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OO RUEHWEB

DE RUEHZP #1487/01 2491224
ZNR UUUUU ZZH
O 061224Z SEP 07
FM AMEMBASSY PANAMA
TO RUCPDOC/DEPT OF COMMERCE WASHDC IMMEDIATE
RUEHC/SECSTATE WASHDC IMMEDIATE 1114

UNCLAS PANAMA 001487 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CEN - TELLO 
ALSO FOR WHA/EPSC - SALAZAR 
COMMERCE FOR 4332/ITA/MAC/WH/OLAC - JANDERSON 
DOC ALSO FOR 3134/USFCS/OIO - KESHISHIAN 
 
E.O. 12958: N/A 
TAGS: OVIP ETRD PGOV PM
SUBJECT: SCENESETTER: SECRETARY OF COMMERCE CARLOS 
GUTIERREZ'S SEPT. 12-13 VISIT TO PANAMA 
 
This message is sensitive but unclassified.  Please protect 
accordingly. 
 
¶1.  (U) Welcome and Summary.  Embassy Panama extends a warm 
welcome to you and your delegation.  Your engagement in 
Panama can help strengthen our bilateral relationship, boost 
support for the U.S.-Panama Trade Promotion Agreement (TPA), 
reinforce U.S. export opportunities regarding the $5.25 
billion Panama Canal expansion project and other multiple 
opportunities, 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 free trade, as evidenced by the National 
Assembly's nearly unanimous ratification of the TPA within 
two weeks of its June 28 signing.  You will have the 
opportunity to meet with top GOP officials, local media, and 
a cross-section of private sector and ci 
vil society leaders. 
 
¶2.  (SBU) Your visit follows President Bush's March 2007 
Latin America tour and other recent high level Administration 
visits, including: Deputy U.S. Trade Representative John 
Veroneau (March), Transportation Secretary Mary Peters (May), 
Deputy Secretary of State John D. Negroponte (May), Secretary 
of State Condoleeza Rice (June), Health & Human Services 
Secretary Mike Leavitt (June), and several Congressional 
 
SIPDIS 
delegations.  Your visit also comes on the heels of Panama's 
September 3 formal launch of the Panama Canal expansion 
project and commemoration of the thirtieth anniversary of the 
signing of the Panama Canal Treaties, which brought former 
President Jimmy Carter, Senator Robert Byrd, and several 
Latin American heads of state to mark the occasion. 
 
¶3.  (SBU) Your visit also comes on the heels of the 
Panamanian National Assembly's widely criticized selection of 
its new President, Pedro Miguel Gonzalez, who is indicted by 
the U.S. for the 1992 killing of U.S. serviceman Zak 
Hernandez in an act of terror in Panama.  In accepting the 
post on September 1, Gonzalez held out the possibility of 
stepping down should his presence become an "obstacle" to the 
U.S. Congress' ratification of the TPA.  End Summary. 
 
-------------------------------------- 
Panama Sees Boom in GDP and Investment 
-------------------------------------- 
 
¶4.  (U) With 8.1% GDP growth in 2006, Panama's economy saw 
its fastest growth in 14 years, surpassing growth of 6.9% in 
2005 and 7.5% in 2004.  GDP growth for 2007 currently tops 9% 
and some private analysts predict it may exceed 10% by 2008. 
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. 
 
¶5. (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. 
 
-------------------------- 
Panama Embraces Free Trade 
-------------------------- 
 
¶6.  (U) Panama maintains one of the most liberalized trade 
regimes in the hemisphere.  As Panama's largest trade 
partner, the U.S. consistently maintains a huge trade surplus 
 
with Panama.  Two-way trade so far this year (through June) 
exceeds $1.8 billion, which includes more than $1.6 billion 
in U.S. exports and about $168 million in Panamanian exports 
to the U.S.  Two-way trade in 2006 reached nearly $3.1 
billion, an increase of 24% over 2005's trade of nearly $2.5 
billion.  The U.S. exported about $2.7 billion to Panama and 
imported $378 million. 
 
¶7.  (U) Reflecting Panama's enthusiasm for free trade, the 
National Assembly ratified the U.S.-Panama TPA on July 11, 
2007 by an overwhelming 58-3 margin.  TPA opponents came 
mainly from the ranks of left-wing extremists whose 
opposition proved sparse and disorganized.  Virtually all 
business sectors have lined up in support of the TPA. 
Although leading labor groups had initially presented a 
strong anti-TPA front at the outset of negotiations in 2004, 
they ultimately splintered on the issue.  CONATO, the main 
council of confederated labor unions, voted narrowly (4-3) to 
support the TPA in June 2007. 
 
¶8.  (U) 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. 
In March 2007, Panama and Honduras concluded their FTA 
negotiations.  Panama continues to negotiate separate FTAs 
with Costa Rica, Guatemala, and Nicaragua. 
 
--------------------------------------------- ---- 
ACP Launches $5.25 Billion Panama Canal Expansion 
--------------------------------------------- ---- 
 
¶9.  (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.   The ACP has cut 
average Canal transit times, reduced 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. 
 
¶10.  (U) In October 2006, Panamanians voted overwhelmingly 
(78% to 22%) in favor of the proposed expansion of the Panama 
Canal.  This project entails primarily construction of a 
"third lane" and two new sets of locks to accommodate larger, 
"Post Panamax" ships.  The ACP formally launched construction 
activities on September 3, 2007 in ceremonies attended by 
former President Carter and other dignitaries.  The GOP 
expects the project will be done in 2014.  Panamanians hope 
that it will be a transforming event that provides jobs and 
sets the tone economically for many years. 
 
¶11.  (U) 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.  U.S. firms have done well thus far in the 
competition for early contracts, including CH2M Hill's recent 
win of a 7-year project management deal with the ACP.  Some 
in the construction industry worry that Panama has nowhere 
near the number of skilled workers necessary for the 
expansion project, particularly English-speaking workers. 
 
--------------------------------------------- -------------- 
Poverty, Unemployment, Corruption & Other Challenges Remain 
--------------------------------------------- -------------- 
 
¶12.  (SBU) At $4,900, 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. 
 
¶13. (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 for his involvement in alien smuggling.  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. 
 
¶14. (SBU) The lack of an effective educational system and the 
lack of support for small business development are two 
factors that contribute to Panama's high poverty levels. 
Despite spending 12% of the national budget and 5% of GDP on 
education, Panama's workforce remains poorly educated.  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. 
 
--------------------------------------------- -------------- 
Torrijos Enjoys High Approval Despite Challenges & Missteps 
--------------------------------------------- -------------- 
 
¶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) Three years into his five-year term, Torrijos 
continues to enjoy nearly 60% public approval, 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. 
 
¶17.  (SBU) Driven by the internal politics of the PRD 
majority, the National Assembly on September 1, 2007 selected 
Assemblyman Pedro Miguel Gonzalez as the Assembly's 
President.  Gonzalez is indicted in the U.S. in connection 
with the 1992 killing of U.S. serviceman Zak Hernandez in an 
act of terrorism done in Panama.  After fleeing to a third 
country for more than two years, Gonzales later returned to 
Panama and was acquitted by a Panamanian court in a sham 
trial marred by witness intimidation, harassment of 
prosecutors, and manipulation of the judge and jury. 
Gonzales remains wanted by the U.S. on counts of murder, 
attempted murder, conspiracy to commit murder.  In accepting 
the post on September 1, Gonzalez held out the possibility of 
stepping down should his presence become an "obstacle" to the 
U.S. Congress' ratification of the TPA.  The National 
Assembly's decision has been criticized widely by Panamanian 
commentators, opposition figures, and ordinary citizens. 
 
¶18.  (SBU) With opposition parties remaining fractured and so 
far unable to coalesce into an effective counterweight, the 
PRD remains 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.  It remains unclear whether or the 
extent to which the recent Pedro Miguel Gonzalez episode 
might affect the PRD's 2009 prospects, but the Gonzalez 
affair indicates that the fissures and divisions within the 
PRD ranks are more profound than previously thought. 
 
------------------------------------------ 
Panama Active on Global and Regional Stage 
------------------------------------------ 
 
¶19.  (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 and has consistently voted with the U.S. 
Panama also hosted 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 
--------------------------------------------- - 
 
¶20.  (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 c 
ritical 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. 
 
¶21.  (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. 
 
¶22. (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 
enhance the security of container traffic between our two 
countries.  CSI equipment was began operating in late August 
at the Balboa Port on the Pacific side of the Panama Canal 
and will likely be installed by the end of 2007 at the 
 
U.S.-run Manzanillo International Terminal (MIT) in Colon. 
EATON