INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000300130004-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 46
• Document Creation Date: December 27, 2016
• Document Release Date: April 20, 2011
• Sequence Number: 4
• Publication Date: April 25, 1986
• Content Type: REPORT

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Directorate of --Seefet---
Intelligence
International
Economic & Energy
Weekly
25 April 1986
CLre
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International
Economic & Energy Weekly
25 April 1986
Secret
iii Synopsis
1 Perspective?Oil Market Outlook: Continued Price Volatility
3 Summit Issues: West German and Japanese Economic Performance and
Prospects for Reflation
9 Summit Issues: Monetary Reform Faces Long-Term Debate
13 International Financial Situation: Argentina's Financial Prospects
17 Global Privatization: Gaining Momentum
23 High-Definition Television: Search for a World Standard
29 Briefs Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence
i
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International
Economic & Energy Weekly
Synopsis
Secret
1 Perspective?Oil Market Outlook: Continued Price Volatility
Oil prices may fall by another $5 from the current $15 per barrel world
average over the next several months in response to weak seasonal demand and
continued ineffectual action by OPEC. An improvement in non-Communist oil
consumption combined with little or no growth in non-OPEC supply would
make it easier for OPEC producers to hammer out an agreement to arrest the
price slide later this summer.
3 Summit Issues: West German and Japanese Economic Performance and
Prospects for Reflation
The potential for stronger, more balanced growth in West Germany and Japan
is likely to prompt other summit nations to ask Tokyo and Bonn to abandon
their austere budget policies, but both countries will resist the role of
"economic locomotive."
Summit Issues: Monetary Reform Faces Long-Term Debate
Big Six leaders do not intend to put international monetary reform at the
forefront of topics discussed at the Tokyo summit in May. The major
advocates of reform?France and Italy?almost certainly will not mount any
major initiatives on monetary reform at the summit because they believe
ambitious proposals would meet stiff resistance from West Germany, the
United Kingdom, Japan, and Canada.
13 International Financial Situation: Argentina's Financial Prospects
Creditors probably will support Buenos Aires's requests for new money this
year, but actual disbursements will be less than anticipated as a result of slow-
going loan negotiations and delays arising from missed IMF-supported
program targets. Nonetheless, a prolonged holdup in foreign credit disburse-
ments might derail Alfonsin's restructuring program, threaten confrontation
with creditors, and renew domestic demands for a moratorium on interest
payments.
17 Global Privatization: Gaining Momentum
Privatization is gaining momentum worldwide particularly in non-US OECD
countries. Although numerous LDCs have announced intentions to reform
their public enterprises, implementation has come slowly and fitfully.
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23 High-Definition Television: Search for a World Standard
The meeting of the International Telecommunication Union (ITU) in Dubrov-
nik, Yugoslavia, next month is slated to consider a worldwide technical
standard for high-definition television (HDTV). If the standard is adopted,
Japan and the United States are likely to receive the most commercial benefit.
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International
Economic & Energy Weekly
25 April 1986
Perspective Oil Market Outlook: Continued Price Volatility
Secret
Oil prices may fall by another $5 from the current $15 per barrel world
average over the next several months in response to weak seasonal demand and
continued ineffectual action by OPEC. The longest OPEC meeting in history
ended on Monday without any agreement on individual production quotas.
Although the majority of members agreed to an annual output ceiling of 16.7
million b/d?compared with current production of about 18 million b/d?
OPEC members remain divided on fundamental issues. Iran, Libya, and
Algeria wanted to restrict output even further in an attempt to raise prices
back to $28 per barrel.
The market will be especially vulnerable to a price war over the next several
months. Seasonal factors will reduce demand by as much as 2 million b/d, and
competitive pressures could drive the world average oil price to $10 per barrel
or less. Individual OPEC countries probably will be reluctant to make
substantial production cuts without assurances that other producers will
cooperate. Moreover, a resolution of the Norwegian oil strike?likely by the
end of May?would return 900,000 b/d to the market adding to downward
price pressure. Mexican exports could also rise by as much as several hundred
thousand b/d if the new Mexican Energy Minister adopts a more aggressive
marketing strategy. These potential increases more than offset an expected
decline of several hundred thousand b/d in UK North Sea output due to
routine summer maintenance.
In our view, if prices fall below $10 a barrel, there is no economic reason for
them to rise appreciably for some time. Any significant rebound would require
producer cooperation. Even though industry estimates point to a rise in
demand of 1-2 million b/d later this year due to recent price drops, it is not
enough to substantially change the market situation in the absence of producer
discipline. Of course, any increase in demand reduces the degree of discipline
needed to return control of the market to OPEC. If industry estimates of
increased oil consumption prove correct, OPEC producers may find it easier to
hammer out an agreement to arrest the price slide later this summer.
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In any case, supply and demand factors and market psychology are likely to
cause continued price volatility. Spot oil prices in recent weeks have fluctuated
by over $3 per barrel. Seasonal factors, inventory behavior, and the changing
nature of oil marketing will reinforce price volatility over the coming months,
unless OPEC producers reach a consensus to again defend prices.
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Summit Issues:
West German and Japanese
Economic Performance and
Prospects for Reflation
The potential for stronger, more balanced growth
in West Germany and Japan is likely to prompt
other summit nations to ask Tokyo and Bonn to
abandon their austere budget policies, but both
countries will resist the role of "economic loco-
motive." Tokyo and Bonn have been uniquely
successful in curbing government budget deficits,
in virtually eliminating inflation, and in generating
record current account surpluses. Unless their
economies deteriorate sharply?which we do not
expect?Tokyo and Bonn will continue the anti-
inflation, budget-balancing programs that they
view as desirable over the long haul. Without a
shift to expansion, however, their economies will
continue to generate the large trade and current
account surpluses that have provoked trade fric-
tions in the past.
Policy Goals and Growth in the 1980s
In rejecting calls for economic policy relaxation,
Tokyo and Bonn will cite the ill-fated "locomotive"
programs that they agreed to at the 1978 Bonn
summit. The result was a short-lived recovery,
followed by several years of weak or negative
growth, escalating inflation, and large current ac-
count deficits. Although these unhappy outcomes
were the result of the confluence of several fac-
tors?the second oil price shock and the lagged
impact of dollar depreciation through 1978?the
experience soured both governments toward cycli-
cal demand-management policies.
Several years of budget austerity have almost
eliminated the Japanese and West German central
government deficits, and the trend will continue
this year. Monetary policies in both countries also
sought to end inflation, as both the West German
and Japanese central banks focused on tighter
control of monetary aggregates.
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Big Three: GNP Growth Rates,
1979-85
Percent
8
I
1111 CJI II
-4 1979 80
308945 4.86
85
Economic growth in the two countries came largely
from the foreign sector?as real net exports were
stimulated by the bouyant US recovery and the
strong dollar. Strong foreign demand together with
weak domestic demand?largely the result of tight
economic policies?shifted the trade and current
account balances of each country from large defi-
cits at the start of the decade to hefty surpluses by
1985.
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Trade and Current Account
Balance, 1979-85
Billion US S
West Germany
40
1 _L 1[L?I I [
-20
Japan
I I 1-11 - I I 1 I 1 1i I L
1979 80 85
338946 486
Concern Over the "Weak" Dollar
When the US dollar began its ascent in 1980, the
West Germans and the Japanese initially denounced
the strong dollar for inflating domestic prices and
siphoning-off domestic saving. By late 1985, however,
exchange rate realignments had reversed the concerns
of Tokyo and Bonn from dollar strength to dollar
weakness, and they are now anxious that the dollar
not depreciate further. Since the dollar's peak in
February 1985 the yen has appreciated 25 percent in
real effective terms, compared to 12 percent apprecia-
tion by the mark.
Tokyo and Bonn are both concerned that appreciation
of their currencies will threaten growth and jobs, and,
hence, the political fortunes of the ruling parties. A
double election for the Japanese Diet now seems
likely by early summer, and the ruling Liberal
Democratic Party is worried that the deflationary
impact of a rising yen will damage its prospects. The
West German Government faces federal elections
next January, and the coalition parties have recently
suffered a string of election setbacks in state and
municipal elections where unemployment was a ma-
jor voter concern.
West German farmers?a pivotal voter bloc for
the conservatives?are agitated over the government's
handling of EC agricultural policy. The strong per-
formance of the export-dependent manufacturing sec-
tor is an economic highlight that the government does
not wish to lose.
Outlook Through 1987
Although dollar depreciation will dampen West
German and Japanese export prospects, other
forces?lower oil prices, reduced inflation, and
interest rate declines?will take up the slack to
stimulate some moderate growth.
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Japan. We believe the stronger yen will hold
Japanese GNP growth to about 3 percent in 1986,
well below the growth rates of recent years. Con-
sumer spending will remain sluggish as a result of
the small wage settlements negotiated so far this
year. Our econometric model of Japan indicates
that the stronger yen?which Japanese firms are
not fully passing through to dollar export prices?
will cut export volume at most 5 percent in 1986.
Nonetheless, lower oil prices and the relative price
effects of yen appreciation will probably push the
current account surplus to a record $65 billion in
1986, up from $50 billion in 1985.
Japanese economic prospects are likely to improve
slightly in 1987, largely because of stimulus from
lower interest rates and oil prices. Even so, we
expect growth to remain well below 4 percent.
Neither consumer nor government spending will
rise fast enough to offset the continued slowdown in
foreign demand. More important, plant and equip-
ment investment, which had risen sharply in 1984-
85 in response to burgeoning exports, will probably
slow substantially. We expect that the current
account will begin to turn around in mid-1987,
trimming the surplus to $60 billion for the entire
year.
West Germany. Our quarterly model indicates that
West Germany will enjoy a spurt of GNP growth
in 1986, followed by a slowdown in 1987. Private
consumption this year will benefit from the first
stage?about $5 billion?of personal income tax
cuts in both 1986 and 1988 and from real wage
increases. We anticipate that the savings from
cheaper oil will be largely passed on to the consum-
er and will boost GNP growth about 0.5 percentage
point in 1986. Even with these favorable factors,
however, we expect the economy to begin to slow by
midyear, as real net exports decline, and as lower
export earnings cause West German firms to reas-
sess investment plans. We forecast that the effects
of currency appreciation will be more manifest in
1987, and that, with continued fiscal restraint, the
economy will reenter the slow growth pattern that
has characterized West Germany in the 1980s.
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Real Effective Exchange Rates,
1979-86"
Inde Itrt quarter 1979 100
160
80 1979 80 85
a Trade-weighted. inflation-adjusted exchange rates.
t MT', 'S I IC,
338948 4-86
Unemployment, the government's major failing,
will remain high. We expect the number of unem-
ployed will decline only 50,000-60,000 this year,
yielding an average 9.0-percent unemployment
rate. We expect another marginal decline in 1987.
Inflation rates this year and next will be postwar
lows.
Prospects for Reflation
Bonn and Tokyo are unlikely to shift gears abruptly
and reflate unless confronted with imminent reces-
sion. West German Finance Minister Stoltenberg,
backed by Chancellor Kohl, has ruled out advanc-
ing the $4 billion in tax cuts planned for 1988. The
Bonn coalition expects that the improved economic
outlook for 1986 will be enough to secure its
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Japan and West Germany:
Economic Outlook,
1985-87
Percentage point
contribution to GNP growth
(except where noted)
Japan West Germany
1985
1986
1987
1985
1986
1987
Private consumption
1.4
1.9
2.1
0.9
1.9
0.7
1.5
0.4
Government
consumption
0.3
0.5
0.4
0.2
Residential
construction
0.1
0.2
0.4
-0.8
0.4
0.1
Plant and equipment
Investment
1.6
2.0
1.1
0.6
1.1
0
Inventory
0.2
0.8
0.6
0.4
0.8
-0.2
Exports
1.2
-1.1
1.1
2.5
1.2
1.3
Imports
-0.2
-1.2
-2.2
-1.4
-2.1
-1.5
GNP (percent)
4.6
3.1
3.5
2.4
4.0
0.8
1.6
1.2
Inflation (percent)
2.0
1.0
1.5
2.0
Unemployment
(percent)
2.7
3.0
2.8
9.3
9.0
8.8
Current account
(billion US $)
49.3
65.0
60.0
14.8
29.0
29.0
Assumptions: Yen and mark rates of 180 and 2.2 against the US
dollar from second quarter 1986 onward: oil price of $15 per barrel.
If the yen and mark appreciate to 160 and 2.0 in the second quarter
of this year, our analysis indicates GNP growth in Japan would
decline 0.3 and 0.7 percentage points in 1986 and 1987, respective-
ly, with corresponding reductions of 0.5 and 0.4 percentage points
in West Germany.
reelection next January. The government hopes to
downplay unemployment and concentrate instead
on lower inflation, improved real incomes, and
record current account surpluses. A devastating
defeat in the next state election-Lower Saxony in
June-could cause the coalition to reassess its
economic strategy, but time is running out for
major policy changes before the federal elections.
Unless Japanese GNP growth falls well below 3
percent, we also expect Tokyo to stick to its deficit
reduction program, which calls for little or no
growth in current government expenditures. The
recommendations of the Maekawa Commission,
Nakasone's special advisory commission on trade
Secret
policy, do not suggest an imminent shift in Tokyo's
fiscal stance. The report urges that Tokyo focus on
medium- and long-term measures to wean the
economy away from its dependence on export-led
growth.
Both governments are contemplating tax reforms to
reduce high marginal rates, but relief is not likely
soon. West German tax reform will not even be
debated until 1987, and Stoltenberg insists any
direct tax cuts must be largely balanced by indirect
tax increases or reduced subsidies. Japanese tax
reform might have little expansionary impact.
Tokyo may recommend $16-17 billion in personal
and corporate tax cuts later this year, but a new
value-added-type tax may be recommended be-
cause the powerful Finance Ministry wants tax
reform to be revenue neutral
Tokyo and Bonn could resort to expansive mone-
tary policies both to stimulate domestic demand
and to push down their exchange rates. We believe
that this scenario is unlikely, but we do not rule out
that the Bank of Japan may engage in substantial
currency intervention or another cut in the discount
rate if the yen again appreciates strongly. The
Bundesbank, a reluctant participant in the coordi-
nated discount rate cut of last March, is unlikely to
engage in additional rate cutting.
At the Summit
When summit discussions focus on economic policy
coordination, West Germany and Japan may con-
flict with other attendees. The Italians, for exam-
ple, believe that the refusal of West Germany and
Japan to reflate is the main cause of disequilibrium
in the world economic system. The French believe a
key monetary issue is how to recycle the Japanese
and West German current account surpluses to
assure world economic growth, new credit to LDCs,
and reduced protectionist pressures.
West Germany and Japan, for their part, are likely
to endorse greater economic policy coordination in
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principle, but will resist foreign interference with
their economic policies. Japanese Finance Ministry
officials are concerned the United States may
recommend targets for a series of macroeconomic
variables, a plan which Tokyo will strongly oppose.
If pressed to relax its fiscal policy, Bonn is likely to
retort that the United States should first put its
own house in order by solving its government and
trade deficit problems.
A more even distribution of the global current
account?that is, smaller surpluses in West Germa-
ny and Japan matched by lower deficits in the
United States and the debtor LDCs?would in-
crease prospects for trade liberalization under the
new GATT round. Both governments endorse mul-
tilateral trade liberalization but contend that the
deficit countries should be the ones to adjust their
economic policies. Without a shift, West Germany
and Japan will continue to accumulate large cur-
rent account surpluses over the next two years,
fueling foreign protectionist pressures.
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Summit Issues:
Monetary Reform Faces
Long-Term Debate
Big Six leaders do not intend to put international
monetary reform at the forefront of topics dis-
cussed at the Tokyo Summit in May. They are
prepared, however, to endorse the modest aims of
the Group of Ten' (G-10) communique?greater
coordination of domestic economic policy and fur-
ther study by the IMF of the use of exchange rates
and other indicators to measure policy consisten-
cy?issued before the IMF Interim Committee
meeting earlier this month. The major advocates of
reform?France and Italy?almost certainly will
not mount any major initiatives on monetary re-
form at the summit, because they believe ambitious
proposals would meet stiff resistance from West
Germany, the United Kingdom, Japan, and Cana-
da. Meanwhile, Italy and Canada, and perhaps the
EC Commission, are likely to make a pitch that
they be included in the Group of Five (G-5) to
improve international monetary coordination.
Increased Monetary Cooperation
The major industrial countries since last summer
have been moving toward adopting a slightly more
managed floating exchange rate system:
? The G-5, in September 1985, agreed that the US
dollar was too strong and pledged joint action to
bring it into line with "fundamental economic
conditions."
? President Reagan's call in February to study the
question of convening an international monetary
conference provided the impetus for further dis-
cussions on reform.
' The G-10?the main forum in which industrial countries discuss
international monetary affairs?comprises 11 countries: the United
States, Japan, West Germany, France, the United Kingdom,
Belgium, Canada, Japan, the Netherlands, Sweden, and Switzer-
land. The first five countries comprise the G-5.
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G-5 Currencies: Changes Against
the US Dollar, 1985-86 a
Index: January 1985 100
150
Ii I 1 1 I 1 1 I
90 1985
1986
a Nominal rates through 17 April 1986.
hThe West German mark and French franc
are linked through the European Monetary System.
306943 4,86
? Italy and Canada have lobbied for G-5 member-
ship, arguing that monetary cooperation among
the major countries needs to be broadened.
? The IMF's main advisory group, the Interim
Committee?in response to G-10 recommenda-
tions?called on the IMF to study the use of
"objective" indicators and other measures to pro-
mote exchange rate stability and economic policy
consistency without sacrificing the flexibility of
the current system.
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Industrial countries generally welcome G-5 inter-
vention in currency markets and the exploration of
refinements in the current monetary system, but
they differ sharply on whether to go beyond ad hoc
exchange rate management and on whether the G-
5, as presently constituted, is the appropriate forum
for setting international monetary policy
Views of Summit Countries
Despite disagreement among summit participants
on what form the international monetary system
should take in the long run, there is likely to be
little dispute on monetary affairs at the summit.
France?a longtime advocate of reference, or tar-
get, zones for exchange rates?was especially
pleased with the G-5 meeting last September as
well as President Reagan's subsequent remarks on
an international monetary conference. Paris be-
lieves these events signal increased US willingness
to consult on monetary issues, and, therefore, wants
to avoid extreme proposals that might cause Wash-
ington or other summit participants to back away.
political maneuvering be-
tween President Mitterrand and Prime Minister
Chirac probably will result in the French delega-
tion taking a low-key approach to most issues.
West Germany and the United Kingdom?both
firmly opposed to any departure from floating
exchange rates?will seek to play down monetary
reform at the summit. Bonn and London believe
that, despite some weaknesses, the current system
is working adequately. They were greatly disturbed
earlier this year by what they perceived as a shift in
US policy on floating rates and feared it would
open the door to French proposals for sweeping
reforms. Both the West Germans and the British
reject the concept of reference zones.
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/British officials/
have their hands full with other issues?
deregulation of capital markets, the debate over
entry in the European Monetary System, and the
fall in oil prices. Bonn and London, nevertheless,
are likely to go along with increased multilateral
surveillance of macroeconomic policies?as long as
it involves no mandatory adjustments?and closer
consultations in such forums as the G-5.
Japan is likely to support in principle the consensus
on monetary affairs reached at the IMF Interim
Committee earlier this month. The Japanese proba-
bly will seek summit endorsement of the G-10's
work to improve the current system through closer
industrial country cooperation on economic policy
decision making. The adverse impact of the rapidly
appreciating yen on politically important small
exporters, however, has led some politicians to
speculate publicly about the need for monetary
reform to stabilize exchange rates. Although Prime
Minister Nakasone has endorsed President Rea-
gan's proposed study of an international monetary
conference, Tokyo is unlikely to push for the idea
unless Washington takes the lead. The Japanese,
furthermore, remain flatly against target zones,
which they consider unworkable because of the
strong effect of international capital flows on ex-
change rates; they believe coordinated economic
policies must come first and that stable exchange
rates will follow.
Italy and Canada probably will endorse G-10 and
IMF work on international monetary coordination
and stress that other summit participants should
grant them a larger role in world monetary cooper-
ation by admitting them to the G-5. Rome?like
Paris, a strong backer of monetary reform?has
been trying to line up G-5 countries behind its
membership drive. Ottawa is likely to contend,
along with Rome, that no summit country should
be excluded from the G-5. Reaction among the
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LDCs and Monetary Reform
LDCs are taking a more active role in advocating
monetary reform for pragmatic reasons. Most of
them peg their currency to the dollar, the French
franc, or some composite of advanced country
currencies. The major part of Third World debt,
furthermore, is denominated in dollars as are
virtually all oil prices
LDCs state their views on international monetary
developments through the Group of 24 (G-24), a
group of LDC representatives linked to the IMF.
Most of their recent attention has been focused on
Third World debt, but in August 1985 they issued
a G-24 report to the IMF on the functioning of the
international monetary system. The LDCs stressed
in their report that:
? The present exchange rate system is seriously
flawed and should be replaced by a system of
target zones.
? An international conference should be convened
to discuss not only monetary reform but also
debt and development matters.
The G-24 reaffirmed these points in a communique
before the IMF Interim Committee meeting earlier
this month. G-24 representatives also expressed
concern that their August 1985 report was not
being considered by the Interim Committee, and
they called for at least $40-45 billion in Special
Drawing Rights (SDRs) over the next several years
in order to increase the flow of resources to the
Third World.
11
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major countries has been lukewarm despite some
public support for Italian membership. Most are
wary about G-5 effectiveness if the group is ex-
panded to include all seven summit countries, and
they probably fear that if the group is enlarged the
EC Commission also will seek membership, a move
they all are likely to oppose.
Beyond the Summit
Differences among major countries over develop-
ments in the currency markets are sure to make
monetary reform the subject of continuing contro-
versy. An international monetary conference, how-
ever, still appears to be a long way off. All Big Six
countries generally believe that a greater developed
country consensus on monetary cooperation and on
enhanced IMF surveillance should come first. Dis-
cussion of monetary reform, therefore, is likely to
be on hold at least until the fall when the IMF
study on indicators is scheduled to be completed.
Big Six leaders also fear that an international
conference easily could break out into a political
shouting match between the Developed Countries
and the LDCs on a wide range of items, including
debt and development issues.
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Secret
International Financial
Situation: Argentina's
Financial Prospects
Creditors probably will support Buenos Aires's
requests for new money this year, but actual dis-
bursements will be less than anticipated because of
slow-going loan negotiations and delays arising
from missed IMF-supported program targets. Al-
though Argentine backsliding in 1986 may frus-
trate creditors, we think President Alfonsin believes
he needs time to outmaneuver his domestic oppo-
nents and maintain public support for his restruc-
turing plan. In our view, Buenos Aires will continue
to service its debt and liberalize the economy if it
can generate some growth this year. Nonetheless, a
prolonged holdup in foreign credit disbursements
might derail Alfonsin's restructuring program,
threaten confrontation with creditors, and renew
domestic demands for a moratorium on interest
payments.
Economic Performance in 1985
Alfonsin negotiated an IMF-supported program in
December 1984 that ended Argentina's confronta-
tional approach with its creditors and helped Bue-
nos Aires begin to reschedule its 1982-85 debt
maturities and arrange for new commercial loans.
With external support and drawing on middle-class
desires for reform, Alfonsin began a program to
liberalize the economy. Nevertheless, a loose mone-
tary policy set off a price spiral that quickly eroded
Alfonsin's public support and slowed negotiations
for new money from commercial bankers. The
government regained the political initiative and
assuaged creditor concerns in June 1985 with eco-
nomic shock treatment?called the Austral Plan?
that used wage-price controls, a new currency, and
a fixed exchange rate to restore confidence in
domestic financial markets and give the adminis-
tration time to establish more comprehensive poli-
cies.
The Austral Plan had a dramatic impact: inflation
slowed from 30.5 percent in June to an average
monthly rate of 2.5 percent during the last quarter
13
Sources of Funds
According to press and Embassy reporting, Buenos
Aires intends to use a variety of foreign financing
methods to support domestic growth. The govern-
ment will ask commercial bankers to reschedule
over $5 billion in 1986 maturities while seeking a
Paris Club rescheduling. In addition, we think
Buenos Aires will roll over more than $1 billion in
short-term bond maturities as well as issue addi-
tional dollar-denominated bonds. The government
believes foreign direct investment will provide $610
million?nearly one-third less than 1985 levels.
Additionally, Argentina anticipates receiving $500
million in World Bank loans in 1986 and negotiat-
ing for $1 billion in 1987. Although Buenos Aires
probably will receive $1.2 billion in commercial
bank loans from last year's agreement, the eco-
nomic team probably will press for an additional
$2.4 billion in loans to be drawn in 1986 and 1987.
Likewise, Argentina will draw nearly $500 million
under its 1985 IMF agreement and negotiate for
over $1 billion in its next agreement. Buenos Aires,
however, will net roughly half this amount as a
result of repayment of past IMF loans.
of the year. Argentina began clearing its private-
sector arrearages?as a bonus its debt service
burden dropped with falling international interest
rates. Buenos Aires's current account deficit fell by
half when exports rose over 1984 levels, and effec-
tive restrictions sharply reduced imports. Polls re-
vealed that the government's decisive anti-infla-
tionary measures and the overall improved
economic environment significantly bolstered Al-
fonsin's popularity and contributed to his party's
good showing in last November's congressional
elections.
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DI IEEW 86-017
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Secret
Argentina: Balance of Payments,
1984-87
Million US $ Argentina: Economic Indicators, 1984-87.
1984
1985a
19851,
1987b
Current account
-2,391
-1,200
-2,330
-2,100
Trade balance
3,523
4,400
3,140
3,500
Exports, f.o.b.
8,107
8,300
7,790
8,500
Imports, c.i.f.
4,584
3,900
4,650
5,000
Services and
transfers
-5,914
-5,600
-5,470
-5,600
Interest
-5,537
-5,260
-5,150
-5,210
Capital account
613
3,100
1,960
1,800
Foreign direct
investment
268
920
610
800
Net foreign
borrowing
-562
3,700
2,350
900
Net IMF credit
-34
1,000
400
340
Change in arrears
941
-2,520
-1,400
-240
Change in official
reserves
-34
1,900
-370
-300
a Preliminary.
b Projected.
Nevertheless, several developments foreshadow
trouble for Buenos Aires in 1986 and 1987. Eco-
nomic activity in 1985 fell 4 percent, and both
organized labor and the general public are pressur-
ing for growth this year, according to US Embassy
reporting. Unemployment also rose last year, and
there is no sign that increases in private domestic
and foreign investment will reverse the trend dur-
ing 1986. Bureaucratic inertia-which has slowed
banking reform-and competition between the fed-
eral and provincial governments for available sav-
ings threaten to keep private credit tight. Addition-
ally, the government missed its IMF fiscal deficit
target last year and has made insufficient progress
in either cutting expenditures or reforming the tax
system to fully meet this year's target.
Current Economic Policy
Buenos Aires plans to use both domestic and
foreign funds to aid in restructuring its economy in
1986, according to press and US Embassy report-
ing. Meanwhile, Embassy reporting indicates that
Real GDP Growth
Percent
5
-5
Unemployment
Percent
6
4
2
0
Inflation
Percent
800
600
400
200
Average Real Industrial
Wage Growth
Percent
20
Combined Public-Sector
Deficit
Percent of GDP
15
10
0 1984
87
-20 1984
1, 1985 data are preliminar,
1986-87 data arc projected.
87
308899 486
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Alfonsin believes economic growth is necessary to
maintain his political strength in urban areas and
that direct government spending in the countryside
is necessary to enhance his political base in the
provinces. Press reports outline the government's
plans:
? Pare the budget deficit to 3 percent and use
external savings to cover the remainder of Argen-
tine investment needs.
? Devalue the Austral and continue to lower export
taxes to improve the competitiveness of agricul-
tural exports.
? Liberalize the import regime and payment system
to assist manufacturers.
? Gradually lift private-sector price controls?fast-
er and more completely for small as opposed to
large businesses?while allowing public corpora-
tions to raise prices to reflect costs, thereby
making them viable for eventual privatization.
? Convince organized labor to accept general
guidelines for a slow return to market-determined
wages.
? Stabilize monetary policies and regulations to
bolster the banking sector while maintaining posi-
tive interest rates to encourage savings and the
repatriation of overseas assets.
? Increase revenue through tax reform, a forced
savings program, and other stop-gap measures.
Argentina will ask the IMF, World Bank, and
commercial bankers to help cover the financing gap
with additional lending this year. Buenos Aires also
plans to reschedule its 1986 commercial and bilat-
eral maturities and clear up its arrearages, while
repaying a collection of IMF and bond obligations.
Financial Prospects
We believe creditors will be amenable to this plan
but doubt that the full amount of funds that
Buenos Aires desires will be disbursed during 1986.
15
Secret
Although the IMF hopes to have a new standby
program in place by the end of May when the
present agreement expires, negotiations did not
begin until late April. Delays in reaching a new
IMF standby could further retard commercial bank
negotiations, making a final agreement unlikely
before the end of the year. We believe further
delays are probable should Argentina miss some of
its IMF targets without seeking waivers. According
to press reporting, World Bank loans in the pipeline
and negotiations for additional loans could be held
up by wranglings with public Argentine firms over
how and through whom loans should be disbursed
to the private sector.
Outlook for 1986
We foresee a year in which Argentina will have
increasing difficulty meeting its IMF performance
criteria, resulting in delayed loan disbursements
and revisions in its program. Alfonsin's restructur-
ing plan, in our view, is sound, but its implementa-
tion is sparking opposition from labor, the Peron-
ists, and even sectors of the President's Radical
party. Furthermore, the government is making only
modest headway in breaking down bureaucratic
resistance to privatization, tax reform, and other
streamlining measures. We expect that in practice
the program will achieve mixed results and that
Alfonsin may be tempted to spur the economy
through an accommodating monetary policy to
cover revenue shortfalls, resulting in missed IMF
monetary and deficit spending targets. Additional-
ly, we think Buenos Aires will face a lower trade
surplus that will slow the clearing of its public debt
arrears and encourage the use of other short-term
financing.
We believe that Alfonsin is dedicated to fundamen-
tal economic reforms, but that he believes that
political realities dictate that he implement them
slowly. Although creditors probably will find Ar-
gentina's backsliding on its IMF program frustrat-
ing, the government will use the extra flexibility it
thereby garners to offer some concessions to domes-
tic opponents and help maintain public support for
its restructuring program. We believe that Buenos
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Secret
Aires's balancing act between foreign creditor de-
mands and domestic political pressures will produce
marginal economic growth and a small drop in
unemployment at the cost of 70- to 100-percent
inflation. Demands by international creditors, how-
ever, that Buenos Aires show faster progress and
stricter compliance with its IMF program could
produce prolonged holdups in credit disbursements
that might derail Alfonsin's restructuring effort.
This would threaten confrontations between the
government and creditors over debt servicing and
renew demands by the opposition and sectors of the
President's party for a moratorium on interest
payments.
Secret 16
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Secret
Global Privatization:
Gaining Momentum
Privatization?the transfer of ownership or control
of a state asset to the private sector?is gaining
momentum worldwide. Following the lead of Brit-
ain, which has progressed the fastest and furthest
in terms of number of assets sold and revenues
earned, many other countries have already begun
or are planning privatization programs. Most of the
progress has been registered by non-US OECD
countries. Although numerous LDCs have an-
nounced intentions to reform their public enter-
prises, implementation has come slowly and fitful-
ly. In such instances, powerful special interest
groups?the military, labor organizations, industri-
alists, consumers, or the bureaucracy?are imped-
ing reform in economies where legal prohibitions,
economic policy, and established practice have long
favored government-led development.
Britain Leads the Way
Since taking office in 1979, Prime Minister
Thatcher has made the sale of state-owned assets a
hallmark of her domestic economic program to
revitalize the economy through private initiative.
Her government has spelled out four specific goals
for its privatization program: to reduce the size of
the government sector; to promote competition and
efficiency in the denationalized sector; to expand
share ownership; and to raise revenues to help
finance the government's budget deficit. The gov-
ernment intends to sell off gradually a wide range
of public assets including not only the nationalized
industries, but also major public utilities, state-
owned housing, defense industries, and social ser-
vice institutions.
Britain's privatization program has made substan-
tial progress. Between 1979 and the end of 1985,
the Treasury had received a total of roughly $11
billion from the sale of state assets. London began
speeding up the pace in late 1984, increasing
revenues to more than $3 billion a year. It also
17
introduced bigger ticket items, most notably 50.2
percent of British Telecom (more than $2 billion)
and 100 percent of Enterprise Oil ($530 million).
Government budget estimates for 1986-88 antici-
pate a further escalation in revenue earnings from
privatization to almost $7 billion a year from assets
such as British Gas Corporation, the British Air-
ports Authority, the Royal Navy Dockyards, and
parts of the Water Authorities Association.
Despite wide public support as shown in public
opinion surveys, the most frequently heard objec-
tion is that the government is "selling off the
Georgian silver" to finance current spending, rob-
bing future generations of wealth. Other arguments
center around the proper regulatory authority to
oversee monopolies?such as British Gas. Particu-
larly in recent months, a surge of British nationalist
sentiment has emerged in reaction to the proposed
sale of parts of British Leyland to General Motors,
Others Follow Suit
Notwithstanding the potential pitfalls, numerous
other industrial countries have already begun or
have plans to begin privatization programs in the
near term.
Canadian Prime Minister Mulroney came to power
in 1984 pledging to reduce Ottawa's direct involve-
ment in the economy by selling as many of the
Federal government's Crown corporations as possi-
ble to the private sector. These wholly owned
companies, which account for roughly 12 percent of
Canada's GNP, are involved in a wide range of
industries including transportation, broadcasting,
Secret
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Trends in Privatization: Selected Countries
Divestiture Liquidation Partial Joint Management Comments
Divestiture Venture Contract
Industrial countries
United British Aerospace, British Telecom, Water The Royal The government has maintained spe-
Kingdom Cable and Wireless, Authorities Associa- Dockyards a cial privileges in several of these indus-
Britoil, Enterprise tion a tries to veto actions that it believes are
Oil, British Gas,a not in the country's best interest.
British Airways,.
British Airports
Authority a
France
Industrial companies
including Thomson,.
Pechiney,. Rhone-
Poulenc,. Elf Aqui-
taine;a several retail
banks;a and Paribas and
Suez financial groups a
New government plans to privatize
nine major industrial groups and 36
banks nationalized by Mitterrand. Al-
though the specifics have not been
worked out, the government is likely to
maintain sizable minority holdings in
all enterprises involved.
Japan Japan Air Lines a Nippon Telegraph and Tokyo plans to gradually sell shares in
Telephone,a Japan these firms through the end of the
Tobacco,a and Japan decade.
National Railways a
Spain
Textile factories, Integrated Car manufacturer Electron- Part of the government's industrial re-
tourism and catering steel manu- ics firm structuring program to make Spain
firms, and a truck facturer more competive in the EC.
company
Developing countries
Bangladesh Jute and textile mills
Government-owned Has sold or plans to sell 100 companies
banks,a national airline,a since the government announced a new
shipping lines,a and tele- industrial policy in 1982.
phone system a
Pakistan
National air- On 20 January, Pakistan formally
line a and gov- announced the initial phase of its
ernment-run planned disinvestment of six major
cement, pe- public-sector firms worth over $100
troleum, and million.
textile facili-
ties a
Mexico Nacional Hotelera
Mexicana Airlines a
Of 482 public enterprises offered for
sale, closure, or merger since February
1985, Mexico has sold 21 relatively
small firms for a total value of about
$40 million.
Brazil
CVRD mining company,
Petrobas
President Sarney intends to privatize
42 parastatals listed for reform under
the previous administration and add
another 12 firms to the list.
a Planned.
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Privatization: How It's Done
Privatization?the transfer of assets and activities
from government to the private sector?can occur
in any of the following ways:
? Divestiture is the disposal by the government of
all of its ownership and control of an enterprise.
The most common form is sale of the enterprise
to an individual or group of investors.
? Liquidation is an extreme form of divestiture in
which a government allows, or forces, an enter-
prise to go out of business. It does not directly
expand the private sector. It usually occurs after
it is found that there is no way to make the
enterprise profitable.
? Partial divestiture occurs when the government
disposes, usually by sale, of some of its owner-
ship in a company. By selling less than 50 percent
of an enterprise, the government retains formal
and, in some cases, actual control.
? Leasing of assets, rather than the outright sale,
does not diminish the value of state wealth and
transfers the responsibility for its operation to
the private sector.
? Minority joint ventures with the private sector,
domestic or foreign, provide outside funds to
parastatals without sacrificing government con-
trol of the companies.
? Management contracts are most frequently used
when the state wishes to retain ownership of an
enterprise but finds that it needs specially skilled
labor or managerial talent not available in the
public sector.
wheat sales, and manufacturing. Ottawa has made
some progress toward this goal in the past two
years, despite the poor financial shape of many of
the corporations and public sentiment that this
national legacy should not be sold off indiscrimi-
nately or, even worse, to foreigners. Thus far,
19
Secret
Ottawa has sold De Havilland Aircraft (to Boeing
for $112 million) and Canadian Arsenal, an arms
manufacturing company. Bids are currently pend-
ing on Canadair, which manufactures corporate
jets, and Teleglobe Canada, a monopoly on over-
seas telephone traffic.
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France's newly elected conservative government
has vowed to establish a more free market econo-
my. The centerpiece of its program is the privatiza-
tion of nine major industrial groups and 36 banks,
nationalized when President Mitterrand came to
power in 1981, and other major companies that
have been in state hands since World War II. The
list of firms in the new government's five-year
privatization program, which could raise as much
as $27 billion, includes Elf Aquitaine, the petro-
leum enterprise; Thomson, a major electronics 25X1
group; Pechiney, the aluminum giant; and the
Rhone-Poulenc chemical firm. Also on the list are
France's three largest retail banks, which together
hold over 40 percent of all French deposits.
According to the financial press, Italy is running a
close second to, or perhaps even surpassing, Britain
in its drive to privatize state assets. Craxi's socialist
government is doing so with as little fanfare as
possible, however, to minimize domestic opposition.
The process in Italy is different because of the
country's unique industrial structure, whereby the
state owns and manages companies in partnership
with the private sector. The state holding firm IRI
raised $1.6 billion between 1983 and August 1985
through the sale of assets including equity holdings
and property. It is expected to bring in another $1.5
billion over the next year by issuing shares in
enterprises such as the Aeritalia aerospace compa-
ny and Selenia electronics firm. The state energy
holding group, ENI, raised $628 million by selling
20 percent of its pipe-laying subsidiary, Saipem, in
1984. Over the next three years, Rome is likely to
earn another $500 million from the phased sale of
up to 51 percent of the SIP telephone utility and
roughly $210 million from the Banco Nazionale del
Lavoro, which is offering 25 percent of its equity to
Italian investors and a further portion to its staff.
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Japan plans to shrink its small public sector by
privatizing all or part of four major enterprises by
1990. To spur competition and appease foreign
complaints of protectionism, the government began
to allow competition in the telecommunications and
tobacco industries as of 1 April 1985. This was
done in preparation for the gradual sale of its
shares in Nippon Telegraph and Telephone and
Japan Tobacco during the next several years. To-
kyo also plans to eventually privatize, with hopes of
rejuvenating, the loss-making Japan National Rail-
ways by splitting it into several private firms.
Finally, the government most recently announced
its intention to sell its 35-percent share of Japan
Air Lines.
West Germany has done less in the area of privati-
zation than the other major West European coun-
tries but shows signs of becoming more active in the
future. Bonn's only action so far involved reducing
its stake in the Veba energy conglomerate from 44
percent to 25 percent in 1984. The government will
be offering shares with an estimated value of $333
million, including a 40-percent stake in VIAG, the
large energy, chemicals, and aluminum firm; a 47-
percent portion of Prakla-Seismos, an energy explo-
ration and services group; and 45 percent of IVG, a
property and transport group. Bonn is also explor-
ing the possibility of privatizing a state-owned
mortgage bank and selling shares in two other
banks as well as reducing its holdings in Salzgitter,
a state-owned steel firm, and Saarbergwerke, a
small coal mining firm.
Several of the smaller West European countries
also have shown interest in shifting more economic
activity into the private sector. Spain's socialist
government, for example, has already sold eight
major state enterprises since taking office in 1982.
This comes as part of its effort to reduce its public-
sector deficit and enhance Spain's competitiveness
in the EC. Turkey's Prime Minister Ozal has an
ambitious "master plan" to privatize 32 state enter-
prises?under the tutelage of a US commercial
bank?and the Swedish government is negotiating
to sell its 75-percent stake in Pripps, the country's
leading brewery.
Secret
Increasing LDC Interest
Privatization has also become an increasingly im-
portant issue in the Third World during the past
two years. Numerous countries have announced
their intention to reform public enterprises as a
result of rising domestic and foreign debt burdens,
pressure for reform from lenders and donors, and
efforts to promote export competitiveness. Often
the commitment to privatization, however, appears
to be more rhetorical than real. Reform has come
slowly and fitfully as a result of opposition from
powerful interest groups?the military, labor orga-
nizations, established industrialists, subsidized con-
sumers, and the bureaucracy?and weak local fi-
nancial markets. When reform has occurred, the
major "strategic" parastatals in energy, minerals,
utilities, and heavy manufacturing generally have
been excluded, leaving relatively small or unprofit-
able companies for sale.
Several LDCs have announced their intention to
implement comprehensive divestiture of selected
public enterprises. However, only a few govern-
ments have actually begun the process:
? In February 1985, Mexico announced its inten-
tion to sell, close, or merge 236 public-sector
entities out of some 1,100 as part of an austerity
program. This list was recently expanded to 482
enterprises. So far, the government has sold 21
relatively small parastatals at a total value of
around $40 million. According to press reports, in
October 1985 the Mexican Government also sold
the Nacional Hotelera chain to a private invest-
ment group for an estimated $84 million.
? In Bangladesh, more than 30 jute mills and more
than 20 textile mills, which had been nationalized
in 1972, were sold back to the private sector
during the first year of the New Industrial Policy,
which was announced in 1982.
? In October 1985, Malaysia sold 30 percent of its
shares of the Malaysian Airlines System (MAS).
Over the next three years MAS is scheduled to
become a private corporation. Divestiture of a
container handling facility is also planned.
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? Jamaica has sold or leased most of its sugar
refining and hotel interests.
In place of complete divestiture, most LDCs are
opting for partial divestiture, leasing, management
contracts, and minority joint ventures that do not
generate such strong political opposition and that
are more possible given the limited financial
networks:
? Saudi Arabia has begun to privatize its $10
billion Saudi Arabian Basic Industries Corpora-
tion by selling shares to Saudi citizens and inves-
tors from Arab Gulf states.
? Argentina's national oil company is leasing stra-
tegic oil drilling rights to the private sector.
? Brazil has sold minority shares in important
parastatals such as the giant CVRD mining
company. The government also offered nonvoting
shares for 25 percent of Petrobas, the national oil
company, in November 1985, and the US Embas-
sy reports that further offerings may be made in
telecommunications and electric utilities
parastatals.
? Mexico is seeking to bring its 58-percent partici-
pation in Mexicana Airlines down to 51 percent
by selling off stock.
? In Thailand, the government has decided to
privatize, through stock offerings, parts of the
Electricity Generating Authority of Thailand and
Thai Airlines International.
? Bangladesh plans to sell, through stock offerings,
up to 49 percent of the state-owned banks, ship-
ping lines, the national airline, and the telephone
system. The government has also contracted out
the management of some publicly owned hotels.
21
Secret
? In January 1986, Pakistan announced a plan to
offer shares worth over $100 million in six major
public-sector firms to private investors. The firms
include Pakistan International Airlines, the State
Oil Corporation, and cement and textile mills. A
second offering probably would not be as attrac-
tive because it includes 12 money-losing enter-
prises, some of which are not even functioning.
? In Chile, shares are now being sold in the power
company Chilectra and in two banks the govern-
ment took over after their collapse in 1983.
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In our judgment, parastatal reform will continue to
proceed slowly in most LDCs. While the potential
economic benefits of reform are clear, the perceived
high political costs and weak capacity of local
financial markets will sidetrack major reform ef-
forts. Lacking leaders with a clear commitment to
change, most LDCs are likely to continue imple-
menting only limited reforms such as leasing, joint
ventures, and management contracts. Without sig-
nificant pressure from international donors and
lenders, few LDCs are likely to implement more
important reforms needed to reduce parastatal
excesses and inefficiencies.
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High-Definition Television:
Search for a
World Standard
The meeting of the International Telecommunica-
tion Union (ITU) in Dubrovnik, Yugoslavia, next
month is slated to consider a worldwide technical
standard for high-definition television (HDTV). We
believe the decision on the next generation of TV
technology will shape the television industry that
will emerge by the end of the century. HDTV,
which is not expected to reach the home market for
15 years, delivers a fourfold increase in picture
clarity and stereo sound, bringing TV viewing close
to 35mm film quality. If the standard is adopted,
Japan and the United States are likely to receive
the most commercial benefit. Japan leads in the
new technology and has already spent $100 million
on HDTV. The United States could extend its
dominance in the field of international program
distribution. Soviet Bloc support is pivotal for
adoption of this Japanese/US-backed proposal.
Key West European countries, most notably
France and the Netherlands, will oppose the
HDTV standard to protect investments by domestic
firms in alternative television technology. Defeat or
delay of the standard--the likely outcome?would
result in several competing standards and higher
costs for all involved.
The Debate
A decision on the HDTV standard for television
studio production equipment will engender strong
debate in Dubrovnik as many of the participating
countries come with substantial commercial inter-
ests to protect. The new standard is supported by
Canada, Japan, and the United States. In addition,
US State Department officials currently believe
Italy, Portugal, Spain, Sweden, and Switzerland
will endorse the proposed standard, and reporting
from Geneva last November indicated that Den-
mark, Finland, and Norway may support the
recommendation.
23
Secret
Today's Television Standards
Color television technology emerged in the 1950s,
predating worldwide program distribution by satel-
lite. Broadcasting began at the national or regional
level, permitting nations to set separate technical
specifications for recording, transmitting, and re-
ceiving television signals. Program exchange, cur-
rently facilitated by satellites, must undergo signal
conversion when sent among different broadcast
regions. Today, there are three families of color
television transmission standards, all
incompatible:
? The National Television Standards Committee
(NTSC) television systems used in North Ameri-
ca and Japan.
? The Sequential Color with Memory System
(SECAM) used in France and Greece, Eastern
Europe including the Soviet Union, Northwest
Africa, and parts of the Middle East.
? The Phase Alternation Line System (PAL) used
in the rest of Europe, Asia, and some other
countries.
European opposition to the standard is centered in
the Netherlands, France, and the United Kingdom,
where several consumer electronics firms have de-
veloped an alternative HDTV technology. Instead
of offering something all new, Philips of the Neth-
erlands, Thomson of France, and the Independent
Broadcast Association in Britain have developed
enhanced versions of today's equipment?a family
of transmission techniques called MAC (multi-
plexed analog components). These nations argue
that the proposed HDTV standard is not suitable
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The proposed high-definition television production standard
Compared to standard television pictures
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Secret
for reception by European television sets. This
opposition is aimed in part at keeping foreign
equipment out of their markets. Indeed, advanced
television technology may be incorporated into a
EUREKA project on broadband telecommunica-
tions.
France is committed to use the MAC system on its
upcoming TDF-1 broadcast satellite scheduled for
launch in November 1986. Adoption of the Japa-
nese/US standard could mean HDTV would com-
pete with European alternatives, most likely bring-
ing early obsolescence of MAC.
In March, the French Government began a cam-
paign, aimed primarily at West European coun-
tries, to forestall adoption of the standard. Since
the recent French parliamentary election, however,
we have received conflicting reports on the current
French position. US industry experts claim that the
new Directorate General of Telecommunications is
more amenable to the Japanese/US proposal. Such
a reversal could undercut the rest of Western
Europe's opposition. However, US Embassy offi-
cials in Paris and the Secretary General of the ITU
still believe Paris will defend what the French
industry sees as its own interests.
The Soviet Bloc could prove pivotal on endorsement
of the standard./
At this time, the USSR uses SECAM
technology. the Soviets want
to skip enhanced versions of television for HDTV
but want assurances that HDTV technologies will
not fall under Western export controls before com-
mitting themselves.
Possible outcomes from the ITU debate include:
? Approval of the standard. Chances for approval
are very good if France shifts its position and the
Soviets agree to support the standard.
? Defeat of the standard. Defeat of the standard
could occur only if the issue came to an open vote.
Voting in this forum is not unprecedented, but
unlikely.
25
The New Standard
In November 1985, the ITU study group responsi-
ble for television broadcasting recommended a
standard for HDTV studio equipment. The new
standard is only for the studio production system
used to record and edit films and programs. The
study group recommends:
? Doubling the horizontal screen lines to 1,125.
More densely packed display units create the
sharpness of 35mm film images.
? Changing the display screen to a 16-to-9 width-
to-height ratio. This ratio duplicates the dimen-
sions of cinematic screens and takes advantage of
the eye's natural wide viewing angle. Current TV
receivers use a 4-to-3 ratio.
? A 2:1 interlace and 60 Hertz (Hz)field rate. This
rate is superior to the 50 Hz standard in Europe
where the human eye perceives a 'flickering" as
images change.
These recommendations will go before the ITU for
acceptance in May 1986. While adherence to an
ITU standard is voluntary, historically countries,
for the most part, follow the standards. We believe
endorsement of an HDTV standard is likely to
shape the direction of the television industry for
years to come. Indeed, some industry officials feel
the choice of a standard in May will be a factor in
determining funding levels for research and devel-
opment in the United States.
? Delay of the standard. In the likely chance of
protracted debate and no consensus, the standard
will be sent back to the ITU study group for
review. The next opportunity for endorsement
will be 1990. In the meantime, several incompati-
ble standards are likely to evolve.
Japan and the United States To Benefit Most
We believe the Japanese electronics and US video
industries will be the primary winners if the pro-
posed HDTV studio standard is adopted in May.
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Secret
The Japanese electronics industry is already well
ahead in developing HDTV cameras and editing
equipment. The current lead is built on moves in
the early 1970s when the Japanese national broad-
casting company (NHK) began a $100 million
project in conjunction with several Japanese elec-
tronics firms to advance HDTV technology. Major
Japanese companies involved with the NHK pro-
ject are Hitachi, Matsushita, Sharp Electronics,
and Sony. No US companies have followed suit.
Toshiba Corporation has developed and patented a
range of HDTV equipment for broadcast stations,
including a color TV camera, a video tape recorder,
transmission equipment, and a home-use receiver
with a 40-inch color display. Japanese firms, in an
effort to push HDTV as the standard technology,
have promised to license their equipment to broad-
casters worldwide. Some Japanese companies have
even developed a converter that will make the
incoming HDTV signal compatible with European
television sets.
As the current world leader in film and television
programing production, the United States earns
$1.3 billion annually from video exports. An indus-
try report notes that programs of US origin repre-
sent 25 percent of total daily broadcast time on all
channels in France, Germany, Italy, and the Unit-
ed Kingdom. In addition, markets for US program-
ing are expanding as foreign purchases of video
material for cable TV and VCRs are growing at 20
percent annually.
In the film industry, HDTV will change video from
the physical medium of film to an electronic
stream, thereby eliminating one step in sending the
signal from the studio to the viewer. Industry
experts claim that the HDTV production system
will save film makers 15 percent on total costs over
the 35mm film system used for many TV programs
and motion pictures. By moving to electronic distri-
bution, television and motion picture exchange
worldwide could be instantaneous. Currently, some
major Hollywood film studios and at least one
television network are conducting experiments to
display an HDTV signal on a standard home
television.
Secret
Aside from film and production applications, we
believe HDTV technology will spark growth in
several other fields:
? Semiconductor devices. Because the HDTV pic-
ture is so detailed, future television sets will need
image memory devices to temporarily store and
process the final television picture. Japanese
firms are predicting 10 megabits of memory per
TV set.
? Home video. HDTV home movie cameras, re-
corders for playback, and videodisks may become
consumer items as costs come down.
? Medical imaging. High-resolution electronic im-
ages will sharply enhance stop-motion X-rays and
CAT scan pictures for medical diagnosis.
? Security surveillance. A California company is
already offering a high-resolution surveillance
camera for homes and businesses.
? Military. Electronic imaging systems will im-
prove battle simulators and range finders, and
may be used as sensors for target detection.
Outlook
Japan will probably proceed with bringing HDTV
technology to the Japanese studio market even if no
decision is reached in May or if the standard is
defeated. Recently, a Japanese firm successfully
transmitted an HDTV signal via optical fiber. The
Japanese Government and NHK have scheduled
domestic HDTV broadcast trials via satellite for
1991. In the United States, most industry experts
believe the broadcast and film industries will con-
tinue to move toward commercial applications of
HDTV?but more cautiously because financial
outlays would be harder to justify. We believe that
continued US corporate investment in HDTV tech-
nologies is directly related to the outcome of the
May standards decision. The lack of investment in
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the consumer electronics side of HDTV has virtual-
ly conceded HDTV technology leadership to the
Japanese.
The European opponents, particularly France, will
consider delay a victory for European industry. We
believe failure to adopt a new world standard will
postpone the arrival of Japanese and US program-
ing and equipment, cause proliferation of divergent
standards, and create a more costly environment
for all.
Over the longer term, we believe acceptance of the
studio standard is only one step in the evolution of
this new technology. Complete delivery of HDTV
to the home depends on two additional systems: a
transmission system for delivery of the television
signal and a high-definition receiver/display sys-
tem. The digital signal may be sent via satellite,
cable, terrestrial broadcast, or transferred to video-
disk or cassette. Several countries have proposed
that the 1988 Space World Administrative Radio
Conference, a conference with treaty-making pow-
er, allocate a worldwide frequency band for HDTV
broadcasting. We believe obstacles to decisions on
frequency band allocation and satellite transmis-
sion standards may encourage the production of
videodisks and cassettes and transmission via cable
before worldwide satellite distribution is achieved.
Political problems may also slow any assignment of
frequency allocations. Closed societies such as
those in the Soviet Bloc will attempt to discourage
any system that challenges their control over the
flow of information.
Secret
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Briefs
Energy
First Delivery Ecopetrol?the state oil company?has begun exporting crude oil from the
From New Colombian Cano Limon field in northeastern Colombia. Ecopetrol delivered 400,000
Field barrels to Spain last week and is scheduled to deliver an additional 750,000
barrels to Japan and Jamaica during the next two weeks. The high-quality
Cano Limon crude will be sold at spot market prices. Once the necessary
infrastructure is installed, exports could rise to 90,000 b/d at the end of this
month and double that by midyear. Government officials, however, may
choose to slow or stretch out plans to increase production because of low world
oil prices and political concerns that rapid oil development may fuel domestic
inflation. Nevertheless, oil company officials are currently negotiating with the
government to allow production levels beyond the current 35,000 to 40,000
b/d.
Yugoslavia's
Official Debt
Rescheduled
International Finance
Yugoslavia last week reached agreement with Western government creditors
to reschedule 85 percent of its approximately $400 million debt falling due
between May 1986 and May 1987. Repayments extend over nine years with a
four-year grace period. The governments also approved rescheduling a smaller
percentage of loans falling due between May 1987 and April 1988, provided
Yugoslavia continues its program of economic adjustment and reform. Al-
though the agreement is not tied to a specific IMF standby arrangement, the
Fund will monitor Yugoslav compliance with policy and performance targets.
The agreement falls short of the 1986-88 rescheduling Belgrade sought,
29 Secret
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Secret
Pressure Mounts on
London to Join EMS
Algerian Financial
Troubles Deepen
Mozambique Bank
Scandal Jeopardizes
IMF Agreement
Secret
25 April 1986
because Western governments balked at multiyear relief without stricter IMF
oversight. Nonetheless, Belgrade can claim, for domestic consumption, that
the accord is similar to the multiyear rescheduling with Western banks last
year and provides evidence of increased creditor confidence and less IMF
involvement in domestic affairs.
Recent statements by two British Cabinet ministers will increase the pressure
on Prime Minister Thatcher to drop her opposition to bringing sterling into the
European Monetary System (EMS). Foreign Secretary Howe, who would like
London to join EMS to burnish its European credentials, recently told a group
of Conservative MPs that Britain could not postpone its decision indefinitely.
On the same day, Chancellor of the Exchequer Lawson hinted that he now fa-
vors full British membership but reiterated the government's position that the
time is not yet right. Lawson said that membership in a fixed exchange rate
system would, over the medium term, make it easier for London to maintain its
anti-inflationary monetary policy. Proponents of membership argue that
British manufacturers will benefit from increased stability of the pound, while
opponents argue that membership will make London's economic policy
subservient to Bonn. The Prime Minister may attempt to compromise, arguing
that a decision on EMS should wait until after the general election, due in
1988, but widely expected in 1987.
Algeria's failure to raise a $500 million syndicated loan underscores growing
concern among international bankers over Algiers's reluctance to deal effec-
tively with reduced hydrocarbons earnings?a decline of as much as 50
percent. some banks may downgrade
Algeria's credit rating or follow the lead of at least one international bank that
is reducing its Algerian financial exposure. Bankers are probably alarmed
that, after lowering second-quarter gas prices, Algeria may have to do the
same for the rest of the year. Moreover, the government has instituted few new
measures to bring domestic spending more in line with revenues. Some new
lending will probably continue?Algiers still holds about $3 billion in foreign
exchange reserves?but bankers' doubts will probably translate into sharply
higher interest rates and other charges.
Revelations of high-ranking, large-scale corruption in the foreign exchange
department of the Bank of Mozambique may jeopardize a much-needed new
IMF agreement with Mozambique, according to US Embassy reporting.
Several bank employees have already been detainedr
IThe arrests coincide with final govern-
ment deliberation over adopting an IMF?World Bank reform strategy advo-
cated by the accused bank governor. The bank scandal is likely to delay
announcement of new reforms, previously anticipated at the end of this month.
As a result, international donors may be less forthcoming in responding to
Mozambique's urgent need for capital inflows.
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Secret
Global and Regional Developments
Soviets Make Up The USSR is donating 25,000 metric tons of rice to the Sandinistas to make
Nicaraguan Rice up for the recent harvest shortfall, with the first shipment due via Cuba this
Shortfall week. The deal provides high-quality Soviet rice valued, for aid purposes, at
$5 million?half the US export price. The donations are likely to allow
Managua to meet rice ration requirements for the first time in months.
Global Sugar Prices
Turn Up Sharply
Central American
Economic Meeting
World sugar prices have jumped by 75 percent since early 1986, reflecting a
drawdown in stocks as growth in global consumption for 1985/86 (Sept-Aug)
appears to be outpacing production. Raw sugar prices in April have averaged
8.5 cents per pound, compared with the record low of 2.6 cents per pound
struck last July. Increased Soviet buying has fueled the price rally in recent
weeks. the USSR, the world's largest sugar
importer, purchased as much as 1.2 million metric tons since late March,
including 150,000 tons from Australia. India, Egypt, and Pakistan have also
been unusually large buyers in recent weeks. Another factor is increasing
information that the 1985/86 Soviet and Cuban crops are down significantly
from earlier estimates. Some traders believe prices could reach 12 to 14 cents
per pound by the end of 1986?a level that would approach production costs
for major sugar exporting LDCs such as the Dominican Republic, Brazil, and
the Philippines. The current upturn in prices, if sustained, would probably
increase foreign exchange earnings from their beleaguered sugar sectors.
25X1
25X1
Vice presidents from Honduras, El Salvador, Guatemala, and Costa Rica met
in San Jose last week for discussions aimed at reviving regional trade and
preparing an economic agenda for the Central American Presidential summit
to be held in May. According to Embassy and press reporting, the delegates
agreed that the Central American Core Four should jointly press lenders for
better debt terms and additional loans. The Costa Rican representative told
the press that international organizations may be asked for as much as $300
million in new, soft loans. The additional financing reportedly would be used to
clear up intraregional debt arrearages, which have been a significant factor
depressing regional trade in recent years. According to Embassy reporting, the
exclusion of Nicaragua was clearly intended as a political signal when the
economic initiative was initially proposed by President Monge of Costa Rica.
It probably was also prompted by a realization that Managua's participation
would eliminate the chance of US support for new financial assistance.
31
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25 April 1986
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National Developments
Developed Countries
Japan Pushes Into
US Truck Market
Tokyo Plans
To Market Space
Launch Services
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25 April 1986
We believe that the Japanese medium and heavy truck manufacturers will
expand their foothold in the US market and possibly achieve their ambitious
goal of quadrupling current sales by the early 1990s. We estimate that the
Japanese could capture up to 10 percent of the $9-10 billion US medium and
heavy truck market. Faced with slack markets at home and in the Middle
East, Asia, and Africa, Japanese truck producers are eyeing the already
crowded and competitive US market. The Japanese are relying on a strong
dealership network, a higher quality standard truck, and prices 10 to 20
percent below US levels to penetrate the market. Japanese truck builders are
probably willing to accept losses to secure a long-term market share.
As part of an aggressive overall effort to develop indigenous aerospace
capability, Tokyo intends to commercially market its H-II launch services in
Asia beginning in the 1990s. International sales are probably necessary to
offset H-II program costs, especially because the recent breakup of Nippon
Telephone and Telegraph has eliminated a major captive market for domestic
launch services. Although the US Embassy indicates that officials of Japan's
Science and Technology Agency plan to consult the United States before any
such action, we doubt Tokyo will allow such consultations to interfere with
prospective launch service sales. Current cost projections indicate H-II services
will be competitive with comparable US and European programs.
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Secret
UK Undershoots
Deficit Goal
A sharp reduction in Britain's Public Sector Borrowing Requirement (PSBR)
for the financial year that ended 31 March will probably induce London to
further ease domestic interest rates. The PSBR totaled 5.9 billion pounds,
down from 10.2 billion pounds in 1984-85 and 1 billion pounds below the
Treasury forecast. The budget deficit figure was the lowest since the late
1970s in nominal terms and represented the lowest proportion of GDP-1.6
percent?since 1971. The borrowing requirement shortfall is due to a variety
of factors, including higher-than-anticipated receipts from inland revenues,
excise taxes, and national insurance contributions, as well as advance pay-
ments from the sale of British Telecom, which were not due until 1986. The
budget windfall, along with a drop in inflation last month?to the lowest level
in three years?and the stabilization of sterling against the dollar, is likely to
push down base lending rates?down 2 percentage points in the past month to
10.5 percent?further in coming weeks.
Italy Eases In response to the early April European Monetary System realignment and a
Foreign Exchange strengthening of the lira, the Italian Government has resumed its policy of
Controls gradually relaxing foreign exchange controls. On 14 April, Minister of Foreign
Trade Capria lifted temporary exchange controls imposed in January to ward
off heavy speculation against the lira and relaxed other restrictions. The
January measures had forbidden importers to prepay their bills and required
companies to finance in foreign currency 75 percent of those exports that had
payments deferred beyond 180 days. The most significant new liberalization
measures raise from $1.1 to $1.4 million the ceiling on forward operations in
lira and allow Italian banks to grant lines of credit to foreign banks?payable
within 10 days?for Italian exports. Although additional minor reforms may
occur later this year, Treasury Minister Goria's concern over the huge public-
sector deficit, an underdeveloped capital market, and historical current
account deficits probably will prevent substantial capital market liberalization
anytime soon.
New Portuguese
Budget Ambitious
Lisbon is likely to have trouble meeting the ambitious deficit target set forth in
its 1986 budget, and will probably have to submit a supplemental budget later
this year. The budget foresees a deficit equal to 11.1 percent of GDP?down
from 13.6 percent in 1985. Revenues will benefit from the stimulative effects
of lower oil prices and a net inflow of funds from the EC, but Lisbon may not
achieve the 23-percent increase the budget projects. The rigid tax system has
undergone little change and still relies heavily on indirect taxes. Moreover,
Lisbon has found it difficult to collect the new value-added tax (VAT) because
of inadequate accounting systems in many small firms. Interest payments are
expected to account for over one-fourth of total spending. Given the absence of
significant cost-cutting reforms in social security, health and education, and
spending on ailing public enterprises, expenditures are likely to exceed targets.
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Secret
Argentine
Economic
Developments
Argentine
Land Tax Proposed
Mexico Signs Regula-
tion Discriminating
Against Foreign
Trademarks
Secret
25 April 1986
Less Developed Countries
On 4 April Economy Minister Sourrouille initiated a new phase of the
stabilization plan by replacing the price and wage freeze with a system of
limited price and wage increases. We doubt, however, that the new controls
will mollify the increasingly militant labor movement, which seeks real wage
hikes to compensate for a 20-percent drop in purchasing power last year.
Sourrouille also implemented a 3.8-percent devaluation of the Austral. We
believe that, with the spread between the parallel and official exchange rate
running above 10 percent, the devaluation is too limited to enhance the
competitiveness of Argentine exports. Meanwhile, members of Argentina's
Bank Advisory Committee are currently debating whether to roll over
BONODs?bonds issued by the Argentine Government in lieu of foreign
exchange to private-sector creditors?falling due this year. Payment on the
bonds this year would increase Buenos Aires's 1986 new money requirements
by $1.2 billion./
The land tax proposal now being considered by the congress is designed to in-
crease production incentives for farmers. The program?to be implemented
with a $350 million World Bank structural adjustment loan?would allow
Buenos Aires to replace taxes on exports, profit, and capital with a tax on rural
land value. Removal of export taxes would further enhance Argentina's ability
to compete in the international grain market and increase its capacity to pay
the foreign debt. Since each hectare in a given area would be taxed equally,
the scheme would favor land-intensive grain production over cattle ranching
and would penalize inefficient farmers. Agricultural production has increased
significantly over the past five years even with export taxes that often topped
25 percent; current estimates of up to 9 million metric tons in exports from this
year's flood-damaged corn crop are still 30 percent above the 1985 total. The
tax, however, is neither imminent nor permanent: it is designed as an
emergency five-year measure that will start no earlier than 1 January 1988.
A regulation was signed last week that provides tax incentives to Mexican soft
drink and water bottlers who do not use foreign trademarks. The tax incentive
is extended only to 100-percent Mexican-owned and -managed companies that
use only domestic inputs and do not pay for foreign soft drink formulas or tech-
nical assistance. The regulation is intended to strengthen the position of
national trademarks in the domestic market. It comes, however, at a time
when the United States is stressing improved protection of American intellec-
tual property rights in a number of countries including Mexico.
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Poor Nicaraguan
Coffee Harvest
Floods Disrupt
Transport in Peru
and Bolivia
India Awards Gas
Pipeline Contract
Nationwide Power
Failure in Bangladesh
Nicaragua's recently completed coffee harvest
was the worst this decade, but higher prices may result in a slight gain in ex-
port earnings. According to officials of the Ministry of Agriculture and
INCAFE, the government coffee trading monopoly, the 35,000-metric-ton
harvest was one-third below the regime's target and 40 percent below pre-1979
levels. While officials cite poor weather and manpower shortages for the
decline, private-sector coffee growers blame government controls.
Recent flooding of Lake Titicaca has temporarily closed the InterAmerican
Highway and disrupted rail shipments of Bolivian lead and zinc concentrates
to Peruvian ports. US officials who surveyed the damaged area believe that the
InterAmerican Highway may reopen shortly, but that the high water that has
inundated the lake steamer-railroad terminal on the Peruvian shore and 15
kilometers of track will disrupt rail traffic for as long as two years. Local hy-
drologists indicate that the lake?now two meters above normal?will crest
next month and then decline slowly. In Peru, the floods will force the
resettlement of at least 75,000 people while an estimated 47,500 Bolivians
have lost their homes and farms. With the collapse of the tin market, the
increased importance of lead and zinc exports will probably spur La Paz to di-
vert some ore shipments to Chilean ports.
After more than two years of negotiations, a French-Japanese consortium has
won the $600 million contract to build a pipeline that will bring gas from the
Bombay High offshore area to northcentral India. When completed in 1989,
the 1,700-kilometer pipeline will link the onshore terminal at Hazira with
Bijaipur and Jagdishpur. The French-Japanese group won the contract over its
nearest competitor, Snamprogetti from Italy, by offering a package that
included concessionary financing and substantial participation by Indian
companies. Six fertilizer plants now under construction or on the drawing-
board will be supplied gas via the pipeline. This will help India hold down the
growth in fertilizer imports?currently more than $1 billion annually?but
increasing domestic demand will probably delay any significant import
substitution until the 1990s.
A 12-hour power failure in early April that paralyzed most of the country
underscores Bangladesh's growing energy problems. The outage of the nation-
al grid was reportedly triggered by lightning, according to the US Embassy.
Frequent power failures have disrupted industry and agriculture?the jute
industry alone lost $2.2 million in January. Generating capacity meets only 80
percent of peak demand, according to US Embassy estimates. This capacity
35
Secret
25 April 1986
Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300130004-3
Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300130004-3
Secret
shortage is attributed to equipment failure as a result of poor maintenance and
water shortages during the winter dry season, problems that will not be
alleviated even when new generating capacity goes on line next year.
Venezuela's Declining The Lusinchi administration is concerned that a projected oil revenue shortfall
Foreign Exchange of at least $5 billion this year, with little relief in sight next year, could cause
Reserves nongold reserves to fall sometime next year below the $5.5 billion level that the
administration considers a comfortable minimum. Nongold reserves have
declined almost $600 million from mid-January's $10.4 billion level. To
staunch the outflow, the administration has trimmed 1986 foreign exchange
allocations to the public sector by $400 million and to the private sector by $1
billion. Importers have been directed to substitute Venezuelan products. The
administration this week invoked the "contingency clause" in the $21.2 billion
multiyear rescheduling agreement reached with banks in February, and
probably will call for a followup rescheduling of principal due in 1987?about
$1.1 billion. The Embassy reports that Caracas may even request a deferral of
the $750 million "downpayment" due banks this year. Such a request would
encounter stiff resistance from bankers, who considered the promised down-
payment a prerequisite for the rescheduling. We believe, however, that
Lusinchi is likely to make the promised downpayment rather than provoke a
confrontation with bankers that could invalidate the debt deal and tarnish
Venezuela's credit rating.
Soviets Step Up
Agrochemical
Purchases
China Orders
US Passenger Jets
Secret
25 April 1986
Communist
Moscow's commitment to increase grain yields has been highli hted b recent
agreements to purchase large quantities of Western ?esticides.
/The 1986-
90 plan gives priority to grain cultivation by "intensive" technology?
appropriate use of agrochemicals and land, planting of high-yield grain
varieties, and improved transportation. This year the area of grain under
intensive cultivation is to be nearly double last year's level-14 percent of total
area sown to grain. Another doubling is planned in the near future. Prelimi-
nary analysis indicates that in many areas grain harvests were 60 percent
higher than with conventional technology
The Civil Aviation Administration of China (CAAC) reportedly signed a firm
contract for four Boeing 747s and four Boeing 767s for its regional airlines last
March, and will make the announcement at the Aerospace Exhibit in Beijing
in May. Because passenger demand continues to exceed capacity and CAAC
has the foreign exchange, additional purchases are likely. The acquisitions,
however, will exacerbate shortages of qualified pilots; China is meeting only
half its needs for pilot training, largely because of a difficulty in finding
qualified applicants.
36
25X1
Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300130004-3
Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300130004-3
Secret
China Enacts
New Law on
Foreign Investment
Cuban Acquisitions of
Western Computers
China's new law on wholly-owned foreign enterprises will only allow the
establishment of enterprises that China deems conducive to its development
and that export all or part of their products. The law is vague, however, on the
key issues of expropriation and profit repatriation, leaving much to Beijing's
interpretation. Given China's unwillingness to recognize international legal
norms in the areas of profit repatriation, expropriation, and dispute settlement,
this law will probably do little to attract new foreign investment in China.
Since 1983, the Cuban Government has been making major purchases?legal
and illegal?of small computers and has established a corporation for the
assembly and sale of computers in Cuba. As of late 1985, approximately 1,500
personal computers were being used in the Cuban Government, especially in
the Ministry of Basic Industry, the State Committee for Material and
Technical Supply, the Ministry of Public Health, and the Ministry of Foreign
Trade. Cuba has obtained computers from the United States, Japan, and Italy
by both legal and illegal means.
37
Secret
25 April 1986
Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300130004-3
Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300130004-3
Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300130004-3
Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300130004-3
Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300130004-3
25X1
Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300130004-3
Secret
Secret
Declassified in Part - Sanitized Copy Approved for Release 2011/12/08: CIA-RDP88-00798R000300130004-3