WORLD FINANCIAL MARKETS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00153R000100080028-3
• Release Decision: RIPPUB
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• Document Page Count: 11
• Document Creation Date: December 20, 2016
• Document Release Date: January 15, 2008
• Sequence Number: 28
• Publication Date: April 1, 1983
• Content Type: OPEN SOURCE

Approved For Release 2008/01/15: CIA-RDP85TO0153R000100080028-3
DATE
TRANSMITTAL SLIP 19 Apr 83
TO: Andy Marshall, D/Net Assessment
ROOM NO. I BUILDING
3A930 Pentagon
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World Financial Markets
Morgan Guaranty Trust Company of New York
April 1983
Lower oil prices and
world recovery, 1
Oil prices, 1
Industrial countries:
policy response and
economic outlook, 3
Prospects for the major
non-oil LDCs, 7
Outlook for the
oil-exporting LDCs, 9
Statistical appendix, 11
Lower oil prices and
world recovery
Last month's agreement by OPEC -
lowering its benchmark price by $5
per barrel - was a delayed, but in-
evitable accommodation to long-
gathering market forces. Following
Britain's proposal for a North Sea
selling price compatible with Ni-
geria's, it appears, as of the begin-
ning of April, that the OPEC accord
has a better-than-even chance of
holding prices in the $25-$30 range.
For the world economy, the pros-
pect of reasonably stable oil prices,
and at a lower level than in 1981-82,
is good news: first, inflation will be
reduced, by as much as 1% in the
industrial countries this year; sec-
ond, the odds of a moderate eco-
nomic recovery are enhanced, pro-
vided governments do not reinforce
deflationary monetary policies as
measured inflation lessens. The win-
ter months brought encouraging
signs of recovery and improved con-
fidence in the United States, Cana-
da, Germany, and the United King-
dom. Nonetheless, sizable risks re-
main, not the least that U.S. interest
rates may fail to fall, or could rise
further in real terms, jeopardizing
the longer-term revival of invest-
ment so necessary for sustained-re-
covery in the United States and the
world at large.
Resumed OECD growth and this
year's lower interest rates come
none too soon for the economic and
financial well-being of developing
countries. Oil-importing LDCs will
receive the multiple benefits of low-
er oil import bills, reduced interest
payments, and stronger export mar-
kets. Nonetheless, few can afford any
easing-off in present adjustment ef-
forts. Oil-exporting countries, fac-
ing reduced earnings, will experi-
ence intensified financial pressures
for adjustment. OPEC and other oil-
exporting LDCs are headed for a
collective current account deficit
this year exceeding $50 billion, re-
quiring correspondingly large "re-
verse recycling."
Oil prices
The fall in oil prices - from an ef-
fective OPEC average of just under
$33 per barrel in January to $28.50
in late March -- was the inevitable
result of dramatic shifts in world oil
demand and supply generated by
the large price increases of 1979-80
and continuing adjustment to the
first oil shock. Oil consumption
dropped 6.5 million bpd, or over
12%, from 1979 through 1982. Oil
inventories, built up rapidly in 1979-
80, have been drawn down steadily
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since mid-1981 (see Chart 1). To-
gether, the consumption decline and
inventory shift reduced demand on
the producing nations by 9.5 million
bpd between 197:9 and 1982, a drop
that was absorbed entirely by OPEC
(see Tables 1 and 2).
Key featuresf the recent OPEC
agreement are national production
quotas and an ;overall OPEC pro-
duction ceiling of 17.5 million bpd
for the rest of this year. The 13 na-
tions are to maintain quality and lo-
cation price differentials established
last year. It is their ability to adhere
to these decisions, as well as the
non-OPEC producers' willingness to
avoid conflicting actions and the oil
buyers' expectations about the oil-
exporters' resolve, that will deter-
mine to a large extent the course
of oil prices. kr
The next few months are crucial
because there +1s still room for fur-
ther inventory reduction - particu-
larly if oil companies believe the
chances of the OPEC agreement
holding are low,;, More fundamental-
ly, oil consumption will be undergo-
ing its normal seasonal fall at a time
when weak economic activity in the
industrial countries will be adding
~P.
Oil demand, supply, and inventories
quarterly data in millions of barrels per day
?
ILLEGIB
withdrawals in the near term, the
greater unity among the members
marks a significant change from the
disarray of the past nine months.
further downward pressure. In the
short term, oil consumption will re-
spond little to the recent oil price
declines.
Indeed, for the whole of 1983
world oil consumption is likely to fall
1%-2%. The pace of decline will be
greatest in the first half, slow pro-
gressively during the latter part of
the year, and may eventually turn
into an increase, especially in 1984,
given the expected pickup in world
economic growth. But the modest
dimensions of price declines so far
are unlikely to restore the extrava-
gant oil consumption of the past.
In real terms, oil prices remain
high by the standards of the 1960s.
Investments made during the 1970s
in more efficient energy use and in
oil substitution are not likely to be
dismantled. In some cases, they may
increase in step with other invest-
ment. Further improvements in en-
ergy efficiency are on the way in the
United States, through legislated
gasoline consumption standards for
new automobiles. Moreover, the
fall in oil prices provides a case for
increasing taxes on oil consumption
in many industrial countries and
LDCs.
In the face of mounting financial
pressures and weak oil demand, es-
pecially in the near term, several
OPEC members could be tempted to
offer hidden discounts. Non-OPEC
members may formally cut prices
further in order to boost sales. Un-
settled price differentials could be-
come the incentive, or pretext, for
price shading. These actions, if
widespread, could even precipitate
a new round of declines in oil prices.
Opposing these forces is the
OPEC accord reached after pro-
,,, tracted negotiations in London last
_month. Even though the agreement
`is vulnerable to continuing inventory
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OPEC also appears to have won the
tacit cooperation of Mexico, the larg-
est non-OPEC exporter, on both oil
production and prices. Further, the
new OPEC agreement on quotas is
more substantive' than last year's.
By designating Saudi Arabia as the
swing producer without a formal
quota, and by allocating to Iraq and
Kuwait quotas they are not likely to
reach, the accord has a built-in
downward flexibility of around 3 mil-
lion bpd. That is','. it effectively ac-
commodates OPEC production as
low as 14.5 million bpd - about the
same as recent'?actual levels -
even if all the other members were
to reach their quota limits. Both the
overall and individual production
limits have been 'set as quarterly
ceilings, with no carry-over allowed
for any unused portion of the quo-
tas. In addition, the OPEC commit-
tee appointed to'Imonitor compli-
ance with the agreement has been
given somewhat greater powers. Fi-
nally, there is the'irospect that by
the fourth quarter'`of 1983 demand
for OPEC oil may exceed the 17.5
million bpd ceiling These factors,
and the probabilit of an upturn in
oil consumption in`1984, could well
strengthen the members' resolve to
adhere to the accord in the near
term.
Table 1
World oil demand and supply'
millions of barrels per day
Change
between
1979 &
1982
1982
1983
Demand' -9.4
43.8
43.8
Oil consumption -6.5
45.7
44.8
Industrial countries -7.2
34.5
33.8
Developing countries' 0.7
11.3
11.0
Stock changes -2.8
-1.9
-1.0
Non-OPEC supplies 2.7
24.4
25.1
Non-Communist production 2.5
23.1
23.6
Communist net exports 0.2
1.3
1.5
OPEC production -12.1
19.4
18.7
Of which: crude oil -12.2
18.5
17:.8
'Including natural gas liquids.
'Excluding Communist countries.
'Including OPEC.
Table 2
Distribution of OPEC crude oil
production
production in millions of bpd
shares in percent
Jan
Jan
Jan
1981
1982
1983
Saudi Arabia
10.3
8.7
4.6
% share
42
42
27
Other Gulf producers'
3.9
2.7
2.0
% share
16
13
13
Rest of OPEC
10.4
9.4
10.1
% share
42
45
60
Of which:
Nigeria
9
9
5
Venezuela
9
10
13
Libya
7
4
7
Iran
5
5
16
Iraq
2
6
5
Others'
11
12
14
'Kuwait, Qatar, and the UAE.
'Algeria, Ecuador, Gabon, and Indonesia.
Given the uncertainties about the
behavior of inventories and of OPEC
members, no price` projection can
be asserted with' confidence. In
what follows, OPEC oil prices are
assumed to average $28 per barrel
for 1983 as a whole. This level is
more than $1 below the annual aver-
age that would result if the present
price structure were to survive in-
tact and, thus, allows for price shad-
ing but no price collapse. An aver-
age price of $28 represents a drop
of more than 15% from the 1982
annual OPEC average of just over
$33. Allowing for inflation and a
modestly weaker dollar, it implies a
decline of 20% in real terms.
Industrial countries: policy
response and economic outlook
Lower oil prices will shift about $40
billion from oil-exporting to oil-im-
porting countries, not counting
trade volume adjustments. The re-
duction in income will be felt princi-
pally by OPEC, while most of the
benefit - over $30 billion - will
accrue to the industrial countries
and will be equivalent to about 0.4%
of OECD GNP.
The reduction in oil prices has
much the same effect on oil-import-
ing countries as an excise tax cut.
The first result is lower import costs.
These should pass directly to a re-
duction of OECD inflation by up to
1% this year, allowing for related
price adjustments on other energy
supplies. The lower inflation, in turn,
will provide a one-time boost in real
incomes.
How far this gain will translate
into a sustained increase in spend-
ing and real output hinges critically
on the policy response of the indus-
trial countries. Their role today is
even more important than when oil
prices were rising sharply. At that
time oil exporters could be relied on
to respend a significant part of their
higher income; indeed, their ab-
sorptive capacity turned out sub-
stantially greater than expected. To-
day, by contrast, most oil exporters
have been obliged to cut spending.
Considerable weakening already is
evident in industrial-country exports
to OPEC and Mexico (see Table 3).
OPEC import volume this year may
be down some 10% from 1982.
Moreover, given severe balance of
payments constraints, oil-importing
LDCs cannot boost spending and
imports significantly.
Accordingly, the industrial coun-
tries must resist any temptation to
tighten monetary policies. To do so
would risk delaying world economic
recovery and could impair interna-
tional financial stability. In this con-
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Table 3
Industrial countries:'
merchandise exports to OPEC
and Mexico
Exports
Value of exports, to OPEC
$ billions, seasonally & Mexico
adjusted annual rates k change
To OPEC
To Mexico year ago
1980
94
21
33
1981
110
24
17
1982
106
17
-9
1981 QIV
115
25
17
1982 QI
117
20
9
oil
iii
19
-6
Qill
99
16
-15
Q!V
99
10
-22
1983 Jan-Feb (est)
95
8
-25
'United States, Canada, Japan, Germany, France,
United Kingdom, Italy, Belgium, Netherlands,
Spain, Sweden, and Switzerland. These 12
countries supply three-quarters of OPEC and
Mexico's total merchandise imports.
nection, any newupward surge of
the dollar in exchange markets
would be disruptivp. Fear of renewed
depreciation of their currencies lim-
its the scope of foreign monetary
authorities to reduce their own do-
mestic interest rates, but without
lower domestic i iterest rates, eco-
nomic recovery abroad may not be
sustained.
Wise response to the lower oil
prices should not impede their stim-
ulative effects nor hamper efforts to
achieve a reduction of real interest
rates. Lower oil prices do not, in
themselves, warrant adjustment of
targets for money;:supply growth in
nominal terms. With unchanged tar-
gets, a given growth in nominal in-
come implies higher growth of real
output if general,; inflation lessens.
As shown in Table 4, current mone-
tary targets alloyv. room for moder-
ate economic recovery in the United
States, Germany, and Japan, pro-
vided the auth pities aim for the
upper ends of heir target ranges.
This assumes, o .course, that veloci-
ty does not fall much as last year.
That expectation will have to be
monitored closely, lest present mon-
etary targets prove ill-chosen.
The reduction of inflation and in-
flationary expectations should per-
mit a reduction of nominal interest
rates, contrary to the recent upward
drift in U.S. rates. Whether interest
Table 4
Monetary targets and income growth in 1983
% change per annum
Target rate Projected % change implied change Target of monetary Real GNP Nominal in velocity
aggregate growth' GNP deflator GNP 1983 1982
United States
M1
8.8'
2.6~
4.4
7.0
-1.8
M2
9.0
2.6
4.4
7.0
-2.0
Japan
M2+CD
7.5
3.2
1.6
4.9
-2.6,
Germany
Cent]. Bank Money
6.5
0.9
3.6
4.5
-2.0
France
M2
9.0
0.0
10.2
10.2
1.0
United Kingdom
#M3
9.2
2.5
6.5
9.2
0.0
'Computed at upper end of target range: standardized to yield approximate calendar-year
average growth rates.-
Page 4 / World Financial Markets / April 1983
-2.4
-3.4
-4.1
-1.6
-0.3
-3.8
rates also fall in real terms rests in
part on the outlook for government
financing and on financial-market
perceptions of prospective budget
deficits. Since a portion of the in-
come transfer to the industrial coun-
tries from the oil exporters will be
saved, a given budget deficit can be
financed at a lower interest rate. In-
creased taxes on energy consump-
tion could contribute, at least mar-
ginally, to a narrowing of budget
deficits where they are a genuine
obstacle to reduction of interest
rates.
Of course, the real income bene-
fits of lower international oil prices
should not be taxed away. The fun-
damental justification for higher en-
ergy consumption taxes is to sustain
long-term conservation. Where bud-
getary considerations are not over-
riding, increased revenues from en-
ergy levies will allow reductions in
other taxes. Further, to foster ener-
gy production and development, the
United States and Canada need to
review taxation of their energy in-
dustries, as Britain has done for
North Sea producers in the March
budget.
Given present policies in the major
industrial countries, which have gen-
erated some reduction over the past
year in nominal interest rates, the
new stimulus imparted by oil price
declines should promote a moder-
ate economic recovery. The signs
of economic revival among the
seven major industrial economies
are most evident in the United
States, Germany, the United King-
dom, and Canada. The rebound is
expected to be less strong than the
typical experience following previ-
ous recessions in the postwar peri-
od: after declining 0.5% in 1982,
overall real GNP in the seven major
industrial countries is expected to
advance about 2% in 1983 (see Ta-
ble 5). Given productivity increases
normally achieved during economic
recovery, this output growth will not
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 Table 5
Real GNP/GDP
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% changes
United States
1.9
-1.8
2.6
Canada
3.1
-4.8
1.0
Japan
3.8
3.0
3.2
France
0.3
1.5
0
Germany
-0.2
-1.2
0.9
United Kingdom
-2.4
1.2
2.5
Italy
-0.2
-0.3
0
weighted average
(1981 GNP weights)
1.5
-0.5
2.0
?
dramatically reduce the high levels
of unemployment in these econo-
mies. Nor is there any chance that
recovery will be investment-led, as
had been hoped two years ago prior
to the long slide in capacity utiliza-
tion. Pickup in business investment
will, at best, be delayed till the sec-
ond half of 1983 and is even then
contingent on robust expansion of
consumer demand:;.
In the United States, the upswing
in economic activity in early 1983
can be traced mainly to a slowing of
the sharp inventory decumulation
that took place late last year and to
the remarkable rebound in residen-
tial construction. Real GNP is ex-
pected to grow 2.5% or more in
1983 on a full-year comparison,
which translates into a little more
than 4% growth from the end of
1982 through the end of 1983. On
the whole, recent statistics point to
continued recovery:,; industrial pro-
duction has been rising since De-
cember, while housing starts at-
tained a 1.75 million annual rate in
February, more than twice their
0.84-million low in November 1981.
The index of leading indicators
jumped 3.5% in E. January and
climbed a further 1.4% in February.
But if the economic..rebound is to
bring enduring advance, consumer
demand must strengthen. In volume
terms, retail sales held flat during
this past winter and the latest read-
ing on factory orders showed a de-
cline in February. More promising
for the future, however, is the recent
stability of unemployment and pro-
spective gains in real disposable in-
comes.
Economic growth in the United
States is a prerequisite for sus-
tained economic advance in Cana-
da. Currently, the Canadian econo-
my is showing distinct signs of turn-
around. Industrial production rose
5% in January, following little
change in the previous two months.
Housing starts in early 1983 were
?
more than 50% above the low levels
reached last summer. Significant
also is an apparent slowdown in in-
ventory destocking.. Increased ex-
ports to the United States and, in
time, less inhibited consumer spend-
ing are further important forces that
should underwrite overall expansion:
the fall in real consumer spending
accounted for 1.5 percentage points
of the 5.7% drop in real GNP over
the last four quarters.
Few European countries can hope
for speedy recovery. Germany may
be one exception. German factory
orders rose 6.7% in January after
increasing 4% in December and
6.4% in November. Industrial pro-
duction rose 1 % in January. For the
year, 1% growth in real GNP looks
achievable, or 4% from the fourth
quarter of 1982 to the fourth quarter
of 1983. Rising consumption and in-
vestment spending are the essential
engines of growth. The main stimu-
lus to consumption will come from
higher real incomes and from lower
saving rates as consumer confi-
dence is restored. Real consumer
spending fell 2.5% from the end of
1981 to the end of 1982, outpacing
the 2% decline in real GNP. How-
ever, the saving rate fell from 15.6%
in the first quarter of 1982 to 14%
in the last quarter, leaving it little
above the 13.5% rate of the expan-
sion years in the late seventies.
Further decline or stability of the
saving rate will speed the economic
recovery.
A second key to German econom-
ic recovery is an upturn in invest-
ment promoted by lower interest
rates and a revival of consumer
spending. An important step is the
recent one-percentage-point cut in
German official rates, which will
help spur construction activity.
While construction orders began to
increase in real terms during 1982,
year-end orders were still below the
levels of early 1981.
Real GDP of the United Kingdom
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Table 6
Consumer prices
% changes, December-December
United States
8.9
3.9 3.5
Canada
12.1
9.3 5.5
Japan
4.4
2.4 2.0
France
14.0
9.7
8.5
Germany
6.3
4.6
2.0
United Kingdom
12.0
5.4---
7.5
Italy
19.0
16.3 15.0
weighted average
(1981 GNP weights)
9.3
5.4
4.5
Table 7
Current account balances
billions of dollars
United States
5
-8
-25
Canada
-5
2
3
Japan
5
7
15
France
-5
-12
-6
Germany
-7
3
9
Italy
-9
-6
-2
United Kingdom
12
7
-2
Page 6 / World Financial Markets / April 1983
could be up 2.5% in 1983. Already
in 1982, and against the tide, Britain
scored a 1.2% 'gain in real GDP -
but with still-r sIng unemployment
and sagging i dustrial activity dur-
ing the second aIf. The main growth
impetus corn from consumer
spending, whit `rose sharply begin-
ning last summ r. For some time that
advance was et by massive stock
drawdowns. 0 y in December and
January did manufacturing output
finally pick up.hBusiness confidence
now has cle'rly improved, with
wide-ranging creases being re-
ported in new:?orders. Lower nomi-
nal interest rates are encouraging
construction Ad consumer borrow-
ing. Consume pending is further
underwritten b'the recent budget's
personal income tax reductions. In
time, moreov , the major gain in
competitivene~' of domestic pro-
ducers, provifed by sterling's ex-
change mark a."'slide since Novem-
ber, should aId gains in overall
economic a i;ivity commensurate
with rising do lestic demand.
France ha 'little hope of GDP
growth this ar. The economy is
constrained the austerity mea-
sures under'aken in conjunction
with the EM realignment. Those
measures impose forced savings on
high income:roups and increase
taxes on alcohol, tobacco, and en-
ergy. Also, social security taxes will
be raised byj1% of taxable income.
Consumer spending was the driving
force behinPI French real growth
over the past two years and will
have to be restrained to correct the
current account deficit. The austerity
measures aye intended to.cut con-
sumer purchasing power by 2%. To
help reduce*1 the current account
deficit, Fren.bh tourists now are lim-
ited to 2000-francs annual spending
abroad.
Neither is the Italian economy ex-
pected to grow in 1983. Economic
policy aimsrto reduce the large pub-
lic-sector deficit, over 15% of GDP
in 1982, through spending cuts and
tax increases, and to curb the high
rate of inflation. At 16%, Italian in-
flation is far above inflation in other
major countries. This year's renego-
tiation of the wage indexation ma-
chinery lowers the automatic degree
of wage indexation by 15%, which
should facilitate reduction of infla-
tion.
In Japan, there is no immediate
sign of a growth upturn. Industrial
production, declining three months
in a row, dipped 0.9% in February.
Both consumption and investment,
the twin sources of growth in 1982,
are expected to grow more slowly
this year. Real consumption is
braked by lower wage increases.
Investment will be held back by high
real interest rates and by excess
capacity, especially in export-re-
lated industries. Nonetheless, as
stockbuilding and residential con-
struction pick up, real GNP will
grow by 3.2%, scarcely more than
in 1982.
The decline in oil prices will fur-
ther cool OECD inflation, which has
been receding for more than two
years as a result of the long reces-
sion. By the end of 1983, consumer
price increases should decline to
an average 4.5% for the seven ma-
jor industrial countries, following
5.4% in 1982 and 9.3% in 1981 (see
Table 6). Maintaining or bettering
the surprisingly good outcome of last
year, consumer prices are likely to
increase by 3.5% or less in the
United States, Germany, and Japan
in 1983. In the United Kingdom, by
contrast, consumer prices will ac-
celerate in the months ahead as
sterling's steep depreciation feeds
through the domestic price struc-
ture. Italy and France will once
again suffer much higher inflation
rates than the other major countries,
in part because exchange rate de-
preciation will reduce the anti-infla-
tion bonus from the decline in dol-
lar oil prices.
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Real effective dollar
exchange rate
index. 1975 - 79=100
I I I I I I I I I 1 1
1970 73 75 80
Oil prices and the
OPEC current account
-25 - -?-=ol,,
-50 1 1 I 1 1
1970 73 75 80 83
Real oil Price =effective OPEC oil Price deflated by
index of OECD manufactures prices in dollar terms
U.S. net oil imports
as percent of total industrial
countries'net oil imports
10 1 1 1 1 1 1 1 1( 1 1
1970 73 75 80 83
For the seven largest industrial
countries as a group, the oil import
savings from lower prices may ap-
proximately offset the adverse cur-
rent account impact of higher eco-
nomic growth and increased im-
ports. Their combined current ac-
count deficit could show little
change in 1983 (see Table 7). The
distribution of their joint deficit
should, however, shift significantly.
The appreciation of the dollar over
the past two years and the recovery
of the U.S. economy would be the
main factors behind this shift. The
U.S. deficit may increase by $17
billion, from $8 billion in 1982 to $25
billion this year. The combined cur-
rent account surpluses of Japan and
Germany could increase by $14 bil-
lion, from $10 billion to $24 billion.
At the same time, increased exports
to growing economies, lower oil
prices, and minimal domestic growth
should shrink the combined deficits
of Italy and France from $18 billion
last year to $8 billion in 1983. Falling
oil prices and economic recovery
may push Britain's current account
into balance or small deficit this
year, after a $7 billion surplus in
1982.
Although many analysts believe
that the current account shift bed
tween the United States and other
industrial countries will yield a sig;
nificant weakening of the dollar
such an outcome is far from assured
Over the past few years, exchang
rate changes have been influenced
to a much greater extent by capital
flows than by current account devel-
opments. The dollar will continue to
benefit from a favorable interest rate
differential, in real and nominal
terms, and from international eco-
nomic and political uncertainty.
While the OPEC current account
deficit undoubtedly will lead to
sales of dollar assets by member
countries, these will only have an
exchange rate impact insofar as the
asset preferences of the new hold-
?
ers differ significantly from those of
OPEC. As Chart 2 illustrates, the
dollar has fluctuated in the same
general direction as real oil prices
over the past decade, but its surge
in 1981-82 occurred while the OPEC
current account surplus was disap-
pearing. Movements of the dollar
were more heavily influenced by
changes in U.S. oil-import depen-
dence and U.S. anti-inflation policies
- particularly high real interest
rates - than by oil price move-
ments or the OPEC surplus. By con-
trast, there is a closer relation be-
tween oil price changes and fluctu-
ations of sterling and the yen, with
sterling weakening and the yen nor-
mally strengthening in periods of
falling oil prices. Yen strength now
would be a highly welcome develop-
ment in view of its sizable under-
valuation and mounting trade fric-
tions.
Prospects for the major
non-oil LDCs
For the 12 oil-importing LDCs who
are also major borrowers in the in-
ternational financial markets, net oil
import bills in 1982 were $32 billion.
Lower oil prices in 1983 should re-
duce those costs by $4-$5 billion, a
significant fraction of the group's
$33 billion current account deficit
in 1982. Measured against outlays
for imports of other goods and ser-
vices, excluding interest payments,
Table 8 shows that the direct bene-
fit of lower oil prices is especially
important for Brazil, Turkey, and
Thailand, and also provides sub-
stantial relief for the Philippines and
Korea.
In addition, the 12 oil importers
should achieve ai00 million re-
duction in oil import bills through
volume savings. Their domestic oil
production is set to rise 10% this
year and will furnish 31% of their
consumption needs, up from 23%
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Table 8
Oil-importing LDCs:
implications of a $28 per barrel
oil price for 12 major borrowers
Decrease in net oil imports in 1983
%of %of
1982 1982
$ billions' imports' GNP
Argentina
0.0
0.0
0.0
Brazil
1.4
8.0
0.5
Chile
0.1
1.6
0.3
Colombia
0.1
1.1
0.1
Korea
1.0
4.7
1.5
Philippines
0.3
4.1
0.8
Taiwan
0.6
3.1
1.2
Thailand
0.4
6.1
1.1
Ivory Coast
0.1
3.3
1.0
Morocco
0.2
4.0
1.1
Israel
0.3
2.3
1.2
Turkey
0.5
8.4
0.9
'Reduction of 15% in 1982 net oil imports
value, before volume adjustment.
'Goods and services excluding oil and interest.
Table 9
Oil-importing countries: external
position of 12 major borrowers'
1981
1982
1983
Non-oil export volume,
% change
11.8
-0.5
5.0
Non-oil import volume,
% change
3.9
-9.5
4.0
Net oil imports, mm bpd
2.7
2.5
'2.3
Terms of trade,
1977-79=100
80
81
82
$ billions
Merchandise exports
111
106
115
Merchandise imports
-127
-112
-115
Trade balance
-16
-6
0
Oil trade balance
-36
-32
-27
Net interest payments
-22
-26
-23
Other services and
transfers, net
Current account
-39
-33
-23
as % of exports of
goods and services
Total external debt,
year-end
'Argentina, Brazil, Chile, Colombia, Korea,
Philippines, Taiwan, Thailand, Ivory Coast,
Morocco, Israel, Turkey.
Page 8 / World Financial Markets / April 1983
as recently as 1979. Moreover, from
1979 through 1982, the group's con-
sumption appears to have dimin-
ished 7%, against a 4% rise in
their GNP - a'. quite unexpected
conservation achievement.
A second-plus for the borrowing
countries this y&ar is the decline in
international intrest rates. Total ex-
ternal debt of the 12 major non-oil
LDCs rose justxover 10% in 1982,
standing close to $300 billion by
year-end. At 1982 interest rate
levels, the rise in outstandings
would have swollen the group's net
interest payments by over $3 billion
in 1983. Insteadilower interest rates
mean that theyidshould see net in-
terest payments lessened by $3 bil-
lion. Thus, even with allowance for
rising loan-rate spreads and re-
duced earningb'on external assets,
lower world interest rates confer a
$6 billion net benefit on these LDCs
-with Brazil, Argentina, and Korea
the main beneficiaries.
The financial and economic pros-
pects of the oil-importing LDCs in
1983 depend most of all on the pro-
jected economic recovery in their
industrial-country export markets.
In 1982, whenthere was an overall
reduction in world trade volume of
some 2%, the&exports of the 12 ma-
jor non-oil LDCs slipped by less
than 1%. This was a respectable
showing in the global context, but a
disastrous outcome when set
against the 12% average annual ex-
port volume gains they had achieved
over the 1975-81 period. Moreover,
while the terms of trade of these
LDCs did not'deteriorate further last
year - softe'r' oil and import costs
in dollar terms offset, on average,
continued erosion of export prices
- those terms of trade remained
20% less favorable than in the more
benign conditions of 1977-78.
Nonetheless, scarcity of foreign
exchange in'i1982 obliged the group
to cut back import volume by 9.5%,
leaving little room for GNP growth.
Indeed, Argentina and Chile suf-
fered major declines in overall eco-
nomic activity of 4% and 14%, re-
spectively. Most Asian countries
achieved GNP gains well below
their normal expectations.
Latest forecasts for LDCs still are
marking down hopes for 1983, in
light of the disappointing outcome
for 1982 and the extreme weakness
of world trade during the past win-
ter. Gloom can be exaggerated. The
current trend in industrial-country
forecasts is to upgrade cautiously
the expected scale of aggregate de-
mand recovery. Upturn in the inven-
tory cycle should quickly generate
revival of demand for LDC exports,
although some will be frustrated by
protectionism.
For the 12 major non-oil LDCs the
current account projections in Ta-
ble 9 assume a 5% average gain
in export volume this year - mod-
est in historical perspective, but
perhaps realistic when viewed from
the depressed position of today.,
Likewise, the projected 5% rise in
non-oil LDC export prices would be
feeble for a normal period of world
economic recovery, but in fact as-
sumes sizable advance, relative to
present levels, through the balance
of 1983.
Since external financial conditions
remain difficult, the non-oil LDCs
cannot look forward to fast GNP
growth this year. For the twelve ma-
jor borrowers, average GNP growth
may be little more than 1%, which
would hold total imports to a rise
of less than 3% in volume terms.
On these assumptions, their joint
current account deficit should shrink
by $10 billion or more from last
year's $33 billion outcome. The $10
billion improvement would represent
$5 billion in net oil import savings,
a $3 billion reduction in net interest
payments, and a $2 billion improve-
ment in net trade in other goods
and services.
The new money required to fi-
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Table 10 nance their remaining $23 billion
OPEC current account current account deficit will not be
billions of dollars
Total OPEC
Oil revenues
Other exports of goods
and services'
Imports of goods and
services'
-200
-235
-224
Investment income, net'
13
16
8
Current account
116
2
-34
Official transfers, net
-9
-8
-6
Current account
after transfers
Four Gulf producers'
Oil revenues
Other exports of goods
and services'
Imports of goods and
services'
-83
-106
-108
Investment income, net'
12
20
14
Current account
Official transfers, net
-8
-8
-5
Current account
after transfers
'Excludes investment income but includes
private transfers.
'Excludes oil sector investment Income which
is included In the calculation of oil revenues.
'Saudi Arabia, Kuwait, Qatar, and the UAE.
easily obtained, nor will the ma-
turing portion of their $300 billion
outstanding debt be readily refi-
nanced. Lenders and borrowers,
encouragement from the gradual
improvement in the external en-
vironment facing non-oil LDCs. No
relaxation of adjustment efforts is
warranted, however, since a morel
helpful global environment was al-'
ways an underlying assumption in
adjustment programs.
Outlook for the oil-exporting LDCs
The immediate implications of lower
oil prices for the oil-exporting LDCs
are negative. Economic recovery in
the world at large will ultimately be
helpful to oil exporters. In the near
term, however, the pluses - lower
interest rates and strengthening de-
mand for non-oil exports - are
likely to be offset by the sharp de-
cline in these countries' oil and gas
earnings. Oil comprises the great
bulk of their total exports of goods
and services - over 80% for OPEC
members and about 50% for Mexico.
The 13 OPEC members will be the
hardest hit by lower prices and de-
mand. An average price of $28 per
barrel for 1983 implies a near-$40
billion decline in OPEC oil revenues
to $154 billion, the lowest since
1978. Exports of natural gas also
will be adversely affected by lower
oil prices. OPEC's other non-oil ex-
ports are small. The result will be
import cutbacks and a larger cur-
rent account deficit.
OPEC members have the ability
to reduce imports substantially. In-
deed, they have already done so.
OPEC's total imports of goods and
services rose over 20% by volume
in 1981, but less than 5% in 1982.
The full-year gain in 1982, however,
masked cutbacks as the year pro-
ceeded, as is confirmed by indus-
trial countries' export data (see Ta-
ble 3). In 1983 OPEC imports of
goods and services could well con-
tract by almost 10% in volume.
Even with this decline, the OPEC
current account will shift into deficit
of about $40 billion in 1983, from
near balance in 1982 (see Table 10).
Most of the deterioration in the
aggregate OPEC current account is
likely to be absorbed by Saudi Ara-
bia and the other three oil exporters
of the lower Gulf-Kuwait, Qatar, and
the UAE. These countries not only
are experiencing the largest drop in
oil production, but also in prices.
Having adhered most closely to
OPEC's previous benchmark price
of $34, they face a greater decline
in their export prices than those
OPEC members that offered dis-
counts in 1982. Thus, even though
the Gulf producers also are likely
to cut imports of goods and ser-
vices, perhaps by 3% in volume,
their aggregate current account is
projected to shift from a surplus of
over $20 billion in 1982 to a deficit
of around $15 billion in 1983.
This deterioration need not place
severe strains on the Gulf econo-
mies. The four together had esti-
mated official foreign asset holdings
of over $250 billion at end-1982. Nor
should the use of external assets by
these four countries cause liquidity
problems in financial markets, since
use of these assets merely implies
their shift to other hands.
For those oil-exporting LDCs that
are major borrowers the challenge
will be much more serious. Their
1983 current account and external
financing needs are shown in Table
11. The group consists of nine coun-
tries, members and nonmembers of
OPEC. Their $75 billion net oil and
gas exports in 1982 represented al-
most 60% of their total foreign ex-
change earnings. Between 1980 and
1982 the combined current account
of these countries swung from a
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4P ?
Table 11
Oil-exporting countries: external
position of nine major borrowers'
Oil sector
Oil production, mm bpd
Net oil exports, mm bpd
Average export price,
$/barrel
$ billions
Net oil & gas exports
Non-oil & gas trade balance
Exports
Imports
Net interest payments
Other services and
transfers, net
Current account
as % of exports of
goods and services
Total external debt,
year-end
Official foreign assets,
year-end
1980
1982 1983
10.2
9.8
9.7
7.1
6.1
6.0
85
75
66
-58
-66
-61
29
23
25
-87
-89
-86
-7
-16
-16
-17
-19
-18
3
-26
-29
2
22
24
151
208
230
48
25
18
'Algeria, Ecuador, Egypt, Indonesia Malaysia,
Table 12
Oil-exporting coduwt a:
implications of a $28 per barrel
oil price for nine major borrowers
Change in net oil exports in 1983
$ billions'
% of
imports'
% of
1982
GNP
Indonesia'
-2.3
10.7
2.5
Venezuela'
-2.2
12.7
3.1
Nigeria'
-1.7
10.0
2.5
Mexico
-1.5
6.5
0.9
Algeria'
-1.3
9.6
3.2
Ecuador'
-0.3
13.1
2.4
Malaysia
-0.2
1.3
0.8
Peru
-0.2
5.0
1.2
Egypt
-0.1
1.0
0.3
modest surplus to a deficit of $26
billion. Their imports climbed rapid-
ly until 1981, while a steady drop in
oil and non-oil export volumes was
compounded in 1982 by a $2.50
drop in their average oil export
price. Thus, in just two years, their
total external deb~grew nearly 40%
and exceeded $200 billion by end-
1982, of which two-thirds is owed to
banks. Of the total, $76 billion or
36% falls due thisyear.
The projected decline in oil prices
to an average ofx$28 per barrel in
1983 will reducerthese countries'
net earnings from oil and gas ex-
ports by about $9, billion, or, 12%.,,,/
The impact will range from a-high
of over $2 billion for Indonesia (over
2.5% of GNP) to,a low of $100 mil-
lion for Egypt (0.3% of GNP, see
Table 12). With the notable excep-
tion of Nigeria, most of these coup-
xcess of 0-6 uction capacity
is small. To raise oil production
wo lu In any event, jeopardize
price stability. .
Lower world interest rates will
help these nine countries by reduc-
ing their gross interest payments on
floating rate debt. Their total net in-
terest payment, however, may
change little because of rising debt
outstandings, stiffer terms on new
borrowings, and, lower earnings on
declining external assets.
More significant is the expected
rise in these countries' other ex-
ports of goods,and services. Most
of the improvement will be realized
in late 1983 and in 1984, as indus-
trial country growth picks up. In
1983, such earnings (excluding in-
terest receipts) could rise $2-$3 bil-
lion for the nine countries, with
Malaysia, Indonesia, and Mexico
being the main beneficiaries.
Lack of foreign exchange will
compel another round of import cut-
backs this year by most of these
countries. Several will suffer out-
right declines in overall economic
activity. In the aggregate, their im-
ports of goods and services (ex-
cluding oil, gas, and interest) may
be down by nearly 8% in volume.
This would help contain their 1983
current account deficit to just under
$30 billion, $3 billion higher than in
1982.
The increased current account
deficit of these oil-exporting coun-
tries, together with the refinancing
of their maturing debt, poses a
major challenge for international
finance in 1983. The projected cur-
rent account deficit presumes reso-
lute adjustment by the borrowing
countries. In view of the new oil
rnal lenders -
t
ll
f
e
, ex
a
export short
ILLEGIB
notably the IMF and the commercii".
banks - must be prepared to see
an increase in their exposure to oil
exporters somewhat exceeding ear-
lier objectives. For a time, the great
recycling of funds from oil pro-
ducers to consumers must, of ne-
cessity, be reversed.
`Member of OPEC.
'After adjustment for price differentials and
export volume changes.
'Goods and services, excluding oil and interest,
before adjustment to lower oil earnings.
Page 10 / World Financial Markets / April 1983
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