US embassy cable - 05PANAMA1352

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 
------- 
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 
--------------------------------- 
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 
------------------------- 
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 
----------------- 
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 
------------------------------------- 
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? 
---------------------- 
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 
------------------------------------------ 
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