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

UNCLAS SECTION 01 OF 05 PANAMA 000701 
 
SIPDIS 
 
SENSITIVE 
 
DEPARTMENT FOR WHA/CEN 
SOUTHCOM ALSO FOR POLAD 
 
E.O. 12958: N/A 
TAGS: AMGT ASEC MOPS OREP PGOV PM PREL
SUBJECT: SCENESETTER: GEN CRADDOCK APRIL 4-5 VISIT TO PANAMA 
 
REF: PANAMA 627 
 
¶1. (U) This message is sensitive but unclassified.  Please 
protect accordingly. 
 
¶2. (SBU) On behalf of Embassy Panama, I would like to 
extend our warmest welcome on your upcoming visit to 
Panama.  You will have the opportunity to review a 
wide range of issues, including bilateral security and 
information-sharing proposals.  Your visit here, as 
the government of President Martin Torrijos enters its 
ninth month, signals the interest of the United States in 
strengthening our excellent relations with Panama. 
(Secretary of State Powell visited Panama on November 3, 
2003, to attend Panama's Centennial celebrations and, 
again, on September 1, 2004, to attend the presidential 
inauguration.  Secretary of Defense Rumsfeld visited Panama 
November 13-14, 2004, to discuss ongoing security and law 
enforcement cooperation and Canal issues.)  Panama's 
exemplary cooperation on a wide range of issues including 
security, law enforcement policy, and trade -- promises to 
reach new levels under the Torrijos government.  Elected as 
a modernizing, anti-corruption reformer by the largest 
post-1989 plurality on record, Torrijos has made clear that 
his most important foreign policy priority is relations 
with the United States and that he intends to deepen our 
mutual focus on counter-terrorism capabilities, combating 
international criminal networks, and expanding trade and 
investment.  Torrijos is the first Panamanian president 
elected after the hand over of the Canal on December 31, 
1999, and the final withdrawal of the U.S. forces.  U.S. 
relations with Panama are more mature than in the past, 
based on mutual economic and security interests. 
 
--------------- 
A Brief History 
--------------- 
 
¶3. (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 
entrepot for international trade.  In October 1968, Dr. 
Arnulfo Arias Madrid, the deceased husband of former 
Panamanian President Mireya Moscoso, was deposed from the 
presidency by the Panamanian military.  General Omar 
Torrijos (d. 1981), the deceased father of current 
Panamanian President Martin Torrijos, became dictator 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.  Panama has held 
free and fair elections three times since 1989, 
transferring power from/to opposition parties. 
 
--------------------------------------- 
President Torrijos and a New Generation 
--------------------------------------- 
 
¶4. (SBU) In his September 1, 2004, inaugural address, 
Torrijos clearly identified his government's principal 
priorities as sustainable economic development and poverty 
alleviation, investment, fiscal reform, increased 
government transparency, and job creation.  The new 
president and his Democratic Revolutionary Party (PRD) -- 
largely purged of its former anti-democratic, anti-U.S. 
tendencies and holding an absolute majority in the 
Legislative Assembly -- have faced large challenges from 
the outset: a serious budget shortfall and tide of red ink 
left by the outgoing government; urgently required action 
to right the nation's foundering retirement and medical 
system (the Social Security Fund); restoring public 
confidence in government institutions and the rule of law; 
completing the Free Trade Agreement negotiations with the 
United States; launching a more activist and "coherent" 
foreign policy (including closer relations with Western 
Europe and a review of Panama's relations with Taiwan and 
China); and a decision on how to proceed with Canal 
expansion, leading to a 2005 national referendum.  The GOP 
has responded to the deficit with belt-tightening measures, 
including passing an unpopular fiscal reform package in 
late January.  Reform of the social security system is 
currently under discussion, with legislative action likely 
in April 2005. 
 
¶5. (SBU) Martin Torrijos Espino won the presidency on May 
2, 2004, in general elections that amounted to a landslide 
(47 percent of the popular vote), which propelled his 
Democratic Revolutionary Party (PRD) into control of the 
Legislative Assembly (42 out of 78 legislative seats). 
Torrijos has surrounded himself with young, primarily 
U.S.-educated professionals like himself, and has 
marginalized "old guard" supporters of former President 
Ernesto Perez Balladares (1994-99).  Torrijos and those 
closest to him have indicated that they intend to work 
closely with U.S. officials, especially on security, law 
enforcement, trade and investment.  Overall, his cabinet 
appointments have been inspired choices -- many of them 
technocrats with a pro-U.S. outlook.  Most (but not all) of 
Torrijos's cabinet-level and other high-level appointments 
are respected professionals without excessive baggage from 
Panama's 21-year military dictatorship or the PRD's 
anti-U.S. faction, a promising sign.  Anticipated pressures 
from a well-entrenched oligarchy could frustrate the 
Torrijos administration's reform plans. 
 
¶6. (SBU) After campaigning on a "zero-corruption" platform, 
Torrijos launched a number of anti-corruption 
investigations and initiatives in the opening weeks of his 
administration. His most controversial action was the 
removal and replacement of Supreme Court President Cesar 
Pereira Burgos, who had passed retirement age, in a bid to 
clean up Panama's politicized Supreme Court.  The 
controversy over corruption within the Supreme Court 
continues to play out in the media, and President Torrijos 
recently formed a commission to look at justice sector 
reform. We support this effort, and the Embassy continues 
to build its strong Good Governance initiative, which began 
with Ambassador Watt's 2003 speech against official 
corruption. That speech resonated firmly with Panamanians 
from all walks of life and generated front-page headlines. 
The Ambassador has also stated publicly that poverty could 
pose dangers for democracy and that skewed income 
distribution and social injustice increase the appeal of 
unscrupulous populist demagogues.  The Embassy currently 
supports good governance activities directed toward 
judicial reform, civic education, business ethics, and 
strengthening the anti-corruption prosecutors' 
institutional capacity.  An important element of the 
Embassy's Good Governance initiative is its visa revocation 
program.  Based on Embassy recommendations, the State 
Department in summer 2004 revoked the U.S. visas of two 
former senior GOP officials, which provoked a spate of 
mostly favorable press commentary and huge support (85 
percent according to one poll) from average Panamanians. A 
third visa, of former Maritime Authority Director Bertilda 
Garcia, was revoked in early March.  Several other corrupt 
officials have lost their visas for money laundering or 
related issues and we are ever alert to ensure that other 
corrupt officials who have harmed USG interests may not 
travel to the United States. 
 
----------------------------------- 
Security and Law Enforcement Policy 
----------------------------------- 
 
¶7. (SBU) President Torrijos came to office with a clear 
focus on security, particularly regarding canal and 
maritime security, and combating terrorism and 
transnational crime. His government is taking steps to 
impose order, efficiency, and organization on Panama's 
security agencies.  On May 12, 2004, the U.S. and Panama 
signed a Proliferation Security Initiative (PSI) 
Shipboarding Agreement, underscoring the excellent 
bilateral cooperation that the new GOP has assured us will 
continue or improve.  The Government of Panama (GOP) must 
sort out its financial priorities to address issues such as 
how to adequately patrol Panama's long Caribbean and 
Atlantic coastlines and how to secure Panama's porous 
border with Colombia against guerrilla infiltration. 
 
¶8. (SBU) A centerpiece of U.S.-Panamanian relations in 
recent years has been a steadily improving law enforcement 
and security relationship.  Close bilateral cooperation 
with our Panamanian counterparts has yielded many successes 
including, but not limited to, steadily increasing 
narcotics seizures, more sophisticated investigations, an 
active maritime law enforcement relationship, the 
development of specialized units, and an enhanced ability 
to combat money laundering and other illicit financial 
flows.  While the USG's relationship with the Torrijos 
Administration has been positive, there remains work to be 
done to solidify these gains and enhance the effectiveness 
of joint operations.  Panama's law enforcement institutions 
remain weak and all suffer from a paucity of resources and 
limited professional capacity. Through our limited 
assistance programs, we are trying to address these 
shortcomings, but real success will require additional 
resources from the Panamanian budget. 
 
-------------------- 
Security Cooperation 
-------------------- 
 
¶9. (SBU) Panama's former sovereignty sensitivities are 
slowly receding with recognition that the challenge of 
securing the Canal and Panama's borders requires a more 
mature and collaborative bilateral relationship.  Panama 
early on gave political support to the Coalition of the 
Willing.  It signed and, on October 8, 2003, ratified a 
bilateral Article 98 Agreement.  Related to Canal and 
border security, Panamanians have become much more willing 
to accept mil-to-mil security training, equipment, and 
other assistance, as was shown during the August 2004 
multinational Panamax naval exercise that centered on Canal 
defense.  The GOP has welcomed Ambassador Watt's initiative 
to increase the number of Medical Readiness Exercises and 
other DOD humanitarian programs that provide much-needed 
assistance to rural Panamanians.  During the 2003 New 
Horizons exercise, both the GOP and local press praised 
U.S. military for constructing schools and clinics. 
Together, these programs highlight the humanitarian side of 
the U.S. military and foster positive public perceptions of 
the USG.  New Horizons 2005 (NH05) is currently underway 
and has received wide and favorable press coverage.  The 
principal objective of NH05 is to provide joint readiness 
training opportunities for U.S. military units and their 
Panamanian counterparts.  The training includes 
mobilization and deployment from the United States to 
Panama, and performance of humanitarian and civic 
assistance projects. 
 
---------------- 
Our Third Border 
---------------- 
 
¶10. (SBU) Panamanian planning, layered defenses and 
proactive security measures are generally well-regarded, 
although the Canal remains an attractive and vulnerable 
threat to terrorists. Continued U.S. training, equipment 
and other assistance reduce GOP vulnerabilities to any 
potential terrorist attack.  To protect water resources, 
the Panama Canal Authority (ACP) has committed to match 
dollar-for-dollar AID's three-year USD 2.5 million 
integrated watershed management program.  Panama committed 
to a robust maritime security agenda, which led to its 
timely adoption of the new International Maritime 
Organization (IMO) International Shipping and Port Security 
(ISPS) Code, which entered into force July 1, 2004.  In May 
2004, Panama amended its shipboarding agreement with the 
United States to support the Proliferation Security 
Initiative (PSI).  Despite significant progress, Panama 
continues to be an important transit point for drug 
smugglers, money launderers, illicit arms merchants, and 
undocumented immigrants heading north. 
 
----------------- 
Maritime Security 
----------------- 
 
¶11. (SBU) The GOP has sent strong signals that it intends 
to clamp down on what it calls abuses countenanced by 
previous governments in administering Panama's open ship 
registry and mariner identification documents.  Panama's 
ship registry now is the world's largest and comprises 
around one-quarter of the world's ocean-going fleet (5,525 
large commercial vessels).  About 13 percent of the U.S. 
ocean-going cargo transits the Canal each year.  Panama's 
seafarer registry currently licenses over 264,000 
crew members  In response to our homeland security 
concerns, the new GOP has announced intentions to greatly 
improve security and transparency in documenting ships and 
the crews that work on them.  Panama has privatized and 
developed some former U.S. military ports and other related 
facilities.  Port services grew dramatically from about 
200,000 containers per year in the early 1990s to 2 million 
by 2003.  Panama now boasts the leading complex of port 
facilities in Latin America.  We are actively discussing 
with GOP counterparts ways in which we can enhance maritime 
security through more robust information sharing--a subject 
that will likely come up during your visit. 
 
---------------------------------- 
International Trade and Investment 
---------------------------------- 
 
¶12. (U) Panama's approximately $14 billion economy is based 
primarily on a well-developed services sector that accounts 
for roughly 80 percent of GDP.  Services include the Panama 
Canal, banking and financial services, legal services, 
container ports, the Colon Free Zone (CFZ), and flagship 
registry.  Panama also maintains one of the most 
liberalized trade regimes in the hemisphere.  U.S. 
bilateral trade with Panama came to USD 2.1 billion in 
¶2003.  U.S. exports were USD 1.8 billion and imports were 
USD 301 million in 2003. The stock of U.S. Foreign Direct 
Investment (FDI) in 2002 was USD 20 billion.  U.S. FDI is 
primarily concentrated in the financial sector.  Per capita 
GDP is around $4,000. 
 
-------------------- 
Free Trade Agreement 
-------------------- 
 
¶13. (SBU) Former President Moscoso pushed to move forward 
quickly on a bilateral Free Trade Agreement (FTA). 
Negotiations began in April 2004; to date, the U.S. and 
Panama have held eight negotiating rounds.  The last round, 
held January 31 to February 6 in Washington, failed to 
close the agreement, primarily because of Panamanian 
agricultural sensitivities surrounding rice, poultry, and 
pork.  Panama also has a strong desire to increase its 
existing sugar quota.  It is not clear when a new round 
will be scheduled; however, the GOP needs to be more 
realistic regarding its aspirations if the agreement is to 
close.  The Torrijos administration views a bilateral FTA 
as imperative to attract investment, increase exports, and 
make Panama competitive with the CAFTA countries.  Jerry 
Wilson, President of Panama's Legislative Assembly, has 
commented to Embassy officials that, once negotiated, the 
FTA agreement "will pass." 
 
----------------- 
Canal Stewardship 
----------------- 
 
¶14. (SBU) During the past five years, the Panama Canal 
Authority (ACP) has proven itself an able administrator, 
turning the Panama Canal into an efficient and profitable 
business.  Since the 1999 hand over the ACP has reduced the 
average Canal transit times by one-third (from 36 hours to 
24 hours), has reduced accidents in Canal waters 
significantly, and has overseen large-scale upgrade and 
maintenance projects, such as widening the Gaillard Cut to 
allow simultaneous two-way transits.  The ACP also has 
increased revenues, which in FY 2004, exceeded USD one 
billion for the first time.  The Government of Panama 
received USD 332 million from the Canal in FY 2004 
(payments for government services, tolls, and profits). 
 
--------------- 
Canal Expansion 
--------------- 
¶15. (SBU) The Torrijos team plans to make Canal expansion a 
top priority.  The proposed Canal expansion project to 
construct a third-set of locks has an estimated price tag 
of USD 4-6 billion and is expected to take 8-10 years to 
complete.  It expects the project to be a transforming 
event for Panama that will provide jobs and set the tone 
economically for years to come.  Given the driving forces 
of international shipping -- containerization, construction 
of "post-Panamax" mega-ships currently unable to traverse 
the Canal, and growing trade between East Asia and the U.S. 
eastern seaboard -- the expansion is central to maintaining 
the Canal's future viability.  The expansion is expected to 
be financed through a combination of Canal revenues, new 
user fees, and bridge loans.  However, Panama's 
constitution requires a national referendum first be 
submitted to the Panamanian people for their approval.  GOP 
officials have stated this referendum will most likely 
occur in late 2005 or early 2006. 
 
WATT