AS HIS POPULARITY PLUMMETS, PANAMANIAN PRESIDENT

C O N F I D E N T I A L SECTION 01 OF 03 PANAMA 001352

SIPDIS

DEPARTMENT FOR WHA/CEN
SOUTHCOM ALSO FOR POLAD
VANCOUVER FOR CG ARREAGA

E.O. 12958: DECL: 06/21/2015
TAGS: PREL PGOV ETRD PM POL CHIEF
SUBJECT: AS HIS POPULARITY PLUMMETS, PANAMANIAN PRESIDENT
TORRIJOS PROPOSES A 90-DAY "NATIONAL DIALOGUE" ON SOCIAL
SECURITY REFORM -- AN ANALYSIS

REF: PANAMA 1184

Classified By: AMBASSADOR LINDA WATT FOR REASONS 1.4 (B) AND (D).

SUMMARY
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1. (C) Apparently surprised by the persistence of anti-CSS
(Social Security) reform agitation following passage of a
June 1 reform bill (see Reftel),and as one poll placed his
approval rating at just over 20%, Panamanian President Martin
Torrijos on June 16 proposed a 90-day social security reform
"national dialogue." But anti-reform forces have refused to
sit down with the government unless it "suspends" the new
law, which Torrijos has ruled out. Simmering ill feeling
left over from February's fiscal reform has multiplied the
strength of CSS reform opponents and produced a defacto
alliance between white collar professionals (teachers and
physicians) and labor union radicals. The Torrijos
government's present difficulties bespeak its political
inexperience: it failed to consult widely leading up to the
law's passage, rammed the law through the National Assembly
on a party-line vote literally at midnight, and ran a poor
public relations campaign to "sell" the need for reform. As
a sign of how seriously he considers the current political
situation, Torrijos canceled plans to attend a June 18-19
MERCOSUR summit in Asuncion, Paraguay, and sent Foreign
Minister Lewis instead. End Summary.

A Dialogue, But No One Is Talking
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2. (C) The 90-day National Dialogue on CSS reform, which
President Torrijos proposed last week, is a toothless
exercise designed to examine "substantive improvements" to
the June 1 CSS reform law (known as law #17) and damp down
the opposition. Torrijos's biggest problem may be finding
someone to talk to. The loudest critics of CSS reform, the
union-based "National Front to Defend Social Security"
(FRENADESSO),have refused to participate unless the GOP
suspends the new CSS reform law, which Torrijos has ruled
out. On June 21 Archbishop Dimas asked Torrijos to suspend
Law 17, supposedly to encourage dialogue with FRENADESSO,
according to news reports. (Note: The recent CSS reforms
increase employee and employer contributions, raise the
retirement age, and stiffen eligibility requirements and are
the first big changes in Panama's Social Security (CSS)
system since the Endara government raised the retirement age
in June 1991. Without them, the government claims, CSS would
have gone bust within several years. The GOP claims the
reforms will make CSS viable for 30-40 years. See Reftel.
End Note.)

Strikes Enter Fourth Week
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3. (SBU) As an "indefinite" strike by 25,000 teachers,
20,000 SUNTRACS construction workers, and 5,000 physicians
and technicians entered its fourth week, the GOP hopefully
announced the re-opening of elementary schools on June 20,
but schools remain closed. Oddly, the GOP has been paying
striking teachers and doctors all month, apparently in an
attempt to maintain "goodwill" with respected professional
groups, thinking the strikes would end soon. If that was the
GOP's intent, it has backfired. With school children on
forced vacation, and facing 25,000 canceled medical
appointments (including 1,500 surgeries),ordinary
Panamanians are beginning to clamor for an end for pay
without work. The GOP intends to stop paying teachers as of
the next pay period, (June 30).

GOP Miscalculates
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4. (C) Comptroller General Dani Kuzniecky freely
acknowledged June 16 to POL Counselor that the GOP had
misjudged the length of the crisis that would surround the
June 1 bill's passage and had failed to plan accordingly. He
quickly added, "No other government would have fixed our
fiscal deficit and CSS the way we did." Kuzniecky noted that
simmering discontent among well-heeled Panamanians over the
February 2 fiscal reform, which (among other things)
increased taxes for businesses and white-collar workers,
contributed to anti-government feeling and encouraged the
government's political opponents to unite. He expressed
annoyance at the Panamanian Chamber of Commerce's reluctance
to aid the GOP by taking a moderate stance and oppose the
SUNTRACS radicals, apparently because it hopes the
government's disarray will help it rescind part or all of the
February 2005 tax increases. The private sector is happy at
the government's discomfort, Kuzniecky said.

Strong Talk at the Camara de Comercio
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5. (C) At a June 15 meeting, Panamanian Chamber of Commerce
members were vehement in their denunciations of the GOP's
February 2005 fiscal reform. The Ambassador pointed out that
people who could pay taxes should pay and that the government
needs money to operate. She urged them not to lose sight of
the social dimension, as so many Panamanians live below the
poverty line and suggested that perhaps it was time to move
beyond the assumption that money paid to the government would
be stolen. Although some agreed with that analysis, the
group implied that they have every intention of trying to use
the GOP's present difficulties to roll back as much of the
fiscal reform law as possible.

Middle Class Backlash?
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6. (SBU) Panama is one of the least taxed countries in Latin
America. (In 2004 tax collections equaled only 9% of GDP.)
Even so, Panama's middle class (white collar workers and
independent professionals earning $1,000-3,500 per month) are
having a hard time adjusting to the one-two punch of fiscal
and CSS reforms. Until February 2005, most Panamanian
professionals paid no taxes at all on 30-50% of their income
classed (for tax purposes) as "representational." Under the
effects of February's fiscal reform and June's CSS reform,
white-collar workers will lose 12-20% percent of their gross
income to taxes. Making matters worse, Panama's
consumer-oriented, status-conscious middle class has no
culture of saving, typically drive late-model cars, and send
their children to pricy private schools. The new taxes are a
bitter pill, one that brings unwelcome belt-tightening and
forces lifestyle changes.

"Rejection Front" Bids for Political Power
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7. (C) Aside from the GOP's credibility, also at play amid
the maneuvering are the future prospects of SUNTRACS leaders
Genaro Lopez and Saul Mendez, and former CSS boss Juan
Jovane. The three "Rejection Front" leaders hope to leverage
a national political role out of the disorder but they could
well emerge with less influence rather than more. SUNTRACS
recently began canvassing donations after it said its $2
million strike fund was exhausted, following $50-per-week
payments to its striking members. Comptroller General
Kuzniecky told POL Counselor June 16 that Juan Jovane is
"fully dedicated" to the idea of building a party. Behind
the "masquerade" of FRENADESSO, Kuzniecky claimed, are people
who are trying to destabilize the government. President
Torrijos echoed this assessment in his June 21 meeting with
DEA Administrator Karen Tandy, asserting that the movement
would be a political party vying for the presidency in 2014.

Comment
--------------


8. (C) The political inexperience of technocrats in senior
positions is beginning to show. In its handling of CSS
reform (and in its earlier handling of fiscal reform),the
Torrijos administration was guilty of pursuing good public
policy but bad politics. In both instances the GOP showed
commendable political will to tackle festering problems,
knowing in advance that they would prove unpopular. But in
neither case did President Torrijos stump the country looking
for support, carry out a real public relations campaign, or
present any intelligible, over-arching strategy of his
economic vision. Public reaction was worse and more enduring
than the government expected, and the government took more
than its share of political lumps.


9. (C) Some observers fear the GOP has spent so much
political capital that it may lose the referendum on Canal
expansion planned for 2006. Others claim that average
Panamanians will see that the Canal widening project is
Panama's best chance for prosperity and job creation and will
approve the referendum by a wide margin. The reality is that
the overwhelming majority of Panamanians, many of whom are
not covered by social security, and who struggle just to find
money to ride the bus to work each day, don't care about the
macroeconomic debates on tax increases, free trade
agreements, and Canal expansion. Fully one million
Panamanians (out of 2.9 million) are not covered by social
security. To win those people over, the GOP will have to
find ways to benefit them directly. Its plans for public
transportation reform would help. The GOP's success in
creating jobs will be its litmus test.

WATT