Amid Unrest, Panama President Agrees to Talks

After two weeks of protests that reflected a sharp decline in his popularity, President Martin Torrijos has blinked in the standoff with unions and business leaders over a far-reaching reform plan.

In a nationwide address this week, Torrijos agreed to a 90-day “discussion period” with the growing ranks of opponents of new laws he backed to put Panama’s finances on stronger footing and lay the groundwork for a $5-billion expansion of the Panama Canal.

The announcement comes as polls show that Torrijos’ approval rating has fallen below 30% from the mid-60s a month ago. More than 500 people have been arrested during the demonstrations, and businesses estimate their losses caused by the disturbances at $80 million. Classes at public schools and two universities have been suspended indefinitely.

A referendum on the 10-year project to expand the canal had been planned for November. But reaction to Torrijos’ reforms and the severe financial pain they inflict on the middle class have been so vehement that many observers doubt the referendum would pass if were it held today.

“People are angry because there was little public consultation or debate over the reforms,” said Jorge Giannareas, a political analyst and law professor. “Although sentiment in Panama is in favor of the canal expansion, many people would vote against it now just to punish Torrijos.”

As a result of the reforms, which take full effect next year, average middle-class wage earners stand to lose 25% of their take-home pay, Giannareas said.

More than 80,000 teachers, construction workers and government employees have been on strike since Torrijos-backed legislators passed a bill in late May to overhaul Panama’s generous social security system. Many Latin countries are facing similar crises, but Panama’s pension system is perhaps closest to hitting the wall. If left untouched, it could go broke as early as 2010.

The reform increases contributions by wage earners by nearly 40%, while extending the retirement ages of men to 65 from 62 and of women to 62 from 57, changes strongly opposed by unions. To receive full benefits, workers now must contribute a portion of their wages for a minimum of 25 years, up from 15.

In February, Torrijos rammed through a bill to erase yawning deficits and broaden the tax base, one of the weakest in the hemisphere. Annual tax collections equate to only 9% of annual economic output. Mexico, which is often singled out as a country with weak tax collection, takes in 12% of annual economic output.

Wall Street generally applauded the Torrijos changes as politically courageous and fiscally responsible.

“Panama is reducing its deficit and giving the country greater flexibility as it considers a canal expansion that may be as much as 50% financed by issuing bonds,” said debt analyst Lisa Schineller, of credit-rating firm Standard & Poor’s. The firm lifted a “negative watch” rating on Panama’s bonds after the measure passed.

The Panama Canal Authority, which operates the waterway, is nominally independent of the government. But Schineller said, “The canal is part of the government and fiscally prudent management of government finances could translate into more cost-effective financing for the canal.”

Enrique De Obarrio, president of the Panamanian Assn. of Business Executives, said members were worried that the new taxes could cut economic growth in half.

He said the pension revision, as drastic as it was, didn’t offer a long-term cure.

“The law passed was important and showed the courage of the president,” De Obarrio said. “But it is not enough. It’s just an extension of the agony.”

Giannareas said that pushing the legislation through Congress with a minimum of public debate and transparency had cost Torrijos support.

“He’s like a supermarket shopper who has a lot of things on his list but no idea what it’s all going to add up to in the kitchen,” the law professor said.