Argentina: U.S. Private Sector Players Downbeat on

UNCLAS BUENOS AIRES 001673 SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EFIN ETRD EINV AR SUBJECT: Argentina: U.S. Private Sector Players Downbeat on Economic/Political Reality -------------- Summary -------------- ¶1. (SBU) U.S. private sector players in the finance, accounting, and energy fields are downbeat on Argentina's medium-term economic prospects. In a November 25 lunch hosted by Ambassador for visiting State Department CFO Brad Higgins, they predicted the Kirchner administration's political base will weaken in line with declining growth and agreed that the GoA's private pension fund nationalization had exacerbated the impact of the global financial crisis on Argentina's economy by spooking capital market players and diminishing already low investor confidence. The majority also predicted that really serious problems would likely not hit the Argentine economy until after 2009. Notwithstanding the economic downturn, U.S. company reps noted broad profitability through the second half of 2008 and agreed that Argentina still offers U.S. companies some of the best human capital in the region. All participants agreed that foreign capital investment in primary infrastructure had dried up, particularly in the energy sector. Established U.S. companies who face slow growth and regulatory/tax uncertainties won't leave Argentina, but company reps felt that few new U.S. companies will seek to enter the challenging Argentine market in the near term. End Summary. ¶2. (U) Ambassador hosted a November 25 lunch for Assistant Secretary Assistant Secretary of State for Resource Management and Chief Financial Officer Brad Higgins. Attendees included Jose Maria Zas, President of American Express Argentina; Lorna Martin, Managing Director, Fitch-Ibca Credit Rating Argentina; Guillermo Fiad, President, Duke Energy International Southern Cone; Facundo Gomez Minujin, Managing Director JP Morgan Chase Argentina; Jorge Bacher, Managing Partner Price Waterhouse Coopers Argentina; and Econcouns (notetaker). -------------- -------------- Economic Decline Impact on CFK Political Fortunes -------------- -------------- ¶3. (SBU) Chase saw the Cristina Fernandez de Kirchner (CFK) administration's ability to push the private pension fund nationalization through Congress with relative ease making the CFK administration politically stronger, calling it now better placed to win Congressional support of the annual renewal of its controversial Emergency Law/Superpowers authority. Fitch disagreed, arguing that CFK's political base will evaporate when economic growth stops. Fitch believed that Argentina had reached an economic tipping point in late November, with consumers pulling back and stores and restaurants empty. Duke agreed that Argentina's economic prospects "would get worse before they get better" and predicted a rough October 2009 mid-term election for the CFK administration as a consequence. Duke argued that a cowed Argentine private sector was responsible for CFK administration policy excesses. "We're to blame - who would have thought we'd let them take the pension funds," Duke said. ¶4. (SBU) All U.S. company participants agreed that the CFK administration's strong-arming of the private pension fund nationalization had exacerbated the impact of the global slowdown on Argentina's economy by spooking capital market players and diminishing already low investor confidence. Chase noted the loss of the private pension funds as key institutional investor capital providers had been extremely disruptive to local financial markets. Chase ascribed the "outsized" losses on Buenos Aires equity markets to fears in financial circles that the GoA would use its newly acquired holdings in private banks and companies (via the pension fund nationalization) to expand state controls on the private sector. Chase cited the Central Bank's placement of "observers" in bank foreign exchange trading floors as an object-lesson case in point. Chase projected possible stagflation in the run-up to 2009 elections, with inflation high due to union pushes in a pre-election year to make up for prior year wage increase shortfalls. However, led by Price Waterhouse Coopers (PWC),the majority of company reps present said that it was most likely the government will not face major economic problems until 2010 and that it will prime the electoral pump for 2009 with public works spending. -------------- Economic Downturn Bites -------------- ¶5. (SBU) PWC noted that earnings of U.S. companies operating in Argentina had remained strong through the second quarter of 2008 and that, slowdown notwithstanding, Argentina still offered some of the best human capital in the region to U.S. companies. PWC said it is building up its local employee base to service other PWC affiliates in the region, and noted Exxon's recent move to increase the size of its back office engineering service center by 20%. Chase noted they had recently moved a financial analysis hub from Mumbai, India to Buenos Aires to take advantage of Argentina's more attractive time zone and lower junior analyst turnover rates. ¶6. (SBU) All participants agreed that foreign capital investment in primary infrastructure had dried up, particularly in the energy sector. Duke Energy noted that an uncertain Argentine investment climate mandated a short three-year timeframe for a full return on any new capital invested, versus a 7-10 year norm for the electricity generating industry worldwide. Chase opined that established U.S. companies won't leave Argentina in light of the economic downturn and regulatory/tax uncertainties, but that very few new U.S. companies will seek to enter the challenging Argentine market in the near term, especially if they need to count on more than a three year return on investment. PWC lamented that, in the 100 years since Argentina had reached its democratic and economic highpoint in 1916, there had been an almost continuous downtrend of wealth destruction. -------------- - American Companies Best Employers in Argentina -------------- - ¶7. In discussion of A/S Higgins resource management responsibilities at the State Department, American Express (Amex),named one of Argentina's best companies to work for in a recent employee survey by leading daily Clarin, credited the company's open management and flex-time polices for the satisfaction of its union-free labor force, whose average age is 30. Compensation is not a major job satisfaction issue, according to Amex, since financial service sector salaries are union-driven and standardized across the banks and non-bank financial institutions. Amex noted that, economic downturn notwithstanding, its operations in consumer credit-starved Argentina are growing faster than those in the United States or in Europe. WAYNE