Document Type: 
Document Number (FOIA) /ESDN (CREST): 
Release Decision: 
Original Classification: 
Document Page Count: 
Document Creation Date: 
December 9, 2016
Document Release Date: 
March 5, 1999
Sequence Number: 
Case Number: 
Publication Date: 
April 1, 1975
Content Type: 
PDF icon CIA-RDP86T00608R000500180008-1.pdf471.86 KB
h~il~:= In~piications of the .T Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180008-1 confidential No Forril;n T)tssrrn Intelligence 1V~emorandum Chile.? I~nplicationr of the Wo~:rening Trade and Payments Position confidential ER IM 75-8 April 1975 COPY N0 78 Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180008-1 Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180008-1 NATIONAL SECURITY INFORMATION Unaut~lorized Disclosure Subject to Criminal Sanctions Claulli~d by OIS]19 Ex~mpf Irom O~n~ral D~cla~flllcaflon Sch~dul~ 01 E.O. 11632 ?x~mpflon calepory~ yen(1~1 (2), and SJ) Automatlca y ~claulF ?d om dab fmpouy6l~ fo d~hrmlm Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180008-1 Approved For Release 2001/08/2~~~86T00608R000500180008-1 No f%nrelrp~ I)Lsserr~ Chile: Implications of the Woncning Trade and Payments Positit>n J KEY JUDGMENTS Chile faces a large balance-ol-Payments deficit this year. ? Lower upper prt~.:ta and Participation in a ('IPRC export-restriction scheme arc likely to cut total export earnings ~0`%~. ? Rising world market prices I'~r manufactures are incretrsirg Chile's import costs by about 7`/~. ? I~orcign aitl is very low, mainly because of international distaste for the milit;~ry governnrei t. ? Although the junta has applied to the Paris Club for debt n~licf, it stands little chance of getting its I~)75 debt service Payments of US x,710 million voluntarily reduced by more than ~~?(~ million. ('hile:ut foreign reserves are minuscule, and extensive commercial financing is precluded by Chiles already enormous foreign debt. Santiago thus would be forced to slash imports from the current r,!te by as much as ~ I billion - a 45;'% rrtluction in vt,lumr from 1~t74 - if it were to fully meet its debt service commitments. So far, no steps to restrict imports have been taken. [hsPite its strong desire to improve Chiles international credit standing, the military governnunt may default on 1 ~t75 debt service payments due to most Communist anti some West European countries. Ikfault is most likely on the obligations to countries that are Icast willing to provide new aid or show flexibility in debt negotiations. The potential foreign exchange savings from defaulting on debt service Payments are probably not more than S 135 million, because Iess selective defaults wcndd irreparably damage the country's international credit Position. Some Note: Comments and yuerics regarding [his ntrmorandum arc welcomed. They may tx~ directed to of the C-ftice of Economic Research, Code '. ^3, F~xU?nsion 5079. Approved For Release 2001/08R~N~TAMR$1P86T00608R000500180008~11s'b CONFIDENTIAL Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180008-1 additional reiicl' probably will be available through a small bank loan the government is nuw seckint;. Chile ncvcrthcltss will probably have to slash imports by X80!) million, or sonic :;S"~~ in volume, in 1975. A reduction of this nrignitudc will reverse the economic recovery after the Allende period and derail government economic rcfornrs. ? Kcal (;I)1' nuiy decline c-.uring the latter part of the year by as much as 10'i~~ at an annual rate (3'/r4'%~ in 1975 ),with industry suffering nrorc than this. I~urther rises in unemployment and declines in real wages will incrcasc public unrest. ? The govcrnmcnt ;rill be forced to incrcasc its intervention in the economy, and pressure from within the military ~s~ll mount for the att.~.:k on ('hilt's triple-digit inflation to be abandoned. CONFIDENTIAL Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180008-1 Approved For Release 2001/08/21 :CIA-RDP8tiT00ti08R000500180008-1 CONFIDENTIAL I ? 13y the ~ nd ol? I~)74, ('bile's eeununty was rrruvrring (runt the shanthlcs of the Final year of Allrnd~ t;ovrrnntrnl ;Intl the Sehtemhe~ 1 c.73 military takeover. L;thor disrihline had been restored, essential services reinstate,l, and brier and labor controls and other regulations that fettered hrodurtion largely r~?nx~wcd. Kcal (~!)1' grew 5'~;, in I~)7~}, relCaining Ihr 197' level (see I~igur~~ I ). Alihuugh the govrrnnu~nt's anti-inllalion hrugrant increased unenthloynte,tt and lowered real wages, it surre.ded in only halving 197,i's 70O'%~ inllaliun r~~te. '. Rrrovery was must hrlhrd by a hike in ex hurt earnings ul' Wrote than one-h;tll', a sii.ahlr inl'luw ut tl)fl'I~;It rrunomie assistance, and rrl'inancing by the 1';n'i~ ('luh of SU'~ ol~ Ihr 1974 ('hilr;ut debt service haymrnt ul' $til2 Writ ion. Rrrurd world rubber briers - averaging 93 rents a hound, compared with tit cents in 1173 -- and ;t I:u~ge rise in rubber exhort vuluntr weer antral lu the exhort reruvrry. I?xl~u ?I rereihts plus inrreasrd foreign assist:utre hcrntitted a near-d~r~thling in the ~~oluntr of imhur~ls ul? furls, raw nwter~als, and semi-ntanufarturrd gouck deshih? Wroth hither briers fur oil. grain, and other goods. An HO'/~ cumula!ivc dr~aluation of the escudo during the ye;u? enruura(;ed exhorts and disrourat;ed nonrssrnti;tl inthorh. Altiuutgh the trade ~.Iefiril v :-s slashed by 30~~~ I?rum Ihr 1973 Ir~~rl, net foreign reserve;; slipped by about `1;110 million, mainly rctlcrling disahpuintinely small inllows ul' hrivatr rahital. Pour World C~~irlxr Price ?utluol: in 1975 3. ('untinurd rrrovrry in 1~~75 is now threatened by the dehrrssed world ruplkr nt:~rket. Rrressiun-induced derlinrs in th:? runsumhtion of copper by the industrial nations, growing inventories, ;;nd a rising supply of scrap have kept the Lc~ndun A1?:tal I~:xrh;utge prier tlurtuating rl~~se to 60 cents a pound for the first three months of 1975, following a lzreeihitous fall from the April 1974 teak ol? 51.5' a pound. 4. Plans by Chile, in cooperation with the ether CIPEC countries, to reduce exhorts by 15;~~ probably will forestall further substantial price declines this year. They will not raise prices significantly, however. Accurnu~atrd stocks must lx educed before new production can br sold at higher priers. An average world copper prier of 60-65 rents a pou~~d appears to be the best that Chile can hope for this year, compared with 93 rents a pound in 1974. Approved For Release 2001/08/2~F~~+~E~~8tiT00ti08R000500180008-1 Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180008-1 CONFIDEN11Al CMILE: %canomic Inr~icators Inflation Rato Unemployment Rato i'on:ont, CoclCrx nnnunl nvoratlo, Parcont 0!)3 i I Real GDP Growth Parcont 7.7 376 !).7 Public Sector Deficit >JS a Percent of Exrandituros -4.0 Real Wage Changes Percent, Jon/Jan 8.7 Net Foreign Roservea' Million US$ at Yearend 1911 191? 1973 1974 ses~r~ ~ re 1971 1972 l~i3 1874 J. lob! nrrrva rrnur rAorr hnq /irdi/lN,r. 38.0 CONFIDENTIAL Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180008-1 Approved For Release 2001/08/21 :CIA-RDP8tiT00ti08R000500180008-1 CONFIDENTIAL Impact on Export Earnings S, ('bile's copper export earnings will be clown about two-fifths in 1975. CIPI?("s control schentc will reduce the 1975 voluntc of Chilean copper exports in two steps te; 782,000 tons front 887,000 tons in 1974. AL a world price of G2 ce,tts a pound, 1975 earnings would i)c about'~920 million, compared with $1,560 million last year. 6. Although prospects fur earnings from exports other than copper ac, good, the ~~. exports contribute Duly 3G"~~ of` the. total. Agricultural exports-chielly ,;ulses and fruits--will benefit froru a br;ller ha-vest. removal of export restrictions, artu government efforts to open neN rnarkets. Nitrate exports will be strengthened by incretrsed world dcntand for 1'crtilizrr and rehabilitation of processing facilities, 1'rospccts for such export-oriented industries as ccllulosc and l aper also l:,rvc improved. Larnings fr~~m non-copper cxportti should reach about $52.5 mil~ion in 1975, about IOf~ above last year. "Total 1975 exports nonetheJcss will not exceed ~ 1.5 billion. compared with $2 billion in 1974. Soaring "I'raclc Ucficit 7. While export earnings arc falling, imports continue to rise, A second successive good harvest and rower grain prices arc reducing the ~aluc of food imports. 13ut, although the anti-inflation program is holding clown demand for other imports, their prices arc rising and total import outlays arc still increasing slowly. If recent import trends continue, ('hib~ is hcacling for a thumping trade deficit of X900 million, contparcd with only Si200 million last yeat'(s;.e. Fignrre ?). Slipping Capital Account 8. "there is no chance Chile could finance a trade deficit of anywhere; near x,900 million. It would have to retrench even if foreign creditors were favorably inclined. But most of Chile's creditor arc unwilling to provide any rc!ief to the military government in the light ol` the repeated charges of violations of human rights. Thus, deliveries of of`ticial aid, which rose a little last year after tl~r fall of the Allende go~~crnnunt, will drop by about X130 million this year. Only US bilateral aid and assistance from international institutions totaling $267 million will rem:un, ss shown below: Approved For Release 2001/0$Jr$p~Fl~Itgt~pP86T00608R000500180008-1 Approved For Release 2001/08/2'I~oR~16t86T00608R000500180008-1 IM~~ Itt7 W~~rld Bank 4U US AID and 1'1,~4HO :~(1 :D13 I0 9. The outlook for private capital inllows rcnwins poor. 1)cspilc csxtcnsive Promotional effort, the govcrnnlenl has been unable to attract a sit!nificant movement of direct foreign inveshnent. 'thus, a smt~ll net inflow of some $150 million in Private capital--mainly supplier crccLls is the best U?at :an be expected for the year. Chile Probably has already acquired as much as $?0(~ c~~hlion in supplier credits to cover the January-Pdarch paymen!s deficit. As the silualle:l~ deteriorates, ,1[owever, we estimate that as much as $SU m~lliotl of tl[em cc~:.1:.' 1~e offsc~f ,y caPiial flight. Disappointing Debt Relief I'ruspccts lu. We. cstinr.Uc that CHILE: Trade Baltlnce ice payment ,vil! be voluntarily ~"~ ~ ~ renegotiated in 1975 (sce'hablc , ti ~ \ 1). Santiago probably will "I \ v ~ apply to the Paris ('luh fora k' \ rollover of a substantial share. t,5oo r'' \ 1 of the ~5(i5 fnillion due nlcnr N ~ ~ lx.~s this yrar. Club guidelines, ~ ~~/ ~ how~~vcr, define only about ~ ~ ; ~ $~70 mill;on in obligations as Exports t.o.b. ~~ \~ eligible. for renegotiation. OI. 1.000 ~,,,,~^,~~' this amount, Club prcrcdenl .,.~+...` ^ ` cttcuttes that ontt..; ~?~~; or ~.:~o '/~~ ~ ? million, wiil actually he consid- f ~~ creel for :enrgutiation. shout Coppor Exports La.6. ~ 500 S50 million of this amount probably cannot hr resched- uled heeauu the United King- dom and Italy intend to t~ov- cott the renegotiations, and the o __._ I_ ._ l I _ I__ ___!. 1988 69 70 71 72 73 74 CONFIpEN'In:. Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180008-1 CONFIDENTIA Approved For Release 2001/08/21 :CIA-RDP86~00608R000500180008-1 Tal-Ic 1 (:bite: Summary of Extcnull Debt Srrvic.: Paynu,nty - __ _ ___ Million US $ United Stalcs Other Mcmbcr Coon- (rll`V 'rOt71t tnterna- tional Insliht- (lOnS Otbl`r 'I'Ot71t I')7~1 Ikht service payments due ' .157.0 :1~IU..1 (,')7.3 S2.H (r2.1 H12.2 ( arried over fron- I r)7.~ I~ 104.7 l a l .b 2.i(,.3 21.5 12.') 270.7 allinl; due in Ir)7?t t r I(rl.') I'%3.S .155.4 .11.3 47.:1 43~t.0 ther ~ P ')0.4 15.' 105.(, .... I.') 107,5 .stinrtlcd paynrcr7ts .... 11>I..t '-h 3)(f1,0 'Ikht relic( I)75 .... .... 400.0 ~ IH._ t..4... `~ Ikht service payments due .12 i.0 '41.5 564.5 S_t. I ') I .h 710.2 Iteyuircd payments ?..7.6 54.1 72,6 484 3 I?:xl~ cted voluntary clcht relief ... 20(,.'t .... Ir).0 . 225.9 1. Including aunpensatinn payments due in 1974 fur natiunali~cd properties and estimated inten?st payments nn rcfinaucin7t loans from the 1974 renegotiation. United Kingdo-n prob,lhly will succeed in persuading three other I:uropcan menthers to join thrru. I I . 'I~hc renwinin); ~ I ~i5 million due in I r)75 represents obliga!iuns to international linanci;71 agencies, ('onununist countries, and Latin nnterican countries. Payments due the international financial agencies arc not renegotiable. /lppcals to roll ;tver the X50 ntillinn due the ~~o1TlIT111111St countries probably will tali on deaf ears. nlthentgh relief front the Latin nnteriran countries is likely, it could total only R 19 million. Closing the Pavmcnts (:ap I'. ('bile's irnprnding balance-of-paynx'nts crunch has put the rnilitarv govenunenl in a difficult position. The soaring potential track deficit cornhined with a rising services deficit and a smaller prospective capital account surplus will leave a payrr7ents gap of about $1 billion (see Table ~). Foreign reserves, already ~(, 15 CONFIDENTIA Approved For Release 2001/08/21 :CIA-RD~81iT001i08R000500180008-1 Approved For Release 2001/08/~~N~'IPi~~~86T00608R000500180008-1 Chile: Ilalnncc of 1'nymcnte ,' ' 1173 1974 Pro;cctcd After Corrective Mcnsures lixpct is (f.u.h.) I ,325 2,037 I ; t45 I ,445 Co~~i1>L r r I ,088 I ,SGO 920 920 Ot'ICr mining IU2 ISO 170 170 A?;riculturc atn.i ,is!tinr; 24 SS GO 60 Industrial product, III 272 295 295 Impttri a (c.i.l'.) l ,608 2,234 2,330 ; ,545 Foodstuffs 595 472 330 330 1'ucls ;Ind lubricants 7O 348 400 3(i0 Capital goods 285 338 390 Materials and intcrntccliatc gu, ,is 544 978 I ,100 745 Uthcr 114 98 110 IIO Track halanrc -283 -197 ?885 -100 Net x:rviccs and transfers ?19O ?244 ?290' ?2~1U3 Current account balance -473 ?441 ?1,175 -390 1'rivatc capital 116 148? 150 1 SO Official capital ?(>4 -242 -223 -223 I)rlwml!s 341 396? 267 267 Anxr, tization 1t05 ?638 -490 -490 IXbI relief 337 424 226 3(i05 ~bl)rl?ICrITI Cal)1181 f 6 .... 103 Capital acanurt balance 389 330 153 39O l2cs;:rvcrnovcntcnts (increase+) ?84 ?111 -1,022 .... I. Net topper crports assume a discount of H.5 crnts per pound (torn the price of 62ccnts for copper wirebar c.i.f, huntpe, to allow (ur quality deviation, freight, and insurance. 2. Includinl; b174 milling interest payments nn Ibrcil;n debt. 3. Includinl; 5220 rnillinn r~terest payments un (oreil;n debt. 4. 1?:xcludinl; a ESSn million Debit lu private capital and a currcsponding credit to official capital repreunlin(; ;h~~ l;uvernmcnt's assumption of responsibility for paying c~nmpensation to the former owner of properties nationalir_?d by the Allende l;ovcrnmcnt. 5, Includinl; default oI S 134 million. G. Included in private and official capital. million short of short-term foreign liabilities, cannot provide much h.;;lp. Large-scale commercial borrowing is precluded by both Chile's already enormous foreign debt and low reserves. Approved For Release 2001/08~rt~fNRf~1P86T00608R000500180008-1 Approved For Release 2001/08/21 ~~F6T00608R000500180008-1 13. Ucspite its strong desire to improve Childs credi~ standing, the militt~ry government probably will choose to default on the debt service payments due most of the Communist countries to help close the gap. Faced by ref~.tsa:'~itf so`':tite Paris ('tub members, especially the United Kingdom and Italy, to tell over th~.~ir debt, it also may def;tult rm payments to titan. In addition, Sar.t~.ago is scek~~~ng and probably will get short-term conunerc~ial funds to cover the 'b 103 million in the Paris Club obligations tlwt represent compensation payments for nationalized US properties. '1'hesc steps at best would still Icave a payments gap of $800 million. 14. Santiago unqucstionitude we believe may be necessary in 1975 would be extremely disruptive to the still weak Chilean CONFIDENTIAL Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180008-1 Approved For Release 2001/08/~N~Qi~~~b86T00608R000500180008-1 economy. Supplies of raw materials, intermediate products, and capital goods will be down to the 1968 Ie~~cl, when real industrial, mining, and construction output totaled only abou~ 80`/~ of +hc 1974 level. Because no rc!icf is likely before mid-1976, when economic recovery in the incfustr;al nations may oegin to push world copper prices back up, Chilean output and employment almost certainly will be focccd rJown sharply. l8. [n the second half of 1975, real GDI', currently stagnant because of the anti-in[ation program and the reduction in copper output under the CIPEC agreement, seems likely to drop at an annual rate of as much as 10`%. This could reduce (:,Ui' for the calendar year by 3`Ir4'/~. If the $50 million worth of fertilizer imports required for farming i~ maintained, agriculture would be the only economic sector likely to register an increase in output. Severe shortages of raw materials and semi-manufactures could reduce output in manufacturing by as much as 25`~~, and by 5'%10`% in mining and construcaion (annual rates). Tite swollen services sector, accounting for about hail of total output, will be dampened by the -ieclincs in mining and manufacturing. 19. Our estimate for real GUP in 1975 differs sharply from a recent IMF forecast, which envisions a S`/~ gain. The difference reflects mainly higher IMF projections of earnings fr;~m copper exports and of official short-teen and long-term capital. On this basis, the IMF believes that a reduction of only $260 million in imports from last year will be required and that this can be made with only a 5'i'~ decline in spending for imports of materials, intermediate products, and capital goods. We believe the IMF estimates and analysis are much too optimistic. 20. Uespite the economic decline we project, the regime clearly will try for a time to hold to its anti-inflation program. Indeed, it may consider strengthening it by further, restrictions on nominal wage rates and increased budget austerity. Except for a rise in debt service payments, government expenditures arc slated to remain at the 1974 level. I~evenuc from a new value-added tax and stronger tax collection efforts will nearly offset increased debt service payments and falling revenues from copper, and the government deficit probably will grow only slightly. The junta also will persist in its efforts to trim the government payroll, thus adding to unemployment. 21. Later in the year, however, the deteriorating economic situation will place serious strains on the programs to curb inflation and reduce government intervention in the economy -programs that have constituted the main hope for eventually putting Chiles ailing economy on a sound footing. Import liberalization will have CONFIpENTIAL Approved For Release 2001/08/21 :CIA-RDP86T00608R000500180008-1 Approved For Release 2001/08/~,,},~~~~86T00608R000500180008-1 to he lerminatccl, and foreign exchange will have to he rationed. Moreover, large rises in unemplciyment. and decli,ucs in real wages will cause mounting public unrest antl put slronl; pressure ou th.; government from within the military to exp;uul public employment and to take other public welfare measures that in ef~fecf will ~onslilulc abandonment of its programs. Approved For Release 2001/08/~N~~i~~~86T00608R000500180008-1