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Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Confidential Coping with (JPEC Surpluses .A Global Perspective Confidential ER 77-1039'8 August 1977 C 0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001 ~~y ~ ~ Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 NATIONAL SECURITY INFORMATION Unauthorized Disclosure Subject to Criminal Sanctions Classified by 015319 Exempt from General Declassification Schedule of E.O. 11652, exemption category: ?SB(1), (2), and (3) Automatically declassified on: dots impos~i61? fo d~fermins Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Coping with OPEC Surpluses A Global Perspective Cerairal Intelligence Agency I?irectorate of Intelligence Summary The foreign payments problems created by the 1974 price hike imposed by the Organiza- tion of Petroleum Exporting Countries (OPEC) have diminished over the past three years and will continue to do so through 1980 if real oil prices do not increase much. OPEC's current account surplus is now running at about US $40 billion a year compared with the record $73 billion in 1974. Because of the rapid inflation in prices of goods and services other than oil, the burden posed by the OPEC surplus now equals less than 5 percent of non-OPEC exports after it had climbed from 1 percent in the early 1970s to 11 percent in 1974. We expect that by this measure the burden will drop to roughly 2 percent in 1980. Policymakers in some countries nonetheless still find that payments problems are a serious restraint to economic growth. While most coun- tries took the accessary and often difficult steps to adjust, others discovered they were unable to do so mainly because of domestic political and economic weaknesses. Ire fact, a major impact of the OPEC-generated crisis was to surface or sharply intensify these fundamental weaknesses. Our review of non-OPEC countries indicates that while most less developed countries (LDCs) are no more constrained by balance-of-pay- meats problems now than they were before 1974, many developed countries 'have experi- enced striking changes in their payments posi- tions. After years of surpluses or easily manage- able deficits, developed countries, especially in Western Europe, now have large deficits. The change means that policymakers in these coun- tries will have to reevaluate their perceptions of how to balance their economic growth and payments goals. Altogether, we identified 22 countries whose foreign payments positions could generate con- cern between now and 1980. The list, of course, will change as time passes and unforeseen events develop. For example, Argentina is not included because measures taken over the past few years have corrected the worst of its payments problems; erratic policies or increased political instability could quickly alter this situation. Similarly, India's currently favorable situation largely reflects excellent weather and could turn around quickly. The size of the current account deficits that each cowltry will actually be ablf~ to manage through 1980 will depend mainly on its export potential and how each government and its creditors view the nation's economic and politi- cal prospects. A country's debt burden will While the Department of Treasury agrees with many of the individual conclusions stated, it believes that OPEC payments surpluses are likely to continue to be a major obstacle to achievement of a sustainable world payments pattern and should remain a matter of grave concern to policy-making officials. Treasury believes that the highly aggregated projections presented understate the difficulties facing the system. Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 continue to be a factor of secondary impor- tance. Lenders have been and are willing to provide funds to a country with a heavy debt burden if they believe it has good growth prospects. On the other hand, little will be lent to a country with a small debt if the lender lacks confidence in that country. Among the countries with potential problems discernibbe at this time, France, Canada, Spain, and Brazil will have to run large current account deficits ($3 billion or more annually) through- out the period to achieve economic growth rates that approach those of the 1960s. From an economic and financial point of view, they have the wherewithal to do so. The three developed countries have low enough foreign debts to manage such deficits while Brazil's market and export potential is sufficiently bright to attract the necessary foreign capital. Their ability to nm large deficits will depend much more on political factors. France's payments problems could be pushed into the critical range by a leftist coalition election victory in 1978, which almost certainly would trigger large-scale capital flight and a loss of foreign investor confidence. The ability to overcome these difficulties would depend on the delineation and the timing of policies set by the new government. If the coalition pursued its relatively moderate avowed program, capital outflow would ebb though businessmen would still hesitate to make new investments. The economic problems would be especially severe, however, i.f policy differences among the coali- tion members led to legislative immobility and massive uncertainties. Although Canada has obtained large amounts of private foreign capital in recent years, Que- bec separatism and other contentious political issues may interrupt this flow. Some elements in the international banking community are already taking a close look at investment in Canada. Spain faces the difficult task of moving from a dictatorship to a democracy while coping with strong separatist movements. The task could be complicated by the need to undertake austerity measures to bridle the country's high inflation. Spain does, however, possess a dynamic econo- my and a fairly large and prosperous middle class to help it through the transition. Although Brazil's political situation now seems firm, the process of choosing a new president combined with continuing inflation problems poses some threat to this stability. Italy, Sweden, Denmark, Finland, and New Zealand have decided to slow growth of GNP to reduce current account deficits to what they consider more acceptable levels. Their govern- ments, however, may well have to shift policy courses as they alternately encounter political pressures for higher growth and the reality of enlarged current account deficits. In these five countries, efforts to maintain employment and social benefits have been instnamental in mak- ing their exports less competitive as production costs outpaced those of their major competi- tors. Peru, Zambia, Zaire, and Jamaica do not have much room for maneuver, and they will end up with small deficits and low GNP growth. Private lenders and international institutions are insist- ing that these countries take steps to correct fundamental economic problems, actions that will depress economic growth. If they fail to take external advice or default on their foreign debts, they would not be able to borrow the necessary funds to pay for the imports needed to achieve or maintain economic growth. The Philippines, Turkey, and Morocco, with their poor export potential, may soon be unable to finance the large current account deficits needed to maintain a rapid economic pace. The other listed countries have their own peculiar difficulties. How well Egypt manages will depend on the availability of Arab funds and Cairo's ability to support risky economic reform programs. The size of Israel's deficit will be determined mainly by the amount of foreign aid that it receives. South Africa's position will hinge on the intensity of outside attacks on its ii CONFIDENTIAL Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 racial policies. If pressures continue to mount, Pretoria is likely to react by reducing its dependence on foreign capital, thereby braking the economy. Portugal will require perhaps $0.5 billion to $1 billion a year in official capital to help overcome the effects of the political turmoil of 1974 and to maintain a moderate rate of economic growth. Chile should be able to develop at a reasonable pace and raise sufficient foreign private capital to cover both its la?ge debt service burden and a current account deficit reaching $500 million by 1980. Austria, whose problems are largely cyclical in nature, should be able to gradually reduce its current account deficit to a manageable level while achieving an acceptable rate of GNP growth. On balance we think there continues to be sufficient flexibility in the international finan- cial system to handle these levels of deficit financing. The International Monetary Fund's (IMF) special fund may be called on to help with adjustment assistance when particularly troublesome strains arise. Among the countries we have identified as having potential payments problems, only a few face acut,; economic slowdowns. The greatest risk is a contagious economic slowdown in Western Europe. If isolated coun- tries elsewhere go into an economic tailspin, the global picture would be little affected. Nine of the countries, however, are in Western Europe where recessions can spread more quickly be- cause the region's economies are so integrated. The situation could be especially troublesome if both France and Italy are involved. An econom- ic downturn in the next few years would come at a particularly bad time for the continent. Unemployment is expected to remain high because of demographic factors, and France, Italy, and Spain will be contending- with unset- tled political conditions. iii CONFIDENTIAL Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 CONFIDENTIAL CONTENTS Introduction 1 The Size and Distribution of the OPEC Surplus 2 Trends in Overall Size 2 Distribution of the Current Account Deficits 3 Summary Projections to 1980 6 Regional Distribution 7 The Problem Countries 9 Identification-More than Arithmetic 9 Country Profiles 9 Political Determinants 14 Outlook to 1980 14 Manageable Deficits 14 Prospects for Individual Countries 15 Large deficits 15 Reduced deficits and slow growth 15 Small deficits and slowgrowth 16 Large deficits financed by official capital flows 16 Growing payments problems 16 The special cases 10 Implications for World Economic Stability 17 Beyond 1980 17 Appendix A: Prospects for the Current Account Balances of Individual Problem Countries 19 Appendix B: Supporting Statistical Tables 43 v CONFIDENTIAL Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Coping with OPEC Surpluses A Global Perspective Introduction This paper assesses the problem non-OPEC countries face in meeting their goals for econo- mic growth while managing their large OPEC-re- lated current account deficits. Inflationary pres- sures and foreign payments problems in many non-OPEC countries have made it much more difficult for policymakers to take measures to overcome high rates of unemployment and to make use of idle productive capacity. Their predicament stems in large part from the ongoing adjustment to the massive increase in OPEC oil prices in 1973-74. Nonetheless, by historical standards the world economy has adapted well to higher oil prices. Before World War II, dislocations of even lesser magnitude led to widespread financial defaults, rampant protectionism, and economic depressions. Because of better economic coop- eration among countries, a more efficient inter- national monetary system to channel funds to deficit countries, and the greater ability of individual countries to manage their economies, these calamities have been averted. Countries now rarely default on their foreign debts or introduce highly protectionist policies. They now solve payments problems mainly by direct- ly and indirectly slowing economic growth, hoping to reduce the demand for imports. This process, ,however, always contains the danger that restraints on demand will trigger a global economic slowdown within a system that is now highly interdependent. Policymakers have tried somewhat different methods of limiting economic growth in order to reduce their current account deficits. Fiscal and monetary restraints combined with an incomes policy are used most often..[n the case of countries whose goods and services are not competitive in international markets, their cur- rency values have been allowed to decline under the present system of managed floating ex- change rates. While the impact of devaluation on exports tends to be felt gradually, the country almost immediately must accept lower economic growth as a result of the higher domestic price paid for imported goods. LDCs and smaller developed countries often restrict imports directly, although these conl:rols may not slow growth as much as other policies in countries having a fairly sophisticated economic structure. For example, Brazilian entrepreneurs have responded by producing import-competing goods. To judge how well non-OPEC countries are coping with the impact of the OPEC surplus on their economies, the paper first repori:s the size of the OPEC surplus and the distribution of its mirror image deficits among non-OPIEC coun- tries. Next, it considers the impact of inflation on the burden of these deficits. The trend in the size of the surplus=whether in nominal or real terms-is important because the surplus could grow so large that even the strongest economies would have difficulty in managing their deficits while it could shrink to a level that no longer exerts much disruptive influence. The distribu- tion of the deficits indicates which countries may be having the most severe problems. The paper then deals with the crux of the payments problems created by OPEC'--whether countries with large current account deficits can Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 CONFIDENTIAL live with them. After all, the OPEC surpluses remain in the international monetary system, being deposited or invested in one or another non-OPEC country. But the ability of individual countries to attract these funds varies consider- ably. We therefore identify a list of countries that have restrained or might have to restrain growth so as to reduce current account deficits. In doing so, we look at both the statistics regard- ing debt burden and at the perceptions of policymakers and creditors. The paper then discusses how these countries are likely to fare in 1977-80. Finally, the prospects beyond 1980 are reviewed briefly. The Size and Distribution of the OPEC Surplus Trends in Overall Size The OPEC current account surplus has now stabilized. After sharp gyrations reflecting the initial price rise in 1974 and recession-depressed demand in 1975, the surplus was $40 billion' in 1976 and is expected to remain at roughly the same level in 1977. Since its peak in 1974, the surpltts has declined by about 45 percent (see OPEC Figure 1 Current Account Surplus as a Percent of Non-OPEC Exports li table 1). The decline reflects increasing OPEC imports and a faltering demand for OPEC oil _ which resulted from the global economic slow- tThe current account balance includes goods, services (inelua- down. Between 1973 and 1977, the average ing reinvested earnings), and private transfers. annual rate Of growth of GNP in the developed Including goods, services (including reinvested earnings), and private transfers. Preliminary. western Europe (including Yugoslavia), US, Japan, Australia, New Zealand, South Africa, and Israel. Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 countries will probably be less than one-half the rate attained during the 1960s. Since 1972, moreover, the rapid pace of world inflation and continued expansion in world trade have eroded the real impact of the OPEC surplus. Between 1972 and 1976 the dollar price deflator for the trade of non-OPEC countries climbed by 80 percent, while trade volume increased by 20 percent. The inflation and rising volume of exports, combined with a declining OPEC surplus after 1974, reduced markedly the burden shouldered by non-OPEC countries, as measured by the relative impor- tance of the surplus (and conversely the defi- cits) to non-OPEC trade. For example, the OPEC surplus as a percent of non-OPEC exports jumped from 1 percent to 11 percent in 1974 but slipped back to 5 percent in 1975 arld 1976 (see figure 1). Zflere, and in other comparisons, the non-OPEC countries d.o not include the Communist nations. Therefore the OPEC surplus is not equal to the deficits of the non-OPEC countries discussed in this paper (see table 1). CC-NFIDENTIAL The high rate of inflation has also favored debtor nations at the expense of lenders. Despite the considerable increase in non-OPEC LDC borrowing in recent years, this group's outstanding real debt increased by only about one-fourth between 1972 and 1976 while nomi- nal debt nearly tripled.3 The ratio of annual debt obligations (principal repayments plus interest) to exports has remained roughly con- stant. Distribution of the Current Account Deficits If the current account deficits caused by the OPEC surplus were shared widely, non-OPEC payments problems would be min:irnal. But a relatively few countries ended up absorbing the bulk of the surplus (figure 2). Moreover, in 1976 these same countries had to offset an 3.See appendix table B-3. Smaller Developed Countries: Current Account Balances ' Billion US $ Annual Average Table 2 Major Developed Countries: Current Account Balances ' Billion US $ Annual Average 1970-72 1975 1976 2 Total ................... 14.2 22.8 7.9 United States s .. 1.4 21.2 8.6 Japan ............... 5.0 - 0.4 3.9 West Germany . 2.1 7.5 6.8 France ............. 0.8 1.1 - 4.8 UK ................... 2.0 -2.8 -1.1 Italy ................. 2.5 0.9 -1.7 Canada ............ 0.4 - 4.7 - 4.3 ' Including goods, services (including reinvested earnings), and private transfers. s Preliminary. a The US current account figures include reinvested earnings from direct investments ko conform with the IMF definitions used for all countries. Official U5 data do not include these flows. In 1974-76, US direct investment income reinvested abroad minus foreign direct investment income reinvested in the US amounted to a net inflow of $6 billion per year. If these earnings are excluded, the .1976 US current account surplus in 1976 would be $2.5 billion. 1970-72 1975 1976 Total ......................... - 0.5 -15.9 -19.7 EC: countries ........ 0.9 2.3 -0.3 Denmark ....... - 0.3 - 0.6 - 2.2 Ireland .......,.. -0.2 -0.2 -0.5 Belgium ........ 1.2 1.2 0 Netherlands .. 0.2 1.9 2.4 Other countries ... -1.4 -18.2 -19.9 Spain ............. 0.5 -3.5 -4.4 Norway ,........ -0.2 -2.3 -3.5 Sweden .......... 0.2 -1.1 -1.9 Israel ............. -0.4 -2.9 -2.3 Turkey .......... 0 -1.9 - 2.2 South Africa - 0.9 - 2.5 - 1.9 Austria ......,.... - 0.1 - 0.3 -1.5 Finland ......... - 0.2 - 2.2 -1.1 Portugal2 ...... 0.4 -0.7 -1.3 Greece ........... - 0.4 -1.1 -1.1 New Zealand .. 0.1 -1.4 -0.7 Australia ........ - 0.3 0.1 -1.1 Iceland .......... 0 -1.0 0 Yugoslavia ..... - 0.1 -1.0 0.1 Switzerland 0.2 2.7 3.6 'Includes goods, services private transfers. Q 1972 only. (including reinvested earnings), and Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09: CIA-RDP79B00457A000600070001-0 Countries With. Current Account Deficits, 1976 OTHER 8.8 SWEDEN 1.9 SOUTH AFRICA 1.9 DENMARK 2.2 TURKEY 2.2 ISRAEL 2.3 NORWAY 3.5 CANADA 4.3 SPAT N 4.4 FRANCE 4.8 QTHER 8:3' BANGLADESH OS :: o.a os EGYPT 2.4 MEXICO 3.1 DEVELOPED COUNTRIES NON-OPEC LDCs Approved For Release 2001/04/09: CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 i~r~c~c~ ~c~~ 1970-72 Annual Average 1970-72 Annual Average L_J -8 additional surplus of $30 billion jointly accll- mulatcd by 13 other non-OPEC countries.4 Ten countries accounted for more than one- half of the combined deficits of non-OPEC countries in 1976. 1n fact, four countries-Bra- zil, France, Spain, and. Canada-had about 30 percent of the total. Roughly th.e same degree of concentration prevailed in both the devel- opeds and LDC segments of the non-OPEC world. The most striking changes occurred among the 27 developed countries (see tables 2 and 3). The combined total for those developed coun- tries running deficits grew from $3 billion to $38 billion between the early 1970s and 1976, 4We use 1976 current account data throughout the paper as a benchmark in discussing a country's payment position. That year is relatively normal compared with 1974 and 1975, which reflect the immediate impact of the oil price rise and the following deep recession. SDevelopcd countries as defined for this paper are the OECD countries, Israel, South Africa, and Yugoslavia. 1976 40 43 [)eveloped Countries 1976 1970-72 Annual Average 12 15 Q Overall Balance - Countries with Surplus Countries with Deficit as can be seen in figure 3. At the other extreme, tour countries-the US, West Germany, the Netherlands, and Switzerland-greatly improved their current account positions. Among the more than 80 LDCs, a sharp current account deterioration took place in Brazil, Mexico, Peru, the Philippines, Egypt, Syria, and Morocco (see table ~l). These seven countries accounted for mare than three- fourths of the $18-billion increase in LDC deficits. The enlarged deficits of the three Muslim countries were due to increased imports financed by the much greater economic assist- ance provided by the Persian Gulf nations. At least seven LDCs ran current account surpluses in 1976-Argentina, Colombia, India, Taiwan, Ma- laysia, and the two small oil-producing coun- tries of Brunei and Oman. Aside from the countries with current ac- count surpluses and those with large deficits, many countries have relatively smrvall and easily manageable deficits. Most are LDCs; developed Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Non-OPEC LDCs: Current Account Balances' Billion US $ Annual Average 1970-72 1975 1976 l'otal ........................... Brazil ............... -7.7 -1.1 -34.0 -71 -22.0 -6.1 Mexico ............. -1.0 - 4.1 - 3.1 FgYPt .............. -0.5 -2.4 -2.4 Morocco .......... 0.1 - 0.5 - LS Peru ................. Negl. -1.6 -1.1 Philippines ...... Negl. -1.0 -1.1 Pakistan ........... -0.5 -1.1 -0.8 Syria ................ Negl. -0.6 -1.2 Bangladesh ..... N. A. -1.0 - 0.5 Singapore ........ -0.6 -0.8 -0.9 South Korea ... -0.7 -2.0 -0.3 Jamaica ........... -0.2 -0.3 -0.3 'Thailand ......... -0.2 -0.6 -0.5 'Tunisia ............ 0 -0.2 -0.3 'Loire ................ -0.3 -0.7 -0.1 Bahrain ........... Negl. -0.2 -0.4 Chile ................ -0.2 -0.6 Negl. 'I,ambia ............ - 0.2 - 0.6 - 0.1 Colombia ........ - 0.3 - 0.1 0.7 Ilong Kong .... Negl. -0.4 Negl. Ivory Coast .... - 0.1 - 0.4 - 0.2 Sri Lanka ....... -0.1 -0.2 Negl. Argentina ........ - 0.3 -1.3 0.6 India ................ - 0.5 -1.5 0.6 Taiwan ............ 0.2 -0.5 0.3 Malaysia .......... -0.2 -0.2 0.7 Oman .............. 0.2 0.7 0.8 Brunei ............. 0.2 0.9 1.0 CACM ~ ........... -0.2 -0.7 -0.4 East Africa ..... -U.2 -0.4 -0.4 Other ............... - l . l - 4.5 - 5.3 countries tend to fall into the polar groups, having either current account surpluses or large deficits. The Far Eastern LDCs have been most successful in achieving a favorable payments position despite the global recession in 1974-75. With the exception of the Philippines, all the Far Eastern LDCs now have a current account position better than or at least equal to that of the early 1970s. In Latin America and in Africa, many LDCs with sizable quantities of export- able coffee have been helped by the high coffee prices. Argentina, after applying rather severe austerity measures, has reached the point where its payments position is no longer a major constraint to economic growth. Buenos Aires' problems, however, have usually had their origin in political disarray; a reversion to that condition could easily undermine its economic gains. Finally, some non-OPEC LDCs-Tunisia, Trinidad and Tobago, and Malaysia-are net exporters of oil and have shared in the income accniing from higher oil prices. The economic prospects for the poorest countries of southern Asia and sub-Sahara Africa have not been materially affected by the OPEC surplus. They have been able to maintain sluggish economic growth by attracting enough aid to finance the foreign exchange losses of $3 billion a year stemming from the higher cost of oil imports and the lower exports caused by the recession in developed countries. The increased aid, mostly concessional, has been provided by developed and OPEC countries in large part through multilateral channels. Indeed some of these least developed countries-particularly Muslim states such as Syria, Pakistan, and the Sudan-have gained on balance from the oil price hike because they have been given large amounts of OPF/C aid. The low-income south Asian countries, fa- vored by excellent weather for the crops in the past two years, have had reasonably high economic growth, less inflation, and greatly improved foreign payments positions. India, for example, ran a $600-million current account surplus in 1976, its first in more than 20 years. The position of these countries, however, could change drastically as a result of a few bad harvests. Summary Projections to 1980 Through 1980 the OPEC surplus could drop to about $30 billion under a plausible set of assumptions regarding economic growth and oil production in the North Sea, on the North Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Slope, and in Mexico.6 Chances are somewhat greater that the surplus will top $30 billion than fall below it. The projection's assumption that oil prices rise at the same rate as the prices of exports of industrial countries, although seem- ingly reasonable, depends greatly on Saudi policies. During the next three years, OPEC states arc likely to maintain sufficient pressure to keep oil prices rising at least as rapidly as the prices paid for imports. All of them except Saudi Arabia and some of the smaller Arab states need the increased revenue to maintain ambitious devel- opment programs and to continue to improve levels of living. Only Saudi Arabia has enough excess production capacity to hold down oil prices. So long as the Saudis continue to see close relations with the US and the West as being in their best interests, Riyadh is likely to try to confine oil price increases to the same rate that OPEC import prices go up. Price increases beyond our estimate would increase the OPEC surplus dramatically, however. If oil prices, for example, were to climb l0 percent a year while OPEC import prices continue to rise by 6 percent per annum, the OPEC surplus could reach $65 billion in 1980. The other key assumption is that during 1977-80 GNP grows by 4.2 percent per year in developed countries (compared. with 4.9 per- cent per year during 1961-72) and by 4.5 percent per year in non-OPEC LDCs ( with 5.5 percent per year during 1961-72). While developed-country growth at a rate less than 4 percent a year would sharply reduce the OPEC surplus, such a low rate over a sustained period seems unlikely. For one thing, the considerable unemployment implied would be politically unacceptable. For the next few years, the developed-country growth rates are more likely to be above 4.2 percent, thus increasing the demand for OPEC oil. As an upper limit to the growth range, we use 5.5 bOn the demand side, oil consumption is not curtailed, although its growth slows to 4 percent per year, compared with 7 percent from 1968-73, and on the supply side all available non-OPEC sources are tapped. percent a year, an expansion rate that the Organization for Economic Cooperation and Development estimates will be needed if most developed countries are to reach full employ- ment by 1980. For each one-tenth of a percent- age point above 4.2 percent that GIMP increases, the OPEC annual current account surplus in 1980 rises by about $1 billion. Therefore, if GNP should grow by 5.5 percent per year, the OPEC surplus would reach about $50 billion in 198 0. In any case, the real burden of the OPEC surplus is likely to shrink through 1980. When measured in 1976 dollars, the surplus falls by 45 percent-from $40 billion in 1976 to $23 billion in 1980 (our base-case projection). The surplus as a percent of the exports of non-OPEC countries declines from 5 percent to 2 percent. In fact, the OPEC surplus would have to rise to at least $65 billion to maintain the 1976 ratio between the surplus and exports. Regional Distribution Developed countries are likely to gain most from the expected decline in the OPEC current account surplus through 1980. The current account deficits of the non-OPEC LDCs prob- ably will increase somewhat. Given our base- case growth assumption (4.2 percenl: per year in 1976 Base Case Faster GNP Growth Faster GNP Growth and Higher Real Oil Prices OPEC countries 40 30 5(1 65 Developed countries -12 0 to 10 -5 to -2(1 -15 to -30 Non-OPEC LDCs -22 -25 to -35 -25 to -4G -27 to 1}2 Communist countries 11 -7 -7 -7 Statistical discrepancy -3 0 0 0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 CONFIDENTIAL the developed countries and 4.5 percent in the non-OPEC LDCs) and constancy in the terms of trade between the two regions, the non-OPEC LDC deficit is expected to run anywhere between $25 billion and $35 billion. The upper end of this range approximates the amount that non-OPEC LDCs could borrow without strain- ing their credit worthiness. Depending on the extent of LDC current account deficits, the developed countries could register anything from a near balanced current account to a $10-billion surplus. If world GNP grows at our assumed upper limit of 5.5 percent per year, the developed country deficits would remain at roughly the 1976 level rather than improve, as in the base case. 'The non-OPEC LDC deficit. would increase only slightly because the group's increased imports of oil and other goods and services would be nearly offset by expanded sales to developed countries. Thus the developed coun- tries would end up absorbing the bulk of larger OPEC surplus. This does not mean that non-OPEC countries should pursue lower growth targets just to reduce the OPEC surplus. For many countries the larger current account deficits produced by higher economic growth will not necessarily be any more difficult to finance than the smaller deficits created by lower growth. The increased exports that generally go along with higher economic growth help to keep down the debt service burden of the deficit countries and provide a more favorable atmosphere for in- creased lending. Moreover, although the economies of deficit countries would still be restrained by foreign payments problems, they would be able to remove their growth restraints sooner or relax them somewhat as a consequence of the more rapid global economic growth pace. If the economies of non-OPEC countries with favor- able payments positions were expanding at a faster clip, then deficit country exports would accelerate. Unless the deficit countries control their domestic demand, however, the higher exports would be largely offset by the imports needed to produce export goods and, more 'importantly, by the effect of rising domestic incomes on purchases from abroad. If, along with higher growth, oil prices rise by 10 percent per year while prices for other traded goods and services increase by 6 percent annually, the developed countries again absorb most of the increment in the OPEC surplus since they buy most of the oil. The LDC deficit would be $2 billion more in 1980 in this situation. Measured against expected exports, the burden of current account deficits on developed countries, when higher real oil prices are combined with rapid growth, would not be much greater in 1980 than at present. Numerous shifts are likely to occur in the current account positions of countries within each non-OPEC region. Although these changes cannot be predicted with any certainty given the many forces at work, one fairly large shift is highly likely: the current account positions of the UK, Norway, and Mexico will improve with their burgeoning oil production and exports. Since most of this oil will be purchased by developed countries, about one-half the $10- billion to $20-billion base-case gain in the developed country current account position would go to these three nations. Further reduc- tions in the deficits of those developed coun- tries with deficits would have to come from countries with surpluses, such as West Germany and Japan. Using our high-growth scenario, if the developed countries with deficits are to have smaller deficits they will have to be at the expense of reduced surpluses in non-OPEC countries. But, as we have seen, we would expect that in this higher growth mode these surpluses would shrink. In our third case-high growth combined with increasing oil prices-the sum of the deficits of those developed countries that have deficits would not fall much even if all current non-OPEC country surpluses were eliminated. The reduction in the surpluses of those developed countries in a surplus position would about offset the increase in the surpluses of oil-exporting countries. Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 The Problem Countries Identification-Mare than Arithmetic Many countries have large current account deficits, but not all of them are in serious difficulty. To identify the problem countries, we use the criterion that payments problems could be a major brake on economic growth. The 22 countries listed below qualify under 1:his standard-at least tentatively-and will be exam- ined further to see whether they deserve to be labeled as a problem country. Major Smaller Less Developed Developed Developed Countries Countries Countries Canada Austria Brazil Prance Denmark Chile Italy Finland F,gypt Israel Jamaica New Zealand Morocco Portugal Pcru South Africa Philippines Spain Zaire Sweden Zambia Turkey Any list of this nature must be compiled with a large dose of judgment. Although they had large deficits in 1975 and 1976, the UK and Mexico are excluded because rising oil exports are expected to produce current account sur- pluses by 1980. Pakistan and Bangladesh are receiving sufficient aid to maintain their historic growth rates, despite their larger deficits. Nor- way's large deficit mainly reflects the substarl- tial foreign investment in the North Sea oil fields. Several small countries, such as Zaire and Jamaica, were added to the list of potential problem countries because their deficits are arge when compared with the size of thejr economies. Egypt and Chile arc special cases. Egypt was included even though its larger deficit resulted from a sharp jump in OPEC aid. Cairo faces scve:re payments problems in its efforts to overcome decades of economic mis- management. Although Chile's deficit was eljm- inated in 1976, its heavy debt burden will compete with imports during the next i'ew years. The junta has not tried to ren,gotiate a debt stretchout with its creditors since 1975 because it believes such requests will founder on the question of Chilean human rights violations. The list of course will change as time passes and unforeseen events develop. For example, Argentina is not included because measures taken over the past few years have corrected the worst of its payments problems; erratic policies or increased political instability could quickly alter this situation. Similarly, India's currently favorable situation largely reflects excellent weather and could turn around quickl}~. Country Profiles For a better understanding of the condition of the 22 countries on our list we analyzed several commonly used statistical measures of payments difficulties. In each case, the trend between 1970-72 and 1976 as well as the current position was assessed. The summary impressions are as follows: ? The current account position of 17 coun- tries deteriorated sharply in real terms. Chile, Zambia, Zaire, Jamaica, and South Africa held their deficits in check by restraining growth and therefore curtailing imports. ? The current account balance as a percent- age of exports moved up sharply ire all coun- tries except Chile, Zaire, Jamaica, Zambia, and South Africa (figure 4), The percentage in most developed countries rose from near zero in the early 1970s to a range of between 5 and 30 percent in 1976. Israel and Turkey had higher percentages-42 and 50 percent respectively. Among the LDCs the percentage climbed sharply in Brazil, Egypt, Morocco, and Peru--where it topped the 50-percent mark in 1976. In other LDCs on our list, it stayed between 20 and 35 percent. ? The real external debt of nearly all listed countries rose rapidly when compared with the average for its group-developed or LDCs. The exceptions were Chile and Zambia whose real debt remained constant. West European debt increased especially steeply because large foreign borrowing is a new experience for these countries. Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Ficlure 4 Current Account Balance as Percent of Exports of Goods and Services Austria Brazil Canada Chile 'Denmark E9YPt Finland France Israel Italy Jamaica Morocco New Zealand .Pero Philippines Portugal south Africa Spain Swederr Turkey Z~iire '.Zambia Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 CC>NFIDENTIAL Figure 5 Ratio of External Debt to Exports of Goods and Services Austria $razil Canada Chile Qenmark E9yPt Finland Israel Jamaica Morocco New Zealand Peru Philippines Portugal South Africa Spain Sweden Turkey Zaire Zambia 205 215 Annual Average ` 1970-72 . ~~~ 1976 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 CONFIDENTIAL ? The relative debt outstanding (the ratio of the debt to exports) climbed in all of the listed countries except Chile, Tsrael, Morocco, and Turkey (figure 5). In most developed. countries the ratio remained low to moderate ranging from 15 percent for Austria to 100 percent for Denmark with most countries clustering around 70 percent. Israel and Turkey, however, had fairly high ratios of 165 and 150 percent, respectively. Among t:he LDCs, the ratio falls mainly in the 200-300 percent range with Egypt exceeding 400 percent and Morocco, 7,ambia, and Jamaica standing near 100 percent. ? The debt service ratio (the ratio of annuaa debt amortization and interest to exports of goods and services) also climbed sharply in all rountrics except Egypt, Israel, Morocco, the Philippines, Portugal, and Turkey. Among the developed countries-except Israel (21 percent) and Spain (16 percent.)-the ratio remained at 11 percent or less. The typical LDC debt service ratio of most of our LDCs ran to more than 30 percent. Brazil led with 46 percent. The average of non-OPEC LllCs during the 1970s was 16 percent a year. n The ratio of foreign reserves to imports dropped sharply between the early 1970s and 1976 in all the countries except Chile, Morocco, the Philippines, and Sweden (see tables 6 and 7). But :if gold is vahled at tril)le the official price of $42.22 per ounce ($126.66) the ratios of the developed coun- tries on the list would have declined only slightly. Although in most of the 22 countries the international payments indicators have deterior- ated since the early 1970s, there are clear dil`ferences among them. The most striking difference is between the West European states, which only recently have been running large deficits, and the LDCs. The LDCs are used to coping with a heavy debt burden, and many of them consider borrowing and growing debt as essential to their economic development. Most developed countries, on the other hand, had. been net exporters of capital before 1974. They now must adjust to their new role as major borrowers. While heavy borrowing is new to the West European countries, it is normal for some other developed countries. Japan was extremely suc- cessful during the 1960s in obtaining large amounts of foreign capital to sustain rapid economic growth-despite a debt burden that exceeded that of most LDCs. Why these countries slipped into payments difficulty can best be seen by comparing trends in their foreign trade with trends in other non-OPEC countries. Figure 6 shows that in 15 Table 6 Developed Countries: Reserves as a Share of Imports of Goods and Services Percent Annual Average 1970-72 1975 1976' Potential Problem Coun- tries Austria . ....................... 43 30 41 Canada ...................... 25 12 15 llenmark ................... 13 6 7 Finland ..................... 18 6 7 France ....................... 28 12 23 Israel ......................... 27 18 19 Italy _ ......................... 30 14 28 New Zealand ........... 31 12 12 Portugal .................... 82 28 74 South Africa ............ 19 8 16 Spain ......................... 53 27 33 Swede^ ...................... 13 11 13 'furkev ...................... 60 19 22 Other Countries Australia .................... 54 19 23 Belgium .................... 25 15 24 Greece ....................... 27 15 22 Japan ......................... 55 22 24 Netherlands .............. 22 16 27 Norway ..................... 20 14 14 Switzerland ............... 76 70 lOEi Uuiled Kingdom ..... 18 6 9 United States ........... 20 11 2.5 West Germany ........ 40 26 34 Yugoslavia ................. 8 25 25 Average ~ ...................... 30 16 26 ' With gold valued at $126.66 per troy ounce or triple the official price. Based on total reserves and imports. Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 Approved For Release 2001/04/09 :CIA-RDP79B00457A000600070001-0 of the 22 countries on the potential problem list exports grew much slower than the average between the early 1970s and 1976, indicating that they were losing their share of the world Non-OPEC LDCs: Reserves as a Share of Imports of Goods and Services Annual Average 1970-72 1976 1976 ' market. The copper-producing countries of Penl, Zambia, and Zaire fared the worst as copper was one of the few commodities whose real value dropped sharply during the 1970s. At the other extreme, Brazilian and Spanish ex- ports rose much more rapidly than the average. In eight countries, imports increased much slower than the global average, with Zambia, Zaire, Jamaica, and Chile showing the smallest growth. Eight countries-France, Spain, Brazil, Potential Problem Coun- tries Brazil ......................... 50 38 Chile .......................... 21 22 27 Egypt ........................ 13 6 10 Jamaica ..................... 22 2 Morocco .................... 22 1.5 Peru ........................... 33 13 17 Philippines ................ 29 33 35 Zaire .......................... 22 6 Zambia ...................... 38 8 Other Countries Argentina .................. 20 40 48 Bahrain ..................... 25 22 Bangladesh ............... 11 33 Bolivia ....................... 33 25 Colombia .................. 14 52 57 Cyprus ...................... 100 50 El Salvador .............. 33 25 Ethiopia .................... 33 60 Guatemala ................ 25 42 India .......................... 35 53 62 Jordan ....................... 150 56 67 Kenya ........................ 29 23 Malaysia .................... 44 53 57 Mexico ....................... 23 12 15 North Yemen .......... 50 140 Oman ........................ 50 l~~ix~~~~~~ "r. pobert A. Pastor Senior Staff Member `lational Security Council executive Office Building ~ ~ ";r. Robert I-lormats Senior Staff ~-lember "tiational Security Council executive Office Bui lding ~~ '?r. ~,1 i 1 1 i am G. Hyland Senior Staff h-lember ~',etional Security Council executive Office Quilding i~ The Edonorabl e Charles L. Schultze 1 ^~:a i r:-nan Wrunc i 1 of Lcononai c Advisers executive Office wilding ~j^ T e ~ionorabl a r~Ji 1 1 i am 'r!ordhaus i_~~nber Council of Economic Advisers Executive Office Euilding i~'~r. ?eter G. Goul d Special Assistant to the Chairman Council of Econoric Advisers Executive Office Eau i l d i ng t~Er. Richard tad. HE~irnl ich E)eputy assistant Special Pepresentative for Industrial Trade Policy Office of the Special Representative for Trade Fde~;ot i at i ons 1300 G Street, AE. 1'J. f~r. Geza E?ei:etekuty ~~ Office c:rf tlroc~ '~~~f~~~ial Representative for Trade t~~:gcat ir7~:;cans ExecUtivff Office ur~iilding ,- 3