PANAMA: SCENESETTER FOR CODEL HOYER

UNCLAS PANAMA 000265

SENSITIVE
SIPDIS

PASS TO H

E.O. 12958: N/A
TAGS: OREP EWWT OVIP PREL PGOV ECON ETRD EINV PM
SUBJECT: PANAMA: SCENESETTER FOR CODEL HOYER

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SUMMARY
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1. (SBU) Summary. Since the 1989 restoration of democracy,
Panama has established and consolidated a democratic, stable
and responsive government; accelerated economic growth
through open markets; and strived to ensure that the benefits
of that growth reach all citizens. While a hemispheric leader
in progress on these fronts, Panama today stands at a
crossroads. Its political establishment is approaching its
fourth presidential election since 1990 - in May 2009, yet
cynicism abounds. Panama has leveraged its superb stewardship
of the Canal and central location to create an economic and
logistical architecture that is yielding now comparatively
stellar economic growth and a substantial reduction in
poverty. However, opportunities created by the growth remain
elusive to the poor and middle class due to continued income
inequality fostered by lack of access to quality education,
inadequate public infrastructure (especially transportation)
and the disproportionate effect of inflation on lower income
citizens.


2. (SBU) The U.S./Panama Free Trade Agreement (FTA) dominates
the bilateral relationship. President Torrijos, who leaves
office July 1, asserts he fulfilled all major campaign
promises, but one - the FTA. Since the FTA is a legacy issue,
President Torrijos and his administration are willing to
spend political capital to legislatively address potential
issues brought up by opponents of the FTA. After July 1, a
new Administration assumes power. While both major
candidates, Ms. Herrera and Mr. Martinelli, support the FTA,
their willingness and ability to push through the legislative
changes for implementation are uncertain. End Summary.


3. (SBU) This scenesetter includes Post's input for the
requested one-page fact sheets. After paragraph 5, each
section is a standalone fact sheet. Biographies were emailed
separately.

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MEETING PRESIDENT TORRIJOS
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4. (SBU) During your meeting and dinner with President
Torrijos, the FTA will be the most important topic. President
Torrijos (a Texas A&M graduate and formerly a regional
McDonalds Manager in Chicago) speaks and understands English,
but is often more comfortable speaking English in less formal
settings; as a result, the President may engage in more
substantive discussions outside of the formal meeting. A
Trade Summary is provided below.


5. (SBU) Your tour of the Panama Canal and initial excavation
of the $5.25 billion Expansion Project will demonstrate the
Panama Canal Authority's (ACP) world class managerial
prowess, a source of great pride to the Panamanian people.
Since the handover of the Canal from the United States to
Panama at the end of 1999, the safety record, number of
yearly transits, and revenue have improved through FY2008.
(The global economic recession may cause transits and
revenues to drop in FY2009.) In 2007, the ACP started a $5.25
billion expansion project to add a third lane for large
post-Panamax ships to transit the Canal. Currently, Colorado
based engineering firm CH2MHill is the Project Manager for
the expansion. Three consortia submitted bids to design and
build the $3.35 billion locks and a winner is expect to be
declared in late June. U.S. based Bechtel leads a consortium
while Spanish firms lead the other two. The winning
consortium is expected to purchase up to $1 billion of goods
in the United States, such as equipment and construction
materials. Panama imported $4.9 billion dollars of U.S. goods
in 2008 (vice exporting $380 million to the United States).
Under the FTA, obligations covering government procurement
will apply to the independently run ACP as well as the
Government of Panama at large.

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POLITICAL LANDSCAPE
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6. (SBU) Panama will hold general elections on May 3, 2009,
to choose a president and to fill every elected seat in
Panama's National Assembly. We fully expect this date to
herald the fourth free and fair election since Operation Just
Cause in December 1989 restored democracy in Panama.
According to polls, a population focused on insecurity from
the rising rate of crime and lingering economic insecurity
from the now abating rate of inflation has grown cynical
about its government's ability to deliver security and
sustained social and economic progress. The race is now
basically a two-person race, with opposition Democratic
Change (CD) party candidate Ricardo Martinelli enjoying a
steady 12-15% lead in the polls over the candidate of
President Torrijos' Revolutionary Democratic Party (PRD),
former Housing Minister Balbina Herrera. Martinelli has thus
far successfully positioned himself as the candidate for
change, in part as a result of an impressive campaign
financed in part from his substantial fortune (Martinelli
owns a major supermarket chains in Panama.) Herrera has been
campaigning on a platform of continuity with Torrijos'
successful administration, but has suffered from several
political missteps by the Torrijos administration, and by her
past association with Manuel Noriega, and her reputation as a
left wind firebrand in the past. The explosion of the Murcia
case has roiled the political landscape in the wake of his
assertion of funneling $6 million to the PRD (including
Herrera) and Herrera's assertion that Martinelli through his
business laundered money for Murcia.


7. (SBU) The outgoing Torrijos administration has maintained
excellent relations with the United States throughout the
last five years, marked by the negotiation of the FTA, and by
improved security cooperation. Panamanian public opinion is
pro-American, but also strongly sovereigntist and
nationalistic. The Torrijos administration has been able to
expand its security and trade ties to the U.S. without
significant political opposition due to Torrijos tight
control over the PRD, his own government, and the National
Assembly (NA) where the PRD has an absolute majority. None of
these will hold under a hypothetical Martinelli
administration, though Martinelli is strongly pro-American.
His government would be based on a small and weak party (CD),
and will have to deal with an unwieldy four party coalition
to govern. It is also unlikely Martinelli's Alliance for
Change coalition can win a NA majority. Thus, Martinelli will
face significant challenges pursuing his agenda. Should
Herrera win, it is likely that she will strive to maintain
the same good relations with the U.S. as Torrijos has, though
her advisors tend to be more left-wing and anti-American than
Torrijos'. However, she would also probably have more
effective control of her government and the NA then
Martinelli, and so might be able to form a more effective
government that could carry through on agreements.

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PANAMA'S ECONOMY
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8. (SBU) Behind the construction cranes and traffic jams lies
an expanding economic/logistical architecture. Its foundation
is the Canal through which passes roughly 5% of world
commerce. The Panama Canal Authority (ACP) has embarked on a
$5.25 billion dollar expansion, the centerpiece of which is a
third set of locks capable of handling the largest class of
container vessels. A growing network of ports, including
Manzanillo International Terminal in Colon (partially owned
by U.S. firm Carrix),facilitates trans-isthmian logistics
along with revitalized Kansas City Southern Railway between
Panama City and Colon. Panama Ports (Hutchison Port Holdings,
Inc. of Hong Kong) launched a $240 million expansion of its
Pacific and Caribbean terminals, augmenting the GOP' s
construction of the $2 15 million Panama- Colon Highway. The
Colon Free Zone generated over $19 billion in trade last
year. It serves as a hemispheric "one-stop shop" for
sourcing, financing, and delivering products (mostly from
Asia) to Latin American markets.


9. (SBU) Panama's robust financial center, with 90 banks and
$63 billion in assets fuels the purchase and movement of
cargo and facilitates the absorption of robust foreign direct
investment (FDI) inflows that totaled $2.4 billion for 2008.
Through generally prudent management, it has been able to
finance construction projects and consumer spending, key
drivers of GDP growth - 11.5% last year and roughly 9% in

2008. Although the global financial crisis will impact
Panama, growth is expected to be 1-3% - one of the only
countries in the hemisphere expecting positive growth.


10. (SBU) In recent years, Panama has reached beyond its
traditional maritime and financial networks to build
connectivity of data and knowledge, and people. Panama lies
at the junction of five high bandwidth submarine fiber optic
cables, placing Panama City second only to New York City in
bandwidth availability. This feature was key in the decisions
of Dell and Hewlett-Packard to locate regional headquarters
at the former Howard Air Base, which is undergoing a $705
million transformation as a regional manufacturing and
distribution hub.


11. (SBU) Panama's tourism industry has similarly mushroomed
in the past five years, with tourist arrivals increasing from
600,000 to 1.6 million between 2000 and 2008. Arrivals at
Tocumen International Airport reflect a similar trend,
climbing from over 2.1 million in 2000 to an estimated 4.5
million in 2008. Tocumen recently completed an $85 million
expansion of its international terminal, complimented by the
concurrent growth in its flag carrier, Copa (which codeshares
with Continental Airlines).


12. (SBU) A recent United Nations report highlighted true
progress in poverty reduction from 2001 to 2007 - overall
poverty fell from 37% to 29% and extreme poverty fell from
19% to 12%. Yet, the distribution of Panama's wealth and
income remains highly skewed, and Panama has one of the
highest degrees of inequality in the Americas. This situation
creates palpable resentment as BMWs and Land Rovers zip past
hot, crowded, buses that subject riders to unreliable
multi-hour commutes. Most inhabitants of Panama City have
never visited an indigenous area or the Darien where poverty
predominates, and government services are minimal.

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UNITED STATES/PANAMA TRADE
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13. (SBU) The U.S. goods trade surplus with Panama was $4.5
billion in 2008. U.S. goods exports in 2008 were $4.9
billion. U.S. exports to Panama have grown by 130% from 2005
to 2008. The stock of U.S. foreign direct investment (FDI) in
Panama was $6.2 billion in 2007 (latest data available). U.S.
FDI in Panama is concentrated largely in the nonbank holding
companies and finance sectors.

FREE TRADE AGREEMENT (formerly known as Trade Promotion
Agreement)


14. (SBU) On June 28, 2007, the United States and Panama
signed a Free Trade Agreement (FTA). Panama approved the FTA
on July 11, 2007. The FTA is a comprehensive free trade
agreement. When/if implemented, the FTA will result in
significant liberalization of trade in goods and services,
including financial services. The FTA also includes important
disciplines relating to: customs administration and trade
facilitation, technical barriers to trade, government
procurement, investment, telecommunications, electronic
commerce, intellectual property rights, transparency and
anti-corruption, financial services, and labor and
environmental protection. Under the FTA, Panama will be
obligated to liberalize the services sector beyond its
commitments under the WTO General Agreement on Trade in
Services by adopting a negative list approach where all
sectors are covered except where it has made specific
exceptions. Moreover, in connection with the FTA, Panama
agreed to become a full participant in the WTO Information
Technology Agreement, and entered into an agreement with the
United States that resolved a number of regulatory barriers
to trade in agricultural goods ranging from meat and poultry
to processed products, including dairy and rice.


15. (SBU) Panama's maximum tariff on industrial goods is 20
percent. Panama's tariffs on agricultural goods range from 10
percent to more than 250 percent. When/if the FTA enters into
force, 88 percent of U.S. exports of consumer and industrial
goods will enter Panama duty free, with remaining tariffs
phased out over periods of 5 years or 10 years. The FTA
includes "zero-for-zero" immediate duty free access for key
U.S. sectors and products, including agricultural and
construction equipment, information technology products, and
medical and scientific equipment. Other key U.S. export
sectors such as motor vehicles and parts, paper and wood
products, and chemicals also will obtain significant access
to Panama's market as duties are phased out.


16. (SBU) The FTA provides for immediate duty free treatment
for more than half of U.S. agricultural exports to Panama,
including high quality beef, certain pork and poultry
products, cotton, wheat, soybeans and soybean meal, most
fresh fruits and tree nuts, distilled spirits and wine, and a
wide assortment of processed products. Duties on other
agricultural goods will be phased out within 5 years to 12
years, and for the most sensitive products within 15 years to
20 years. The FTA also provides for expanded market access
opportunities through tariff-rate quotas (TRQs) for
agricultural products such as pork, chicken leg quarters,
dairy products, corn, rice, refined corn oil, dried beans,
frozen French fries, and tomato products. These TRQs will
permit immediate duty free access for specified quantities
that will increase as over-quota duties are phased out over
the course of the implementation period.


17. (SBU) Apparel products made in Panama will be duty free
under the FTA if they use U.S. or Panamanian fabric and yarn,
thereby supporting U.S. fabric and yarn exports and jobs.
Strong customs cooperation commitments between the United
States and Panama under the FTA will allow for verification
of claims of origin or preferential treatment, and denial of
preferential treatment or entry if claims cannot be verified.

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PANAMA COUNTER-NARCOTICS OVERVIEW
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18. (SBU) Panama is one of the USG's most important partners
in the fight against the drug trade, and its close
counter-narcotics cooperation with the U.S. in 2008 led to
the seizure of 5l metric tons of cocaine, following seizures
of 60 tons in 2007 and 40 tons in 2006. These were the
highest seizure figures in the region by far. Police also
seized over $3 million in cash linked to drug trafficking,
confiscated $1.5 million from 42 bank accounts, and arrested
126 people for international drug-related offenses.


19. (SBU) The seizure rates reveal that Panama continues to
be a major trans-shipment country for illegal drugs to the
United States and Europe, as a result of its geographic
position in the drug trafficking "transit zone." Drugs are
shipped by go-fast outboard-motor boats through Panama's
territorial waters on the Pacific and Caribbean coasts an
area that is two times the size of Panama's land mass - and
overland through the dense forests of Panama's Darien
province. The drugs arc trafficked by Colombian and Mexican
drug trafficking organizations (DTOs),and by elements of the
FARC and the remnants of paramilitary organizations. These
organizations have protagonized a significant increase in
violent crime in Panama this year, a fact that has led to
increasing social alarm in Panama. As a result of this, the
Government of Panama called a meeting of the presidents of
Panama, Colombia, Mexico and Guatemala in late 2008 to
promote greater cooperation in the struggle against
international organized crime and drug trafficking. As a
result, the four governments are working on concrete plans to
confront the DTOs through law enforcement cooperation and
information sharing.


20. (SBU) Panama has limited resources to confront the drug
traffickers. Having disbanded its military in 1989, following
the U.S. invasion, Panama has a National Police (PNP) force
of approximately 15,000. Security reforms were implemented in
2008 to try to increase Panama's ability to confront the drug
traffickers, including the creation of a coast guard-like
National Aero-Naval Service (SENAN),and breaking off a
National Frontier Service from the police to cover the
boarders. These forces are in their infancy, however, and
Panama still has very limited air and sea assets with which
to adequately control its territorial waters. The U.S. Coast
Guard has the right to enter Panama's territorial waters in
pursuit of drug traffickers, and has had success seizing
go-fasts. However, USCG does not have sufficient available
assets to shut down the coastal route either.


21. (SBU) Post plans to use Merida Initiative funds to build
up Panama's capacity to deal with this serious
drug-trafficking threat, and its growing gang problem. NAS
funds will be used to retrain the PNP in community policing
techniques, while USAID administered Economic Support Funds
(ESF) are used to develop an effective community-based gang
violence prevention program. The prevention program will
focus on the two major urban centers, Panama City and Colon,
and on the rural communities of the Darien, which suffer from
significant drug trafficking activities. Post's program will
work to build ties between the community based organizations
and the police, so that the two parts of the strategy support
one another, and create a self-reinforcing circle of success.
At the same time, Post will continue with our traditional
assistance to Panama's counter-narcotics efforts, including
highly effective vetted-units, Coast Guard-SENAN cooperation,
and support for Panamanian efforts to tighten control of its
borders, ports and airports.

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MERIDA
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22. (SBU) Panama is a major transit location for the drug
trade between Colombia and the U.S. and Europe. Huge amounts
of cocaine transit through its territorial waters and over
the Pan-American Highway everyday. Panama is taking decisive
action against traffickers, and is one of the top countries
in Latin America in terms of drug seizures. This is due
primarily to its excellent collaborative Counter-Narcotic
relationship with the U.S., and the work of a small group of
elite police officers.


23. (SBU) While Panama's security apparatus rakes up
impressive drug seizures, the Panamanian public is alarmed by
a perceived wave of crime and insecurity. This is largely a
result of Panama's nascent gang problem. Indigenous youth
gangs are developing in all of Panama's slums, especially in
Panama City, Colon and David in the west. This gang activity
is the result of enduring poverty and poor education leaving
young people without the skills to succeed in Panama's
rapidly growing economy. Meanwhile, Colombian and Mexican
drug traffickers offer increasing opportunities for criminal
groups to make money by stealing from drug dealers (tumbos),
selling drugs on the local market and by acting as paid
killers. While Panamanian authorities insist that the recent
wave of killings is mostly among youth gangs and drug
dealers, the public is nevertheless seriously concerned about
the perceived erosion of security in Panama's streets.


24. (SBU) Embassy Panama believes that it is essential to
help the GOP confront the gang problem now. The gangs are
becoming more entrenched and sophisticated all the time
according to local prosecutors, and could eventually offer
the drug cartels a ready made local structure, should they
decide to move their operations to Panama. Panama is
potentially a very attractive location for the drug cartels
to re-locate to once the Merida Initiative makes operating in
Mexico more difficult, due to its world-class banking system,
miles of unpopulated coastline in the middle of the transit
zone, and highly developed shipping and cargo infrastructure
sitting on one of the most important shipping lanes in the
world. Getting the gang problem under control now is the best
way to prevent the cartels from eventually bringing their
brand of terror and violence to Panama, potentially
threatening one of the most important commercial hubs in the
world.


25. (SBU) Embassy Panama proposes a holistic, integrated
inter-agency approach to the problem, using Merida funding to
give life to a strategy, rather than building a strategy
around funding streams. The foundation for our strategy is
community policing. Post believes that the gang problem
cannot be brought under control unless and until the police
and the community come together to reclaim the streets of
Panama's poor neighborhoods. Many of these neighborhoods have
suffered for years from a scarce police presence. When
present, police are a foreign presence, due to short tours of
duty meant to avoid corruption. Post is working with the
Panamanian National Police (PNP) to implement a Community
Police strategy, in conjunction with the Miami Dade Police
Department, to indoctrinate the highest level of the police
leadership in the concept of community policing. At the same
time we are implementing a "culture of lawfulness" program to
build up the PNP's ability to police itself. Community
organizations are also being re-established to interact with
the police, not just to identify criminal activities, but to
report on police corruption and malfeasance. Post will use
additional funds allotted through Merida to strengthen the
PNP's ability to investigate and discipline internal
corruption as a prerequisite for effective community
policing. ILEA funds will also be used to strengthen the
PNP's leadership, and prepare them to lead an organization
which is ready to work with the community to aggressively
target criminal gangs, without violating the democratic
foundations of the state, and the rule of law.


26. (SBU) Post will also work with the courts and prosecutors
to increase their ability to investigate, prosecute and try
gang activities. This will be increasingly difficult as
Panama transfers to the accusatorial system over the next
five years. While in the long run this transformation will be
positive, and help to avoid the long and unnecessary
incarcerations of suspects which frequently lead to the
creation of youth gangs in prison for self-protection, it
will be a traumatic change over if the justice system is not
adequately prepared. The Central American Finger Print
Exchange will be a valuable tool for prosecutors, as they
face the need to provide independent evidence besides police
testimony to gain convictions. Post will work to see if
creative use of this system can meet requests we have
received for help setting up a "tattoo" data bank to help
prosecute gang suspects. Post will also use available USG
assets, including training seminars by TDY federal agents, to
help Panama establish the basic tools for successful
prosecutions, including forensic investigation and a witness
protection program.


27. (SBU) While improvements in policing and prosecution of
gang cases can help deter gang activity, and take gang
leaders off the streets, Post believes that Panama is in a
unique situation to establish an effective youth engagement
program which prevents youth from joining gangs. Unlike many
of the countries affected by gang activity, Panama is
experiencing an economic boom, in which qualified workers are
in short supply. Here the resources of the Merida Initiative
are vital to implement a strategy of gang prevention. USAID
Panama has developed an excellent plan to develop youth
centers in high risk areas, in conjunction with Panamanian
NGOs and faith-based organizations, which will provide
vocational training, extra-curricular activities, safe-haven
recreational activities. These activities will take place in
coordination with a GOP Integral Security Program, financed
by the Inter-American Development Bank. Post has already had
preliminary talks with the GOP and the IDB about
collaborating on this issue. ECA educational programs,
especially the English Access Micro-scholarships, would play
a key role in anchoring these centers, and providing real
opportunities for youth to get the kinds of skills which can
give youth a path to productive employment. Post also plans
to partner with the active American business community to
develop business education programs, internship programs, and
even first-job programs with companies who are not just
socially responsible, but also badly in need of qualified
workers.


28. (SBU) While Post is strongly committed to this strategy
for success, there is no intention to abandon the extremely
successful model of intelligence sharing, and small elite
unit operations which have made Panama a great success in the
interdiction effort, and will hopefully give the cartels
cause to pause before moving their operations to Panama in
the future. Merida Initiative aid for vetted units,
information sharing, border inspection and maritime
interdiction will be used to further strengthen Panama's
successful programs, and to disrupt drug trafficking routes
in Central America.

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COUNTER-TERRORISM
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29. (SBU) Panama's main terrorism concern is an attack
against the Canal. The Panama Canal Authority and the
Government of Panama work closely together to protect the
Canal, and the ODC has trained several elite squads of
security forces to protect the Canal in the event of an
attack. Panama co-hosts the annual PANAMAX exercise, a
multinational security training exercise tailored to the
defense of the Panama Canal. The exercise replicates real
world threats to the Canal in order to develop appropriate
responses and guarantee safe passage to the approaches to the
canal and through the waterway. 20 nations, including the
United States, participate. On the margins of PANAMAX, Panama
hosts a tabletop exercise specifically designed to enhance
its ability to address asymmetric threats.


30. (SBU) Panama's other main terrorism concern is the
presence of drug trafficking organizations (DTOs) and
elements of the FARC in the Darien. With a population of no
more than 50,000 and only one main road, the Darien is a very
underdeveloped region on the border with Colombia, which is
physically and psychologically remote for most Panamanians.
Elements of the FARC have long used the parts of this region
closest to the border as a rest and relaxation zone, in
addition to organizing drug trafficking and logistical
operations in support of other FARC units inside of Colombia.
In trying to confront this threat, Panama is limited by the
fact that it has no military forces, following their
dissolution after Operation Just Cause in 1989. Panama's
security is the responsibility of the National Police (PNP),
the National Aero-Naval Service (SENAN),the National
Frontier Service (SENAFRONT),and the Institutional
Protection Service (SPI Secret Service equivalent). The
Torrijos government spun SENAFRONT off from the PNP late last
year in an attempt to stand up a more capable force on the
border that could keep the DTOs and the FARC under control.
While this was a good first step, SENAFRONT is still far away
in terms of size, training and equipment from being able to
take on the FARC. Post, through our Narcotics Affairs Section
(NAS) and our Office of Defense Cooperation (ODC - SouthCom)
has been working with limited funds to assist the development
of SENAFRONT with training and equipment.


31. (SBU) Post is developing a proposal for DOD
counter-insurgency funds that would stress a "whole of
government" strategy, based on the idea that the real danger
of the FARC and DTOs in the Darien is that they may be able
to usurp the legitimacy of the state in an area where the
state had little effective presence beyond the main road and
a few SENAFRONT bases, and the FARC and DTOs are able to buy
consciences by paying premium prices for goods and assistance
with the drug trade. The funds would be used to leverage GOP
funds and spearhead an effort to develop effective techniques
for improving government services in remote areas. This
program would go hand in hand with other DOD funded programs
to improve SENAFRONT's logistical capabilities so it could
cut the drug, weapons and supply trafficking routes in the
Darien.
STEPHENSON