INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000706930001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 43
• Document Creation Date: December 22, 2016
• Document Release Date: August 5, 2011
• Sequence Number: 1
• Publication Date: April 6, 1984
• Content Type: REPORT

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Secret I
International
Economic & Energy
Weekly
See. et-
DI IEEW 84-014
6 April 1984
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International
Economic & Energy
Weekly)
6 April 1984
iii Synopsis
1 Perspective-Fallout From Argentine Payment Episod
Briefs Energy
International Finance
Global and Regional Developments
National Developments
19 eru's Military: The Impact of Economic Crisis
,,/P 68s s
25 /International Debt Relief: Trends and Issue
33 /
The Thai Economy: Working To Sustain Its Performance
39 /Indonesia: Outlook for Aircraft Manufacturing
directed t Directorate of Intelligence,
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Comments and queries regarding this publication are welcome. They may be'
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6 April 1984
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Secret
International
Economic & Energy
Weekly
Synopsis
Perspective-Fallout From Argentine Payment Episode L_]
Last Saturday's eleventh-hour solution to the Argentine payment crisis
demonstrates. the pressure on all parties to reach agreements to keep interest
payments on loans current. The terms gained by Argentina may lead other
financially troubled countries to seek similar arrangements.
19 Peru's Military: The Impact of Economic Crisis
Peru's civilian government is struggling with how to impose fiscal discipline
without antagonizing a politically powerful military establishment that is
unaccustomed to limits on its arms expendituresF-l
25 International Debt Relief: Trends and Issuesu
A record 25 LDCs and East European countries obtained debt relief totaling
$55 billion during 1983, as compared with 12 countries and $10 billion in relief
handled in 1982. Both the number of restructurings and the volume of debt in-
volved in 1984 should surpass last year; 30 countries already are seeking debt
relief.
33 The Thai Economy: Working To Sustain Its Performance
Thailand's Prime Minister Prem Tinsulanon-who arrives in Washington next
week-is faced with difficult economic problems that threaten the continua-
tion of his country's recent impressive performance
39 Indonesia: Outlook for Aircraft Manufacturing
The Indonesian Government's ambitious development program for aircraft
manufacturing-launched in the mid-1970s-is plagued by technical and
financial problems, but Indonesia could in the long run become a coproducer
with Western aircraft firms
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Secret
International
Economic & Energy
Weekly F-]
6 April 1984
Perspective i Potential Fallout From Argentine Payment Episode
Last Saturday's eleventh-hour solution to the Argentine payment crisis
demonstrates the pressure on all parties-commercial banks and debtor and
creditor goverments-to, reach agreements to keep interest payments on loans
current. The Argentine agreement narrowly prevented US commercial banks
from having to classify as nonperforming over $4 billion in Argentine loans.
Argentina is not the only debtor attempting to cope with overdue interest
payments. Peru currently has a number of commercial bank loans with interest
arrearages; the Philippines has only begun payments to meet January obliga-
tions; Venezuela, despite having the export earnings and reserves to keep
interest payments current, also has allowed arrearages to accumulate. More-
over, the Argentine solution brings Buenos Aires' interest payments only up to
early January; another $750 million will be required by the end of this quarter
to preclude another crisi
The Argentine agreement could have a number of implications for debt relief
negotiations with other debtors:
? According to the press, the narrow margin by which a loan classification
situation was averted in Argentina may cause some regional banks to
reexamine their participation in other debt restructuring packages. Members
of the Philippine bank advisory committee were already concerned about
participation of the smaller US banks in a rescheduling agreement, and the
Argentina episode may further erode their willingness to increase their
exposure.
? The favorable terms that Buenos Aires gained by allowing interest arrear-
ages to approach the 90-day limit may lead other debtors to attempt similar
tactics. Argentina received a $100 million commercial bank loan at only one-
eighth percentage point above LIBOR and ultimately used only $100 million
of its own reserves. ome Venezuelan Cabinet
ministers saw the Argentine situation early on as an opportunity to secure
more favorable terms from creditors. Hardliners in other countries also could
come to view the Argentine settlement as an incentive to delay interest
payments and let the United States and other creditors share the burden of
repayment.
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? The Argentine example may also be read by other debtors to indicate that an
IMF agreement is not necessarily a prerequisite for securing new loans and
the cooperation of creditors. While last week's innovative Argentine bridging
facility is linked to an IMF agreement by June, this target date may not be
met if the Peronists, who have already been critical of the package, delay leg-
islative approval of Alfonsin's budget and ratification of the Fund
agreement.
? Finally, the Argentine episode-which was conceived by Mexico with
contributions from Venezuela, Brazil, and Colombia, and guaranteed by a
bridge loan from the United States-may lead to more direct involvement of
governments in solving commercial debt problems.
The next big debtor country where the implications of these potential fallouts
may be tested is the Philippines. Although the Argentine incident has raised
concern among Manila's commercial creditors about Philippine debt servicing
capabilities, we believe Manila is unlikely to follow Argentina's example.
Central Bank Governor Fernandez and Finance Minister Virata insist Manila
will meet its obligations. A recent IMF cash-flow analysis indicates this should
be possible at least until June when a new IMF agreement is expected to go to
the IMF board. Unlike Argentina, the Philippines, by virtue of its import-
dependent economy, has more to lose by driving away commercial creditors
from a debt restructuring package than it has to gain by using hardnosed
negotiating tactics to obtain marginally better credit terms. Moreover, Manila
cannot rely on its ASEAN neighbors-who are already reluctant participants
in "swap" arrangements with the Philippines-to participate in a rescue
package.
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Secret
Energy
oviet Oil Production An article in Pravda Tuesday stated that the USSR is having serious problems
Problems with oil production in West Siberia, which accounts for 60 percent of the
Ii ~nese Government
t Stocks Rise
country s on output. The article noted that the main problem is the increasing
difficulty in tapping wells, but it also indicated that low-quality equipment,
poor planning, and declining labor morale are contributing factors. It stated
that oil planners already are talking of lowering their targets for this year and
for the plan for 1986-90. Soviet energy leaders have been trying since last fall
to reverse the situation. Special measures have been introduced to increase
output, including the acquisition of some 400 submersible pumps from the
United States.
This is not the first time that the Soviets have publicly discussed their
problems in West Siberia, but this is their bleakest description. The article,
suggests that production problems may intensify and that oil production may
have peaked. Data for October 1983 through February 1984 show that oil
output has fallen 200,000 b/d from record levels of 12.4 million b/d attained
during the previous 12 months. This is-the first time since World War II that
oil production has fallen over such an extended period. The USSR might have
reached a limit in its ability to cope with the operational problems in West
Siberia, although the effects of emergency allocations and new investment
might not be clear for some time. These problems have caused the Soviets
difficulty in meeting export contracts; earlier this year they ren n
obligations to ship oil to a number of West European countries.
Japanese Government-owned oil stocks rose 8 million barrels in the first two
months of 1984 and now total 94 million barrels or some 21 days of
consumption. Tokyo plans to increase the stockpile to 110 million barrels by
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stralian Coal
xports Up
the end of March 1985 as part of its goal to acquire 189 million barrels by the
end of March 1989. Total oil stocks including commercial inventories at the
end of February stood at 433 million barrels-equal to about 100 days of
consumption. In early 1979, prior to the Iranian Revolution, total Japanese
stocks represented about 74 days of consumption. Japanese efforts to increase
its strategic stockpile in recent months probably reflect Tokyo's concern about
tension in the Middle East)
Australian coal exports-Canberra's largest export earner-reached a record
61 million metric tons in 1983, about 30 percent above the 1982 level. Coking
coal exports were up nearly 25 percent to 43.4 million tons. Steam coal,exports
rose 50 percent to 17.7 million tons. Coal sales to Western Europe showed the
sharpest increase, rising about 40 percent. Increased Australian coal sales were
due to the absence of labor disputes in 1983, the commissioning of new mines,
and the devaluation of the Australian dollar combined with the strong US
dollar. Because coal trading is done in US dollars, foreign exporters-such as
Australia and South Africa-can cut export prices in US dollars without a
corresponding drop in local currency prices. The US dollar price of Australian
coking coal to Europe, for example, dropped 20 percent in 1983, while the
price in Australian dollars fell only 14 percent.n
Australia: Coal Export Prices
Change
Coking coal exports to
Western Europe
US $ 55.50
44.10
-20.5
Australian $ 57.10
48.90
-14.4
Steam coal exports to the
Far East
44.90
38.50
46.20
42.70
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Argentine Reaction to
Bridging Loan ,
Aires to accept an IMF-based program.
Alfonsin remains committed to reaching an accord with IMF and foreign
lenders, but he will continue to talk tough publicly to defuse criticism.
Although he is likely to work out a letter of intent with the Fund in the next
several weeks, domestic opposition probably will hinder quick progress on a
final accord. The National Congress, including the Peronist-controlled Senate,
must approve both the budget and any final IMF agreement. The Peronists
and their labor union allies, as well as many of the government's own
supporters, will resist wage and public spending cuts that threaten economic
recovery
Philippine Austerity
Could Cause Domestic
anking Crisis
Opponents of the government are strongly criticizing the loan floated last
Saturday, indicating that President Alfonsin is likely to face difficulties in
reaching a final accord with the IMF and foreign lenders. Argentine
legislators clashed on Saturday over the nation's emergency loan package,
according to press reports. The chairman of the government's finance commis-
sion endorsed the arrangement, but Peronists and leftists fear new austerity
measures will be demanded in return for financial assistance. They argue that
the loan package is a US gambit intended to use the participation of four Latin
countries-Mexico, Brazil, Colombia, and Venezuela-as a lever on Buenos
Central Bank officials are concerned that restrictions on monetary growth that
are preliminary to reaching a standby agreement with the IMF could
precipitate a collapse of the domestic banking system. The domestic reserve
position of the financial system has deteriorated since last October's devalua-
tion of the peso. The devaluation sharply eroded the liquidity of banks that
carry a large proportion of their assets in pesos and their liabilities in dollars.
By mid-February commercial bank reserves fell short of official reserve
requirements by 11. percent. As a result, Central Bank officials are concerned
that many banks will be unable to comply later this year with an increase in re-
serve requirements from 23 to 30 percent that is part of the preliminary
agreement with the IMF;n
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Nigerian Assets
emain"Low
To comply with the IMF target, the Central Bank may require banks to freeze
the peso equivalent of their maturing foreign obligations. This would take
billions of pesos out of circulation and lead to the collapse of a number of
banks. Although the Central Bank in the past has supported failing banks with
emergency loans to avoid a financial panic, this would cause Manila to violate
monetary tar ets set by the Fund and thus is likely to be ruled out as a policy
alternative
on its medium- and long-term debt coming due this year.
Internal government statistics indicate that Nigeria has only $775 million in
foreign reserves, with about one-third of them placed in the United States.
Although this represents a small increase over February's $686 million, it
amounts to just over one month of imports even at the present sharply reduced
levels. Lagos currently is trying to reschedule about $6 billion in arrearages on
trade credits and will be hard pressed to meet payments of roughly $3.5 billion
Currency and
Securities
Gold and SDRs
Total
Total
United States
402.9
231.7
371.6
0
774.5
231.7
United Kingdom a
-131.3
0
-131.3
Other Europe
105.0
0
105.0
International institutions
36.6
104.5
141.1
Communist
12.6
0
12.6
Unknown
148.3
267.1
415.4
a On 27 March Nigeria was overdrawn on its UK accounts; such
shortfalls have occurred in the past and have been subsequently
rectified by transfer of funds.
Dominican Republic To President Jorge Blanco will try during his visit to Washington next week to
Request US Emergency translate his pro-US orientation into increased financial assistance. He plans
Assistance to ask for over $300 million in emergency aid, according to the US Embassy.
This would include a $30 million bridge loan to help tide the country over until
IMF funds are available, $100 million in public works project lending in 1984,
and $184 million in project loans for 1984-85. The President will also ask that
the United States buy Dominican bauxite for its strategic stockpile.
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Secret
Recor Losses for West
Ger any s Export
grantee Agency,
Zimbabwe Misses
,/,IF Targets
Malagasy Debt
Rescheduled
Dominican officials hope that a tentative agreement will be reached with the
IMF this week on the second year of a three-year Extended Fund Facility
loan. This would pave the way for renegotiating official debts and probably '
would secure new funding from foreign commercial banks to allow the country
to restock depleted petroleum and food reserves. The IMF program will
include a cap on government spending, increased taxes, the elimination of
foreign payment arrears, and broader use of the parallel foreign exchan
market. These measures, however, risk spurring further labor unrest. 7
.threat to his budget consolidation efforts over the next five years.
Fees for West Germany's export guarantee agency Hermes went up 40 percent
this month, yet West German officials expect losses could reach $800 million
this year. Considerable losses are expected from the $2 billion in Hermes
guarantees falling due this year from 20 countries experiencing foreign
payments difficulties; indemnification of West German exporters to Brazil and
Poland will represent the largest outflows. The fee increase, which will
disadvantage West German exporters, was to have taken effect last October.
Chancellor Helmut Kohl, however, bowing to pressure from industry groups,
postponed it against the advice of Economics Minister Count Otto Lambsdorff
and Finance Minister Gerhard Stoltenberg. Stoltenberg regards mounting
Hermes losses resulting from the international debt crisis to be the greatest
Zimbabwe's growing budget deficit and new restrictions on capital outflows
have brought it out of compliance with its IMF standby program and have
jeopardized remaining credit drawings. The deficit could be 12 percent or
more of GDP in fiscal year 1984-substantially above the 5.5-percent IMF
guideline-and nearly all payments abroad were suspended last week in an
effort to conserve foreign exchange. The Fund is aware that unforeseen
pressures-particularly the severe drought-have made compliance difficult,
and it will negotiate with Harare.to establish new performance criteria.
Although quick agreement might allow Zimbabwe to draw $40 million
delayed since December, the IMF re ortedly has canceled another $40 million
drawing scheduled for early April. .
Almost. $190 million in principal, interest, and arrears payments on official
and officially guaranteed debt owed by Madgascar has been rescheduled
under the Paris Club. The terms include a 5-percent downpayment by the end
of 1984, five years' grace, and a six-year repayment period for debts due
between July 1983 and the end of 1984, including about $20 million in arrears
outstanding at the end of June 1983. Madagascar also accepted the imposition
of a $25 million monitoring account from which to make 1984 payments. .
Madagascar still needs another $50 million or so this year, according to IMF
estimates, and the Fund is reluctant to disburse the first tranche of a 15-
month, $34 million standby arrangement until this gap is closed. Antananarivo
is seeking official grants and loans to bridge the shortfall.
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Global and Regional Developments
Investor Confidence in The announcement last week by Jardine Matheson, Hong Kong's leading
ong Kong Shaken trading company, that it plans to move its legal domicile to Bermuda has
stunned the Colony and sent its stock market plunging. A simultaneous
decision by Hutchison Whampoa, another major trading company, to pay a
large bonus dividend to shareholders rather than to reinvest profits in the
company, is being viewed in financial circles as showing a lack of confidence in
Hong Kong's future. Government authorities have labeled Jardine's move a
commercial decision. Communist-controlled newspapers in the Colony, howev-
er, have suggested that it was made in consultation with the United Kingdom
in an attempt to influence continuing negotiations over Hong Kong's future.
Although the British have tried to play on -investors' concerns about the
economy in past negotiations with the Chinese, Jardine's decision probably was
taken unilaterally and primarily to put itself into a position to move funds out
of Hong Kong quickly, if necessary. Jardine will maintain its headquarters
office in Hong Kong. Jardine's announcement, however, has split the united
front of businessmen, who previously had been trying to maintain a show of
confidence in the Colony's future. Although Jardine's action could start a
snowball effect among other firms, most businesses probably will not decide
their future course of action until after Beijing announces its intentions
regarding the Colony in September.)
Sweden's New The government is reviewing its export control procedures to give greater
Approach to Export protection to COCOM-controlled technology. A special group has been
C ntrols established in the Foreign Trade Department to decide what measures Sweden
should take to tighten export controls.. There appears to be a consensus in the
government that the country's export control list, which now is confined
largely to war materiel, will have to be expanded to include a large number of
dual-use technologies that are imported from the COCOM countries. The
group is expected to make a report in June or July.
The review of export control policy is an effort to erase the perception in the
United States that Sweden is an easy route for the diversion of high technology
to the USSR and East European countries. Sweden is increasingly concerned
that this view could jeopardize access to US technology that is crucial to
modernizing its armed forces and key industries. Swedish sources have
described the new approach as conforming to the COCOM list without joining
COCOM. The new procedures probably will include a certification system for
importing and reexporting COCOM-controlled items. The government, how-
ever, apparently is still debating whether the new procedures will be legally en-
forceable and what provisions for verification-including end-user checks-
should be made.
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Sharp Cuts in OPEC
Manufactures Imports
Last Year
Falling oil revenues forced OPEC members to sharply reduce imports of
manufactures in 1983. Trade data for selected major industrialized countries
indicate that exports of manufactures to OPEC fell $13.3 billion, or 21
percent; the United States and West Germany bore the brunt of the cutback.
The largest declines were reported for transport equipment and machinery,
each accounting for about one-third of the total cutback. Semifinished goods
followed closely, accounting for about 25 percent. Debtor OPEC members,
such as Venezuela and Nigeria, slashed foreign purchases to ease serious
foreign payments problems. The Gulf States-Saudi Arabia, Kuwait, Qatar,
and the UAE-scaled back development programs, reducing imports of
construction and electrical machinery, and transport equipment. Iraq, its
economy beset by the war with Iran, was forced to cut imports of manufac-
tures by nearly two-thirds. Only Iran increased imports of manufactured goods
last year as it renewed trade links broken during 1979-80.
Iran Cuts Imports
Total 62,6
90
49,420
Algeria 4,2
50
3,860
-390
Ecuador 1,0
50
550
-500
Gabon 4
80
440
-40
Indonesia 7,4
30
5,460
-1,970
Iran 2,5
00
5,900
3,400
Iraq 7,7
30
2,830
-4,900
Kuwait 3,6
40
3,270
-370
Libya 2,1
00
1,610
-490
Nigeria 4,1
20
2,160
-1,960
Qatar 8
30
540
-290
Saudi Arabia 18,2
60
17,060
-1,200
United Arab Emirates 3,6
50
2,940
-710
Venezuela 6,6
60
2,810
-3,850
a Data are for exports of manufactures from the United States,
Japan, West Germany, France, and Canada.
outflow of foreign exchange. Tehran has stopped new orders and canceled
some existing ones with several of its trading partners, including Japan, the
United Kingdom, West Germany, and France. During the last four months,
Iran is now restricting imports to help stem the
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Secret
Iran has been forced to draw down about $1.5 billion of an estimated $11 bil-
lion in international monetary reserves and foreign assets to help pay for the
high level of imports in 1983
Iran wants to hold on to its remaining foreign exchange reserves in case Iraq is
able to interfere significantly with oil exports. The restrictions also may be an
effort by Tehran to reduce the costly congestion of Iranian ports and railroads
as a result of the 75-percent increase in imports last year. Although Tehran is
unlikely to solve its transportation problems soon, it may have to ease the
import restrictions later this year. Prolonged import cuts could add to growing
war weariness among the public.
EC Farm Spending EC Agriculture Ministers last Saturday adopted several unprecedented meas-
Reforms ures to cap the runaway farm spending that has brought the Community to the
brink of bankruptcy. The new measures, which had been blocked by Ireland
since the recent EC summit, impose quotas with strict penalties on milk
production and cut overall farm prices in the EC this year by about 1 percent.
The ministers also agreed to phase out the system of border taxes and subsidies
on intra-EC agricultural trade. Nevertheless, EC farm spending will still
exceed expected revenues this year by $2-3 billion.
Approval of the agricultural package considerably eases the crisis atmosphere
fanned by the failure of two EC summits, but the Community's financial
disputes remain unresolved. The EC still faces insolvency this fall because the
United Kingdom is likely to veto proposals to raise additional funds to cover
the budget shortfall unless London's annual payments to the EC budget are
permanently reduced.
Australia Changes Prime Minister Hawke is gaining broad support for reversing Canberra's
U 'anium Policy restrictive uranium export policy. A draft of an official position paper, which
was leaked to the press last week, supports development of new uranium mines
and permits exports to countries maintaining strict nonproliferation standards.
In addition, a growing number of key party leaders recently have joined
Hawke in rejecting the party's platform, which calls for a complete phaseout of
the $420 million-a-year export industry. Hawke believes Australia's uranium
reserves=the largest in the non-Communist world-could attract nearly $1
billion in new investment and generate additional export revenues.F_~
Although industry sources report that current world uranium demand could
not support the development of new mines, a policy switch would provide
Canberra the option to authorize*new mining when demand strengthens.
Hawke, however, still faces a showdown over the issue with the left wing at the
party's biennial conference in July. The conference will provide the first
chance to change the platform, and it appears Hawke now has the votes to win.
(C NF)
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NICs' Trade Surplus The six newly industrializing countries' (NICs) trade surplus with the Big
With Big Seven Seven nearly tripled in 1983, reaching $8.4 billion. Most of the improvement
Increases reflected developments in Mexico. Trade statistics for the Big Seven show that
exports of the six NICs rose 6 percent in 1983, with almost all of the gain com-
ing in sales to the UnitediStates. Taiwan led the NICs with an export gain of
22 percent. Mexico and South Korea followed with increases of 8 and 3
percent, respectively. Only Mexico and Brazil cut their imports from the Big
Seven.
NICs: Trade Balance With Big Seven a Billion US $
Exports
67.4 71.5
Imports
64.3 63.1
Balance
3.1 8.4
Imports
9.9 10.0
Balance
-4.9 -5.5
South Korea
Exports
10.6 10.9
Imports
11.8 13.3
Balance
-1.2 -2.4
a Both import and export data are valued f.o.b. NIC exports were
derived by dividing Big.Seven imports from the NICs by 1.1; NIC
imports were obtained by using Big Seven export data.
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National Developments
Developed Countries
Canadian Dollar Since early March, the Canadian dollar has been under heavy downward
Depreciates pressure, dropping last week to its lowest level since June 1982. In part
Z reflecting the considerable narrowing in US-Canadian interest rate differen-
tials and the financial community's belief that Ottawa would not match hikes
in US interest rates, the Canadian dollar fell from US $0.81 to just over
US $0.78. Finance Minister Lalonde may have added to the decline by
displaying a lack of concern over the value of the Canadian dollar; his
nonchalance was taken as a signal that Ottawa would not intervene to
maintain its value. Lalonde later reversed course, and Gerald Bouey, Governor
of the Bank of Canada, said that Ottawa would attempt to protect its currency
from falling further. Subsequent support from the Bank, however, has failed to
halt the Canadian dollar's decline.
Ottawa Assumes
Cati'adair's Debt
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6 April 1984
For the past year, the Bank of Canada's primary goal has been exchange rate
stability, and Ottawa is likely to lean against any further depreciation in the
near term because of the inflationary impact of a declining currency. With the
next federal election probably occurring this fall, however, Ottawa may limit
its defense of the Canadian dollar should rising US interest rates put pressure
on Canadian interest rates. A rapid rise in interest rates probably would blunt
recovery in Canada, thereby hurting the Liberal government's reelection
chances. Governor Bouey has blamed high Canadian interest rates largely on
the US budget deficit. If interest rates increase prior to the election, Ottawa is
likely to become even more critical of US monetary policy.F__-]
and thereby secure additional orders for the Challenger aircraft.
Ottawa recently announced that it would financially restructure debt-plagued
Canadair-the larger of Canada's two federally owned aircraft manufactur-
ers. The Canadian Development Investment Corporation (CDIC)-the feder-
ally owned holding company that controls Canadair and many other federal
corporations-will assume the company's US $1.1 billion debt, all of which
can be attributed to development and production of the Challenger executive
jet. In addition, Ottawa granted Canadair US $250 million in supplemental
funding to cover 1984 operating expenses. Ottawa expects the transfer of the
company's debt will reassure potential customers of Canadair's survivability
The CDIC believes the revitalized Canadair will be able to sell 15 Challengers
per year and return the company to profitability in 1985; the sale of that
number of aircraft would give the company about 10 percent of the market for
large corporate jets. Canadair, however, has not been able to sell a single
Challenger aircraft in the past six months. We believe Canadair will have
difficulty in surmounting earlier design problems and the competitiveness of
the market for large business jets. Both economic and political factors lie
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Fr nch Socialists
oceed With
Restructuring
Swedish Wage I
Settlements Undermine
Government Economic
Policies
Dutch Union
Leadership Facing
96alition Split
Montreal-a key area in the next federal election.
behind Ottawa's decision; to continue to support Canadair. The government
wishes to maintain a domestic aircraft industry and to protect jobs in
drain on the economy as well as on the budget.
The steel decision follows the pattern set earlier in the coal and shipping
industries and indicates the Mitterrand government's resolve to modernize
industry, even at the risk of antagonizing labor supporters. The Socialists have
informed managers of nationalized enterprises that they are expected to be
profitable by 1986 or 1987. Mitterrand wants to reorient French industry
toward high-technology production and realizes that inefficient industry is a
protested, and there has been sporadic violence.
Paris has announced plans to reduce employment in the steel industry by
20,000 workers over the next three years. The plan will reduce employment in
the industry to about 75,000 workers,. compared with over 120,000 only five
years ago, and will close several plants. Even though the reductions will be ac-
complished through normal attrition and early retirement, some workers have
The Social Democratic Palme government has reacted sharply against wage
settlements reached by public- and private-sector labor unions in the 1984
negotiating round. Increases averaging 8.6 percent in the public sector and 6.7
percent in the private sector have severely undercut government efforts to hold
down wage costs. The government had hoped to hold wage settlements to well
below the 6-percent inflation rate most observers expect for 1984. Moreover,
the higher wages will threaten Sweden's improved foreign competitiveness and
industrial profitability, which stemmed from the 16-percent devaluation in late
1982.F_
The government has threatened to freeze prices and tighten fiscal policy if
remaining labor negotiations fail to adhere to its no-real-wage-growth guide-
lines over the 1984-85 period. It appears doubtful, however, that the unions
will heed the warning because they are seeking their first real wage increase in
several years. How the government responds to this threat to its economic
program is likely to affect its reelection chances next year. The high wage
settlements call into question the Social Democrats' claim that only they can
achieve the consensus among industry, labor, and the public needed to reverse
Federation President Wim Kok is trying to restore harmony between public-
and private-sector unions before turning over his post to Hans Poni, vice
president of the civil service union. Wim Kok has agreed to stay on beyond his
official term-which ends in November 1984-to try to settle the differences.
Internal tensions increased last fall when the union of industrial workers
refused to support prolonged strikes by the civil service union. In refusing to
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W t German Foreign
pulation Down
industrial competitiveness.
support civil servant protests over a 3-percent cut in wages and a reduction in
social security benefits, the industrial workers expressed growing Dutch
sentiment that public workers are pampered and that they should share in
sacrifices being made to revive the economy. The industrial workers have
tacitly supported The Hague's austerity measures in the hope that the new
policies will speed a recovery of industrial investment and employment. Pont
has a reputation as a coalition builder, but he will be able to unify the
federation only if the public-sector unions adopt a more moderate line and all
members agree that special emphasis should be accorded to increasing
West Germany's foreign population declined 3.6 percent last year, the first
drop since 1978. The 4.5 million foreigners are an increasing source of friction
to native Germans. The decline resulted from a sharp drop in immigration
resulting from restrictions on relatives joining families, a falloff in asylum
seekers, and the slack labor market in West Germany. Foreigners represent
7.4 percent of the population, a proportion exceeded in Western Europe only
by Switzerland (15 percent) and Belgium (9 percent).F--]
take advantage of the offer this year.
Foreign workers in West Germany, numbering about 1.7 million, have been
eligible since December for bonuses of up to $6,000 plus a refund of their so-
cial security contributions if they are unemployed and agree to return to their
homelands permanently with their families. As many as 50,000 are expected to
South African Budget Despite its worst recession in 40 years, South Africa has announced an austere
budget for FY 1984/85 to combat persistent double-digit inflation, Pretoria's
principal economic concern. Spending is set to rise by 9.4 percent-slightly less
than the prevailing 10-percent inflation rate-while revenues are projected to
increase 15.4 percent. The projected deficit of $2.4 billion is just under the ad-
justed guideline of 3 percent of GDP under South Africa's IMF standby
agreement. Because of high domestic interest rates, Pretoria probably will rely
on its solid international credit rating to obtain external financing. F-1
Controlling the deficit will again prove difficult. Defense, for example, has
been consistently underbudgeted in recent years, and gold prices, which are the
key factor determining revenues, are unpredictable. Meanwhile, the major
causes of the 3.5-percent decline in real GDP in 1983-drought and falling
gold prices-persist. South African banks have raised their prime lending rate
to 21 percent, a record level. A third successive year of drought is causing
South Africa to once again import grain. As a result, even the forecast of limit-
ed real growth this year may be too optimistic.
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in Chile .
Venezuela's Public-
Sector Austerity
:
Pro
Pakistan Looks to an Finance Minister Ghulam Ishaq stated last month that'Pakistan would move
Islamic Economy further in the direction of an Islamic economic system. Islamabad already has
. Less Developed Countries
New Economic Team President Pinochet hopes that easing austerity measures will undercut the
opposition and enable him to avoid liberalizing the political system substantial-
ly. He believes that the slow pace of the economic recovery, rather than his
government's political policies, is provoking opposition activity. He also
apparently believes that, by combating unemployment and by providing
assistance to banks and businesses, he can reduce the level of protest and avert
a general strike.F__-]
The new Ministers of Economy and Finance, in contrast to their predecessors,
favor expanding the economy more quickly and have pledged to concentrate on
reducing unemployment. Press reports state that, as a result, Chile's negotia-
tions with the IMF have been suspended. Finance Minister Escobar probably
can reduce unemployment somewhat over the next year by increasing the
budget deficit and expanding the money supply. These inflationary policies,
however, are likely to meet with resistance from the IMF. Nonetheless, we
expect Escobar, who is a former IMF official with extensive contacts in
international financial circles, ultimately will reach an accommodation with
encouraged, they are reserving judgment until the plan is implemented
Economic concessions alone, however, are unlikely to slow the momentum of
the protest movement. Antigovernment violence has increased, following the
national protest last week. Students continue to clash with security forces, and
terrorists have murdered several policemen and caused widespread losses of
electric power in Santiago. The government's failure to continue the political
liberalization begun last fall will help to unify and radicalize the opposition,
further reducing the chances for a peaceful transition to democratic rule. C
Venezuela's recently announced public-sector austerity program only partially
fulfills economic adjustments foreign creditors have requested before they will
reschedule debts. President Lusinchi announced on 14 March various meas-
ures including: a 10-percent government spending cut; plans to reorganize or
sell certain public agencies; and a mix of salary freezes and pay reductions for
high-level officials. We believe that, despite its cautious acceptance by labor
and political opposition leaders, the program will be difficult to implement.
The planned spending reductions threaten public-sector employment that
Lusinchi previously pledged to protect, and financially weak state companies
are likely to be difficult to sell. Moreover, the announced salary reductions will
have only a small impact on public expenditures. Although foreign bankers are
introduced Islamic concepts in the economy such as zakat (tax on savings),
ushr (tax on agricultural production), and optional interest-free banking at the
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trike of Tea and
Rubber Workers in
Sri Lanka
government-owned banks. Nonetheless, religious fundamentalists have criti-
cized President Zia for moving too slowly. Ishaq indicated that Pakistan is now
developing a program to eliminate interest payments on all domestic transac-
tions with state and commercial banks. The elimination of interest on savings
along with the zakat would remove the incentive for bank savings and reduce
funds available for private investment. Should this occur, the heavy private
investment expected by the government to stimulate economic growth in the
sixth five-year plan for 1983-88 probably would not occur. n
quickly. If the strike is not settled soon, world tea prices are likely to rise.
Sri Lanka's tea and rubber plantations were shut down on 1 April when
600,000 union workers went on strike. Bouyant commodity prices have spurred
the largely Tamil-dominated unions to press for higher pay. Tea accounts for
more than one-third of Sri Lanka's export earnings and about 8 percent of gov-
ernment revenues. According to US Embassy reporting, Colombo has been
counting on higher tea prices and export earnings to ease foreign payments
problems and the budget deficit. We believe Colombo initially will delay
negotiations to test the resolve of the unions, but then is likely to come to terms
-Seychelles Continues Government moves to wrest economic control away from the private sector is
Nationalization deterring investors. Two hotels-one foreign owned-recently were national-
rogram ized in a further encroachment on the all-important tourism sectorf
The govern-
ment s le tad drift has prompted a US oil company to delay planned drilling
operations. We believe other foreign and local businessmen also will be chary
of investing in the island group.
Et opia's 10-Year Insurgencies, insufficient external financing, and organizational shortcomings
L elopment Plan will prevent Addis Ababa from achieving the ambitious 7.5-percent average
annual growth rate projected in its recently announced 10-year development
plan (1984/85 to 1994/95). The government is calling for greater economic
centralization to improve basic services, develop mining and energy resources,
and expand agricultural production. Two years ago,
Ethiopia, however, would be hard
the gap.
pressed to obtain from Western countries much beyond the roughly $250
million of official aid now disbursed annually. The USSR, which in most years
provides less than $100 million in project aid and oil credits, is unlikely to fill
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Update on the 1982 and On the basis of additional information from scattered and sometimes oblique
1983 Soviet Grain Soviet press reports in 1983 of grain production, yields, and state purchases,
Crop we have increased our estimate of the 1982 grain crop from 165 million metric
tons to 180 million tons. With respect to the 1983 grain crop, General
Secretary Chernenko stated in his early March election speech that production
"exceeded 190 million tons." In late March, a middle-level Ministry of
Agriculture official told Embassy officers that the 1983 grain crop was 10
million tons "below average." His statement-made in the context of a
comparison with the 1976-80 period-implies grain production of 195 million
tons in 1983. Although we have little additional evidence to support an
estimate below 200 million tons, a 1983 crop of about 195 million tons would
be within the ? 8-percent range of error associated with our methodology. The
USSR has not published overall grain production, yield, or state purchase
statistics since 1980.1
A larger grain crop in 1982 than we earlier estimated helps explain why the
USSR imported less grain during the 1982 crop year (July 1982-June 1983)
than we had expected, yet was able to accelerate growth in the crucial
livestock sector in 1983. A grain crop as low as 195 million tons in 1983 would
provide one rationale for the USSR's having maintained grain imports through
the 1983 crop year at levels close to those of the previous crop year and some
40 percent above minimum levels committed under long-term agreementsC
Positive Soviet
Comments on
Hungarian Reforms
developments are without relevance for the USSR.
Lecturers in Moscow, in the first public discussion of Hungarian reforms since
General Secretary Chernenko's succession, recently presented a generally
favorable evaluation of Hungary's economic and social reforms. They stated
that limited growth in the labor force, together with the scarcity of resources
and capital, had required new approaches. The lecturers played down the
importance of the private sector in Hungary, however, and sidestepped a
question on whether Hungarian successes portend a larger role for the private
sector in the USSR. They implied that Hungarian reforms and social
the views of the Soviet leadership.
Influential Soviet ideologists, however, remain skeptical of Hungary's econom-
ic and social experiments, but the lectures support a recent claim by a
Hungarian diplomat that the USSR will continue to allow Hungary "room to
maneuver." Budapest probably welcomes such positive commentary, but it is
likely to await more official statements before reaching final conclusions on
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Peru's Military: The Impact
of Economic Crisis
This is the first of several articles that will exam-
ine the impact of economic difficulties on the
militaries of several key Third World countries.
governments over the past 15 years has enabled
Peru to achieve superiority over its two rivals and
emerge as the predominant Andean military power.
We estimate that between 1971 and 1980 Peruvian
military purchases totaled $2.2 billion. With over
$1 billion of this going for Soviet arms, the USSR
emerged as Lima's single largest supplier in the
period. The size of the armed forces has increased
as well. Since 1973, the Army's strength has almost
doubled to 75,000, while th a has grown
from about 7,000 to 40,000
Peru's civilian government is struggling with how
to impose fiscal discipline without antagonizing a
politically powerful military establishment that is
unaccustomed to' limits on its arms expenditures.
Military leaders have already seen spending guide-
lines delay some arms purchases, limit the expan-
sion of counterinsurgency capabilities, and slow the
development of domestic arms industries. We be-
lieve the military eventually could fear that its
ability to suppress domestic insurgents and main-
tain its superiority over armed forces in Chile and
Ecuador is being' jeopardized. If the military gets
nervous, the government will come under consider-
able pressure from military leaders to violate this
year's IMF-directed budget guidelines. Moreover,
concerns by the armed forces over President
Belaunde's declining popularity, recent leftist elec-
toral gains, increasing strikes and civil disorder,
and perceived administration restrictions on mili-
tary autonomy in counterinsurgency operations
have increased the possibility that the military will
intervene to replace the current government.n
The Military's Role
The armed forces are primarily responsible for
defense against external attack. Strategic planning
has long been based on a perceived need to field
forces capable of fighting simultaneously against
Chile and Ecuador, countries with which Peru has
continuing border disputes. Periodic clashes with
Ecuador's border forces and Peru's enduring irre-
dentist designs on northern Chile have served to
keep defense high among national budgetary priori-
ties. Heavy 'spending by both military and civilian
The military assists the underequipped and poorly
trained police in maintaining internal security, and
the level of its involvement increases with the
seriousness of the threat. The armed forces played
a major role in defeating an insurgency in the
1960s, and since late 1982 they have become
heavily involved in the struggle against the Sendero
Luminoso (Shining Path, or SL)-a rural Maoist
insurgent group of approximately 1,500 armed
members. At present about 2,500 Army, Marine,
and Air Force troops are deployed against the SL
in the 12 Andean provinces that constitute the
government's Zone of Emergency. This threat also
has forced the military to review its weapons
acquisition priorities in order to boost purchases of
equipment more suitable for counterinsurgency op-
erations.
By tradition, the military has been the dominant
voice in determining who governs Peru, intervening
against civilian regimes it considered inept, ideolog-
ically suspect, or threatening to its institutional
interests. In the post-World War II era, the mili-
tary has assumed power four times and ruled for a
total of 22 years, most recently from 1968-80.
During the early phase of this 12-year stint in
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power, the armed forces were dominated by a leftist
high command, which implemented a "progressive"
style of military government unique in Latin Amer-
ica. The regime nationalized foreign oil companies,
fostered extensive state intervention in the econo-
my, implemented social reforms, and pursued a
nonaligned foreign policy. By the late 1970s, the
military returned to the more moderate, and even
conservative, views that still predominate and in
1980 permitted restoration of full civilian demo-
cratic rule.
The Economic and Political. Backdrop
Given the military's record of direct intervention in
politics, the government of President Belaunde has
allocated substantial resources for weapons pur-
chases, salaries, and other military needs to keep
the armed forces happy.,In December 1983, the US
Embassy estimated that military expenditures had
claimed almost 25 percent of the government's
1983 budget, and that defense outlays as a percent-
age of GNP had risen from 3.4 percent in 1979 to
5.1 percent in 1983. One open source, however,
states that the 1983 military budget-excluding
new equipment purchases-accounted for 7.3 per-
Major weapons purchases approved since the re-
turn of civilian rule in 1981 include a contract in
1981 for 14 Soviet-made MI-24/25 attack helicop-
ters worth $91 million and a contract in 1982 for 26
Mirage 2000 fighters valued at $700-800 million.
To our knowledge, the civilian leadership has never
turned down any major purchase insisted upon by
the armed forces. (S NF)
The troubled economy and the persistent insurgen-
cy remain the government's two major problems.
The unprecedented 12-percent decline in real GDP
' Reliable data on Peruvian military expenditures are closely held
within the government. The US Embassy estimates that published
figures understate the actual amount spent by at least 20 to 30
percent. In addition, each service reportedly has a "slush fund"
derived from outside sources of income. The Air Force, for
example, earns revenue by transporting oil company employees to
offshore rigs and remote jungle locations and received about $50
million from the sale of 10 Mirage Vs to Argentina in 1982F_
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6 April 1984
last year-the result of natural disasters, weak
foreign demand for exports, and policy errors-has
helped erode the popularity of the Belaunde admin-
istration and arouse military doubts about the
President's leadership. The government, which
must grapple with a $12 billion foreign debt and
130 percent inflation, faces poor economic growth
prospects again in 1984. Popular dissatisfaction
over the downturn and the government's imposition
of austerity measures under its IMF program led to
opposition gains in municipal elections last Novem-
ber-including an impressive showing by the'
Marxist United Left coalition.)
In February, Peru negotiated rescheduling agree-
ments with its private creditors and signed a new
letter of intent with the IMF for an 18-month
standby agreement worth $260 million. The US
Embassy reports that, as a result of the IMF
program, payments for military imports will be
budgeted at $200 million in 1984, down from an
estimated $350 million last year.F_~
The Sendero Luminoso's terrorist activities further
contribute to friction between the military and the
government because Belaunde is reluctant to grant.
the armed forces the full autonomy they want in
dealing with the problem. Guerrilla leaders report-
edly believe that their military capabilities have not
been damaged severely by internal security force
Sendero's unpopular violent tactics, serious lack of
arms, and the gradually improving capabilities of
the security forces will hamper its development into
a national movement. Nonetheless, the guerrillas
will continue to challenge the government's pres-
ence in parts of the remote highlands in the Zone of
Emergency and undertake periodic attacks in
Lima
Impact on the Military
Over the past two years, the military has repeatedly
warned the President against drastic cuts in the
25X1
I
25X1
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Selected Recent Peruvian Arms Requirements and Orders
Item
Source
Units
Approximate
Cost
(million US $)
Status
Medium-lift helicopter
US
10-15
110
Contract for UH-60s still under negotiation.
Heavy-lift helicopter
US
3-6
60
Unclear; Peruvians have evaluated US CH-47
Chinook.
Medium tank
US, USSR
20-50
107.5
Peruvians interested in US M60A3 tanks; more
likely to buy less expensive Soviet vehicles.
Armored personnel
carriers
US, Brazil
230
70
Negotiations continuing.
Spare parts for Soviet
Unknown
50
Peru continues to search for alternative sources for
equipment
Soviet spares.
Observation helicopters West
10-15
Unknown
Negotiations for West German BO-105 light helicop-
Germany
ters continuing; status unclear.
Mirage 2000
France
26
More than 700
Contract signed 1982; Peruvian financial problems
forced renegotiation of terms in 1984; discussions
continuing.
Medium transport
US, USSR
2
35 (for US
Unclear
C-130)
Bell 214ST helicopter
US
6
32.5
Six in country; option to buy six more.
Air defense radar
US, USSR
2
20
Unclear
New naval base/air
Undeter-
1
500-1,000
Approved by Peruvian Congress October 1983; Navy
station/ shipyard
mined
evaluating bids from firms, arranging financing.
Upgrade of light cruiser Netherlands
1
130
Contract signed with Dutch firm August 1983.
Upgrade of destroyers
Possibly
Netherlands
7
Unknown-but
in excess of 200
No contracts signed yet.
LST (used)
US
4
3 per ship for
reactivation
and rearmament
Navy has only one operational LST; interested in
leasing four from US Navy.
military budget. Military leaders have submitted
extensive shopping lists that included not only the
Mirage 2000 fighter but also armor and helicopters
for the Army and modernization of the Navy's
aging surface fleet
Despite government efforts to meet military de-
mands on most major items, Peru's economic prob-
lems are having an impact on procurement, unit
readiness, and counterinsurgency operations. Lack
of funds already has led the Air Force to delay
replacement of its aging Canberra bombers with
the US A-10 or similar aircraft. Moreover, serious
differences have arisen between Peru and France
over the terms of the Mirage 2000 contract. The
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Secret N
government's inability to make required downpay-
ments prompted France to call for renegotiation of
the sale in early 1984. We expect that both parties
will strive to salvage the deal, but, given the
budgetary limits under Peru's new IMF program
and the competing priorities of the more powerful
Army, the Air Force may have to reduce the
number of aircraft ordered and delay their delivery.
Funding restraints have hindered the military's
ability to perform its internal security mission. The
need for concessionary financing has delayed ac-
quisition of counterinsurgency-related equipment,
such as helicopters, night vision devices, and im-
proved radios. In addition, the government's failure
to allocate adequate funds for civic action and
economic development-which many in the mili-
tary believe is essential to winning the struggle
against the guerrillas-has provoked numerous
complaints from officers in the Emergency Zone.
Economic difficulties have also caused the armed
forces to request salary increases from the adminis-
tratio Officer pay
has not kept pace with triple-digit inflation. Many
officers are forced to moonlight, and some appar-
ently have become involved in drug trafficking,
especially when stationed in the cocaine-producing
northeastern region of Peru.. According to the US
defense attache's office, many military installations
operate nearby farms and sell produce to bolster
the income of officers and enlisted men. Some units
reportedly spend more time working on these farms
than on military activities.
Development of Peru's nascent arms industry and
military training programs have suffered. An as-
sembly plant for Italian-designed jet trainers sched-
uled to open last year remains uncompleted, and
two frigates under construction since the late 1970s
have yet to join the fleet; technical difficulties also
have contributed to the delays. Information on
training programs and exercises is limited, but the
high cost of fuel, ammunition, and spare parts
undoubtedly.has hindered these activities. The US
attache's office reported in September 1983, for
example, that Britain had refused to return five
Secret
6 April 1984
MB-339 trainer aircraft engines to Peru until the
Air Force paid for repair work. As a result, the Air
Force grounded several aircraft and cut its training
program in half
Peru's economic difficulties will continue to limit
military readiness, training, and procurement-
especially of the most advanced weapons-but not
enough to cost Lima control of internal security or
military predominance in the Andean region. Pe-
ru's principal rivals, Chile and Ecuador, face simi-
lar economic problems, as well as political uncer-
tainties. The Peruvian armed forces' political clout
will ensure access to sufficient financial resources
to prevent a serious deterioration of military capa-
bilities. Civilian governments of either the left or
the right probably will allocate funds for at least
one major purchase by each service every year-as
well as provide for other needs such as higher
salaries-or risk being removed from office. In-
deed, we believe pressure for military purchases
could cause Peru to fall out of compliance with its
present IMF spending guidelines.
The military leadership is not completely insensi-
tive to Peru's economic problems and probably will
agree to some reductions or delays in certain
programs but not at the risk of losing superiority
over Ecuador and Chile or reducing pressure on the
Sendero Luminoso terrorists. To help resolve the
dilemma, the military is prepared to consider unor-
thodox methods of financing its purchases. The US
defense attache's office reported in late 1983, for
example, that the Army was planning to exchange
Peruvian iron ore for $16.2 million worth of Yugo-
slavian munitions.)
The emerging strain between military needs and
economic reality could threaten civilian democratic
rule. We believe military leaders are not currently
inclined to intervene in the government. On the
other hand, the range of adverse trends-the ad-
ministration's declining popularity, increasing.
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strikes and civil ;disorder caused by the economic
downturn, recent leftist electoral gains, and civil-
military disagreements over counterinsurgency pol-
icy-probably is causing some officers to consider
the option of intervention
The armed forces' current preference for Western
equipment, dissatisfaction with Soviet logistic sup-
port, and desire'to avoid overdependence on the
USSR will lead'Peru first to approach the United
States and Western Europe for new weapons. Nev-
ertheless, we believe the military will turn again to
the USSR-which historically has provided gener-
ous credit terms, if Western suppliers fail to offer
adequate financing, refuse to accept barter propos-
als, or are unwilling to sell their most advanced
equipment in
January, for example, that failure to arrange West-
ern financing for C-130 transports was prompting
the Air Force to consider buying the Soviet AN-32.
the USSR, determined
to expand its influence with Peru's armed forces,
agreed last year to refinance Lima's military debt
and is increasing efforts to sell equipment and
provide training' for all three services. Moreover,
should Peru's neighbors increase their arms pur-
chases, this could further encourage Lima to turn
to Moscow because of the Soviets' ability to deliver
materiel rapidly.
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International Debt Relief:
Trends and Issues 1
A record 25 LDCs and East European countries
obtained debt relief totaling $55 billion during
1983, compared with 12 countries and $10 billion
in relief handled in 1982. Commercial banks, for-
eign governments, and multilateral institutions
combined their efforts to provide large-scale debt
relief packages for major debtors such as Mexico,
Brazil, and Yugoslavia. The outlook for 1984 is one
of continued debt repayment difficulties and addi-
tional restructurings.' Both the number of restruc-
turings and theivolume of debt involved should
surpass last year's record levels; 30 countries al-
ready are seeking debt relief. Although we believe
most 1984 debt relief negotiations will be success-
fully completed, several issues-notably IMF com-
pliance and bolder debtor demands-already are
making negotiations difficult
The Legacy of 1983
Several developments, in addition to the sheer
magnitude of the countries and money involved, set
1983 apart from earlier years:
? The simultaneous restructuring of debt by several
large debtors was unprecedented. Although some
observers were concerned about the ability of the
international financial system to handle this situ-
ation, the task has been accomplished thus far
without major disruptions.
' In this article "restructuring" refers to a renegotiation of the
terms of existing debt by a country in payments difficulty and
covers both rescheduling and refinancing. When debt is "resched-
uled," existing terms-usually the interest spread and the maturi-
ty-are altered through agreement between debtor and creditor.
Under a debt "refinancing," terms are also altered as new funds are
advanced to t~ebtor to replace funds provided under an earlier
agreement
? About 40 percent of new medium- and long-term
syndicated loans were tied to debt rescheduling
packages. Nearly all of this "involuntary" lend-
ing went to Latin American debtors. (c)
Another significant change that occurred last year
was the more active role played by the IMF in 'the
debt relief process. Debtors' compliance with IMF-
supported adjustment programs became a central
issue as new lending and commercial and official
debt relief exercises were more closely linked to the
status of a debtor's relations with the Fund. In
1983, commercial banks directly tied disburse-
ments of new credits to the quarterly IMF perfor-
mance targets of several large debtors. Failure to
comply led to a rapid deterioration in a country's
ability to service its debt because of the debtor's
denendence on new bank and Fund disbursements.
The impact of noncompliance is underscored by the
experience of four major debtor countries that
failed to meet IMF targets during 1983:
? The IMF withheld two $320 million disburse-
ments to Argentina, in August and November,
because of a series of violations of Fund criteria
including accumulation of arrearages on external
debt, discrimination against British firms, and
failure to meet several performance targets.
Banks withheld $1.0 billion of new credits ar-
ranged in early 1983 because of Buenos Aires's
noncompliance.
? The IMF declared Brazil out of compliance.with
its first-quarter 1983 targets on 1 June. As a
result, Brazil was unable to draw $410 million
and $540 million from the IMF and commercial
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LDC and East European Debt Restructurings, 1975-83
30
20
I i
t
10
-JUNS -.000 _C1 all 1
"
I
d
i
l
l,
I
I-
banks in June and September, respectively. Be-
cause Brasilia and the IMF did not reach agree-
ment until November on a revised stabilization
package, the Fund and the banks withheld dis-
bursement until yearend.
? Peru failed to comply with its public-sector defi-
cit target and was unable to draw $70 million
from the Fund in September.. Commercial banks
responded by withholding two $100 million dis-
bursements. In addition, negotiations between the
Government of Peru and the World Bank for a
structural adjustment loan of $200 million were
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6 April 1984
This graph lists restructurings
by date of the signed
agreement. Thus an agreement
listed in one year may involve
maturities in previous or
subsequent years.
suspended until Lima reached an agreement with
the Fund.
? In early September the IMF determined that the
Philippines was out of compliance with its stand-
by facility, and the Fund suspended further dis-
bursements. Manila remains unwilling to make
the major changes in its economic policies neces-
sary to secure a Fund program. Although no
commercial bank credits were tied to IMF dis-
bursements, failure to conclude a program has,
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LDC and East European Debt Restructurings in 1983
Month
Amount
Restructured
Terms for Restructuring Debt
New Money
Commitments
(million US $)
Maturity
Grace Period Interest Rate
(million US $)
(years)
(years)
Spread
(percentage points
above LIBOR)
Argentina
November
5,500
5.0
3.0
NA
1,500
Brazil
February
4,800
8.0
2.5
2.125
4,400
Chile
July
1,300
7.0
4.0
2.125
1,300
Costa Rica
September
615
8.0
4.0
2.250
225
Cuba
December
130
7.0
3.0
2.250
0
Dominican Republic
September
568
5.0
1.0
2.250
0
Ecuador
October
1,210
6.0
1.0
2.250
431
Malawi
March
57
6.5
3.0
1.875
0
Mexico
August/
September/
October/
December/
22,824
8.0
4.0
1.875
5,000
Nigeria
July
1,350
3.0
5.5
1.500
0
September
480
2.8
3.5
1.500
0
Panama
September
185
6.0
3.0
2.250
93
Peru
July
380
8.0
3.0
2.250
450
Poland
October
1,400
10.0
5.0
1.750
0
Romania
June
601
6.5
3.5
1.750
0
Togo
October
84
7.3
0
2.000
0
Uruguay
July
629
6.0
2.0
2.250
240
Yugoslavia
September
1,400
6.0
3.0
1.750
600
Zambia
October
67
7.0
3.0
2.250
0
Brazil
November
3,800
9.0
5.0
Central African
Republic
July
13
9.5
5.0
Costa Rica
January
200
8.3
3.8
Cuba
March
413
8.5.
3.5
Ecuador
July
200
7.5
3.0
Liberia
December
22
10.0
5.0
Malawi
October
30
8.0
3.5
Mexico
June
2,000
5.5
3.0
Morocco
October
-980
8.0
4.0
Niger
November
27
10.0
5.0
Peru
July
1,044
7.5
3.0
Romania I
May
148
6.0
3.0
Senegal
December
8
9.0
4.0
Sudan
February
536
16.0
6.0
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LDC and East European Debt Restructurings in 1983 (continued)
Month
Amount
Restructured
Terms for Restructuring Debt New Money
Commitments
(million US $)
Maturity
(years)
Grace Period Interest Rate (million US $)
(years) Spread
(percentage points
above LIBOR)
Togo April
300
9.5
5.0
Zaire Decem
ber 1,000
11.0
5.0
Zambia
375
9.5
5.0
delayed negotiations on a private creditor rescue
package and official creditor rescheduling. Any
new disbursements from Philippine commercial
creditors are likel to be linked directly to Fund
compliance.
Government reluctance to accept an IMF-support-
ed austerity program also held up debt relief
measures in both Nigeria and Venezuela:
? Nigeria avoided coming to terms with the IMF
throughout 1983, with a major sticking point in
negotiations being the government's reluctance to
devalue the naira and reduce subsidies. Although
Western banks agreed to refinance $1.4 billion of
short-term debt in July and another nearly $500
million in September, by yearend trade arrear-
ages exceeded $5 billion. Western governments
that insured over $2 billion of these credits have
said any rescheduling of these obligations is
dependent upon Lagos's adopting a Fund pro-
gram. The military regime that seized power last
December, however, continues to oppose several
fund-endorsed adjustment measures.We believe
bankers are unlikely to agree to major new
lending until Lagos comes to terms with the IMF.
? Venezuela also failed to renegotiate maturing
debts during 1983 as Caracas refused to enact a
meaningful stabilization program in a presiden-
tial election year. Since the December elections,
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6 April 1984
the government has still not entered into serious
negotiations with the Fund.F---]
More Restructurings in 1984
This year we believe that both the number of ,
restructurings and the volume of debt involved will
surpass last year's levels. According to Embassy
and financial press reporting, some 30 to 40 debtor
nations will seek approximately $70 billion in debt
-relief. Some 30 countries are currently seeking or
have already agreed to restructure in 1984. Coun-
tries that will restructure their debt that did not do
so in 1983 may include Venezuela, the Philippines,
and Ivory Coast. F- - -
Key developments in debt relief operations now
under way include the following:
? Argentina's. new government would like to re-
schedule 1982 and 1983 amortization payments
and arrearages along with debt maturing in 1984.
Argentina has about $12 billion in 1982-84 pub-
lic-sector maturities and $2.5 billion in 1983
arrearages.
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LDCs and Eastern Europe: Debt Restructurings in 1984 a
Africa/Middle East Central African Republic (o)
Ivory Coast (o,c)
Liberia (o,c)
Madagascar (o,c)
Morocco (o,c)
Mozambique (o,c)
Nigeria (c)
Senegal (o,c)
Sudan (o)
Sierra Leone (o)
Togo (o,c) .
Uganda (o,c)
Zaire (o,c)
Zambia (o,c)
Asia Philippines (o,c)
Latin America Argentina,(o,c)
Bolivia (c)
Brazil (c)
Chile (c)
Costa Rica (o)
Cuba (o,c)
Dominican Republic (o)
Ecuador (c)
Honduras (c)
Mexico (c)
Nicaragua (c)
Peru (o,c)
Venezuela (c)
8 0 = official.
c = commercial.
Poland (o,c)
Yugoslavia (o,c)
? Venezuela is seeking to, refinance approximately
$13.1 billion in deferred 1983 principal repay-
ments and would like to stretch out payments on
another $3.4 billion coming due in 1984. The new
government states that a debt restructuring has
the highest priority, but negotiations are likely to
take several months. Commercial banks may
agree, however, to renegotiate Venezuela's debt
without a Fund arrangement because the country
does not require any new credits.
? Nigeria has maintained debt service payments
under last year's bank reschedulings and is cur-
rent on payments under medium- and long-term
Angola (o,c) Egypt (o,c)
Guinea Bissau (o,c) Mauritania (o,c)
Somalia (o) Nigeria (o)
Upper Volta (o)
Chile (o)
Colombia (c)
Costa Rica (c)
Guyana (c)
Paraguay (c)
Venezuela (o)
loans. Lagos must bring current nearly $500
million in outstanding payments under letters of
credit and reschedule at least $5 billion in over-
due payments under suppliers' credit agreements.
Nigeria. has campaigned vigorously to break the
solidarity among the 300 to 400 uninsured credi-
tors, and to block a British initiative that would
ensure that uninsured creditors receive terms
comparable to those secured by holders of govern-
ment-guaranteed credit. Discussions with the
IMF have been stalled for months but may soon
exhibit some progress as financial pressures build.
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? The Philippines has requested that commercial
creditors reschedule almost $11 billion in credits
maturing through June 1985. The Philippines has
also petitioned government creditors for a re-
scheduling of $4 billion in official obligations.
Both official and commercial creditors have
grown increasingly frustrated at Manila's inabil-
ity to reach agreement with the IMF and reluc-
tance to deal openly with creditors. We believe
there will be little progress until after the May
elections. Even if a Fund agreement is initialed in
June, the first Fund disbursements will not occur
until the fall. Financial sources indicate the banks
may delay new money disbursements until at
least October.
? Poland has made substantial progress toward a
precedent-setting, multiyear bank rescheduling
agreement. Bankers expect the 1984 bank agree-
ment to consolidate all future principal repay-
ments not covered under the three previous
reschedulings. In addition, bank creditors are.also
offering more than $150 million in trade financ-
ing. Warsaw has also requested a multiyear
rescheduling of nearly $12 billion in official
debt-including $7 billion in arrearages-accu-
mulated since 1981. The Poles have pressed, with
little success to date, for new credits from govern-
ments and attempted to link any Paris Club
agreement to negotiations for IMF membership.
? Yugoslavia and Western creditor governments
have agreed to refinance all principal payments
coming due in 1984-over $500 million-subject
to final approval of an IMF program. The Yugo-
slav Federal Assembly on 20 March approved the
IMF standby agreement; final approval should
come from the Fund Executive Board shortly.
Commercial creditors are expected to reach
agreement with the Yugoslavs by May to refi-
nance $1.2 billion in 1984 maturities
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6 April 1984
Key Issues
Although we believe most restructuring requests in
1984 will be met, several issues will make negotia-
tions difficult:
? Debtors' compliance with their IMF austerity
programs will again be a contentious issue. Non-
compliance with Fund programs already jeopard-
izes negotiations on second- and third-round debt
relief packages, especially for countries asking for
new loans.
? Increased domestic opposition to austerity will
contribute to tension between debtor govern-
ments, their creditors, and the IMF. Govern-
ments in Nigeria, the Philippines, and Argentina
are already balking at taking austerity measures.
In the months ahead, we expect several govern-
ments to press vigorously for more lenient adjust-
ment programs.
? Recent events show that many large debtor coun-
tries are becoming bolder in their debt negotiat-
ing stances, requesting more favorable terms-
longer maturities and grace periods, lower inter-
est spreads, and reduced front-end fees-on both
new and existing loans. Some debtors are seeking
more substantial relief and are calling for a
sharing of responsibility between debtors and
creditors for solving the debt problem and assum-
ing losses.
? Probably the most serious threat to the resolution
of debt problems is some form of radical action
by the debtors-a debtors' cartel, an explicit
repudiation of debt, or a prolonged refusal to
make debt servicing payments. We believe, how-
ever, that the odds of such radical moves remain
low. Even Argentina, despite the recent rhetoric
and the fact that it is in a better position than
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most LDCs to cope with the likely fallout from
repudiating its debts, will not, we believe, choose to
do so. In fact, the available evidence indicates it
will continue negotiations with banks and the IMF.
Implications of Continued Restructurings
Recent and ongoing debt restructurings are shifting,
current repayment problems to the late 1980s and
early 1990s. We believe that commercial banks will
not voluntarily lend to cover all amortization pay-
ments in the years ahead, particularly to major
Latin American debtors. Consequently, when these
payments come, due-most large principal repay-
ments start during 1986-87-we expect debtors
will again require additional financial relief. As
restructurings by major debtors continue, the risk
banks increases
West European' banks will take a less conci iatory
posture in negotiations on future South American
debt restructurings. To sustain debt relief efforts,
we believe it will be necessary for all lenders and
borrowers to remain committed to the renegotiation
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The Thai Economy:
Working To Sustain
Its Performance
Thailand's Prime Minister Prem Tinsulanon-who
arrives in Washington next week-is faced with
some difficult economic problems that threaten the
continuation of his country's recent impressive
performance. The Thai economy in recent years
has grown faster~than most other LDCs, and we
expect the economy to continue growing at about 6
percent annually for the next several years barring
another global recession. Prem is making some
progress in solving difficulties that threaten a con-
tinuation of this 'strong performance. He still, how-
ever, faces political opposition to reforms needed to
deal with a slowdown in export growth, a decline in
agricultural productivity, and an unprofitable state
enterprise sector
Economic Successes
Over the past two decades, Bangkok has successful-
ly pursued an export-led growth strategy that has
transformed an economy dominated by rice, tin,
and rubber production into a diversified agricultur-
al exporter with a growing manufacturing base:
? Economic growth has averaged more than 7
percent annually since 1960 and remained above
4 percent in 1982 despite the global recession.
? Per capita income is over $800, placing Thailand
firmly in the ranks of middle income developing
countries.
? Unemployment and inflation are both low-run-
ning at about 6.5 percent and 5 percent,
respectively.
? The share of manufacturing production in GDP
has risen from' about 10 percent in 1960 to 22
percent last year-and is now on par with the.
share of agriculture.
? Thailand's conservative fiscal and monetary poli-
cies have restrained both public- and private-
sector foreign borrowing, resulting in a debt
service ratio of about 20 percent.
Thailand's Improved Creditworthiness
Thailand's impressive economic performance, espe-
cially when compared with debt-burdened LDCs,
has led over the last year to a marked improve-
ment in the country's international credit rating
and to a more favorable evaluation by foreign
investors. By last summer the government could
obtain large foreign commercial loans on terms
equal to or better than those of most other Asian
borrowers. Bangkok, for example, arranged a $200
million loan at the spread of 0.375 percentage
points over LIBOR-below the rates that South
Korea and Malaysia were paying. Foreign invest-
ment-although still small by Asian standards-
reached $225 million in 1983, up nearly 25 percent
from the previous year. Some foreign businesses
that moved their regional headquarters from Bang-
kok to Singapore at the height of the Vietnam War
are considering returning, according to the US
commercial attache.
? Production of domestic natural gas and crude oil,
beginning in 1981, helped reduce Bangkok's oil
import bill
The Economy in 1983
Economic performance in 1983 was mixed. Output
increased about 6 percent, according to preliminary
official estimates, with most of the recovery gener-
ated by a domestic investment boom. Manufactur-
ing and construction were both up sharply, and
good weather contributed to a nearly 3-percent rise
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Thailand: Economic Indicators, 1978-84
Billion US $
0
-0.5
GDP
Consumer
prices
0 -4.0
Current
account
balance
Trade
balance
14
Total - Total
Tin
Rice
I I I I I I I
0 1978 79 80 81 82 83 84
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6 April 1984
Public
sector
Private
sector
0 1978 79 80 81 82 83 84
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Thailand: Balance of Payments
Current account
-2,569
-1,006
-2,700
-2,130
Merchandise trade balance
-3,022
-1,571
-3,900
-3,100
Exports, f.o.b.
6,902
6,835
6,500
7,400
Of which:
Rice !
1,208
Sugar
441
563
338
400
Tapioca
754
859
516
700
Rubber
500
413
495
600
Tin
423
338
203
200
Corn I
382
362
290
400
Manufactures
830
1,014.
870
1,200
Imports, c.i.f.
9,924
8,406
10,400
10,500
Oil
2,984
2,647
2,591
2,400
Net services and transfers
453
565
1,200
970
Interest payments
1,026
1,083
1,029
1,188
Net nonmonetary capital
2,487
1,667
1,356
1,682
Direct investment
288
183
225
300
Errors and omissions C
62
-531
594
248
a Estimated.
b Projected.
c Includes allocation of SDRs.
in agricultural production. Fiscal austerity meas-
ures narrowed the budget deficit to $1.3 billion or
3.5 percent of GDP, down from 6 percent the year
before. FI
On the downside, a nearly 25-percent increase in
imports stemming from the recovery combined with
a 5-percent drop in export earnings to produce a
record $3.9 billion foreign trade deficit. This com-
pares with a $1.6 billion trade deficit a year earlier.
The decline in export earnings resulted from de-
pressed commodity prices and an overvalued cur-
rency, which is unofficially fixed to the US dollar.
Despite foreign! exchange receipts from tourism and
remittances from overseas workers totaling about
$2 billion, the estimated current account deficit
nearly tripled to $2.7 billion in 1983. Speculation in
anticipation of a possible devaluation began last
summer and contributed to Thailand's external
financial problems. Importers accelerated pur-
chases, and private-sector borrowers accelerated
foreign debt repaymentsF__1
Since last October, Prem has been coping with a
domestic financial crisis that was precipitated when
three finance companies with liabilities of about
$100 million went bankrupt. Bangkok is attempting
to shore up other ailing finance companies and
prevent the crisis from spreading to the banking
system, which is unprotected by deposit insurance.
Several banks remain in a precarious state and
could go under if credit is tightened and interest
rates rises
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Bangkok's Evolving Economic Strategy
After abandoning a brief experiment with a govern-
ment-controlled manufacturing sector in the late
1950s, Bangkok has pursued a free enterprise,
export-oriented development strategy. The World
Bank recently attributed much of Thailand's eco-
nomic success to the relatively low level of market
distortions. Nevertheless, the Thai Government
has been willing to intervene if it felt this was
necessary to further the country's economic inter-
ests;for example, government policies that deliber-
ately depressed rice prices to encourage additional
agricultural exports of sugar, corn, and tapioca. (c)
Over the last decade, Bangkok's role in the econo-
my has expanded. The five-year plan for 1976-81
called for the development of Thailand's first
offshore natural gas field, which was completed
ahead of schedule. The current plan proposes a
blueprint for a heavy industry complex in which
the government will have a substantial equity
stake. Bangkok is establishing the Thai Develop-
ment Research Institute to formulate long-range
development strategies."F-l
Needed Economic Adjustment
Although Prem reportedly understands little about
economics, he has relied. more than his predecessors
on an increasingly competent group of technocrats
to formulate his economic policies, according to the
US Embassy. He has already adopted a number of
measures to deal with foreign finances. Hoping to
spur exports, he cut taxes on rice and tin last fall.
To stem an outflow of foreign exchange reserves
last December, Prem imposed import=credit restric-
tions, which required commercial banks to limit
1984 import financing to the 1983 level.- He has so
far refrained from increasing long-term borrowing
Ana ce the burgeoning current account deficit.
Prem has also increased taxes and cut subsidies to
some state enterprises because of a revenue short-
fall resulting from the drop in exports. A $50
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6 April 1984
airport exit tax on Thai residents has proved espe-
cially controversial. The government's plans to
divest itself of several money-losing state enter-
prises to ease the deficit provoked strike threats by
the large public-sector labor unions. Prem, howev-
er, avoided further attempts to raise fares for the
Bangkok bus company-the biggest money loser.
Prem's predecessor fell when he attempted to in-
crease energy prices, and large public demonstra-
tions forced Prem to back down from an attempt to
increase heavily subsidized transportation fares in
1982. Moreover, important politicians and military
officers, with interests in the tariff-protected manu-
facturing sector and heavily subsidized state enter-
prises, oppose attempts to improve efficiency.
Longer Term Issues
Reforms to deal with Thailand's longer term eco-
nomic problems are proving even more difficult:
? Downgrading of estimates of natural gas re-
serves. Bangkok's plans for natural-gas-based in-
dustrial development and further decreases in
petroleum imports received a sharp setback last
year when estimates of reserves in the major
producing field were cut by two-thirds. Moreover,
in February an independent consultant down-
graded reserve estimates in the major undevel-
oped offshore field by more than one-third. As a
result, we now believe that the Gulf of Thailand
contains less than 300 billion cubic meters of
gas-far less than the 450 bcm on which Bang-
kok's industrial development plans are based. The
reduced availability probably eliminates any pos-
sibility of natural gas exports. Moreover, the
publicity surrounding the downgrading threatens
the private-sector investment that Bangkok wants
for its proposed fertilizer and petrochemical
complexes.
? Growing protectionism. Not all of Bangkok's
foreign payments problems are temporary. Ex-
port growth-especially for manufactures-has
been slowing for several years as a result of
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international commodity agreements and world-
wide increased protectionism. Quotas or other
restrictions limit exports of sugar, tin, coffee, and
tapioca. Textile agreements with the United
States and the European Community restrict
those countries' import of Thai textiles. Japan's
increased purchases of US poultry have been
partly at the expense of Thai chicken exports,
according to the local press.
? Rapidly growing labor force. Thai technocrats
are especially (concerned by a labor force project-
ed to grow by 1700,000 a year for the remainder of
the decade. There is little additional land for new
farmers. Bangkok's emphasis on capital-intensive
industrial development will produce relatively few
urban, industrial jobs. The labor-intensive, ex-
port-oriented manufacturing sector is still rela-
tively small, and the number of new jobs avail-
able in domestic manufacturing is limited.
? Agricultural exports still provide more than 60
percent of export earnings. Measures to keep
urban food prices low have depressed farm in-
comes and discouraged investment in higher
yielding agricultural technologies-new seed va-
rieties, and increased use of fertilizer and irriga-
tion. Thai rice yields are among the lowest in
Southeast Asia. Moreover, urban incomes are
more than double those in rural areas.n
The Economic Reform Package
Thai economic policy makers, especially Dr.
Snoh-the chief planner who will accompany Prem
to Washington-recognize the difficulties ahead.
In conjunction with a five-year, $1 billion World
Bank structural adjustment loan begun in 1982,
they have designed a reform package.. Prem has
already implemented several politically controver-
sial reforms, including raising domestic energy
prices to world levels, eliminating price controls on
most items, increasing taxes to reduce the fiscal
deficit, decontrolling interest rates to encourage
saving, lowering some tariffs, and streamlining
some government administration. Not everything
has worked well. Plans to restructure the domestic
appliance and automobile assembly industries to
improve their efficiency by exposing them to in-
creased foreign and domestic competition have had
little success.)
Although we expect Thailand will continue to face
foreign payments problems, we believe economic
growth will probably remain above 4 percent and
could average about 6 percent over the next few
years. Increasing world demand for Thai commod-
ity exports-especially rice, rubber, and corn-and
a possible devaluation of the baht could reduce the
current account deficit to about $2 billion in 1984.
Because Thailand does not have a large foreign
debt, it probably will be able to finance a deficit at
that level. We expect Prem or any likely successor
probably will maintain the same conservative fiscal
and monetary policies that have served Thailand
well in the past
The longer term outlook for accelerating economic
growth is not favorable. Although Prem has made
more progress on economic reform than many
believed possible four years ago, his government is
more concerned about political stability than eco-
nomic efficiency. Prem may have reached his lim-
it-at least for a while-in pursuing economic
reform. We expect political opposition will hinder
further measures to decrease subsidies to state
enterprises, lower manufacturing tariffs, and shift
funds from urban to rural areas. As a result, we
expect moderate growth but no acceleration to the
8- to 10-percent range enjoyed by neighboring
Singapore, Taiwan, and South Korea
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Indonesia: Outlook for Aircraft
Manufacturing
The Indonesian Government's ambitious develop-
ment program for aircraft manufacturing-
launched in the mid-1970s-is plagued by techni-
cal and financial problems, but Indonesia could in
the long run become a coproducer with Western
aircraft firms. Under the direction of the influential
Dr. B. J. Habibie, Minister of Research and Tech-
nology, a series of licensing and coproduction
agreements have been concluded; these have been
augmented by construction of a large manufactur-
ing facility-Nurtanio II-that should be largely
operational by 1985. Despite the government's
commitment, the Indonesian aircraft industry faces
severe shortagesiof technical and managerial exper-
tise and lacks the manufacturing and educational
infrastructure required to fully support the new
facility. Government spending cuts engendered by
the flat oil market will compound these problems.
As a result, we believe the industry will not be a
major factor on the world market
Aircraft Manufacturing in Indonesia
P. T. Nurtanio, the largest aircraft manufacturing
firm in Indonesia, has one of the most modern
industrial facilities in the country. The company
was formed in 1976 when the Indonesian Govern-
ment combined the few existing aircraft re-
sources-including Pertamina's Advanced Tech-
nology and Aeronautical Division and the former
Nurtanio Aircraft Company-to form a single
firm. Nurtanio was modeled after West Germany's
Messerschmitt-Bolkow-Blohm (MBB) and drew
heavily from it for technical and personnel assis-
tance. Indonesia; concluded a series of licensing
agreements covering assembly of commuter air-
craft and helicopters. Beginning in 1976 with kit
assembly of MBB helicopters and a Spanish 12-
passenger aircraft, Indonesia has progressed to
prototype production of a 34- to 39-seat airplane
jointly with CASA of Spain~
The Indonesian aircraft industry, however, still is
considered by most industry analysts to have limit-
ed manufacturing capabilities. Indonesia does some
metal fabrication as well as assembly but has no
capability in engines or advanced avionics. Never-
theless, by joining in coproduction programs, they
are gaining experience
New Facilities and Programs
The showcase plant at Java's Bandung Air Force
Base is close to completion. As part of Indonesia's
move to develop an aerospace industry, the new
380,000-square-meter production facility has
220,000 square meters of covered space, housing
several state-of-the-art facilities, including comput-
er numerically controlled machining centers, com-
puterized main stores, composites and surface
treatment shops, production hangars, a research
center, and a training center for 1,000 workers per
year. The numerically controlled machining centers
are already working. In addition, the initial phase
of a $50 million maintenance center to test and
overhaul engines used on aircraft built at the plant
is planned for late 1984.F__-]
The new facility is about one-third the size of
Japan's combined aircraft facilities. US aircraft
manufacturers visiting Nurtanio II note that much
of the equipment is state of the art, especially the
computer numerically controlled machines. Despite
the new equipment, Nurtanio continues to work
almost exclusively as an assembly plant. All sophis-
ticated components-such as engines, avionics, and
rotor hubs-are imported. Moreover, specialty
shops such as those for composite materials require
Western technical assistance to turn out a quality
product.
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DI IEEW 84-014
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Secret
Indonesia: Aircraft Programs at Nurtanio
Foreign Licensor or
Coproducer
Type
Date of
Agreement
Date of First
Production
NC-212 Aviocar CASA, Spain
12-seat, twin turboprop transport
1976
1976
NBO-105 MBB, West Germany
6-seat light utility helicopter
1976
1976
BK-117 MBB and Kawasaki, West
Germany and Japan
8- or 11-seat multipurpose helicopter
1982
1985
SA 330 Puma Aerospatiale, France
16- or 17-seat transport helicopter
1979
1981
AS 332 Super Puma Aerospatiale, France
16- or 17-seat transport helicopter
1982
1983
Bell 412 Bell Textron, United States
14-seat utility helicopter
1982
1984
CN-235 Coproduction with CASA, Spain
34- to 39-seat, twin-turboprop transport
1979
1983
In. addition to existing licensed assembly, we be-
lieve the new plant will be used to produce the
CN-235, a 34- to 39-seat turboprop aircraft de-
signed and built on an equal-risk basis between
Nurtanio and Spain's CASA. Nurtanio will manu-
facture the outer wings, rear fuselage, and vertical
tail surfaces. This aircraft is tailored to meet the
growing market for small commuter aircraft. Indo-
nesia intends to build the aircraft to US require-
ments and to seek FAA certification. A prototype
was completed and test flown in December 1983.
Shortage of Skilled Labor
Nurtanio is attempting to remedy a chronic short-
age of skills necessary to underpin current pro-
grams and build a work force for anticipated
growth in production. Indonesian engineering grad-
uates are studying at aerospace facilities in the
United States, West Germany, France, and Spain.
Others are getting on-the-job training from MBB,
Aerospatiale, and CASA technicians working at
Nurtanio. Current employment is about 10,000, up
from only 600 in 1976. The expertise of the labor
force still is deficient. By 1986 employment is
scheduled to grow to 12,000, even though some
foreign observers have reported that the current
work force is heavily overstaffed. Habibie recently
said he intends to h ve 60,000 employees by the
year 2007.
Nurtanio will seek additional coproduction ar-
rangements and offset production work in the next
few years to upgrade its manufacturing capabili-
ties. Indonesia already stepped up talks with Airbus
and Boeing about production of components for
large commercial jet aircraft. Indonesia's Garuda
Airlines is discussing potential purchases of either
the Airbus A320 or Boeing 757. As part of any
deal, Nurtanio wants to produce components for
the purchased aircraft. Although procurement de-
cisions probably will not be made before mid-1984,
negotiations have included:
? French offers of concessional financing to set up
an aircraft maintenance facility tied to the pur-
chase of up to 20 Airbus A320s.
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