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C O N F I D E N T I A L PANAMA 000757 
 
SIPDIS 
 
STATE PASS TO COMMERCE/ITA/MAC GAISFORD, TREASURY/JOHN 
HARRINGTON, AND USTR/AMERICAS OLIVER 
 
E.O. 12958: DECL: 10/04/2029 
TAGS: ECON PREL PGOV PM
SUBJECT: MARTINELLI NOT MEETING PRO-BUSINESS RHETORIC OR 
EXPECTATIONS 
 
REF: A. PANAMA 711 
     ¶B. PANAMA 657 
     ¶C. PANAMA 756 
 
Classified By: Ambassador Barbara J. Stephenson for reason 1.4 b and d 
 
¶1. (C) Summary:  The distinguishing feature of the Martinelli 
Administration's economic policy has been that there does not 
appear to be a coherent or consistent policy.  It has made 
one major positive decision, which is to maintain sound macro 
economic policies.  It has made one major negative decision, 
which is to continue to resist U.S. and OECD pressure to 
increase financial transparency.  And it has taken a series 
of apparently ad hoc actions against certain business sectors 
which has threatened Panama's reputation as a good place to 
invest.  Finally, widely spread rumors that Martinelli plans 
to appoint two cronies to the Supreme Court will further 
erode investment confidence and judicial independence. 
Martinelli campaigned on a pro-business platform and comes 
from the private sector, but his performance to date calls 
into question expectations that he will govern in a manner 
that provides business predictability and certainty. 
However, we believe that the Martinelli Administration can 
correct its course by embracing predictability and 
transparency.  End Summary. 
 
The Good 
-------- 
 
¶2. (SBU) The 2010 budget for $10,280 million, up 5.3 percent 
from the 2009 budget, is dominated by social services, which 
accounts for almost half of public spending.  However, unlike 
many countries which have had to cut social spending or face 
large deficits, Panama will run only a small deficit, $511.7 
million, or 1.9 percent of the annual nominal GDP, resulting 
in a total public debt of 42 percent of the GNP.  The 
continued macro economic stewardship points to the Martinelli 
government being able to achieve either its ambitious 
spending goals (such as the expected $1 billion metro system 
for Panama City) or investment grade bond rating.  See reftel 
A for more on the budget. 
 
The Bad 
------- 
 
¶3. (C) However, the Government of Panama appears to be 
divided about whether and how to address demands by the OECD 
on tax havens and the U.S. for an effective Tax Information 
Exchange Agreement (TIEA).  Vice President and Foreign 
Minister Varela told the Ambassador on October 2 that he 
supports constructively engaging the U.S. and OECD, but that 
Minister of Economy and Finance Vallarino is not yet on 
board.  In a separate meeting, Presidnt Martinelli told 
Varela to "make it happen" (referring to getting off the OECD 
black list), but then asked the Ambassador to weigh in with 
Vallarino, illustrating the division. 
 
¶4. (SBU)  As a result, and as former Vice President Al Gore 
put it to Minister Vallarino on September 30,  Panama is 
worsening its reputation in global financial services by 
continuing to be called a tax haven.   BNP Paribas announced 
on September 27 that it is pulling out of Panama and all 
other OECD black listed countries due to the increasing risk 
of doing business in those countries.  The stubbornness of 
the GOP also leaves it open to abuses within the Colon Free 
Trade Zone, which harbors significant legitimate business but 
also is the route for illegitimate money and products. 
 
¶5. (SBU) Additionally, the government's actions against US 
firms AES and MIT call into their commitment to maintaining a 
strong investment climate.  AES has been hard hit by the GOP 
threat to unilaterally change the contracted price of water 
for hydroelectric generation plants owned by AES.  The result 
of this ongoing dispute, which still has not been resolved, 
has been to reduce AES, bond rating in Panama to below 
investment grade.  See reftel B for more information on AES. 
 
¶6. (SBU) This is not the first time that the government took 
aim at a sector without regard to existing contracts.  The 
GOP introduced a bill that would have eliminated contract 
concessions changes by reverting contracts back to their 
original agreement if the company harmed the people of 
Panama, thereby eliminating years of business predictability 
to contract holders.  This clause appears to have been aimed 
at port concessions, including the US firm Manzanillo 
 
International Terminal (MIT) which operates in Colon.  The 
renegotiations between MIT and the GOP also have not 
terminated, but MIT has expressed optimism that resolution 
will come soon and be acceptable.  The result of these two 
actions, plus other actions which did not directly impact 
American firms, has been to negatively affect business 
perspective on the investment climate.  AES told us that 
plans to construct a second hydro plant in Panama valued at 
$600 million have been shelved, and MIT has told us that the 
US owner no longer considers the Port of Colon a good place 
for future investment.  The major change in the investment 
climate is that now investors are not certain that political 
calculations will not play a role in how contracts will be 
enforced; every contract could now be valid for only the 
five-year presidency term. 
 
The (Possibly) Ugly 
-------------------- 
 
¶7. (C)  The increase in political interference with 
contractual matters is possible due to the historically weak 
judiciary system.  In October, Martinelli will appoint two 
supreme court magistrates to take seats  in January.  The 
names floated do not give us optimism: Gerardo Solis, who is 
widely considered to be corrupt, and Jose Almengor, who is 
believed to be in line for a position in order to keep him 
from talking about Martinelli secrets.  Several leading 
newspaper editors told the Ambassador and DCM that President 
Martinelli's honeymoon with the local press would end if he 
nominated these two to the Court.  See reftel C for more 
information. 
 
¶8. (C) Comment:  Post will continue to monitor the 
Administration's activities on investment climate, financial 
transparency, and judicial independence.  While it is clear 
from the actions it has taken that the Martinelli 
Administration has not lived up to its promises or its 
pedigree, post believes a nuanced message to the GOP can end 
certain negative trends and prevent future erosion of 
predictability from occurring.  We are cautiously optimistic 
that the worst - at least regard to ad hoc actions against 
businesses - is over.  End comment. 
 
STEPHENSON