SCENESETTER: CODEL BURTON JANUARY 12-13 VISIT TO

UNCLAS SECTION 01 OF 03 PANAMA 000010

SIPDIS

DEPARTMENT FOR H BFLECK AND WHA/CEN FOR GSCHIFFER

E.O. 12958: N/A
TAGS: OREP PGOV PREL AMGT ASEC ETRD PM CA GT ECONOMIC AFFAIRS
SUBJECT: SCENESETTER: CODEL BURTON JANUARY 12-13 VISIT TO
PANAMA



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


2. (SBU) Embassy Panama extends its warmest welcome on your
upcoming visit to Panama. You will have the opportunity to
review a wide range of issues, including bilateral security
and the economic/trade environment. Your visit follows the
highly successful visit by President and Mrs. Bush on
November 6th and 7th, 2005 as well as recent visits by DEA
Administrator Karen Tandy (June 20-22, 2005),a USG
inter-agency delegation (September 28-30, 2005) to discuss
U.S.-Panama cooperation on Panama's Secure Trade and
Transportation Initiative (PST & TI),and FBI Director Muller
(October 27-28, 2005).


3. (SBU) As the government of President Martin Torrijos
enters its second year in office, your January 12-13 visit to
Panama can help to strengthen our already excellent bilateral
relationship. Elected as a modernizing, anti-corruption
reformer by the largest post-1989 plurality on record (47% of
the vote and 41 out of 78 legislative seats),Torrijos has
made clear that his most important foreign policy priority is
relations with the United States. He also has acted to
deepen our two countries' mutual focus on counter-terrorism
capabilities, combating international criminal networks, and
expanding trade and investment. Your visit coincides with
the ninth (and possibly final) round of U.S. - Panama
negotiations on a Free Trade Agreement (FTA) in Washington.

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


4. (SBU) The Torrijos team sees Canal expansion as a top
priority. The proposed Canal expansion project to construct
a third set of locks could cost $8 billion and take 8-10
years to complete. The GOP expects the project will be a
transforming event for Panama that will provide jobs and set
the tone economically for years to come. Given growing trade
between East Asia and the U.S. eastern seaboard, the
expansion is central to maintaining the Canal's future
viability and is expected to be financed through a
combination of Canal revenues, new user fees, and bridge
loans. However, Panama's constitution requires a national
referendum to approve the idea. This referendum could occur
in late 2006 or 2007. A September 2005 CID-Gallup poll
showed that a majority of Panamanians would vote in favor of
Canal expansion, although the outcome of a referendum cannot
be predicted.

Panama Canal Stewardship
--------------


5. (SBU) Since the 1999 handover, the Panama Canal Authority
(ACP) has proven itself an able administrator, turning the
Panama Canal into an efficient and profitable business.
During the past five years, the ACP has reduced average Canal
transit times, accidents in Canal waters, and has overseen
large-scale upgrade and maintenance projects. The ACP also
has increased revenues, which in FY 2004, exceeded $1 billion
for the first time and contributed $332 million to the GOP
budget.

GOP Priorities
--------------


6. (SBU) The Torrijos government's principal priorities are
canal and maritime security, economic development, job
creation, poverty alleviation, investment, fiscal reform, and
government transparency. Torrijos has faced large challenges
from the outset: a serious budget shortfall; a near-bankrupt
national retirement and medical system (the Social Security
Fund); and faltering public confidence in government
institutions and the rule of law. Pressures from entrenched
interest groups have slowed the Torrijos administration's
reform plans. Torrijos has worked to complete FTA
negotiations with the United States, and launch a more
activist and "coherent" foreign policy (including closer
relations with Western Europe). After a "review" of Panama's
relations with Taiwan and China, the GOP has decided to stick
with Taiwan.

President Torrijos and a New Generation
--------------


7. (SBU) Torrijos has surrounded himself with young,
primarily U.S.-educated professionals like himself, and has
marginalized "old guard" supporters of former President
Ernesto Perez Balladares (1994-99). He has appointed many
pro-U.S. technocrats to his cabinet, although they lack
experience. Most of the cabinet are respected professionals
without excessive baggage from Panama's
21-year military dictatorship or the PRD's anti-U.S. faction.


Poverty: Hampers Economic Prospects
--------------


8. (U) At $4500, Panama's per capita GDP is Latin America's
fifth highest. However, Panama's solid GDP growth in recent
years (7.6% in 2004, 6% in 2005) and pursuit of trade
liberalization have yet to translate into broadly shared
prosperity. Panama faces the second-worst income
distribution pattern in Latin America, persistent poverty
(40% overall, higher than 80% in some rural areas),and
stubbornly high unemployment (officially about 12%, with
20-25% underemployment). Moreover, Panama's dollarized
economy currently faces the highest rate of inflation (about
3%) the country has seen in the past 23 years, as rising fuel
and food prices place greater hardship on low-income
Panamanians.

FTA - Ninth Negotiating Round Jan 10-12
--------------


9. (SBU) Negotiations on a bilateral FTA began in April 2004
under President Moscoso. To date, eight negotiating rounds
(the last one in February 2005) have failed to produce an
agreement, mainly due to Panamanian sensitivities in
agriculture, such as rice, poultry, and pork. Panama also
wants to increase its sugar quota. The Torrijos
administration views a bilateral FTA as imperative to attract
investment, increase exports, and make Panama competitive
with the CAFTA countries. Your visit will coincide with the
ninth, and likely final, round of negotiations in Washington.

Security and Law Enforcement Policy
--------------


10. (SBU) The Torrijos government is highly focused on Canal
and maritime security and combating terrorism and
transnational crime, although it has not yet found the
resources to adequately patrol Panama's long Caribbean and
Pacific coastlines and to secure Panama's porous border with
Colombia against guerrilla infiltration. U.S.-Panamanian
cooperation in law enforcement and security has steadily
improved in recent years. This has led to increasing
narcotics seizures, better investigations, active maritime
law enforcement, more specialized units, and better detection
of money laundering and illicit financial flows. While the
USG-GOP relationship is good, Panama's law enforcement
institutions are weak and suffer from limited resources and
professionalism. On May 12, 2004, the U.S. and Panama signed
a Proliferation Security Initiative (PSI) Shipboarding
Agreement. Panama gave early
political support to the Coalition of the Willing and
ratified a bilateral Article 98 Agreement.

Security Cooperation
--------------


11. (SBU) The GOP recognizes that securing the Canal and
Panama's borders requires a mature, collaborative bilateral
relationship. Panamanians are eager to accept mil-to-mil
security training and equipment, as was shown during the
August 2004 and August 2005 multinational PANAMAX naval
exercises that centered on Canal defense. PANAMAX 2005
counted 15 participating nations. The GOP has welcomed an
increased number of USG-sponsored Medical Readiness Exercises
and other DOD rural humanitarian programs, which construct
schools and clinics, and highlight the U.S. military's
humanitarian side. New Horizons 2005, in the Azuero
Peninsula, received wide and favorable press coverage.

Our Third Border
--------------


12. (SBU) The Canal remains an attractive and vulnerable
terrorist target, although good Panamanian defense planning
and U.S. training and equipment have made any potential
terrorist attack more difficult. To protect water resources,
the Panama Canal Authority (ACP) has committed to match
dollar-for-dollar AID's three-year $2.5 million integrated
watershed management program. Despite
significant progress, Panama continues to be an important
transit point for drug smugglers, money launderers, illicit
arms merchants, and undocumented immigrants heading north.

Maritime Security
--------------


13. (SBU) The GOP is acting to end abuses in Panama's open
ship registry and mariner identification documents. Panama's
ship registry, the world's largest, comprises one-quarter of
the world's ocean-going fleet (5,525 large commercial
vessels). About 13% of the U.S. ocean-going cargo transits
the Canal each year. Panama's seafarer registry currently
licenses over 264,000 crew members.
Port services grew dramatically from about 200,000 containers
per year in the early 1990s to 2 million by 2003. Panama now
boasts the leading complex of port facilities in Latin
America. In response to our homeland security concerns, the
Torrijos Administration is working to greatly improve
security and transparency in documenting ships and the crews
that work on them. We are actively discussing with GOP
counterparts ways in which we can enhance maritime security
through more robust information sharing.

Anti-Corruption
--------------


14. (SBU) After campaigning on a "zero-corruption" platform,
Torrijos has run a notably more honest government than his
predecessors. In October 2004 Torrijos replaced the
controversial Supreme Court president, Cesar Pereira Burgos,
who had passed retirement age. Controversy over corruption
within the Supreme Court continues to attract popular
interest, especially after the USG revoked the visa of
Supreme Court Magistrate Winston Spadafora in late November.
Torrijos' December 2005 appointments to replace two outgoing
Supreme Court Justices were generally well-received.


15. (SBU) At the end of September 2005, a commission that
President Torrijos formed in March to make proposals on
justice sector reform released its detailed report and
recommendations. The Embassy supports that effort, and good
governance activities directed toward judicial reform, civic
education, business ethics, and strengthening the
anti-corruption prosecutors' institutional capacity.

Visa Revocations
--------------


16. (SBU) An important element of the Embassy's Good
Governance initiative is its visa revocation program. Based
on Embassy recommendations, the State Department in summer
2004 revoked the U.S. visas of two former senior GOP
officials, which provoked a spate of mostly favorable press
commentary and huge support (85% according to one poll) from
average Panamanians. A third visa, of former Maritime
Authority Director Bertilda Garcia, was revoked in early
March, 2005. In December, 2005 the visa of sitting Supreme
Court Justice Winston Spadafora was revoked under section
212(f) of the Immigration and Naturalization Act based on
credible allegations of corruption, sparking considerable
controversy. Several other corrupt officials have lost their
visas for money laundering or related issues and we are ever
alert to ensure that other corrupt officials who have harmed
USG interests may not travel to the United States.

Macroeconomic Climate
--------------

17. (U) Panama's approximately $14 billion economy is based
primarily on a well-developed services sector that accounts
for roughly 80% of GDP. Services include the Panama Canal,
banking and financial services, legal services, container
ports, the Colon Free Zone (CFZ),and flagship registry.
Panama also maintains one of the most liberalized trade
regimes in the hemisphere. U.S. bilateral trade with Panama
came to $2.1 billion in 2004. U.S. exports were $1.8 billion
and imports were $316 million in 2004. The stock of U.S.
Foreign Direct Investment (FDI) is approximately $20 billion.
U.S. FDI is primarily concentrated in the maritime, energy
and financial sector.
EATON