Panamanians voted on Sunday against the efforts of their president, Ricardo Martinelli, to stay in power even though he was constitutionally barred from seeking reelection. It’s not an overstatement to say that in doing so, Panama overcame the greatest challenge in it’s 25 year-old democracy.

For several years Martinelli looked for a way to get rid of the constitutional ban on reelection. He couldn’t do it through a constitutional amendment since the vote of two separate legislatures is required to change the Constitution. And given that polls consistently showed that public opinion was firmly against the idea of introducing consecutive presidential reelection, a referendum was also out of the question. Thus, Martinelli tried to pack the Supreme Court with three new justices. The idea was that a friendly Supreme Court would rule that the ban on reelection was unconstitutional (as occurred in the case of Daniel Ortega in Nicaragua). However, Panamanians took to the streets and Martinelli backtracked. Then he opted for a less overt strategy: supporting a successor and appointing his wife as his vice-presidential candidate. As Mary O’Grady of the Wall Street Journal pointed out, Martinelli moved his queen to stay in power.

Despite a legal prohibition to do so, Martinelli actively campaigned for his candidate José Domingo Arias and his wife, while viciously attacking their rivals. His government spent millions of dollars in publicity and the president toured the country giving away goodies such as digital TV boxes and inaugurating infrastructure projects (he ordered that the new metro in Panama City not charge a fee until after the election). It is ironic that while Panama has been the most outspoken critic of Venezuela in Latin America, Martinelli’s government engaged in similar electoral tactics as those of Chavismo.

Fortunately, it didn’t work. Juan Carlos Varela, who is Martinelli’s vice-president turned bitter rival, handily defeated Arias by 39.1% versus 31.7%. Panama City’s former mayor, Juan Carlos Navarro, came in third with 27.9%. Even though Martinelli accepted his candidate’s defeat, he didn’t call Varela on Sunday to congratulate him, claiming he had lost his phone number. That doesn’t bode well for a smooth transition. Martinelli is well-known for holding bitter grudges. After splitting with Varela, the National Assembly he controls voted to increase taxes on liquor sales to fund a subsidy for elderly people. As it happens, Varela’s family owns a rum-distillery.

One of the areas where Varela could find a nasty surprise is in public finances. Total government debt (in absolute terms) has increased by 70% during Martinelli’s watch and it wouldn’t be too surprising if the incoming administration finds that the fiscal figures have been doctored to make them look less grave. The Martinelli administration has already engaged in accounting tricks such as postponing payments, relying on turnkey projects to build infrastructure, and taking public enterprises off the books to feign a lower fiscal deficit.

The high levels of government spending have been masked by the fact that the economy grew at an annual average rate of 8% for the last 5 years. While the economy was growing at such a high pace, the fiscal deficit and the public debt (as a percentage of GDP) seemed under control. However, now that the economy is decelerating, the fiscal iceberg is becoming more apparent: the central government deficit was 4.4% of GDP last year. And, after years of declining thanks to high growth rates, total public debt as a percentage of GDP (39% by the end of 2013) is expected to start rising again in 2014. 

Varela will also have to deal with the cronies that Martinelli placed in several key posts such as the Comptroller General, the Attorney General and the head of a recently created tax authority with vast powers. Varela will also face a National Assembly with a majority that belongs to Martinelli’s party.

If Panamanians want to avoid having a president with authoritarian leanings, they should look at amending the Constitution (but not holding a Constituent Assembly as some propose) so the executive doesn’t enjoy so much power in appointing key officials in the government. For example, the next president will be able to appoint four Supreme Court Justices (out of nine), one Electoral Court Justice, and six board members to the Canal Authority (out of eleven), among others. It’s too much power to place in a single person. The constitutional reform should also grant greater independence to the Judiciary.

Panamanians dodged a bullet on Sunday. But their ability to do so in the future depends on restructuring their institutions in order to have a weaker president and a stronger republic.