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DE RUEHZP #0914/01 1522225
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R 012225Z JUN 07
FM AMEMBASSY PANAMA
TO RUEHC/SECSTATE WASHDC 0521
INFO RHEHAAA/NSC WASHDC
RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEAUSA/DEPT OF HHS WASHDC

UNCLAS PANAMA 000914 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PREL PGOV ETRD ECON OVIP OTRA PM
SUBJECT: SCENESETTER FOR SECRETARY OF STATE RICE'S 
JUNE 4 VISIT TO PANAMA 
 
This message is sensitive but unclassified.  Please 
protect accordingly. 
 
¶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 will: 
 
- 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 countries; 
- 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 outlets. 
 
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 Summary. 
 
-------------------------------------- 
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 
businesses. 
 
¶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 watershed. 
 
¶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 Venezuela. 
 
--------------------------------------------- - 
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 aliens. 
 
¶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 
licenses 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. 
 
Eaton