Panama Vice President Juan Carlos Varela upended pre-election polls showing him lagging behind to win the country’s presidential election, after publicly feuding with the ruling party over allegations of corruption.

Varela, 50, was declared the winner by the national electoral tribunal on Sunday, which said his lead in the race was insurmountable. With 93 percent of the precincts counted, Varela had 39 percent. Former Housing Minister Jose Domingo Arias, who led in pre-election polls and had the backing of President Ricardo Martinelli, was second with 32 percent and conceded the race. Ex-Panama City Mayor Juan Carlos Navarro was third with 28 percent.

“This government is going to fight against inequality and is not going to tolerate corruption,” Varela told supporters at a hotel in Panama City after being declared the winner. “Better days will come to Panama, with a government that is human, decent and visionary.”

Varela will succeed Martinelli, who helped oversee the Panama Canal’s $5.25 billion expansion, opened Central America’s first subway and pushed unemployment to a record low 4.1 percent, on July 1. With voters saying inflation was their top concern, Varela advocated price controls on basic foods and said he would be more open to talks with unions and indigenous groups, who have battled with Martinelli over mining and hydroelectric projects.

‘Martinelli Machine’

“Varela closed the campaign with a lot of momentum,” said Risa Grais-Targow, a Latin America analyst at Eurasia Group in New York. “He was able to beat the Martinelli machine due to voter perception that an Arias victory would be a de facto Martinelli re-election.”

Martinelli congratulated Varela for his “overwhelming victory” on his Twitter account. His Democratic Change party still won the most seats in the 71-member National Assembly, with 30 lawmakers compared with 12 aligned with Varela, according to preliminary estimates by the electoral tribunal.

A father of three, Varela received a bachelor’s degree in industrial engineering from the Georgia Institute of Technology in Atlanta and served on the board of his family’s company, Grupo Varela, whose investments include a brand of Panamanian rum.

$36 Billion Economy

A political alliance between Varela’s Panamenista Party and Martinelli began breaking down soon after the 2009 election. After publicly feuding over their political alliance in 2011, Varela repeatedly rebuked the president for allegedly consolidating state resources for political gain. That year he called on Martinelli to suspend a $250 million contract to buy radar equipment and helicopters from Italy, pending an investigation into allegations that officials took bribes. Martinelli rejected the accusations and said Varela, who he had already removed as foreign minister, should resign the vice presidency.

Fueled by government spending, Panama’s $36 billion economy has been among the world’s fastest-growing, with gross domestic product surging an average of more than 8 percent a year under Martinelli, who wasn’t eligible for re-election. Growth will slow to about 6 percent by 2015, prompting the need for “improved spending control,” Fitch Ratings said in a report today. Public spending accounted for a record 10 percent of GDP last year, Fitch said.

“We think tighter spending controls will be needed to meet targets set under the current fiscal responsibility law,” according to the report.

Corruption Index

The International Republican Institute, a Washington-based policy advocacy group, said in a report today that the campaign was “generally competitive” and met international standards. It called for greater transparency during the campaigns so that “parties disclose the origin of contributions and prevent the use of public funding for partisan propaganda.”

Panama ranked 102nd out of 177 nations in last year’s Corruption Perceptions Index compiled by Transparency International. In 2012, the World Economic Forum rated the country’s judiciary 132nd out of 144 countries in terms of political independence.

Panama’s dollar bonds have returned 7.5 percent this year, compared with 5.5 percent for emerging markets, according to JPMorgan Chase & Co.’s EMBIG index. Standard & Poor’s rates the country BBB, the second-lowest investment grade level, putting Panama in the same category as Colombia and Bahrain.

Construction projects throughout Panama have remained idle since April 23, when workers walked off the job in an effort to win a 35 percent salary increase. The strike threatens to further delay the canal’s expansion, designed to accommodate larger ships and help reduce transport costs for commodities such as liquefied natural gas.

“Each day of the strike brings new delays that harm the reputation and trust in the country as reliable center for transport,” the Panama Canal Authority said in an April 25 statement. The project, which was beset by a dispute with the consortium undertaking the construction earlier this year, is due to be finished late next year.

To contact the reporter on this story: Eric Sabo in Panama City at esabo1@bloomberg.net

To contact the editors responsible for this story: Bill Faries at wfaries@bloomberg.net; Andre Soliani at asoliani@bloomberg.net Randall Woods

From  VP Joe Biden

Elections in Panama

We congratulate the Panamanian people on the high turnout and electoral officials on a peaceful and orderly election. International and domestic election observers, including those from the Organization of American States, the U.S. Embassy, the Carter Center, and the International Republican Institute reported that the polling process was transparent and fair.

We look forward to working with President-elect Juan Carlos Varela and his entire administration to advance our bilateral relationship. Our longstanding cooperation and commitment to Panama and the Panamanian people will endure with the next administration.

Readout of Vice President Biden’s Call with Panamanian President-elect Juan Carlos Varela

Today, Vice President Biden called President-elect of Panama Juan Carlos Varela to congratulate him on his victory.  The Vice President reaffirmed the historic ties between the United States and Panama, and reiterated our commitment to work as partners in advancing shared goals, including promoting economic prosperity, security, and greater regional integration in Central America.  The Vice President congratulated the Panamanian people for demonstrating their commitment to democratic values through a free, fair, and transparent election process.  The Vice President also underscored the importance of developing a robust agenda for the upcoming 2015 Summit of the Americas to be held in Panama.