SCENESETTER: AUSTR VARGO'S TRIP TO PANAMA FOR THE

UNCLAS SECTION 01 OF 04 PANAMA 000929

SIPDIS


FROM AMBASSADOR LINDA WATT TO AUSTR REGINA VARGO


E.O. 12958: N/A
TAGS: ETRD PREL PM ECONOMIC AFFAIRS
SUBJECT: SCENESETTER: AUSTR VARGO'S TRIP TO PANAMA FOR THE
FIRST ROUND OF U.S.- PANAMA FTA NEGOTIATIONS (APRIL 26-30)


This message is sensitive but unclassified. Please protect
accordingly.



1. (U) I warmly welcome your April 25-30 visit to Panama.
The USDEL's visit marks the culmination of a long campaign by
the GoP to move forward on an FTA with the U.S. You will
have the opportunity to reiterate USG commitment to expanding
trade and investment between our two countries, and to press
for continuing focus on predictability for investors and
transparency and anti-corruption within Panama's
institutions. Your visit highlights our governments' mutual
interest in the strategic issues of expanding open markets
throughout the hemisphere and strengthening democracy.
Panama's upcoming May 2 national elections will reign
paramount in the minds of many of your interlocutors. It is
worth noting Panama was an early member of the Coalition of
the Willing, has signed and ratified a bilateral Article 98
Agreement, is a strong anti-narcotics ally, a strong
supporter of U.S. maritime security/trade-security
initiatives, and has sided with the USG in regional and
multilateral trade fora. Panama has proven itself a good
friend and ally.


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A Brief History
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2. (U) From its founding in 1903 until 1968, the Republic of
Panama was a constitutional democracy dominated by a
commercially oriented oligarchy focused on Panama as an
entreport for international trade. In October 1968, Dr.
Arnulfo Arias Madrid -- the deceased husband of current
Panamanian President Mireya Moscoso -- was elected to and
deposed from the presidency for the third time. General Omar
Torrijos (d. 1981) -- the deceased father of current
opposition leader and leading presidential candidate Martin
Torrijos -- became dictator in 1969 and was succeeded in
infamy by General Manuel Noriega. On December 20, 1989,
President George H.W. Bush ordered the U.S. military into
Panama to restore democracy, protect AmCits and their
property, fulfill U.S. treaty responsibilities to operate and
defend the Canal, and bring Noriega to justice. Noriega is
still serving a 30-year sentence in Miami for drug
trafficking. Since 1989, Panama has twice held free and fair
elections, transferring power from/to opposition parties in
1994 and 1999.


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May 2004 Elections
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3. (U) Panama will hold national elections on May 2, 2004,
with the incumbent Moscoso Administration leaving office
September 1. Four campaigns are vying for the presidency, 78
legislative seats, and all mayoral and local representative
positions. Democratic Revolutionary Party (PRD) candidate
Martin Torrijos maintains a substantial lead over third-party
candidate and former Panamanian President Guillermo Endara
(1989-1994). The ruling Arnulfista party candidate, former
Foreign Minister Jose Miguel Aleman (1999 to 2003),seems to
be closing the gap with Endara. Minor Democratic Change (CD)
party candidate Ricardo Martinelli is a distant fourth. A
recent poll shows Torrijos with 47 percent support, followed
by Endara with 27 percent, Aleman with 19 percent, and
Martinelli with 6 percent. Panama's elections are expected
to be free and fair and should not warrant extensive
monitoring or observation. All candidates want to maintain a
close and cooperative relationship with the US and are
strongly supportive of an FTA with the US; however, the
agricultural lobby and Panama's rural populace weighs
particularly heavy with Endara.


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Towards a Democratic Culture
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4. (SBU) My September 29 speech to Panama's Chamber of
Commerce, Industry and Agriculture, launching Embassy's Good
Goverance Initiative (GGI),resonated with Panamanians and
generated front-page headlines. Venality, conflict of
interest, nepotism, and lack of transparency are ingrained in
Panama's political culture and institutions. Panama's
"spoils system" allows politicians to use the entire state
bureaucracy as a patronage base. The country's criminal
libel laws, left over from military rule, impose enormous
costs and risks on journalists and whistle-blowers.
Legislative immunity is often abused, as elsewhere in the
region. The Embassy currently supports good goverance
activities directed toward judicial reform, civic education,
business ethics, and strengthening anti-corruption
prosecutors' institutional capacity, and is reviewing
implementation of President Bush's initiative to cancel visas
to the United States of corrupt public officials.


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A Mixed Macroeconomic Record
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5. (SBU) Since the turnover of Canal operations and US
military bases in 1999, Panama has had a mixed record of
economic success. The Canal is run more efficiently, safely
and profitably than under USG administration. Canal-related
industries, especially cargo transshipment through ports at
both ends of the Canal, have boomed, as have visits by U.S.
cruise ships, which will surpass 200 port calls in Panama
this year. Panama's overall economy went flat when nearly
30,000 U.S. military personnel and their dependents left
during the late 1990s, privatizations slowed, and the 2001
global recession took hold which perpetuated the country's
estimated 13.4% unemployment. Also, Panama has failed to
attract large investments into the former Canal Zone.
Poverty, income disparity (2nd only to Brazil in the
Hemisphere),an actuarially bankrupt social security system
and a heavy sovereign debt load are arguably the biggest
internal challenges facing Panama today. Since mid-2003,
however, economic growth has picked up, primarily as a result
of tax incentives given to a booming construction sector, low
interest rates, and a global economic recovery. Panama's
growth rate for 2003 came in at around 4 percent.



6. (U) Panama's $12 billion economy is based primarily on a
well-developed services sector that accounts for
approximately 78 percent of GDP. Services include the Panama
Canal, banking and financial services, legal services,
container ports, the Colon Free Zone (the 2nd largest in the
world),and flagship registry. Panama also maintains one of
the most liberalized trade regimes in the hemisphere.
Bilateral trade with Panama came to $2.1 billion in 2003.
U.S. exports were $1.85 billion and imports were $301
million. The stock of U.S. Foreign Direct Investment (FDI)
in 2002 was $20 billion, down 20 percent from 2001. U.S. FDI
is primarily concentrated in the financial sector.


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International Trade and Investment
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7. (SBU) Economic issues top Panama's agenda with the United
States. First, for political and economic reasons, the
Moscoso Administration is pleased the first negotiating round
for the bilateral FTA will be held prior to the May 2
national elections. (Comment. While the GOP argues that the
timing of the talks will send the right signal that this is a
"state project" rather than a political one, the Moscoso
Administration is hoping for some pre-electoral political
advantage. End comment.) Panama is also satisfied with the
current negotiating schedule as it provides for completion of
an agreement prior to the November U.S. elections and the
July 2005 expiration of TPA. The GoP views the FTA as a
vehicle to lock in the status quo or better (CBI, GSP),
improve market access in niche areas (e.g., banking,
maritime, and sugar),and most importantly to attract
investment. GoP Minister Jacome was not pleased with recent
public remarks by Costa Rica's Trade Minister that they would
welcome Panama into CAFTA. Jacome told ECON Chief that from
Panama's perspective this was a bilateral, but he was not
closing the door on any options.



8. (U) The GoP has long argued for Panama's re-designation
from a "near foreign port" to a "distant foreign port" under
the U.S. Passenger Vessels Services Act (PVSA),to capture a
larger share of the cruise ship trade. The USG is studying
the possibility of a re-designation. The GoP estimates that
up to U.S. $50 million per year could be gained for Panama's
growing tourism sector. Over the past year, we have seen a
marked improvement in the GoP's willingness to make progress
on a number of U.S. investment cases, to address bilateral
trade issues, including agricultural concerns, and to enhance
cooperation/coordination in regional and multilateral trade
fora. The USG has asked Panama to continue its progress on
resolving investment disputes and improving its investment
climate through responsiveness to investor concerns, clear
rules of the game, predictability, and transparency in
decision-making. Agriculture protectionism is still vexing,
however; US beef imports from the recent BSE scare have not
resumed, and we fight recurring skirmishes on pork, poultry,
potatoes, and other products. (Comment: In part due to
upcoming elections. End Comment.)



9. (U) After several years of effort, Panama was elevated to
"Category 1" for air safety oversight on April 14, 2004.
This was the result of efforts by the Federal Aviation
Administration and Embassy to focus the GoP on implementing
needed changes to its aviation authority in order to ensure
the safety of the traveling public. The designation allows
Panamanian air carrier COPA to increase flights into the U.S.
COPA (49 percent owned by Continental Airlines) may now
exercise an option for Boeing aircraft, valued at more than
$354 million, to service new routes, thus directly
benefitting these two key U.S. companies. Lastly, sometime
next year the GoP is expected to move forward with a national
referendum on expansion of the Canal through the construction
of a third set of locks. If, given the green light, the
project's value is estimated to be between USD 4-9 billion
and would take around 10 years to complete. Substantial
opportunities for U.S. service providers is expected.




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Maritime Security
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10. (SBU) The 9/11 attacks called significant attention to
the potential for terrorist exploitation of Panama's leading
maritime position. Panama has the world's largest flag state
registry with approximately 6300 vessels over 500 gross
metric tons and approximately 300,000 seafarers.
Additionally, approximately two-thirds of Canal traffic
originates or terminates at U.S. ports, roughly 13% of U.S.
seaborne trade. Nearly, 27 percent of foreign-flagged cargo
ships arriving at U.S. ports are Panamanian. Moreover,
approximately 125 U.S. military vessels, including
nuclear-powered U.S. submarines ("high value transits"),
visit Panamanian ports and/or transit the Canal each year.
Port services have grown dramatically from about 200,000
containers per year in the early 1990s to almost two million
by 2002, giving Panama Latin America's leading port complex.
(Note: Although a large number of containers transit the
Panama Canal, the number that actually are shipped and
transshipped from Panama are substantially less -- around 90
thousand. End note.)



11. (SBU) Given these equities, the Embassy, through its
Maritime Security Working Group and in coordination with
Washington agencies, has undertaken a broad Maritime Security
agenda with the GoP. We have seen a strong willingness on
the part of the Moscoso Administration for Panama to meet its
responsibilites as a major maritime player. Progress has
been particularly good since President Moscoso's appointment
in June 2003 of Panama's Public Security and National Defense
Council ("the Consejo") Executive Secretary Ramiro Jarvis to
coordinate maritime security matters. Key components of the
agenda include: making Panama's seafarer document more
secure, protecting U.S. forces, port security (including for
cruise ships),container security, export controls,
proliferation security, and strengthening GOP institutions.
Progress by the GoP has been good on all of the fronts;
however, we will have to keep the pressure on the GoP to
follow-through, in particular, on meeting new IMO requirement
regarding ship and port security.



12. (SBU) Panamanians have also become increasingly willing
to accept military-to-military security training, equipment
and other assistance to enhance their capabilities to protect
the Canal and borders. Although the present terrorist threat
to the Canal is considered low and Panamanian planning,
layered defenses and security resources are generally well
regarded, the Canal remains vulnerable. Continued U.S.
training, equipment and other assistance are vital to preempt
a major terrorist attack.




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Fighting International Crime
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13. (SBU) Law enforcement cooperation with Panama is
excellent. The Moscoso Administration set up a new,
GOP-interagency counternarcotics vetted unit; expanded upon
the basic shiprider agreement to facilitate maritime/air
operations in pursuit of drug, arms and explosives smuggling
(and may soon include WMD); expedited thirty-eight maritime
drug prisoner transfers to USG custody (saving U.S. taxpayers
U.S. $1 million per event); and captured and transferred to
U.S. custody seventeen fugitives from U.S. justice (most
recently, on January 14, Colombian drug kingpin Arcangel de
Jesus Henao Montoya, wanted in New York for smuggling five
tons of cocaine). Panama is working much more closely with
Colombian President Uribe's government against
narco-terrorists. The GOP has also welcomed USG assistance
-- DOD special operations forces (training National Police
(PNP) border units) and AID community development (enhancing
productive capacity and governmental presence in the Darien
border province).



14. (SBU) The GOP revamped its legal and administrative
structures to fight money laundering, becoming a model for
other countries, such as Russia, that are trying to bring
their regimes up to grade. Panama assisted the USG in the
prosecution of money laundering cases and provided crucial
information against former Nicaraguan President Arnoldo
Aleman. However, at the 2004 Summit of the Americas in
Monterrey, Mexico, several hemispheric neighbors chided
Panama for recently granting "asylee" status to a former
Ecuadorian cabinet minister, who is charged with embezzlement
of government funds.
WATT