ECONOMIC INTELLIGENCE WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79B00457A000100110001-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 27
• Document Creation Date: December 15, 2016
• Document Release Date: July 7, 2004
• Sequence Number: 1
• Publication Date: August 18, 1977
• Content Type: REPORT

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Secret
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be Nv t b e5 rev yr
Economic Intelligence Weekly
On file Department of
Agriculture release
instructions apply.
Secret
ER EIW 77-033
18 August 1977
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ECONOMIC INTELLIGENCE WEEKLY
18 August 1977
France: Prospective Leftist Victory Having Little
Effect on Economy to Date . . . . . . . . . . .
The strong possibility of a Socialist/Communist victory at the polls next
March has so far had surprisingly little effect on business investment and
capital outflows, while severely depressing prices on the Paris Bourse.
United States, Japan, and West Germany: Striking
Differences in Recent Foreign Trade Patterns . . . . . . . . . . . . . . 6
Exports and imports of the three giant non-Communist economies have
taken markedly different paths in the past 18 months.
OPEC Current Account: Surplus Receding from
First Half High . . . . . . . . . . . . . . . . . . . . . . . . . . .
With OPEC oil liftings expected to fall off in second half 1977, the
combined current account surplus of member countries will decline
substantially from the $25 billion of the first half.
Soviet Grain Prospects Still Excellent . . . . . . . . . . . . . . . . . .
To judge from crop conditions as of early August, the USSR will have a
second consecutive bumper grain crop-between 220 million and 225
million tons.
Chilean Payments Position: Breathing Spell . . . . . . . . . . . . . . . 15
Even though two years of harsh austerity have reduced the financial gap to
manageable size, Chile faces continued difficulties in securing needed
foreign support.
Coffee: Another Producer Attempt to Support Prices . . . . . . . . . 25
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FRANCE: PROSPECTIVE LEFTIST VICTORY HAVING
LITTLE EFFECT ON THE ECONOMY TO DATE
The strong possibility that the Socialist-Communist alliance will win control of
the French Government next March so far appears to be having only moderate
mpact on investment decisions while severely depressing stock market prices.
Our necessarily subjective judgment that the economy is pretty much on course
despite the leftist threat results from analysis of (a) investment in plant and
equipment, (b) international capital movements, and (c) prices of securities. Since
we obviously could not know what these indicators would have shown under
different political circumstances, we looked for developments that purely economic
factors could not account for. In brief we found:
? Little political impact on business investment; projected investment
in 1977 varies enormously across industries and in nearly every case is
clearly related to economic conditions in the particular industry.
? Only moderate political impact on flows of capital into and out of
the country; while some inflows such as portfolio investment have
weakened, signs of the often-rumored capital flight are lacking.
? A strong political impact on the stock market, where prices have
fallen to levels that are incredibly low by standard economic criteria.
Business Investment Fairly Steady
Conventional wisdom holds that fear of a leftist victory is depressing
investment outlays; businessmen who are surveyed frequently cite such concern. On
the other side of the coin, both the present government and the Patronat-the
influential employers federation-are pressing firms to invest now in the hope that
the resulting boost to the economy will forestall a leftist election victory. While we
cannot completely rule out a negative political impact on investment, we believe
that, on balance, any such effect has been relatively small. French business
investments apparently are being determined primarily by enonomic factors.
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The ;over ame:nt's survey of business intentions for 1977 is probably the best
indicator of investment plans available. The June survey points to a nominal increase
of about l4 percent from 1976 outlays, corresponding to a real increase of 4 to 5
percent after allowance for inflation. Given the fact that excess capacity still is high
by past standards in most industries, existing investment prospects seem at least
reasonably sati; factory and indicate that political fears are not a major depressant.
Because tusiness conditions vary widely among industries, disaggregated
investment intentions reveal more than the total. The motor vehicle, petroleum
processing, chemical, and electrical construction sectors all expect large increases in
investment sper ding this year. All four industries have sound reasons for investment.
For motor vehicles and electrical con-
struction, large output gains over the past
two years have squeezed excess produc-
tion capacity. The petroleum sector must
France: Projected Increases in 1977
invest heavily in catalytic cracking equip- Business Investment
ment to meet ar expected shift in demand
from heavy fuel oil to lighter products.
Spokesmen for the chemical industry
forecast that its firms will be unable to
meet dem,,.nd by 1980 unless they begin
expansion programs now.
At the same time that some in-
dustries arc rapilly expanding capacity, a
number of others are cutting investment
spending. Thes; include basic metals,
paper, shipbuilling and aircraft, coal
mining, leather, clothing, and textiles.
This amounts to a roll call of the problem
children .3f French industry-sectors
whose immediate future is poor to medi-
ocre regardless )f election results. Most
are already receiving special government
aid in some: form. Basic metals-especially
steel-is the clt,arest case, for France
suffers from tie same excess capacity
problems that affect most steel-producing
countries. The paper industry, as well as
the entire clothi ag and textiles sectors, is
plagued by high costs and skyrocketing
imports of foreign products. Coal con-
tinues its ine::orable decline simply
Percent
Change
Glass
74
Automobiles
48
Oil and natural gas
38
Chemicals
30
Electrical construction
21
Machinery
16
Construction materials
15
Primary transformation
of metals
10
Wood
4
Food industries
i
Printing and publishing
0
Textiles
-3
Mining.
-6
Shipbuilding and aircraft
-9
Paper
-10
Clothing
-11
Basic metal products
-17
Hides and leather
-27
Weighted Average
14
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because French reserves are running low. Shipbuilding must retrench because of its
nearly total failure over the past 18 months to garner new orders, while aircraft
producers are in a similar situation due to poor sales of the Concorde and other civil
airliners.
iCapital Flows Generally
apparently involved point to a moderate shift in investor behavior rather than to
Firms also are said to be shifting assets to foreign subsidiaries. The amounts
experienced a net outflow of portfolio investment funds over the past year or so.
the third quarter. Partial data and press commentary indicate that France has
Rumors of large-scale capital flight began to surface not long after the March
1976 local elections, in which the Socialist-Communist coalition made substantial
gains. Analysis of this question unfortunately is hampered by the very long time lags
before complete data are published. Detailed final balance-of-payments figures are
available only through second quarter 1976 and detailed provisional figures through
anything that might be labeled capital flight.
Data on overall short-term capital move-
ments-available through first quarter
1977-also point to an absence of large-scale
capital flight. Private nonbank flows as well as
errors and omissions would likely be in the
red if any large-scale capital flight were
occurring. Yet both categories have remained
steadily-and substantially-in surplus.
France: Short-Term International
Capital Flows
Private
Nonbank
Errors and
Omissions
1973
I
698
-81
II
125
286
III
635
-229
IV
682
-82
1974
I
1,356
-102
II
70
665
III
839
2
IV
249
637
1975
I
912
517
II
847
576
III
924
720
IV
569
112
1976
I
177
-134
II
17
543
III
1,367
186
IV
408
633
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FRANCE: Selected Indexes of Stock Prices
--Jan Jan Jan Jan
1974 1975 1976 1977
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Fear of a leftist government clearly is depressing stock prices on the Paris
Bourse. The average French stock can now be purchased for just half as many francs
as in 1961, even though nominal GNP is now six times the 1961 level. Dividend
yields on a number of stocks-including some blue chip issues-are in the 15-percent
range. Moreover, stock indexes dipped in each of the last two years immediately
after leftist victories in local elections. Significantly, the only stock category to resist
the downtrend is made up of French firms whose principal activities are outside
France.
This strong political impact on the stock market-in contrast to the
comparatively weak effect on business investment-may reflect mainly the influence
of psychological factors on stock price movements. The Paris Bourse is a relatively
thin market and thus is especially volatile; French firms rely on internal resources
and borrowed funds, rather than equity financing, for the bulk of their capital
requirements. Another possible cause of the divergence between stock prices and
business investment may be that stockholders are behaving as owners while
corporate managers are behaving as salaried employees.
Stockholders have valid reasons for fearing a leftist government. The
Socialist-Communist alliance already has targeted nine major companies* for
nationalization, and pressure to extend the list is evident within the alliance.
Moreover, leftist plans to boost social security charges and to allow big wage
increases threaten corporate profits across the board. Finally, a leftist government
would be likely sooner or later to increase personal income taxes on nonwage
income such as dividends and capital gains.
Recent stock price behavior indicates that investor fears extend beyond the
nationalization issue. The.index for firms in the service sector is just as depressed as
the index for manufacturers of basic products even though the former group should
be much less affected by any program of nationalization.
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*In decending order of employment the nine are: Saint-Gobain-Pont-a-Mousson (construction materials, pipes
and valves, packaging); Rhone-Poulenc (chemicals); Thomson-Brandt (electronics); Compagnie Generale
d'Electricite (electrical equipment); Pechiney-Ugine-Kuhiman (metals, chemicals); ITT-France (telecommunica-
tions); CH-Honeywell Bull (computers); Dassault-Breguet (aircraft); Roussel-Uclaf (pharmaceuticals).
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UNITED STATES, JAPAN, AND WEST GERMANY: STRIKING
DIFFERENCES IN RECENT FOREIGN TRADE PATTERNS
Exports and imports of the three most important non-Communist economic
powers-th(, Urited States, Japan, and West Germany-have taken markedly
different paths in the past 18 months.
The US trade account has shifted from approximate balance in first quarter
1976 to a )?ecord $25 billion deficit in second quarter 1977.* In contrast, Japanese
and West German surpluses rose by $11 billion and $4 billion. The sharp differences
reflect (a) the much greater percentage increase in US oil imports as the United
Change in Trade Balances from 11976 Ito 1977 II
Change in
Trade Balance
Change Attributable
to Increased Oil
Imports
Change Attributable
to Nonoil Factors
United Stites
-25
46
-9
Japan
11
-1 _
12
West Gerr iany
4
-1
5
States became more dependent on foreign oil; (b) the more rapid rise in Japanese
and West Cerman sales to the United States than in US sales to the other two; and
(c) an appreciation of both the yen and the mark relative to the dollar, particularly
since third quarter 1976. While these currency changes significantly reduced US
market shares ir. third-country markets in value terms, the US volume losses were
small except in tie non-OPEC LDC market vis-a-vis Japan.
In th( 1960s, all three economies normally had surpluses, with the United
States enjoying 1 he largest. Throughout most of the 1970s, in contrast, the United
States ran sizabl( trade deficits, while the other two had large trade surpluses.**
*All trade fig fires an ffpercentages in this article are expressed at annual rates. They have not been seasonally
adjusted. Both export, and imports are f.o.b. and are derived from IMF Direction of Trade data.
**This article iliscuss(s merchandise trade only. In the case of service transactions, the United States has been
able to sharpl3 incres se its surpluses, while Japan and West Germany have had enlarged deficits. Between the
early 1970s (the aventge of 1970-72) and 1976, the US service surplus (including private transfers) rose $15.7
billion. By conaparisoir the Japanese service deficit increased $4.1 billion, and the West German deficit increased
$3.8 billion.
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Merchandise Trade Balance (f.o.b./f.o.b.)
West Germany
22.4
In 1970-73, the US trade balance fluctuated between a $3 billion surplus and a
$6 billion deficit, reflecting mainly cyclical factors and the impact of the dollar
devaluations. For similar reasons the Japanese surplus varied between $3 billion and
$8 billion. By comparison, the West German trade surplus grey it in the early
1970s on the strength of exports, reaching $15 billion in 1973.
As a consequence of the 1973/74 OPEC price hike, the US and Japanese trade
balances deteriorated sharply in 1974. West Germany actually increased its trade
surplus to a record high in 1974; the volume of its oil imports is smallest of the three
and its oil import prices rose less rapidly due to the product mix.
By 1976 the West German surplus had slipped $5 billion- from the ion
peak; roughly half the lost ground had been regained by second quarter 1977. Since
1974 the Japanese have achieved rapidly expanding annual surpluses, reaching a $17
billion rate in second quarter 1977. The US balance has followed a more erratic
course. After a large surplus in 1975-the result of a deep cut in US imports-the
trade account once again fell into deficit, reaching a record $25 billion rate in
second quarter 1977.
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In gauging the factors affecting the recent divergence in trade patterns, we have
focused on comparisons between first quarter 1976 and second quarter 1977. This
approach Aelps avoid issues connected with the disruptive,oil price hike of 1973/74
Impact of Oil
Since earl;, 1976, US imports of oil have skyrocketed $16 billion-from an
annual rat of S29 billion to an annual rate of $45 billion-while the oil imports of
the other two major countries have risen about $1 billion each. Several factors have
contributed to the larger increase in US demand for foreign oil:
? The flat trend in US domestic crude production, with the resulting
increase in dependence on foreign oil.
? An unus-Tally harsh winter in 1976/77.
? A s lift to oil fuels caused by the natural gas shortage.
? A pid )ttildup in inventories of Detrole products in second quarter
1977.
? A more rapid revival in US industrial production than that of West
Germany.
Even after the increase in petroleum imports is removed from the trade balance
of each country, the relative deterioration of the US balance is sizable.
Nonoil Imports
Differences in nonoil import growth contributed little to the contrasting trade
performance of the three. US imports of nonoil products grew by 26 percent over
the period on a yearly basis, whereas those of Japan and West Germany rose 22
percent an4 19 percent, respectively. If the latter countries had increased nonoil
imports as fast .s the United States, the German surplus would have been $6 billion
lower, and the Japanese surplus would have declined by $2 billion; US exports to
the two countries would have increased by $1 billion.
Export Trends
Most of thc difference in nonoil trade performance between the United States
and the other two countries can be traced to export patterns. Between first quarter
1976 and s3concl quarter 1977, US exports rose only 12 percent while West German
exports climbed 17 percent and Japanese exports 28 percent. The contrast in growth
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rates reflects mainly a 7-percent
appreciation (annual rate) of the
mark and an 8-percent appreci-
ation of the yen against the dollar.
If currency changes were re-
moved, the dollar value of Japan-
ese exports would have grown 19
percent and the West German rate
would be about the same as the
United States. This calculation as-
sumes that the period is too
short for the appreciation to
have altered volume trends.
The initial impact of the ex-
change rate movements was to
push up the dollar value of Japa-
nese and West German exports at
a faster pace than the dollar
value of US exports in nearly ev-
ery major country grouping.
Among OPEC members and the
other developed countries (that
is, excluding the Big Three), the
United States lost markets to
Japan and West Germany when
measured in value terms.
US sales to Communist
countries actually fell from early
1976 through mid-1977, mainly
as a result of lower grain ship-
ments. During the same period,
West German sales climbed,
while Japanese exports were lit-
tle changed.
The Japanese have ex-
panded their position in the non-
OPEC LDC market at the ex-
pense of both the United States
and West Germany. The large in-
crease in Japanese sales to the
region-a 50-percent annual rate
Merchandise Exports
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between first quarter 1976 and second quarter 1977-played an important role in
overall Japanese export expansion. Of the $21 billion increase in Japanese exports,
$10 billion wer.t to the non-OPEC LDCs. Part of this superior Japanese performance
results from the difference in Big Three market composition. Many LDCs whose
economies and imports have slowed-for example, Mexico and Brazil-are important
markets for the United States and West Germany but less so for Japan. On the other
hand, the LDCs with fast growth rates, such as South Korea, Hong Kon and
Taiwan, are more important markets for Japanese goods.
A much different picture arises when market shares are measured in volume
rather than val ae terms. At worst the US volume losses in OPEC and most other
developed countries were small. In the case of non-OPEC LDCs, the Japanese
wrested market, from both the United States and West Germany; the shifts occurred
mainly in ,he Far East.
US Losses in In tra-Big Three Trade
A sig iificant part of the swing in each country's trade balance is explained by
trade patterns among the Big Three themselves. Between first quarter 1976 and
second quarter 1977, Japanese and West German exports to the US market rose 30
percent and 36 percent, respectively. An increase in sales to the United States of $5
billion account e d for about 25 percent of the rise in Japanese exports in this period.
Although less than 7 percent of West German sales go to US buyers, the rapid
increase in Ger.nan ex orts to the United States boosted FRG export earnings by
more than $2 billion.
In sharp contrast, US sales to Japan rose at an annual rate of only 9 percent
and to We;t Germany at 13 percent. The result was an increase in the US deficit
with Japan of almost $5 billion and with the FRG of about $1 billion. Even after
the impacj: of currency changes is eliminated, incremental Japanese and West
German ex ports to the United States still topped US sales to the two by a wide
margin.
Trade between West Germany and Japan also increased rapidly. German
exports to Japan increased at a rate of 26 percent. Japanese exports to Germany
grew 38 percent shoving the Japanese trade surplus with West Germany up by about
Short-Tern! Out] ook
We bc?lieve that the differences among the Big Three trade balances, while
remaining large, will narrow slightly in second half 1977. US oil imports are
expected to slow with with the advent of Alaskan oil and the reduction of unusually
high petroleum : nventories. The strong surge in Japanese sales to the United States
and West Germny is likely to moderate as a consequence of limits agreed to on
exports of steel and television sets. Meanwhile, US sales to non-OPEC LDCs will
probably p;,ck up as imports by countries where the has a large market
stake turn upward again.
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OPEC CURRENT ACCOUNT: SURPLUS RECEDING FROM
FIRST HALF HIGH
The OPEC current-account surplus reached $25 billion in first half 1977,
substantially above the $19 billion of first half 1976. A sharp upturn in oil sales,
especially to the United States, accounted for the lion's share of the increase. With
oil liftings expected to fall off in second half 1977, the surplus will decline to as
little as one-half the January-June level.
OPEC Countries Current Account Balance
1st Half
1st Half
Projected
1976
1977
1976
1977
Trade balance
31
38
64
65
Exports, f.o.b.
61
71
130
142-145
Oil
57
67
122
134-137
Nonoil
4
4
7
8
Imports, f.o.b.
30
34
65
77
Net services and private transfers
-11
-12
-22
-25
Freight and insurance
-4
-5
-10
-11
Investment income receipts
3
4
6
8
Other
-10
-11
-19
-22
Grants
-1
-1
-2
-3
Current account balance
19
25
40
37-40
For 1977 as a whole, we estimate a current-account surplus ranging from $37
billion to $40 billion, depending mainly on OPEC pricing policies and the weather;
this surplus would approximate last year's. The 1977 estimate includes a lower
second half surplus, projected at $12 billion to $15 billion. This reduced level ($24
billion - $30 billion at annual rates) is now expected to prevail through at least 1978.
Sharply. Increased First Half Exports
OPEC oil earnings in first half 1977 climbed to a record $67 billion, more than
15 percent above the same period last year. About 50 percent of the rise reflected
higher oil prices and the remainder higher crude oil liftings. The overall 8-percent oil
price increase is the weighted average of the 10-percent hike of 11 of the 13 OPEC
members and the 5-percent increase of Saudi Arabia and the UAE, all effective 1
January 1977. OPEC oil exports-30 million barrels per day-were abnormally high
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in the firn;t half. Exports usually fall after a price increase, as stocks built up in
anticipatirn of higher prices are drawn down. After the January price increases,
however, c;olde:~ than normal weather kept winter demand high and oil companies
were still replenishing stocks in the spring.
Imports Moving Up Moderately
Imports by OPEC members were $34 billion in the first half-up 15 percent
from first half 1976. The volume of goods purchased rose 7 percent, continuing the
slackened pace evident since spring 1975. Indeed, the slower intake has allowed the
mammoth backlogs at OPEC ports to be sharply reduced. OPEC import prices stood
6 percent abov; first half 1976, partly reflecting the appreciation of the yen, the
mark, and other currencies against the dollar.
Country Positio as
Ten OPEC members achieved current-account surpluses in first half 1977.
Saudi Arat is once again led the pack with an $11 billion surplus.
Besides the current account surplus,
OPEC reserve positions benefited from a
tightening of credit terms on oil sales.
After the January 1977 price hike the
majority of OPEC members adopted an
average 60 day, credit for oil sales com-
pared with 90 clays last year. Algeria,
Ecuador, Nigeria, and Venezuela set pay-
ment due dates for some of their crude as
short as 30 drys. As a result of the
shortened redil terms, $4.9 billion more
in oil receipts flowed into OPEC coffers
on a one-time bisis. Official reserves thus
rose roughly $:;0 billion to about $160
billion as of 30 June 1977.
Second Half Treads
We eitima .e that the second half
1977 surplus will fall off sharply due to
reduced OPEC oil sales. Consumers are
expected to draw down their unusually
high oil stocks in the third quarter, and
non-OPEC supplies-Alaskan North Slope
and North Sea-will be rising throughout
OPEC Countries:
Current Account Balances
Billion US $
1st Half 1st Half
1976 1977
OPEC 19.4 24.9
Saudi Arabia 8.5 10.8
Iran 2.5 3.3
UAE 2.7 3.0
Kuwait 2.5 2.4
Libya 1.1 2.0
Iraq 1.0 1.5
Venezuela 0.9 0.9
Indonesia -0.1 0.7
Nigeria 0.2 0.6
Qatar 0.7 0.5
Gabon 0 -0.1
Ecuador -0.1 -0.1
Algeria -0.7 -0.7
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the six-month period. OPEC imports are assumed to continue to climb at the
moderate pace of recent months. This yields a second half surplus of $12 billion to
$15 billion, depending on how oil demand is affected by winter weather and by how
much companies build stocks in the last quarter in anticipation of a possible 1
January 1978 price rise.
Among the OPEC countries, Indonesia, Nigeria, and Venezuela probably will
move into the red in the second half. Although Saudi Arabia is expected to absorb
by far the largest share of the export cut, its oil revenues will remain at first half
levels because Riyadh hiked prices by 5 percent on 1 July 1977.
For the year as a whole the OPEC surplus is likely to run from $37 billion to
$40 billion, approximately the same as in 1976. With OPEC oil export volume
remaining at the same level in both years, the higher oil prices and the growth in
investment income will just about cover the increase in imports of goods and
services.
Beyond 1977
We now expect that the $24 billion to $30 billion surplus (annual rates)
projected for second half 1977 will last at least through 1978. This assumes that (a)
oil prices rise at the same rate as global trade prices; (b) the volume of OPEC imports
increases at about 10 percent; and (c) OPEC liftings level off as non-OPEC supplies
expand.
SOVIET GRAIN PROSPECTS STILL EXCELLENT
Based on crop conditions as of early August, CIA estimates that the USSR will
have a second consecutive bumper grain crop between 220 million and 225 million
tons. USDA's current estimate is 220 million tons with a "two-thirds chance" that
output will be between 205 million and 230 million tons. A high-ranking Soviet
agricultural expert told US reporters last week that this year's production would be
225 million tons. Quality may suffer, however, because of wet harvesting condition
in some winter grain areas. The demand for milling quality grain can be filled b
imports which could reach 14 million tons in the year beginning this October.
The current estimate compares with our early July estimate of 225 millio
tons. The range reflects slightly lower soil moisture levels in parts of the spring grai
area east of the Urals. The primary swing factor is output in Kazakhstan, whey
roughly 40 percent of this year's spring wheat will be harvested. If soil moistur
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USSR: Grain Production
Million Tons
1971
1972
1973
1974
1975
1976
1977'
Total
181.2
168.2
222.5
195.6
140.1
223.8
220-225
Winter gi ains
63.0
40.6
63.5
62.5
48.7
60.9
72
Of which:
Whea::
47.8
29.4
49.4
44.7
36.7
44.6
57
Rye
12.8
9.6
10.8
15.2
9.0
14.0
13
Spring grains
118.2
127.6
159.0
133.1
91.4
162.9
148-153
Of which:
Barley
32.3
35.1
51.7
51.6
32.9
67.1
59-60
Wheal
51.1
56.6
60.5
39.2
29.6
52.3
48-50
.t Estimated.
levels here remain adequate through August, the upper limit of the range could
result.
Much of the success of the 1977 grain crop rests on the unusually large
production of minter grains. CIA estimates winter grain production at 72 million
tons, compared with 61 million tons in 1976 and an average of 56 million tons in
1971-75. Last year's winter losses were more than one-fourth of the crop; this year's 25X1
winter grains sustained only moderate damage, leaving a record area to be harvested.
In the major spring grain region east of the Urals, localized showers have
produced a:1 irregular pattern of crop development. Because of uncertainty about
the overall impact of these rains, we project total spring grain production to range
from 148 million to 153 million tons. Last year, Soviet spring grain production
reached a record 163 million tons. In European USSR, prospects continue for
above-average spring grain yields; moderate temperatures and above-normal precipi-
tation have prevailed since early spring.
Despite unusually wet conditions in some areas, the progress of this year's grain
harvest is ahead of the five-year average and substantially faster than in 1976. By 1
August, grain and pulse crops, excluding corn, were cut on 44.4 million
hectares-slightly more than one-third of this year's crop area. In addition, the
Soviets reported that about four-fifths of the cut grain had been threshed, a
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considerable improvement compared with earlier progress reports. The rapid harvest
of winter wheat and its high moisture content may jeopardize its quality. Chances
are that some of this wheat will not be suitable for milling or breadmaking.
With at least three-fourths of the spring grain east of the Urals remaining to be
cut, final output is far from certain. Only average harvest losses and continued
favorable weather conditions east of the Urals are required to ensure a bumper crop.
In West Siberia a late harvest is often caught by snow and frost that occur in late
September and early October.
A small part of rumored Soviet grain imports in the year beginning this October
have been confirmed-5.5 million tons out of a possible 14 million tons. The size of
US sales is the unknown. Only 1.7 million tons have been reported to USD
CHILEAN PAYMENTS POSITION: BREATHING SPELL*
Two years of harsh austerity have reduced Chile's financial gap to manageable
size. The military junta is now gradually easing austerity and allowing imports to
ow 15 to 20 percent this year. Although Santiago is counting on increased
commercial bank and supplier credits, it will have to draw heavily on its small
foreign reserves to cover this year's projected $900 million financial gap.
The military government's ability to further relax demand management policies
will be constrained by sluggish copper prices and difficulties in obtaining more
foreign capital. Availability of foreign funds depends partly on the junta's
willingness to curb its human rights violations. The recent announcement that the
government has disbanded the National Intelligence Directorate (DINA) seems a
genuine effort- to curtail past abuses and modify the most, severe aspects of political
repression. Given the prospects for aid, even with improved human rights policies,
Chile's growth for the next few years will not support a sharp rise in the living
standards of most of the population.
The Allende Legacy and the 1975 Crisis
Chile's precarious payments position-in large part the aftermath of economic
mismanagement by the Marxist regime of Salvador Allende (1970-73)-became a
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financial urisis in 1975. The crunch was triggered by the collapse of world copper
prices and the coming due of large scheduled debt repayments, which pushed the
current account deficit to $580 million and the financial gap to $1.1 billion. The gap
was closed only by postponing roughly a third of the $730 million in scheduled debt
repaymen -:s.
Chile: Foreign Financial Gap
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1975 1976' 19772
Million US $
Exports, f.o.b 1,267 2,244 1,570 2,077 2,000
Imports, f.o.b. 1,363 1,821 1,577 1,412 1,650
Net services ar d
transfe,s -363 -626 -571 -612 -680
Current account balance -459 -203 -578 53 -330
Debt amol tizatiun -407 -367 -524 -556 -589
Financial i pp -866 -570 -1,102 -503 -919
Medium- and long-term
capital inflows 646 742 1,051 890 730
Direct pi ivate
investrr ent 0 -98 50 80 90
Official ]ending;
agencies 172 310 516 463 180
Bilateral debt r -lief 352 287 232 0 0
Private foreign credit 122 243 253 347 460
Net short-tIrm c, pital
and error; and c missions 251 -250 59 -42 0
Change in l eserve s 31 -78 8 345 -189
External dE bt at yearend
(including short?term) 4,218 4,849 5,225 5,725 5,776
Debt servic ratio
Due 36 24 41 33 35
Paid 11 12 28 33 35
' Provisional.
2Projected.
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To prevent an even larger deficit and dampen runaway inflation, the new
military government-which had seized power in September 1973-imposed one of
the harshest austerity programs seen anywhere in the past 25 years. Private sector
credit all but disappeared in 1975, while government spending was slashed by
one-fourth. The squeeze on domestic demand cut the volume of foreign purchases
by nearly one-fifth; real GDP fell 13 percent, and industrial output plummeted 28
percent. From the viewpoint of the military government, such unpopular and
wrenching changes could be installed only by tightening the junta's already strong
political grip on institutions and individuals in the society.
Restoring Equilibrium in 1976
The effects of stringent austerity carried over to 1976 when import volume fell
another 13 percent, dropping to about the 1972 level. At the same time, Chile
benefited from the recovery in copper prices and from rapidly expanding noncopper
exports, the result of (a) a vigorous export promotion campaign and (b) devaluation
of the peso roughly in line with the country's triple-digit inflation. Total exports
gained more than 30 percent in value, allowing a small current account surplus and
more than halving the financial gap to $500 million.
By narrowing the gap, Santiago was able to meet scheduled debt repayments
for the first time since 1971. Private foreign lenders, encouraged by the
government's belt tightening and improved ability to repay debt, provided about a
$100 million increase in long-term capital last year, more than offsetting a fall in
official lending brought on by Chile's human rights policies. These funds, together
with $80 million in direct investment inflows, closed the financial gap and permitted
a substantial increase in foreign exchange reserves. By yearend, reserves amounted to
about four months' imports.
The improved payments situation paved the way for gradual easing in fiscal and
monetary restraints beginning in mid-1976. Despite somewhat easier private
credit and increased foreign demand, real GDP rose only 3.5 percent and in-
dustrial output recovered by a mere 6.5 percent. The strongest revival occurred in
the copper industry where output last year averaged 1 million tons, up from
828,000 tons in 1975. The growth in economic activity barely put a dent in the
record number of jobless. The inflation rate, fueled by continued large budget
deficits and parallel monetary growth, averaged 174 percent for the year as a whole,
compared with 341 percent in 1975.
The 1977 Payments Situation
We expect Chile's financial gap to widen by more than 80 percent this year, to
about $900 million. Although foreign sales are being bouyed by noncopper export
earnings, sagging copper demand and prices will prevent any increase in total
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Unemployment Rate
Percent 14.5
Annual Average 13.8
Foreign Debt service Payments
769 796
Million US$
Copper Exports and Earnings
^^ Thousand Tons
} Million US $
100
Central Government Deficit as a
Percent of Expenditures
59.0 3
L Estimated 2. Projected 3. Including large-scale deficit spending
not reported in the official budget.
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exports. Copper shipments this year will approximate 951,000 tons, down 6 percent
from last year, while copper earnings are projected to slip more than 10 percent.
At the same time, Santiago is providing enough reflation to induce a 15- to
20-percent rise in imports, leaving a trade surplus of $350 million this year. The
deficit in transportation, other services, and interest payments, together with debt
amortization costs, will leave Chile with the estimated financial gap of about $900
million in 1977.
The military government is relying on commercial bank borrowing and
expanded use of supplier credits to finance the payments gap. Anticipating criticism
and pressure from the United States and other creditors for its human rights
practices, Santiago has foregone negotiations for debt relief again this year. For the
same reason, borrowing from bilateral and multilateral sources are off sharply.
Funds from these sources will amount to less than half of last year's inflows. Direct
investment will. not grow much, partly because of bureaucratic delays in approving
new projects. Consequently, a reserve drawdown of nearly $200 million probably
will be required this year.
To keep import growth within bounds and maintain progress against inflation,
the junta is staying with its plan to ease austerity measures only gradually. Real
wages this year are being allowed to increase only about 5 percent, leaving them still
well below 1972 levels. On the budgetary side, Santiago's program calls for moderate
tax reductions, small increases in social spending, and some limited wage increases
for government workers. In these circumstances, Santiago will run a budget deficit
equal to 12 percent of government expenditures, 5 percentage points smaller than
last year. Consumer credit is also being eased, but not very fast.
On balance, we estimate that these measures will allow real GDP to rise by
close to the junta's_ 6 to 7 percent target thisyear. Real output for 1977 will still be
slightly below the 1974 level; unemployment will remain at about 12 percent; and
inflation is likely to average about 100 percent. Given the authority of the junta,
Chilean labor is in no position to protest the slow revival in its real income. The
business community for its part still feels it is better off under the present regime
than under the Allende government.
Looking Ahead
Unless world copper prices rise more than can reasonably be expected, the
military government will be unable to further relax its austerity measures over the
next few years and may have to tighten them again. Debt amortization payments
will not begin to decline until after 1980, and obtaining external financing will
continue to be a serious problem. By yearend, foreign reserves will be down to two
months' import cover and thus cannot continue to underwrite increased imports.
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Without hi?;her copper prices, Santiago needs $800 million_to $900 million a year in
gross capital 'irifl)ws if the junta's target of 6 to 7 percent economic growth is to be
met. Even though the junta seemingly is relaxing its human rights attitudes, Chile
cannot cou:rt_on:filling much of the gap with bilateral or multilateral financing.
Substantial : ncreases in direct foreign investment are also unlikely over the next
rew years. The prospect thus is for prolonged constraints on imports, slower
conomic growth, and continued high unemployment levels.
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Note
Coffee: Another Producer Attempt To Support Prices
Brazil's recent purchases of large amounts of coffee on the world market and
its suspension of coffee sales during the last few months probably have had little
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effect on world prices. El Salvador's heavy buying on the futures market also has
failed to boost prices. Prices have stabilized in recent weeks at about $2.00 per
pound aft ,r ha'ring fallen from nearly $3.40 in mid-April, primarily because of some
revival in i oaste r demand.
Othe- cof;'ee-producing countries are pushing for measures to arrest the price
decline. C mtac is among leaders of the exporting countries are increasing, and there
is talk of (a) a c.efense fund (possibly financed by Venezuela) to support the market,
(b) a possible revision of the International Coffee Organization, and (c) new
attempts to form an exporter's cartel. The coffee producers were unable to achieve
effective coo e:?ation during 1972-74 and probably will have no greater success this
time.
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