ECONOMIC INTELLIGENCE WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00608R000500140014-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 20
• Document Creation Date: December 9, 2016
• Document Release Date: March 19, 1999
• Sequence Number: 14
• Publication Date: April 9, 1975
• Content Type: REPORT

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Secret
No Foreign Dfssem
Economic Intelligence Weekly
Secret
ER EIW 75-14
9 April 1975
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NATIOPtAI SECURITY INFORMATION
Unauthorized disclosure Subject to Criminal Sanctions
Clauifled by O13S19
Exempt from penerol dscla~iiftcation schedule
of E.O. 11634,) exemption mtegory:
AufomatiEm111yy(d~clauifie~d on:
Dote Impouible fo Determine
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Nu Foreign Dissem
9 April 1975
India: Listless Economic Performance
. 3
Italy: Keeping a Step Ahead of Trouble
. 5
Resurgence of the International Bond Market
. 8
Venezuela: No Financial Bonanza
10
.South Vietnam: Economic Strains
13
Notes, Publication of Interest, Statistics
Growth Prospects in the Smaller OECD Countries are less bleak than in the
Big Six. Their aggregate real GNP probably will rise about 2?% in 1975, compared
with 2.8% in 1974 and with the 0.5% increase forecast for the Big Six. Their
more expansionary policies and lesser dependence on industries hard hit by the
oil crisis -- notably automobiles -- underlie these better prospects.
Switzerland is the only small country expected to suffer a fall in GNP this
year. The sharp appreciation of the Swiss franc has cut foreign demand, and Bern
is maintaining tight fiscal and monetary policies to curb inflation. Norway will
post the most rapid growth, perhaps as much as 5%, with a tax cut and oil earnings
boosting consumer expenditures.
Because of the higher level of real demand, inflation will not slack off as
much in the smaller countries as in the Big Six. Iceland probably will experience
a startling 40% rise in prices, while several countries, including Switzerland and
the Netherlands, will fare inflation of about 10%.
The composite current account defict of these countries will change little from
the $12 billion posted in 1974. Because of their more rapid GNP growth, smaller
countries will probably experience a $2-$3 billion deterioration in their current
Note: Comments and yuerics rci:arding the Economic /nrclligence Weekly arc welcomed. T1uy may be directed
25X1 A to the OI'fiee of Economic Kcsearch, Codc 143, Extension 7892.
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account balance with the developed West. This deterioration, combined with ~~ioher
interest payments, probably will offset improvements in the small cour tries'
aggregate balance with OPEC countries and non-oil LDCs.
A Growing Number of LDCs are being buffeted by the global ecrmomic
downturn. Real growth in Taiwan, South Korea, and Hong Kong -- usu;illy the
LDC growth leaders -- is faltering Lecause of weak US and Japanese den~and for
their manufactures. Other important non-OPEC LDCs such as Brazil,. Mexico,
Malaysia, and the Philippines are less affected, but growth will be suf;stantially
helow their long-term average.
Saudi Funds for the EC Common E3orrowing Facility Will Be Reque;~ted during
the visit of EC Comr~iissioner for Financial Affairs Haferkamp to Riyaril~~ this week.
The EC will probably seek pledges from other OPEC members later this spring.
No problems are anticipated in funding the $1.5 to $2.5 billion f~;cility, bF.:ing
set up to help finance the oil payments of EC members in distress. l~Ithough no
loan requests have been received, Ireland may be an early borrower.
Representatives of the Intergovernmental Council of Copper Exporting Nations
(Chile, Peru, Zambia, and wire) are meeting in Paris to discuss the effect on prices
of recent cuts in exports of ?0%-?5%. They also will discuss proposals for buffer
stocks and other measures required to raise long-term prices.
The Association of Iron Ore Exporting Nations formed last. week will mainly
be a forum Yor the exchange of information and will heave nr.-~ authority to set
either prices or production quotas. Australia and Sweden joinaJ nine developing
countries in establishing the association. The London-based ~~sociation accounts
for about 30% of world iron cue production and 60% of woad exports. Member
nations, principally ~lenezuela and Brazil, supply about half of ll'3 iron ore impor?s;
Canada, a nonmemuer, supplies most of the rer,iainder. (Confir~ential No Foreign
Dissem)
This issue contains a detailed explanation ~~f the
.sources used in derivation of the. statistics appearing
on the indicator charts.
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INDIA: LISTLESS ECONOMIC PERFORMANCE
The Indian economy posted another disappointing performance in the fiscal
year ending 31 March 1975. Agricultural rnd industrial production limped badly.
Per capita grain production and real i~-come declined for the third time in the past five
years. Without a shift to more pragmatic government policies, India seems doomed
to merely exist from one monsoon to the next and from one consortium meeting to
another.
Agriculture and Industry
A sub-st;,ndard wheat harvest last siring was
followed by a poor summer monsoon. Grain
imports soared; they will approach 8 million tons
for the year ending this June. The United States i?
supplying well aver half of this grain-4.1 millio;i
tons in commercial sales and 800,000 tons under
a recent aid agreement. New Delhi has also
purchased more than a million tons of US wheat
for shipment after 30 June. Another poor mon-
soon next summer could push grain imports
above this year's level; a good monsoon could cut
imports to 3-4 million tons.
Immediate economic hopes remain tied to
weather-dependent agriculture. Agricultural re-
covery, even to the level of four years ago, would
stimulate an upturn throughout the economy.
But New Delhi has failed to make the changes
necessary to encourage recovery. More than a hundred river irrigation scheme
remain tied up in interstate riparian disputes. Fertilizer production in April-
December 1974 rose only 4% above the year earlier level, with the industry running
at less than 60% of capacity. India's potential for reaching self-sufficiency in rock
phosf nate on the basis of the massive deposits di.::overed eight years ago remains
unfulfilled. The recent tightening of controls on the private wheat trade hurts
production incentives by cutting off successful wheat farmers fr~,m profitable
grain-short markets elsewhere in the country.
India?
Net National Product aid
Grain Production Par Capita
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Industrial production in 1974 grew 2%-3%, far below the 6% average of the last
two dacades. The curtailment of public investment, caused by inflation, lessened the
demand for heavy industrial products. Light manufactures suffered from shortages
of electric power, trans~~ort bottlenecks, and restrictions on imports of equipment
and raw materials. In an effort to stimulate output, New Delhi loosened some
controls on industry-for e::ample, allowing large firms to expand capacity. 'these
moves have been ad I~oc, however, and have been applied only to the most severely
affected industries. Similar liberalizations in the last 20 years have always been
rescinded when conditions impro:;,d.
foreign Trade
The sharp increase in petroleum prices prompted New Delhi to hold oil imports
down to 340,000 b/d in 1974, or slightly below t}te previous year. The resultant
energy gap cannot quickly be covered by conservation, changeovers to alternative
energy sources, or increased domestic production. Offshore oil exploration, while
promising, will not make a significant contribution to energy resources for several
years.
In 1974, India's foreign trade deficit nearly tripled tc an estimated $1.6 billion.
A 48% rise in imports dw~irfed a 22% growth in exports. Outlays on three essential
imports-petroleum, foodgrains, and fertilizer-accounted for the entire increase.
India obtained nearly $700 million from the IMF in 1974, rescheduled $196 million
in debts, and obtained about $1.7 billion in new aid. The same level of aid will be
more difficult to obtain this year because many donors have their own balance-c-f?
payment~? problems. New Delhi will have to take some combination of the following
steps: dip into foreign exchange reserves ($1.3 billion), increase IMF borrowings,
press for debt rescheduling, or, as a last resort, further curtail imports.
Policy
The adversity of recent years and the shock of the oil crisis appear to leave
edged the government toward pragmatism. At least a new emphasis is apparent in
government rhetoric-on the need to eliminate bottlenecks, increase agricultural
output, and speed up the licensing of new industrial ventures. India's leadership,
however, remains committed to socialism, viewing the private sector as a selfish and
corn~pt barrier to economic development. Income redistribution is still more
important ~o New Delhi than growth. Major policy changes to spur growth appear
unlikely. (Confidential)^
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ITALY: KEEPING A STEP AHEAD OF TROUBLE
With output down, unemployment rising, and inflation maintaining a torrid
pace, the Christian Democratic Farty of Frime Minister Aldo Moro probably will
suffer further setbacks in the regional and local elections this June. The major
bright spot - a sharp drop in the current account deficit - is not apt to impress
the voters. Workers increasingly are expressing discontent through strikes for more
generous fringe benefits, pensions, and unemployment compensation. Another
center-left coalition probably will be put together after the elections, following
lengthy negotiations.
In 1974, Italy once again muddled through, escaping the economic and
political disaster widely predicted in the Western press. After tortuous compromises,
the coalition government came up with an austerity program in July that greatly
improved the trade account. The quadrupling of oil prices caused a $2.1 billion
deficit in the first quarter; the fourth quarter deficit had narrowed to $1.3 billion.
More important, the austerity measures enabled Italy to scrape together $6 billion
in credits from foreign official sources. Tliis was enough, along wit}i se~me private
borrowing, to avoid dissipation of reserves despite the $8 billion current account
deficit.
The credit squeeze and tax hikes, principal features of the austerity program,
led to a precipitous drop in industrial output in the second half. While other sectors
were less seriously affected, GNP began to slide after midyear. As a result, growth
for the year was held to 3.6% -still one of the highest rates in Western Europe -
compared with a 5% long-term average. The number of workers on short hours
or without jobs rose in the second half, adding to already substantial labor unrest
and straining the union-government truce arranged in early 1973. In spite of
weakening demand and slower growth in wholesale prices, inflation of consumer
prices accelerated to a 28% annual rate in the second half because of sizable
increases in wages, indirect taxes, and prices of petroleum products.
Dispiriting Growth Prospects
Italy probably will be the only country among the Big Six to suffer a drop
in output in 1975. We anticipate a 1% decline in real GNP because Italy's shaky
credit rating will encourage Rome to move very cautiously toward reflation. Even
the Communist opposition is advocating fiscal moderation. The Socialists, likely
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ITALY:
SELECTED ECONOMIC INDICATORS
Index: 1970=100 {seasonally adjusted) Thousand Persons
130 r 1,200 (~
Industrial Production I Unemnlovment
s
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to gain in the June elections, may demand economic stimulation as the price of
their continued participation in the government. Measures taken after midyear
probably would have little effect on economic growth in 1975.
In recent months, the government has acted more to check the decline in
output than to stimulate an upswing. Preferential central bank rediscounting for
banks that reduce interest rates and the removal of the import deposit scheme
last month should help hold the drop in fixed investment in 1975 to about 5%.
Recent increases in appropriations for public constniction, subsidies to agriculture
and exports, and worker income supplements do not make the 1975 budget much
more expansionary tna:: originally planned. The added spending is supposed to
be covered by increases in postal rates and by tax receipts beyond the amount
initially forecast. As a result of the tax reform implemei~?ed at the start of 1974,
which featured income tax withholding and better enforcement, collections have
improved considerably.
Ministering to Labor
Although displeased with the government's hesitant reaction to the recession,
workers probably will fare better than business this year. Union grt~mblings already
have induced the national federation of industries and the government to greatly
improve cost-of-living adjustments, family allowances, and income maintenance
payments. Renegotiation this coming autumn of triennial labor contracts affecting
half the industrial labor force is sure to give an added push to wages.
Concessions to labor will force up industrial costs and keep inflation boiling
in 1975. We anticipate a 20% rise in consumer prices, about the same as in 1974.
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Wa~~ted: $6 Billion in Foreign Capital
Barring a protracted political crisis, particularly one that led to increased
Communist influence in the government, Italy should be able t?~ finance another
large current account deficit this year. We expect a deficit of $6 billion, down
$2 billion from 1974. Lower international commodity prices should improve Italy's
terms of trade, and the recession probably will cause a slight decline in import
volume. We assume that the lira will be allowed to depreciate enough to keep
exports competitive despite the lofty inflation rate.
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Political turmoil could upset an already shaky financial situation by
? drying up credit from private and official sources abroad,
? provoking a massive flight of domestic capital, and
? cutting off the repatriation of capital, which began in the second half
of 1974 because of Italy's credit restrictions and high interest rates.
In any event, prospects of obtaining large loans directly from OPE states are
poor. President Leone's credit-seeking trip to Saudi Arabia in March was a disaster,
and negotiations with Iran appear to be hopelessly tangled. Financing of the current
account deficit thus will require large receipts from such petrodollar recycling
mechanisms as the IMF facility and the prospective EC and OECD facilities. If
such assistance is not forthcoming - or if a shift to the left scares off capital -
Rome will have to curb imports and dip into its $3 billio,7 foreign exchange
reserves. (Confidential No Foreign Dissem) ^
The decline in short-term interest rates from the record levels of mid-1974 has
sparked a recovery in the international bond market.
New international issues totaled $3 billion in the first quarter of 1975, more
than double the amount of a year earlier. Most of the funds were raised by private
borrowers from countries without crushing financial problems, such as France, Can-
ada, Japan, and Austria.
Investors are attracted by the high returns on the bonds and by the opportun-
ities for diversification of portfolios. The bonds typically carry interest rates of 9~0
at a time when short-term Eurodollar deposit rates have plummeted to about 7%
because of recession and easier money. Bond purchases also permit investors to
acquire assets in countries that have effectively Halted the inflow of short-term
capital. In Switzerland, to take the extreme example, new foreign bank deposits are
subjected to a 4C% negative interest rate. Controls on short-term capital movements
have been imposed to keep the inflow of speculative funds from excessively appre-
ciating the currencies.
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Recent bond issues re-
flect tlae preference of in-
vestors for such currencies
as the mark and the Swiss
franc. Issues denominated
in marks, for example,
made up one-third of the
first quarter total, compared
with one-tenth in 1974; the
share of dollar-denominated
issues fell from two-thirds to
about one-half.
Private borrowers are
Hashing new issues to market
to beat anticipated increase
in government borrowing
later in 1975. French and
Japanese borrowers also
have acted promptly because
their governments are
moving to limit appreciation
of the currencies by curbing
inflows of long-terra capital.
New French issues totaled
$690 million in the first
quarter, enough to cover
more than half of the current
account deficit.
Value of New
International Band Issues
By Currency Denomination
n m Iv I
1973
Deutsche
Mark
II III IV I estimate
1974 1975
. Role of OPEC Countries
A substantial portion of new issues clearly has gone into the portfolios of
OPEC countries, mainly Saudi Arabia and Kuwait. Middle Eastern banks have be-
come prominent managers and underwriters of international bond issues. Borrowers
are even offering issues denominated in Arab currencies: two issues totaling $45
million and denominated in Kuwaiti dinars were floated in the first quarter, and the
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International Bond Issues
January-March 1975
US Deutsche- Swiss
Country of Issue Dollar mark Franc Other Total
Total 1,430 960 175 420 2,985
France 300 240 25 125 690
Japan 185 70 60 10 325
Canada 310 .... .... 100 410
International
organizations 435 110 .... 45 590
Other 200 540 90 140 970
Asian Develo}.ment Bank plans to issue $14 million worth of Saudi riyal-denomin-
ateci bonds this year.
Arab bond purchases are an encouraging sign that oil producers may gradually
lengthen the maturities of their massive portfolios and thereby reduce the potential
for disruptive capital movements. So far, however, the purchases are a drop in the
bucket in comparison with the estimated OPEC current account surplus of $57
billion in 1975. In any case, OPEC investors probably will show little interest in
issues originating in the countries with the most serious payments problems. (Con-
fidential) ^
VENEZUELA: N4 FINANCIAL BONANZA
Venezuelan oil earnings, now at peak, still are not large enough to make
Caracas willing to bankroll major LDC commodity support schemes or other major
foreign projects. Over the naxt few years, rapid growt}~ in imports almost certainly
will put the current account in the red. Thus, Caracas will continue its push for
the highest possible oil prices within all international forums.
Exports
Oil export earnings will gradually drop from their high of $10.3 billion in
1974 because of the government's oil conservation policies. Plans call for production
cf only 2.0 million b/d in 1980, down from nearly 3.0 million b/d in 1974.
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VENEZUELA Alternativo Projoction
of Current
Account Balance'
Billion US$
Projected Trade
and Current
Account Balance
Billion US$
15 r
Alternative Projection
of Export Earnings 2
Billion US$
15
14
13
12
1. Assuming real import gmwdi
0!20?,6 annua/ty in 19760.
2. Exportoaming ilnude oil output
a maintained at 2.4 mil/ion b/d
through 1980.
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Domestic oil consumption will grow more rapidly toward the end of the decade
as the petrochemical industry expands. By 1980, exports of petroleum and
petroleum products will slip to about 1.5 million b/d, earning only $7 billion,
assuming price increases of 8% and 5% in 1976 and 1977 and constant prices
during 1978-80.
The composition of oil exports is not expected t~ change substantially by
1980. Now, about two-thirds of exports are crude; refined product exports consist
mostly of residual fuel oil, priced below crude. Studies on ]low to increase the
value of oil exports are only beginning, and feasible projects will not be completed
until after 1980.
If Venezuela maintains its industrialization schedule, non-oil exports -
particularly petrochemicals, steel, and aluminum -will expand rapidly after 1977,
reaching about $3.5 billion by 19$0. At this rate, they would essentially offset
the anticipated drop in oil exports.
Imports
With the sudden surge in foreign exchange in 1974, imports jumped about
65% (approximately 25% in real terms) to $4.6 billion. The volume of imports
in 1975 will probably rise at about the 1974 rate. Assuming a 12% price increase,
the value of imports will move up to $6.4 billion. This rapid growth reflects the
large import requirements of extensive development in heavy industry. Rising
consumer incomes also will call out increased imports of finished consumer goods
plus raw materials and intermediate products for impart substitution industries.
We believe, however, that real import growth will drop to 15% in 1976 and
to 10% in each of the following years as the government tightens restrictions on
imports to postpone sizable trade deficits. A 10% annual increase in the volume
of imports probably is required to support real economic growth of 7%-8?Io.
Current Account Balance and Foreign Aid Implications
Given these projections and a continuation of the usual deficit in freight and
insurance services, the current account surplus will end in 1977. Considering only
the current account, foreign reserves will peak at about $9.0 billion in 1976; as
mounting trade deficits boost the current account deficit, foreign reserves will begin
to drop and by 1980 will be depleted. With these prospects in view, we expect
Venezuela to back away from expensive LDC commodity support schemes acid
major foreign aid commitments. Even in its present affluent situation, Caracas has
iz
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been conserving its funds for use in building up latent export industries. To finance
commodity support scherres, only short-term loans totaling $40-$80 million were
offered to Central America to finance a coffe~? stockpile, with repayment on
commercial terms.
Alternative Projections
The government could adopt other policies, but trade deficits are still likely
to develop. Caracas could allow imports to grow more rapidly, as much as 20%
annually, while pushing development projects in the hope that in the 1980s new
non-oil exports would reverse the rise in the trade deficit.
Alternatively, oil production could be maintained through 1980 at about 2.4
million b/d, the expected 1975 rate. Venezuela probably has the capacity to sustain
production at this level. But toward the end of the decade this policy could increase
the stress on OPEC in coping with the problem of prorationing oil production.
With higher export earnings, Caracas probably would allow a 20?lo increase in
imports annually in 1976-80. In either case, trade deficits would develop by 1977
and foreign reserves would be depleted by 199. Venezuela's capability to provide
foreign aid in the 1980s would be negligible.
Note: Ass~~~mptions underlying the projections in this article include:
(a) average nominal oil prices in 1975 will equal prices on 1 January 1975, in
1976 will rise by 8?l0, and in 1977 ?,vill rise by a further 5%; (b) import prices
will rise by 12% in 1975, 9% in 1976, and 6?lo in 1977; (c) export and import
prices will be constant in 1978-80; (d) freight and insurance outlays will equal
12% of the f.o.b. value of imports; and (e) investment income will equal 8% of
the value of assets held abroad. (Confidential) ^
SOUTH VIETNAM: ECONOMIC STRAINS
The economy of South Vietnam's capital and Delta is showing increasing
strains from the recent military reverses.
Until this past week, developments '.n the now-abandoned northern regions
evoked little business reaction in more densely populated areas. Most South
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senrtedly refusing
to allow withdrawal of accrued interest. The National Bank of Vietnam has managed
so far to keep the lid on by promising to guarantee all commercial deposits while
warning of the dangers of keeping large, vulnerable cash holdings.
Much of the increase in the money in circulation has gone to purchase dollars
or gold. The black market dollar rate -near 820 piasters to the dollar before
the recent turn of events -soared from 900 on 31 March to more than 1,700
on 4 April. (The official rate is 725 piasters to the dollar.) Gold prices are now
up over $235 an ounce, compared with $195 an ounce as late as 24 March.
Business and Commerce
Rapidly declining business confidence in the future of non-Communist South
Vietnam portends a general disintegration of the commercial and industrial sectors.
Within the important Chinese business community the feeling is one of dismay,
fear, and distrust of the government and the army. Many Chinese are planning
to get out of the country. In addition to the other strains, they complain that
the ever-longer curfews contribute little to security and severely limit business
activities.
Foreign businesses have been the first to abandon ship. Many have already
sent dependents out and some are evacuating expatriate principals as well. Most
recently, Mobil and Pecten Vietnam (a Shell subsidiary), the two oil companies
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doing exploratory drilling off the coast of Vietnam, at least temporarily shut down
operations and evacuated all foreign personnel. The Bank of America, First National
City Bank, and Chase Manhattan have also prepared for evacuation of their
expatriate staffs, and this has encouraged a particularly bitter reaction among native
bankers as psychologically ruinous.
Nevertheless, Saigon's most important needs -food, fuel, and strelter -- can
be met from supplies on hand for some time. Official rice stocks, for example,
are high enough at 150,000 tons to feed the 3 million people of the Saigon-Gia
Dinh metropolitan area for three r~:onths. Over the longer run the n-.any refugees
t;iat will find their way into Saigon and the military reinforcements that will be
called upon to defend the city will increase pressures on supplies of food and
other essential goods. Those pressures could become critical if the Communists
cut off access to rice from the Delta and supplies moved up the Mekong and
Saigon Rivers. (Confidential)^
Romania: Testing U5 Trade Climate
Minister of Heavy Industry Ioan Avram arrived in the United States on 6 April
to discuss the purchase of equipment for the 1976-80 economic program. Among
the items Bucharest may buy are petroleum machinery, equipment for producing
roller bearings and vehicle transmissions, and naval construction equipment. Avram
has indicated, however, that prospects for purchases are poor unless the United
States restores ExIm Bank financing, which was suspended under the Trade Act
of 1974. Following authorization for ExIm credits in 1971, Romania increased
its import of US machinery and equipment from $12 million to $88 million
ire 1974. (Confidential No Foreign Dissem)
South Africa: Uranium Enrichment Plant
According to Prime Minister John Vorsier, a pii~t uranium enrichment plant
went into operation on 5 April. The plant, reported in October 1973 to cost $120
million, will be used to gain experience with South Africa's secret enrichment
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process, which n-iay be a variation of a West German jet nozzle process.
Abundant uranium ore and cheap electricity will
permit South Africa to actively compete in th? world enrichment market, estimated
to be worth $5-$10 billion annually in the 1980s. (Unclassified)
Pui.~lication of Interest*
Trade anc'. Payments Trends of Non-OPEC LDCs
(El2 IM 75-7, April 1S75, For Official Use Only)
This memorandum examines trade and payments developments in non-OPEC
developing countries in 1974 and assesses their international economic prospects
for 1975.
* Copies of this publication may be ordered by calling Code 143, Extension 7234. 25X1 A
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