INTELLIGENCE MEMORANDUM THE ECONOMIC OUTLOOK FOR PERU AND THE IPC DISPUTE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600020035-1
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: December 22, 2016
• Document Release Date: May 17, 2010
• Sequence Number: 35
• Publication Date: March 1, 1969
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The Economic Outlook for Peru and the IPC Dispute
'ER IM 69-33
March 1969
Copy No. 48
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelai ioii of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GROUP I
ZXOLIIDrD FROM AUTOMATIC
DOWNORADINO AND
DrCLANMIFICATION
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
March 1969
INTELLIGENCE MEMORANDUM
The Economic Outlook for Peru
and the IPC Dis_ute
Summary
Peru's dispute with the United States over the
expropriation of the International Petroleum Company
(IPC) seriously threatens Peruvian economic growth
during the next several years. If Peru does not take
steps by early April of this year to compensate the
IPC for the properties taken over last October, it
will lose a large part of its US aid. In this event,
private foreign investment in Peru would be reduced,
and drawings on credits from international financial
institutions might suffer a large decline over a
period of several years. The adverse impact on Peru's
receipts of foreign capital and thus on the rate of
economic growth would be still greater if the military
government retaliated against the United States by
expropriating additional US investments.
Invocation by the United States of the Hicken-
looper and Sugar Act amendments because of the IPC
issue would reduce US aid to Peru by between $45 and
$55 million in 1969, would cause it to lose some
assistance from other sources, and would discourage
private foreign investment at least temporarily. As
a result, Peru probably would achieve little or no
growth in total output in 1969, unless it took com-
pensating measures. Restrictions on profit remit-
tances by foreign businesses in Peru could help in
maintaining its capacity to import, since these prof-
its now amount to about $90 million annually. Even
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research
and was coordinated with the Office of Current
Intelligence.
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if Peru took this step, total Peruvian output could
not be expected to rise by more than 1 or 2 percent
in 1969 because of the restricts 7e effects of the
government's financial stabilization program. Such
a rate of growth would mean a small decline in out-
put per capita because Peru's population is rising
by 3 percent annually.
If Peru initiated steps to compensate IPC during
the next year or so, a gradual recovery of economic
growth could be expected in the early 1970's. If US
sanctions remained in force throughout the early
1970's, however, the country's economic performance
would not be very satisfactory. With the cutoff of
virtually all inflows of foreign capital from custom-
ary channels, the expansion of Peru's import capacity
during the period would be small, and the rate of
economic growth probably would be scarcely high
enough to match the increase in population.
In these circumstances, Peru probably would seek
assistance from such Free World countries as Japan
and France and from the Communist countries. Efforts
to obtain assistance from other Free World countries
are likely to have little success because Peru`s
international credit rating would be damaged by the
sanctions. The USSR and other Communist countries
probably would offer economic credits, but large-
scale utilization of credits from these sources by
Peru seems unlikely because of its fundamentally
Western orientation.
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Economic Dis cute with the United States
1. The first major act of Peru's new military
government, which ousted the Belaunde administration
in October 1968, was to seize the main producing
assets of the IPC. In so doing, the new leaders
nullified the Act of Talara, under which the Belaunde
government and IPC had reached agreement regarding
IPC's future operations in Peru. IPC's ownership of
the La Brea y Parinas oil deposits had long been. a
major focus of nationalistic irritation.* Prior to
his election in 1963, Belaunde pledged to settle the
IPC question within 90 di.ys -- a pledge finally re-
deemed in August 1968 wj.th the Act ofTalara. As the
terms of the settleme_t became known, many Peruvians
felt that the government had not obtained sufficiently
large concessions from IPC, and nationalistic dissat-
isfaction with the settlement became increasingly
strong.
2. General Juan Velasco Alvarado, who led the
takeover, capitalized on this nationalism by using
the unpopular Act of Talara as a pretext for the coup.
Six days after the coup, he further strengthened his
popular support by seizing the IPC properties. Velasco
has kept the IPC issue in the public spotlight and
seemingly has foreclosed any settlement of the dispute.
The remaining IPC properties were seized in January
and February 1969 for an alleged nonpayment of debts
to Peru for oil products supplied from the expro-
priated refinery. On 6 February, Velasco set IPC's
debt to the state -- against which the value of the
expropriated assets is to be deducted -- at $690 mil-
lion. This amount represents the value (less the
direct costs of production) of petroleum products
"illegally" obtained from IPC's properties since 1924.
In order to contest this claim in Peruvian courts, IPC
apparently must first pay it.
Economic Setting
3. Peru's difficulties with the United States
over the expropriation of the IPC come aL. a time of
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economic recession, following a long period of
rapid economic growth. During 1961-66, gross
domestic product (GDP) grew an average of 6.3 per-
cent annually, the highest rate in South America.
In the 1950's and early 1960's, growth was sparked
by sizable direct foreign investments and by a
rapid expansion of fishmeal and minerals expo?,ts.
After 1962, growth was fueled mainly by large in-
vestments financed to a considerable extent by
international lending institutions and private
foreign banks.
4. As the e onomic advance continued, strains
began to develop. Sluggish government revenues
led to budgetary deficits and increasing inflation,
and the balance of trade worsened after 1964, as
exports stagnated. The failure of the Belaunde
government to resolve its budgetary problems led
in early 1967 to a loss of business confidence and
a substantial capital flight. A 31-percent devalua-
tion of the sol in September 1967 improved the
trade balance, but political obstacles to the
achievement of budgetary balance further eroded
business confidence, and the cappital flight con-
tinued. Reduced investment and a drought-induced
drop in agricultural production slowed the rate
of growth of GDP to 5 percent in 1967.
5. In mid-1968 the Belaunde government began
a strong attempt at financial stabilization with
the aid of special powers granted by the Congress.
Belaunde was deposed before the results of the
program became apparent. The military government,
continuing this program, has (a) cut government
expenditures and imposed new taxes, (b) obtained
a $75 million standby credit from the International
Monetary Fund (IMF), (c) refinanced some $150 mil-
lion in debt service payments falling due to
private US and European banks during 1968-69, and
(d) increased pressure on the US-owned copper com-
panies to proceed with planned investments totaling
more than $600 million over the next several years.
The stabilization program appears to have achieved
some success under the new regime. The rise in the
cost of living, which amounted to 23 percent from
mid-1967 to mid-1968, has stopped, and a large
favorable balance of trade was achieved in 196 8 .
Most of this improvement, however, was gained at
the expense of a sharp curtailment of imports of
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capital goods, a decline in investment, growing
unemployment, and a further slowing of economic
growth. The increase in GDP for 1968 amounted to
only about 2 percent.
6. At best, Peru faces a period of austerity
and fairly slow growth over the next year or two
while basic readjustments are made to bring govern-
ment revenues and expenditures more nearly into
balance. Even if the IPC issue did not threaten
to bring about a reduction in Peru's receipts of
foreign capital, the economy would not be expected
to achieve a growth rate of more than 2 or 3 per-
cent in 1969. Restoration of more rapid growth
rates depends largely on an expansion of tax reve-
nues and export earnings, which in turn require
large foreign investments in copper and other
mining projects.
Threatened Ending of US Aid to Peru
7. If Peru does not take steps by early April
to provide adequate compensation to IPC for the
producing properties and refinery that it expro-
priated six months earlier, it will lose a large
part of the aid that it has been receiving from
the United States. The US government will be
required by the Hickenlooper amendment to the
Foreign Assistance Act and similar amendments to
the Sugar Act to terminate certain types of eco-
nomic aid, all military assistance, and the coun-
try's quota for sugar exports to the US market.
Similar legislation will require the United States
to use its veto power to deny new loans to Peru
from the Social Progress Trust Fund and the Fund
for Special Operations, which are administered by
the Inter-American Development Bank (IDB). Dis-
bursements on existing loans from these funds
probably would continue, however. In addition,
the Export-Import Bank might refrain from extending
any new credits for investments in Peru, and the
United States might reduce or end certain other
types of aid even if such action were not required
by law.
Amount of US Aid at Stake
8. Although US-Peruvian relations have been
strained in recent years, Peru has continued to
receive substantial amounts of US aid. Scheduled
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disbursernPiiLs of all types of US aid in 1969 prob-
ably amounted to between $70 and $80 million be-
fore the IPC dispute came to a head. Unless the
issue is resolved, Peru probably will lose between
$45 and $55 million in US aid in 1969 and even more
in succeeding years.
9. If the IPC problem had not arisen, Peru
probably would have received about $15.million in
development loans and technical assistance through
the Agency for International Development (AID) in
1969, compared with some $25 million in both 1965
and 1966. The United States has not-authorized
any new development loans for Peru since July 1967,
because of Peru's purchase of Mirage jet aircraft
from France and the subsequent passage of the
Symington and Conte-Long amendments. During 1968,
however, the United States disbursed $8 million
under development loans negotiated before July
1967. About $37 million in authorized loans for
development projects remains in the pipeline,
about $10 million of which had been scheduled for
disbursement in 1969. Technical assistance has
continued despite the strain in UJS-Peruvian rela-
tions. Under normal circumstances, technical'
assistance in 1969 would amount to about $5 mil-
lion -- the level of the past several years.
Military assistance grants from the United States
have averaged about $10 million per year since
1961.
10. Since 1961, "soft" loans amounting to
about $120 million have been authorized for Peru
by IDB's two special funds, which are supported
wholly by the United States. About $70 million in
loans from these two funds remains undisbursed.
Scheduled disbursements under these loans would
not necessarily be affected by US sanctions against
Peru, but US vetoes of new loans would eventually
reduce disbursements from their current level of
some $10 million annually.
. 11. Peru's export quota of 354,000 short tons
of sugar for the US market in 1969 involves a
prospective subsidy of about $25 million. This
element of US aid to Peru reflects the difference
between the value of the exports at the price
received from the-United States (about 6.5 cents
per pound) and the value at the world market
price, which is expected to be about 3 cents per
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pound in 1969. By early April, Peru probably will
have shipped about 35 percent of its US quota for
1969. Application of the Sugar Act amendment thus
would probably reduce Peruvian export earnings by
about $16 million (or 2 percent), provided that
Peru could find alternative markets for its sugar.
12. The Export-Import Bank also is an impor-
tant source of credits for economic development
in Peru. During 1961-68, Peru received credit
extensions totaling about $120 million from this
source. Eight loans are active at present; these
total $68 million, of which $27 million remains
undisbursed. The US copper companies in Peru have
been counting on the Bank to finance a large por-
tion of the $600 million cost of their planned
expansion program. Under Title II of Public Law
480, Peru has been receiving surplus US agricul-
tural commodities valued at about $6 million
annually. If the foreign aid amendments are
invoked, the US might also stop insuring private
US loans for housing construction in Peru. Private
funds amounting to some $5 million annually have
been flowing to Peru under the Housing Guarantee
Act; $3.5 million is scheduled to be disbursed
during the remainder of 1969.
Impact of US Aid Suspension on Other
Inf lows of Capital
13. Suspension of aid to Peru by the United
States probably would in time bring a sharp reduc-
tion in the sizable amounts of capital that Peru
has been receiving from international financial
institutions. The prospective decline in receipts
of capital from the United States probably would
create conditions that would prevent Peru from
making further drawings on its standby credit of
$75 million from the IMF, only $42.5 million of
which will have been used by May. During 1961-68,
Peru received credit extensions averaging about
$20 million annually from the World Bank and the
regular loan funds of the IDB. About $70 million
in credits from these two sources remains undis-
bursed.* The World Bank has a long-established
* This amount is in addition to the $70 million
of undisbursed credits from the two special funds
administered by the IDB.
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policy of deferring action on loans to a member
engaged in a dispute with another member. Although
disbursements from IDB's regular funds might con-
tinue for projects already under way, the dominant
position of the United States in the IDB would make
extension of new credits to Peru unlikely unless the
US government raised no objection.
14. If US aid were suspended, bankers and ex-
porters in the United States and Western Europe
probably would defer new development loans and
suppliers' credits for at least six months while
they assessed Peru's reaction to the loss of aid.
Bankers probably would provide some money, how-
ever, for projects already under way and would
ref'.nance existing debts, since the alternative
might simply be default by Peru. Private direct
investment in Peru by foreign enterprises would
be likely to be held in abeyance for six months
or more. Short-term financing of Peru's foreign
trade would continue, though perhaps on a reduced
scale .
Options Open to the Peruvian Government
15. Although the new Peruvian leaders appar-
ently thought for a time that the United States
was bluffing, at least some of them now understand
that the Hickenlooper and Sugar Act amendments
probably will be invoked. Peru's reaction to the
loss of US aid could range from calm resignation
to drastic retaliatory measures. Peru's most
effective low-key response would be to restrict
the remittance of profits by US and other foreign
businesses. The bulk of this outflow of funds
could be blocked either through exchange controls
or through imposition of heavy new taxes on the
profits of foreign firms, which would have the
added advantage of helping to balance the budget.
Foreign companies in Peru earn about $90 million
annually and normally repatriate a large part of
their profits. Peru could restrict this outflow
sufficiently to largely offset the prospective
decline in receipts of capital from official
sources. This action probably would not precipitate
a large-scale flight of capital from Peru because
(a) Peruvian banks are not sufficiently liquid to
support a large-scale flight of capital, (b) the
Peruvian government would take measures to restrict
large transfers of funds to other countries, and
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(c) some investors transferred large sums abroad in
1967 and early 1968 in response to Peru's uncertain
economic prospects.
16. To retaliate against the United States for
cutting off W.d, the Peruvian government also could
take the extreme, shortsighted step of expropriating
some or all of the remaining US investments in Peru,
which have a book value of about $600 million and
a probable market value of about $1.5 billion.
These investments are located in all sectors of the
economy -- mining, agriculture, manufacturing,
shipping, commerce, communications, and banking.
Among the more important investments are those of
the Cerro Corporation (copper) and Southern Peru
Copper Company, the Belco Petroleum Corporation,
W.R. Grace and Company (sugar, textiles, chemicals,
banking, and shipping); and the International Tele-
phone and Telegraph Company. Although Peru and the
United States have signed a specific risk invest-
ment guaranty agreement in regard to the conver-
tibility into dollars of earnings of US companies
in Peru, there is no guaranty agreement covering
expropriation.
11. The Peruvian regime already has taken steps
to broaden economic contacts with Communist coun-
tries, continuing the policy initiated by Belaunde.
Peru has not traded with the TJSSR since 1963, and
its trade with the Eastern European countries
amounted to only $21 million in 1967 (or 1/ percent
of the Peruvian total). Since the coup, Peru has
established diplomatic relations with Rumania, .
Czechoslovakia, Yugoslavia, and the USSR and has
signed trade agreements with Rumania, Czechoslovakia,
Poland, and the USSR. Most of these agreements have
called for increased trade, without setting specific
goals, and have been accompanied by offers of export
credits to Peru. Peru has expressed interest in
importing farming, manufacturing, mining, and oil-
field equipment, and the USSR appears to be willing
to buy various Peruvian commodities (but not sugar).
At present an official Peruvian
delegation is in Communist China to arrange a pur-
chase of rice and try to develop a market there
for Peruvian exports. Major efforts to expand trade
with Western Europe and Japan also would be an
obvious response to deteriorating relations with the
United States.
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Economic Outlook for 1969
18. The prospect that US economic sanctions
will be applied in April is already having a
detrimental effect on the Peruvian economy. The
pace of foreign investment has slowed in recent
months. The large US mining companies, for example,
are awaiting developments before continuing with
their planned investment programs. Moreover, US
commercial banks are attempting to reduce their
outstanding loans to Teru, and a clandestine
flight of capital appears to be under way. Com-
mercial bank deposits fell sharply in January and
continued to decline in early February. Activity
has increased in the nonregistered foreign exchange
market, where nervous investors have been willing
to pay a premium to avoid having their purchases
of dollars reported to the government. In addi-
tion, the IMF has reported a $15 million loss of
foreign exchange by Peru during January and early
February.
19. In itself, the prospective reduction in
US aid probably would halve the 2 to 3 percent
rate of economic growth expected for Peru in the
absence of the dispute over the IPC. Since some
aid would already have been delivered and some
funds probably would be provided by the Export-
Import Bank for projects in process, Peru would
lose only an estimated $45 to $55 million this
year. Moreover, the amount withdrawn front the
flow of expenditures would be somewhat smaller
than the amount of aid lost, because the technical
assistance funds are spent largely in the United
States and part of the sugar subsidy presumably
is remitted as profit by W.R. Grace and Company,
Peru's second largest sugar producer.
20. Peru's receipts of capital from the Social
Progress Trust Fund, the Fund for Special Opera-
tions, the general loan fund of IDB, and the World
Bank probably would not be affected materially in
1969 because disbursements under loans already
authorized would continue. Loss of the remainder
of the standby credit from the IPIF and reduction
of direct private investment -- added to the loss
of 'US aid -- probably would result in little or no
growth in total Peruvian output in 1969, unless
profit remittances were reduced greatly.
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21. If loss of aid from the United States were
offset by taxing or blocking the remittance of
profits by foreign-owned companies, Peru might,be
able to achieve a, rate of 1 to 2 percent in eco-
nomic growth. The Peruvian government will be
reluctant to take such action, however, because
of fear of antagonizing other foreign governments
and scaring off potential private investors. In.
either eve-t., output probably would not grow, and
might decline, if the Peruvian government further
disturbed its economic relations with the United
States, by expropriating additional US investments.
Long-Term Economic outlook
22. Peru's economic prospects for the early
.1970's would be fairly good if the IPC issue could
.be settled. Under the stimulus of the expected
large inflow of private foreign capital to develop
copper and other mineral deposits, the growth of
the volume of exports probably could be expanded
to 5 to 6 percent annually during 1970-73, compared
with an average of 2/ percent annually in 1962-66.
This rise would permit Peru to meet the large pay-?
ments on its external debts (which are scheduled
to resume in 1970) without major difficulty. It
should also facilitate the recovery of a fairly
high rate of economic growth by 19 7 3 .
23. If the foreign aid amendments were invoked
and remained in force throughout the early 1970's,
Peru's rate of economic growth probably would be
low, at best. Because the rise in import capacity
would be small, total Peruvian output probably
would not be able to rise by more than 2 to 3 per-
cent annually on the average, or less than the
growth of population. The inflow . official
foreign capital would dwindle as unaisbursed loan
balances with the World Bank and the IDB's loan
funds were drawn down. Inflows of private long-
term capital probably would be negligible if the
repo triation of profits of foreign businesses
were blocked. The growth of exports would be slow,
being affected adversely by the decline in the
value of sugar exports and failure to expand the
mining industries owing to the lack of foreign
investments. The rise in import capacity.also
would be restricted by Peru's debt servicing
obligations unless Peru defaulted or could re-
finance the debt.
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24. Peru is likely to encounter major problems
in disposing of its sugar at profitable prices.
Because Peru's cost of production usually has been
well above the world market price, sugar production
has been profitable only because of the premium
prices offered by the United States. The prospect,
however, for selling sugar at prices above the
world market level to other countries such as the
USSR is dim.
25. The stagnation of economic growth would
aggravate Peru's unemployment problem. To cope
with it, the government might attempt to expand
public investments greatly, mainly in fields with
small import requirements (road building, for
example). Such projects probably could be financed
partly with increased taxes on foreign businesses,
but substantial government deficits and rising
inflationary pressures still would be likely if
sizable programs were undertaken.
26. Peru probably would make strong efforts to
interest investors in countries such as France or
Japan in taking over US-held concessions for fur-
ther development of deposits of copper and other
minerals. Under recent legislation, these conces-
sions can be cancelled if their development is not
initiated soon. Efforts to attract capital from
other countries are likely to have little success,
however, because Peru's inte.Lnational credit rating
would be damaged by invocation of the Hickenlooper
amendment. At best, Peru might obtain foreign
financing for a few small projects, if it offered
terms more favorable to the investor than those
presently in force for US-held concessions.
27. Peru also probably would seek assistance
from the Communist world. In many ways, however,
such assistance would be a poor substitute for
the US aid that it would lose. The Communist
countries are not likely to grant assistance in
hard currencies that Peru would need to finance
imports from Free World markets. They might offer
long-term credits for the financing of imports of
capital goods from their own countries and of
technical assistance, but other Latin American
countries generally have found such offers unattrac-
tive. Some Communist equipment is much different
from that to which the Peruvians are accustomed
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and might requ;.re the presence of Communist tech-
nicians in order i:or it to be useful to Peru.
Peru probably would not view with favor the influx
of" Communist technicians that would be required
to make use of large amounts of equipment or to
carry out large development projects.
28. The prospective situation in Peru would
appear to offer the USSR an opportunity to greatly
increase its presence and influence in South
America at moderate cost -- the replacement of US
aid disbursements of $70 to $80 million annually.
The full cost, however, of replaci,ig the United
States, Western Europe, Japan, and the interna-
tional lending gag 2ncies as sources of capital for
Peru would be much larger. Capital inflows from
all these sources have averaged between $150 and
$ 200 million annually since 1961. The inflow
would reach $300 to $400 million annually during
the next several years, almost entirely from the
United States, if aid disbursements were maintained
and the planned expansion of the mining industry
(which Peru still seems to expect US companies and
the Export-Import Bank to finance) were carried
out. Assumption of this burden by the USSR would
involve aid disbursements comparable to those now
required for Cuba, although Peru might be more
successful in repaying the credits. Considering
the Western orientation and possible instability
of Peru's new military government and the danger
of provoking strong reactions by Peru's neighbors
and the United States, the USSR probably would
not provide large-scale aid to Peru. In line with
credits previously extended to Brazil, Chile, and
Argentina, however, the USSR might offer long-term
credits of $50 to $100 million, to be drawn down
over an extended period of time.
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