[SANITIZED]LATIN AMERICA REGIONAL AND POLITICAL ANALYSIS 14 JULY 1977 - 1977/07/14

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Document Number (FOIA) /ESDN (CREST): 
03000023
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RIPPUB
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U
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41
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April 3, 2019
Document Release Date: 
April 12, 2019
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Publication Date: 
July 14, 1977
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Approved for Release: 2018/10/02 C03000023 3.5(c) Latin America REGIONAL AND POLITICAL ANALYSIS 3.5(c) 132 RP ALA 77-048 14 July 1977 Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 3.5(c) Approved for Release: 2018/10/02 C03000023 LATIN LATIN AMERICA 14 July 1977 CONTENTS 3.5(c) Argentina: Improved Foreign Financial Situation 13 This publication is prepared for regional specialists in the Washington community by the Latin America Division, Office of Regional and Political Analysis, with oc- casional contributions from other offices within the Directorate of Intelligence and from other agencies within the Intelligence Community. Comments and queries are welcome. They should be directed to the authors of the individual articles. RP ALA 7 7-0 4 8 14 July 1977 Approved for Release: 2018/10/02 C03000023 3.5(c) Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 5.F..Q.PrET Argentina: Improved Foreign Financial Situation The military junta that took over last year has brought Argentina back from the brink of international bankruptcy to a state of comfortable solvency. Interna- tional obligations are being met, and reserves have reached an all-time high. The government must now induce industry to exploit the favorable foreign balance by im- porting more of the materials needed for raising domestic /, production. Economic prospects for the remainder of 1977 are good even though the government still faces serious domestic problems--inflation, a large budget deficit, and lagging industrial production. Its handling of these problems over the next year or so will help determine whether it remains in power bong enough to consolidate its gains. Inherited Problems When the military ousted the Peronist government in March 1976, the economy was approaching disaster. The trade balance had registered $0.5 billion deficit in 1975-- compared with a $1.3 billion surplus two years earlier, when a good grain harvest boosted exports, and an $800 million surplus in 1974. The 1975 drop resulted from a poor grain harvest, the loss of EC markets for meat, and an unrealistic exchange rate that made Argentine manu- factures uncompetitive while encouraging importers to buy heavily abroad in anticipation of a major devaluation. Although the higher cost of oil imports also contributed to the trade deficit, oil costs are less significant for Argentina than for most oil-importing countries because domestic oil production covers 85 to 90 percent of re- quirements. In addition, poor debt planning had allowed a concentration of foreign debt payments to build up in 1976. Reserves were near the vanishing point. Domestic production was stagnant. Government poli- cies had discouraged agricultural output, while manufac- turers found themselves in a profit squeeze between rising / rycosts and regulated prices. Inflation was spiraling up- '/,7 ward so rapidly that, if left unchecked, the 1976 rate RP ALA 77-048 14 July 1977 13 Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 ET would have approached 1,000 percent. With a bloated bureaucracy and an inadequate revenue structure, the government deficit was rising rapidly, and the regime was increasingly covering expenditures by issuing more currency. eor their part, workers were demanding and getting sizable wage increases in an effort to offset rising prices. Argentina's foreign credit rating was poor, and the Peronist government had not yet lined up funds to cover its foreign financial gap.* This gap had widened from a $0.5 billion in 1974 to $2 billion in 1975. Argentina: Foreign Financial Gap 19772 1973 1974 1975 Million US $ 19761 Exports, f.o.b. 3,266 3,931 2,961 3,895 4,500 Imports, f.o.b. 1,983 3,160 3,431 2,652 3,500 Net services and transfers -563 -644 -815 -632 -790 Current account balance 720 127 -1,285 611 210 Debt amortization -573 -600 -800 -1,000 -1,000 Financial gap 147 -473 -2,085 -389 -790 Medium- and long-term capital inflows 594 723 NA 1,300 NA Net short-term capital inflows 180 -301 NA 290 NA Change in reserves 921 -51 -791 1,201 -300 External debt, yearend 4,672 4,873 4,695 5,189 4,679 Percent Debt service ratio 20 17 30 29 25 'Preliminary. 2Projeeteci. *Financial gap is defined as the current account deficit plus amortization of medium- and long-term debts shifts in short-term capital are not included. RP ALA 77-048 14 July 1977 14 joc´┐ŻCefil-**r Approved for Release: 2018/10/02 C03000023 If Approved for Release: 2018/10/02 C03000023 ET 1976--The Bail Out The new junta immediately focused on the need to stimulate exports, with emphasis on agricultural products. It reversed the previous policy of keeping agricultural prices low to benefit urban workers. Sharply increased prices for farm products, improved availability of cred- its, and abolition of the marketing monopoly of the state grain board led to a 10 percent increase in grain areas planted. Favorable weather during the growing and harvesting seasons then contributed to a bumper crop. Although world wheat prices dropped, aggressive market- ing by private Argentine grain sales agencies--pushed by a shortage of facilities to store the record crop-- accounted for a large share of the $900 million increase in total exports in 1976. This trend continued into 1977, when the remainder of the harvest was marketed. Meat exports nearly doubled in 1976 compared with the depressed 1975 level, aided by more realistic ex- change rates. With continual "microdevaluations" of the peso to offset inflation and the gradual elimination of the dual exchange rate, the government also succeeded in stimulating exports of nontraditional products by the end of the year. Imports dropped 23 percent in 1976 as inventories were drawn down and as demand was dampened by recession. In addition to initiating the export promotion pro- gram, Economics Minister Martinez de Hoz launched a world- wide effort to obtain foreign loans. In personal approaches to banks and international financial institutions in the US, Canada, Western Europe, and Japan he succeeded in lining up nearly $1 billion in four- to five-year loans. Together with $300 million from the International Monetary Fund, these loans enabled Argentina to meet debt obligations and to improve the debt maturity profile. By the end of 1976, debt payment coverage was as- sured. Moreover the trade balance had swung from a $500 million deficit in 1975 to a $1.2 billion surplus. The current account balance totaled $600 million, compared with a $1.3 billion deficit the year before. International reserves had trebled. Gains on the domestic front promised further improvement in the general economic climate and the restoration of foreign confidence in Argentina's fi- nancial soundness: RP ALA 77-048 14 July 1977 Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 --GDP, although down 2.9 percent for 1976 as a whole, was rising in the last qLarter. --The inflation rate was down from more than 400 percent (annual basis) in the first half 1976 to about 100 percent in the second half. --The national budget deficit, which equaled 13.5 percent of GDP in the first half of 1976, was down to about half that level in the second half; for the year as a whole, 41 percent of expenditures were covered by revenues, compared with only 23 percent in 1975. 1977--Maintaining the Pace The foreign financial situation has remained highly favorable so far. Exceptionally large grain shipments boosted exports to $1.8 billion in the first four months, double the level of imports. More than 85 percent of imports consisted of industrial inputs and capital goods, signaling an upturn in industrial output. To encourage this trend, the government has removed practically all restrictions on imports. If production picks up, imports should be considerably larger in the remainder of the year; exports will decline until the next harvest begins in November. The government's economic team p=jects the year's exports at $4.3 billion to $4.5 billion, the trade surplus at close to $1 billion, and the current account surplus at $200 million. The junta is continuing its program of incentives for agriculture and expects another large grain harvest in 1977-78. It is also counting on realistic exchange policies to boost exports of manufactured goods. Debt payments due in 1977 are close to the 1976 level of $1 billion and will require additional borrowing to cover. Although an improved credit rating will make loans easier to obtain, new borrowing is expected to to- tal less than one third the 1976 level because of record foreign reserves. Argentina almost certainly will choose to reduce its external debt rather than accumulate addi- tional reserves. RP ALA 77-048 14 July 1977 Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 s ET Farther Down the Road Longer range prospects for the Argentine economy are clouded by political uncertainties. If the present economic team remains in power and adheres to current policies, the economic recovery is likely to accelerate and the foreign financial situation should continue im- proving. In light of past Argentine experience, however, it cannot be assumed that this will happen. The well-organized and traditionally influential labor sector has been a major factor forcing previous military governments to abandon promising economic re- form programs. Much of the burden of the present eco- nomic readjustment has fallen on the working class, whose purchasing power--as the regime concedes--may have dropped by one third in the past year. Labor organizations have lost most of their political influence and lack a central rallying point since Juan Peron's death. If public opinion turns against the junta, however, labor elements could probably exert enough pressure to force the government to ease restrictions on wages and union activities. Continuation of the present economic pro- gram would then be impossible. If changes were made that favored urban labor at the expense of agriculture, the problems that characterized much of the last three decades would reappear. Another possible development would be the ascendancy of a more hard-line group within the military that would replace the present gradualist, free enterprise approach with stricter controls. Although this policy might bring down inflation more rapidly, it could stifle the reviving manufacturing sector and cause extensive unemployment. Any change from the present government would probably have a generally destabilizing effect. Foreign investors are wary because of past experi- ence with Buenos Aires' vacillating economic policies and are waiting for more solid evidence of political stability before investing heavily. They are favorably impressed, however, with the junta's liberalization of foreign investment laws and with its efforts to settle outstanding disputes with several foreign firms. In- creasing numbers of businessmen are visiting Argentina to study investment opportunities. Some foreign firms-- especially oil companies--are increasing their exposure. RP ALA 77-048 14 July 1q77 Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 s..FrgT The financial gap should decline moderately over the next few years, as annual debt payments diminish with better debt scheduling. The current account surplus may not increase substantially, since rising imports will probably limit trade surpluses. Agricultural ex- ports--in which Argentina has a comparative advantage-- should remain large; exports of manufacturers, especially autos and other transport equipment, probably will in- crease. Covering even a sizable financial gap should present no problem. 18 3.5(c) RP ALA 77-048 14 July 1977 Approved for Release: 2018/10/02 C03000023 3.5(c) Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 3.5(c) Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR Approved for Release: 2018/10/02 C03000023 Approved for Release: 2018/10/02 C03000023 NR