US embassy cable - 04PANAMA3025

UNCLAS SECTION 01 OF 05 PANAMA 003025 
 
SIPDIS 
 
 
USDOC4332/ITA/MAC/WH/OLAC/MGAISFORD 
USTR FOR AMALITO 
TREASURY FOR CKUSHLIS 
WHA/PPC FOR PTRIVELLI 
SOUTHCOM FOR POLAD 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, EINV, ETRD, PM, ECONOMIC AFFAIRS 
SUBJECT: PANAMA: ECONOMIC TRENDS AND LOOMING CHALLENGES 
 
1. (U) This message is sensitive but unclassified; please 
protect accordingly. 
 
 
2. (SBU) Introduction:  Hoping to capitalize early on its 
campaign promises (anti-corruption, transparency, fiscal 
responsibility and economic growth), current popularity (70 
percent), and control of the legislature, the Torrijos 
Administration is poised to press ahead with a very ambitious 
economic agenda. This agenda includes fiscal reform, fixing 
the social security program, negotiation and ratification of 
an FTA with the U.S., and teeing up a political referendum on 
Canal expansion before 2005 is over. While the agenda's 
economic imperative is clear to most of Panama, its execution 
represents a negative agenda for many entrenched interests 
and will be a heavy lift politically.  2005 promises to be a 
defining year for the Torrijos Administration and a test of 
its willingness and Panama's readiness to move more firmly 
out of the corruption, clientelism, and paternalism matrix. 
This cable provides Panama watchers a snapshot of these and 
other economic developments.  End introduction. 
 
 
--------------------------------------------- - 
The Fiscal Reform and Social Security Packages 
--------------------------------------------- - 
 
 
3. (SBU) Minister of Economy and Finance (MEF) Ricaurte 
Vasquez is scheduled to unveil an over-due package of fiscal 
reform proposals this week.  However, it is not clear whether 
the proposals to fix the social security system are ready for 
prime time. In terms of timing, we expect the fiscal reforms 
to be discussed with business groups this week and then 
pushed through in an extraordinary legislative session 
sometime in January.  Reform of the actuarily bankrupt Social 
Security System (Spanish abbreviation CSS) will probably be 
taken up by the legislature during the February/March 
time-frame to seek passage before the bulk of university 
students return to regular classes mid-March. (Note: the GoP 
clearly expects heated demonstrations and possible civil 
disturbances by students and labor groups. End Note.) 
 
 
4. (SBU) Regarding fiscal reform the message is clear: those 
who can afford to pay (Panama's business class) are going to 
be asked to pay, and the MEF will also announce a series of 
measures to improve and simplify tax administration.  In 
talking with Panama's business elite it is evident that many 
of them are not enamored with the prospect of increased taxes 
(or being put in the position of having to pay taxes) as they 
feel not enough is being done to address a bloated and 
inefficient public sector.  Despite this there seems to be an 
understanding that it's time to try and fix the system.  As 
one senior official (and businessman) said "this is the price 
we have to pay for being in Panama" (read: to continue 
enjoying a low-crime, stable political and economic 
environment).  Reforming the social security system (CSS) 
will be a tougher prospect as it affects Panama's working 
class; however, a broad consensus seems to be developing that 
the current situation is untenable.  The GoP will likely 
manage this by picking the least offensive measures such as 
increasing the retirement ages for men and women and 
increasing the number of contributory years; rather, than 
reducing benefits or significantly increasing workers 
contributions.  See para (9) for a further discussion of the 
program woes. 
 
 
 
 
------------------------------ 
Tightening the Budgetary Belt? 
------------------------------ 
 
 
5. (SBU) Despite efforts to limit public spending by the 
Minister of Economy and Finance Ricaurte Vasquez since taking 
office -- and primarily as a result of excesses of the 
previous Moscoso Administration -- the 2004 budget deficit is 
expected to reach 5.3 percent of GDP with the overall stock 
of public sector debt increasing to around 66 percent of GDP. 
 Nevertheless, GDP grew an impressive 6 percent in 2004 
primarily as a result of export oriented growth and a 
construction boom fueled by tax incentives (and most likely 
illicit sources of funds).  Growth for 2005 is forecasted to 
be 5 percent.  While the 2005 general budget passed last 
month was trumpeted as "austere," the GoP was cautious not to 
tighten too much (this would have slowed growth down and 
caused political heartburn.  As Panama has no monetary 
policy, fiscal policy is the only major policy lever 
available).  The approved 2005 budget of $6.192 billion 
mirrors the 2004 budget of $6.168 billion.  A budget deficit 
of 3.5 percent is forecasted for 2005. 
 
 
6. (U) While the GoP's penchant to keep taking on more debt 
is troubling (debt service represents $1.417 billion or 22.9 
percent of the 2005 budget), Panama's economic health is 
enviable when compared to most countries in the region. Two 
of the three sovereign credit rating agencies currently have 
Panama one notch below investment grade.  These agencies are 
also carefully watching the measures Panama takes over the 
next few months which has implications for Canal expansion. 
Separately, citing well-known excesses of the previous two 
administrations, President Torrijos has also promised to 
publicize an account of discretionary funds usage every three 
months in order to reduce corruption and increase 
transparency. 
 
 
 
 
-------------------------- 
FTA: An Easy Ratification? 
-------------------------- 
 
 
7. (SBU) Jerry Wilson, President of Panama's Legislative 
Assembly, commented to EmbOffs that once negotiated the FTA 
agreement "will pass."  However, Minister of Trade and 
Industries Alejandro Ferrer has remarked several months past 
to EmbOffs that ratification of the FTA could be harder to 
obtain than reform of the Social Security System.  (Comment. 
Hyperbole aside, Ferrer's statements may be a positioning 
tactic to emphasize to us that depending on the negotiations 
outcome (read: agriculture), ratification may not be a sure 
thing.  However, Torrijos's PRD party holds a majority in 
Congress and President Torrijos and his team have 
consistently signaled their strong support for a FTA.  End 
comment.)  Separately, it is also clear, both from 
discussions with senior USG officials and what we are hearing 
at Post, that the GoP is seeking to set up rice as their 
exclusion-candidate -- citing the 60 thousand-plus jobs in 
the sector. 
 
 
 
 
---------------------- 
Panama Canal Expansion 
---------------------- 
 
 
8. (SBU) The proposed Canal expansion project to construct a 
third-set of locks has an estimated price tag of $4-6 billion 
and is expected to take 8-10 years to complete.  However, the 
constitution requires a national referendum first be 
submitted to the Panamanian people for their approval. GOP 
officials have stated this referendum will most likely occur 
in late 2005 or early 2006, and not earlier, as originally 
touted.  Actual timing of the referendum will likely depend 
on how quickly the Canal can mount an educational/public 
relations campaign aimed at garnering broad public approval 
and how much heat the Torrijos Administration takes on fiscal 
and social security reform.  The GoP is very aware that 
political referendums have had a history of failure in Panama 
-- voters have used them to register general discontent 
irrespective of the issue's merits -- and will want to 
carefully manage the process and timing. (Comment: 
Interestingly, we hear from various sources that Canal 
personnel are still working from timelines that have the 
referendum taking place mid-2005.  End Comment.) 
 
 
9. (SBU/NOFORN) The expansion is expected to be financed 
through a combination of Canal revenues, new user fees, and 
bridge loans.  Privately, we understand that the ACP is 
looking to levy a new "construction tax" (paid by the Canal's 
customers i.e., the world's shippers) that would take effect 
the day after the referendum is approved to fund a 
significant portion of the project. The Torrijos 
Administration is clearly very enamored with the project and 
see it as jobs-creation machine, a vehicle to consolidate 
Panama's position as a premier maritime/logistical/entrepot 
venue, and solidifying their role in Panama's history (the 
vision thing). 
 
 
--------------------------------------------- -------------- 
Anti-Corruption Efforts: Or a Case of Too Many Straw Tails ? 
--------------------------------------------- -------------- 
 
 
10. (SBU) Staying true to Torrijos's campaign promise of 
"zero corruption," Vice Minister of Finance Rolando Mirones 
submitted a formal request to the Public Ministry that former 
MEF Norberto Delgado be investigated for "illicit enrichment" 
on Monday, November 1.  Prohibited from speaking freely about 
the evidence the current GOP has obtained, Mirones stated 
that Delgado cannot justify his current assets.  La Prensa, 
Panama's leading newspaper, cited marked increases in 
Delgado's net worth on his sworn declarations of wealth 
during the last five years.  Mirones further commented that 
this action was a direct message for former GOP authorities 
that the Torrijos Administration will file complaints when 
there is evidence.  (Note.  Delgado also contacted Embassy to 
document "his side" of 
the story.  Details to be provided via septel.  End note.) 
 
 
11. (SBU) Panama's anti-corruption prosecutor issued an 
arrest order for Bolivar Pariente, former General Manager of 
Panama's National Bank (BNP) for charges of approving a loan 
in violation of BNP policies.  Under Pariente's leadership, 
the BNP granted a loan to a corporation to build the Prados 
del Este housing development which flooded in September 2004. 
 According to the charges, BNP granted credit facilities for 
the project in violation of the law that established BNP and 
the BNP ethics manual.  Total loss is estimated to be $12 
million.  Pariente remains outside Panama.  (Note: Pariente 
was briefly in the United States but then departed.  Embassy 
has revoked Pariente's visa, as a "flight risk," to impede 
his entry into the U.S. should he try to return.  End note.) 
 
 
12. (SBU) While these and other efforts are salutary, it 
remains to be seen how true Torrijos will be to the campaign 
promise of zero corruption.  Many in Panama's elite (and 
elsewhere) doubt that any big fish will be prosecuted or that 
Torrijos will go after his own.  As one person said, there 
are too many people with "straw tails" in Panama (read: light 
mine, and I light yours).  This is the one area where 
Torrijos can establish and maintain credibility with Panama's 
voters even if they disagree with him on other things such as 
economic reforms.  The polls clearly show that corruption and 
employment are the major concerns of average Panamanians. 
Who Torrijos selects as Attorney General (a critical ten-year 
appointment rumored for this week) will be telling. 
 
 
---------------------- 
Fixing Social Security 
---------------------- 
 
 
13. (U) Press and other reports indicate that the Panamanian 
Social Security System (Spanish abbreviation CSS) will 
exhaust its resources in 2011 if reforms are not taken. 
Plagued by increasing life expectancies and static 
contribution rates and rules, the CSS maintains a large gap 
between the amount paid in and the amount paid out. Created 
in 1941 when the average life expectancy was 60 years, the 
CSS set retirement ages (the age at which the CSS would pay 
benefits) at 60 years for men and 55 years for women. 
Contrastly, Panama's average life expectancy in 2004 is 74 
years but its retirement ages have changed little: 62 years 
for men and 57 years for women.  Additionally, the rate of 
contributors per retiree (the number of contributors paying 
into the system for every retiree) has drastically declined 
from 58 contributors in 1941 to 5 contributors in 2004. 
Currently, Panamanians are only required to contribute to the 
CSS for 15 years.  For example, a woman retiring after 15 
years of contributions at 57 years with a life expectancy of 
72 years is expected to receive over 4 times what she put 
into the system.  Factoring in inflation adjustments as well, 
it is no surprise the CSS is losing approximately $600 
thousand per day.  While a dialogue continues between the 
CSS, employer, and labor groups over how to best reform the 
CSS, no consensus has been reached.  (Note: The CSS provides 
pensions, medical services, and workers' compensation to over 
60 percent of Panama's three million population.  The 
Disability, Old Age, and Death (IVM) program component 
provides pensions to Panamanians; for many, this is their 
only source of retirement income.  End note.) 
 
 
14. (U) Recent press reports have highlighted Minister of 
Economy and Finance (MEF) Ricaurte Vasquez's comments that 
the financial crisis of the Caja de Seguro Social (CSS), 
Panama's Social Security System, could present an obstacle 
for the expansion of the Panama Canal.  According to Vasquez, 
international financial institutions, from whom Panama would 
borrow to finance the Canal's expansion, fear Canal monies 
would be used to finance CSS obligations.  This could result 
in higher interest rates from the lending international 
markets. 
 
 
----------------- 
Container Traffic 
----------------- 
 
 
15. (SBU) Manzanillo International Terminal (MIT), the 
largest container port in Latin America, recently announced a 
30 percent growth in TEU movements (Twenty foot equivalent 
units; the industry standard to measure containers) over last 
year.  MIT moved 1.9 million TEUs in 2003, an increase of 
800,000 units from the 1.1 million TEUs in 2002.  This growth 
can be attributed to economic recovery in Latin America and 
increased commercial trade with China. (Comment:  While 
Panama sees significant transshipments through ports such as 
MIT, Evergreen's Colon Container Terminal (Taiwanese-owned) 
and Hutchinson-Whampoas' Panama Ports Company (Chinese 
owned), the volume of containers (carrying local export) sent 
to the U.S. is quite small, probably around 15,000 TEUs. The 
Panama Canal Authority (ACP) cites that during FY 2004, 
5,947,092 containers passed through the Canal.  Of these, 
1,696,868 containers were destined for the East Coast of the 
United States and 58,200 were destined for the West Coast. 
 
 
--------------------------------------------- ---- 
Panama Canal (ACP) Breaks the Billion Dollar Mark 
--------------------------------------------- ---- 
 
 
16. (U) The Panama Canal Authority (ACP) earned a record 
$1.06 billion for the fiscal year ending September 30, 2004, 
with $757.7 million collected from transit tolls.  (Note: The 
ACP maintains the U.S. fiscal accounting year. $923 million 
was earned in 2003.  End note.)  Revenues passed to the 
central government from Canal operations (dividends, tonnage 
fees, and services) came to around $332 million, up from $294 
million the previous fiscal year.  Such revenues will come to 
around $384 million during FY 2005.  Gross cargo throughput 
was approximately 267 million tons, a 10 percent increase 
over 2003. The number of "Panamax" vessels (currently the 
largest ships which cross the Canal) transiting the canal 
increased 12.5 percent to 5,329 and total transits grew by 
6.7 percent to 14,035.  The ACP reported only ten accidents 
during this year, the least number reported in the last 81 
years.  According to the ACP, the principal route utilizing 
the Canal was from Asia to the East Coast of the United 
States and the Gulf of Mexico.  Approximately 66 percent of 
the cargo transiting the Canal is going to or from the United 
States. 
 
 
 
 
--------------------------------------------- ----------- 
ACP: A Strict Question of Supply and Demand or We Did It 
Because We Could 
--------------------------------------------- ----------- 
 
 
17. (SBU/NOFORN) Taking advantage of its market position and 
the growth in containerization that is driving global 
maritime trade, the Panama Canal Authority (ACP) is proposing 
to modify its toll system and rules of measurement for 
container ships in order to establish a toll structure based 
on a charge per TEU (twenty-foot equivalent unit) to account 
for on-deck containers (of which presently only 8.78 percent 
is covered).  For a full container vessel the proposal 
establishes a $42 per TEU toll begining May 1, 2005, $49 per 
TEU toll beginning January 1, 2006 and $54 per TEU toll 
begining January 1, 2007.  A senior shipping industry contact 
said that the net effect of the change will be a 65 percent 
increase in the total transit cost per Panamax sized vessel 
from $170,000 to $280,000.  The ACP for its part feels this 
is "back pay."  Despite some grousing, shippers will pass the 
costs onto their customers (the Walmart and Home Depots of 
the world), and recognize the Canal is still the best game in 
town (the U.S. intermodal system Long Beach/LA is reportedly 
operating at capacity and the Suez Canal is costlier).  The 
ACP also knows this and expects to add in excess of $40 
million to its bottom line just during the first year the 
change goes into effect. 
 
 
 
 
---------------- 
Panama Joins G-4 
---------------- 
 
 
18. (SBU) On November 5, the GOP formally announced its 
entrance to the now G-4 (Group of Four), formally the G-3 
consisting of Colombia, Venezuela, and Mexico.  GoP officials 
have stated that Panama's G-4 accession is to promote 
Panama's economic, political, and social integration with 
those countries.  MFA Senior Advisor Nils Castro commented to 
EmbOffs, during a November 24 meeting, the G4 represented a 
consolidation of Panamanian economic integration with the G3 
markets as well as a vehicle to improve Panama's 
attractiveness as a hub into those markets given the small 
size of Panama's internal market.  Castro noted that 
accession to the existing current trade agreement between 
those countries has to be worked out, but added the current 
agreement includes agricultural safeguards which should make 
things easy for Panama.  Castro also added that the G-4 
agreement could eventually further Panama's penetration into 
Ecuador and Peru where Panama sees real potential.  Panama's 
commercial exchange with Venezuela is small.  Principal 
exports will be consumer or manufactured products.  While GOP 
officials have been reticent to provide specifics in public 
venues on how Panama will accede to G-4, Castro commented 
that negotiations would begin soon after the closure of the 
U.S.-Panama FTA.  According to the G-3's original agreement 
signed by the three original members on June 13, 1994, 
tariffs would be reduced to zero by January 2005. 
 
 
------------------------------- 
A Victory for Environmentalists 
------------------------------- 
 
 
19. (U) Former-President Moscoso authorized the construction 
of a paved highway through the Volcan Baru national park 
reserve in 2001.  It was ostensibly to be used to connect two 
previously separated villages for commercial reasons, and to 
support eco-tourism for the park.  In reality, the road would 
have simplified access to several of Moscoso's coffee farms 
in the area.  National and international opposition to the 
road was extremely intense, and construction stalled due to 
protests, legal actions, and propitiously bad weather. 
During the last week of October, President Torrijos formally 
struck down a previous decree of then-President Moscoso that 
had allowed the construction of the so-called "Camino 
Ecologico."  With this action, the proposed road construction 
is permanently halted. 
 
 
 
 
-------------- 
On the Horizon 
-------------- 
 
 
20. (SBU) The GOP is continuing discussions with Colombia for 
electricity and gas pipelines to flow through Panama to 
connect Central America.  It is estimated that Central 
America will require approximately 5,840 additional MW in 
2015.  In April 2003, Panama and Colombia signed a MOU to 
perform feasibility studies of an Electric and Gas 
Interconnection between Panama and Colombia.  On November 1, 
2004, Panama signed an MOU with Colombia to conduct a 
feasibility study for a gas pipeline interconnection from 
Colombia to Panama.  GOP officials are continuing 
government-to-government discussions as well as beginning 
discussions with the private sector as the cost of the 
projects would be borne totally by the private sector.  In a 
November 24 meeting with EmbOffs, MFA Official Nils Castro 
stated Panama preferred a water connection for both projects 
because it would provide a lower security risk, reduce 
illegal immigration possibilities, and a maintain the Darien 
as a natural barrier against infectious animal diseases 
(i.e., hoof and mouth, screwworm, etc).  According to the 
GoP, the pipeline would most likely go across the Atlantic 
Ocean, connecting Cartegena, Colombia, with Colon, Panama. 
(Comment:  While interesting so far much of this is just 
talk. The GoP recently asked Post for possible technical 
assistance (through USTDA) on the gas project. End Comment. 
WATT