Argentina: Secretary of Labor Chao Talks Investment Climate

UNCLAS BUENOS AIRES 002353 SIPDIS SIPDIS SENSITIVE E.O. 12958: N/A TAGS: AR ECON EFIN BEXP OVIP SUBJECT: Argentina: Secretary of Labor Chao Talks Investment Climate with U.S. Companies Ref: Buenos Aires 2338 This cable contains sensitive information - not for internet distribution. -------------- Summary -------------- ¶1. (SBU) Secretary of Labor Chao met December 10 with representatives of Citibank, IBM, and Wal-Mart, all major U.S. service sector employers in Argentina. Company reps highlighted their profitable operations here, praised the caliber of Argentina's labor pool, and agreed that rapid expansion of U.S. investment in Argentina's service sector over the past five years has been fueled by the nations well-educated, highly capable and relatively inexpensive workforce. In response to the Secretary's prompting on investment climate challenges U.S. companies face, participants cited labor law inflexibility, rising inflation, poor contract enforcement, ingrained corruption, systemic weakness in the national judiciary and frequently changing tax and regulatory rules of the game. Secretary Chao questioned the impact of Argentina's still unresolved post-crisis legacy of debt default and the GoA's growing reliance on bond placements by Venezuela. Participants acknowledged that Argentina's decision to pre-pay relatively inexpensive IMF debt and instead rely on national and Venezuela-assisted bond issues has been financially and politically costly. They predicted that resolving outstanding Paris Club arrears would be high on new President Cristina Fernandez de Kirchner's (CFK's) agenda and agreed that the key challenge facing the incoming CFK administration will be to manage needed economic policy changes in a way that sustains Argentina's five-year-long track record of strong growth. End Summary. -------------- -------------- Lunch with U.S. Companies that are Major Employers -------------- -------------- ¶2. (U) Secretary Elaine Chao and Ambassador hosted a December 10 luncheon for representatives of U.S. service sector companies who are major employers in Argentina to discuss their company operations in Argentina and the challenges the local investment climate poses. Attendees included Juan Bruchou, President of the American Chamber (AmCham) & CEO Citibank; Alejandro Diaz, CEO of the AmCham; Ezequiel Gomez Berard, CEO of Wal-Mart Argentina; and Sebastian Mocorrea, Vice President of Governmental Programs for IBM Argentina. All company representatives noted that their operations were profitable and that Argentina remains a very attractive regional market from their headquarters perspective. -------------- -------------- Attraction: Argentina's Capable, Educated Workforce -------------- -------------- ¶3. (SBU) Secretary Chao noted Argentina's reputation as a nation with a strong societal and family emphasis on education and asked about the quality and training of the nation's labor force. Participants praised the caliber of Argentina's labor pool and agreed that the rapid expansion of U.S. investment in Argentina's service sector over the past five years was a function of the nation's well-educated, highly capable and relatively inexpensive workforce -- the latter due to GoA policies to maintain artificially low nominal currency values. IBM's Mocorrea explained that these competitive advantages made it easy for IBM to choose Argentina as one of its four global service export centers alongside China, India and Brazil. IBM currently employs over 6,000 Argentine software engineers and technicians making it the second largest U.S. employer in Argentina. Its operations here focus on IT service exports to other western hemisphere IBM affiliates. ¶4. (SBU) Wal-Mart's Berard noted his own company's rapid expansion during the 5-year economic growth surge that followed Argentina's 2001/2 economic crisis: Wal-Mart now has 21 stores in Argentina and has hired over 1,500 employees in the past year alone to reach a total of over 7,500 employees, making Wal-Mart the single largest U.S. company employer in Argentina. Ambassador noted that, in a recent local employee survey of "best companies to work for," six of the ten top-ranked firms and ten of the twenty top-ranked firms in Argentina were U.S.-owned. ¶5. (SBU) Citibank's Bruchou highlighted his bank's 90-year history in Argentina, with a network of 60 branches, 3,500 employees and "universal" consumer finance, corporate finance and investment operations here. Citi had lost most of its capital in the aftermath of the economic crisis, Bruchou said, but it has recuperated well over the past four years of financial sector consolidation (including the departure of U.S. competitors Bank of America and Bank Boston) and economic recovery. In response to the Secretary's question on banking penetration, Bruchou noted that, although loan volume has increased substantially, Argentina remains substantially under-banked, with financial sector assets hovering at 11-12% of GDP (down from pre-crisis levels of 22-24%),well below the 30-40% of GDP averages in neighboring countries. Key reasons are Argentina's cash-economy tradition, a lack of consumer confidence in the local banking system following the crisis (where deposits were frozen and many savers suffered substantial losses),and a linked tendency for Argentine's to hold their capital overseas, with some estimates of Argentine capital flight ranging as high as $100 billion. -------------- -------------- Investment Constraints: Labor Inflexibility, Inflation, Price Controls, Corruption, Rule of Law -------------- -------------- ¶6. (SBU) With capable human capital a key Argentine competitive advantage, Mocorrea called IBM's greatest challenges in Argentina growing competition for qualified employees, the lack of flexibility in local labor legislation and a judicial system that favors employees in most legal action. In response to the Secretary's question on how Argentine labor law rigidity impacts the investment climate, Citibank's Bruchou noted that foreign multinationals generally compete for high-end employees who have numerous job alternatives. But, he said, labor law inflexibility hurt Argentina's small and medium enterprises (SMEs),traditionally an engine for growth and employment. The high cost of firing workers has made SMEs wary about bringing on permanent documented employees, Bruchou said. (Notwithstanding Bruchou's concerns, according to government statistics, domestic unemployment has dropped from a post-crisis high of over 20% to the 8% level, close to Argentina's structural rate of unemployment). ¶7. (SBU) Citi's Bruchou added that relative cost advantages of Argentine labor are waning as high domestic inflation rates are encouraging Argentina's strong labor unions to aggressively defend their members' purchasing power. Over 40% of Argentina's workforce is currently unionized and participants discussed the growing strength of Argentine unions and GoA's post-crisis efforts to cultivate union leaders and maintain social calm, including by flowing government social safety net payments to unemployed heads of households through union and "piquetero" unemployed worker groups. The incoming CFK administration has indicated that it plans to address growing inflation by working with industry and labor to negotiate multi-year sector-by-sector "social pacts" to contain prices and wages. AmCham's Diaz, however, said that in the Chamber's recent discussions with Labor Minister Tomada, the Minister was not yet sure how these pacts would be structured. Ambassador noted that an earlier CFK statement that Argentina looked to Germany as a model for economic development was likely based in part on her respect for Germany's tradition of consensual government, industry, and labor dialogue. ¶8. (SBU) In response to the Secretary's prompting on investment climate challenges U.S. companies face in Argentina beyond labor law inflexibility and rising inflation, participants noted generally weak Argentine rule of law in terms of enforcing the sanctity of contracts, a legacy of "ingrained" corruption, systemic weakness in the national judiciary (with the time to investigate and prosecute corruption cases averaging 15 years),and frequently changing rules of the game. Citi and IBM highlighted abrupt changes in tax rates and regulations, the imposition of formal and informal price controls, the attempted imposition of interest rate caps on loans, and the business uncertainty that such moves have engendered. Wal-Mart offered that price controls on retail consumer items it sells have largely been "politically cosmetic" and haven't significantly impacted Wal-Mart's bottom line. ¶9. (SBU) Secretary Chao and Citi discussed the impact of Argentina's still unresolved post-crisis legacy of debt default, with outstanding claims to both the Paris Club and to a significant group of bond "holdouts," as well as an increasing GoA reliance on bond placements on its behalf by Venezuela. Citi acknowledged that Argentina's decision to pre-pay relatively inexpensive IMF debt and instead rely on restricted bonds issued under national law has been costly for the nation, both in terms of the price Argentina must pay to access international capital markets, and in terms of Argentina's reputation as a nation that continues to flout international market norms. -------------- Moving Forward with the CFK Administration -------------- ¶10. (SBU) Ambassador suggested that the challenge for the incoming CFK administration will be to manage economic policy changes in a way that sustains the benefits Argentina has gained over the past five years of strong growth. Wal-Mart agreed that the challenge will be engineering a soft landing to more sustainable GDP growth levels and noted the GoA's successful efforts to maintain a primary fiscal surplus. Citi suggested that the best advice the USG could offer to CFK would be to "talk to us"; to actively engage U.S. companies operating in Argentina and so better get the word out to potential investors that her administration is "open for business." Citi also predicted that resolving outstanding Paris Club arrears would be high on CFK's agenda and that, at this point in time, it is more important for Argentina to clear Paris club arrears than to resolve outstanding debt to bond holdouts. ¶11. (U) This cable has been reviewed by the Secretary's delegation. WAYNE