 
activities directed toward judicial reform, civic education, 
business ethics, and strengthening anti-corruption 
prosecutors' institutional capacity, and is reviewing 
implementation of President Bush's initiative to cancel visas 
to the United States of corrupt public officials. 
 
 
---------------------------- 
A Mixed Macroeconomic Record 
---------------------------- 
 
 
¶5. (SBU) Since the turnover of Canal operations and US 
military bases in 1999, Panama has had a mixed record of 
economic success.  The Canal is run more efficiently, safely 
and profitably than under USG administration.  Canal-related 
industries, especially cargo transshipment through ports at 
both ends of the Canal, have boomed, as have visits by U.S. 
cruise ships, which will surpass 200 port calls in Panama 
this year.  Panama's overall economy went flat when nearly 
30,000 U.S. military personnel and their dependents left 
during the late 1990s, privatizations slowed, and the 2001 
global recession took hold which  perpetuated the country's 
estimated 13.4% unemployment.  Also, Panama has failed to 
attract large investments into the former Canal Zone. 
Poverty, income disparity (2nd only to Brazil in the 
Hemisphere), an actuarially bankrupt social security system 
and a heavy sovereign debt load are arguably the biggest 
internal challenges facing Panama today.  Since mid-2003, 
however, economic growth has picked up, primarily as a result 
of tax incentives given to a booming construction sector, low 
interest rates, and a global economic recovery.  Panama's 
growth rate for 2003 came in at around 4 percent. 
 
 
¶6. (U) Panama's $12 billion economy is based primarily on a 
well-developed services sector that accounts for 
approximately 78 percent of GDP.  Services include the Panama 
Canal, banking and financial services, legal services, 
container ports, the Colon Free Zone (the 2nd largest in the 
world), and flagship registry.  Panama also maintains one of 
the most liberalized trade regimes in the hemisphere. 
Bilateral trade with Panama came to $2.1 billion in 2003. 
U.S. exports were $1.85 billion and imports were $301 
million.  The stock of U.S. Foreign Direct Investment (FDI) 
in 2002 was $20 billion, down 20 percent from 2001.  U.S. FDI 
is primarily concentrated in the financial sector. 
 
 
---------------------------------- 
International Trade and Investment 
---------------------------------- 
 
 
¶7. (SBU) Economic issues top Panama's agenda with the United 
States.  First, for political and economic reasons, the 
Moscoso Administration is pleased the first negotiating round 
for the bilateral FTA will be held prior to the May 2 
national elections.  (Comment.  While the GOP argues that the 
timing of the talks will send the right signal that this is a 
"state project" rather than a political one, the Moscoso 
Administration is hoping for some pre-electoral political 
advantage.  End comment.) Panama is also satisfied with the 
current negotiating schedule as it provides for completion of 
an agreement prior to the November U.S. elections and the 
July 2005 expiration of TPA.  The GoP views the FTA as a 
vehicle to lock in the status quo or better (CBI, GSP), 
improve market access in niche areas (e.g., banking, 
maritime, and sugar), and most importantly to attract 
investment. GoP Minister Jacome was not pleased with recent 
public remarks by Costa Rica's Trade Minister that they would 
welcome Panama into CAFTA.  Jacome told ECON Chief that from 
Panama's perspective this was a bilateral, but he was not 
closing the door on any options. 
 
 
¶8. (U) The GoP has long argued for Panama's re-designation 
from a "near foreign port" to a "distant foreign port" under 
the U.S. Passenger Vessels Services Act (PVSA), to capture a 
larger share of the cruise ship trade.  The USG is studying 
the possibility of a re-designation.  The GoP estimates that 
up to U.S. $50 million per year could be gained for Panama's 
growing tourism sector.  Over the past year, we have seen a 
marked improvement in the GoP's willingness to make progress 
on a number of U.S. investment cases, to address bilateral 
trade issues, including agricultural concerns, and to enhance 
cooperation/coordination in regional and multilateral trade 
fora.  The USG has asked Panama to continue its progress on 
resolving investment disputes and improving its investment 
climate through responsiveness to investor concerns, clear 
rules of the game, predictability, and transparency in 
decision-making.  Agriculture protectionism is still vexing, 
however; US beef imports from the recent BSE scare have not 
resumed, and we fight recurring skirmishes on pork, poultry, 
potatoes, and other products.  (Comment: In part due to 
upcoming elections.  End Comment.) 
 
 
¶9. (U) After several years of effort, Panama was elevated to 
"Category 1" for air safety oversight on April 14, 2004. 
This was the result of efforts by the Federal Aviation 
Administration and Embassy to focus the GoP on implementing 
needed changes to its aviation authority in order to ensure 
the safety of the traveling public.  The designation allows 
Panamanian air carrier COPA to increase flights into the U.S. 
 COPA (49 percent owned by Continental Airlines) may now 
exercise an option for Boeing aircraft, valued at more than 
$354 million, to service new routes, thus directly 
benefitting these two key U.S. companies.  Lastly, sometime 
next year the GoP is expected to move forward with a national 
referendum on expansion of the Canal through the construction 
of a third set of locks.  If, given the green light, the 
project's value is estimated to be between USD 4-9 billion 
and would take around 10 years to complete.  Substantial 
opportunities for U.S. service providers is expected. 
 
 
 
 
----------------- 
Maritime Security 
----------------- 
 
 
¶10. (SBU) The 9/11 attacks called significant attention to 
the potential for terrorist exploitation of Panama's leading 
maritime position.  Panama has the world's largest flag state 
registry with approximately 6300 vessels over 500 gross 
metric tons and approximately 300,000 seafarers. 
Additionally, approximately two-thirds of Canal traffic 
originates or terminates at U.S. ports, roughly 13% of U.S. 
seaborne trade.  Nearly, 27 percent of foreign-flagged cargo 
ships arriving at U.S. ports are Panamanian.  Moreover, 
approximately 125 U.S. military vessels, including 
nuclear-powered U.S. submarines ("high value transits"), 
visit Panamanian ports and/or transit the Canal each year. 
Port services have grown dramatically from about 200,000 
containers per year in the early 1990s to almost two million 
by 2002, giving Panama Latin America's leading port complex. 
(Note: Although a large number of containers transit the 
Panama Canal, the number that actually are shipped and 
transshipped from Panama are substantially less -- around 90 
thousand.  End note.) 
 
 
¶11. (SBU) Given these equities, the Embassy, through its 
Maritime Security Working Group and in coordination with 
Washington agencies, has undertaken a broad Maritime Security 
agenda with the GoP.  We have seen a strong willingness on 
the part of the Moscoso Administration for Panama to meet its 
responsibilites as a major maritime player.  Progress has 
been particularly good since President Moscoso's appointment 
in June 2003 of Panama's Public Security and National Defense 
Council ("the Consejo") Executive Secretary Ramiro Jarvis to 
coordinate maritime security matters.  Key components of the 
agenda include: making Panama's seafarer document more 
secure, protecting U.S. forces, port security (including for 
cruise ships), container security, export controls, 
proliferation security, and strengthening GOP institutions. 
Progress by the GoP has been good on all of the fronts; 
however, we will have to keep the pressure on the GoP to 
follow-through, in particular, on meeting new IMO requirement 
regarding ship and port security. 
 
 
¶12. (SBU) Panamanians have also become increasingly willing 
to accept military-to-military security training, equipment 
and other assistance to enhance their capabilities to protect 
the Canal and borders.  Although the present terrorist threat 
to the Canal is considered low and Panamanian planning, 
layered defenses and security resources are generally well 
regarded, the Canal remains vulnerable.  Continued U.S. 
training, equipment and other assistance are vital to preempt 
a major terrorist attack. 
 
 
 
 
---------------------------- 
Fighting International Crime 
---------------------------- 
 
 
¶13. (SBU) Law enforcement cooperation with Panama is 
excellent.  The Moscoso Administration set up a new, 
GOP-interagency counternarcotics vetted unit; expanded upon 
the basic shiprider agreement to facilitate maritime/air 
operations in pursuit of drug, arms and explosives smuggling 
(and may soon include WMD); expedited thirty-eight maritime 
drug prisoner transfers to USG custody (saving U.S. taxpayers 
U.S. $1 million per event); and captured and transferred to 
U.S. custody seventeen fugitives from U.S. justice (most 
recently, on January 14, Colombian drug kingpin Arcangel de 
Jesus Henao Montoya, wanted in New York for smuggling five 
tons of cocaine).  Panama is working much more closely with 
Colombian President Uribe's government against 
narco-terrorists.  The GOP has also welcomed USG assistance 
-- DOD special operations forces (training National Police 
(PNP) border units) and AID community development (enhancing 
productive capacity and governmental presence in the Darien 
border province). 
 
 
¶14. (SBU) The GOP revamped its legal and administrative 
structures to fight money laundering, becoming a model for 
other countries, such as Russia, that are trying to bring 
their regimes up to grade.  Panama assisted the USG in the 
prosecution of money laundering cases and provided crucial 
information against former Nicaraguan President Arnoldo 
Aleman.  However, at the 2004 Summit of the Americas in 
Monterrey, Mexico, several hemispheric neighbors chided 
Panama for recently granting "asylee" status to a former 
Ecuadorian cabinet minister, who is charged with embezzlement 
of government funds. 
WATT