INTERNATIONAL ECONOMIC & ENERGY WEEKLY 15 JULY 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000300010005-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 41
• Document Creation Date: December 22, 2016
• Document Release Date: January 26, 2011
• Sequence Number: 5
• Publication Date: July 15, 1983
• Content Type: REPORT

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Directorate of
Intelligence
International
Economic & Energy
Weekly
15 July 1983
DI IEEW 83-028
15 July 1983
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International
Economic & Energy
Week1
15 July 1983
iii Synopsis of This Issue
1 Perspective-Producer Collusion in the Oil Market?
3 Briefs Energy
International Finance
Global and Regional Developments
National Developments
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15 July 1983
15 International Oil Market: Midyear Assessment
21 USSR: Status of Construction on the Gas Export Pipeline
25 Mexico: High Costs of Maintaining Austerity
33 Lebanon: Economic Impact of Partition
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International
Economic & Energy
WeeklyF--]
Synopsis
Perspective-Producer Collusion in the oil market? I 25X1
The cooperation of major non-OPEC exporters has been instrumental in
OPEC's success in upholding the current price structure.
International Oil Market: Midyear Assessment
Recent gains in OPEC oil production and a firming in spot oil prices have sig-
naled a return to more stable conditions in the oil market. Price weakness
could reappear in early 1984 if OPEC expands production too rapidly and
overshoots demand later this year.
USSR: Status of Construction on the Gas Export Pipeline
Mexico: High Costs of Maintaining Austerity
President de la Madrid appears willing to.test the limits of what is necessary to
stay in compliance with the IMF stabilization program, even though meeting
the targets is provoking more severe economic problems than international
bankers or the Mexican Government had foreseen. He has the support of
organized labor and the grudging cooperation of business and the middle class,
but it is becoming much harder to maintain consensus. We believe that
worsening economic conditions will force Mexico City to seek adjustments in
IMF restrictions in the next few months
Lebanon: Economic Impact of Partition
Under the very poor security conditions that exist now and would remain after
a partial Israeli withdrawal, Lebanon's economy will stagnate. President
Gemayel may appeal to the United States to halt Israeli penetration of
Lebanese markets and will continue to press for US economic aid to finance
large budget deficits.
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Perspective
International
Economic & Energy
WeeklyF--]
15 July 1983
Improved prospects for OECD economies have contributed to buyer expecta-
tions that the slide in oil consumption is coming to a halt. This, combined with
general producer compliance with production quotas and the anticipated end
to inventory reductions, has dramatically changed the psychology of the
market in just the last three months. Spot prices for crude oil are now near of-
ficial prices, and industry observers generally agree that the fall in nominal oil
prices has probably bottomed out.
The cooperation of major non-OPEC exporters has been instrumental in
OPEC's success in upholding the current price structure. OPEC representa-
tives met with UK and Mexican officials last winter and spring in an effort to
secure cooperation, and in early June the Algerian Oil Minister represented
set prices last spring that Nigeria had previously indicated were the minimum
acceptable without provoking retaliation. Mexico has held its exports near a
1.5-million b/d self-imposed cap despite customer requests for more supply
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Following the meeting the Soviets realigned their export
price with the $29 per barrel OPEC benchmark by imposing their second 50-
cent increase in a two-month period.
of crude unwanted by producing companies in the spot market.
The cooperative effort stemming from common interest in upholding oil prices
has been effective so far, but it is ill-equipped to deal with further declines in
oil consumption. In such an event, we expect that non-OPEC producers, as
well as a number of OPEC members, will again contribute to price pressures
by trying to maintain or expand their market shares. Mexico's tenuous
financial position permits little leeway for export restrictions if prices drop
further, and we believe that the Soviets' need for hard currency would lead
them to continue to export near their maximum. Britain is constrained to
follow the market by provisions that require the British National Oil Company
to purchase North Sea crude at the reference price. Britain must then dispose
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The ability of producers to maintain stable prices in the near term hinges
largely on non-Communist consumption. Despite the improved economic
outlook, oil consumption has continued to decline. If economic recovery gains
momentum during the second half of the year and causes a rise in oil
consumption, demand for OPEC crude could rise by 2 million b/d and reach
about 19 million b/d. Such a rebound would help further stabilize the market
and improve the producers' ability to uphold prices.
One major hurdle for OPEC will be the manner in which the cartel members
establish new production quotas when demand exceeds the present 17.5 million
b/d ceiling. OPEC's Ministerial Conference next week in Helsinki is likely to
address the raising of individual quotas as well as Nigeria's failure to comply
with its ceiling-exceeded by 100,000 b/d in the second quarter. Because of
the pressing financial needs of Nigeria and several other OPEC members, we
believe there will be a great temptation to produce too much too soon. Unless
there is a sustained rebound in oil consumption, these pressures could again
lead to the accumulation of excess inventories and a return to the weak market
conditions that prevailed in early 1982 and 1983. Under these conditions, and
lacking the continued support of non-OPEC producers, we believe OPEC
members would be unable to prevent a further decline in prices.
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Energy
OPEC Production OPEC production in June averaged 17.4 million b/d, matching May's level
Update and nearing the cartel's 17.5 million b/d ceiling imposed at the March
ministerial meeting. Production in Saudi Arabia rose 300,000 b/d as Riyadh
boosted output to meet its war relief commitment to Iraq.
the Saudis currently provide roughly 250,000 b/d of oil to
Iraq's customers to enable Baghdad to fulfill its export contracts. An increase
Quota Jan
Feb
Mar
1st
Qtr
Apra Maya Jun a
2nd
Qtr a
Total
18.8
17.5
17.0
14.9
15.9
15.9
15.9
17.4
17.4
16.9
Algeria
0.6
0.725
0.7
0.7
0.7
0.7
0.7
0.7
0.7
0.7
Ecuador
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
0.2
Gabon
0.2
0.15
0.2
0.1
0.2
0.2
0.2
0.2
0.2
0.2
Indonesia
1.3
1.3
1.2
1.0
1.1
1.1
1.4
1.4
1.3
1.4
Iran
2.3
2.4
2.7
2.5
2.6
2.6
2.3
2.3
2.3
2.3
Iraq
1.0
1.2
0.8
0.8
0.8
0.8
0.8
0.8
0.8
0.8
Kuwait
0.7
1.05
0.6
0.8
0.9
0.8
0.7
0.8
0.7
0.7
Libya
1.2
1.1
1.4
1.2
1.3
1.3
1.1
1.1
1.1
1.1
Neutral Zone
0.3
b
0.3
0.2
0.2
0.2
0.4
0.5
0.4
0.4
Nigeria
1.3
1.3
0.8
0.7
0.9
0.8
1.2
1.6
1.5
1.4
Qatar
0.3
0.3
0.3
0.2
0.2
0.2
0.3
0.3
0.3
0.3
Saudi Arabia
6.3
c
4.6
3.6
3.6
3.9
3.9
4.6
4.9
4.5
United Arab Emirates
1.2
1.1
1.2
1.1
1.1
1.2
1.2
1.2
1.2
1.2
Venezuela
1.9
1.675
2.1
1.8
2.1
2.0
1.7
1.7
1.7
1.7
a Preliminary.
b Neutral Zone production is shared about equally between
Saudi Arabia and Kuwait and is included in each country's
production quota.
c Saudi Arabia has no formal quota; it will act as swing producer
to meet market requirements.
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in liftings by the former Aramco partners also helped Saudi production
rebound to nearly 5 million b/d, its highest level this year. Output in Indonesia
and Nigeria dropped slightly from May levels, but Lagos still exceeded its
quota by 200,000 b/d. According to officials from a major international oil
company, the Nigerians are likely to urge OPEC to increase its allocation
when the cartel meets next week in Helsinki. With the exception of the UAE,
other OPEC producers-including former recalcitrants Iran and Libya-
continued to restrict output within their assigned quotas in a show of cartel
unity.
Synfuel Outlook Dims A major US oil company has recently slashed its long-term synthetic fuels
forecast. The firm now expects non-Communist synthetic liquids production to
reach only 600,000 b/doe in 1990 and 1.2 million b/doe in the year 2000-66
percent and 75 percent below projections made two years ago. The company
contends that weak oil prices combined with long construction leadtimes and
technological uncertainties will limit the capital commitments for synfuel
IMF Proposes Reduced The IMF has proposed that India borrow only $1.3 billion during July 1983-
Support for India June 1984, rather than the $2.5 billion envisioned when a three-year Extended
Fund Facility was arranged in November 1981. The IMF's revised, more
favorable, estimates of India's trade and current account deficits reflect lower-
than-anticipated international inflation. Indian officials have expected at least
part of the proposed cuts and are less likely to see an anti-India bias here than
in curtailed concessional aid from the World Bank. Reduced IMF support for
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India would ease the Fund's strained liquidity position and permit higher loans
to countries with immediate problems. In our judgment, India can probably
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balance-of-payments prospects are heavily dependent on the success of current
oil exploration efforts. F___1 25X1
Colombia's Troubles Lenders are now indicating to Bogota that it will have difficulty securing the
With Bankers Continue $600-800 million in loans needed this year to cover its payments deficit.
According to an Embassy report, Central Bank officials learned recently that
most lenders are willing to maintain their current lines of credit but not
provide new money. Bankers' reluctance to increase their exposure mainly
reflects their concern about Colombia's mounting payments problems and
sluggish domestic economic conditions. Moreover, a recent negative IMF
evaluation of Colombian trade, fiscal, and monetary policies will cause more
difficulties on the borrowing front. Given this critical assessment, we believe
the IMF will most likely impose severe conditions on Colombia if Bogota is un-
able to obtain the new international lending necessary to avoid a debt
financing crisis in coming months.
Philippine Financial Manila's aid consortium chaired by the World Bank pledged $1.2 billion for
Decisions Loom 1984 last week in Paris, exactly what Manila is receiving this year. The
government used a special "third day" to review its economic program for
commercial creditors, but many banks elected not to send representatives.
Manila is now expected to turn its full attention to the financial crisis growing
out of the country's $8-9 billion short-term debt.
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Liberia's Financial The Doe regime once again is heading for a financial crisis. According to
Noose Tightens Embassy reporting, Monrovia will probably be without funds from the IMF
and international banks for the next three to four months. The IMF has
refused to disburse the last two tranches under the current $60 million standby
arrangement until Monrovia makes arrangements to reschedule some $25
million owed to international banks for past oil purchases. Monrovia's access to
additional funds from US and other private banks, currently financing oil and
other essential purchases, will be restricted without IMF money. International
bankers are worried about the government's ability to cover the cost of salary
as well as oil and debt payments. Monrovia already is at least one month
behind on distributing paychecks, even though Doe promised last December to
regularize payments in exchange for popular acceptance of hefty reductions in
wages. The Fund is insisting on further salary reductions and the paying off of
outstanding commercial debts as conditions for a new standby loan. Protracted
negotiations almost certainly will prompt Doe to seek Washington's help in
persuading the Fund to accept a less stringent program and in obtaining US
bank loans. He also may request increased allocations of US Government
assistance.
Global and Regional Trends
LDC Foreign Exchange LDC foreign exchange reserves fell by $9.5 billion during first-quarter 1983,
Reserves Decline following a $20 billion drop in 1982. Despite most countries' attempts to
constrain imports, slack export earnings and high debt service burdens have
depressed reserves. According to IMF data, first-quarter reserves stood at
$130 billion, their lowest level since 1978. Nearly all of the first-quarter
decline was accounted for by OPEC members, which lost $8 billion. Venezuela
and Nigeria, which began drawing down reserves in 1981, continued to do so
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LDCs: Foreign Exchange Reserves a
Billion US $
Total
120.9
144.4
163.8
159.4
139.6
130.1
OPEC
58.6
72.5
92.1
93.1
83.4
75.4
Nigeria
1.9
5.5
10.2
3.9
1.6
1.6
Venezuela
6.0
7.3
6.6
8.1
6.5
5.3
Latin America
28.1
33.9
32.3
30.0
20.6
19.2
Argentina
5.0
9.4
6.7
3.3
2.5
3.4
Brazil
11.8
9.0
5.8
6.6
3.9
3.5
Chile
1.1
1.9
3.1
3.2
1.8
1.3
Mexico
1.8
2.1
3.0
4.1
1.0
NA
Asia
29.1
32.5
33.4
31.2
31.1
31.2
South Korea
2.7
3.0
2.9
2.6
2.8
2.3
Philippines
1.8
2.3
2.8
2.2
1.7
1.7
5.0
5.6
6.0
5.1
4.5
4.3
a Total reserves minus gold.
b First quarter 1983.
under pressure from depressed oil revenues and mounting debt service
obligations. Brazil's reserves are only 30 percent of their 1978 level, and
Mexico's reserves had dwindled to near zero by February of this year before
being boosted by $1.7 billion from commercial banks in late March.
Although foreign exchange reserves continue to fall, the ratio of reserves to av-
erage monthly imports-an important measurement of a country's liquidity-
has stabilized. Import restrictions and other austerity measures have squeezed
the level of imports far below normal. Reserve levels in 1982 were equivalent
to almost four months of imports, only a small decline from 1981. We expect
non-OPEC LDC reserves to increase slightly throughout the rest of this year
as export markets pick up and new borrowing begins to increase after
traditional first-quarter lags and as debt rescheduling eases repayment flows.
OPEC members, however, will have to curb imports further to reverse the
erosion in their reserves.
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West European Space The European Space Agency's (ESA) successful flight of the Ariane launch
Program vehicle on 16 June will help restore customer confidence in the commercial
space program. Success was crucial; so far two of six launches have failed, and
another failure could have led several customers to cancel their contracts and
thus jeopardize the Ariane program. ESA must still launch the seventh Ariane
successfully if the consortium is to be competitive with the United States in the
estimated $25-30 billion market for space launch services over the next 10
years.
~ \ESA has already announced a delay in the next scheduled flight,
from 18 August to 15 September, probably to ensure time for a thorough
checkout.
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Italy Rejects EC Italy's caretaker government has rejected an EC-ordered '16-percent cutback
Steel Cuts in steelmaking capacity by 1985. The cuts, which would amount to 5.8 million
tons and come mainly from Italy's lossmaking state steel group Finsider, are
more than double the Italian proposal of 2.4 million tons. While the EC
proposal would probably improve Finsider's profitability, the cutbacks would,
according to official estimates, result in a loss of 15,000 jobs. More important,
the government would have to shut down one or more plants in high
unemployment areas such as Naples or Genoa. The prospects of increased
layoffs coupled with a continued impasse in major wage negotiations could
increase labor unrest. The political sensitivity of the issue has been increased
by the delicate negotiations to form a new government in the wake of last
month's election
Although the government's final position probably will await the formation of
a new governing coalition, the options include a suit in the EC Court of Justice
against the EC decision or a refusal to participate in the steel allocation
scheme. The latter course could launch a "steel war" and result in Community
safeguards against Italian steel. A new government is likely to favor compro-
mise but will be anxious to find a solution that cushions the impact on labor.
EC Rejects OECD At the 11 July EC Finance Ministers meeting, France and Italy blocked
Export Credit ratification of the US-backed compromise for revising the OECD export credit
Compromise arrangement. The compromise proposes that minimum interest rates on loans
to relatively rich countries remain at 12.4 percent, rates to medium-income
countries be reduced by 0.65 percentage point to 10.7 percent, and rates to the
poorest countries drop 0.5 percentage point to 9.5 percent. France continues to
demand that minimum interest rates be reduced by 1 to 1.5 percentage points
and wants agricultural products to be covered by the arrangement-presently
the consensus only involves industrial products. Paris's hardline position also
reflects discontent with the EC Commission's conduct of the negotiations and
suggests that the French are attempting to place control of negotiations more
firmly in the hands of the finance ministers. Italy apparently was unable to ac-
cept the compromise because the caretaker government was unable to
formulate a position on the issue.
The Community issued a communique following the meeting requesting
extension of the existing arrangement until 31 October 1983 and the beginning
of new OECD negotiations before the end of September. We expect the other
non-US participants in the consensus to go along with the EC extension
request. In the future, Community positions are likely to be developed by the
finance ministers, and, as a result,`EC negotiators may be even more inflexible.
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Less Developed Countries
Mood of Egyptian Private-sector confidence in President. Mubarak apparently has risen in recent
Private Sector Improves months, according to the US Embassy. Concerns that Mubarak would renege
on President Sadat's open-door economic policies have been put to rest as
Mubarak has made clear in speeches and meetings with businessmen that he
supports a major role for the private sector. Business community fears about
possible domestic political instability also have eased. On the negative side
there is continued criticism of Prime Minister Muhi al-Din because of his
strong support for public-sector industries, and complaints persist about
tightened import controls. The private sector probably will remain supportive
of the President as long as there is no serious civil unrest in Cairo.
Increased Labor Unrest Concern over unemployment and declining real wages has provoked workers to
in Brazil stage walkouts at two publicly owned oil refineries. Metalworkers in Sao Paulo
have struck several foreign-owned auto plants and other industries, and some
50,000 workers have staged generally peaceful demonstrations there. The
government has removed the leaders of a petroleum workers' union, fired 30
refinery employees, and put local Army units on alert. Nonetheless, other
metalworkers in the city and some government bank employees have scheduled
one-day work stoppages next week, and workers at a third oil refinery have
voted to strike.
Brasilia is concerned about the possibility of more widespread demonstrations
against the government and about a possible shortage of petroleum products. It
probably will act quickly to curtail additional walkouts, particularly in public-
sector enterprises. The recent disruptions, following strikes last month by
public employees, also will stiffen the resistance of government officials to
tougher austerity measures being sought by the IMF.
Nicaraguan Land Nicaragua has announced that it intends to allocate about 100,000 hectares of
Reform Accelerated land in time for the fourth anniversary of the Sandinista takeover 19 July. An
additional 275,000 hectares are to be released in the next few months. In
contrast, Managua has distributed less than 120,000 hectares to peasants since
the beginning of the program in 1981, although the government has confiscat-
ed nearly 200,000 hectares from private owners. The regime is speeding land
reform in order to boost rural support and to reward those who participate in
the government's efforts to defeat the counterinsurgency. At the same time,
Managua is using property confiscations as a weapon against those allegedly
aiding the insurgents.
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Stepped-up land reform probably will reduce agricultural production because
the government will be unable to supply the advisers or credit needed to
maintain output. Although some of the land to be distributed to peasants could
come from the 730,000 hectares owned by the state and not currently under
cultivation, additional productive medium and large private properties are
Seychelles' New President Rene announced earlier this month a series of measures to increase
Economic Measures public revenue and bolster sagging foreign exchange reserves. The measures
include a ban on automobile imports, a more comprehensive sales tax, a boost-
in the tax rate on upper level incomes, and a major increase in local bus fares.
The US Embassy reports that the reforms, which already are generating
popular resentment, will not be enough. To curb spending Rene must modify
his expensive social programs, such as universal health care. Reviving the
tourism industry, which accounts for nearly half of GDP, would require a
currency devaluation, something Rene believes is too politically risky.F__-]
China Lobbying IDA Beijing's Finance Minister Wang Bingqian called in representatives of the
Donor Countries major World Bank donor countries last week to press China's case for
receiving "a fair and reasonable share" of the upcoming IDA replenishment.
The 33 donor countries are scheduled to meet next week in Tokyo to discuss
the Bank's proposal of $16 billion for IDA VII. This is the first time China will
be eligible for IDA funds since joining the Bank in 1980, and Wang argued
that China's record $11 billion foreign exchange reserves should not influence
the IDA decision on the allotment because China would be in deficit in a few
years. Wang claimed that, if China receives assistance now, it will become an
IDA donor country by the 1990s. Although Wang did not specify a figure, the
US Embassy in Beijing believes China would like to receive as much as India,
about $1 billion a year, or 25.percent of the proposed replenishment. Beijing
thus will be competing for the Bank's resources with other LDCs at a time
when it is seeking to promote closer ties with them.
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USSR Hard Currency The Soviet hard currency position deteriorated in first-quarter 1983, as the
Trade Deficit Up trade deficit climbed to $2 billion, compared with $1.2 billion in January-
March 1982. Exports fell by about 6 percent, due primarily to a $500 million
reduction in sales to Iraq. The value of exports to the developed Western
countries was about the same as in first-quarter 1982. An apparent drop in the
value of oil sales (due to a likely leveling off in volume and a roughly 12-per-
cent decline in price) was offset by increases in nonoil exports.
Hard currency imports, meanwhile, rose by 5 percent. A sharp drop in
agricultural imports was more than offset by increased purchases of pipe,
machinery and equipment, and of Libyan oil for resale to Soviet customers in
the West. Total imports from the major suppliers for the Siberia-to-Western
Europe gas pipeline-France, Italy, and West Germany-increased 32 per-
cent. Purchases of Libyan oil rose by an estimated 160,000 b/d, to more than
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200,000 b/d in first-quarter 1983. According to US data, Moscow purchased
no US soybeans and reduced the volume of grain it bought from US suppliers.
USSR: Hard Currency Trade With Selected Countries Million US $
January-March 1982
January-March 1983
Exports
Imports
Balance
Exports
Imports
Balance
Total
6,358
7,600
-1,242
5,994
7,979
-1,985
Developed West
5,215
6,406
-1,191
5,262
6,512
-1,250
Of which:
Australia
2
182
-180
1
283
-282
Austria
274
166
108
208
263
-55
Belgium
392
278
114
322
212
110
Canada
10
208
-198
6
341
-335
France
659
488
171
604
687
-83
Italy
824
409
415
1,043
548
495
Japan
262
1,121
-859
274
916
-642
Netherlands
444
198
-246
529
181
348
United Kingdom
307
236
71
318
291
27
United States
33
1,371
-1,338
76
736
-660
West Germany
1,401
1,041
360
1,191
1,316
-125
1,143
1,194
-51
732
1,467
-735
Argentina
10
435
-425
10
514
-504
Brazil
61
167
-106
6
130
-124
Iraq
586
2
584
75
NEGL
75
Libya
62
115
-53
117
551
-434
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Soviet Grain Following a two-and-a-half-month hiatus, Moscow reentered the world grain
Buying Activity market last week
The purchases are the first in the new marketing year and may reflect a Soviet
need to line up grain shipments for the summer months. Prior to last week,
Moscow had only 2 million tons of grain scheduled for delivery during the
July-September quarter. With the outlook for a much-improved Soviet
domestic crop-currently estimated at 210 million tons-imports are likely to
total 25-30 million tons this year, compared with 33 million tons last year.
Given the ambitious export plans of non-US exporters and existing Soviet
long-term accords for up to 14 million tons annually, the USSR should have
little difficulty meeting most, if not all, of its grain imports from non-US
sources, if it so desires.
13 Secret
15 July 1983
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Secret
International Oil Market:
Midyear Assessment
Recent gains in OPEC oil production and a firming
in spot oil prices have signaled a return to more
stable conditions in the oil market. Although non-
Communist consumption has continued to fall and
inventories are being depleted, the willingness of
producers to cooperate and prospects for economic
recovery should, in our view, cause prices to hold at
current levels through December. In the absence of
a sustained economic recovery and a rebound in oil
use, the willingness of financially pressed producers
to cooperate and hold the line on prices is likely to
wane. Price weakness could reappear in early 1984
if OPEC expands production too rapidly and over-
shoots demand later this year.
Consumption Patterns. The decline in oil consump-
tion continues. Based on oil industry data, we
estimate that non-Communist oil consumption fell
by about 5 percent during first-quarter 1983, the
14th consecutive quarter that oil sales have de-
clined from year-earlier levels. Partial data for the
second quarter indicate that the decline in oil sales
is continuing, albeit at a slower rate than in 1982.
Oil consumption in the United States and Italy fell
by an estimated 3 percent in April-May. During
the same period oil sales in France approximated
year-earlier levels.
Inventory Adjustments. Industry expectations of a
price decline caused a large inventory liquidation in
recent months and contributed to the depressed
demand for OPEC oil. We estimate non-Commu-
nist oil stocks on land declined to about 3.9 billion
barrels at the end of the first quarter or about 92
days of forward consumption. We believe second-
ary and tertiary stocks-oil held by wholesalers,
retailers, and users-were also drawn down in
anticipation of an oil price decline. Based on the
Non-Communist Primary Oil Stocks on Land a
Billion Barrels
Days of Forward
Consumption
1st
Qtr
2nd
Qtr
3rd
Qtr
4th
Qtr
1st
Qtr
2nd
Qtr
3rd
Qtr
4th
Qtr
1979
3.5
3.8
4.2
4.3
72
78
81
82
1980
4.3
4.6
4.8
4.6
91
99
97
93
1981
4.5
4.6
4.7
4.6
101
104
100
96
1982
4.3
4.2
4.3
4.3
97
98
97
96
1983
3.9 b
92 b
a End of period. Estimates include government-owned stocks in
Japan and the United States that have increased from 18 million
barrels in first-quarter 1978 to about 385 million barrels at end of
first-quarter 1983. The increase amounts to about nine days of
forward consumption.
b Estimated.
25X1
0
historical relationship between stock levels and
consumption, stocks at the end of March were still
above normal by about 100-200 million barrels,
representing two to four days of forward consump-
tion. On the basis of our estimate of consumption
and current supply levels, we believe commercial
inventories during the second quarter held roughly 25X1
steady or declined by up to 1 million b/d. This is in 0
marked contrast to a normal seasonal buildup.
' Because of historical seasonal fluctuations in the level of oil
consumption, non-Communist primary oil stocks are normally
accumulated during the spring and summer months. The buildup is
usually about 1.5 million b/d during the second quarter and
approximately 2.5 million b/d during the third quarter. These
stocks are then depleted during the fall and winter to meet peak
consumption needs. The drawdown is normally about 1 million b/d
during the fourth quarter and about 3 million during the first
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Preliminary data indicate
OPEC crude oil production in June averaged 17.4
million b/d, more than 1 million b/d above April
levels and approaching the cartel's production ceil-
ing of 17.5 million b/d set in March. Nigeria, the
UAE, and Indonesia are the only nations to have
exceeded their individual production quotas; sec-
ond-quarter production in all three nations was
close to 100,000 b/d above their ceilings. Major
non-OPEC exporters have signaled their intentions
not to undermine the price structure. According to
statements made by senior Mexican oil officials,
Mexico has adopted a temporary 1.5 million b/d
export ceiling. While maintaining output at near
capacity levels, the United Kingdom dropped prices
only slightly in April. 1r
Arab Light
Official
Spot
Yield
Kuwait Medium
Official
Spot
Yield
30.00
29.00
29.00
29.00
29.00
28.00
29.00
28.85
28.60
28.90
25.54
26.57
28.02
27.31
27.49
28.30
27.30
27.30
27.30
27.30
27.50
26.25
27.25
26.95
27.10
24.69
25.67
27.05
26.31
26.26
30.00
30.00
30.00
30.00
30.00
26.54
27.82
29.40
28.81
29.65
Recent Price Developments
Producer willingness to hold down production, cou-
pled with buyer acceptance of the British National
Oil Company's minimal price reduction in April
and the lack of retaliatory cuts by Nigeria and
other OPEC members, has helped firm prices in
recent months. Spot crude oil prices continue to
fluctuate around official prices. Arab Light prices
are now only 10 cents below the official price, while
spot crude prices for Bonny Light are running
about 20 cents above the official level. Most-
expect further price fluctua-
tions in the coming weeks as the market attempts to
sort out supply and demand trends.
Consumption Factors. Oil market conditions dur-
ing the remainder of this year will depend in large
Secret
15 July 1983
part on consumption trends. Predicting future con-
sumption patterns, however, is difficult:
Forecasters have had limited success in predict-
ing the sharp decline in consumption during the
past few years. Moreover, estimates differ on how
much of the decline was due to conservation
versus the recession.
o The pace of economic activity and its impact on
oil consumption are uncertain. Many forecasters
believe a recovery will bring a rebound in oil use
because increased activity in energy-intensive in-
dustries and oil's traditional role as a swing fuel
should bolster oil demand.
a Accurate and timely data on end user consump-
tion of oil are not available. The apparent con-
sumption measured by companies includes sec-
ondary and tertiary stock movements, the effect
of which cannot be easily separated from actual
oil use. If, as we expect, significant drawdowns of
these stocks occurred in early 1983, a reversal in
25X1
25X1I
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Secret
Arab Light Prices
US $ per barrel
Production
Million b/d
30 18
Spot price
Official price
20 Jan
1982
a
t_ 1_ I I I I I I I I I I I I I I
Jan 14 Jan Jan
1983 1982 1983
this trend could cause major international compa-
nies to overestimate final consumption in second-
half 1983, unnecessarily boost imports, and wind
up with excess oil stocks.
between countries.
? Fluctuations in currency exchange rates will
cause oil prices, and hence consumption, to vary
Consumption Outlook
To assess the market outlook for the balance of
1983, we have examined two scenarios for oil
consumption. Under our base case, we assume that
the economic recovery combined with erosion in
real oil prices raises oil consumption above year-
earlier levels in the fourth quarter. Although the
OECD economies now appear to be pulling out of
the recession, the recovery is neither uniform nor
rapid. Most economic consulting firms expect
growth in the United States and Japan, for exam-
ple, to outpace the level of growth in Western
Europe. These same forecasters expect that average
OECD growth will approximate only 2 percent for
the year. To accommodate the uncertainty about
economic recovery and the possibility of continued
high rates of conservation, we have examined an
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15 July 1983
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Estimated Non-Communist Oil Supply and Demand
Consumption a
Inventory change b
Supply
Non-OPEC
OPEC
a Including refinery gain.
b Including stock change afloat.
47.5
44.0
43.2
44.6
44.8
45.0
42.5
42.8
45.4
43.9
44.7
42.0
41.0
43.0
42.7
-3.3
-1.8
0
0.2
-1.2
-4.2
-0.6
1.6
-1.2
-1.1
-3.9
-0.1
1.9
0
-0.6
44.2
42.2
43.2
44.8
43.6
40.8
41.9
44.4
44.2
42.8
40.8
41.9
42.9
43.0
42.1
23.3
23.6
23.8
24.4
23.8
24.1
24.2
24.4
24.4
24.3
24.1
24.2
24.2
24.3
24.2
20.9
18.6
19.4
20.4
19.8
16.7
17.7
20.0
19.7
18.5
16.7
17.7
18.7
18.7
17.9
alternative case that assumes that the rate of
decline in oil consumption in developed countries
continues at its recent pace through yearend. Un-
der both scenarios we assume LDC oil consumption
remains relatively flat
Inventory Behavior. Movements in oil inventories
will play a key role in '.determining the level of oil
demand for the balance of this year. Companies
still have some leeway to reduce stocks and proba-
bly will strive to keep inventories at minimum
levels. Our base forecast, however, assumes that at
some point in the next few months inventory deple-
tion will be halted-either because stocks will be
approaching minimum levels or companies perceive
that the price decline is over. Because of differing
levels of inventories, some companies may have
already ceased drawing down stocks, which proba-
bly accounts for the recent rise in OPEC produc-
tion. On balance, the resumption of normal inven-
tory patterns later this year could alone raise oil
demand by nearly 2 million b/d. Under our alter-
native case, we assume excess inventories remain
through yearend because international oil comba-
nies continue to overestimate future consumption
Secret
15 July 1983
The Base Case: Prices Hold. Should oil consump-
tion rebound and inventory changes return to his-
torical patterns during second-half 1983, demand
for OPEC oil would increase to about 20 million
b/d including 1 million b/d of natural gas liquids.
Under this base case scenario, demand for OPEC
oil would rise above the present quota system by
the fourth quarter. Such an increase should help
underpin the present pricing structure and lessen
pressures for some OPEC members to cheat on
their quotas. While OPEC members appear deter-
mined to prevent a further slide in oil prices,
production controls will remain essential to main-
taining price stability. We expect OPEC members
to have a difficult time apportioning new quotas
once demand exceeds the present level.
Alternative Forecast: Price Weakness. Should the
lower consumption case materialize, demand for
OPEC crude oil would average roughly 17.5 mil-
lion b/d during second-half 1983, approximating
the current OPEC ceiling. Under this scenario
OPEC members would have a difficult time pre-
venting a further price decline. Should OPEC
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Secret
production increases overshoot actual consumption
levels, excess stocks would persist and spur another
downturn in demand for OPEC oil this winter.
Under these circumstances and without a sustained
rebound in oil consumption, serious price pressures
could return in early 1984, repeating the pattern of
Another key in the near-term market outlook will
be the behavior of non-OPEC producers. Although
oil market stability remains in their interest, we
believe coordination with OPEC would wane
should oil demand drop sharply:
? Renewed market weakness would put pressure on
Mexico to lower prices, given its financial diffi-
culties and desire to sell up to its export capacity.
? The United Kingdom would face increased pres-
sure to cut prices should sales plummet as a result
of market weakness or attempts by other export-
ers to increase market share.
? The Soviet Union would be among the first to
shave prices to maintain volumes and ensure vital
hard currency earnings.
Looking Ahead
Even though we believe cooperation among oil
producers and a slight improvement in oil demand
will result in stable oil prices through the end of the
year, oil exporters are by no means out of the
woods. Given the financial difficulties faced by
many producers, a sustained rebound in oil con-
sumption will be needed to maintain cooperation
and to avoid the temptation to cheat on pricing and
production guidelines in an attempt to improve
market share. Equally important will be the ability
of OPEC members to establish new quotas once
demand exceeds the present 17.5 million b/d ceil-
ing. We expect these negotiations to be difficult,
and considerable pressure will be generated by
several financially pressed members to obtain as
large a share of the new quota as possible. The
danger for OPEC would be to produce too much
too soon, causing the market to accumulate excess
inventories once again. If this were to happen, we
would expect another serious crisis to develop early
in 1984 when the market approaches the normal
seasonal drop in oil consumption.
The size of a possible supply glut-measured as the
excess of desired production over demand for
OPEC oil-provides an indication of the potential
for downward price pressures. To estimate OPEC's
desired production level, we calculated the level of
production each country needs to maintain total
financial assets at yearend 1982 levels, assuming
current prices hold and austerity measures remain
in place. On this basis, we estimate that OPEC's
desired production approximates 23-24 million b/d
including natural gas liquids-nearly 5 million b/d
above our 1983 base-line demand estimate. Should
OPEC members attempt to achieve this desired
production level, prices would probably fall sharply,
perhaps to $20 per barrel or lower.
OPEC's problems would be further compounded in
the unlikely event that the Iran-Iraq war ends. Any
attempt by Iran and Iraq to increase exports would
put downward pressure on prices and force OPEC
into difficult rationing decisions. While Iranian 25X1
production is not constrained to its present level by
the war, Iraq would require only four to six months
after the war to increase exports by 1-2 million b/d.
Even the anticipation of such an increase in sup-
plies would soften the market and pose serious
problems for producers attempting to maintain oil
prices. 25X1
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15 July 1983
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Secret
USSR: Status of Construction on the Gas
Export Pipeline
Soviet Pipelaying Reports
Information in the Soviet press suggests that pipe-
laying for the gas export pipeline probably will be
completed in the third quarter of 1983. As of
20 May 1983, 4,237 km of the pipeline's total
length of 4,451 km had reportedly been insulated
and laid in the pipeline trench. The Soviets hope to
have pipelaying completed by September-three
months ahead of schedule.
According to Soviet media reports, most of the
pipelaying on the difficult eastern portion of the
route-from Urengoy through the Urals-has al- 25X1
ready been completed and is undergoing testing.
nance of pipelaying equipment.
The Soviet press,
however, later reported that pipelaying proceeded
on a faster-than-average pace once the swamps
froze. The pipelaying progress claimed in the Soviet
press is possible if the Soviets made good use of
November and December for acquiring and stock-
piling supplies and materials, for welding linepipe
into jointed lengths, and for repair and mainte-
A late May Soviet media report announced that
over 3,000 km of the gas export pipeline had
already been tested with water at a pressure of 90
atmospheres-15 atmospheres above actual operat- 25X1
ing pressure. On the Ukrainian section of the
pipeline, pipelaying operations are still in progress.
Soviet media have announced that pipelaying in
this area may not be completed until September-
primarily due to the rugged and difficult terrain
along the pipeline route through the Carpathian
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Secret
15 July 1983
target for West Siberia in 1985.
Now that pipelaying operations on the Siberia-to-
Western Europe gas export pipeline are apparently
nearing completion, the Soviet press has reported
that some of the 20,000 workers employed in
pipelaying activities are being transferred to work
on construction of a new gas pipeline from Urengoy
to Yelets. The Soviets would need this and another
pipeline in order to attain their gas production
Status of Compressor Station Construction
The Soviet press has reported that 18 compressor
stations for the gas export pipeline will be complet-
We believe, however, that the Soviets will not
attain their goal of having 18, compressor stations
operational by the end of the year. In building
compressor stations, the Soviets have had a history
of not being able to bring the right men and
material to the right place at the right time.
chase still being negotiated).
The USSR now has 22 Western Frame V turbine
and compressor sets-enough to equip seven com-
pressor stations and to provide sufficient power to
move all the gas contracted for to date. At the end
of 1985 the Soviets should receive delivery of the
last of the Frame V turbines and compressors and
will already have installed enough compressor pow-
er to accommodate the scheduled sales of gas to
West European buyers (including the Italian pur-
How the Soviets will use these Western turbines
and compressors is still unclear, however. Accord-
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25X1
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ing to Soviet press reports, some stations on the gas
export pipeline will be equipped with the Frame V
turbine-and-compressor sets and otber stations with
newly developed Soviet sets.
With respect to the efficiency and reliability of
pipeline operation, use of Soviet turbines is clearly
an inferior alternative to equipping the line with the
Western equipment originally ordered. Nonethe-
less, Moscow may consider the use of Soviet tur-
bines to be advantageous in terms of a riposte to the
recent US embargo, as well as an assertion of
Soviet technical prowess and determination to be-
come self-sufficient. By using some of their domes-
tically manufactured turbines on the gas export
pipeline, moreover, the Soviets could use some of
the Western turbines and compressors that will be
delivered over the next two years on another pipe-
line moving gas to the western USSR for domestic
use or, potentially, for export. Because of the
"looping" effect, this would enhance the combined
reliability of operation of those gas pipelines.
Soviet Turbine Development
The Soviet-produced GTN-25, GTN-16, and GPA-
16 turbine and compressor units are newly devel-
oped, have not been adequately field-tested, and
probably will prove to be considerably less reliable
than the Western equipment. Although there were
problems with production of the turbine blades for
the GTN-16 (a 16-MW industrial-type unit) some
of these problems apparently have been resolved.
We believe the Soviets are having more serious
problems in obtaining blades for their 25-MW
turbine.
Soviet press
reports have also announced the intention to in-
crease output of the GPA- 16 (a jet engine deriva-
tive) at the Sumv Turbomotor Plant to 55, this
year
Although the Soviets probably will experience
problems with these newly developed turbines and
compressors, we believe that some may be used on
the gas export pipeline as a matter of prestige.
Secret 24
15 July 1983
25X1
25X1
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Mexico: High Costs of
Maintaining Austerity
President Miguel de la Madrid is strengthening the
austerity program he introduced last December
with tough new initiatives on wage, subsidy, and
administrative policies. He appears willing to test
the limits of what is necessary to stay in compliance'
with the IMF stabilization program, even though
meeting economic and financial targets is provok-
ing more severe economic problems than interna-
tional financiers or the Mexican Government had
foreseen.
Strong determination and skillful negotiating tac-
tics have ensured de la Madrid the support of
organized labor and earned him the grudging co-
operation of business and the middle class. It is,
however, becoming much harder to maintain con-
sensus. Import and public spending cuts are sharply
reducing economic activity, bankruptcies and job
losses are multiplying, real wages and personal
incomes are plummeting, and inflation is staying
near triple digits.
We believe that in the next few months worsening
economic conditions will force Mexico City to seek
adjustments in IMF restrictions on the public-
sector deficit, money supply expansion, and over-
seas borrowing to hold the fall in employment and
consumption to politically acceptable limits. Even if
de la Madrid eases austerity, the steep economic
decline is likely to persist throughout this year. If
he continues to stand tough, Mexico would be in a
more favorable foreign exchange and inflation posi-
tion for regaining some economic momentum, per-
haps by late 1984.
Austerity Bites Deep
cutting government spending, and freeing most
price controls. In May, the IMF characterized
austerity implementation as forceful, and-based
on preliminary data judged Mexico in compliance
with first-quarter program objectives. More recent-
ly, the US Embassy indicated that Mexican offi-
cials expect to pass second-quarter targets also-
but by a much less comfortable margin.
We believe Mexico City cut its budget deficit
during the first half of 1983 to some 10 percent of
25X1
^
25X1
GDP-from 18 percent of GDP in 1982-despite a
falloff in tax revenues. The 1983 budget mandated
a 20-percent real cut in non-debt-related spending
and a 20-percent increase in revenues. Reduced
spending-largely reflecting trimmed capital goods
imports-appears to be at or below target, and the
government has just announced further sharp re-
ductions in food subsidies. Tax revenues, however,
have sagged with lower world oil prices and declin-
ing revenues from business and personal income 25X1
taxes. 25X1
Implementation of the IMF austerity program has
slashed foreign purchases and enabled Mexico to
meet its external financial targets and build foreign
exchange reserves somewhat. We estimate that
Mexican imports during January-June were 60
percent below the level during the same period in
1982. This boosted Mexico's trade surplus to $6.6
billion during the first half of the year, allowed
$4.8 billion in interest payments on the foreign
debt, and pushed the current account into surplus.
Capital flight continued but at levels that were 25X1
offset by the new foreign loans allowed under the
stabilization program.
Meeting IMF Targets. De la Madrid has been
moderately successful in managing his austerity
program by devaluing the peso, restraining wages,
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Mexico: Foreign Financing Gap
Million US $
(except where noted)
-3,003
7,802
6,550
3,250
6,950
20,927
22,224
10,550
11,250
10,950
14,441
16,362
7,500
7,500
7,500
3,797
3,742
1,900
2,400
2,100
1,481
1,233
650
750
750
Minerals
353
1,439
1,208
887
500
600
600
Imports, f.o.b.
6,699
18,486
23,930
14,422
4,000
8,000
4,000
Net services and transfer
-1,284
-5,290
-9,541
-10,486
-4,650
-5,650
-5,350
Interest
-1,437
-5,437
-8,383
-10,879
-4,750
-5,650
-5,650
Current account balance
-4,443
-6,761
-12,544
-2,684
1,900
-2,400
1,600
Debt amortization due
1,058
5,984
6,310
8,500
4,000
4,000
4,000
Financial gap
-5,501
-12,745
-18,854
-11,184
-2,100
-6,400
-2,400
Medium- and long-term
capital inflows
5,431
12,460
18,006
16,698 d
5,500 d
20,500 d
-17,500 d
Net short-term capital (errors
and omissions)
215
1,173
Changes in reserves
145
888
1,114
-3,000
1,000
1,000
2,000
Other financial items
External debt, yearend
17,600
50,700
74,900
80,800
NA
86,800
83,800
Short term
5,200
11,100
22,500
23,200
NA
10,000
10,000
Due
35.0
45.6
47.7
63.1
56.3
59.4
60.5
After debt relief
35.0
45.6
47.7
46.8
36.9
40.9
41.7
a Estimated.
b Assumes Mexican policymakers relax austerity by increasing
imports and public spending.
e Assumes Mexico City keeps imports and public-sector spending at
rock bottom rates through 1983.
d Includes $4 billion in 1982, $1 billion in first-half 1983, and $5 bil-
lion in second-half 1983 in debt relief on medium- and long-term
debt principal due; and $1 billion in first-half 1983 and $12 billion in
second-half in rescheduling of short-term into long-term obligations.
e Includes rescheduled short-term debt and arrears, and capital
flight.
Domestic Economic Tailspin
Output. Financial restraints have provoked growing
domestic economic problems, however. We calcu-
late that economic activity fell at an annual rate of
about 6 percent during January-June.
Import shortages have hit industrial production
hardest. Continuing price controls on basic com-
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15 July 1983
modities and shortages of imported raw materials,
intermediate goods, machinery, and spare parts
have eliminated profits for many firms and led to
numerous bankruptcies and plant shutdowns. Dur-
ing the first half of 1983, idle capacity in industry
grew rapidly; the 163 largest industrial firms were
operating at two-thirds capacity, down from 90-
percent capacity in 1982, according to a Bank of
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Shaded portion of bar indicates range
Real GDP Growth
Percent
Merchandise Imports
Billion US $
Gross National Savings and Gross Capital
Formation as a Share of GDP
Oil Productions
Million b/d
aAssumes Mexican policy makers relax austerity by increasing imports and
public spending.
bAssumes Mexico City keeps imports and public spending depressed.
'Excluding natural gas liquids.
Consumer Price Inflation
Percent
125
100
QD
Public-Sector Deficit as a Share of GDP
Percent
Money Supply Growth
Percent
125
100
75
50
7
Debt Service Obligationsd
Billion US $
dlnterest on all debt, amortization due on medium- and long-term only; in
1982 debt moratorium and private sector arrears lowered actual debt
payments $5 billion, in 1983 we expect debt rescheduling to reduce actual
payments on interest and medium- and long-term debt by about $7 billion.
e Projected.
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Mexico survey. On the basis of first-quarter data
released by the Mexican treasury, we estimate that
industrial production dropped at an annual rate of
12 percent during the first half of 1983. F__1
Other sectors are also declining. We estimate that
public and private construction activities are off
nearly 75 percent. Traditional commercial activi-
ties have been cut sharply by the falloff in industri-
al output and imports and by the higher value-
added tax. The outlook for agriculture is also poor
because of falling real farm price guarantees and
growing shortages of fertilizers, machinery, and
other imported inputs. Even the minerals sector has
been hit by sharp budget cutbacks and low world
oil prices.
Employment. In these circumstances, employment
pressures-particularly for unskilled labor-have
become severe. Private-sector economists in Mexico
estimate that 1 to 2 million jobs have been lost
since mid-1982 and that unemployment is now in
the 20- to 30-percent range. While government
authorities claim the figures are lower, they admit-
ted in May that the unemployment rate had dou-
bled during the last, year. Job losses have thus far
been concentrated in the private sector. Based on
preliminary official data, we believe government
jobs stayed constant or increased slightly because
of the $2.7 billion public works program announced
by Mexico City last January.
Inflation. Inflation remains in the triple-digit range
despite the recession and much higher unemploy-
ment. In January-June consumer prices rose 41
percent, an annualized rate of 100 percent, fueled
by the soaring peso cost of imports, mounting
consumer goods shortages, and the still high budget
deficit. Wholesale prices rose substantially faster-
at an annualized rate of 133 percent-as a result of
raw material shortages, lower input subsidies, and
fewer price controls.
Selling Austerity
Public Relations Efforts. Recent public opionion
polling indicates that the President's low-key and
Secret
15 July 1983
down-to-business style, his vigorous attack on inef-
ficient policies, and his measures to curb official
abuses of power have convinced many Mexicans
that belt tightening is essential. To maintain the
cooperation of organized labor, business, and the
middle class, the government is attempting to
improve its reputation for honesty, efficiency, and
fairness, and ensure that austerity is shared equal-
ly. A vigorous anticorruption campaign has even
targeted key ruling party loyalists. De la Madrid's
National Development Plan, published 30 May, is
a major effort to retain public support for belt
tightening. The plan suggests that 18 more months
of tough austerity are needed but that equity will
be considered and living standards of the poor
improved, in part by eliminating privileges of the
rich.
Private-Sector Hesitation. The middle class and
private business have been pleased with de la
Madrid's lack of rhetoric, his nonconfrontational
style, and the anticorruption campaign, but they
are concerned about the absence of an explicit role
for private enterprise in the development plan. Even
though the plan does not specifically call for more
nationalizations, many businessmen believe govern-
ment ownership of Mexico's productive capacity
will increase. Mexican and US economists doubt
the government's ability to greatly increase nonoil
exports in the short or medium term-as the plan
calls for-without substantial support from private
business.
rise in the cost of living.
Winning Over Organized Labor. We continue to
believe that retaining support of organized labor
remains key to keeping austerity going. Gaining
and maintaining unions' support thus far has
been-in our opinion-de la Madrid's most notable
achievement. Official labor unions have remained
quiet despite the administration's unwillingness to
make concessions on wages. In January, minimum
wages were raised just 25 percent and in June only
15.6 percent. These increases lag far behind the
The President also has taken a hardline stance with
small Communist-dominated unions. According to
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press and US Embassy reports, a monthlong strike
by nonacademic employees of the National Univer-
sity, organized into Mexico's largest Communist-
led labor union, ended in early July without a pay
increase for the strikers. The administration was
inflexible during bargaining sessions and was pre-
pared to terminate the workers' contracts. Mem-
bers of another leftist union were undercut by the
announced liquidation of the government-owned
company they were striking.
Limited Progress on Debt Rescheduling
The IMF stabilization package-purchased at the
short-term cost of economic austerity and possible
social unrest-was intended to open a window to
reschedule Mexico's mammoth foreign debt. None-
theless, debt rescheduling efforts continue to slip.
[Many public-sector agencies
have not yet begun to work out individual terms
with representatives of the banks. While most of
the public-sector debt of some $67 billion will
eventually be rescheduled, few bankers are pleased
with the terms offered on $19.5 billion in arrear-
ages and debt payments on public debt due through
1984.
Even less has been accomplished in efforts to
restructure private debt. The US Embassy recently
estimated that as of mid-June only $200 million-
of the $9 billion to be renegotiated-has been
rescheduled despite Mexico City's offer to guaran-
tee availability of foreign exchange to pay private-
sector debt for loans rescheduled over six to eight
years. The recent headway on Mexico's foreign
accounts has encouraged the international financial
community somewhat, but, because of the contin-
ued capital flight and problems in reducing debt
arrearages, bankers remain skeptical about the
government's ability to provide foreign exchange to
pay private debt obligations/
million to some $1.2 billion.
While Mexico has largely stayed current on public-
sector interest obligations, the substantial interest
arrearages owed by the private sector continue to
grow. Over the last six months, government efforts
to help the private sector reduce arrearages on
interest obligations have been only partially suc-
cessful because of the illiquidity of many Mexican
firms and government foreign exchange shortages.
As a result, we estimate that the past-due interest
on private-sector debt during this time rose by $200
We project that the economic decline will persist
throughout this year, whether de la Madrid eases
up on austerity or not:
? If Mexico City backslides, and we put the odds at
a little better than even that it will, GDP would
J Mexico: Impact of Economic Deterioration, 1983
Relaxed Continued
Austerity a Tough
Austerity b
Change in GDP (percent)
-5
-8
Job losses (millions)
1.5
2.0
Inflation (percent)
115
90
Change in real merchandise
imports (percent)
-25
-50
Decline in supplies of locally
available goods and services
(percent)
-7
-13
Change in investment (percent) - 15
-35
Change in per capita
consumption (percent)
-7
-7
-10
-10
Current account balance
(billion US $)
-0.5
3.5
Free market exchange rate,
yearend (pesos per US $)
150 to 200
200 to 300
a Assumes Mexican policymakers relax austerity by increasing
imports and public spending.
b Assumes Mexico City keeps imports and public spending
depressed.
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decline 5 percent and consumption would dip
7 percent.
? On the other hand, if de la Madrid moves to
maintain austerity, we see GDP falling 8 percent
this year and personal consumption plummeting
10 percent.
Current estimates of changes in key economic
variables by US econometric services and by the
Mexican Government are nearly, but not quite, as
pessimistic as our own, while the IMF is still
holding to its initial economic growth and inflation
projections.
The Relaxation Case. By relaxing austerity to
boost imports and spending, we believe that Mexico
City can stem-but not halt-the steep slide in the
economy by yearend. Divisions among government
officials over whether this should be done are
growing. Many Mexican economists, business and
nonestablishment labor leaders, and opposition pol-
iticians also are arguing that the adjustments have
gone far enough.
Mexico: Forecasts of Key Economic Variables, 1983
Central Intelligence
Agency
-5e
-8f
a Latin America Review Second Quarter 1983, Data Resources,
Inc., June 1983.
b Latin America Outlook, Summer 1983, Wharton Econometric
Forecasting Associates, July 1983.
c From National Development Plan, May 1983.
Mexico would be able to slow the sharp drop in
imports this year with improved first-half foreign
exchange reserves and a renewing of some trade
credit lines. This would relieve some critical short-
ages and enable some plants to raise production
slightly. Even so, import volume is likely to be at
best 25 percent below last year's result, and nearly
60 percent lower than the 1981 level. We would
expect most businessmen to maintain a "wait and
see" attitude before making substantial new com-
mitments to purchase imports because they are
suspicious of de la Madrid's commitment to private
enterprise
In our judgment, it is more likely that the govern-
ment itself would provide the principal stimulation
to the economy. Increasing public spending enough
to boost the budget deficit as a share of GDP 3 or 4
percentage points from the current 10-percent rate
would slow the decline in economic activity by
about one-third for the year. Higher public spend-
ing would spur both investment and consumption.
Inflation Current Imports Exports
(percent) Account (billion (billion
Balance US $) US $)
(billion
US $)
115 e -0.5 e 12.0 e 21.8e
90f 3.5f 8.0f 21.5f
d IMF Staff Report, 9 May 1983.
e Assumes Mexican policymakers relax austerity by increasing
imports and public spending.
f Assumes Mexico City keeps imports and public spending
depressed.
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We believe, however, that any substantial rebound
in government spending would aggravate inflation
and boost the increase in consumer prices to an
annual rate of 130 percent in July- December. F_
Sticking to the IMF Program. If de la Madrid
stands firm on austerity, import volumes would
stay at rock bottom, and the economic slide would
accelerate. In this case, we project real imports in
1983 would fall 50 percent below last year, and
almost 75 percent below the 1981 level. While
industries would continue drawing down nearly
depleted inventories, capacity utilization would
drop to less than half. As a result, locally available
supplies of goods and services would decline fur-
ther.
With continued budget cuts and the contraction of
demand, we expect that inflationary pressure would
ease somewhat, and the increase in the cost of
living would average some 80 percent for July-
December. This, along with a more favorable for-
eign exchange position, should make it possible for
economic recovery to begin by late 1984.
Implications for the United States
Prospects for prolonged austerity, a continued fall-
off in consumption, and mounting political
pressures will cloud US-Mexican economic and
political relations for at least the next two years.
Despite substantial improvements in bilateral eco-
nomic relations since de la Madrid took office last
winter, grating bilateral episodes-such as an ex-
propriation of properties owned by US firms or
additional debt moratoriums-are still possible,
particularly if the United States is blamed for
increasingly poor economic performance.
We believe Mexico City's principal bilateral con-
cern will still be to preserve Washington's backing
in the international financial negotiations. De la
Madrid has indicated his gratitude for the US
leadership in arranging new financial credits and
the progress on debt relief. Mexico City expects US
officials to back its efforts to maintain austerity
with additional credits from the Commodity Credit
Corporation and help in restoring trade credits. In
addition, Mexico will call for the United States to
intercede with the IMF and international banks if
it seeks to adjust the stabilization program and to
obtain new loans over the next few years.
US-Mexican economic relations will suffer in sev-
eral areas. We expect private-sector Mexican bank-
ruptcies to cause US banks to write off $3-4 billion
in bad debt over the next year or so. US exports to
Mexico-our third-largest trade partner-will fall
by $4-5 billion this year, after dropping $6 billion
in 1982. US-owned businesses in Mexico that
produce for the domestic market-the majority of
the $7 billion US investment-will continue to face
poor demand, and many will pull out because of
mounting losses. Meanwhile, illegal migration to
the United States will remain at record levels. F_
On the positive side, US-owned assembly opera-
tions along the border that process goods for reex-
port to the United States will increase profits
because of lower real wages and the weak peso.
During the next several years, the Mexican Gov-
ernment will be taking steps to keep US businesses
operating so that the companies' home offices will
still subsidize Mexican losses. Mexico City has
already announced that to spur increased produc-
tion for exports it will adjust rules and interpret its
foreign investment laws liberally.
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Lebanon:
Economic Impact of Partition
Under the very poor security conditions that exist
now and would remain after a partial Israeli with-
drawal, Lebanon's economy will stagnate. Presi-
dent Gemayel may appeal to the United States to
halt Israeli penetration of Lebanese markets and
will continue to press for US economic aid to
finance large budget deficits. Without a stable
peace, US aid will do nothing more than ameliorate
living conditions in Beirut; domestic confidence in a
safe and stable future is both the necessary and the
sufficient condition for rapid economic revival.
As long as Syria remains committed to undermin-
ing the Gemayel government or Israel occupies a
large chunk of Lebanese territory, we do not
believe that the Arab Gulf states will grant Leba-
non significant financial assistance. Indeed, if Arab
donors believe Israeli-made goods are entering their
markets through Lebanon, they may even impose a
partial economic boycott.
Economic activity in Lebanon has remained low
since the end of the fighting in September 1982.
Farming has probably been the hardest hit sector.
Last summer's fighting in the south and in the
Bekaa Valley destroyed many crops and disrupted
field work:
? The presence of large Syrian and Israeli occupa-
tion armies in the countryside continues to pre-
clude normal farming operations.
? The departure of many Egyptians, Syrians, and
Palestinians from the south since June 1982 has
left farmers short of labor.
' Our trade and national income statistics are rough estimates;
Lebanon's Statistical Office closed in 1975 and never reopened.
? Zahlah-the city in the Bekaa Valley that is the
farmers' major source of key agricultural sup-
plies-is a Christian community surrounded by
the Syrian Army and Lebanese Muslims, making
commerce difficult.
? Exports have suffered as Saudi Arabia and Jor-
dan briefly banned the entry of some Lebanese
goods earlier this year on the grounds that some
were actually Israeli products falsely labeled to
evade the Arab boycott of Israel.
? Travel on Lebanon's roads is hazardous and
restricted. The Israel Defense Force (IDF)
frequently closes the Sidon-Beirut road-the
principal north-south route-and detains some
Lebanese trucks carrying produce north to Bei-
rut, frequently holding them until the produce is
spoiled, according to the Embassy.
In accordance with the Arab economic boycott,
trade with Israel has long been illegal. Since the
end of the fighting, however, Israel has exported a
steady flow of farm goods to Lebanon despite a
public pledge in late 1982 not to export goods that
compete with Lebanese products. According to the
US Embassy, Israeli-grown produce has now cap-
tured a substantial share of the Beirut market that
the south's Shia farmers have traditionally sup-
plied. President Gemayel's failure to stem the flow
of Israeli produce into Beirut increases Shia suspi-
cions that Gemayel cares little for their fate and
would welcome the permanent partition of Leba-
non. In addition to its farm exports, Israel now
permits Lebanese merchants to import goods duty
free via Israel's port of Haifa. The US Embassy
estimates that roughly 35 trucks leave the border
each day carrying both Israeli produce and third-
country goods into Lebanon.
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DI IEEW 83-028
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Areas of Control
Christian
Government
Israeli
Syrian
Likely limit of Israeli withdrawal
Economic Activity
Intensive agriculture
Oil pipeline
Cement
Food processing
Petroleum refining
Textiles
UNDOF
Zone
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Boundary representation is
not necessarily authoritative.
MASCUS
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1974
Total=8.1 Billion 1974
1974 Lebanese Pounds
Construction,
transportation 1,002
Lebanon's small industrial sector has taken a beat-
ing in eight years of recurring hostilities.
only
two or three factories of Lebanon's once flourishing
textile industry still operate. Electricity systems
have been heavily damaged, and power outages are
frequent.
The only growth industry since the civil war has
been labor exports. The number of Lebanese work-
ing elsewhere in the world more than tripled be-
tween 1974 and 1981, and remittances are now
estimated to make up about 40 percent of GNP.
The earnings Lebanese sent home may have
reached $2.5 billion in 1981, thereby compensating
for much of the decline in personal income caused
by the destruction of the domestic economy.
1980
Total=4.9 Billion
1974 Lebanese Pounds
Construction,
transportation 637
A surge of optimism about Lebanon's political
prospects after the arrival of the multinational
peacekeeping force (MNF) in September sparked a
short-lived wave of rebuilding in Beirut. Few busi-
nessmen, however, have felt confident enough to
invest in new enterprises. Most of the rebuilding
was either minor repairs needed to make homes
habitable and small businesses operational or the
clearing away of rubble.
The government's financial picture brightened
somewhat in early 1983, although the deficit re-
mains high. Customs revenues rose after President
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Gemayel closed several of the "illegal" ports oper-
ated by the principal Christian militia and directed
ships to the government-controlled port of Beirut.
Similarly, the perception in West Beirut after
Gemayel took control there in February that the
government was able to impose penalties for non-
payment of taxes has boosted income tax receipts,
according to the US Embassy. Nonetheless, Ge-
mayel's writ still runs only in the greater Beirut
area, and-his government is unable to collect taxes
or customs duties in the Christian heartland or in
areas under Syrian and Israeli control. Moreover,
customs duties continue to be hurt by the routing of
Lebanese imports through Haifa.
Beirut's expenditures have not fallen commensu-
rately with the decline in the government's area of
control. In a bid to retain the allegiance of the civil
servants, the government has continued to keep
them on the payroll even though most ministries
have barely functioned for years and many employ-
ees show up only to pick up their paychecks.
Lebanon: A,Resilient Economy
Official Foreign Exchange Reserves
Billion US $
1972 75
C C
s
I L I I J
80 833
By contrast, Lebanon's foreign exchange indicators
remain strong, and official reserves afford Lebanon
well over a year's import coverage. Local bankers
agree that the private sector also has substantial push for a major reconstruction program any time
liquid assets-both domestic and foreign-that soon and probably reasons, as do many of his
could be mobilized to support reconstruction. finance officials and the private sector, that, if and
Worker remittances, which are by far Lebanon's when political and security issues are successfully
largest foreign exchange earner, are reportedly resolved, economic recovery will follow of its own
holding steady. accord.
Through eight years of turmoil, Lebanon has never
come close to a balance-of-payments crisis. Official
foreign exchange reserves actually rose in 1978 and
1982-years in which Lebanon suffered major
invasions. Although the Lebanese pound fell sharp-
ly immediately after the 1982 invasion, it had
regained almost all of the lost ground by last
October, and the Central Bank then resorted to
dumping pounds on the market to slow the pound's
rapid rise. By February 1983, the pound was
stronger than it had been since 1980.
President Gemayel is immersed in his political and
military problems, and we believe economic revival
is among the least of his concerns. He is unlikely to
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15 July 1983
Impact of Partition
We expect that Lebanon will be partitioned indef-
initely. Syria will probably continue to refuse to
withdraw its forces, and Israel will unilaterally pull
out of the mountain districts just south of Beirut,
remaining in the Bekaa and southern Lebanon. We
also expect that the IDF, citing security problems,
will expand its current restrictions on commerce
and agriculture, keeping the south's economy de-
pressed. The US Embassy reports that merchants
in Sidon-the major city in southern Lebanon-
recently went on two general strikes to protest
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Israeli transportation restrictions and other per-
ceived injustices. The strikes provoked a short-lived
Israeli attempt to retaliate by closing the shops of
some of the activists.
Resentment of other IDF moves will harden local
anti-Israeli sentiment. In contrast to the IDF's
frequent blockages of the Sidon-Beirut road, the
Embassy reports that the highway connecting Isra-
el and Sidon is usually open, leading many Leba-
nese to suspect that closures of the Beirut road are
part of an Israeli campaign to force the south to
direct its trade to Israel. Local anger has been
heightened by a recent Lebanese press report that
the IDF will not permit any merchandise to enter
Israeli-occupied areas from Beirut or elsewhere in
Lebanon unless the Israeli military commander in
Sidon has given prior approval.
We believe the main goals of Israeli economic
penetration-selling its own exports and promoting
Haifa as an alternate import route-are to ensure
that politically powerful groups in Lebanon have a
financial interest in maintaining close political and
economic ties with Israel and to erode their resist-
ance should Israel decide to prolong its occupation.
Israel probably recognizes that the Lebanese who
profit from the Israeli moves-importers of manu-
factured goods and consumers in Beirut-are pri-
marily politically influential Christians and the
Sunnis. By contrast, the farmers in the south who
are suffering from the Israeli restrictions are most-
ly impoverished and politically divided Shia. Al-
though many Christians and Sunnis still refuse to
violate the Arab economic boycott by trading with
Israel, we believe that this sentiment will decline
over time, as the potential profits from an Israeli
connection become apparent.
Israel has long eyed the waters of southern Leba-
non's Litani River as a partial solution to its own
water shortages. Once the current international
spotlight on Lebanon fades, Israel might well try to
implement its already prepared blueprints for
building a diversion canal. Such a move would
certainly provoke loud protests from the local in-
habitants and perhaps appeals from the Beirut
government for US intervention with Israel.
We think it unlikely that Gemayel's army could
secure the area left to his government without
prearranged political deals with various religous
factions and the continued presence of a sizable
MNF contingent. If security is not assured, nervous
entrepreneurs would continue to put off large-scale
investment, and low loan demand would likely
force closure of a few of Beirut's many small banks.
To replace private-sector loan demand, the banks
could continue to lend fairly large sums to the
government and to seek international borrowers
more aggressively.
Beirut will continue to look to Western donors and
domestic borrowing to finance continued budget
deficits. Domestic revenues will remain low since
most of Lebanon will still be beyond the reach of
Gemayel's taxmen, and the depressed economy and
competition from Haifa port will keep customs
receipts low. Large-scale aid from the Gulf states is
unlikely to materialize, primarily because of the
continued Israeli presence, but also because the
Arabs face their own financial problems. Nor is the
World Bank likely to provide large amounts of
financing for Lebanon's reconstruction efforts.
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would be very reluctant to do so unless the central
government was in control of all Lebanese
territory.
Critical balance-of-payments problems will be un-
likely, however. Beirut's foreign debt is very low,
and we doubt that the crucial inflow of remittances
will decline. These funds are devoted mainly to
covering the living expenses of local relatives, and,
barring a complete and prolonged breakdown into
chaos, we do not believe that many expatriate
Lebanese will move their families out of Lebanon.
A Boycott?
It has been rumored that Syrian President Assad
might close Syria's borders and airspace to Leba-
non in response to what he views as excessive
normalization of relations between Israel and Leb-
anon. A complete shutdown would cut Lebanon's
only overland transport route to the Gulf states-
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which buy the great bulk of Lebanon's exports-
and force air traffic to detour over the Sinai. Such
a move would make economic recovery harder, but
would not deal a major blow to the economy as it
stands today. If the, other obstacles to economic
recovery eased, some exports could be rerouted
through the port of Beirut and a smaller share
could be sent out by air freight. We doubt, howev-
er, that Damascus would close the border entirely;
Lebanon is a choice route for smuggling into Syria,
an activity from which Syrian officials have long
profited.
We think it unlikely that other Arabs would impose
harsh economic sanctions. When Sadat signed the
Camp David accords, the only trade sanction the
Arab League imposed was a boycott of Egyptian
firms dealing with Israel. Expatriate Egyptian
workers were not sent home then, and we do not
believe the Arabs would take such a drastic meas-
ure against Lebanon now. An Arab blacklist of
Lebanese firms trading with Israel probably could
not be enforced, especially in view of Lebanon's
strict bank secrecy laws and Israeli efforts to
protect the identity of their Lebanese trading
partners.
A simple Arab boycott of Lebanese commodity
exports, such as Jordan and Saudi Arabia briefly
imposed earlier this year, would add another formi-
dable obstacle to the many already faced by the
farmers. If the boycott extended to third-country
exports transiting Lebanon on their way to the
Gulf, the transportation sector and government
port revenues would be hurt.
Implications for the United States
President Gemayel may seek Washington's help on
two fronts. He may: ask the United States to
pressure Israel into cutting back its exports to
Lebanon, eliminating Lebanese access to Haifa,
and easing restrictions in the south. Should Israel
attempt to divert Litani waters, US mediation
Secret
15 July 1983
would likely, be requested. Gemayel will probably
also increase appeals for substantial US economic
aid, pleading absence of Arab aid, low economic
activity, and private-sector unwillingness to invest.
Although current US economic aid can ameliorate
living conditions in and around Beirut, it cannot
spark a general economic revival. The primary
impact of US economic aid would be to symbolize a
commitment to the government in Beirut. If peace
and stability ever occur in a reunited Lebanon, the
Lebanese have the funds and the entrepreneurial
ability to rebuild their country with little foreign
assistance.
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