Document Type: 
Document Number (FOIA) /ESDN (CREST): 
Release Decision: 
Original Classification: 
Document Page Count: 
Document Creation Date: 
December 19, 2016
Document Release Date: 
May 23, 2006
Sequence Number: 
Case Number: 
Publication Date: 
January 16, 1974
Content Type: 
PDF icon CIA-RDP85T00875R001900010115-0.pdf591.92 KB
25X1 Approved For Release 2006/09/26 :CIA-RDP85T00875R001900010115-0 Approved For Release 2006/09/26 : CIA-RI)P85T00$75R0019000101:155-0,, REMARKS: S-5828 The attached was handcarried to Mr. Charles Coo er NSC, on ].6 Jan 74. with contributions from S/EC, D/LA, D/NE Distribution : 1 1 - D/OER - D/I 3 ST PC 1 SA ER 1 - 1 - D /LA 1 - D/D 1 - D/NE 1 - D/S 1 - S/EC ROOM NO. `BUILDING FORM NO .nA 1 R EPL,,Crs FCnM?r.e 1 FEC 55 G WHICH MAY BE USED. 25X1 Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 CI-A/ c~~n s-~sga 7~ Approved For Release 2006/09/26: CIA-RDP85TOO875ROO1900010115-0 The. 1 7c,ct of U:i.' Price Ilikes on Selected -- Overview Overview Prior to the energy crisis, the economic outlock for sevexal major US aid recipients w:ls fairly bight. In the case of South Korea, 1973 was a banner year, while Thailand, the Philippines, and Turkey each recorded substantial economic gains. In all four cases, the outlook was for another good year in 1974. In South Vie;:nam and Cambodia, war-related problems continued to cause economic difficulties. Chile faced serious economic trouble, including an intractable balance-of-paymenifs problem inherited from the Allende government. Some improvement .In Chile's economic per:`ormance was anticipated in 1974. Energy-related problems will cause difficulties for all seven countries this year. The immediate problem will be substantially higher costs of oil imports. in the case of South Korea, oil import costs will increase at least $700 million in 1974, to about $1 billion -- in cost equals 20% of total exports last year. The other countries face smaller increases in oil import costs, but the amounts are substantial. relative to the size of their economies and financial resources. Approved For Release 2006/09/26 : CIA-RDP85TOO875ROO1900010115-0 Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 The non-oil import bill for these countries also will tend to increase considerably this year as a new round of inflation hits their major trading partners, including other LDCs. Although most of the aid recipients are agricultural countries, several of them must import large amounts of food and other agricultural products. Prices of these commodities are likely to increase again this year because of continuing tight world supplies. Chile will be especially hard hit in this regard, since about one-third of its non-oil imparts are foodstuffs. Imports of consumer goods and capital equipment will carry higher price tags as well. The ability of several of the countries to boost exports will be hindered by the expected sharp economic slowdown in major industrialized countries. Real output .in these countries will expand very slowly, and their demand for raw materials is likely to stagnate. Japan's raw material import requirements this year probably will decline sharply. As a result world market prices for some commodities exported by LDC's may well be dropping while their import prices are rising. Beyond this, the general weakening of world-wide business confidence may well lead to a temporary slowdown in private investment flows into LDCs. Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 Approved For Release 2006/09126.: CIA-RDP85T00875R001900010115-0 South Vietnam, Cambodia, and' Chile will be least capable of handling the financial burden stemming from the oil price hikes. All three were ha,'ing serious balance- of-payments problems before the crisis. Neither their economies nor their international financial positbns are very resilient. South Vietnam and Cambodia will face problems simply because of higher oil costs -- in the case of Cambodia, security problems will make it difficult to get oil. Chile's difficulty will stem primarily from a possible sharp downturn in a;port earnings. All three countries 2epe:nd heavily on foreign funds to maintain economic stabil~.ty. South Korea and t'ie Philippines will have smaller financial problems. Bothrcountries face foreign exchange constraints, but South Korea probably can avert a s--rious .balance-of-payments problem a's long as private capital inflows continue at near normal levels if foreign aid flows continue at recent levels, the Philippines probably can manage this year by drawing down reserves. Thailand and Turkey are in the bes; position to cope with problems arising from higher oil prices. Turkey currently has foreign exchange reserves equal to a year's imports and possibly could achieve a small balance-of-payments surplus in 1974. Despite the increased oil bill, Thailand probably will still have reserves equal to at least three months' imports by the end of this year. I _', ?. Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 Approved For Release 2006/09/26 CIA-RDP85T00875R001900010115-0 South Korea Higher oil price:; in 1974 will boost South Korea's oil import bill. by at least $700 million. Tota', oil import costs will amount to about $1 billion, equivalent to almost one-third, of last year's export earnings. The increased oil bill will put a heavy but probably not critical strain on South Korea's foreign reserve position. Domestic economic activity will continue strong in spite of some problems arising from the oil price hikes. Although South Korea's balance of payments has improved in recent years, it is still vulnerable. Exports, largely light manufactures, grew by 80% in '1973, to $3.3 billion, and imports increased rapidly, to $4.1 billion. The deficit was more than offset by private capital inflows, largely from the United States, and by foreign aid. As a result, foreign exchange reserves have been rising. Reserves reached $1 billion at the end of 1973, equal to about three month's imports. Increased oil import costs plus anticipated increases in non-oil imports, especially foodstuffs, will boost the value of South Korea's foreign purchases by at least 30% in 1974, to an estimated $5.3 billion. A substantial portion of Korea's imports consist of machinery and equipment, and prices for these goods are likely to increase appreciably. Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 Approved For Release 2006/09/26 : CIA-RDP85T0b875R001900010115-0 The value of grain imports should increase substantial clue to higher prices. While import costs will rise sharply, South Korea's export growth will slow to perhaps 20% in 1974 -- about half the average rate of the previous five years. The bulk of Korean exports consist of light consumer goods, Foreign demand for which will weaken this year. Almost two-thirds of the growth in South Korean exports in 1973, for example, went to Japan, but the Japanese economic growth is expected to slow dramatically. Sales to the US market will increase, but not enough to increase total exports as rapidly as in recent years. Giver the outlook for imports and exports, South Korea's current account deficit will increase from $400 million in 1973 to an estimated $1 billion in 1974. The. deficit.will be offset to some extent by official and private capital inflows. D f uring 1973, capital inflows reached an estimated $800 million. The problem is that world-wide business con.'idence has already been shaken by the energy crisis, and this could lead to a decline in private investment inflows to Korea. If capital inflows about match last year's level, Seoul can probably cover its payments deficit by drawing down official reserves. Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 South Korea's unprecedented real growth in GNP of 17% in 1973 was largely the result of growing exports, and if their expansion slows, so will the rate of economic growth. Beyond this, sonic weakening in domestic demand is likely because of the contractionary effect of higher oil import costs. Should demand fall sharply, many firms would face bankruptcy within a fairly short period because they depend so heavily on borrowing to finance their operations. All things considered, we judge that South Korea's real growth in 1974 will probably slow to 5% to 7% because of the likelihood of slower export growth. Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 Turkey Higher oil prices in 1974 will boost Turkey's oil import bill by at least $300 million. Total oil import costs will amount to about $600 million, '..quivalent to about half of last year's export earnings. Turkey should be able to handle the rise in oil import costs without great difficulty this year. During the pact two years, Turkey's balance of payments has improved significantly. Exports, largely agricultural, grew by 54% last year to $1.2 billion, because of higher wur'ld commodity prices. Imports also increased sharply, reaching $2.0 billion. The deficit was more than offset by remittances 'nom Turkish workers in Europe plus capital inflows. As a result, Turkey's foreign reserves increased dramatically. By October 1973, they totaled $2.2 b3.llion, equal to a year's imports. Increased oil import costs plus ai.ticipated increases in non-oil imports will boost the Turkey's 1974 foreign purchases by an estimated 50#, to $3.0 billion. Since consumer goods make up less than 5% of imports, any squeeze on purchases abroad would slow economic growth. Turkey will be unable to boost exports as fast as last year because of increasing domestic requirements for agricultural goods and slower growth of output. Prices may aga?.n increase substantially but the best we expect Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 . Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 is a 25% hike in export earnings. Worker remittances, meanwhile, will not increase much, if at all, since West Germany is suspending recruitment of workers for the duration of the fuel crisis. Given the outlook for imports, exports, and worker remittances, Turkey's current account balance is likely to swing from an estimated $400 million surplus in 1973 to a $300 million deficit in 1974. The deficit will not be extremely large compared with the country's foreign exchange reserves and will be partly covered by normal capital inflows. During 1972 nearly $600 million in official aid (including $145 million from the U.S.) was earmarked for Turkey. Approximately $450 million consisted of project aid and remains in the pipeline. Private foreign investment in Turkey amounted to $92 million in 1973. Debt service last year amounted to a manageable $167 million. Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 Approved For Release 2006/09/26 CIA-RDP85T00875R001900010115-0 Higher oil prices will boost Chile's import bill by some $180 million. The estimated $235 million that Chile will have to pay for oil in 1974 equals about 20% of last year's export earnings. Because of t`he expected decline in world-wide demand for copper, financing this oil import bill will absorb an even larger share of 1974 export earnings. The junta that replaced the Allende regime in September 1973 inherited an economy in shambles. Copper and a,friculture, mainstays of the economy, had suffered serious production drops. Chile's balance of payments had deteriorated from a surplus of $123 million in 1970 to a deficit of $908 million in 1972. Despite continued deterioration through August, the 1973 balance-of- payments deficit declined to: $255 million because of increased exports and large capital inflows after the military assumed power. Even before the oil price hike, imports were expected to increase by at least 15% this year, because of growing requirements for food, industrial inputs, and copper mining equipment. Santiago had planned to more than offset this import rise by boosting copper production from 650,000 tons to as much as 800,000 tons. If copper prices slide as expected, however, Chile would have found it Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 Approved For Release 2006/09/26 : CIA-RDP85T00875R001900010115-0 difficult to balance its trade account even without a sharp rise in its oil. import bill. A decline of 10 cents a pound on the world copper market represent:; a 1