PANAMA: ECONOMIC TRENDS AND LOOMING CHALLENGES

UNCLAS SECTION 01 OF 05 PANAMA 003025

SIPDIS


USDOC4332/ITA/MAC/WH/OLAC/MGAISFORD
USTR FOR AMALITO
TREASURY FOR CKUSHLIS
WHA/PPC FOR PTRIVELLI
SOUTHCOM FOR POLAD


E.O. 12958: N/A
TAGS: ECON EFIN EINV ETRD PM ECONOMIC AFFAIRS
SUBJECT: PANAMA: ECONOMIC TRENDS AND LOOMING CHALLENGES


1. (U) This message is sensitive but unclassified; please
protect accordingly.



2. (SBU) Introduction: Hoping to capitalize early on its
campaign promises (anti-corruption, transparency, fiscal
responsibility and economic growth),current popularity (70
percent),and control of the legislature, the Torrijos
Administration is poised to press ahead with a very ambitious
economic agenda. This agenda includes fiscal reform, fixing
the social security program, negotiation and ratification of
an FTA with the U.S., and teeing up a political referendum on
Canal expansion before 2005 is over. While the agenda's
economic imperative is clear to most of Panama, its execution
represents a negative agenda for many entrenched interests
and will be a heavy lift politically. 2005 promises to be a
defining year for the Torrijos Administration and a test of
its willingness and Panama's readiness to move more firmly
out of the corruption, clientelism, and paternalism matrix.
This cable provides Panama watchers a snapshot of these and
other economic developments. End introduction.


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The Fiscal Reform and Social Security Packages
-------------- -



3. (SBU) Minister of Economy and Finance (MEF) Ricaurte
Vasquez is scheduled to unveil an over-due package of fiscal
reform proposals this week. However, it is not clear whether
the proposals to fix the social security system are ready for
prime time. In terms of timing, we expect the fiscal reforms
to be discussed with business groups this week and then
pushed through in an extraordinary legislative session
sometime in January. Reform of the actuarily bankrupt Social
Security System (Spanish abbreviation CSS) will probably be
taken up by the legislature during the February/March
time-frame to seek passage before the bulk of university
students return to regular classes mid-March. (Note: the GoP
clearly expects heated demonstrations and possible civil
disturbances by students and labor groups. End Note.)



4. (SBU) Regarding fiscal reform the message is clear: those
who can afford to pay (Panama's business class) are going to
be asked to pay, and the MEF will also announce a series of
measures to improve and simplify tax administration. In
talking with Panama's business elite it is evident that many
of them are not enamored with the prospect of increased taxes
(or being put in the position of having to pay taxes) as they
feel not enough is being done to address a bloated and
inefficient public sector. Despite this there seems to be an
understanding that it's time to try and fix the system. As
one senior official (and businessman) said "this is the price
we have to pay for being in Panama" (read: to continue
enjoying a low-crime, stable political and economic
environment). Reforming the social security system (CSS)
will be a tougher prospect as it affects Panama's working
class; however, a broad consensus seems to be developing that
the current situation is untenable. The GoP will likely
manage this by picking the least offensive measures such as
increasing the retirement ages for men and women and
increasing the number of contributory years; rather, than
reducing benefits or significantly increasing workers
contributions. See para (9) for a further discussion of the
program woes.




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Tightening the Budgetary Belt?
--------------



5. (SBU) Despite efforts to limit public spending by the
Minister of Economy and Finance Ricaurte Vasquez since taking
office -- and primarily as a result of excesses of the
previous Moscoso Administration -- the 2004 budget deficit is
expected to reach 5.3 percent of GDP with the overall stock
of public sector debt increasing to around 66 percent of GDP.
Nevertheless, GDP grew an impressive 6 percent in 2004
primarily as a result of export oriented growth and a
construction boom fueled by tax incentives (and most likely
illicit sources of funds). Growth for 2005 is forecasted to
be 5 percent. While the 2005 general budget passed last
month was trumpeted as "austere," the GoP was cautious not to
tighten too much (this would have slowed growth down and
caused political heartburn. As Panama has no monetary
policy, fiscal policy is the only major policy lever
available). The approved 2005 budget of $6.192 billion
mirrors the 2004 budget of $6.168 billion. A budget deficit
of 3.5 percent is forecasted for 2005.



6. (U) While the GoP's penchant to keep taking on more debt
is troubling (debt service represents $1.417 billion or 22.9
percent of the 2005 budget),Panama's economic health is
enviable when compared to most countries in the region. Two
of the three sovereign credit rating agencies currently have
Panama one notch below investment grade. These agencies are
also carefully watching the measures Panama takes over the
next few months which has implications for Canal expansion.
Separately, citing well-known excesses of the previous two
administrations, President Torrijos has also promised to
publicize an account of discretionary funds usage every three
months in order to reduce corruption and increase
transparency.




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FTA: An Easy Ratification?
--------------



7. (SBU) Jerry Wilson, President of Panama's Legislative
Assembly, commented to EmbOffs that once negotiated the FTA
agreement "will pass." However, Minister of Trade and
Industries Alejandro Ferrer has remarked several months past
to EmbOffs that ratification of the FTA could be harder to
obtain than reform of the Social Security System. (Comment.
Hyperbole aside, Ferrer's statements may be a positioning
tactic to emphasize to us that depending on the negotiations
outcome (read: agriculture),ratification may not be a sure
thing. However, Torrijos's PRD party holds a majority in
Congress and President Torrijos and his team have
consistently signaled their strong support for a FTA. End
comment.) Separately, it is also clear, both from
discussions with senior USG officials and what we are hearing
at Post, that the GoP is seeking to set up rice as their
exclusion-candidate -- citing the 60 thousand-plus jobs in
the sector.




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Panama Canal Expansion
--------------



8. (SBU) The proposed Canal expansion project to construct a
third-set of locks has an estimated price tag of $4-6 billion
and is expected to take 8-10 years to complete. However, the
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, and not earlier, as originally
touted. Actual timing of the referendum will likely depend
on how quickly the Canal can mount an educational/public
relations campaign aimed at garnering broad public approval
and how much heat the Torrijos Administration takes on fiscal
and social security reform. The GoP is very aware that
political referendums have had a history of failure in Panama
-- voters have used them to register general discontent
irrespective of the issue's merits -- and will want to
carefully manage the process and timing. (Comment:
Interestingly, we hear from various sources that Canal
personnel are still working from timelines that have the
referendum taking place mid-2005. End Comment.)



9. (SBU/NOFORN) The expansion is expected to be financed
through a combination of Canal revenues, new user fees, and
bridge loans. Privately, we understand that the ACP is
looking to levy a new "construction tax" (paid by the Canal's
customers i.e., the world's shippers) that would take effect
the day after the referendum is approved to fund a
significant portion of the project. The Torrijos
Administration is clearly very enamored with the project and
see it as jobs-creation machine, a vehicle to consolidate
Panama's position as a premier maritime/logistical/entrepot
venue, and solidifying their role in Panama's history (the
vision thing).


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Anti-Corruption Efforts: Or a Case of Too Many Straw Tails ?
-------------- --------------



10. (SBU) Staying true to Torrijos's campaign promise of
"zero corruption," Vice Minister of Finance Rolando Mirones
submitted a formal request to the Public Ministry that former
MEF Norberto Delgado be investigated for "illicit enrichment"
on Monday, November 1. Prohibited from speaking freely about
the evidence the current GOP has obtained, Mirones stated
that Delgado cannot justify his current assets. La Prensa,
Panama's leading newspaper, cited marked increases in
Delgado's net worth on his sworn declarations of wealth
during the last five years. Mirones further commented that
this action was a direct message for former GOP authorities
that the Torrijos Administration will file complaints when
there is evidence. (Note. Delgado also contacted Embassy to
document "his side" of
the story. Details to be provided via septel. End note.)



11. (SBU) Panama's anti-corruption prosecutor issued an
arrest order for Bolivar Pariente, former General Manager of
Panama's National Bank (BNP) for charges of approving a loan
in violation of BNP policies. Under Pariente's leadership,
the BNP granted a loan to a corporation to build the Prados
del Este housing development which flooded in September 2004.
According to the charges, BNP granted credit facilities for
the project in violation of the law that established BNP and
the BNP ethics manual. Total loss is estimated to be $12
million. Pariente remains outside Panama. (Note: Pariente
was briefly in the United States but then departed. Embassy
has revoked Pariente's visa, as a "flight risk," to impede
his entry into the U.S. should he try to return. End note.)



12. (SBU) While these and other efforts are salutary, it
remains to be seen how true Torrijos will be to the campaign
promise of zero corruption. Many in Panama's elite (and
elsewhere) doubt that any big fish will be prosecuted or that
Torrijos will go after his own. As one person said, there
are too many people with "straw tails" in Panama (read: light
mine, and I light yours). This is the one area where
Torrijos can establish and maintain credibility with Panama's
voters even if they disagree with him on other things such as
economic reforms. The polls clearly show that corruption and
employment are the major concerns of average Panamanians.
Who Torrijos selects as Attorney General (a critical ten-year
appointment rumored for this week) will be telling.


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Fixing Social Security
--------------



13. (U) Press and other reports indicate that the Panamanian
Social Security System (Spanish abbreviation CSS) will
exhaust its resources in 2011 if reforms are not taken.
Plagued by increasing life expectancies and static
contribution rates and rules, the CSS maintains a large gap
between the amount paid in and the amount paid out. Created
in 1941 when the average life expectancy was 60 years, the
CSS set retirement ages (the age at which the CSS would pay
benefits) at 60 years for men and 55 years for women.
Contrastly, Panama's average life expectancy in 2004 is 74
years but its retirement ages have changed little: 62 years
for men and 57 years for women. Additionally, the rate of
contributors per retiree (the number of contributors paying
into the system for every retiree) has drastically declined
from 58 contributors in 1941 to 5 contributors in 2004.
Currently, Panamanians are only required to contribute to the
CSS for 15 years. For example, a woman retiring after 15
years of contributions at 57 years with a life expectancy of
72 years is expected to receive over 4 times what she put
into the system. Factoring in inflation adjustments as well,
it is no surprise the CSS is losing approximately $600
thousand per day. While a dialogue continues between the
CSS, employer, and labor groups over how to best reform the
CSS, no consensus has been reached. (Note: The CSS provides
pensions, medical services, and workers' compensation to over
60 percent of Panama's three million population. The
Disability, Old Age, and Death (IVM) program component
provides pensions to Panamanians; for many, this is their
only source of retirement income. End note.)



14. (U) Recent press reports have highlighted Minister of
Economy and Finance (MEF) Ricaurte Vasquez's comments that
the financial crisis of the Caja de Seguro Social (CSS),
Panama's Social Security System, could present an obstacle
for the expansion of the Panama Canal. According to Vasquez,
international financial institutions, from whom Panama would
borrow to finance the Canal's expansion, fear Canal monies
would be used to finance CSS obligations. This could result
in higher interest rates from the lending international
markets.


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Container Traffic
--------------



15. (SBU) Manzanillo International Terminal (MIT),the
largest container port in Latin America, recently announced a
30 percent growth in TEU movements (Twenty foot equivalent
units; the industry standard to measure containers) over last
year. MIT moved 1.9 million TEUs in 2003, an increase of
800,000 units from the 1.1 million TEUs in 2002. This growth
can be attributed to economic recovery in Latin America and
increased commercial trade with China. (Comment: While
Panama sees significant transshipments through ports such as
MIT, Evergreen's Colon Container Terminal (Taiwanese-owned)
and Hutchinson-Whampoas' Panama Ports Company (Chinese
owned),the volume of containers (carrying local export) sent
to the U.S. is quite small, probably around 15,000 TEUs. The
Panama Canal Authority (ACP) cites that during FY 2004,
5,947,092 containers passed through the Canal. Of these,
1,696,868 containers were destined for the East Coast of the
United States and 58,200 were destined for the West Coast.


-------------- --------------
Panama Canal (ACP) Breaks the Billion Dollar Mark
-------------- --------------



16. (U) The Panama Canal Authority (ACP) earned a record
$1.06 billion for the fiscal year ending September 30, 2004,
with $757.7 million collected from transit tolls. (Note: The
ACP maintains the U.S. fiscal accounting year. $923 million
was earned in 2003. End note.) Revenues passed to the
central government from Canal operations (dividends, tonnage
fees, and services) came to around $332 million, up from $294
million the previous fiscal year. Such revenues will come to
around $384 million during FY 2005. Gross cargo throughput
was approximately 267 million tons, a 10 percent increase
over 2003. The number of "Panamax" vessels (currently the
largest ships which cross the Canal) transiting the canal
increased 12.5 percent to 5,329 and total transits grew by
6.7 percent to 14,035. The ACP reported only ten accidents
during this year, the least number reported in the last 81
years. According to the ACP, the principal route utilizing
the Canal was from Asia to the East Coast of the United
States and the Gulf of Mexico. Approximately 66 percent of
the cargo transiting the Canal is going to or from the United
States.




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ACP: A Strict Question of Supply and Demand or We Did It
Because We Could
-------------- --------------



17. (SBU/NOFORN) Taking advantage of its market position and
the growth in containerization that is driving global
maritime trade, the Panama Canal Authority (ACP) is proposing
to modify its toll system and rules of measurement for
container ships in order to establish a toll structure based
on a charge per TEU (twenty-foot equivalent unit) to account
for on-deck containers (of which presently only 8.78 percent
is covered). For a full container vessel the proposal
establishes a $42 per TEU toll begining May 1, 2005, $49 per
TEU toll beginning January 1, 2006 and $54 per TEU toll
begining January 1, 2007. A senior shipping industry contact
said that the net effect of the change will be a 65 percent
increase in the total transit cost per Panamax sized vessel
from $170,000 to $280,000. The ACP for its part feels this
is "back pay." Despite some grousing, shippers will pass the
costs onto their customers (the Walmart and Home Depots of
the world),and recognize the Canal is still the best game in
town (the U.S. intermodal system Long Beach/LA is reportedly
operating at capacity and the Suez Canal is costlier). The
ACP also knows this and expects to add in excess of $40
million to its bottom line just during the first year the
change goes into effect.




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Panama Joins G-4
--------------



18. (SBU) On November 5, the GOP formally announced its
entrance to the now G-4 (Group of Four),formally the G-3
consisting of Colombia, Venezuela, and Mexico. GoP officials
have stated that Panama's G-4 accession is to promote
Panama's economic, political, and social integration with
those countries. MFA Senior Advisor Nils Castro commented to
EmbOffs, during a November 24 meeting, the G4 represented a
consolidation of Panamanian economic integration with the G3
markets as well as a vehicle to improve Panama's
attractiveness as a hub into those markets given the small
size of Panama's internal market. Castro noted that
accession to the existing current trade agreement between
those countries has to be worked out, but added the current
agreement includes agricultural safeguards which should make
things easy for Panama. Castro also added that the G-4
agreement could eventually further Panama's penetration into
Ecuador and Peru where Panama sees real potential. Panama's
commercial exchange with Venezuela is small. Principal
exports will be consumer or manufactured products. While GOP
officials have been reticent to provide specifics in public
venues on how Panama will accede to G-4, Castro commented
that negotiations would begin soon after the closure of the
U.S.-Panama FTA. According to the G-3's original agreement
signed by the three original members on June 13, 1994,
tariffs would be reduced to zero by January 2005.


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A Victory for Environmentalists
--------------



19. (U) Former-President Moscoso authorized the construction
of a paved highway through the Volcan Baru national park
reserve in 2001. It was ostensibly to be used to connect two
previously separated villages for commercial reasons, and to
support eco-tourism for the park. In reality, the road would
have simplified access to several of Moscoso's coffee farms
in the area. National and international opposition to the
road was extremely intense, and construction stalled due to
protests, legal actions, and propitiously bad weather.
During the last week of October, President Torrijos formally
struck down a previous decree of then-President Moscoso that
had allowed the construction of the so-called "Camino
Ecologico." With this action, the proposed road construction
is permanently halted.




--------------
On the Horizon
--------------



20. (SBU) The GOP is continuing discussions with Colombia for
electricity and gas pipelines to flow through Panama to
connect Central America. It is estimated that Central
America will require approximately 5,840 additional MW in

2015. In April 2003, Panama and Colombia signed a MOU to
perform feasibility studies of an Electric and Gas
Interconnection between Panama and Colombia. On November 1,
2004, Panama signed an MOU with Colombia to conduct a
feasibility study for a gas pipeline interconnection from
Colombia to Panama. GOP officials are continuing
government-to-government discussions as well as beginning
discussions with the private sector as the cost of the
projects would be borne totally by the private sector. In a
November 24 meeting with EmbOffs, MFA Official Nils Castro
stated Panama preferred a water connection for both projects
because it would provide a lower security risk, reduce
illegal immigration possibilities, and a maintain the Darien
as a natural barrier against infectious animal diseases
(i.e., hoof and mouth, screwworm, etc). According to the
GoP, the pipeline would most likely go across the Atlantic
Ocean, connecting Cartegena, Colombia, with Colon, Panama.
(Comment: While interesting so far much of this is just
talk. The GoP recently asked Post for possible technical
assistance (through USTDA) on the gas project. End Comment.
WATT