SCENESETTER: SECRETARY OF COMMERCE CARLOS

UNCLAS PANAMA 001487

SIPDIS

SIPDIS

STATE FOR WHA/CEN - TELLO
ALSO FOR WHA/EPSC - SALAZAR
COMMERCE FOR 4332/ITA/MAC/WH/OLAC - JANDERSON
DOC ALSO FOR 3134/USFCS/OIO - KESHISHIAN

E.O. 12958: N/A
TAGS: OVIP ETRD PGOV PM
SUBJECT: SCENESETTER: SECRETARY OF COMMERCE CARLOS
GUTIERREZ'S SEPT. 12-13 VISIT TO PANAMA

This message is sensitive but unclassified. Please protect
accordingly.


1. (U) Welcome and Summary. Embassy Panama extends a warm
welcome to you and your delegation. Your engagement in
Panama can help strengthen our bilateral relationship, boost
support for the U.S.-Panama Trade Promotion Agreement (TPA),
reinforce U.S. export opportunities regarding the $5.25
billion Panama Canal expansion project and other multiple
opportunities, and advance broader U.S. economic and social
interests. Your visit comes at a time when Panama enjoys an
economic boom while, at the same time, it endeavors to
overcome stubbornly high levels of poverty, yawning income
disparities, high unemployment, widespread corruption, and
poor educational and healthcare systems. Public support
nonetheless remains solid for both the Torrijos
Administration and free trade, as evidenced by the National
Assembly's nearly unanimous ratification of the TPA within
two weeks of its June 28 signing. You will have the
opportunity to meet with top GOP officials, local media, and
a cross-section of private sector and ci
vil society leaders.


2. (SBU) Your visit follows President Bush's March 2007
Latin America tour and other recent high level Administration
visits, including: Deputy U.S. Trade Representative John
Veroneau (March),Transportation Secretary Mary Peters (May),
Deputy Secretary of State John D. Negroponte (May),Secretary
of State Condoleeza Rice (June),Health & Human Services
Secretary Mike Leavitt (June),and several Congressional

SIPDIS
delegations. Your visit also comes on the heels of Panama's
September 3 formal launch of the Panama Canal expansion
project and commemoration of the thirtieth anniversary of the
signing of the Panama Canal Treaties, which brought former
President Jimmy Carter, Senator Robert Byrd, and several
Latin American heads of state to mark the occasion.


3. (SBU) Your visit also comes on the heels of the
Panamanian National Assembly's widely criticized selection of
its new President, Pedro Miguel Gonzalez, who is indicted by
the U.S. for the 1992 killing of U.S. serviceman Zak
Hernandez in an act of terror in Panama. In accepting the
post on September 1, Gonzalez held out the possibility of
stepping down should his presence become an "obstacle" to the
U.S. Congress' ratification of the TPA. End Summary.

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Panama Sees Boom in GDP and Investment
--------------


4. (U) With 8.1% GDP growth in 2006, Panama's economy saw
its fastest growth in 14 years, surpassing growth of 6.9% in
2005 and 7.5% in 2004. GDP growth for 2007 currently tops 9%
and some private analysts predict it may exceed 10% by 2008.
Panama's dollarized $15 billion/year 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. The
Panama Canal accounts for approximately 5% of Panama's GDP
directly, and between 23% and 35% indirectly. The maritime
industry accounts for approximately 20% of Panama's GDP.


5. (U) The GOP estimates that inflows of Foreign Direct
Investment (FDI) exceeded $2.4 billion in 2006, more than
double that of 2005. However, this result was skewed by
HSBC's $1.8 billion purchase of Banistmo (Panama's largest
bank) in November 2006. The stock of U.S. FDI in Panama,
which currently totals about $5.2 billion, is concentrated
primarily in the maritime, energy, and financial sectors.
Growing numbers of U.S. and other foreign retirees have
helped drive Panama City's skyline upward, boosted the
country's impressive construction boom over the past several
years, and prompted closer ties between U.S. and Panamanian
real estate industries. Although the GOP has tightened its
banking supervision considerably over the past decade, money
laundering remains an ongoing challenge and is increasingly
of concern in other sectors, such as real estate and the
gaming industry.

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Panama Embraces Free Trade
--------------


6. (U) Panama maintains one of the most liberalized trade
regimes in the hemisphere. As Panama's largest trade
partner, the U.S. consistently maintains a huge trade surplus

with Panama. Two-way trade so far this year (through June)
exceeds $1.8 billion, which includes more than $1.6 billion
in U.S. exports and about $168 million in Panamanian exports
to the U.S. Two-way trade in 2006 reached nearly $3.1
billion, an increase of 24% over 2005's trade of nearly $2.5
billion. The U.S. exported about $2.7 billion to Panama and
imported $378 million.


7. (U) Reflecting Panama's enthusiasm for free trade, the
National Assembly ratified the U.S.-Panama TPA on July 11,
2007 by an overwhelming 58-3 margin. TPA opponents came
mainly from the ranks of left-wing extremists whose
opposition proved sparse and disorganized. Virtually all
business sectors have lined up in support of the TPA.
Although leading labor groups had initially presented a
strong anti-TPA front at the outset of negotiations in 2004,
they ultimately splintered on the issue. CONATO, the main
council of confederated labor unions, voted narrowly (4-3) to
support the TPA in June 2007.


8. (U) Panama has existing free trade agreements in place
with El Salvador, Taiwan, and Singapore, as well as partial
trade agreements with Mexico, Colombia, and the Dominican
Republic. In December 2006, the National Assembly
unanimously approved a bilateral free trade deal with Chile.
In March 2007, Panama and Honduras concluded their FTA
negotiations. Panama continues to negotiate separate FTAs
with Costa Rica, Guatemala, and Nicaragua.

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ACP Launches $5.25 Billion Panama Canal Expansion
-------------- --------------


9. (U) Since the December 31, 1999 handover of the Panama
Canal by the U.S., the Panama Canal Authority (ACP) has
proven itself an able administrator, turning the Panama Canal
into an efficient and profitable business. The ACP has cut
average Canal transit times, reduced accidents in Canal
waters, and has overseen large-scale upgrade and maintenance
projects. The ACP also has tripled Canal revenues since the
handover, topping $1.5 billion in 2006. In 2006, the ACP
remitted to the national government $570 million. To protect
the Canal's vital water resources, the Panama Canal Authority
(ACP) has matched a $2.5 million fund that USAID put in place
to better manage the Canal watershed.


10. (U) In October 2006, Panamanians voted overwhelmingly
(78% to 22%) in favor of the proposed expansion of the Panama
Canal. This project entails primarily construction of a
"third lane" and two new sets of locks to accommodate larger,
"Post Panamax" ships. The ACP formally launched construction
activities on September 3, 2007 in ceremonies attended by
former President Carter and other dignitaries. The GOP
expects the project will be done in 2014. Panamanians hope
that it will be a transforming event that provides jobs and
sets the tone economically for many years.


11. (U) Given growing trade between East Asia and the U.S.
eastern seaboard, the expansion is central to maintaining the
Canal's future viability. The ACP plans to finance the
project through a combination of Canal revenues, increased
tolls, and $2.3 billion in bridge loans. The Embassy has
consistently stressed the USG's desire for clear and
transparent contracting rules that offer fair opportunities
to U.S. bidders. U.S. firms have done well thus far in the
competition for early contracts, including CH2M Hill's recent
win of a 7-year project management deal with the ACP. Some
in the construction industry worry that Panama has nowhere
near the number of skilled workers necessary for the
expansion project, particularly English-speaking workers.

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Poverty, Unemployment, Corruption & Other Challenges Remain
-------------- --------------


12. (SBU) At $4,900, Panama's per capita GDP ranks among
Latin America's highest. President Torrijos hopes that
sustained growth resulting from the Panama Canal expansion
project and the TPA will help push Panama into "first world"
status. However, neither the Canal nor the TPA is a panacea,
as cronyism and weak institutions (especially the notoriously
corrupt judiciary and troubled health and education sectors)
have kept Panama's solid GDP growth from translating into
broadly shared prosperity. Panama is second only to Brazil
in having Latin America's worst income distribution. Poverty
persists at nearly 40% overall (higher than 80% in some rural
areas),and unemployment remains high (officially about 8.6%,

with more than 20% underemployed) despite showing some signs
of improvement in the past two years.


13. (SBU) Corruption is widespread in the Panamanian
judiciary. Despite campaign promises by President Torrijos
to eradicate corruption, there have been no significant
indictments or prosecutions for official corruption. In
December 2005, the USG revoked the visa of sitting Panamanian
Supreme Court Justice Winston Spadafora. In September 2000,
the USG revoked the visa of ex-President Ernesto Perez
Balladares for his involvement in alien smuggling. The
Embassy is focused on working with Panamanians to promote
good governance and to help them better address the risks
posed by public mismanagement, corruption, and persistent
urban poverty and hopelessness.


14. (SBU) The lack of an effective educational system and the
lack of support for small business development are two
factors that contribute to Panama's high poverty levels.
Despite spending 12% of the national budget and 5% of GDP on
education, Panama's workforce remains poorly educated. About
half of prospective University of Panama students recently
failed their entrance exams, prompting university authorities
to lower the threshold for entrance. Acutely aware of the
political blow-up the could result from filling the Panama
Canal expansion project with skilled foreign workers, the GOP
is spending $85 million to train Panamanian workers hoping to
work on the project.
However, about one-third the training program's applicants
cannot begin the program because they lack the basic literacy
and math skills required.

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Torrijos Enjoys High Approval Despite Challenges & Missteps
-------------- --------------


15. (SBU) Since taking office for a five-year term in
September 2004, the Torrijos government set its principal
priorities as canal and maritime security, economic
development, job creation, poverty alleviation, investment,
fiscal reform, and "eradicating corruption." Torrijos 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. Although
pressures from entrenched interest groups slowed GOP fiscal
reform efforts, Torrijos' 2005 fiscal reform package -
together with tax revenues driven by impressive economic
growth - brought the GOP into a fiscal surplus (0.5% of GDP)
by early 2007, Panama's first such surplus in ten years.


16. (SBU) Three years into his five-year term, Torrijos
continues to enjoy nearly 60% public approval, despite
weathering bruising battles over fiscal and social security
reforms, the Canal referendum, crises in healthcare and
transport sectors, and having little to show for his promise
to eliminate corruption. His Revolutionary Democratic Party
(PRD) controls Panama's unicameral National Assembly and
other governmental institutions.


17. (SBU) Driven by the internal politics of the PRD
majority, the National Assembly on September 1, 2007 selected
Assemblyman Pedro Miguel Gonzalez as the Assembly's
President. Gonzalez is indicted in the U.S. in connection
with the 1992 killing of U.S. serviceman Zak Hernandez in an
act of terrorism done in Panama. After fleeing to a third
country for more than two years, Gonzales later returned to
Panama and was acquitted by a Panamanian court in a sham
trial marred by witness intimidation, harassment of
prosecutors, and manipulation of the judge and jury.
Gonzales remains wanted by the U.S. on counts of murder,
attempted murder, conspiracy to commit murder. In accepting
the post on September 1, Gonzalez held out the possibility of
stepping down should his presence become an "obstacle" to the
U.S. Congress' ratification of the TPA. The National
Assembly's decision has been criticized widely by Panamanian
commentators, opposition figures, and ordinary citizens.


18. (SBU) With opposition parties remaining fractured and so
far unable to coalesce into an effective counterweight, the
PRD remains well positioned to control Panama's political
agenda going into the 2009 elections. As Torrijos is
constitutionally prohibited from a consecutive term, various
PRD members - including former President Ernesto Perez
Balladares, First Vice President/Foreign Minister Samuel
Lewis Navarro and his cousin, the Mayor of Panama City Juan
Carlos Navarro- have already begun to jockey for position as

the PRD's 2009 candidate. It remains unclear whether or the
extent to which the recent Pedro Miguel Gonzalez episode
might affect the PRD's 2009 prospects, but the Gonzalez
affair indicates that the fissures and divisions within the
PRD ranks are more profound than previously thought.

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Panama Active on Global and Regional Stage
--------------


19. (SBU) In late 2006, Panama emerged as Latin America's
consensus candidate for a two-year seat on the UN Security
Council. This followed a prolonged deadlock between
Venezuela and Guatemala. Faced with a steep learning curve
at the UNSC, Panama has thus far played a responsible and
constructive role and has consistently voted with the U.S.
Panama also hosted the Organization of American States (OAS)
General Assembly in June 2007, which will focus on "energy
for development." President
Torrijos has pursued a policy of maintaining friendly
relations with all nations, including hemispheric neighbors
such as Cuba and Venezuela.

-------------- -
Good Cooperation on Security & Law Enforcement
-------------- -


20. (SBU) As a key link in the global supply chain and a
vital transit point for U.S. trade (about two-thirds of the
Canal's traffic is bound to or from the U.S.),the Canal
presents an attractive and vulnerable terrorist target.
Moreover, despite significant progress, Panama continues to
be an important transit point for drug smugglers, money
launderers, illicit arms merchants, and undocumented
immigrants heading north thanks to its proximity to
drug-producing neighbors and its status as an important,
dollarized, financial center. With USG assistance, Panama
has strengthened its ability to detect illegal money and
narcotics shipments through Tocumen International Airport.
Several GOP agencies participate as part of a Joint Task
Force that averages several seizures of narcotics and/or
money each week. For example, Embassy law enforcement
agencies and the Task Force recently conducted two joint
operations that seized at total of $1.5 million in cash and
gold. In March 2007, Panamanian authorities, with c
ritical USG law enforcement support, conducted the largest
ever maritime narcotics seizure on the Pacific Coast of
Panama. Authorities confiscated a ship containing
approximately 20 tons of cocaine with an estimated value of
$500 million. A USG built checkpoint near the Costa Rican
border that is manned by various GOP agencies has also made
consistent narcotics seizures and interdictions of
undocumented aliens.


21. (SBU) The GOP recognizes that securing the Canal
requires a mature, collaborative bilateral relationship. The
Torrijos government is 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.
The GOP is moving ahead with plans to merge its National
Maritime Service and its National Air Service into a single
"Coast Guard" type of operation. 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.


22. (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 (over 5,000 large commercial
vessels). About 13% of the U.S. ocean-going cargo transits
the Canal each year. Panama's seafarer registry currently
licenses over 300,000 crew members. Port services have grown
dramatically in the past decade, as Panama now boasts the
leading complex of port facilities in Latin America. In
February 2007, the GOP and U.S. Department of Homeland
Security executed a "Container Security Initiative" agreement
enhance the security of container traffic between our two
countries. CSI equipment was began operating in late August
at the Balboa Port on the Pacific side of the Panama Canal
and will likely be installed by the end of 2007 at the

U.S.-run Manzanillo International Terminal (MIT) in Colon.
EATON