INTERNATIONAL ECONOMIC & ENERGY WEEKLY
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Collection:
Document Number (FOIA) /ESDN (CREST):
CIA-RDP97-00771R000706850001-6
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S
Document Page Count:
43
Document Creation Date:
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Case Number:
Publication Date:
February 10, 1984
Content Type:
REPORT
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Directorate of
Intelligence
Weekly
International
Economic & Energy
-e-
DI IEEW 84-006
10 February 1984
Copy 6 8 3
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Weekly
International
Economic & Energy
10 February 1984
iii Synopsis
Perspective-Brazil's Economic Struggle To Continue
Energy
International Finance
Global and Regional Developments
National Developments
17 `Brazil: Social Pressures on Economic Policy
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21 ~Brazi1: Struggling With Economic Stabilization 25X1
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27 / Mexico: Pushing Nonoil Exports
33 N Zealand: Muldoon Faces a Troubled Economy in an Election Yea
ju6'riational Financial Situation: Oil Price Impact on LDC Debtors
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directed to Directorate of Intelligence, 25X1
Comments and queries regarding this publication are welcome. They may be
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10 February 1984
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International
Economic & Energy
Weekly
Synopsis
1 Perspective-Brazil's Economic Struggle To Continue
We believe it will take several years before Brazil's IMF-backed stabilization
program provides the foundation for renewed economic vigor. Brasilia still
faces the politically difficult task of making public corporations more efficient
and of revitalizing the private sector.
17 Brazil: Social Pressures on Economic Policy
Another sharp drop in living standards this year probably will provoke
sporadic violence and demands to reverse Brazil's economic slide. The
transition to civilian rule probably will not be threatened.
21 Brazil: Struggling With Economic Stabilization
Despite this month's signing of a second major international rescue package,
we believe Brazil will be hard pressed to avoid another foreign exchange crisis
this year. The measures taken to date have resulted in appreciable economic
and social costs, and we judge that the government is highly reluctant, in an
election year, to demand significantly greater sacrifice.
27 Mexico: Pushing Nonoil Exports
Mexico's foreign payments success last year has not been mirrored in
expanded nonoil exports. Even though President de la Madrid made the
expansion of manufactured exports a key goal, efforts to spur foreign sales
have been dampened by missteps, ongoing policy contradictions, and the
lingering financial crisis.
33 New -Zealand:. Muldoon Faces a Troubled Economy in an Election Year
Although economic troubles have eroded public confidence in Prime Minister
Muldoon, recent public opinion polls show he remains the popular choice for
prime minister by a fairly wide margin
39 International Financial Situation: Oil Price Impact on LDC Debtors
This article in our series on economic and political aspects of the international
financial situation examines the impact of oil price changes on selected LDC
debtors.
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? Perspective
Weekly
International
Economic & Energy
10 February 1984
Brazil's Economic Struggle To Continue
We remain concerned about Brazil's longer run economic health. In our
opinion, it will take several years before the IMF-backed stabilization program
provides the foundation for renewed economic vigor. Moreover, Brasilia will
need to supplement existing adjustment efforts with a strong attack on major
institutional impediments. The large, complex network of public corporations
has shown its resistance to spending controls, while a long-established, heavily
indexed price structure similarly has proved hard to modify. Until further
reforms are undertaken-and they will be politically difficult-Brazil will face
continuing economic problemsF--]
leaving the" country still vulnerable to new external shocks.
Brasilia last year made impressive progress on several fronts but did not
achieve two key objectives-dampening inflation and rebuilding foreign
exchange reserves. Steadfast monetary restraint did not prevent the inflation
rate from doubling to slightly more than 200 percent. As a result, business and
the middle class shifted financial resources from new investment to speculative
ventures. Brazil's striking $6.5 billion trade surplus was attained primarily by
curtailing imports sharply, and there is little room for further cuts. The trade
surplus did not alleviate Brazil's precarious foreign reserve condition, because
of unexpected shortfalls in foreign credit and direct investment, thereby
export mining-rather than to trim employee benefits.
The government's austerity program has not lightened the excessive economic
dominance of the public sector. As a result of the public sector's continued
large borrowing needs and its preferential access to the domestic banking
system, the government's restraints on domestic credit have caused a severe
liquidity shortage for private business. Parts of the private sector have survived
mainly through increased participation in the underground economy. Although
public corporations have accepted sizable budget cuts, they have moved mainly
to postpone investment-even in such vital areas as domestic energy and
unemployment high, the potential for social turmoil remains.
Under Brazil's movement to a democratic political environment, future
governments will be less able to force dramatic adjustment policies on the
public and the Congress. We believe a continuing recession would stir
considerable popular opposition, including more vocal media criticism, intensi-
fied lobbying for economic concessions, demonstrations, and strikes. With
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Barring rapid economic adjustment, Brazil's foreign exchange needs in the
mid-1980s will grow. Debt servicing burdens will be large as loan repayments
contracted in the early 1980s are bunched in these years. The rescheduling
arrangements worked out with foreign creditors as part of the 1982 and 1983
rescue packages will add to the debt load. Although creditors will press for
economic reforms, Brazilians are likely to demand growth. We believe that
4-percent real annual growth-and a concomitant rise in imports-will be
required over the next five years to bring down unemployment gradually and
preserve democratic rule.
r - productive efficiency.
To meet its large debt servicing and economic growth needs, Brazil must
strengthen its ability to earn foreign exchange-mainly by spurring export
growth-and reduce its dependence on foreign borrowings. To accomplish this
the government will need to implement economic and financial reforms aimed
at revitalizing the private sector, mobilizing greater private domestic saving,
and keeping a lid on public deficits. Furthermore, it will need to make greater
use of price rationalization and free collective labor bargaining to improve
Although we believe that a favorable world economic environment might
enable Brazil to ease its debt,plight over the next five years, another economic
slump or round of tight money policies in the industrialized countries probably
would frustrate Brasilia's efforts. Slow export growth and sustained high
interest rates would require Brazil to sharply depress economic activity or step
up foreign borrowing to honor its debt obligations. Because neither option
would be acceptable either to Brasilia or to foreign banks, the two sides would
have to work out a compromise arrangement to ease repayment terms
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OECD Increase in Nuclear power generation in the OECD countries increased nearly 11 percent
/Nuclear Power Output in 1983, compared with 1982, and now accounts for over 15 percent of OECD
/ electricity generation, equivalent to 4.0 million b/doe of primary energy.
with a capacity of 11
900 megawatts-electric (MWe)
Fourteen new reactors
,
,
,
entered commercial operation last year, and one reactor (about 200 MWe) was
retired. Nuclear power capacity in Western Europe alone increased by 7,200
MWe with France accounting for three-fourths of the increase. Prospects for
additional growth in the coming year are excellent, as 12 plants-with a
capacity of about 9,600 MWe-are already undergoing startup and low-power
testing. An additional 24 reactors, with a capacity of nearly 23,600 MWe, are
in the late stages of construction and are scheduled to begin commercial. 25X1
operation in 1984. More than one-third of this new capacity will come on line
in the United States.F___1 25X1
Installed Capacity
(thousand MWe, net)
Gross Electricity Generation
(terawatt-hours)
1982
1983
1982
1983
OECD
134.3
146.0
767.6
849.6
United States
57.6
60.4
298.7
313.6
Japan
16.6
16.6
104.5
106.5
Canada
5.2
7.0
42.6
53.0
Western Europe
54.9
62.0
321.8
376.5
Belgium
2.6
3.5
15.6
24.1
Finland
2.2
2.2
16.5
17.4
France
20.1
25.4
108.9
144.2
Italy
1.3
1.3
6.8
5.8
Netherlands
0.5
0.5
3.9
3.6
Spain
2.0
2.0
8.8
10.7
Sweden
6.5
7.4
38.8
40.5
Switzerland
1.9
1.9
15.0
' 15.5
United Kingdom
8.0
8.0
44.1
50.0
West Germany
9.8
9.8
63.4
64.7
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9ch Boost Gas Sales Dutch natural gas sales rose by 4 percent in 19{83 to 74 billion cubic meters
Norwegian LNG
J"spects
(bcm), ending a four-year decline. Domestic sales rose by 6.5 percent, as gas
remained the cheapest fuel for residential and small industrial users. Gas
exports were up 2 percent to 35.6 bcm. Sales to France and West Germany
rose by 30 and 2 percent, respectively, while sales to Belgium declined 18
percent because of increased deliveries from Algeria. An expected increase in
competition from Algerian and Soviet gas deliveries this year and sluggish gas
demand do not bode well for future sales. Moreover, these market conditions
probably put The Hague in an unfavorable bargaining position in export
contract renegotiations scheduled for completion before October 1984.1
dependence on Soviet gas supplies in the 1990s.
Shipment of liquefied natural gas (LNG) from northern- Norway to US and
West European markets could be an economically viable alternative to pipeline
transportation, according to a joint study by Tenneco and Norsk-Hydro. The
study indicates liquefaction of Troms gas and shipment by tanker could allow
the gas to be sold at prices comparable with Algerian LNG delivered to
Western Europe. This would make it economical to develop fields not large
enough to justify a pipeline to the nearest market. Current Troms gas reserves,
however, do not yet warrant building a liquefaction plant, and additional
reserves must be proved before the project proceeds. The report points to the
United States as a promising market for Norwegian LNG because of future
US gas import requirements and spare capacity at existing LNG receiving
terminals. Troms gas might be used eventually to limit West European
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Taiwan Looks to LNG Officials of the state-owned Chinese Petroleum Corporation (CPC) recently
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10 February 1984
requested a foreign construction company's preliminary tender for the design,
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engineering, and construction of a 2-billion-cubic-meter liquefied natural gas
(LNG) receiving terminal on the southern coast of Taiwan
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A final construction award is expected in April or
May 1984, the LNG is expected to be supplied
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under a long-term supply agreement with Indonesia. A gas supply agreement,
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gas reserves will be depleted in the 1990s at current production levels.
however, probably will not be completed until the terminal's construction is
under way, Taiwan is looking to LNG because the
country is heavily dependent upon imported Middle Eastern oil, and existing
Increase in Soviet Recently released Soviet trade data indicate that the USSR reexported about
Reexport of OPEC Oil 250,000 barrels per day of oil from Libya, Iran, Iraq, and Saudi Arabia during
Venezuela Oil Company
'~1_____Plans Cutbacks
the first nine months of last year. This is about 60 percent more than during
the same period in 1982. The Saudi oil, which helps pay Iraqi debts to the
USSR, is part of Riyadh's support for Baghdad in the war. This was the first
known time that the Soviets received Saudi oil. The three other Middle
Eastern exporters are paying off their debts to the USSR with oil that they
would find difficult to sell on the soft international oil market. The reexports
-accounted for about 20 percent of total Soviet oil exports to hard currency
countries and for most of the estimated 13-percent increase in Soviet oil sales
to the West last year.)
The Venezuela Oil Company (PDVSA)-a quasi-independent government
corporation responsible for 95 percent of Venezuela's exports and one-fourth of,
the federal government's budget-is curbing expansion plans. The newly
released 1984-88 Development Plan projects a sharp reduction in new
investment in response to depressed world crude prices and the failure of
previous governments to raise domestic oil prices.
PDVSA will make severe cutbacks in new oil exploration, reduce new
drilling activity, and dismiss a number of foreign technical advisers. PDVSA
intends to maintain current capacity of 2.5 million barrels per day (b/d) by in-
creasing the use of secondary recovery methods at old wells. This will enable
Venezuela to continue oil exports at its OPEC quota of 1.7 million b/d.
Barring higher oil prices, however, this will result in stagnant oil export and
tax revenues, thereby limiting the new Lusinchi government's ability to fund
new development programs. Although a gradual increase in domestic oil prices
is a part of the new administration's economic plans, the additional revenues
proposed would be insufficient to restore PDVSA's investment program.
Problems at Libya's The startup of the Libyan National Oil Company's (LNOC) new refinery at
New Refinery Ra's al Unuf has again been delayed until at least July 1984,
The facility, initially scheduled to come on stream in 1981 and to
double Libya's refining(capacity, reportedly has problems that will require the
installation of new pipes. the LNOC has refused to
offer discounts on products from the new refinery and has reduced the
facility's initial processing rate to 110,000 b/d, 60 percent of its original design
capacity. Delays in the startup of the refinery coupled with continued weak
demand for products could result in further setbacks for Libya's ambitious
downstream investment program.
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Sudanese Rebels
Disrupt Oil
Development
N,ew Zairian Oil
iscovery
The rebel attack on Chevron's base camp on 2 February has temporarily
halted the company's oil exploration in southern Sudan. The group responsible
for the raid, in which three workers were killed, appears to be the same one
that kidnaped two Chevron contractors in November. Personnel have been
evacuated from the southern camps, and two of Chevron's four drilling rigs-
both in the south-have been idled. Construction of the pipeline to the Red
Sea has been suspended, and its scheduled completion date is likely to be
pushed back from 1985. Chevron has invested over $800 million in Sudan and
plans to resume operations in the south when its facilities become more secure.
We expect the Sudanese Government will provide a strong armed presence at
A new discovery in the offshore Lukami oilfield could yield as much as 25,000
barrels per day, Attaining this level of
production would double Zaire's oil output, the country's second-largest source
of foreign exchange behind copper, and could bring annual oil export earnings
to $500 million. Zaire currently is Africa's ninth-largest oil producer and has
been exploiting offshore oilfields since 1975. Present plans call for the Lukami
field to produce about 5,000 barrels per day this spring. If the field maintains
adequate wellhead pressure and crude quality for several months, a major
international oil company reportedly will commit itself to full development.
The government desperately needs a major new source of earnings.
anker Safely Avoids A tanker bringing crude oil-probably from Mexico-has passed through
Mines at Nicaraguan mines laid by insurgents at Puerto Sandino, Nicaragua's main oil port.
Port after failing to disarm the mines, the Sandinistas
were able to mark the location of at least some of them by late last month. This
is the first tanker to enter Puerto Sandino since the insurgents mined it in early
January, and Managua expects to bring in additional tankers over the next two
months. The Sandinistas probably risked running a tanker through the mines
because of severe crude oil shortages and to demonstrate the insurgents' failure
New Latin American Latin American governments continue to discuss joint approaches to their
7 Talk of Coordinating creditors. Argentina and Venezuela issued a declaration on 4 February stating
Debt Policies they would coordinate their debt renegotiation policies to better protect their
respective interests, according to press reports. They called for joint studies
with industrial nations to find solutions to Latin American debt problems. In
another declaration issued this past week, Argentina and Colombia asked for a
broad dialogue with creditor countries to alter the current approach to treating
the region's debt. In addition, press reports indicate that Chilean President
Pinochet and Colombian Foreign Minister Lloreda discussed the need to join
efforts to cope with their foreign debts.
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This is the first time major debtors have indicated publicly that they might co-
ordinate their debt renegotiations with other debtor countries. These public
statements are general in nature and do not lay out specific policy guidelines
for managing current debt problems or negotiating with foreign creditors.
Although we do not know if serious actions will result from these proposals,
debtors this year are taking bolder stands on a number of debt issues. Joint ac-
tion by major debtors could upset creditors and could disrupt ongoing debt-
relief renegotiations in Latin America.
t/ Gulf Aid to Iraq disbursements to Iraq fell by one-half last year to about $3 billion. Although
cash transfers were down 75 percent, during April-December Saudi Arabia
and Kuwait sold about 200,000 b/d of crude oil on Iraq's behalf. Japanese oil
companies and the Soviet Union were the principal buyers.
Iraq: Aid Disbursements From Persian Gulf States, 1980-83 Million US $
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Saudi Arabia
3,000
4,000
2,400
Kuwait
2,000
2,000
2,000
United Arab
Emirates
1,450
1,400
1,250
a Valued at $29 per barrel.
Total
Direct
Disbursement
Crude
Oil Sales n
1,809
620
1,189
739
400
339
400
400
0
Barring a sharp oil price rise or increased Iran-Iraq hostilities, we believe a
substantial pickup in Gulf aid to Iraq this year is unlikely. Depressed oil
revenues and domestic spending priorities are restricting Saudi and Kuwaiti
aid worldwide. Moreover, increasing Saudi and Kuwaiti oil sales on Iraq's
behalf could come under attack by other OPEC members, particularly Iran,
for violating Iraq's OPEC production quota. Currently, Iraqi production is
near its 1.2 b/d quota and is expected to increase at midyear when pipeline ex-
ports through Turkey can be expanded. Oil sales and cash that again approach
.$3 billion in 1984 will still require Baghdad to obtain other financing or draw
down foreign reserves-which we estimate at about $5 billion-if Iraq wants
to maintain imports at last year's austere level of $11 billion. Shortages of food
and consumer goods already are starting to appear and if they worsen could
cause unrest and further problems for Saddam Husayn's government.
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Philippines Seeks Manila is soliciting financial assistance from other Asian countries to cover its
'financial Help needs, pending a new agreement with the IMF:
? The ASEAN states in mid-January agreed to reactivate a currency swap
agreement with the Central Bank that involves a dollar deposit of $80
million.
? Japanese Prime Minister Nakasone last month promised the release of $130
million worth of commodity assistance, $20 million in new project loans, and
$10 million in grant aid within two months.
? South Korea has indicated to US officials that it is willing to provide
assistance totaling $10 million.
? Taiwan reportedly plans to extend a $50 million loan.
? Australia is considering offering $90 million in emergency assistance, but it
Philippines following the assassination of Benigno Aquino
Most of the offers reflect regional concerns about political instability in the
Japan and South Korea, however, are primarily responding to US
prodding. The total, however, is only a small part of what Manila requires.
Trade financing has been cut by about one-half since October, when the
payments moratorium on its commercial debt was announced, and delays in
reaching agreements with the IMF and with commercial creditors has
precluded the restoration of normal levels of trade financing. So far, the
impact of the foreign exchange shortage has been softened by drawing down
inventories of raw materials and spare parts. Inventories are now at low levels,
however, and Manila is bracing for large cutbacks in manufacturing activities
and worker layoffs.
Nigeria-IMF Talks A Nigerian economic delegation will arrive in Washington next week to reopen
To Resume stalled negotiations with the International Monetary Fund. Discussions with
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the IMF have been on hold since the coup on 30 December while the Buhari
government reviewed the last round of negotiations undertaken by the Shagari
administration. Next week's talks will center on conditions for Nigeria's
request for a loan of up to $2.5 billion; devaluation of the Naira remains the
major stumblingblock. The Buhari government, like its predecessor, may hope
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Troubled Moroccan-
~MF Relations
India Threatens To
Block World Bank
Capital Increase
Another Japanese
Automaker Expanding
apaci ty
the United States will intercede to soften IMF terms. International bankers
have linked the rescheduling of $2 billion in.officially guaranteed, short-term
debt and the extension of additional credits to an IMF agreement.
Rabat's failure to cut food subsidies in the aftermath of recent riots threatens
the nation's financial stabilization program. Food subsidies of $250 million are
now projected for 1984, twice that originally budgeted under the IMF standby
loan agreement. Although the government is considering measures to reduce
budget outlays, the IMF may withhold loan disbursements until new measures
are in place. Problems with the IMF would jeopardize the completion of
commercial debt rescheduling, and this in turn would further complicate
relations with the IMF.
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India appears ready to impede the World Bank's effort to agree to a selective
increase in the Bank's lending capital. The adjustment now under consider-
ation would cause India to lose voting shares and its ability to nominate its own
Executive Director to the Bank's governing board. To preserve its current
position, India has said it will petition the Bank for a portion of the unallocated
shares held in reserve for new members. If the Bank refuses, Embassy
reporting indicates that India will block the selective capital increase. If a
compromise cannot be reached with other bank members, this would reduce
the Bank's ability to lend by nearly $1 billion a year and could jeopardize the 25X1
replenishment of the International Development Association, the Bank's soft
loan affiliate. Such a drop would affect the lower income LDCs, who receive
most of their international loans from these institutions. We believe the Bank's
management will acquiesce to India's demand because it fears any curtailment
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Global and Regional Developments
According to a recent press report, Japan's Suzuki Motors, the world's largest
minicar producer, plans to enter the subcompact market with production of as
many as 300,000 vehicles per year in 1988. Since Japan's subcompact market 25X1
is already crowded, we believe Suzuki will try to market a large proportion of
the autos in North America. Suzuki and other Japanese automakers ])Ian to in-
crease production capacity by nearly 2 million units by 1989. 25X6
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Canadian Grain Export Canada will be able to increase its grain export capacity by 10 percent, to 33
Opacity To Increase million metric tons, starting in 1985 with the completion of a new export grain
elevator at Prince Rupert on the west coast near Alaska. According to the
builder, grain is expected to begin moving through the new elevator in
November 1984, with full-scale operations planned for February 1985. The
Prince Rupert elevator will move Canada closer to its export goal of 36 million
tons of grain by 1990. Even with a cutback in barley production this year, we
expect Canada to maintain grain exports at about 28 million tons-15 percent
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Developing on
Agricultural Import
Restrictions
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EC Commission proposals to limit imports of corn gluten and other US-
produced animal feed substitutes-which reached $500 million last year-
appear increasingly likely to be accepted by EC members. According to US
Embassy officials in EC capitals, recent US demarches on the proposals have
been rebuffed. West Germany and the United Kingdom earlier had opposed
taking action, but they now appear willing to use their assent as bargaining
chips in their drive to secure reforms of the EC's Common Agricultural Policy
(CAP) and to settle the Community's budget imbroglio. As a result, the
Commission request for a negotiating mandate may be approved as early as
March.
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EC Presses Japan To
irrease Imports
The proposed restrictions are primarily intended to placate increasingly
strident EC farmers who have been hard hit by CAP cost-conservation
measures. Although the Commission claims that imported feed substitutes
displace domestic EC grain and encourage dairy overproduction, most EC
members privately concede that import limitations have become a necessary
trade-off in EC budget wrangling. France and Italy-who in the past have
frequently blocked Community agricultural reform-have insisted that action
against imported grain substitutes is necessary to demonstrate to EC farmers
that third countries also are being made to pay part of the cost of CAP
reforms.
confronted by similar trade surplus problems.
EC Trade Commissioner Haferkamp recently sent a "friendly letter" to
Japan's MITI Minister Okonogi outlining measures the Community wants
Japan to take to redress the growing imbalance in EC-Japan trade, according
to reporting by the US Mission to the EC. The EC views Japanese efforts to
date as cosmetic, and the letter is an attempt to seize the initiative for the
13-15 February EC-Japan high-level consultations in Tokyo. Japan's 1983
trade surplus with the EC was $10.4 billion. In the letter, Haferkamp suggests
Japan:
? Implement its remaining Tokyo-round MTN tariff cuts by April 1984.
? Target promotion efforts at imports of manufactured products in hopes of
prompting increased consumption of EC goods.
? Suspend, either totally or partially, duties on manufactured imports for a
limited period as was done by West Germany in the early 1960s when
EC Negotiating New Representatives of the EC and 66 African, Caribbean, and Pacific (ACP)
Aid Package With nations probably will make little progress this week in their first ministerial-
Cs level negotiations on the Lome III aid agreement. Under the Lome II
their domestic affairs.
agreement, due to expire in February 1985, the ACP countries have received
more than $5.5 billion in aid. Preliminary discussions on the Lome III aid
package held last November revealed a wide gap between the two sides. The
EC insists it cannot afford to meet developing country demands to increase aid
substantially. Instead, the Community has stressed the need to continue past
instruments-such as the EC export stabilization mechanism, which compen-
sates LDCs for falling commodity prices-and improve the quality of aid
rather than increase its quantity. In addition, the EC reportedly is considering
tying the Lome III aid package to human rights standards. The ACP countries
argue that their share of total EC imports is falling, that they require
immediately expanded aid, and that linking aid to human rights interferes in
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National Developments
Developed Countries
eeze in Israel
freeze with the Histadrut, the large trade union organization, in order to
reduce the inflation rate of nearly 200 percent. The officials add that, if an
agreement cannot be reached, the government may legislate a freeze. Union
officials, however, are certain to resist the plan because they believe it would
put a disproportionate burden on wage earners. Moreover, in view of the
Histadrut's ties to the Labor Party, there is little political incentive for it to
reach an accommodation with the government. A freeze would do nothing to
remedy the underlying causes of inflation and would lead Israelis to find
ways-such as bartering and black marketeering-to get around the freeze.
Prices would again soar after a freeze was lifted.
T,lrkish Prime Minister Prime Minister Turgut Ozal last week outlined to the press his wage policy for
utlines Wage Policy this year. Rather than set a wage ceiling, he proposed a wage floor based on his
government's 1984 inflation-rate target-25 percent. Ozal's announcement
was timed to have the maximum impact on the collective bargaining process,
which is expected to resume next month after a military-enforced hiatus of
more than three years. Ozal wants to prevent large wage settlements from
hindering his efforts to control inflation-his top priority. Initial reactions to
Ozal's announcement from the Confederation of Turkish Trade Unions, whose
members have suffered declines in real wages over the past four years, were
generally favorable. The Confederation probably will support Ozal's policy
only as long as wages keep up with inflation
Austrian Policies Face Unpopular tax and price increases in January receive their first test at the polls
Fitt Electoral Test in the 25 March provincial election in Salzburg. This is the first in a series of
regional electoral tests this year for the social-liberal government, and it is
being watched closely because Salzburg is the one province in which the
parties share power. In a recent poll, nearly 90 percent of those interviewed
objected to the January revenue measures. The 2-percentage-point increase in
the value-added tax boosts consumer prices 1.5 percent. In addition, the new
measures include higher taxes on income from savings accounts and price
hikes for postal and rail services. A substantial gain in the Salzburg election by
the opposition conservative Peoples' Party-which now holds a slim majority
in the provincial assembly-could well cause Vienna to reassess economic
policy; it is likely to shift away from a reliance on tax increases toward more
significant budget cutting
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Possible Wage-Price Israeli officials say the government intends to try to negotiate a wage-price
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Cyclone Devastates
Mozambican
2uiiture
Less Developed Countries
Mozambique-already suffering from two years of intense drought-was hit
by an unusually large cyclone in late January that caused the rivers in the
southern part of the country to overflow for the first time in recorded history.
According to US Embassy reporting, the floods destroyed all crops along the
major river valleys, drowned 5,000 cattle in one area, and caused at least 150
deaths. Before the storm, approximately 300,000 people in southern Mozam-
bique were already dependent on foreign-provided disaster relief. The US
Embassy in Maputo reports that, even with the rapid replanting of the now
devastated 1984 crop, at least $20-25 million in additional US food assistance
could be required to tide the country over until the April 1985 harvest.
India Rocked by Farm Violent protests by farmers demanding higher procurement and land compen-
Chilean Measures
To Decrease
unemployment
Libyan Water Project
on Track
sation prices have rocked western and southern India. In Maharashtra and
Karnataka, farmer demonstrations have stopped road and rail traffic and led
to six deaths and over 40,000 arrests. Politicians have fanned farmer
dissatisfaction in the hopes of cashing in during elections that must be held by
January 1985. We expect protests to continue as farmers push agricultural
issues onto the national agenda.
Finance Minister Caceres has announced that lower unemployment is Chile's
primary economic goal in 1984, indicating that the government will continue
to ease austerity in response to political discontent. According to US Embassy
reports, Chile is asking the IMF to support its goal by easing the public-sector
deficit targets and relaxing the ceiling on external borrowing. Santiago
publicly estimates that it will be able to spur 5-percent real economic
expansion and reduce unemployment from 16 percent to 12 percent by
yearend. We are skeptical. Tax measures taken late last year will be slow in
generating new investment. Moreover, US Embassy reports indicate that the
overvalued peso probably will reduce nontraditional export growth. As a result,
Santiago may pursue more stimulative economic policies in response to
domestic political pressure to curb unemployment.
Tripoli has released a $160 million advance payment to the South Korean
contractor in charge of the Great Manmade River Project-Qadhafi's show-
case program-despite the nation's tight financial situation. This initial
payment on the $3.3 billion contract will facilitate equipment purchases and
the construction of two factories to produce prestressed concrete pipes.
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Chinese Grain Surplus Chinese agriculture in 1983 had another banner year, producing a grain
Ad s to Transportation harvest of 370 million metric tons, a 5-percent increase over the old record set
P oblems in 1982. These bumper harvests are creating storage and transport problems-
in 1984 under the agreement.
especially in northeastern China. In Jilin Province, grain storage facilities are
overflowing, and peasant households are being asked to provide temporary
storage for state grain. Moreover, the State Council has decided to move
2.2 million tons of this excess grain to southern China before the end of
September 1984. According to the Chinese press, this grain will be moved by
rail to Dalian port and then transferred to ships destined for Shanghai.=
These grain shipments will add problems to the already overburdened
transport system. Rail cars to move the grain probably are being diverted from
coal-carrying lines. Port congestion will increase because two of the three ports
with dockside grain elevators used for foreign grain shipments will be used for
domestic grain transfers. Ships loaded with foreign grain already wait weeks to
unload. Delays and the record harvest undoubtedly are behind the decision to
postpone purchases of foreign grain. About 2 million tons of US grain
purchased in 1983 as required under the US-PRC grain agreement remain to
be delivered, and the Chinese are committed to purchase 6-8 million tons more
omania Cracks Down Romania recently announced measures to force private farmers to increase
on Private Farming sales of agricultural produce to the state. Consumers are likely to suffer. The
new measures will reduce food supplies in private markets, and increased
government supplies are likely to be exported. Farmers are obligated for the
first time to sell specified amounts of goods to the state at fixed prices and can
sell in the private market only after meeting their obligations to the state. The
measures include threats to expropriate the land of farmers who fail to meet
their quotas. These policies amount to an admission of failure of past efforts to
encourage private farmers to sell to the government. Last March the
government imposed strict producer price controls and restricted the sale and
transport of privately produced food; these measures only worsened shortages.
#ast Germany Reports East Germany has reported a pickup in economic growth last year, but has not
igher Economic regained pre-1982 rates. The regime's accounting shows that national income
Growth rose 4.4 percent, compared with 2.6 percent in 1982. Our preliminary
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10 February 1984
estimates indicate that real GNP increased only about 1 percent last year,
slightly better than the 0.5-percent gain in 1982. The economy is still suffering
from the effects of tight import controls, which produced shortages of raw
materials and other goods. Grain production of 10 million metric tons
approached the 1982 record, but many nongrain crops, such as potatoes, were
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hurt by bad weather. Reported retail sales rose only about 1 percent,
suggesting that, in light of numerous reports of price increases, real personal
consumption probably declined again last year. East Berlin failed to report the
size of what it called its "considerable" trade surplus with nonsocialist
countries, suggesting that it ran a smaller surplus than the estimated $1.5
billion in 1982.
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Brazil: Social Pressures
on Economic Policy
Since 1980, economic stagnation and high inflation
have reversed the rise in Brazilian living standards.
Last year, triple-digit inflation and growing unem-
ployment in the wake of IMF-mandated austerity
sharply squeezed most Brazilians, generating pub-
lic discontent and social unrest. The formerly pros-
perous middle class responded by intensifying polit-
ical resistance to the tough economic policies; the
poor reacted with rising crime and violence, height-
ening the government's fear of a social explosion.
Although Brasilia sustained austerity reasonably
well, it had difficult in complying with all the
IMF targets.
Inflation and Its Effects
on Income Classes in the City of
Rio de Janeiro
We foresee another sharp drop in living standards
this year caused both by the recession-now in its
fourth year-and IMF-mandated adjustments.
These losses are likely to provoke sporadic violence
and demands to reverse the economic slide. Such
popular discontent will bring pressure on Brasilia to
moderate its austerity but probably will not threat-
en the transition to civilian rule. l
The Squeeze Intensifies in 1983
Brazilians were accustomed to a steady growth in
income through the 1970s but since 1980 have seen
their fortunes decline sharply. Prolonged recession,
has caused real per capita income to decline rough-
ly 15 percent in the last three years, according to
US Embassy reports, and unemployment has im-
poverished growing numbers of Brazilians. A Bra-
zilian survey indicates that the proportion of the.
labor force earning less than the poverty level-
approximately $120 a month-climbed from 67
percent in 1981 to 72 percent in 1982. For the
middle class, Brazil's economic stagnation has
blocked upward mobility and fostered discontent.
Low Middle Wealthy Annual Increase
Income Income in Consumer
Price Index
Components
(November
1982-November
1983)
Share of Expenditures
Foodstuffs
60
40
10
232
Personal
services
3
6
6
156
Public
services
NEGL
2
4
126
Weighted annual
inflation rate
188
170
140
Last year, unemployment shot up because of the
plunge in economic activity resulting from IMF-
mandated retrenchments and the global recession.
The US Embassy estimates that 25 percent of the
roughly 50 million labor -force is now unemployed
or engaged in marginal occupations; other esti-
mates are as high as 40 percent. Moreover, already
high inflation doubled to 210 percent for 1983, and
tougher wage restraints accelerated the decline in
real wages.
Middle Class Frustrations Grow. The worsening
recession forced many in the middle class to face
unemployment for the first time or to accept less
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Brazil's Middle Class
Rapid economic growth since the late 1960s has
created a large and increasingly influential middle
class, which until recently provided much of the
political base for the military-dominated regime.
We estimate this group-defined here to include
families earning between three and 20 times the
minimum wage-to be some 25-30 million strong,
or about 20 percent of the population. Mostly
employed in services and industry, the country's
most dynamic economic sectors, the middle class
receives more than one-third of the country's per-
sonal income and comprises nearly all of the
domestic market for personally owned automobiles
and other big-ticket consumer items.
Economic discontent probably played a significant
role in congressional, state, and local elections in
1982, when many middle-income voters shifted to
the opposition. These votes, combined with those of
less privileged groups, enabled opposition parties
to gain control of Brazil's wealthiest and most
populous states.
prestigious jobs. Some unemployed professionals,
especially recent university graduates, had to drive
taxis at subsistence pay, and others resorted to
street peddling. Some workers who attained lower
middle class status in recent years were laid off and
slipped toward poverty. One Brazilian analysis
indicates that 37 percent of the middle class had
fallen into lower income groups since 1980F--]
To cope with the decline in income, most middle
class households pared spending on items consid-
ered necessities, such as education and housing, as
well as on such luxuries as automobiles and travel.
In the state of Sao Paulo, for example, some
800,000 students have transferred from private
schools-widely regarded as essential for university
admission-to public schools.
The Poor Get Poorer. Layoffs have swelled the
ranks of the unemployed. Over the last year,
according to an industrialists' group, Sao Paulo lost
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10 February 1984
Brazil's Poor Majority
The impoverished majority of Brazilians has been
growing but has not received greater political
power. We estimate the poor-defined to include
families earning less than twice the minimum
wage-to be some 80-90 million strong, or about
65 percent of the population. Mostly employed in
unskilled manual jobs, the poor receive about one-
fourth of the country's personal income and have
little purchasing power beyond necessities.
Although low-income voters contributed to opposi-
tion gains in the 1982 elections, as a group the poor
have little direct political influence. Most prolabor
politicians come from the middle or upper classes
and distribute favors paternalistically to their low-
er class constituents in return for electoral support.
some 200,000 manufacturing jobs, reducing even
skilled and semiskilled workers to poverty., The
recession and the many business failures have
reduced opportunities in the service sector, which
traditionally absorbs unskilled labor.
Drought and floods in 1983 boosted food costs-
which represent some 60 percent of budgetary
expenses for low-income households-by 300 per-
cent nationwide. Recent studies in two cities indi-
cate that, as a result, the minimum wage no longer
is enough to buy food for one adult. The decline in
purchasing power has forced cutbacks in the con-
sumption of foodstuffs. According to the press, two-
thirds of Brazil's population now suffer from di-
etary deficiencies, and many workers and their
families survive on one meal a day. Consumption of
low-grade meat-traditionally a main source of
protein for the poor-dropped by as much as 40
percent in Rio last year, according to the US
Consulate. The press reports that in big cities,
including industrial Sao Paulo, increasing numbers
of the indigent are combing garbage dumps for
scraps. F___-]
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Secret
Many Brazilians forfeited hard-won progress to-
ward middle class status last year. To cope with
economic adversity, workers cut expenses by living
with relatives while attempting to bolster family
income by sending wives and children out to look
for work. Some urbanites moved back into slums;
according to the. mayor of Sao Paulo, 55 percent of
the city's 9 million residents now live in slums,
squatter settlements, or other substandard housing.
November confirmed the deepening pessimism
among city dwellers.
The Consequences
Widespread frustration with deteriorating living
standards generated sporadic violence, scattered
strikes, and other signs of unrest last year. Public
discontent was reflected in political resistance to
Brasilia's austerity program.
Social Unrest Erupts. Economic reversals provoked
periodic outbreaks of violence by the lower classes.
Demonstrations in April sparked destructive riots,
and in September and October hundreds of food
markets and other stores were looted in cities as
well as in drought-stricken rural areas. In Sao .
Paulo, where low-income groups have the longest
journeys to work, commuters-angered by train
delays-on several occasions have attacked and
heavily damaged railway equipment. Bus passen-
gers in at least two cities have rioted over fare
increases.
Common crimes, motivated at least partly by the
economic crunch, are provoking mounting public
concern. Assaults, robberies, and thefts are up
sharply, and polls in Sao Paulo and Rio de Janeiro
cities show that four of 10 residents have been
victimized.
Protests Rise. Frustrations in the middle class
intensified as austerity bit deeper. In May 1983,
over one-half the respondents in a poll of urban
voters said they expected their economic circum-
stances to worsen in coming months, and approxi-
mately two-thirds of upper middle class individuals
took this negative view of the future. A survey in
Political discontent with the government's austerity
policies blossomed:
? Industrial workers staged large demonstrations to
protest austerity. .
? Businessmen lobbied for a return to more expan-
sionist policies.
? Intellectuals criticized the IMF for imposing 25X1
tough conditions on its loans to Brazil.
? The media assailed incompetence and corruption
among top officials, including the economic team.
? The lower house of Congress passed a resolution
calling for a moratorium on foreign debt pay-
ments.
Economic protests by the middle class became
more frequent. In mid-1983, many homeowners
threatened not to pay rising mortgage installments,
and more than 100,000 civil servants struck for
higher pay and job security. Thousands of state-
enterprise employees-mostly middle class, well
paid, and well organized-demonstrated against
cuts in budgets and salaries. In October, middle
class groups joined labor unions in lobbying Brasi-
lia to ease up on wage restraints.
Economic Impact. The government, wary of push-
ing the populace too far, granted economic conces-
sions to alleviate political discontent. Last year, for
example, authorities scaled back a hike in mort-
gage payments in deference'to middle class pro-
tests. Moreover, the government was slow to begin
phasing out wheat subsidies, fearing the political
consequences. Few state-enterprise employees were
laid off, and, until last August, Brazil's public
enterprise operating budgets were spared. These
economic concessions prevented Brasilia from com-
plying with its initial IMF agreement
The Figueiredo government gradually introduced
tougher austerity policies to appease its foreign
creditors, but political resistance hindered imple-
mentation of the program. In October, members of
the government party joined with the opposition in
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repealing the administration's wage-restraint law,
as well as other economic-adjustment measures.
These were the first defeats of government-spon-
sored legislation during 20 years of military rule.
Brasilia was forced to compromise-pegging wage
hikes at 87, rather than 80, percent of the consumer
price index.
With the economy likely to contract further this
year, Brazilians can expect no improvement in
living standards any time soon. The government,
strapped by IMF requirements to reduce public
deficits, will be unable to commit significant addi-
tional resources to create new jobs. We foresee
further middle class agitation and sporadic out-
bursts of violence by the poor.
Despite the renewed IMF agreement and the cur-
rent lull in opposition activity, we believe that over
the next year=as the transition to civilian govern-
ment approaches-politicians' concern over social
discontent will influence economic policy making
even more. With presidential elections scheduled
early in 1985, the lameduck administration will be
less able to resist opposition to austerity. Moreover,
serious public disorders would resurrect fear of a
social explosion and probably stiffen resolve in
Congress to resist additional austerity measures. As
a result, the government is likely to be forced to
soften tough economic policies.
Lacking the political consciousness, organization,
and leadership of other economically discontented
groups-such as the middle class-the poor are
unlikely to mobilize politically or engage in large-
scale revolt. Many of these Brazilians have lowered
their expectations for the future and now seem
more intent on survival than on fighting for a
bigger share of the pie.F_~
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10 February 1984
Implications for the United States
The Figueiredo government's willingness to enforce
austerity will be impaired by its need to take
account of public discontent in formulating eco-
nomic policy. We believe Brasilia will again have
difficulty in complying with its IMF accord and
will experience continuing foreign financial prob-
lems this year. Economic nationalism is a strong
current in Brazilian politics, and, if the economic
decline is not reversed, politicians will be tempted
to make scapegoats of the IMF and the United
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Brazil: Struggling With
Economic Stabilization
Despite this month's signing of a second major
international rescue package, we believe Brazil will
be hard pressed to avoid'another foreign exchange
crisis this year. IMF-imposed goals for cutting the
public deficit and the foreign payments gap are
extremely ambitious and probably will not be met.
The measures taken to date have resulted in appre-
ciable economic and social costs, and we judge that
the government is highly reluctant, in an election
year, to demand greater sacrifice. Brasilia probably
believes that, if it can demonstrate reasonable
progress in sustaining economic adjustments, the
IMF will react flexibly. If harsher measures are
demanded, the government is likely to suspend
talks with the Fund and resort to a temporary
unilateral debt moratorium.
Reinforcing Austerity
After failing to meet IMF conditions last May and
subsequently losing foreign bank support, Brasilia
began last summer to stiffen its economic adjust-
ment policies. To slash the public deficit, petroleum
subsidies were eliminated by a 45-percent increase
in oil product prices, while subsidies for wheat were
cut by doubling its official price. Officials also
pared interest-rate subsidies for agriculture and
exports and introduced two new decree laws to cut
1983 state enterprise investment 25 percent below
that of 1982 and to trim current spending.=
After considerable resistance from congress, the
administration managed to enact in November the
last important reform sought by the IMF. The
compromise law permitted wage hikes averaging 87
percent of inflation-rather than the 80 percent
sought by the IMF. To offset the fiscal impact of
higher indexation, the government increased per-
sonal and corporate income taxes and cut state
enterprise fringe benefits further.
1983 Adjustments in Perspective
In retrospect, Brazil's austerity program has pro-
duced uneven results. According to government
data,' Brazil posted a $6.5 billion trade surplus,
which surpassed the IMF's 1983 target and en-
abled Brazil to halve its current account deficit.
Suppressed imports were primarily responsible, but
increased export earnings also contributed after
midyear as a result of aggressive exchange rate
policies. Centralized foreign exchange controls and
the disbursement of suspended loans in December
increased Brazil's reserves and reduced foreign
payments arrears
Fiscal and monetary policies were also tightened.
Brasilia estimates it saved some $4 billion in 1983
by cutting subsidies and curtailing state enterprise
investment. These actions, coupled with increases
in taxes, permitted the government to reduce the
operational public-sector deficit from 6.8 percent of
GDP in 1982 to the 2.7-percent IMF target for
1983.2 The government also maintained a firm
monetary policy stance relative to inflation. Expan-
sion of the monetary aggregates was held to less
than 100 percent, close to the IMF's targets.F__1
The austerity policies did not push down the 1983
rate of inflation as intended. Inflation soared to 210
percent, more than double the rate for 1982. Par-
tially responsible were the rapid cruzeiro devalua-
tions and the withdrawal of oil and wheat subsidies.
into warehouse stocks, delaying import clearances, and making
contraband imports. We have no reliable data, however, to estimate
the magnitudes.
'?The operational deficit, a key IMF performance target, differs
from the actual public-sector deficit in that it does not include
increases in inflation-adjusted values of the stock of outstanding
public debt.
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Brazil: Balance of Payments
0.8
6.5
20.2
22.0
19.4
15.5
Service balance, net
-17.1
-14.2
Interest payments
12.6
10.5
21.2
17.2
Medium- and long-term
maturities
8.2
7.2
Gross foreign exchange
requirements
Direct investment, net
0.8
0.4
Official and supplier
credits
3.2
3.0
Loans
28.1
22.5
Bridge operations
3.6
-3.6
Short-term rollovers
12.0
10.0
Short-term credits
0.5
0.3
Long-term credits
12.0
15.8
Other d
5.4
-1.1
a Case I assumes Brasilia complies with IMF performance targets.
b Case II assumes Brasilia eases austerity slightly.
c Case III assumes foreign market and interest rate conditions
worsen.
d Primarily changes in reserves.
Another important factor was the effect on food
prices of major crop losses from adverse weather.
Despite the setbacks, inflation dropped sharply in
the last two months of 1983, prompting the admin-
istration to claim that anti-inflationary policies
were finally yielding results.
Austerity, combined with sluggish demand abroad,
had a severe impact on production. We estimate
GDP shrank 5 percent in 1983; deteriorating eco-
nomic conditions in the last three years have cut
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10 February 1984
Case I a
Case II b
Case III c
-6.0
-7.0
-8.0
9.0
8.0
7.5
25.0
24.5
24.0
16.0
16.5
16.5
-15.0
-15.0
-15.5
11.4
11.4
11.9
17.9
17.9
17.9
7.9
7.9
7.9
23.9
24.9
25.9
23.5
23.5
23.5
0
0
0
10.0
10.0
10.0
0
0
0
13.5
13.5
13.5
-4.1
-2.6
-1.1
output to 92 percent of the 1980 level. Industrial
production last year probably declined about 8
percent, according to the authoritative Sao Paulo
Industrial Federation. Sales of capital and con-
struction goods, electronic products, chemicals, and
textiles plunged. According to the Brazilian finan-
cial press, private business failures accelerated.
Brazil's middle and lower classes were hard hit by
higher unemployment, and real wage declines cut
into living standards.
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The late November approval of the revised IMF
stabilization program allowed loan disbursements
to resume. We believe Brazil's creditors were dis-
mayed at the minimal progress on inflation and
wages but generally felt that the government prom-
ised as much as possible in the existing economic
and political climate. Despite these qualms, the
IMF and commercial banks released more than $3
billion in frozen loans. Nearly all the money was
quickly used to repay short-term bridge loans and
to clear up interest arrears approaching 90 days
overdue, the point at which loans from US banks
are declared nonperforming. International lenders
also began assembling another large package to
meet Brazil's financing needs through 1984. As the
centerpiece, banks pledged $6.5 billion in new loans
as well as $5.3 billion of 1984 principal reschedul-
ings. Foreign governments, under the auspices of
the Paris Club, agreed to sizable financial support
as well.
To maintain the support of the IMF and other
foreign creditors this year, Brazil must persevere
with unpopular adjustment measures. With the
help of IMF-prescribed policies, Brasilia hopes to
reduce inflation to 100 percent and the current
account deficit to $6 billion. The ambitious policy
targets include:
? A reduction in the expansion of the money supply
and of the monetary base to only 50 percent in
1984.
? A cut in the public-sector borrowing requirement
to 9 percent in 1984 by eliminating the operation-
al public-sector deficit.
? Devaluations of the cruzeiro against the US
dollar to adjust for Brazilian inflation.
In addition, the Brazilian Government has imposed
on itself a $9 billion trade surplus target for 1984.
Brazil's Phase II Financial Rescue Package
The IMF
By gaining from the IMF a waiver of noncompli-
ance and reaching agreement on new and revised
performance criteria extending through the end of
this year, Brazil has become eligible to draw $1.6
billion in 1984 from its three-year Extended Fund
Facility arranged in February 1983.
The Private Banks
Support from the IMF was contingent upon assist-
ance from private banks. On 27 January, some 670
commercial banks signed an agreement to provide
Brazil a four-part syndicated loan package,
including:
? A $6.5 billion medium-term loan, on terms more
generous than last year.
? A rescheduling of $5.3 billion in commercial
loan payments that were due to mature in 1984.
? Continued access to $10.3 billion in short-term
trade financing.
? Maintenance of $6.0 billion in interbank credit
lines with Brazilian banks abroad.
Foreign Governments
The Western industrialized countries of the Paris
Club agreed to:
? Provide $2.5 billion in loan guarantees from
official export credit agencies. Although the
United States has made a firm pledge to cover
one-half the total, others-including the United
Kingdom, France, West Germany, and Japan-
-still have not made specific commitments.
? Reschedule $3.8 billion in payments due by the
end of the year on government-to-government and
officially guaranteed credits. This total consider-
ably exceeds the amount of rollover Brazil ini-
tially requested from Western creditor countries.
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Challenges and Uncertainties. More favorable for-
eign and domestic economic factors will help Brazil
achieve its goals. Export earnings are likely to
increase because of:
? Higher prices for key commodities such as soy-
beans and orange juice.
? A rebound in the production of other agricultural
exports.
? Rising sales of manufactured products in re-
sponse to economic recovery in foreign markets.
Nonetheless, we remain concerned that growing
foreign protectionism could frustrate Brazil's ex-
port drive.F__-]
Meeting trade targets will again depend on re-
straining imports. Brazil hopes that rapidly rising
domestic oil output and steady world crude prices
will enable it to trim $1-1.5 billion from its foreign
oil purchases and hold total imports to $16 billion.
Savings will be used to replenish low stocks of
essential raw. materials and intermediate goods,
according to the economic policy team. Boosting oil
production one-third above last year's 340,000-
barrel-per-day average could prove difficult, how-
ever, after last year's cutbacks in the state oil
monopoly's operating and investment budget.=
The IMF's domestic performance goals are perhaps
even more vulnerable than the foreign payments
goals, especially because of the temptation to back-
slide on austerity during an election year. Inflation
probably will slow, but not as much as planned.
The government's optimistic expectations for agri-
cultural performance could be dashed by short
supplies of seeds and fertilizers. Moreover, many
Brazilians doubt the monetary authorities will re-
strain money growth to 50 percent, because of fears
this would strangle the private sector.F___1
Staying With the IMF-But Barely. We believe
the Figueiredo administration will continue to push
key economic reforms, but not to the point of
jeopardizing its major political objective-an or-
derly transfer of power to a civilian government in
early 1985. Brasilia is not likely to take the tough
steps needed to meet all IMF goals and targets. If it
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10 February 1984
did, it probably would lead to a second straight
year of at least 5-percent decline, which we believe
is politically unacceptable in an election year.
To placate influential Brazilian interest groups, the
government is most likely to try to mitigate further
economic decline by loosening the squeeze on cred-
it, wages, and imports. Although government poli-
cies will take much of the steam out of price
pressures, we believe inflation will not fall below
125 percent. Higher-than-projected inflation, in
turn, will further hinder prospects for achieving the
public-sector borrowing requirement target. We
believe, moreover, less strenuous efforts to boost
agricultural exports and to curb imports in the face
of industrial material shortages could swell the
country's current account deficit to $7 billion. F_
If Brazil demonstrates that it is making reasonable
progress toward adjustment despite missing some
performance targets, we believe-and the Brazil-
ians are likely to calculate as well-that the IMF
would react flexibly. Although some tightening of
performance targets undoubtedly would be request-
ed and there might be some brief interruptions in
the flow of foreign funds, Brazil would probably
proceed with its stabilization program without los-
ing its foreign creditor backing. Moreover, we
believe Brazil may seek more money-perhaps $2
billion-and, as long as it remains in the good
graces of the IMF, the major banks would ante up.
Break With the IMF. Although we consider the
prospect of a break with the IMF unlikely, a
convergence of adverse economic trends, domestic
political pressures, and economic policy setbacks
could lead to such a confrontation. If the IMF
decides that government efforts are inadequate and
insists on harsher austerity, there is a chance the
Figueiredo administration could suspend further
talks and resort to a unilateral moratorium on all
debt payments. In this situation, we believe the
government probably would set the debt moratori-
um for a limited duration, perhaps 90 days, and
attempt to persuade creditor banks to ease austerity
conditions. Should the banks resist-and probably
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Brazil: Economic Indicators, 1975-84
Money Supply Growth
December to December
Consumer Price Growth
December to December
0 1975-79 80 81 82 83b 84e 0 1975-79 80
't Excludes inflation adjustments to value of outstanding public debt.
b Estimated.
c Projected.
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some major banks would-the negotiating positions
of both sides could harden, threatening an es-
trangement between Brasilia and its bankers)
Signs To Watch
Brazil's economic performance in the early months
of this year will be critical to the government's
willingness and ability. to stay its present austerity
course. Single-digit price increases in the first few
months of this year would support claims that the
hyperinflationary cycle has been broken. A growing
number of Brazilians might then concede that
economic retrenchment was beginning to work and
grudgingly acquiesce to these policies. A strong
export recovery would not only help exporters and
importers, but would also strengthen the country's
general creditworthiness. On balance, we agree
with the US Embassy that a continuation of these
trends would open the way for a gradual- reappear-
ance of Brazilians' traditional optimism
Alternatively, if Brasilia does not show significant
progress in-controlling inflation or bolstering its
foreign exchange position early in the year, it is
likely to face rising pressure from the middle class,
business, and labor for policy changes, especially
after Congress reconvenes in March. Under these
conditions, a nationalistic backlash could quickly
develop, precipitate another confrontation with the
IMF, and cause a new foreign exchange crisis by
midyear.
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10 February 1984
Implications for the United States
US commercial interests have been hard hit by
Brazil's debt servicing crisis and recession. US
banks-holding nearly one-fourth of Brazil's for-
eign debt-are suffering profit declines because of
the need to set aside reserves for potential loan
losses and delays in debt servicing payments. The
continuing recession in Brazil, accompanied by an
array of import and currency controls, is denying
the United States an important export growth
market. US exports, which usually have captured
the largest slice of Brazil's nonoil market, fell about
25 percent in the first nine months of 1983 com-
pared with a year earlier. A further drop in exports
is likely this year if Brazil-sticks with its IMF
program. US direct investors, holding about $7
billion of registered capital in Brazil, are taking
losses and finding the investment climate increas-
ingly unattractive. Moreover, US industries-steel,
shoes, and textiles-are facing stiff competition
from the influx of Brazilian exports.
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Mexico: Pushing Nonoil Exports
Mexico's foreign payments success last year has not
been mirrored in expanded nonoil exports. Even
though President de la Madrid made the expansion
of manufactured exports a key goal as part of
renewing economic growth, efforts to spur foreign
sales have been dampened by missteps, ongoing
policy contradictions, and the lingering financial
crisis. Moreover, de la Madrid has not initiated the
major legal changes that will be necessary to
stimulate export-led growth. We believe that de la
Madrid considers the political costs of such far-
reaching reforms would be too great. As a result,
the goal of quadrupling nonoil exports from 1982 to
1988 will remain elusive. Moreover, even under the
most optimistic case, increases in nonoil export
earnings would only slightly ease foreign financing
requirements. Debt service will remain heavy
throughout de la Madrid's term and will absorb
most of Mexico's export earnings.
The Legacy of Import Substitution
Import substitution provided a major impetus for
the Mexican economic expansion that averaged
nearly 7 percent annually during 1961-8 1. Succes-
sive administrations used direct and indirect means
to encourage manufacturing for the domestic mar-
ket. At the same time, overvaluation of the peso
made Mexico's goods unattractive abroad. Agricul-
tural policy fostered self-sufficiency, and laws pro-
hibited exports of specific items.F_~
Inward-looking regulations intensified in 1981-82
as the Lopez Portillo administration sought to cope
with the deteriorating economy. Import and export
license requirements were tightened in late 1981 as
the current account raced toward a $13 billion
deficit. Even with the devaluation in early 1982,
nonoil exports fell 10 percent that year as Mexican
policies discouraging exports were reinforced by
continuing worldwide recession, falling commodity
prices, the Mexican drought, and a lack of export
financingF---]
Turning to Exports
The de la Madrid administration, seeking a re-
sumption of rapid economic growth, has promised a
thorough restructuring of the economy. De la Ma-
drid's program promoting nonoil exports includes:
eliminating regulatory barriers, maintaining a com-
petitive exchange rate, and improving relations
with the alienated private sector. The President
also promised emergency measures to help dis-
tressed businesses gain access to peso and foreign
financing.
Early in his administration, de la Madrid moved to
eliminate some of the more onerous regulations
imposed by his predecessor. Permit requirements
were discontinued for about 90 percent of exports,
and most export tariffs were reduced or ended. In
January the Secretary of Commerce announced
liberal regulations covering earnings from foreign
sales-for example, exporters can use 100 percent
of their foreign earnings to pay supplier debt. In
other areas, most export regulations and incentive
programs are now being administered by the
beefed-up Foreign Trade Institute (IMCE), rather
than by several agencies. For example,.IMCE has
established a one-stop "single window" program,
where the exporter fills out one form and IMCE
processes all the paperwork.
To counteract mounting arrearages on private debt,
the de la Madrid administration set up FICORCA,
a scheme that allows access to foreign exchange at
subsidized rates to firms that successfully resched-
ule their debts. According to press reporting, by
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December 1983 at least $11.6 billion of $16 billion
in private debt had been tentatively rescheduled.
Mexico City has scrambled to gain funds from
multilateral lenders and expand its export-financ-
ing programs to try to offset lost short-term private
and official trade financing. The Mexican foreign
trade bank, Bancomext, was authorized to distrib-
ute $2.5 billion in trade credits in 1983-84. Govern-
ment export guarantees issued by FOMEX, a
government trust fund to support exports, were
raised from $2 million in 1982 to $78 million last
year. Mexico City negotiated a credit program with
the World Bank to channel $625 million in new and
reprogramed funds to Mexican exporters at pre-
ferred rates. Recently, international banks extend-
ed new credits for use by Mexican businesses, but
they are administered through the government
because creditors remain wary of direct loans to
private firms.
In addition to the export credit programs, the
administration has taken a number of other mea-
sures to help industry, including peso credits, tax
incentives, and technical assistance to firms with
short-term financial problems. In return, the firms
promise to maintain employment. On 31 January,
Mexican financial officials announced that $5.7
billion would be made available in 1984 to help
Mexican companies improve their international
competitiveness. The private sector also has initiat-
ed some self-help measures to promote trade.
Groups representing large industry have held train-
ing seminars, and exporters in western Mexico have
held trade shows and sought ties with Hispanic
chambers of commerce in the United States.F_
Impediments to Export Expansion
Despite efforts to date, existing policy contradic-
tions and institutional impediments are obstructing
the export drive. In many cases, the private sector
and government bureaucrats are confused by the
new regulations, and implementation of many of
the new programs is incomplete. For example, an
IMCE official told a. US Embassy officer that the
"single window" program is currently slower than
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10 February 1984
the old system of filing individual requests with
each separate government office. According to
press reports, the private sector has resorted to
underinvoicing and "smuggling" exports by bribing
border officials to avoid cumbersome foreign ex-
change regulations, despite stiff laws against such
violations.
Much of Mexico's private sector is not structured
for export, lacks the marketing skills to sell abroad,
and does not have ready access to foreign distribu-
tion systems. In Mexico's highly protected domestic
market, exports were long considered a residual by
producers, who often had profit margins as much as
three times higher on products sold internally. As a
result, the government has made few converts to its
export-led growth strategy because businessmen
are not convinced the risks are worth the costs.
Moreover, the austerity program required to deal
with foreign exchange shortages has created a
difficult operating environment. The government
has cut subsidies on fuel and freight transportation,
eliminated tax rebate schemes and increased taxes
and user fees. Principally as a result of the peso
devaluation, the cost of needed imports has soared.
The private sector remains wary of government
intentions despite de la Madrid's efforts to cultivate
business. He included business in the tripartite pact
with government and labor to restrain wages in
exchange for job security and holding the lid on
price increases.
the President meets with businessmen monthly to
exchange views. Last July, the President held a
highly publicized meeting with the new director of
the Businessmen's Coordinating Council to end a
feud with the organization over the bank national-
ization. Nevertheless, until de la Madrid defines
what he means by state "rectorship" of the econo-
my, the private sector will continue to hedge its
support of the administration.
Conflicts Over Foreign Investment
Early signals by the de la Madrid administration
that foreign investors would be welcome to enlist in
the export campaign have faded. Soon-to-be-issued
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Mexico: Balance of Payments
- 3,003
7,802
13,080
12,000
11,500
20,927
22,224
22,080
23,000
24,500
14,573
16,477
16,000
16,300
16,900
3,665
3,627
4,014
4,400
5,000
Agriculture
1,481
1,233
1,216
1,400
1,500
Coffee
347
371
NA
NA
NA
Shrimp -
348
453
NA
NA
NA
Minerals
1,208
887
850
900
1,100
Silver
520
386
Imports (f.o.b.)
14,422
9,000
11,000
13,000
Net services and transfers
-10,487
-8,700
-10,500
-9,700
Of which:
Tourist receipts (including border sales)
6,530
5,555
5,700
6,200
6,500
Interest
-8,383
-10,879
-10,700
-11,600
-12,000
Current account balance
-12,544
-2,685
4,380
1,500
1,800
a Estimated.
b Projected.
foreign investment guidelines that are designed to
clarify exemptions to the rule requiring majority
Mexican ownership are unlikely to be encouraging.
The recent automobile decree and a pending phar-
maceutical decree both reserve a portion of these
industries for majority Mexican ownership, estab-
lish heavy local content requirements, set stringent
requirements for balancing exchange earnings, and
establish mandatory performance requirements.
We believe, however, that most established foreign
firms will use their bargaining power as large
employers to create a tolerable operating climate
rather than abandon a market that holds future
promise. Such firms will cut deals, such as the
recent agreement between a US automaker and the
government, that bend implementing regulations
and satisfy the home office and the Mexican
administration. New investors, however, are likely
to remain on the sidelines.
De la Madrid's trade promotion program fell far
short of the target last. year. Because the austerity
program had caused a major slump-economic
activity fell some 7 percent-the government drew
back from basic structural reform to avoid more
serious economic deterioration. Moreover, most of
the $2 billion in official trade credits promised by
foreign governments failed to materialize in 1983,
as bilateral debt rescheduling negotiations dragged
on. One facet of the program remained active, as de
la Madrid kept the peso slightly undervalued. F_
We estimate the value of nonoil exports grew 6
percent in 1983, largely in response to the peso
devaluation and economic recovery in the United
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States-Mexico's largest trade partner. Manufac-
tured exports rose the fastest, posting an increase of
11 percent. On the downside, agricultural exports
stagnated last year while mineral exports fell by 4
percent in value as world commodity prices re-
mained depressed.
Prospects for developing new markets are limited in
the next two years. Most LDCs, including those in
Latin America-which one Mexican official de-
scribed as their natural long-term market-are
undergoing similar financial crises and foreign
exchange shortages that are causing imports to
contract sharply.F___1
Oil gave Mexico a positive trade balance with 10 of
the OECD countries in 1982, and these states
generally are unwilling to allow greater Mexican
penetration. Pegging the peso to the dollar has
reduced the peso's depreciation against other cur-
rencies, and many of the items Mexico can quickly
bring into the international market-car parts,,
steel, textiles, and shoes-face stiff competition
from depressed OECD and other Third World
industries as well as substantial tariff and other
trade barriers. Prospects for increasing sales to
other oil-exporting nations and centrally planned
economies appear poor.
Annual growth forecasts for nonoil exports in 1984-
85 range from the US Embassy's 10 percent to the
Mexican Government's 26 percent. To reach their
optimistic forecast, Mexico City would have to:
? More actively promote the private sector.
? Revamp fiscal policy to support export-oriented
firms and markedly step up trade promotion.
? Strictly comply with the IMF program to assure
adequate foreign lending.
? Open its doors to greater foreign investment.
? Aggressively undervalue the peso.
Even these measures, however, probably would be
insufficient unless accompanied by strong growth
in the US market and rising world commodity
prices.
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10 February 1984
Mexico: Nonoil Commodity Exports,
f.o.b., 1981-83
We believe nonoil export growth is likely to be
nearer the 10-percent mark in 1984 and perhaps a
little higher in 1985. We expect manufactured
goods-including output from in-bond assembly
plants-to lead export growth by increasing about
12 percent annually. Earnings from mineral exports
will probably show little growth, reflecting contin-
ued weak international demand. Agricultural ex-
ports, particularly of winter vegetables and citrus
fruit, should increase in 1984 because of heavy
damage to US crops.
De la Madrid is likely to remain in reasonably close
compliance with the IMF program and obtain
access to essential credit. The administration plans
to devalue the peso about 30 percent this year, in
line with the policy of keeping the real value of the
peso constant. Relations with the private sector
may improve slightly. The attitude toward foreign
investors is likely to remain negative, however,
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although the government may aggressively pursue
investment in certain areas such as computers and
other high-tech goods.
Although we expect nonoil exports to rise steadily,
there remain downside risks, particularly if Mexico
City responds to fears of burgeoning political un-
rest or yields to pressure from the left wing of the
ruling party for rapid reflation. A dramatic shift to
nationalist economic policies is most likely to be
accompanied by further nationalizations, substan-
tial tightening of government controls, and a loss of
essential foreign financing
The US-Mexico Trade Relationship
Trade issues are likely to play a large role in
bilateral relations in the next two years. Mexican
officials believe that "assured" access to the US
market is essential to economic recovery, and Presi-
dent de la Madrid has publicly chided the United
States for growing protectionism. Until Mexico's
recovery is well under way, we believe Mexico City
will remain uninterested in joining GATT and will
continue to oppose calls for reciprocity in trade
matters. Mexican officials are likely to continue
pushing for a bilateral trade treaty. They will also
lobby for renewal in 1985 of the US Generalized
System of Preferences (GSP)-a program that al-
lows duty-free entry of nearly 3,000 LDC products.
In our judgment, structural changes in the Mexi-
can economy and maintaining the peso's competi-
tiveness would contribute more to assuring healthy
sales to the United States. The GSP program and a
bilateral trade treaty, however, would help psycho-
logically to encourage Mexican exporters.
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Economy in an Election Year
New Zealand: Muldoon Faces a Troubled.
Prime Minister Muldoon's visit to Washington on perhaps other controls when his 21-month wage/
fourth consecutive term. Although economic trou- Economic activity in New Zealand remains weak.
bles have eroded public confidence in Muldoon, The OECD estimates that real gross domestic
recent public opinion polls show he remains the product will decline slightly in fiscal year 1983
popular choice for prime minister by a fairly wide (April 1983-March 1984)-the worst performance
margin. To keep inflation in check, we believe since 1977. Manufacturing has been particularly
Muldoon will opt for a tight monetary policy and
24 February comes against the background of a price freeze ends on 29 February.
lackluster domestic economic performance. We be-
lieve economic issues-especially record unemploy-
ment-will dominate the election campaign later The Elusive Recovery
this year when Muldoon will be running for. his
New Zealand: Selected Economic Indicators, 1976-83
Real GDP Growths
Percent
GDPa Thousand persons
Percent
-4 1976 77 78 79 80 81 82 83 b 0 1976 77 78 79 80 81 82.83 b 0
a Fiscal years.,
b Estimated. ,-
1976 77 78 79 80 81 82 83b 0 1976 77 78 79 80 81 82 83 b
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hard hit with industrial production in 1983 nearly
10 percent below the level of a year earlier. As a
result of the sluggish economy, unemployment has
risen rapidly and has emerged as a key election
issue. The number of registered unemployed has
increased from less than 10,000 in 1977 to 77,000
in September 1983, a record 6 percent of the labor
force.
Slack private investment spending is constraining
economic growth. Poor corporate earnings and
widespread lack of confidence by the business
community have resulted in stagnant growth in real
private investment this fiscal year. Moreover, low
earnings have forced firms to borrow in domestic
financial markets and compete with large govern-
ment borrowing. Wellington's budget deficit is
expected to reach $2.1 ' billion this fiscal year, a
record 9.5 percent of GDP.
The one bright spot Muldoon can point to is success
against inflation. The wage/price freeze imposed in
June 1982 for one year was extended in mid-1983
and is now scheduled to be lifted at the end of this
month. The.freeze successfully achieved Muldoon's
goal of ending nine consecutive years of double-
digit inflation. Consumer prices rose less than 4
percent in 1983, compared with 16 percent in 1982.
The failure of nominal interest rates to fall much,
however, suggests that the domestic financial mar-
ket probably is unconvinced about the underlying
success of Muldoon's anti-inflation policy. In par-
ticular, there could be a scramble for wage in-
creases when the freeze expires at the end of the
month. Muldoon appears to recognize this danger
and, according to the New Zealand Insititute of
Economic Research, plans to try jawboning to limit
wage increases to 2.5 percent in 1984.
Another Political Business Cycle?
Substantial disagreement exists among domestic
and foreign observers of the New Zealand economy
about the pace of economic recovery in 1984. The
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10 February 1984
key question is what policies Muldoon will pursue
as he prepares to take his one-seat parliamentary
majority to the polls later this year. The OECD and
the New Zealand Reserve Bank foresee little if any
growth. The US Embassy and several private econ-
omists, however, predict growth between 2 and 4
percent. These forecasts vary because of differing
policy assumptions, particularly monetary policy.
New Zealand governments-including Mul-
doon's-have traditionally primed the economy in
an election year. Since Muldoon took office in late
1975, the average rate of growth in the money
supply during nonelection years has been only 3.6
percent. During the election years of 1978 and
1981, however, the money supply expanded at an
average of 20 percent. A similar trend for govern-
ment fiscal policy is evident since the mid-1970s.
Muldoon has received considerable criticism from
foreign observers for election-oriented economic
policies. The OECD's Economic and Development
Review Committee last year scolded Wellington for
the policy zigzags of recent years, arguing that
little attention has been paid to inflation or foreign
payments considerations and that this has upset
domestic financial markets. So far, however, the
opposition Labor Party has yet to make this an
election issue. They probably fear that Muldoon
will charge them with following the same practice
in 1975.
Muldoon is trying to focus voter attention away
from unemployment and toward his record on
inflation. We believe he remains committed to
limiting inflation and is unlikely to turn on the
monetary spigot. As a result, we estimate that real
GDP growth in fiscal year 1984 will be negligible.
Thus, Muldoon is likely to face the electorate in
late 1984 with a much weaker economy than in his
two previous reelection bids.
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New Zealand: Balance of Payments a
Million US $
-847
-1,433
-1,486
-1,044
487
-24
-102
311
5,490
5,521
5,256
5,554
5,003
5,545
5,358
5,243
-1,334
-1,409
-1,384
-1,355
Net investment income
-569
-632
-735
-850
Capital account
961
1,559
1,898
918
Government borrowing for balance-of-payments purposes c
1,607
1,837
2,139
1,068
Other long-term capital
-667
-630
-1,182
-1,100
Of which:
-929
-1,175
-1,165
-1,330
Other short-term capital d
21
352
941
950
Foreign exchange reserves
343
388
1,073
662
a Fiscal year (1 April-31 March).
b Estimated.
c Includes Reserve Bank borrowings.
d Including errors and omissions.
e.End of period.
Despite Muldoon's efforts, we expect unemploy-
ment to loom larger than inflation as the dominant
issue among voters. New Zealanders are tradition-
ally accustomed to very low levels of unemploy-
ment, and recent public opinion polls indicate that
most voters consider it the country's most serious
problem. The Reserve Bank of New Zealand fore-
casts that fiscal year 1984 will be the fourth
consecutive year in which total employment will be
static. Muldoon's Minister of Labor has publicly
conceded that employment prospects are not likely
to improve appreciably over the next year or so.
New Zealand's unemployment is higher than the
official 6 percent rate. Wellington only counts as
unemployed those workers who register with the
Department of Labor. The government maintains
that this accurately reflects the unemployment
situation. The Labor Party and many domestic
economists, however, argue-correctly, in our
view-that the number of registered unemployed
seriously understates the actual degree of jobless-
ness. They claim that certain categories of workers
(such as married women), who are not eligible for
unemployment benefits, are systematically under-
represented because they have little incentive to
register. The respected New Zealand Institute of
Economic Research estimates that if these groups
were counted the true unemployment rate would be
at least 8 percent.
New Zealand's rapidly growing foreign debt may
become a campaign issue as well. The Labor Party 25X1
probably will charge that Muldoon has mortgaged
New Zealand's future because total foreign debt
reached $9.3 billion in 1983-some 45 percent of
GDP. By this measure, New Zealand is on par with
LDCs such as the Philippines, Mexico, and Brazil.
With the bulk of the recent borrowing in the form
of short- and medium-term loans, the average
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New Zealand: Major Projects
Construction. Period
Approximate Cost
(million US $)
Energy projects
2,410
Marsden Point oil refinery expansion
1980-84
780
Petralgas chemical-methanol plant
Completed
455
Motunui synthetic gasoline plant
1982-85
620
Kapuni ammonia urea plant
Completed
60
Liquigas LPG distribution
1981-88
65
Petrocorp gas treatment facility
1983-85
80
Petrocorp LPG to fuels plant
1983-85
220
Ethane-processing plant
Late 1980s
NA
maturity has shortened considerably, and nearly 62
percent of the government's foreign debt is due in
the next five years. Debt servicing payments al-
ready exceed the cost of oil imports, and the New
Zealand Planning Council, an economic advisory
group for the government, estimates that the ratio
of official debt servicing payments to exports of
goods and services is nearly 25 percent
The increase in foreign debt results from:
? Loans for New Zealand's major projects-some-
times referred to as the "think-big" projects by
Muldoon-which consist primarily of energy pro-
jects designed to reduce New Zealand's depend-
ence on imported oil.
? Borrowing to finance persistent current account
deficits.
The debt for project financing poses few long-term
problems because the projects are expected to
generate the income necessary to service their
debts. Borrowing to finance current account defi-
cits is more troublesome, however, because auster-
ity could be required in the future. New Zealand
Secret
10 February 1984
130
1,370
Government officials recently conceded in talks
with the IMF that continued heavy government
borrowing to finance foreign payments deficits
increases the likelihood of slow growth over the
next few years.
As a result of the heavy foreign borrowing, a US
financial rating service lowered New Zealand's
credit rating in mid-1983. Although the move will
make borrowing somewhat more expensive, Wel-
lington does not anticipate any difficulty in meeting
its borrowing needs.
New Zealand remains an attrac-
tive area for new loans, partly because many US
regional banks, which are cutting back on loans to
troubled LDC debtors, have sufficient funds avail-
able. Nevertheless, the lower credit rating has hurt
Muldoon politically.'In 1982 Muldoon said that
New Zealand's credit rating should be the key
criterion for judging the economic performance of
his government, and Labor has made much of this.
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Secret
Muldoon's Political Prospects
According to the US Embassy, the Labor Party
senses that the government is vulnerable on eco-
nomic issues-particularly unemployment. Labor is
almost certain to charge that New Zealand's econ-
omy has not fared well under Muldoon; real per
capita income is now lower than it was in 1976-
Muldoon's first full year as Prime Minister. Mem-
bers of Muldoon's National Party-and Muldoon
himself-are becoming increasingly concerned
about the high level of joblessness. Despite the
Labor Party's recent gains in public opinion polls,
however, deep internal divisions are keeping Labor
from devising credible alternatives to Muldoon's
economic policies.
37 Secret
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Secret
International Financial Situation:
Oil Price Impact on LDC Debtors'
This article is part of our series focusing on the
economic and political aspects of the international
financial situation.
The slide in oil prices since early 1981 has lowered
the earnings of major LDC debtors that export oil
by an amount greater than it has reduced oil import
bills for oil-importing LDC debtors. The drop in oil
prices and weak demand directly reduced annual
export earnings of eight oil-producing LDC debtors
by $17 billion in 1983 compared with 1981. During
the same period, we estimate that the oil import bill
for 15 key oil-importing LDC debtors fell only $6
billion.2F___~
Impact of Past Price Changes
Past oil price increases contributed significantly to
the current financial difficulties of most oil-import-
ing LDCs. Higher oil prices after the 1973 oil
embargo led many of these LDCs to borrow to
maintain consumption and investment. The 1979-
81 oil price runup put these borrowers in the
position of having to take new loans both to meet
the new oil price hike and to service loans coming
due from the first increase. We calculate that, since
1973, higher oil prices have cost the 15 oil-import-
ing debtors roughly $125 billion-nearly one-half
of these countries' total debt at the end of 1983.F-
In the last two years the oil market situation has
changed dramatically. The average official OPEC
selling price has fallen from a peak of $34.84 in
' This article considers only the direct impact of petroleum price
changes on oil imports and exports. The indirect effects of an oil
price change-including altered industrial-country growth, trade
with OPEC countries, and worker remittances-are not examined.
' The 15 oil-importing debtors we examined are Argentina, Brazil,
Chile, Costa Rica, Ivory Coast, Kenya, Morocco, Pakistan, Pana-
ma, Paraguay, Philippines, South Korea,.Sudan, Thailand, and
Uruguay. The eight oil producers are Ecuador, E~~y t Indonesia,
Malaysia, Mexico, Nigeria, Peru, and Venezuelai
Key Oil-Exporting LDC Debtors: Billion US $
Impact of an Oil Price Change
Impact of
$5/Barrel
1981
1982
1983-
1984 b
Price
Change
Total
72.5
64.2
55.5
56.6
10.2
Ecuador
1.5
1.3
1.5
1.2
0.2
Egypt
2.8
2.9
2.4
2.4
0.4
Indonesia
14.7
10.9
9.2
9.4
1.7
Malaysia
2.1
2.7
1.3
1.3
0.2
Mexico
14.4
16.6
16.0
16.0
2.8
Nigeria
17.1
14.0
10.9
12.3
2.2
Peru
0.5
0.5
0.3
0.5
0.1
Venezuela
19.4
15.3
13.9
13.5
2.6
a Estimated.
b Projected using January 1984 prices.
early 1981 to $28.60 late last year. We estimate
that declining oil prices and reduced consumption
shaved 20 percent off the cumulative oil bills of the
oil-importing debtors between 1981 and 1983. At
the same time, the export revenues of the eight oil-
producing debtors fell nearly one-fourth.
Price Sensitivity
We believe these LDC debtors remain highly vul-
nerable to an oil price shock. Last year, oil still
accounted for nearly 30 percent of the 15 oil-
importing debtors' foreign purchases. If oil prices
were to drop by $5 per. barrel, we estimate the
annual oil import bill of these 15 importers would
be cut $3.7 billion, while export revenues for the
eight oil producers would plummet $10.2 billion. A
large price increase could force the oil importers to
Secret
DI IEEW 84-006
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Key Oil-Importing LDC Debtors: Billion US $
Impact of an Oil Price Change
Oil Import Costs
Impact of
$5/Barrel
1981
1982 1
983 8
1984 b
Price
Change
Total
28.4
26.7 2
2.5
21.5
3.7
Argentina
0.4
0.3
0.1
0.1
NEGL
Brazil
11.0
10.1
7.8
6.8
1.2
Chile
0.7
0.7
0.6
0.6
0.1
Costa Rica
0.2
0.2
0.1
0.1
NEGL
Ivory Coast
0.4
0.4
0.2
0.2
NEGL
Kenya
0.3
0.4
0.3
0.3
0.1
Morocco
1.1
1.1
0.9
0.9
0.2
Pakistan
1.1
1.0
1.0
1.0
0.2
Panama
0.3
0.4
0.3
0.3
0.1
Paraguay
0.1
0.1
0.1
0.1
NEGL
Philippines
2.1
1.8
1.9
1.8
0.3
South Korea
6.9
6.8
6.0
6.0
0.9
Sudan
0.4
0.5
0.5
0.5
0.1
Thailand
3.0
2.5
2.5
2.6
0.5
Uruguay
0.4
0.4
0.2
0.2
NEGL
a Estimated.
b Projected using January 1984 prices.
face politically sensitive
choices, including addi-
tional loans, debt rescheduling, or even more dras-
tic import cuts.
25X1
25X1
25X1
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