VZCZCXYZ0001
RR RUEHWEB

DE RUEHBU #0540/01 0801700
ZNR UUUUU ZZH
R 211700Z MAR 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 7617
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6054
RUEHCV/AMEMBASSY CARACAS 1140
RUEHMN/AMEMBASSY MONTEVIDEO 6295
RUEHSG/AMEMBASSY SANTIAGO 0293
RUEHBR/AMEMBASSY BRASILIA 5909
RUEHLP/AMEMBASSY LA PAZ MAR SAO PAULO 3209
RUEHRI/AMCONSUL RIO DE JANEIRO 2171

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