U.S. INVESTORS ON ARGENTINA: BOOM CONTINUING BUT

UNCLAS BUENOS AIRES 000540 SIPDIS SIPDIS SENSITIVE WHA FOR WHA/BSC, WHA/AND AND WHA/EPSC E FOR THOMAS PIERCE EB/CBA FOR FMERMOUD, DENNIS WINSTEAD EB/IFD/OIA FOR WSCHOLZ, MTRACTON EB/IFD/OMA FOR AHAVILAND AND ASIROTIC PASS NSC FOR JOSE CARDENAS PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE PASS USTR FOR EEISSENSTAT, SCRONIN TREASURY FOR MMALLOY AND LTRAN USDOC FOR 4322/ITA/MAC/OLAC/PEACHER US SOUTHCOM FOR POLAD E.O. 12958: N/A TAGS: EINV ECON ENRG EPET AR SUBJECT: U.S. INVESTORS ON ARGENTINA: BOOM CONTINUING BUT CORRECTIONS NEEDED -------------- Summary -------------- ¶1. (SBU) U.S. executives predicted Argentina's economic boom would continue through 2007 and 2008, during the Ambassador's March 7 lunch for Hector Morales, USED to the IDB. Representatives of major U.S. financial, energy, and agroindustrial companies operating in Argentina agreed that the growth rate would eventually slow due to insufficient investment in the energy sector and also due to excessive government intervention in the economy. They agreed that shifts in GoA macroeconomic and micro-price control policies were needed but doubted the GoA would change its ways, even after the October election. While none of them expect a repeat of the 2001/2002 crisis, they generally agreed that Argentina was wasting its opportunity to become a world player. USED Morales did not have the opportunity to clear this cable. End Summary. -------------- IDB Lunch with U.S. Companies -------------- ¶2. (U) Ambassador hosted lunch on March 7 for USED Hector Morales during his visit to Argentina, to introduce him to U.S. companies with experience in Argentina's (and the region's) energy and infrastructure sectors -- two areas in which the IDB is focusing its lending to Argentina. The heads of Citibank, AES, Occidental Petroleum (Oxy),and IBM, and high-ranking officials from Cargill and Pricewaterhousecoopers (PWC) attended the lunch. Citibank is the only remaining U.S. bank operating in Argentina, and is eager to work with the IDB, particularly in the energy sector. AES holds electricity generation and transmission assets here. Oxy is one of the more aggressive hydrocarbon exploration companies operating in Argentina. IBM represented the high-tech sector, which is a huge growth sector -- and which depends heavily on having adequate energy and infrastructure systems in place. Cargill represented the agroindustrial sector, which is the current economic engine for Argentina, and PWC is a regional energy consultant. -------------- IDB Program in Argentina -------------- ¶3. (SBU) USED Morales noted that the IDB has approved almost $3 billion in new lending to Argentina so far this year, focused primarily on infrastructure (including housing) and energy/water projects in poorer regions of the country. Argentina continues to be one of the IDB's biggest clients, Morales said, and new IDB President Moreno is developing a strong relationship with President Kirchner. ¶4. (SBU) Morales said he was interested in exploring opportunities for the IDB to do more work directly with the private sector, particularly with small and medium sized enterprises, although without competing directly with private banks. He noted that only 3% of IDB's Argentine loan portfolio was outstanding to private sector borrowers, despite the IDB's maximum of 10% allowable for private sector financing. Morales noted that the IDB was in a transition phase, and emphasized that this was an opportunity to re-engage and re-focus IDB programs in the hemisphere. He asked for company perspectives on Argentina's economy and investment environment. -------------- -------------- Citibank -- huge opportunities, especially for locals -------------- -------------- ¶5. (SBU) Citibank called local investment groups extremely active in acquiring assets and doing projects in the energy sector, and suggested that the IDB could work through local banks to help reduce risks and lower costs. He gave the example of a local group's purchase of CMS' Argentina assets, wherein the local group put up 25% equity and Citibank financed the rest. He noted that the liquidity in the markets makes financing possible, with many international equity companies looking to enter Argentina and Argentine pension funds also eager to invest in energy and infrastructure projects. -------------- AES -- Concerned about natural gas supply -------------- ¶6. (SBU) AES commented that energy generation companies operating in Argentina were recovering despite price controls in place since ¶2002. However, he argued that the challenge was to recreate pre-crisis market conditions that would entice new investment. Current low energy prices in Argentina discourage new investment but encourage higher demand. Even though he expected prices to begin recovering by 2008, he was concerned about the looming shortage of natural gas (with declining Argentine reserves, and problems in Bolivia). He noted that a huge part of the Argentine productive economy is powered by natural gas, and wondered where new supplies would come from and how it would be transported, given scarce resources going to increasing capacity in these areas. He pointed out that there is little gas exploration ongoing in Argentina, and while Bolivia has proven reserves, it needs more investment. -------------- Occidental -- Tough operating environments -------------- ¶7. (SBU) Occidental argued that, given the situation in Bolivia, few if any energy companies would risk the investment to bring Bolivian reserves out of the ground to feed the proposed new Bolivia/Argentina natural gas pipeline. He noted that Argentine export taxes also hindered investment, pointing out that natural gas production was eight times less profitable than oil due to the combination of high oil prices and export taxes. This was the reason for the lack of investment in natural gas exploration and extraction. Even with oil, the rates of return are much lower due to Argentina's high taxes on oil exports (Note: Oxy reports that it receives under $40/barrel when world prices approximate $60/barrel. End Note). While Oxy-Argentina can survive with current GoA market interventions and export tariffs in the short term, it needs higher prices in the longer term to compete on a worldwide basis within Occidental for the financial and human resources it needs to expand operations here. -------------- Cargill -- Concerns about energy supply -------------- ¶8. (SBU) Cargill noted that, as a large consumer of energy, the company is worried by the looming shortages here. Notwithstanding proposed new investments in generation, Cargill argued there will be shortfalls through 2009. Cargill has just invested over $350 million in new facilities, including in the construction of a 13,000 metric ton soybean processing plant. Although Cargill signed deals with CMS in December 2005 to ensure an adequate supply of electricity to the new plant, the company seconded Oxy and AES's concerns about Argentine natural gas supplies. Cargill noted that Argentina's ratio of gas reserves/consumption fell from 21 years in the mid-1990s to fewer than 10 years now, and current consumption trends mean that Argentina will become a net importer of natural gas sooner than expected. -------------- -------------- U.S. Companies expect more of the same post-election -------------- -------------- ¶9. (SBU) Participants speculated that world commodity prices would stay high through 2007 and 2008, which will support continued growth in Argentina. With agricultural production making up over 50% of total exports, continued high prices would help maintain twin fiscal and trade surpluses and reduce pressures on the GoA to change current interventionist policies. All private sector participants agreed that the GoA needs to act to create a more conducive environment for investment, particularly in energy, and also to use macroeconomic policies to slow down increasing inflation (rather than use heterodox price controls and export restrictions). However, they argued there was little chance of these changes being made before October 2007 elections. ¶10. (SBU) The Citibank rep argued that, given sustainable debt levels, high reserves, and a flexible exchange rate, Argentina would not repeat the 2001/2002 crisis. The IBM rep agreed that Argentina would not experience a similar economic crisis any time soon, and the company expects the GoA to make significant policy changes even after the elections. Participants concluded that by providing disincentives to investment, the GoA was ensuring that Argentina was losing out in the global competition for financial and human resources, and was thus losing its greatest opportunity ever to become a world player. WAYNE