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C' /~ ~rl? 0 ri o O 64 5 APPr For R eea~ ~ : CIA 09;ypp7109010023-6 API ' C v T I C S~ nN LATI N AMERICA C T Approved For Release 2001/09/2 *P85A~Ol 34FCTG !C1 66c/s - 7 5/ A Year Later: impact of Higher Oil Prices on Latin America -General 1. High oil bills are now creating serious balance-- of-payments problems for the majority of Latin American countries that are significant oil importers. Most of their governments are being forced to curb other imports, slowing economic growth and adding to inflationary pressurfs. The impact has been the most severe on Brazil, Chile, Paraguay, Uruguay, the six Central American countries, and most of the Caribbean countries. 2. The balance of payments impact on the countries .that supply most of their own petroleum requirements -- .Argentina, Colombia, and Peru --- has been moderate. At the same time, net oil exporters -- Venezuela, Ecuador, .Bclivia, and since June, Mexico -- have benefited substantially from higher prices. 3. During much of 1974, the impact of high oil prices on the foreign payments positions of-the oil importing countries was cushioned by booming prices for the region's major export commodities, such as coffee, grains, and minerals. Additionally, several countries were able to obtain loans from the International Monetary Fund (IMF) Oil Facility to help finance the increased oil costs. A._._..~..~J r'-- r%-1---- 'f t IIAA/AD /CIA 1'll'11'IOGTAA07G1'lAA/fAAAAA11' A (~ Impossible to Determine CLAMM'l MW Approved For Release 2001/0$/28 :' CIA-RDP85T00875R002000010023-0 4. Nevertheless, economic activity was hit by the high oil bills. Government reliance on curbing oil consumption through high prices for consumers added to already severe inflation problems. Economic growth rates slipped as governments introduced anti-inflation programs and losses of oil payments from the income stream began to be felt. The situation worsened in the second half of the year as recessions in the indus- trial countries began to reduce world market prices for the region's exports. 5. During 1975, the depressing effects of higher oil bills and recessions in the industrial countries will lead to a further deterioration in the payments positions of. the oil importing counties. Prices of many primary commodity exports are continuing to decline, while prices of imported food and manufactured goods are likely to remain high. Thus, the governments probably will have to further reduce raw materials and capital goods imports needed for economic growth to maintain essential oil supplies. The outlook for 1975 therefore is for a substantial slowing of economic growth and rapidly mounting inflationary pressures in the majority of Latin American countries. Brazil 6. Brazil's balance of payments deficit is likely to reach $1.5 billion this year, in contrast to a surplus Approved For Release 2001/09/28 CIA-RDP85T00875R002 0 - of $2.2 billion in 1973. The trade deficit will exceed $6.0 billion this year, up from nearly $800 million last year. Imports are booming because of higher cost oil and manufacturers efforts to stockpile imported materials in short supply. At the same time, export growth has declined to less than 20% in 1974, compared with 55% last year. Brazil's export performance was limited by a weakening coffee market, a poor cotton crop, restrictions on beef exports, and the sale of most of the soybean crop when prices were at their lowest for the year. Despite-large capital inflows, more than $1.0 billion of the country's foreign reserves will have to be drawn down to finance the current account deficit. Slower export growth and the dampening impact of anti-inflation measures has reduced GNP growth to 9%-10$, down from nearly 12% in 1973. 7. The economic growth rate will slow even-more in 1975. Import growth will be curbed severely in order to prevent a further heavy draw down of foreign reserves. While export performance should improve because of the booming sugar market and strong soybean prices, the vital inflow of foreign capital has faltered badly in recent months and its outlook for next year is uncertain. Moreover, interest payments on foreign debt will rise sharply in 1975 absorbing 3 significant share of the expected increase in export earnings. Approved For Release 2001/09/ 'BL I4;tDP85T00875R002000010023-0 Chile 8. Record copper production and world prices combined with rescheduling of foreign debt payments and a $60 million loan from the IMF Oil Facility are largely offsetting Chile's sharply higher oil bill this year. The balance-of-payments deficit, although still $200 million, is the smallest since 1970. Efforts to halt runaway inflation,- caused in part by higher oil prices, are hampering economic recovery from the Allende period. The expected 5% 1974 gain in real GNP will only restore output to the 1972 level. Next year, lower copper prices will cause a sharp deterioration in the balance' of payments. Export earnings could fall by as much as two-fifths -- if copper prices remain near the present 60 cents per pound -- forcing Santiago to cut back' imports and thus further slowing economic growth., Uruguay 9. Uruguay, among Latin countries, is experiencing the greatest difficulty financing the higher oil import bill, although it has received $20 million -- equal to Beef, the country's majcr export, has been hit by a Japanese ban on beef imports in February and the European Economic Community (EC) ban in July. Because of Uruguay's poop credit rating and limited foreign reserves, Montevideo is cutting back imports of raw materials and intermediate goods. Economic activity is not growing and Approved For Release 20 1/09/28 :.CIA- - ^-~- ma~w~.wee.enma#.~YSemnawrw.ymurm...ruyv....r..u.w. ";v13'ditil~ Approved For Release 2001/09/28 : CIA-RDP85T00875R002000010023-0 -5- Approved For Release 2001/09/28 : CIA-RDP85T00875R002000010023-0 may even be declining this year. Next year will bring little improvement, particularly if the EC retains its ban on imported beef. Central America 10. The six Central American countries have experienced increased balance-of-payments problems this year partly because of high oil import bills. Higher prices for the region's main exports, particularly coffee and cotton, offset only part of the oil bills. Despite IMF Oil Facility loans to Costa Rica and El Salvador, all may well incur payments deficits in 1974. Honduras'econon;ic problems have been compounded by hurricane damage to bananas, its leading export. Balance of payments problems probably will become more severe next year because of continuing high prices for imported oil and capital goods, although the problems of.Guatemala and Nicaragua could be eased if cotton prices remain high. The slowing-of world economic activity may hit Panama's financial industry in 1975, reducing previously large capital inflows and factor receipts. Caribbean Area 11. The benefits to most.Caribbean sugar and bauxite producers from strong export markets are offsetting much of their higher oil bills. The Dominican Republic, for example, is likely to have a trade surplus, largely Approved For Release 2001/09/28 : CIA-RDP85T00875R002000010023-0 reflecting booming sugar prices. -Rising earnings from bauxite and alumina are boosting foreign exchange earnings in Jamaica and Guyana. Economic growth in the Dominican Republic has been strong this year and could remain so in 1975. On the other hand, domestic economic problems are offsetting improved exports in Jamaica and Guyana. Little growth is likely this year or next. Most of the smaller islanas are having a difficult time financing higher oil bills. Their sugar and banana export industries are deciininggor, in some cases, have been abandoned. 'Moreover, prospects for tourism next year are dim. Other Countries 12. Countries that are nearly self-sufficient in oil -- Argentina, Colombia, and Peru -- are experiencing little difficulty in financing oil imports. High prices for major exports, especially in the first half of the year have boosted foreign exchange earnings, keeping the oil bill below 12% of projected export earnings. The net oil exporters -- Venezuela, Ecuador, Bolivia, and since June, Mexico -- obviously are gaining substantially from higher foreign exchange earnings. Trinidad and Tobago and the Netherlands Antilles, which process imported crude oil for reexport, are benefiting from higher receipts from oil companies. Approved For Release 2001/09/28 : CIA-RDP85T00875R002000010023-G- - Exploration Activity 13. Greatly increased oil exploration offers promise for the long-term for several countries but little relief in '-he near term. Exploration is continuing in the promising areas east of the Andes Mountains and one million barrels per day. Stepped up exploration and maximum development policy, 1975 production could reach large new fields. If :.he Mexican government adopt; a Central American coasts, and Mexico recently discovered and Caribbean. Offshore oil has been found along the in coastal and offshore areas in the Atlantic, Pacific, by 35% in 1975 although large imports will still be development in Brazil is.likely to increase oil output .required. 14. In contrast, government policies in some countries are slowing exploration activity. In Venezuela, proved reserves have been declining because of limited government exploration and Caracas' unwillingness to grant new concessions to.private companies. Current low petroleum prices in Colombia hinder increased exploration while oil companies await a new price policy. Additionally, increasingly nationalistic policies in Ecuador have reduced foreign companies' interct in exploring for oil. !1 N 0 N t0 0 In 0 0 M 1A 0 0 0 0 1OA in P4 c4 I N I m ~l-1 O r0-t 0 1 1 rtl In 4 r- 'a' O 1111 r0'1 1w N 10 N N r-1 N N v NNN O In - - T co to N 0 'ef' r? 0 N co N 10 CO co NN M . M rl O N 00rq r*- % en rt'- m yit t70 r-1 I V' 111 N 01 F) N 1 in ep r?I 0 r-I N 0 ' r4 fN r?1 N 0 10 t` r-i fn d' Zinn N 1 IInn N a in ^ J ? 10 N N co v 00 co 9-4 ri a a ' A moved For Release 2001/09/28 : CIA-RDP85T00875R002000010023-0 Sam Nr.w - -- 9028-:61A44DQ851 ; SRU0 D -0 O 2 O N I"1I O O 01. 0? in co In O N . . O . N 10 . . In W r I !'1 f~ N 111 to O f~ N N f M O In O 0 0 In 0 In O 0 0 N O 0 O O IN ~~ 00 0 j' 100 N A rrin 5 q C II1 IOPI M I co 1t IV 0 M N It) 0~1 1Nn 0 1In N 0 9 I ra 1 1 1 N N ; C N 1 1 n higher oil ornatz.on on the impact of prices o - n economy c Par?ormance of Latin lease contact = "mow . to tion, . 29 November 1974 (4" 01/09/28: CIA-RDP85T00875R002000010023-0 MEMORANDUM FOR: Arlington Hall -Ro-an-y~.."Y , MOW: 11-25099 D1-5C4 The attached report is i n response to your 26 November request fcr i f DATE) The attached report is in response to your 15 Nov- ember request for information on the impact of higher oil prices on the econanic performance of Latin American countries. If we can be of further assistance, please contact our regional analyst, or me on Code 143, lion 5541. Latin America Branch Office of Economic Research 'Central Intelligence Agency ef, Latin America Branch Office of Economic Research Central Intelligence Agency 29 November 1974 DATE) FORM NO. 'Q' RCPLACES FORM 10.101 1 #ue a? 25X1A 25X1A Approved For Release 2001/09/28 : CIA-RDP85T00875R0020000100 Distribution: (S-6645) :...1;- DIA (LDX) 1 - Department of State, ARA/ECP (LDX) 1 - D/OER 1 - D/D 1 - St/P 1 - NIO/LA 2 - D/LA OER/D/LA: :BC/5541 (2 Dec 74) Approved For Release 2001/09/28 : CIA-RDP85T00875R002000010023-0