INTERNATIONAL FINANCIAL SITUATION REPORT #56

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000201420001-1
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 12
• Document Creation Date: December 22, 2016
• Document Release Date: February 23, 2011
• Sequence Number: 1
• Publication Date: September 18, 1986
• Content Type: REPORT

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Central Intelligence Agency
International Financial Situation Report #56
18 September 1986
Summary
Formal sessions of the IMF/World Bank meetings scheduled to begin on 28 September will
focus on aid coordination in Sub-Saharan Africa, World Bank investment programs, and a capital
increase for the World Bank. Of more significance will be the informal meetings between debtors
and their official and commercial creditors. In this area, the debtors' common theme will
continue to be the need for increased lending to enable a return to economic growth. Separately,
at the recently concluded Non-Aligned Movement Summit, the LDCs issued an economic
declaration calling for debt concessions. As in the past, however, we believe the diverse
financial situations of the LDCs undercuts a unified, hardline approach at this time. In other
developments:
o Mexico's decision to back away from its proposals for interest capitalization and a
zero coupon bond may help quicken the pace of bank negotiations. However, Mexico's
counterproposal still contains elements the bankers will find problematical, such as
linking repayments to oil prices, a 12-year grace period, and a lower spread over
LIBOR. 25X1
o Brazil is expected to be a tough negotiator in talks with credit this fall. but will
avoid taking unilateral actions, according to the US Embassy.
o Indonesia devalued its currency by 31 percent on 12 September. The decision to
devalue was based on Jakarta's need to reduce its looming current account deficit,
expected to reach $5 billion this year.
o Nigeria signed a letter of intent with the IMF, but I I 25X1
Lagos will not draw money from the standby facility. President Babangida 25X1
remains concerned about opposition to an IMF accord from members of the Armed
Forces Ruling Council.
o Mexico's IMF agreement breaks new ground in debt negotiations and is likely to
become a model for other debtors to follow. For a detailed examination of these
potential spillover effects, see the accompanying typescript.
welcome and may be addressed to the Situation Report Coordinator,
NOTE: REPORT #57 WILL BE PUBLISHED ON 23 OCTOBER 1986
This situation report was prepared by analysts of the Intelligence Directorate. Comments are
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KEY ISSUES
The IMF/IBRD Annual Meetings
The joint annual meetings of the IMF and the World Bank, which begin on
28 September with the IMF Interim Committee meeting, have a variety of topics
scheduled for discussion. In addition to the usual sessions on the role of the SDR,
the use of Fund and Bank resources, and a review of progress in heavily indebted LDCs,
the agenda also includes:
o Aid coordination in Sub-Saharan Africa. A progress report will be given on
the $3.1 billion loan facility for Africa jointly administered by the IMF and
IBRD.
o World Bank investment programs. A report updating the status of the
Bank's Multilateral Investment Guarantee Agency - which insures
investors against noncommercial risks such as war, political unrest,
currency nonconvertibility, and expropriation - will be presented.
o World Bank capital increase. The outcome of these discussions will, in
part, depend on allocation of voting power, a contentious issue amon
developed countries.
The more important discussions, however, will occur in informal sessions. These bilateral
meetings, involving commercial bankers and government financial officials from creditor
and debtor countries, undoubtedly will focus on the current debt problems and the
strategy for dealing with them.
In this arena, the chief issue will be the contention of the LDCs and even some
creditor banks that a revised approach extending beyond the general guidelines of the
Baker Plan is needed. For their part, the common theme of the LDCs has been a return
to economic growth instead of additional austerity. In practical terms, this translates
into additional funds from creditors with reduced or minimal conditionality. Some
debtors believe the IMF has outlived its usefulness, and the World Bank - or a new
agency - should administer the adjustment process in individual countries over a longer
We believe these trends may push the ball increasingly into the court of the
developed country governments, with the US government being viewed as the leader;
some players in the debt crisis may even use the meetings as a forum to increase their
pressure. If developed country governments are forced to take on this role, they will
face a difficult challenge. The most immediate task will be to keep the Mexican deal,
already showing signs of bogging down, on track. Although the developed countries will
reaffirm the need to adhere to the current debt strategy with some modifications to
promote economic growth, a final. resolution to the Mexican-and thus other-
negotiations almost certainly will require the involvement of high ranking Western
F_ I
government and banking officials.
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NAM Summit Declaration on Debt
The economic declaration produced at the recently concluded summit meeting of
the Non-Aligned Movement contains few surprises. The LDCs criticized the
macroeconomic policies of developed countries and blamed the debt crisis on the "unjust
international economic order." Specifically, the declaration calls for:
o Reducing interest rates.
o Stretching out payments, grace, and consolidation periods.
o Increasing the market access of LDC exports in developed countries.
o Giving special treatment to the poorest LDCs.
o Expanding the IMF's Compensatory Financing Facility.
o Limiting debt service payments to a percentage of export earnings.
As in the past, we believe the diverse financial situations of the LDCs and the
wait-and-see attitude of debtors towards Mexico's debt negotiations undercut a united,
hardline approach at this time. The chief debt-related impact likely to emerge from the
NAM summit is a strengthened LDC resolve to obtain more funds with less conditionality
DEVELOPMENTS IN MAJOR COUNTRIES
Mexico
Mexico's decision to back away from its proposals for interest capitalization and a
zero coupon bond may help quicken the pace of negotiations with banks for rescheduling
existing debt and borrowing new money. The Mexicans also have softened their proposal
for easing interest payments, asking banks to reduce the margin they charge Mexico
above the cost of their funds to 0.125 percentage point over LIBOR rather than
eliminate the spread over LIBOR altogether,
The counterproposal still contains
elements the bankers will find problematical, particularly linking repayments to oil
prices, the 12-year grace period, and the lower spread over LIBOR. We believe the
Mexicans are willing to backtrack further on the terms for rescheduling existing debt to
obtain all the new money they seek.
Meanwhile, a Paris Club rescheduling totaling $1.6 billion was signed on 17
September. The contract cutoff date is 31 December 1985 and the consolidation period
runs from-17 September 1986 to 31 March 1988. Repayment will extend over nine years,
Brazil
Brazil and its foreign bank creditors ratified their tentative debt restructuring
agreement covering 1985 and 1986 on 5 September when the required 95 percent bank
participation was assured. The debt accord, as previously reported in July, reschedules
$15.5 billion of medium-term debt and rolls over an equal amount of short-term trade
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and interbank credits. one of the major factors 25X1
that influenced a number of the more recalcitrant banks to join was their desire to avail
themselves of a future opportunity to convert debt to equity in Brazil and the d to
keep in the good graces of the government to facilitate these swaps. 25X1
The Sarney administration reportedly now is eager to negotiate a new type of
multiyear rescheduling of 1987-91 debt. Brasilia will push for 25X1
a reduction of net debt servicing payments as a percent of GDP from this year's
4 percent level to about 2.5 percent next year. During his visit to Washington on
11 September, President Sarney stressed to the National Press Club and the Congress
that Brazil must negotiate lower debt service payments to increase imports, raise
investment, and sustain high economic growth. However, private meetings with US
officials focused on Funaro's desire to get a Paris Club rescheduling a eement without
an IMF accord and with renewed cover from export credit agencies. 25X1
The US Embassy believes the Sarney administration will be a tough negotiator in
planned talks with creditors this fall but will avoid unilateral actions. The Embassy
explains that the Brazilians may attempt to attain the 2.5 percent of GDP debt payment
goal by negotiating a switch in interest rate payments from US prime to LIBOR, a
reduction of the spread on 1987-91 maturities, and new commercial loan co-financing
with the World Bank.
Argentina
International banks granted Argentina a 180-day rollover of $10 billion in debt
obligations, and Finance Secretary Brodersohn expects an IMF mission will arrive in
Buenos Aires to examine financial data before the end of September, according to press
reports. In our view, Argentina will request about $1.2 billion in a 15-month standby
agreement, plus an additional $300 million from the Compensatory Financing Facility.
The IMF will no doubt be pleased by President Alfonsin's decision to install Jose Luis
Machinea as the new Central Bank head. Machinea has taken part in IMF negotiations in
the past and is likely to align Central Bank policies more closely with Alfonsin's
economic agenda. The Fund probably will also take heart at second-quarter statistics
which indicate a 5.7-percent rise in GDP and a 17-percent increase in investment over
the same period last year, but is likely to express concern over August's 8.8-percent
Separately, Buenos Aires recently announced programs to grant amnesty to citizens
repatriating flight capital and to encourage the conversion of debt to equity. We believe,
however, that restrictive elements in both programs are likely to undermine their
success: Argentina is granting amnesty from criminal prosecution only, and is not
waiving penalties and taxes on capital returned from abroad. Moreover, the debt-to-
equity conversion scheme stipulates that the buyer must invest two dollars for each
dollar of debt converted at the Central Bank, a constraint that greatly decreases the
program's attractiveness to potential investors.
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REGIONAL SITUATIONS
Latin America
In Latin America, Peru claims the IMF declaring it ineligible will have little effect
on the economy, Ecuador negotiated a $200 million short-term oil finance facility,
Jamaica ignored the IMF's suggestion to devalue, and Costa Rican officials met with
members of the bank advisory committee.
Prime Minister Alva Castro told legislators from his party last month that the
IMF's declaring Peru ineligible will have little immediate effect on the economy and on
existing loans from multilateral development banks,
Ecuador
Ecuador has negotiated a $200 million short-term oil finance facility to offset the
anticipated shortfall in revenues from crude oil and other petroleum exports. The 18-
month facility, which was offered at 1.5 percentage points over LIBOR, has been
oversubscribed by $84 million. The facility, along with substantial sector loan
disbursements or an expected $200 million in disbursements from the World Bank, should
allow Ecuador to meet its external obligations in 1986, limiting its losses in international
Banks were encouraged by Quito's quick implementation of IMF-supported
economic measures announced in August to improve its balance-of-payments and fiscal
situation. The sucre has been devalued 35 percent relative to the dollar, and the foreign
exchange rate has essentially been unified for both private and public sector
transactions. Interest rates on most domestic savings and loans have been adjusted to
reflect market conditions. In addition, tariffs on 153 imports were reduced by 50
percent, including raw materials, industrial goods, and luxury appliances. The economic
reforms are designed to stimulate exports in agricultural, fishing, and manufacturing
Costa Rica
Costa Rican officials met with a working group of the bank advisory committee
(BAC) in early September to lay the groundwork for the next round of rescheduling $1.8
billion in foreign commerical debt.
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Jamaica
Jamaican Prime Minister Seaga has again rejected IMF conditions for a new
program, and with growing arrearages to the Fund-currently about $100 million-
arranging a financial workout is becoming increasingly difficult. The present impasse
centers on an appropriate exchange rate policy. The Fund believes a further devaluation
is necessary - 10 percent by 1 October - to help offset projected foreign exchange
shortfalls by increasing exports and attracting private capital. Seaga, however, is
opposed to this, feeling that the economic performance of the first half of this year
shows a strengthening economy. In addition, he feels tax and tariff rebates on
manufactured goods can be used to promote exports. Moreover, he believes that a
devaluation can only lead to calls for an early national election and Michael Manley's
return as Prime Minister. Seaga says he will break negotiations with the IMF if it
Eastern Europe
Poland
Poland last week signed an agreement with commercial banks to reschedule about
$1.7 billion worth of principal falling due in 1986 and 1987, and is lobbying for $400
million in new credits. Warsaw also is asking government creditors to reschedule $400
million to reduce its repayments burden this year. The government creditors provided
about $2 billion in debt relief earlier this year and have stated that additional relief
depends on Poland obtaining concessions from other creditors, including CEMA banks.
Creditors have little alternative but to continue revising earlier rescheduling agreements
because of Poland's inability to repay its debts. In our judgment, banks and governments
probably will rebuff its appeals for new credits until Warsaw negotiates an adjustment
program and obtains a standby loan from the IMF. The Fund is not scheduled to grant
Poland any new money this year and probably We only a small part of the $2
billion Warsaw expects from it next year. F 7
In Asia, Indonesia devalued its currency, the Philippines submitted to the IMF a
schedule for implementing measures outlined in its letter of intent.
Philippines
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During President Aquino's meeting this
week with IMF Managing Director de Larosiere and World Bank President Conable,
agreement was reached to move forward with the IMF program,
Managing Director de Larosiere will submit the letter of intent to the
Executive Board as early as next week with the understanding that as long as Manila
adheres to implementing scheduled actions, the Board would vote on the program in mid-
to-late October. Some observers believe the Philippines missed the boat by not seeking
performance-related disbursement and repayment levels from the Fund similar to those
negotiated by Mexico. In addition, the most Manila can now expect to receive from
commercial banks is a multiyear rescheduling with more favorable spreads, according to
US Embassy reporting.
Some changes ce within Aquino's circle of economic advisors.
Central Bank Governor Fernandez will probably
resign after Manila's financial package is finalized. Fernandez is expected to return to
commercial banking after waiting the one-year "cooling off" period required before
government officials can return to the private sector.
Indonesia
On 12 September, Indonesian Finance Minister Prawiro announced a devaluation of
the rupiah by 31 percent. Many financial analysts did not believe the government would
make such a move until after the April 1987 elections. According to US Embassy
reporting, the devaluation was accomplished with a minimum of leaks, unlike the 1983
devaluation that was proceeded by widespread rumors. As a result, rampant speculation
against the rupiah did not occur. According to press reports, the announcement did spark
panic buying in Jakarta's main supermarkets.
The decision to devalue the rupiah was based on Jakarta's need to reduce its
looming current account deficit, expected to reach $5 billion this year. Prices of
Indonesia's oil exports hit a low of $8.43 per barrel before rebounding to about $11 per
barrel. As such, export revenues are expected to be only $7.5 billion this year, almost $5
billion below last year, according to US Embassy reporting. Moreover, US bankers have
indicated that imports are running at a much higher level than last year. Given the
magnitude of the devaluation, future imports will be dramatically curtailed. Indonesian
officials continue to maintain that foreign debts will not be rescheduled, but bankers
believe it will be necessary in late 1987 or early 1988.
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Africa
In Africa, Nigeria signed a letter of intent with the IMF and South African officials
are to meet with their commercial bank creditors later this month.
Nigeria
Nigeria signed a letter of intent with the IMF, but
will not draw money from a standby facility,
President Babangida remains concerned about opposition to an IMF
accord from members of the Armed Forces Ruling Council, and could still back away
from an agreement,
also repot e y requested million in new loans as well as a
rescheduling of $1.5 billion in letter of credit arrearages. Commercial bankers, however,
have demanded that Lagos draw down IMF funds before receiving new credits.
Meanwhile, the US Embassy reports that the government is continuing preparations
for its proposed second-tier foreign exchange market. Lagos is seeking a $400 million
bridge loan from official creditors to fund the market's initial weeks of operation.
According to Nigerian officials, Lagos will repay the bridge loan with money from a
recently negotiated World Bank loan, which also is contingent on an IMF
agreement.
South Africa
South African financial officials are to meet with key commercial bank creditors in
London on 24 September to review the country's financial position at the halfway point of
the interim debt repayment accord reached last March. The interim accord is not
scheduled to expire until June 1987, and Pretoria anticipates no major revisions in the
agreement next week, according to the US Embassy. Discussion at the review is likely to
focus on South Africa's strong current account performance - a $1 billion surplus for the
first half of this year, and a $1.5-2.0 billion surplus forecast by Pretoria for the second
half. The Reserve Bank estimates this surplus would leave, after scheduled foreign debt
repayments, as much as $1 billion this year in foreign exchange to build up reserves and
strengthen the rand. Some foreign bank creditors, however, might view the strong
surpluses as reason to push South Africa to step up debt repayments.
Meanwhile, Reserve Bank Governor de Kock, in an annual economic address, for the
first time acknowledged imprudent South African banking practices and inadequate
banking supervision as an important factors in causing the country's debt crisis last
September. In the past, de Kock has explicitly blamed US commerical banks for
triggering the crisis by withdrawing credit lines.
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Middle East
Among the Middle Eastern countries, Iraq is seeking a two-year delay in repayment
of a 1983 $500 million syndicated loan, and Egypt claims to have narrowed differences
Egypt
Although Egyptian officials appear upbeat about progress toward an IMF standby
arrangement, the IMF team in Cairo this month gave US officials a more guarded
assessment. Cairo claims to have narrowed differences with the Fund over economic
policy reform to only two - the length of time needed to unify the exchange rate and the
size of interest rate hikes - but the Fund believes reforms of the price control system,
viewed by Egypt as politically sensitive, also still fall short. The IMF staff in Cairo told
US officials a standby arrangement might be possible by March 1987 at the earliest, if
agreement on reform measures is reached before yearend. Fund officials estimate a
standby would provide only about $300 million in IMF assistance over one year, but would
facilitate a Paris Club rescheduling resulting in about $2.5 billion in debt relief.
Iraq
Still financially squeezed, Iraq is seeking a two-year dela in re a ment of its 1983
$500 million syndicated loan, Although some
major Western banks will be reluctant to reschedule the debt, Iraq's request is almost
certain to be granted because the loan syndicate is dominated by Arab banks supportive
of Iraq's war effort,
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FINANCIAL BRIEFS
o Colombia's President Barco will be the spokesman for Latin America at the
annual IMF/World Bank meetings.... Colombia is expected to request about $1
billion in loans from the World Bank, the Inter-American Development Bank,
o IMF and World Bank apparently pleased with Haiti's progress in meeting fiscal
and monetary targets, tax reform, trade liberalization....still concerned about
rising government expenses, absence of public investment program, excess
liquidity.... donors considering $35 million loan under the structural
adjustment facility.
Europe/USSR
o Hungary's hard currency current account deficit rose to $845 million in the
first half of this year....up from $435 million in the same period last
year.... continued poor trade performance and Japanese bankers' fears of
overexposure in Hungary likely will raise the cost of new loans to Budapest.
Africa/Middle East
o Soviets encouraging efforts in Africa to undermine support for Western
economic aid programs,
specifically targets Baker Plan
...Moscow's guidance
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o IMF staff recommending Zaire be granted waiver of end-June economic
performance targets.... says standby fundamentally back on track....has been
stalled since Ma ....waiver would allow badly needed $29 million standby
drawing. 25X1
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St1 JEGT: International Financial Situation Report #56
Copy No. 1
Sec. James Baker Treasury
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R. G. Darman
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James W. Conrow
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Robert Cornell
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Thomas J. Berger
6
Charles Schotta
7
James A. Griffin
8
Doug Mulholland
9
Robert M. Kinmi t
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David Mulford
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Sec. George Shultz State
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John C. Whitehead
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Nbrton I. Abramowitz
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Jerome H. Kahan
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Michael Armacost
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Ralph Lindstrom
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W. Allen Wallis
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Elliot Abrams
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Rozanne Ridgway
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Douglas MdVlinn
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Chester Crocker
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Gaston Sigur
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Richard Nbrphy
24
Harry Gilmore
25
Byron Jackson Camierce
26
S. Bruce Smart
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eve Farrar NSC
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Stephen Danzansky it
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Randall Fort PFIAB
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Leo Cherne PFIAB
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OSD (ISA)
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DPI
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ExDi r
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SA/MCI
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IDI
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AIDI
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Ch/PES/IDI
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NIO Economics
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AID/NIC AG
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IDO
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Ch/LBO/EPOS
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Ch /1:DD/NCD
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Ch/TAD/AF
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Ch /IOU/EA
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Ch /IDO/E R
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Ch /IDO/LA
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18 September 1986
/DU)/NE
Ch /MD/SE
D/AIA
Ch /ALA/SA1)
D/OEA
D/EURA
Ch/EURA/EE/EW
D/SOVA
D/NESA
ID/OGI, D/OGI
Ch/OGI/SRD
Ch/OGI/FSIC
Ch/OGI/BCD
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PAS/ISS/SA/DA
Ch/OGI/Pub
OGI/Pub
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1 - Edwin Truman, Federal 'Reserve Board
1 - Henry Wallich, Federal Reserve Board
1 - David Roberts, Federal Reserve,
New York
1 - Leo rherne, PFIAR, New York
1 - E. Gerald Corrigan, President,
Federal Reserve Bank, New York
1 - John Bohn, Chairman, ExIm Bank
2 - Doug Mulholland, Treasury
1 - Ambassador Richard McCormack, State
1 - Martin A. Wenick, State
1 - Nicholas Burakow, State
1 - Peter W. Rodman, State
5 - Byron Jackson, Cannerce
1 - Warren E. Farb, Cmnnerce
1 - DIA 25X1
1 -
Ron Silverman, CMB
1 - Beryl Sprinkel, CFA
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