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DE RUEHZP #0682/01 2281921
ZNR UUUUU ZZH
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FM AMEMBASSY PANAMA
TO RUEHC/SECSTATE WASHDC 2415
INFO RHMFISS/CDR USSOUTHCOM MIAMI FL
RUEAIIA/CIA WASHDC
RHEFDIA/DIA WASHDC
RHMFISS/JOINT STAFF WASHINGTON DC
RHEHAAA/NSC WASHDC
RUEKJCS/SECDEF WASHDC

UNCLAS PANAMA 000682 
 
SENSITIVE 
SIPDIS 
 
PASS TO H 
 
E.O. 12958: N/A 
TAGS: PGOV PREL PM
SUBJECT: PANAMA: SCENESETTER FOR CODEL HAGEL, AUG. 27-28 
 
------- 
Summary 
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¶1. (SBU) You will be arriving in Panama in the middle of a 
long election campaign, due to take place amidst record 
economic growth, but growing economic uncertainty. Panama has 
been one of the fastest growing economies in Latin America 
for the last few years (11.2% growth in 2007), and there are 
signs of wealth throughout Panama City. But Panama is also 
struggling with growing inflation, especially in basic food 
goods, and stubbornly high poverty. Despite the problems, 
Panama has a promising economic future, as it gets ready to 
manage the huge Canal expansion project, which will cost over 
$5 billion, and potentially effect global trade patterns. 
Amidst this economic background, the campaign for the 
Presidential and legislative elections, due in May 2009, is 
in full swing. The ruling Democratic Revolutionary Party 
(PRD) will hold its primary on September 7, one week after 
you leave. Besides the economy, crime is also increasingly an 
important electoral issue here, as Panamanians' fear rising 
crime as gang violence escalates. The government's proposed 
security reforms are being criticized by civil society 
leaders as an attempt to return to the militarism of the 
past. The USG and the GOP continue to cooperate very closely 
on a wide variety of issues, and enjoy excellent relations. 
President Torrijos will travel to the U.S. in mid-September 
to principally meet with members of Congress to push for 
passage of the Panama-US Free Trade bill. End Summary. 
 
 
------------------------------------ 
Booming Economy, But Problems Linger 
------------------------------------ 
 
¶2. (SBU) Your visit comes at a time when Panama's economic 
boom contrasts starkly with sustained high levels of poverty, 
continuing wide income disparities, persistent corruption, 
and woeful educational and healthcare systems.  Panama's 11.2 
percent GDP growth in 2007 topped the region, driven largely 
by significant growth in construction, ports and maritime 
services, banking and financial services, and tourism. 
Foreign investment, which topped USD 1 billion in 2007, 
continues to pour into Panama, as U.S. multinationals such as 
Procter and Gamble, Hewlett Packard, 3M, and Caterpillar move 
into Panama.  Occidental Petroleum and Qatar Petroleum will 
soon decide whether to proceed with their proposed USD 8-9 
billion refinery project in the Puerto Armuelles area of 
western Panama, which would be a significant addition to 
Panama's USD 19 billion economy.  With the country's strong 
economic growth over the past five years, Panama has cut 
unemployment by about half, dropping from about 14 percent in 
2003 to just over 6 percent today. 
 
¶3. (SBU) Panama also maintains one of the most liberalized 
trade regimes in the hemisphere.  As Panama's largest trade 
partner (with two-way trade of USD 4.1 billion in 2007, an 
increase of 33 percent over 2006), the U.S. consistently runs 
a huge trade surplus with Panama, exporting almost ten times 
more than it imports.  The U.S. and Panama signed a bilateral 
Trade Promotion Agreement (TPA) last June that the Panamanian 
National Assembly (NA) ratified two weeks later by an 
overwhelming vote.  However, U.S. ratification remains on 
hold as a result of the NA's September 2007 election of Pedro 
Miguel Gonzalez, who is under federal indictment in 
connection with the 1992 slaying of a U.S. soldier, as its 
president. It now appears certain that Gonzalez will be 
replaced as NA President on September 1 by a little known 
Deputy personally chosen by President Torrijos. The GOP hopes 
this will help pave the way for approval of the TPA. 
 
¶4.  (SBU) Despite being one of Latin America's fastest 
growing economies over the past 15 years, Panama's poverty 
rate has persisted at nearly 40 percent overall and has 
exceeded 80 percent in rural indigenous areas.  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 from attaining more 
broadly shared prosperity. 
 
¶5. (SBU) After some twenty years of enjoying low inflation 
(ranging between 1.5 and 2 percent), Panamanians now face an 
upward spiral in the cost of living.  Annual inflation 
reached 4.7 percent by the end of 2007 and is now running at 
about 9.6 percent.  Increases in the price of food have run 
at nearly twice the overall inflation rate.  The monthly cost 
of a "basic basket" of foodstuffs defined by the GOP as the 
minimal amount needed by a typical Panamanian has skyrocketed 
by more than 20 percent over the past year, reaching nearly 
USD 250 per month.  This means that workers earning the 
minimum monthly wage of USD 310 must spend more than 80 
percent of their income on food, while those earning the 
average wage of USD 400 spend more than 60 percent of their 
earnings just to buy the basic food items.  This, combined 
with fast-rising electricity and gasoline prices, has 
tightened the squeeze on low and middle-income families. 
 
¶6. (SBU) Despite spending about 12 percent of the GOP's 
budget on education, Panama suffers from a poorly educated 
workforce.  About half of prospective University of Panama 
students fail their entrance exams, prompting university 
authorities to lower the threshold for entrance.  About 
one-third of the applicants to GOP worker training programs 
are rejected because they lack the requisite literacy and 
math skills. Panamanian and multi-national firms must draw 
from a  labor pool that is poorly equipped to compete in the 
global economy.  One U.S. multi-national found that less than 
1 percent of some 200 prospective Panamanian employees passed 
the firm's qualifying examination.  By comparison, the firm 
found that pass rates elsewhere in the region typically 
ranged from 15 to 20 percent.  This dynamic is exacerbated by 
laws that require foreign firms to staff 90 percent of their 
local operations with Panamanian employees 
 
------------------------------- 
Panama Canal Expansion Underway 
------------------------------- 
 
¶7. (U) In September 2007, the Panama Canal Authority (ACP) 
formally launched its eight-year, USD 5.25 billion program to 
expand and modernize the Panama Canal.  This project is due 
for completion in 2014.  The ACP plans to finance the project 
through a combination of Canal revenues, increased tolls, and 
USD 2.3 billion in bridge loans.  U.S.-based engineering and 
law firms have won initial contracts to provide project 
management and legal advisory services to the ACP.  Four 
consortia, one led by Bechtel, are preparing to bid in late 
2008 on the design/build contract for the new, much larger 
sets of locks that will be built in parallel to the existing 
locks.  With an estimated contract value of about USD 3.5 
billion, this represents the largest share of 
expansion-related work.  The winning consortium will have to 
contend with the upward spiral in fuel and construction 
materials costs, Panama's shallow pool of skilled labor, and 
constraints on housing, transportation, and other 
infrastructure. 
 
-------------------------------------------- 
Panama's Politicos Jockey for 2009 Elections 
-------------------------------------------- 
 
¶8. (SBU)  Ten months from the end of his five-year term, 
President Torrijos has seen his public approval rating erode 
considerably, declining, according to some polls, by as much 
as 60 percent.  His Revolutionary Democratic Party (PRD) 
dominates Panama's unicameral National Assembly and other 
governmental institutions. Torrijos is constitutionally 
prohibited from a consecutive term, and his former Housing 
Minister and long-time PRD figure, Balbina Herrera, looks 
likely to win the PRD primaries, which will take place on 
September 7, over Panama City mayor Juan Carlos Navarro. 
Opposition parties seem to be forming into two rival blocks, 
and a grand alliance does not look likely unless one of the 
two sides begins to poll very poorly.  One of the two blocks 
is forming around the Panamenista Party, the largest 
opposition party, that elected Juan Carlos Valera as its 
Presidential candidate in primary elections on June 6. He has 
since risen substantially in the polls, making a grand 
alliance between the Panamenista party and the other major 
opposition block less likely. The other main opposition block 
is led by maverick Ricardo Martinelli of Democratic Change 
(CD), which recently formed an alliance that gives this block 
a roughly equal number of loyalist as the Panamenistas. 
 
-------------------------------- 
Security Issues Come to the Fore 
-------------------------------- 
 
¶9. (SBU) Over the past eight months, security concerns have 
become one of the top issues on the minds of Panamanian 
voters.  Panama experienced a significant up-tick in crime, 
not only in Panama City but also across the country, leading 
to an increasing clamor that the GOP do something to improve 
law and order. The increase in crime seems to be tied to 
increased drug dealing within Panama. Continued record 
seizures of illegal narcotics in Panama serve to underscore 
that Panama remains a cross roads for illicit trade. For 
example, of the 120 metric tons of cocaine seized by 
authorities in the hemisphere during 2007.  So far in 2008, 
law enforcement authorities have seized some 30 metric tons 
of cocaine. 
 
--------------------------------------------- --- 
Torrijos' Legislative Powers on Security Matters 
--------------------------------------------- --- 
 
¶10.  (SBU) Before going into recess on June 30, the NA 
granted Torrijos extraordinary powers to enact legislation 
from that date until the NA reconvened on September 1. The 
GOP in planning to use those powers to enact legislation 
which would: establish the National Aero-Naval Service 
(SENAN) by combining Panama's air and sea forces; establish 
the National Frontier Service (SENAFRONT) by breaking an 
existing force off from the Panamanian National Police (PNP); 
establish the National Intelligence and Security Service 
(SENIS) by breaking an existing organization off from the 
Council for Public Security and National Defense (CSPDN); 
reorganize the CSPDN into a Panamanian version of the NSC; 
and enable the President to name a uniformed officer to head 
the PNP and the Institutional Protection Service (Panama's 
Secrete Service), where present law requires that both posts 
be held by civilians. Numerous government officials have 
indicated that the GOP sees these reforms as necessary to 
prepare Panama for the potential increase in criminal 
activity in Panama by international criminal networks as a 
result of the Colombian government's offensive against the 
FARC, and the likely effects of the Merida Initiative in 
Mexico. 
 
¶11.  (SBU)  These proposed reforms have been strongly 
criticized by civil society leaders and the local press as 
potentially opening the door to a return to militarism. Many 
commentators have tried to find a connection between these 
proposed reforms and the Merida Initiative, and some have 
accused the USG of trying to re-militarize Panama. The matter 
of the security reforms will likely come to a head in the 
next two weeks, as President Torrijos is likely to act before 
his special powers expire. The opposition effort to stop this 
may have crested by then, but the issue is likely to become a 
political issue during the elections. 
 
--------------------------------- 
Panama at the UN Security Council 
--------------------------------- 
 
¶12. (SBU) In late 2006, Panama emerged as Latin America's 
consensus candidate for a two-year seat on the UN Security 
Council (UNSC).  This followed a prolonged deadlock between 
Venezuela and Guatemala in the voting for non-permanent 
members in the UN General Assembly.  Panama has consistently 
voted with the U.S. and has played a constructive role on the 
UNSC.  In other foreign policy matters, Torrijos has pursued 
a policy of maintaining friendly relations with all countries 
that seek friendly relations with Panama, including Cuba and 
Venezuela. 
STEPHENSON