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June 29, 1984
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Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Directorate of Intelligence Weekly International Economic & Energy o DI /EEW 84-026 29 June / 984 0 0 ropy 6 7 7 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret Weekly International Economic & Energy. Synopsis P pective-South American Debt: After Cartagena Energy International Finance Global and Regional Developments National Developments 19 SAmerica: IMF Austerity Under Attacid 25 ~LDC Debtors: Incentives for Moratoriums 31 nternational Financial Situation: Political Update This article was prepared by analysts from OEA, ALA, and OGI. 33 In National Financial Situation: Debt Arrearages 37 nternational Financial Situation: Comparison of Adjustment in Eastern Europe and Five Major Debt-Troubled LDCs 41 /The Soviet Grain Crop: Impact on Imports and Meat Supplies 25X1 25X1 25X1 25X1 25X1 25X1 25X1 I 25X1 25X1 I 5X1 25X1 25X1 25X1 Comments and queries regarding this publication are welcome. They may be Directorate of Intelligence, telephone 25X1 25X1 i Secret 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret 25X1 International Economic & Energy Weekly 25X1 Synopsis 1 ~ Perspective-South American Debt: ~f'ter Cartagena 0 25X1 The emphasis during the Cartagena conference on political solutions to alleviate debt burdens will put new strains on international rescue programs in the coming months.0 25X1 1 19 Soutb America: IMF Austerity Under Attack0 25X1 Severely strained economic conditions and sharply reduced living standards are prompting South American governments to question whether IMF- supported austerity programs are acceptable. 25X1 25 LDC Debtors: Incentives for Moratoriums 0 25X1 The dropoff in new lending to debt-troubled LDCs over the past five years is I reducing economic incentives to meet interest and principal payments. ~ 25X1 1 31 International Financial Situation: Political LTpdate0 25X1 IMF austerity measures. have led to heightened olitical tensions in a number I of Latin American countries this past month. ~ 25X1 33 International Financial Situation: Debt Arrearages0 25X1 At least 54 LDCs and East European nations currently are behind on their debt repayments, slightly more than the record total of 52 at yearend 1983. Most of the arrearages are accounted for by a handful of major debtors. ~ 25X1 37 International Financial Situation: Comparison of Adjustment in Eastern Europe and Five Major Debt-Troubled LDCsO 25X1 Eastern Europe appears to be adjusting to its debt crisis more rapidly than most of the LDCs. The quicker. turnaround for Eastern Europe results from being forced into adjustment earlier and the region's comparatively smaller financial problems. 0 25X1 41 The Soviet Grain Crop: Impact on Imports and Meat Supplies 0 25X1 The size of this year's grain crop is likely to lead to higher grain imports than in 1983 and could jeopardize the Soviet's effort to match last year's record iii Secret DI IEEW 84-026 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret International Economic & Energy Weekly Perspective South American Debt: ~J?er Cartagena 25X1 The emphasis during the Cartagena conference on political solutions to alleviate debt burdens will put new strains on international financial rescue programs in the coming months. The final communique not only emphasizes the need for a political solution to the debt.problem, but also criticizes rising interest rates and growing protectionism by industrial countries. The Latin America foreign and finance ministers also called for more flexible IMF conditions and measures to help ease the repayment burden. We believe Cartagena marks a key turning point. Even though a formal debtors' cartel did not materialize, we believe the Latin countries will be more inclined to use po- litical pressure to attempt to obtain repayment concessions, a development that poses dangers for the current approach to the debt problem. The Cartagena Consensus is the first concrete step in taking a unified stand on debt issues. The creation of a consultative system will enable the Latin debtors to coordinate their actions more effectively by. sharing information on debt negotiations. Moreover, it indicates a heightened political willingness to press for financial reforms. Although Brazil and Mexico were eager to avoid any move that would appear confrontational, the selection of Argentina as first coordinating secretary indicates Latin debtors could yet resort to tougher actions. In oui view, the Argentines, having received support,at Cartagena, may adopt more hardline tactics with bankers We believe debt management will increasingly .become a political issue. Latin American leaders will press, as a group, the governments of the industrial countries to take a more active role in easing the- debt burden. They are likely to seek official intercession with the IMF for policies designed to revive growth in an attempt to ease social unrest and with private banks to extend repayment concessions. They will also seek greater access to import markets in the industrialized countries and larger-credit lines from international lending agencies. The major debtors are probably well aware that the gradual transformation of debt management into a political issue. is a double-edged sword, and could undermine access to new money and hurt ongoing negotiations. If debt management becomes a highly politicized issue, debtor countries may suffer. Unwillingness to work with the IMF-best exemplified by Argentina's unilateral decision to present a program to the Executive Board-may reduce the willingness of bankers to lend because their financial support is contingent on economic adjustments. At the same time, bankers' reluctance to reduce Secret DI IEEW 84-026 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 interest rates to levels sought by some debtors is likely to cause Latin American governments to put increased pressure on the governments of creditor countries-particularly the United States-to intervene. It is increasingly likely that debtor countries will subordinate necessary economic adjustments to domestic political considerations. The smaller debtors in particular could opt for political expedients and, in the process, undermine creditors' continued cooperation in making new loans and rescheduling debts to all .countries in the region. This judgment is based, in part, on reactions to Bolivia's unilateral suspension of payments in late May, a move aimed at placating labor restiveness. Although the actual repayment amounts were small, bankers fear that this could set a dangerous precedent. Unilateral action by one debtor could set in motion a chain reaction among other small debtors. We speculate that Colombia, Peru, and Ecuador are the most likely candidates to declare unilateral payments moratoriums in the coming months: ? With Colombia's liquid foreign exchange reserves equal to about one month of imports, President Betancur-who is still resisting an IMF agreement- may be tempted to suspend payments abruptly. ? Growing domestic political and labor pressures during the presidential election campaign may cause Peruvian President Belaunde to pursue hard- line tactics. ? Ecuador's conservative President-elect Febres Cordero, who has publicly said he will pursue better debt renegotiation terms, could suspend debt servicing to improve his standing with labor and the left. We believe the smaller debtors-acting individually but moving in the same direction~ould adopt confrontational tactics to try to force major concessions from lenders. We believe these countries, spurred by Argentina's recent example, could present programs to the IMF on a "take it or leave it" basis. We also believe these debtors may demand new loans from bankers at fixed in- terest rates and with repayment periods of 15 years or more. The more rebellious debtors also could demand that lenders capitalize interest payments or place a cap on total interest payments to insulate them from interest-rate in- creases. Major Latin American countries have little leverage to head off unilateral payments suspensions by smaller debtor countries. Despite the risks, the major debtors may even tacitly support such moves in the hope of benefiting from any concessions granted by creditors. Any easing of commercial repayment terms, for example, would probably cause Brasilia and Buenos Aires to strengthen their determination to obtain a multiyear restructuring package on Secret 29 June l 984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 25X1 25X1 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret Energy Big'Seven Oil Oil consumption in the seven major developed countries rose nearly 6 percent /Consumption Increases in first quarter 1984 over year-earlier levels-the first quarterly increase since ' /Dramatically 1979. The increase in oil consumption reflects the economic expansion in the lllJ// Bi Seven countries Consum tion of most major roducts increased as g P J P gasoline, diesel fuel, and light fuel oil sales in the seven countries rose 10 percent, 11 percent, and 8 percent, respectively. Sales of heavy fuel oil increased in the United States and Japan but continued to decline in Canada and Western Europe. Major Developed Countries Oil Consumption Percent change a -7.9 -7.5 -6.3 -5.7 5.8 -11.1 -10.0 -11.8 -3.2 3.2 -2.3 -11.0 -9.8 -3.3 1.5 a Percent change from corresponding period (first quarter) one year earlier. 25X1 25X1 West European Gas ~ Preliminary data indicate a sharp increase in West European gas demand se Surges during the first quarter of 1984. Gas use in West Germany-Europe's largest consumer-rose 15 percent; while the United Kingdom and France experi- enced increases of 8 and 11 percent, respectively. In Italy, industry officials ex- pect a 15-percent increase in gas use this year and have indicated that first- quarter results exceeded their expectations. Increased West European gas use results principally from increased residential consumption caused by the cold winter and higher industrial use resulting from the economic recovery. Gas use also is up in electric utilities-particularly in Italy and France-as utilities attempt to reduce excess supplies resulting from take-or-pay contract provi- sions. 3 Secret 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 OPEC Q'oncerns About Attendees at the late May meeting of OPEC's Board of Governors expressed Mark Outlook deep concern over the stability of the cartel unless there is an upturn in crude oil demand and prices in the near term 25X1 Z~X1 Da age to Khark Is and disruption in oil supplies. senior Nigerian oil official recently told the US Embassy that unusually high .consumer stockbuilding in the second quarter has made it unrealistic for Nigeria to request an increase in its quota. The official now puts demand for OPEC oil at about 18 million b/d in the second half of this year, or nearly 1 million b/d below earlier expectations.' We do not expect any adjustment in OPEC quotas at next month's meeting even though some members, including Nigeria and the UAE, may press for higher. output. Given prospects for continued weak demand, OPEC will face growing difficulties in preventing downward price pressures unless events in the Persian Gulf cause a significant . The Iraqi air attack on 24 June damaged a portion of Khark Island's four- berth Sea Island terminal. the southernmost mooring dolphin-which is used to align loading tankers-sustained some and repairs to the damaged facilities should not take more than a few weeks. minor damage. The helipad serving it, however, is extensively burned and probably unusable. Although loading capability of the terminal should be unaffected, Iran has not loaded from this terminal since the attack. Inspection Because the damaged dolphin was at the end of ing platform. the Sea Island terminal, its loss is less critical than if it were closer to the load- 25X1 2FX~ 25X1 Secret 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret apan To Take Equity Mitsui and Mitsubishi last week announced their intention to take aone-sixth in Australian LNG equity interest in Australia's $2.5 billion Northwest Shelf LNG project. Project Canberra still must approve the arrangement, which will reduce the Austra- lian equity share to about 33 percent, well below the government's 50-percent guideline for resource projects. We believe, however, that the project's potential to generate $1.5 billion a year in export earnings makes Canberra's approval almost certain. The Japanese investment should help secure LNG export contracts with Japanese utilities that could be signed by the end of the year. Secret 29 June 1984 25X1 25X1 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 l~ew Loan jor Chile Chile obtained a $780 million bank loan in mid-June after the Finance Minister agreed to comply with the existing IMF program and gave reassur- ances that Santiago would continue only cautious reflationary policies. The nine-year loan includes afive-year grace period and carries an interest rate 1.5 percentage points above US prime-a hefty reduction from the 2.25 percent- age points over prime on last year's credit. According to Embassy reports, Chile was seeking disbursement of the first two tranches totaling $390 million by the end of June. The delay in obtaining the loan-Santiago expected the first $195 million tranche in April-has strained Chile's reserves. To prevent large drawdowns, the government used the remaining $250 million of the $550 million BIS credit for 1983-84, according to US Embassy reports. Chile continues to face severe financial difficulties. According to the US Embassy, Chile's trade surplus fell to $372 million during January through April, down 12 percent compared with the same period a year earlier, mainly because of depressed copper prices. We expect payments pressures will intensify in the second half of 1984. The Embassy reports that President Pinochet- angered by rising US interest rates and possible restrictions on copper imports-may be considering a more radial approach to dealing with Chile's Jamayc~an-IMF Update Jamaica has met the last two preconditions necessary to qualify for $144 million in IMF loans. Last week Kingston reported the satisfactory renegotia- tion of debt owed to Trinidad and Tobago and announced 50- to 100-percent price hikes for telephone service. According to the US Embassy, Kingston will use the first IMF disbursement to clear foreign payment arrears before approaching international bankers and official lenders to refinance at least $300 million in debt. Labor's increasingly vocal demands for wage hikes to offset the inflationary effect of recent devaluations could quickly derail the new IMF program. The costly labor dispute that closed the Alpart alumina facility last month could spread to other bauxite companies that have not completed new contracts. Favorable settlements for the relatively well-paid bauxite workers could fuel demands of other unions, particularly public-sector workers. Tight government spending limits under the IMF program, however, will crimp Kingston's ability to fund civil service wage hikes. Public utility workers staged atwo-day strike last week and have threatened to do so again unless the government concedes to wage demands. Opposition leader Michael Manley, president of a major labor union, is likely to push for further demonstrations against the govern- ment's economic policy to keep pressure on the ruling party. Secret 29 June /984 25X1 25X1 I Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Cuban Debt Re eduling greement Near .., Costa ica Freezes De ayments Cuba's creditor countries and commercial banks have agreed to reschedule Havana's $365 million debt that falls due this year. Foreign payments and debt targets similar to those in last year's agreement were negotiated at a recent meeting with West European and Javanese Government creditors. an agreement with the Fund by 31 August. Delays in reaching agreement with the IMF fora $52 million standby credit has prompted Costa Rica to secure a 90-day halt on principal payments to foreign commercial banks. A standstill agreement was reached with the banks on 15 June after it became clear that the IMF would not approve a standby by the 30"June deadline set by the banks. According to the US Embassy, the standstill agreement'by itself is insufficient to stave off a foreign exchange crisis in July. Although USAID announced last week that it would disburse $23 million, even the quick release of the remaining $35 million in US aid scheduled for Costa Rica in 1984 would not cover the country's foreign exchange requirements through July. The banks now are requesting that Costa Rica raise domestic consumption taxes and clear arrears to the IMF to reach Hondurans Oppose Growing labor opposition to austerity is making an IMF program for Suriname's Dim Ai Prospects boost inflation in this import-dependent economy. Honduras increasingly unlikely this year. To avert a strike last week by the country's largest union, President Suazo already has had to modify his recent economic stabilization package. Although the package still includes higher taxes and spending cuts, the IMF also is requiring devaluation or an expansion of the parallel foreign exchange market. Tegucigalpa strongly opposes a devaluation; the lempira's par value with the US dollar has not been changed for more than 50 years. With elections approaching in 1985, the Suazo government is reluctant to alter exchange rates because this would quickly The US Embassy reports that Paramaribo may stall talks with the IMF and concentrate instead on restoring financial assistance from the Netherlands..A lack of preparedness by the Surinamese already has caused the talks with the Fund .to proceed slowly. Moreover, policy measures proposed under an IMF agreement have received a cool reception. Business has rejected the Fund's call for devaluation, and labor has warned that strikes would follow any tax increases. The Dutch are the only other likely source for the level of funding needed by the cash-strapped economy. The Hague, however, continues to insist on an investigation into the murders of opposition leaders in December 1982- Secret 19 June 1984 25X1 25X1 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Mo ccan-French nancial Accord have been nearly exhausted, and a virtual import ban has caused food shortages and cut deeply into living standards. a condition for receiving aid that is strongly opposed by Army Commander Bouterse and others linked to the killings. Without significant aid inflows, pressure could quickly build on the government. Foreign exchange reserves Moroccan Prime Minister during his mid-April visit to Paris. only a fraction of the $2.5 billion in long-term support requested by the France's recent $220 million loan and export credit package to Morocco provides badly needed support. This financing moves Paris ahead of Saudi Arabia as Morocco's foremost benefactor and reaffirms France's intent to remain Morocco's most important commercial partner. The US Embassy reports that the project aid is targeted at three priority development projects, and represents the Mitterrand Government's determination to support Moroc- co's economic stabilization program. The amount of assistance, however, is Global and Regional Developments EC ~ mit Success EC leaders have finally broken the budget deadlock that has paralyzed the Community for the past six months. British Prime Minister Thatcher agreed to a 1984 rebate of approximately $800 million and to a formula for rebates in the following years of two-thirds of London's net tax contributions. With this agreement, Mrs. Thatcher will no longer block a nearly 20-percent Communi- ty revenue increase, which, because of the lengthy ratification process, probably will take effect in 1986. EC Finance Ministers will begin next month to consider interim financing measures. The Commission estimates that the Community faces at least a $2 billion budget shortfall this year. Although the rebate agreement takes the budget issue off the top of the EC's agenda, the EC still faces financial problems. The bulk of the new revenues will go to Spain and Portugal when they enter the Community, probably in 1986. Moreover, despite the much-touted dairy-sector reforms hammered out at the March EC summit, the Common Agricultural. Policy remains a major financial drain. Yugoslav-Westinghouse After lengthy negotiations, Yugoslavia and Westinghouse have agreed to a CounteFtrade Deal countertrade deal involving the financially troubled Krsko nuclear power plant built by Westinghouse. Yugoslavia will obtain spare parts, equipment, and services for the power plant. In return, Westinghouse will make a "best effort" to purchase up to $15 million in Yugoslav goods and services in 1984-86. The Krsko management insisted on the deal because. it lacks the funds needed to cover rising operating expenses and debt service, and Yugoslav authorities are pressing for countertrade arrangements to cover new hard currency outlays. Krsko does not earn hard currency from its domestic electricity sales and must depend on the Croatian and Slovenian republics to cover its foreign exchange Secret 8 29 June 1984 25X1 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 needs. The Yugoslavs already are in technical default on US Eximbank loans for the project, and the Croatian and Slovenian governments will be hard pressed to meet the $200 million in payments for Krsko this year. According to the US Consulate in Zagreb, Krsko officials also are under orders to press for countertrade commitments as a precondition for renegotiat- ing the US-Yugoslav nuclear fuel enrichment agreement. The Yugoslavs reportedly have asked West European fuel processors for offers of fuel 9 Secret 29 June 1984 enrichment linked to countertrade.l I ' Taiw Planning Tarltf .The Taiwan Government is studying large tariff reductions on more than 1,000 imported items. The plan is partly in response to US pressures on Taiwan to reduce its bilateral trade surplus, which reached $6.7 billion last year. Past tariff cuts, however, have had little impact on US sales, and strong local opposition persists. Indeed, to protect local businesses and government revenues, Taiwan already has announced it will introduce any tariff reductions gradually and not start.until 1985. 25X1 25X1 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 .O est German Economics Minister Resigns ,,~ National Developments Developed Countries Free Democrat Martin Bangemann will replace Count Otto Lambsdorff, who resigned as Economics Minister Tuesday. We do not expect major shifts in Bonn's economic policy, but Lambsdorff's absence may. tone down West German criticism of US economic policies. Lambsdorff had long been expected to step down before coming to trial on charges of accepting bribes: 25X1 Compromise in West Gerrr,~an Metalworkers' Secret 29 June 1984 cover the five-month period since the previous contract expired. The chief arbitrator in the seven-week-old strike says that his compromise proposal fora 38.5-hour workweek probably will be acceptable to both sides, but management appears to be called on for greater concessions. The eight- man arbitration panel must approve the proposal unanimously, and if it does, the union and the employers will have one week to accept or reject it. The pro- posal, to take effect next April and run for 18 months, entails a 1.5 hour cut in the average workweek, a 3.9-percent wage increase to preserve present pay levels, and an additional 2-percent raise. Workers also would receive a 3.3-percent pay increase starting next month and a $90 lump-sum payment to bargaining power considerably by stretching union strike funds. Union leaders probably will accept the compromise even though the goal of a 35-hour workweek would not be obtained. The agreement meets their demand for a shorter workweek with no cut in pay. Management, which has steadfastly resisted a retreat from the 40-hour week, probably will try to amend the proposal further as the talks continue. Employers also may want to stall until West Germany's supreme court rules on their appeal of a lower court ruling that nonstriking metalworkers idled by parts shortages are entitled to unem- ployment benefits. Unemployment pay for these workers would bolster union be affected, especially in France, Spain, and Italy. The strike has idled 450,000 workers in West Germany and 25,000 in Belgium, the Netherlands, Italy, and Austria because of a lack of parts from the shutdown West German auto industry. Ford, GM, and Volkswagen have halted production in Belgium, and the BMW-plant in Austria is closed. Should the strike continue, many more West European factories and auto dealers will Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret No End in Sight for The coal miners' strike is nearly four months old, and no end is in sight. BrMiners' Strike Although becoming concerned over the economic impact of the dispute, London has stated that it is prepared to see the strike through into next year. The strike so far- has shut down close to 80 percent of the country's mines, caused London to trim its 3-percent expected growth rate for 1984 by 0 5 , percentage points, and, according to some financial experts, has ;cost the ? government approximately $1.4 billion. The Central Electricity Generating Board has accelerated its coal, oil, and gas imports--contributing to a record trade deficit for April and adding to pressure on the pound-to ensure against major disruptions to the economy. Stocks of coal, excluding those held by the industrial sector, fell by 7.2 million metric tons~r 13.5 percent-in the year ending in March; 74 percent of this drop occurred from February to March, when the strike began. Nevertheless, the National Coal Board-which makes and implements coal policy in the United Kingdom-seems confident that stockpiles can be stretched into fall. them of the potential adverse impact of a protracted strike. The Railwaymen's Union has threatened to join the strike and stop all shipments of coal and iron ore. If the transport unions support the miners, efforts to distribute reserves to steel mills and power plants would be hampered. London hopes that these recent statements of labor solidarity have no more substance than those issued a few months ago when transport unions pledged their support but most truckers and railwaymen continued hauling ~; coal. There has been increased violence on the picket lines, and the government is providing police protection for truckers carrying coal. The press is calling this the most violent labor dispute ever in Britain. It has thus far resulted in two deaths; many injuries, and over 3,400 arrests. Pu lic pressure is mounting on both parties to resume talks-which have broken own twice-and resolve the protracted dispute. Even though the strike puts a snag in Prime Minister Thatcher's drive to reduce the budget deficit, she probably will oppose any accommodation with miners' chief Arthur Scargill, whom she sees as more interested in damaging her government than in representing the interests of the miners. Coal Board Chairman Ian MacGregor recently sent~all members of the miners' union a letter that questioned Scargill's motives and warned Italian vernment Italy's state-run air, rail, and maritime transport services have been hit by a Res se to series of short strikes, many in protest against Rome'sinability to provide ansportation Strikes promised economic benefits. Although the net economic loss thus far is small, Rome nevertheless is concerned that the strikes could cut into the expected record tourism earnings needed to avoid a current account deficit this year. Parliament, which in the past often has intervened to resolve labor disputes in the transport sector, last week approved a new railworkers' contract and " appropriated extra funds for port workers. Public irritation over the strikes, however, may prompt Rome to seek greater control over the transport unions. Some coalition members already have called for new labor regulations in essential public services, and Christian Democratic Party leader De Mita recently announced that his party soon will introduce such legislation. 11 Secret 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 French Austerity After afirst-quarter pause, inflation and trade seem to be responding to the Isr li Wage Accord months are below the levels of the previous three months. Mitterrand government's austerity policies. The rate of inflation has fallen during the last two months, bringing the annual rate since the start of the year to 7.5 percent, well below the 11-percent rate for the same period in 1983. The trade balance recorded a small surplus in May, after larger-than-expected deficits in the first quarter. For the year, the trade deficit is running at an an- nual rate of about $5 billion, half the rate for the same period in 1983. Progress on the inflation and trade fronts has been slower than the govern- ment's timetable ~ Austerity continues to take its toll in jobs; unemployment is nearing 10 percent. In addition, household consumption and industrial production for the last three wage limits as part of an austerity program. The Histadrut, Israel's large organization of trade unions, reached agreement with the government last Sunday on a generous two-year wage pact for most government workers. The government caved in to most of labor's demands to avoid widespread strikes just before the elections on 23 July. Under the accord, wages will be increased 15 percent during the next few months on top of regular cost-of-living adjustments. The Israeli press reports, however, that a few public-sector unions, including the engineers and teachers, have rejected the agreement because it favors lower income workers. This pact will increase pressure on the Manufacturers' Association to reach a similar agreement for private-sector workers. The new agcord also will increase real wages and add to inflation, now running at an annual rate of 400 percent. Any postelection government now will have greater difficulty in getting Histadrut to agree to Ankara Announces Prime Minister Turgut Ozal's major reorganization of the bureaucracy and Maior Public-Sector the State Economic Enterprises (SEEsI last week is intended to increase Reorganization efficiency and strengthen his control over the public sector. Ozal says he has abolished more than half of the committees, boards, and commissions within the various ministries. The new framework law for the SEES-which replaces 32 separate laws-is intended to make the state enterprises operate more efficiently by eliminating several umbrella organizations and imposing mana- gerial experience requirements for management positions. In addition, Ozal promised to submit to parliament legislation to abolish state monopolies in tobacco, tea, and alcoholic beverages. bureaucracy whose commitment to reform he distrusts. Ozal's reorganization follows through on campaign promises. The restructur- ing of the SEES is intended to make them more attractive to private investors; Ozal has pledged to sell several of them. The restructuring also provides Ozal with direct control over the SEES and strengthens his control over a Secret 12 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret Less Developed Countries Kuwait Restricts Kuwait's Central Bank soon will require that all overseas transfers of $850,000 Currency Flight or more be reported and is considering restrictions on the flow of cash abroad. iuG ~..c.ii~iai yaiin aucauy 11aJ 1111~J1G111G11LGLL tl lWV-L1G1 GalillallgG I2tle lUi dollars to make the transfer of dollars abroad more difficult. Kuwaitis, who traditionally have held large balances of Kuwaiti dinars at local banks, are converting dinars to dollars and moving the money overseas because of uncertainty about the course of the Iran-Iraq war and lack of suitable local in- vestments. US Embassy sources estimate that currently as much as $1.4 billion is leaving Kuwait monthly, compared with $600-680 million a month in 1983. We doubt the Central Bank's new policies will substantially reduce the outflow of money. UAE Budget Logjam After heated debates among the United Arab Emirates on funding the 1984 Ne~esolution budget, Abu Dhabi appears to have given in and will bear most of the costs. The prolonged budget maneuvering, particularly between the richer emirates of Abu Dhabi and Dubayy, had threatened to push the loosely unified federation further apart. Although Dubayy originally agreed in principle to spend 50 percent of its estimated $3 billion or more of oil income on the federal budget, it later temporized. To resolve the deadlock, the UAE's President, Shaykh Zayid from Abu Dhabi, accepted a Dubayy contribution of only $545 million, and Abu Dhabi pledged $3.5 billion to fund the budget, according to the US Embassy in Abu Dhabi. In addition, Abu Dhabi will pay about $550 million to cover overdue bills to contractors and government employees. u a i s un ing Record Saudi Wheat Cep expenditures. probably was meant to shame Dubayy into providing more money, although we doubt Dubayy will do so. In any event, the move buys support for Abu Dhabi from other poorer emirates in the north. Moreover, UAE merchants will welcome Abu Dhabi's decision to relieve the liquidity squeeze and instill confidence in a local economy that is heavily dependent upon government This year's Saudi wheat crop is expected to reach a record 1.3 million metric tons, according to recent US Embassy reporting. Moreover, the Embassy projects the 1985 crop could hit 2 million tons, and as much as a million tons may be available for export next year. Riyadh has achieved self-sufficiency in wheat-as recently as 1980 it imported over 1.3 million tons-by guaranteeing farm support prices at four times world market levels, but the program has caused problems: ? Despite a 12-percent increase in this year's subsidy budget, there may not be sufficient funds to pay farmers for the entire crop. Payments for part of the 1983 crop were delayed until March 1984, and similar delays are expected this year. 13 Secret 29 June 1984 25X1 25X1 25X11 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 ? Although the Saudis have doubled wheat storage capacity in the past two years, up to 400,000 tons will have to be stored in temporary bins and trucks this season. ? The government lacks transport facilities to export large volumes. ? The increase in farm acreage is rapidly depleting nonrenewable water Saudi Arabia's wheat surplus is a symptom of the growing difficulty for commodity markets caused by subsidies and technology. By using the latest seeds, fertilizer, irrigation, and foreign know-how, Saudi Arabia has achieved wheat yields on a par with those in the United States and the European Community. The Saudis now will have to dispose of their excess wheat in an already glutted market. Although Saudi officials are reducing wheat subsidies and considering diversification into other crops, we believe subsidies will remain at levels that encourage overproduction. Pakistan Mandates Finance Minister Ghulam Isahq has announced that Pakistan will eliminate Islar~c Banking the use of interest in its financial system by 1 July 1985. Although the precise mechanics of the conversion have not been announced, Isahq said that all deposits will be on a profit and loss sharing basis and that the new system will apply to all financial institutions operating in Pakistan, including foreign banks. State-owned banks and one foreign bank have offered an optional form of an interest-free account since January 1981 that has depositors share in the profit/loss of investments financed by these deposits. The US Embassy reported earlier this year that these deposits account for about 13 percent of total deposits. The government has established minimum rates of return for profit-sharing accounts in nationalized banks equal to or higher than the minimum rates prescribed by the State Bank for regular interest-paying deposits. The setting of a specific date for an end to interest is a direct bid by the gov- ernment for the support of religious fundamentalists in elections anticipated later this year. The fundamentalists have criticized President Zia for moving too slowly on Islamic measures. The government runs the risk, however, of committing itself to a system before it has figured out how the new system will handle many financial transactions, both foreign and domestic Ec nomy Returning The Indian Army attack on the Sikh's Golden Temple and subsequent to Normal in occupation of the Punjab preempted a farmers' strike, which threatened to halt dia's Punjab grain shipments following a record harvest. According to press reports, rail and road traffic has resumed, most curfews have been lifted, and crucial grain shipments have begun from India's leading foodgrain-producing state. The enforced.peace has also allowed farmers and migrant laborers-primarily Hindus-to return to the fields to.begin transplanting the winter rice crop. With key Sikh political leaders and many militants killed or jailed, a sense of stability reportedly has returned to the state. Nonetheless, the economic issues Secret 14 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 that helped propel the Sikh protest movement-requests for higher food-grain procurement prices, increased water availability, and lower power rates-are yet to be resolved and agitations are likely to erupt again. We believe New Delhi will probably maintain a military presence in the Punjab for the remainder of the year, in part, to secure communications, protect Hindus, and restore local administration that was disrupted by the prolonged disturbances. China's Winter Wheat Weather data show that increased rainfall in the winter wheat growing region Outl Improves has alleviated drought, prompting Chinese officials to predict another good wh t h v t W b 1' th t' d d th d h ea ar es e e iev cr t Castro Shuns' CEMA Summit . e a in ease acreage an a improve wea er could produce a crop this year comparable to the record 81 million metric tons harvested last year. The area sown to winter wheat, which accounts for 85 per- cent of the wheat crop, was expanded by 3 percent this year, according to Chi- nese press reports. Prospects of a bumper crop make it unlikely that China will take delivery this year of the 14 million tons of grain it has agreed to import from various sources, including 8 million tons from the United States. ~ Castro probably judged that the summit would produce no benefits and little hope for the Cuban consumer and did not want to associate himself directly with this outcome. He may hope to negotiate later with Moscow directly to ob- tain abetter deal for Cuba. Continued emphasis on traditional commodity exports-such as sugar, nickel, and citrus fruits-will force Cuba into even greater dependence on the USSR and Eastern Europe for economic assistance because prospects for earning hard currency from these products are bleak. At the same time, Moscow has become increasingly irritated over Havana's inefficient use of resources and is looking for ways to cut its assistance to its most expensive client. Negotiations cus its development on agriculture and mining. Castro's assessment that Cuba would not obtain economic concessions from CEMA prompted him to skip the CEMA summit in Moscow. Castro was the only party leader absent, a slight that apparently offended the Soviets. The Cuban delegation was headed instead by Castro's chief foreign and economic policy adviser, Vice President Rodriguez. An East European diplomat told the US Interests Section that, during planning for. the summit, Cuba had ? expressed the hope of adjusting its economic development policy to emphasize industrialization. These plans apparently were rejected, because in his remarks to the Cuban press after the summit, Rodriguez said Cuba will continue to fo- ~ " for the level of Soviet and East European aid to Cuba during Havana's next .'r five-year plan (1986-90) may result in less economic aid and more Soviet ?~ ' ' advisers to control its use. With Cuba facing the prospect of continued austerity for the remainder of the decade, economic relations with the USSR are likely to become more contentious as Havana looks for special treatment. 25X1 25X1 15 Secret 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Estimated Crop Conditions in the Winter Wheat Growing Regions SOUth China Sea Secret 29 June 1984 lZhejian Philippine Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 ' Boundary represenfetion is not necessarily authoritative. Easi China Sea Taiwan Sea' 7S1wan nat mclu4ltd+n Study Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret Soviets Limit Fertilizer Exports The emphasis on the Food Program apparently has shifted priorities in allocating fertilizer to agriculture rather than to exports. In 1983 agriculture received nearly 23 million tons of fertilizer nutrients, 14 percent more than in 1982; supplies of fertilizer to agriculture during 1976-82 grew at an average annual rate of only 2.2 percent. 17 Secret 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret South America: IMF Austerity .Under Attack Severely strained economic conditions and sharply reduced living standards are prompting South American governments to question whether IMF- supported austerity programs are acceptable. With all seven major South American debtor countries presently under or preparing for democratic civilian governments, economic austerity has become more difficult to sustain in the face of growing domestic discontent. To varying degrees, the governments of those countries that have undertaken austerity measures to gain IMF loans-Argentina, Brazil, Chile, Ecuador, and Peru-have begun to consider shifts to growth-oriented policies and a more radi- cal approach to restructuring foreign debt pay- ments. These countries at various times have fallen out of compliance with their IMF programs, but none have yet abandoned efforts to solve their problems under an IMF framework. We believe, however, that debtors will demand increased flexibility on the part of the Fund and bank creditors to support domestic recovery. If such flexibility is not provided, some of these countries may confront the IMF with a "take it or leave it" demand for easier terms. Should cooperation be- tween adebtor and creditors break down, then the chances are good that such a government would suspend its debt payments. IMF-Supported Programs and Their Achievements The current strategies coordinated under the IMF for correcting foreign payments imbalances and strengthening economic growth prospects in South American countries have rested on three pillars: ? The Fund has required that fiscal, monetary, foreign exchange, and pricing adjustments bring domestic demand in line with supply and that resources be shifted into exports. ? The Fund has counted on strong industrialized country recoveries, a rebound in commodity prices, and continued declines in global interest rates to facilitate improvements in current ac- count balances. ? The IMF has been instrumental in securing the cooperation of foreign banks to provide new medium-term loans and the rescheduling of ma- turing debt. According to US Embassy reporting, the seven major South American debtors-Argentina, Bra- zil, Chile, Colombia, Ecuador, Peru, and Venezue- la-dramatically strengthened their foreign trade accounts in 1983. Collectively, their trade surpluses rose fourfold from $3.6 billion in 1982 to $18 billion. Nearly the entire adjustment burden fell to imports, which fell by more than one-fourth. Ex- port earnings increased only negligibly because of depressed foreign demand and declining commod- ity prices. The impressive trade performances.cou- pled with declining interest rates trimmed their combined current account deficit 60 percent to about $12 billion in 1983. Disappointment in 1983 The seven major South American debtor countries experienced a sharp fall in foreign, capital inflows last year. Until the early 1980s, inflows of foreign loans greatly exceeded debt servicing and permitted South American governments to expand their in- vestments and imports substantially. By 1983, out- flows of principal and interest payments had begun to exceed the volume of new loans, compounding the severity of economic adjustment. Secret DI IEEW 84-026 19 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 South American Trade Adjustments Billion iJS $ Note changes in scale Argentina Brazil Chile Colombia 10 25 10 10 8 20 ~ 8 8' 6 15 6 6 4 ~ 10 4 4 2 5 2 2 0 1981 82 83 0 1981 82 83 0 198] 82 83 0 1981 82 83 Ecuador Peru Venezuela 5 5 25 Legend 4 4 ~ 20 Exports D Surplus _ -Imports ?Deficit 3 3 ~ ~ ~ 15 2 2 10 1 1 5 0 1981 82 83 0 1981 82 83 0 1981 82 83 303088 ~A04832) 6-84 Contrary to South American government hopes, inflation accelerated in their countries in 1983. US Embassy reports indicate soaring prices became a particular concern in Argentina, Brazil, and Peru; all experienced triple-digit inflation. Currency de- valuations and cuts in price subsidies under IMF- supported programs, poor weather, budget deficits, and plummeting popular confidence were the major causes of rising prices. 0 The South American recessions, moreover, deep- ened in 1983 because of increasingly restrictive Secret 29 June /984 government policies to cope with rising inflation, continued sluggish foreign demand for South American exports, and the shrinkage in new for- eign loans. Economic activity fell more than 3 percent in Brazil, Ecuador, and Venezuela, and plunged 11 percent in Peru-the largest declines experienced by these countries since the 1930s. In all major debtor countries, gross domestic invest- menf stagnated. 0 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 25X1 25X1 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret Major South American Debtors: Net Bank Loan Receipts New Debt Net New Debt Net New Debt Net Loans Service Receipts Loans Service Receipts Loans Service Receipts Major South American Debtors: Recent Economic Performance Inflation Real Invest- Inflation Real Invest- Inflation Real Invest Inflation Real Invest GNP ment GNP ment GNP ment GNP ment Growth (as a Growth (as a Growth (as a Growth (as a Share of Share of Share of Share of GDP) GDP) GDP) GDP) Living standards fell throughout the region last evident in the food riots and looting of supermar-. year, stirring increased popular discontent with kets in Brazil and in the major strikes or demon- prevailing economic policies. Real wage declines strations in Argentina, Chile, and Peru. and high unemployment have hit the lower and middle classes especially hard. US Embassy report- Financial adjustments have occurred while fledg- ing indicates large portions of the South American ling democratic governments and political move- populations began having trouble meeting basic ments have been trying to establish a firmer subsistence needs last year. Social frustration was 21 Secret 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 footing. Democracy returned to Argentina in 1983 with the election of President Alfonsin. Brazil's military was preparing for presidential elections in early 1985 that will transfer control to civilians, and popular pressures for democracy have been. mounting in Chile. Accordingly, the governments of major debtor countries have been increasingly obliged to heed public opinion in formulating eco- nomic policy. ?p~position to AusteriQy ll~einfforced in Il9~4 South American debtors, discouraged by economic deterioration and prospects of more of the same, became increasingly concerned in early 1984 that existing policy courses were ill advised. According to various sources, South American governments feared that weak commodity prices and import restraints in the industrialized countries will limit export growth and fuel domestic discontent. Debtor disenchantment has become more pro- nounced since March, when the. US prime rate and LIBOR-to which most South American interest payments are tied-began rising. Both interest rates have climbed 2 percentage points, increasing the foreign exchange cost of servicing debt. We estimate each percentage-point rise in interest rates adds roughly $2 billion to the annual interest payments of the seven major South American debtors. ]L~et-ninIlciwg ]Policy Stvategies According to a variety of sources, the experience of the past year is causing major debtor governments to reassess the IMF strategy and to consider alter- native domestic-led growth plans. Nearly all South . American leaders have underscored the importance of getting their economies growing again soon to prevent destabilizing political repercussions. Also, the major debtors are becoming worried that they will be unable to honor both their current debt payment schedules and sustain economic recover- ies. Secret 29 June 1984 Argentina's newly elected President Alfonsin insist- ed early this year that foreign banks must offer more generous loan terms and that the IMF must allow greater latitude for growth. Although Alfon- sin has pledged to seek an IMF agreement, he has criticized orthodox austerity remedies. Though ac- knowledging that domestic economic and foreign payments adjustments need to be made, he has stressed the importance of achieving 5-percent eco- nomic growth this year to preserve social -and political stability: Time is running short, however, and the Alfonsin administration must reach an accommodation with the IMF before bankers will conclude an accord for new financing. Political pressures have led Chile and Peru to sack key economic policy makers who had been staunch defenders of tough austerity policies. They have been replaced with advocates of more expansionary policies. The two governments are searching for policies that can restore growth and reduce unem- ployment but without sacrificing creditor support: Chile's new team under Economic Minister Collados has announced plans to speed recovery by increasing government public works spending. o Peru's new Prime Minister Mariategui and Fi- nance Minister Benavides have developed plans for a modest expansion of public spending. The IMF eventually accepted slightly easier terms, such as an increase in the public-sector deficit target for 1984 from 3.8 percent to 4.1 percent of GDP, and signed a new agreement in late April. Despite IMF concessions, influential government officials in both countries continue to oppose the revised programs because they do not adequately stimulate growth. We believe both Santiago and Lima will come under .political pressure and that difficulties lie ahead in their efforts to adhere to IMF guidelines. 25X1 25X1 25X1 25X1 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret In Brazil, domestic opposition to IMF-supported to IMF or IMF-type policy strategies offers the policies and growing debt service payments has least painful way to cope with large debts and continued .to build. Brazil's most influential econo- sustain economic growth. mists concluded recently that the combined effects of the A major threat in the months ahead is posed, by growing debt payment burden and the IMF adjust- potentially higher interest rates. If the prime rate meat program will prevent economic recovery in rises several more percentage points this year, as the near term. Accordingly, the economists believe many bank economists are predicting, we believe that major changes in government policies are the rise in interest payments will undermine South essential. Moreover, all major candidates for the American debtor incentives to sustain domestic coming Brazilian presidential election advocate adjustments. Equally important, a surge in interest more stimulative domestic policies, revised IMF rates might limit the economic expansion in the conditions, and a major restructuring of the debt. industrialized world and sharply limit South Amer- ican debtor hopes of generating additional export revenues. Venezuela continues to resist recourse to an IMF loan program. Since taking office in February, the Lusinchi administration, flush with some $11 bil- lion in foreign exchange reserves, has effectively made the case that it wants no new financing from either the banks or the IMF but that it must secure refinancing for its 1983-85 debt payments. Caracas has designed an economic program to reduce for- eign borrowing and set the economy back on a growth path. If the South American political leaders come to believe the IMF strategy cannot meet debt and economic growth needs, they will shift, in our judgment, to expansionary policies and more do- mestically driven growth strategies. Some of the major debtors probably would be willing to proceed without Fund backing. The first major test is taking place in Argentina in the wake of President Alfonsin's direct program submission to the Fund's Managing Director of a counterproposal that em- phasizes restoring growth. The temptation also will be strong for Brazil during its coming presidential Prospects We believe most major South American debtor governments will soon find it necessary to ensure renewed economic growth and improved living standards in order to maintain political stability. If economic stagnation persists much longer under current policies, South America's budding democ- racies will be hard pressed to withstand social and political pressures for more expansionary policies. Nonetheless, we believe that chances are good that the major debtors will maintain their IMF adjust- ment efforts and their debt servicing. This judg- ment is based on our expectation of substantial export growth over the second half of 1984 and into 1985. Moreover, we believe most South American governments recognize that continued commitment succession to ease restrictive policies. Implications The abilities of the major South American debtors to gain better control over debt and economic recession will be critical to political stability in the region and continued strong intrahemispheric eco- nomic relations. Should some South American debtors choose domestically led growth policies over IMF stabilization programs, we believe this would portend more aggressive stands toward bank creditors. To sustain recovery, these countries are likely to insist on new debt payment formulas that would be explicitly linked to their ability to pay, regardless of the effects on bank profits. They probably would press creditors to stretch loan maturities to more than 15 years, establish grace Secret 29 June 1984 25X1 25X1 25X1 25X1 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 periods for both principal and interest, and slash interest rates. We believe, in these instances, debtor governments would be willing to resort to tempo- rary debt payment moratoriums to persuade credi- tors to be more responsive. Secret 24 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret for Moratoriums The dropoff in new lending to debt-troubled LDCs over the past few years is reducing economic .incentives to meet interest and principal payments and probably is increasing consideration of pay- ments moratoriums. Last year, for example, several LDC debtors, including Mexico, Brazil, Argentina, Chile, and Venezuela, paid more interest on their foreign debts than they received in net new foreign loans, a dramatic reversal from the 1970s. For these countries, the foreign exchange cost of debt service now exceeds the foreign exchange benefits from new lending.' The Economic Incentive To Service Foreign Debt It is hard to generalize about the causes of morato- riums because of the many economic and political factors that come into play, as well as the diverse nature of moratoriums themselves. Nevertheless, one key factor likely to figure into a debtor coun- try's consideration of a debt moratorium is the level of interest payments on foreign debt compared with current and expected new lending. Interest pay- ments are normally considered the price a borrower pays in order to have use of the lender's principal. Officials in adebt-troubled country, however, could take another view, if they assume that they cannot be forced to repay the principal already borrowed. From this viewpoint, payment of interest becomes the cost of maintaining an acceptable credit rating to secure new loans, rather than the cost of using borrowed funds. Under this view, one indicator of a country's incentive to service foreign debt is the difference between new lending and interest payments over a ' In this article the term net new lending~r new lending-refers to loans made over and above the rollover of existing ones through rescheduling or other means. In addition, we have used just medium- and long-term debt figures because of the greater avail- period of several years. This measure would suggest a weaker incentive for timely servicing of foreign debt if interest costs were higher and/or_the volume The step of declaring a complete moratorium on payments, however, is likely to be taken only as a last resort. The existence of formidable penalties- suspension of trade credits, trade disruption, sei- zure of assets, and loss of official .funding-instead encourages countries to opt for milder actions midway between timely servicing and a total mora- torium. These measures include: ? Moratoriums on principal payments that are made with the agreement of creditors. ? Running arrearages. ? Negotiations to obtain more official aid. ? Negotiations with creditors aimed at securing easier terms on outstanding debt and more bor- rowing. Convergence of Interest Costs and New Borrowing Using as an indicator the difference between new lending and interest payments, the economic incen- tive to service debt on a timely basis has weakened over the past few years. Since 1981, the spread between debt troubled countries' new borrowings and interest payments has narrowed sharply. For many LDCs, interest payments have risen while their ability to obtain new loans has declined. For some 20 key debtors taken as a group, for example, 25X1 new medium- and long-term loans exceeded inter- est paid by an amount equal to 3 percent of their GDPs in 1974-79; in 1980-83, this difference had declined to about 1 percent of GDP. From an individual country standpoint, a number of debtors recently have had to pay more in interest Secret DI IEEW 84-026 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Foreign Trade Dependence A Closer Look Of the economic deterrents against a decision to stop principal and interest payments on debt, the prospect of trade disruption probably is the great- est. The size of this deterrent depends on the importance offoreign trade to a country. Although imports as a share of GDP is a crude indicator of the potential costs associated with a severe disrup- tion of trade, it is useful in suggesting relative differences among countries. United Nations statis- tics show that, oj'the major debtors, Taiwan, Malaysia, Venezuela, Algeria, and South Korea rely the most on foreign trade. For these eve countries, imports as a share of GDP range be- tween 2S and SS percent. Simply from a trade standpoint, therefore, we would expect these coun- tries to have a strong incentiti~e to promote policies that ensure debt obligations are met and access to foreign credit is maintained. In.fact, the East Asian debtors above have an economic policy record that emphasizes economic growth, expan- sion of exports, and only moderate government intervention. During 1981-83, IMF statistics point to real growth rates in each country of S to 6 percent despite the contraction oj'world trade. Venezuela and Algeria have an oil supply safety Brazil, Mexico, Argentina, and India are at the other end oj'the spectrum, with imports-about 10 percent of GDP-being relatively less important to their economies. With its high share of official debt and low interest burden, we do not believe India represents a financial risk. The other coun- tries in this group, however, are in seriousjinancial trouble. Moreover, since 1980 the economies of Brazil, Mexico, and Argentina have all suffered severe recessions accompanied by high inflation, have recently paid more in interest than they have received in new lending, and have a high share of Secret 29 June l 984 charges than they have been able to obtain in new loans. In 1983, for instance, we estimate that: ? Mexico's interest payments exceeded new bor- rowing by about $3.1 billion or nearly 1.2 percent of its GDP. ? Brazil, Argentina, Venezuela, and Chile also experienced significantly greater interest outflows than loan inflows, with the amounts ranging from $0.5 to $1.8 billion. The countries that experienced the most adverse shifts in their interest burden also had the highest proportion of foreign debt from private sources. This debt generally carries floating interest rates. By 1983, Latin American countries, in particular, had been hit with a sharp growth. in interest payments, reflecting the large percentages of pri- vate loans to their countries: Brazil (89 percent); Mexico (85 percent), Argentina (93 percent), Vene- zuela (99 percent), and Chile (90 percent). These large shares reflect their relatively high per capita income, which in the mid-1970s made them appear to be relatively good credit risks and restricted their ability to secure official development loans. At the opposite end of the spectrum, about 90 percent of Iridia's and Pakistan's medium- and long-term debts are from official sources. Thus, India and Pakistan have been sheltered from the sharp rises Although a comparison of interest payments and new lending over the last few years suggests that certain major debtors have a weaker incentive to stay current on their debt obligations, the situation is not likely to remain static. Interest rates, in particular, could change as could bankers' and other creditors' views about LDC credit risks. Moreover, future interest charges also will depend on the level of new loans extended. Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret Major LCD Debtors: Trends in Interest Payments and New Borrowing, as a share of GDP a Net New Interest Borrowing Difference Net New Interest Difference Borrowing 2.5 0.4 e These figures represent averages for the selected periods and cover medium- and long-term debt only. To examine the relationship between interest pay- ments and new lending in future years, we have established two scenarios that we believe bound a reasonable range of outcomes. Our projections in Case A are based on favorable financial conditions for the LDCs, and Case B is based on pessimistic conditions: ? Case A assumes that banks and other creditors extend sufficient new credit to allow the countries to increase their debt by 10 percent ayear- about the rate of-increase in 1982-83-and that by 1987 interest rates fall by 25 percent from 1983 levels. ? Case B assumes that only enough credit is ex- tended to allow the countries' debts to rise 5 percent a year and that interest rates do not decline from 1983 levels. In both cases, economic growth in the countries examined is assumed to recover gradually by 1987 to one-half of the average rate of the 1970s, and world inflation is assumed to be 5 percent a year. Secret 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 The results of these two scenarios suggest several conclusions: ? Under the favorable assumptions in Case A, for most of the countries in our sample, the interest burden would be roughly matched by new lending over the next several years. Under these circum- stances, there would be little change in the incentive for these countries to meet their debt obligations, compared with the current situation. ? Under the less favorable conditions in Case B, interest payments for all of the countries exam- ined would exceed new ,borrowing during the entire 1984-87 period. The projected gaps would average about 1.0 to 1.5 percent of GDP for most countries. Under these circumstances, we believe there would be a definite weakening in the incen- tive for these countries to make timely debt service payments. We believe the debt-troubled LDCs will remain reluctant to take drastic steps such as an extended payments moratorium on both principal and inter- est on financial grounds. The potential costs of such a move-suspension of trade credits, trade disrup- tion, seizure of assets, drying up of foreign invest- ment flows; and loss of official funding-place a powerful restraint on such action. More likely these LDCs will pursue more aggressively such midway measures as negotiated payment moratoriums and running arrearages, as they attempt to realize lower current debt charges while avoiding the penalties of a full moratorium. Nonetheless, there remains a small risk-which could grow-that one or more of the countries facing continuous capital outflows will respond to domestic political pressures and undertake a mora- torium. Such domestic pressures could be sparked by unrest or changes in government-both possible results of more severe economic conditions. More- over, amoratorium by one debtor could trigger a chain reaction, causing others to follow suit. Secret 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Selected Major LDC Debtors: Projections of Interest Payments and Net New Bonowing,1974-878 Percent share of GDP Argentinab-Case A` 1914 75 80 85 L_L_L_LJ 85 1974 15 ~ 80 85 Nigeriab-Case A Interest payments Net new borrowing a Data for 1984-87 are projections. b Note change in scale. `Case A: 25-percent lower interest rate by 1987 and new borrowing per year at 10 percent of debt. ii d Case B: Unchanged interest rate and new borrowing per year at S i 29 Secret 29 June 1984 Sanitized Copy Approved for Release 2011J03/07 : CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret Political Update IMF austerity measures have led to heightened political tensions in a number of Latin American countries this past month. Labor strikes broke out in Jamaica and Peru, while Honduras, Guatemala, and the Dominican Republic abandoned IMF rec- ommendations in the face of growing political opposition. In Bolivia and Argentina, fragile labor agreements are in jeopardy, and renewed strike activity is likely if new labor demands are not met. In the Philippines, President Marcos this month moved to undertake unpopular austerity measures . in the hope of obtaining a speedy IMF agreement before the opposition can be seated and organized in the new assembly. Mexican President de la Madrid obtained another moderate wage settle- ment and skillfully undermined leftist efforts to organize antiausterity demonstrations. In Jamaica, Central Bank and public utility work- ers have gone on strike to protest strict wage guidelines, and Prime Minister Seaga's recently announced austerity budget. In Peru, President Belaunde declared a 30-day state of emergency to cope with escalating demonstrations by public- sector employees demanding wage hikes to com- pensate for rising living costs. Fear of renewed political turmoil could lead both these governments to abandon or ease their .austerity programs. In addition, the Belaunde administration faces a presi- dential election campaign The governments of Honduras, Guatemala, and the Dominican Republic fell out of compliance with their IMF agreements or had negotiations break down because they declined to implement tax and price increases in the face of adverse political repercussions: ? President Suazo suspended an unpopular sales tax on items including alcohol, cigarettes, and phone service only hours before the Honduran Labor Federation was to strike. ? Guatemalan Chief of State Mejia refused to raise a value-added tax recommended by the IMF to curb imports and reduce current account and budget deficits. ? Fearing an outbreak of violence similar to riots in April over food-price hikes, Dominican Republic .President Jorge Blanco declined to implement an oil price increase that the Fund had requested as a precondition to a new arrangement. Although these measures will ease domestic politi- cal tensions in the short run, they will postpone badly needed adjustments and are likely to worsen economic problems in the months ahead. Suspen- sion of IMF disbursements and a deterioration in creditworthiness is likely to result in arrears on debt service and trade accounts. the US Embassy, Santo Domingo recognizes it must come to terms with the IMF in order,to renegotiate its debt with official and commercial creditors and to qualify for US aid. Some observers consider the arrest of leftist leaders in recent weeks as a sign that the government is preparing to go ahead with IMF recommendations. Secret DI IEEW 84-026 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret Bolivia could again face renewed labor unrest following a 20 June communique by the powerful Bolivian Workers Central suspending its dialogue with the Siles government. The labor union con- tends that public announcements by the govern- ment that its foreign debt will be negotiated vio- lates arecent labor accord by which the government agreed to postpone debt repayments. Although the debt moratorium formalizes an exist- ing policy of delaying interest payments, the an- nouncement was part of a response to labor de- mands last month ending weeks of strikes that crippled the transportation and banking sectors. Widespread strikes and internal feuding within the opposition Peronist party has undermined Argen- tine President Alfonsin's efforts to achieve labor peace, which he believes is an essential ingredient in implementing economic policy and reaching an accord with the IMF and commercial lenders. In an attempt to regain the initiative, Alfonsin has adopted a tougher posture toward labor, and, at the same time, has renewed efforts to reach an agree- ment with Peronist bosses on a range of economic issues. The union chiefs' demands, however, will certainly be beyond what Alfonsin is willing to concede. Even if an accord is reached, the current labor leadership exercises little control over the more radical rank and file, and continued confron- tations are likely. Philippine President Marcos is seeking to enact unpopular economic policies before the opposition is seated in the new assembly late next month and begins to debate his management of the economy. Early this month, Manila issued a set of monetary, fiscal, and foreign exchange directives designed to win speedy IMF approval of a $650 million standby loan and to move forward with rescheduling debts to foreign banks and governments. The measures include a 22-percent devaluation of the peso, a 10-percent import surcharge, a 30-percent tax on exporters' windfall profits, and a 5-percent budget cut. The IMF, according to Embassy reporting, believes that the newly announced policies do not include sufficient tax measures and will increase foreign exchange controls, encourage black-market operations, and result in a multiple exchange rate Secret 19 June 1984 regime. Although the measures appear to be strong economic medicine, the IMF will require at least six to eight weel:s to assess their impact, making an agreement unlikely before late summer. Resolution of the debt crisis could be delayed even further if the IMF decides other measures are needed or if the opposition objects to the austerity program. In concluding a moderate wage settlement this month, Mexican President de la Madrid again displayed his ability to limit wage increases and successfully implement an IMF program. The mid- year agreement allowed minimum wages to go up only 20 percent, less than half of what union leaders had asked for. To help ensure labor's assent, the government agreed to freeze some utili- ty prices and to monitor price controls more vigor- ously. The wage settlement will strengthen Mexi- co's bargaining position with bankers in upcoming rescheduling talks. President de la Madrid's tough control tactics and deft political touch thwarted efforts by leftists in early June to organize major demonstrations. Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret International Financial Situation: Debt Arrearages A large number of developing countries continue to be in arrears on their eicternal debt repayments. At least 54 LDCs and East European nations current- ly are behind on their debt repayments, slightly more than the record total of 52 at yearend 1983. We estimate the total amount of debt arrearages at midyear 1984 to be $30-35 billion, the same as at yearend 1983. The $30 billion arrearage figure is equivalent to roughly 20 percent of scheduled 1984 debt repayments for these countries Most of the arrearages are accounted for by a handful of major debtors: ? Poland's debt arrearages are about $12.5 billion, according to our estimates, including nearly $8 billion due to Western governments. Poland. is in the process of clearing up some of these arrear- ages as a precondition to begin negotiations with the Paris Club to reschedule 1982-83 obligations. Most of the remaining arrearages are owed to creditors in socialist countries, Latin America, and the Middle East. Warsaw's payments to Western commercial banks are current as a result of the recent bank rescheduling agreement, which is scheduled to be signed in July, ? Nigeria currently has arrearages totaling about $7 billion, all on short-term trade-related credits, according to press reports. Of this total, $4 billion is owed to uninsured creditors and is in the. process of being rescheduled on a bilateral basis. The remaining $3 billion, consisting of officially guaranteed trade credits, has not been resched- uled because of the refusal of Western govern- ments to move forward until Lagos successfully negotiates an IMF-supported adjustment program. ? Venezuela's interest payments on public-sector debt now are current, but some $1 billion in private-sector arrearages remain, according to Embassy reporting. Caracas is in the process of making foreign exchange available for repayment of private-sector interest, but the process has been slow. Clearing of these arrearages is being re- quired by commercial banks before moving for- ward with a debt restructuring. In addition, principal repayments of $2-2.5 billion have been frozen under a moratorium that was instituted in March 1983. ? Argentina had about $5.5 billion in principal and interest arrearages as of mid-June; according to Embassy and press reporting. Argentina has been running interest arrearages in excess of 90 days. Buenos Aires, however, recently made a $100 million payment of overdue interest and is work- ing with banks to repay by Saturday the remain- ing $350 million required to prevent US banks from having to place their Argentine loans on nonaccrual status. ? Philippine debt arrearages have risen steadily since Manila initiated a moratorium on principal mid-October 1983. Based on IMF data, we estimate. that arrearages currently are about $2.3 billion, of which $2 billion are princi- pal repayments. Until a debt restructuring package is completed, however, arrearages will continue to mount. Secret DI IEEW 84-026 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret Countries With External Payments Arrearages in Mid-June 1984 Latin America Argentina Dominican Republic Honduras Bolivia Ecuador Jamaica Brazil El Salvador Mexico Chile Grenada ~ Nicaragua Colombia Guatemala ' Paraguay Costa Rica Guyana Peru Cuba Haiti Venezuela ~ricd/Middle East Benin Guinea Senegal Cameroon Guinea-Bissau Sierra Leone Central ~gfrican Republic Ivory Coast Somalia Chad Jordan Sudan Comoros Liberia Tanzania Congo Madagascar Togo Egypt Mali Uganda Gambia, The Mauritania Zaire Ghana Nigeria Zambia East Asia ' North Korea Vietnam Philippines Western Samoa Eastern Europe Poland Romania In contrast to these debtors, Mexico and Brazil have made considerable progress during 1984 in clearing up arrearages. Early this year, Mexico paid $300 million in arrearages on nonrescheduled debt, and.private-sector debt reschedulings have been negotiated to eliminate $2 billion in arrears. These private-sector agreements, however, could still come unglued. Brazil has brought its payments up to date following the signing of its restructuring package in March 1984. however, Brazil could experience a new The most important aspect of debt arrearages to US banks involves the delay of interest payments beyond 90 days. Under new US banking regula- tions that take effect on 30 September, loans must be placed on nonaccrual status as soon as interest payments are more than 90 days overdue rather than at the end of the quarter, as under previous rules. The only major debtor with an immediate problem in this regard is Argentina. Should a deal not be worked out to reduce interest arrearages below the 90-day level by the end of June, several buildup of arrearages during second-half 1984 as it attempts to meet stringent IMF targets. Secret 29 June 1984 25X1 25X11 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret major US banks have publicly stated that they would place their Argentine loans on nonaccrual status. 3 5 Secret 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret 1(QD11eIl'lld~>Yll?n~ll lFiin~ncn~ll ~llllu~>tll?n: ~?>rtup~~>rus?n ?ff Aall~us>t~Ien>t n?u lE~s>te>rn ]Ean>c?~pe ~na- ]Fnve May?>r 1,>t-T>r?u~ll~dl ]L.)(D~s Eastern Europe appears to be adjusting to its debt crisis more rapidly than most of the LDCs.' GNP growth in Eastern Europe is projected to approach 2 percent this year-the third consecutive year it has increased. Current account surpluses and the reluctance of lenders have caused some East Euro- pean countries to reduce their hard currency debts; the region's gross debt at yearend 1983 of $82 billion is nearly $4 billion less than the 1981 peak. The small climb in the debt projected for this year reflects not only Poland's accumulating arrearages, but also the renewed ability of other East European countries to attract foreign commercial credits. In contrast, real output in the five key debt-troubled LDCs will drop for the third year in a row. Moreover, current account deficits will continue, and new "involuntary" bank loans arising from restructuring packages probably will add almost $11 billion. to their debt. Differing Circu~IStunces Eastern Europe's quicker turnaround results partly from being forced into adjustment earlier than the LDC debtors. Poland's financial problems began in, 1980 and were soon followed by Romania's grow- ing arrearages in the summer of 1981. Bankers' doubts about the region's creditworthiness were heightened by the increased chill in East-West relations, which were precipitated 'by the Soviet invasion of Afghanistan and worsened. by the impo- sition of martial law in Poland. By early 1982, Eastern Europe was experiencing a marked reduc- tion in credit lines, while the Latin American LDCs continued to attract new loans. More than a year ' In this article, Eastern Europe includes Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, and Yugoslavia, while the Cive key LDC debtors are Argentina, Brazil, Chile, Mexico, and before the Mexican and Brazilian payments diffi- culties surfaced, both Poland and Romania already had rescheduled external obligations, and Yugoslav creditors were putting together a rescue package. Most of Eastern Europe has benefited by facing comparatively smaller financial problems than the Latin American debtors. The LDCs conduct 80 to 95 percent of their total trade in "hard" currencies and, as a result, are critically dependent on access to foreign credit. Eastern Europe, on the other hand, conducts between 65 and 80 percent of total trade turnover in nonconvertible currencies. This large share reduces the region's dependence on hard currency credits. Within this trade, the Soviet Union provided significant economic support to Eastern Europe-at least through 1982-via large oil price subsidies and the toleration of persistent trade deficits. In comparing hard currency finan- cial strains, the five key LDC debtors were bur- dened by debt service ratios ranging from 32 to 98 percent in 1982 compared with just 18 to 53 percent in Eastern Europe (excluding Poland). Iunpact of Adjustnnent Both of these regions have adjusted largely through precipitous import cuts. Hard currency imports declined 25 percent in 1980-82 in Eastern Europe and nearly 50 percent in 1981-83 in the five key Latin American debtor countries. The slide iri imports appears to have ended in Eastern Europe, with some growth projected for this year. For the five LDCs as a group, imports will continue to fall this year but at a slower pace than in the two previous years. Secret D! IEEW 84-026 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret Selected Debt-Troubled Countries: Foreign Debt and Economic Growth Medium- and Long-Term Foreign Debt Billion US $ ~ ~ ~ ~ ~ ~ ~ 0 1978 79 80 81 82 83 84` a Argentina, Brazil, Chile, Mexico, and Venezuela. b Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, and Yugoslavia. ` Projected. 25X1 Selected Debt-Troubled Countries: Trade Adjustment Eastern Europe' Billion US $ ~. ~ ~ ~ ~ ~ 0 1978 79 80 81 82 83 a Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, and Yugoslavia. b Argentina, Brazil, Chile, Mexico, and Venezuela. 25X1 Secret 29 June 1984 GNP Growth Index: 1978=100 Eastern Europeb LDCs~ Billion US $ Exports Imports Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret The impact on the domestic economies has varied as well. Although economic growth was halted in both regions, the decline in Eastern Europe already has bottomed out and was far less severe than the drop still going on in the LDCs. Indeed, only .Poland experienced a severe decline in output that is comparable with the five LDCs. The East European regimes have attempted to spare consumers from shouldering much of the adjustment burden. Investment bore much of the initial brunt of adjustment, dropping 8 percent a year in 1981-82, while consumption remained rela- tively constant or declined marginally (again, Po- land excepted). Consumers in LDCs have fared much worse, experiencing steady drops in both real incomes and consumption during the past couple of years. This deterioration has sparked unrest and strained the political systems in many of these debtor countries. Despite Eastern Europe's quicker recovery from the credit crunch compared with the LDCs, the region still faces long-term trade and financial problems. The regimes have opted for quick fixes and have done little to correct longstanding problems with export competitiveness. Continuing financial prob- lems in the LDCs are hurting East European sales to these important markets. In addition, broader economic adjustments under way in many LDCs are making these countries more aggressive com- petitors in world markets. The breathing space provided by debt reschedulings for Poland, Roma- nia, and Yugoslavia will end in a few years. More reschedulings may be required, and creditors are not yet convinced that, over the long term, Eastern Europe represents a more attractive credit risk than the LDCs. 39 Secret 29 June 1984 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret The Soviet Grain Crop: Impact on Imports and Meat Supplies The size of this year's grain crop is likely to lead to higher grain imports than in 1983. and could jeop- ardize the Soviets' effort to match last year's record meat production. Even so, upward pressure on world grain prices probably will be slight. Even in poor harvest years the Soviet Union pro- duces more than enough grain to meet the needs of its people for bread and other grain products. The problem is to also grow enough feed to maintain livestock herds and expand meat production. Boost- ing meat supplies has been the centerpiece of Soviet efforts to improve the lot of the consumer since. the mid-1960s. Moscow needs to increase meat supplies each year by 1 to 2 percent per capita just to keep shopper queues from increasing substantially and to sustain relatively stable meat prices in free markets for another year. During 1979-82, consumers endured lengthening queues and surges in free market prices. It would take several years of marked growth in meat supplies, however, to satisfy pent- up demand. This spring's bad weather presumably has raised concerns about future meat supplies and may have caused the flurry of new grain purchases in recent weeks. If the crop is sharply reduced, the Soviet leaders will have to decide whether to incur the additional hard currency cost of larger grain im- ports or to accept an increase in consumer dissatis- faction. The Impact of the Weather It is already clear that this year's grain crop will fall considerably below the 1978 record harvest of 237 million metric tons. A harvest better than last year's estimated 195 million tons is possible, but the downside risk is increasing. Good Weather. The Soviets will need much better than average weather for the rest of the i 984 crop season to even approach the 205-million-ton annual average harvest of the 1976-80 period. Although a number of other factors could affect the outcome, with a crop of 205 million tons and assuming nongrain feed supplies approach last year's estimat- ed high level, the Soviets would still need to import nearly 40 million tons of grain this calendar year- s million tons more than last year-to beat last year's record meat production of 16 million tons. Average Weather. With another crop like last year's~stimated at 195 million tons-the Soviets would have to import at least 45 million tons to achieve the same modest growth in meat output that occurred in 1983. To import this much grain by the end of the year, however, would require a level of imports during July-December that would test the capacity of the Soviet ports and rail system. Past monthly trade data show that the Soviet ports and rail system can transport at least 50 million tons of imported grain annually. Only 15 million tons had been shipped through May, however, and we believe 45 million tons is the upper limit that could be imported this year. Bad Weather. The transportation constraint on import capacity indicates that, if the grain crop falls much below 1982's poor performance estimat- ed at about 180 million tons and if the supply of nongrain feed also declines, Moscow probably will be unable to move sufficient grain imports to Secret DI IEEW 84-026 29 June 1984 25X1 25X1 25X1 25X1 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 increase domestic meat production. A reduction in herd size would then be the primary way to raise meat output. We believe the Soviets would be unlikely to sharply reduce herds, however, unless the harvest was disastrous~n a par with the 140-million-ton crop in 1975. They have invested heavily in rebuilding herds since the marked reduction in 1975 and understand fully the problems involved. They would see consumer dissatisfaction and price pres- sures in the near term as less damaging to domestic stability than the longer term impact of excessive livestock slaughtering. Impact on World Grain Prices. The Soviets would have little trouble buying 45 million tons of grain for 1984 delivery. If the stepped-up tempo in monthly deliveries to the USSR-needed to achieve this estimate-were continued for the bal- ance of the 1984/85 marketing year (1 July-30 June), imports for that period would be over 50 million tons. Record wheat stocks and bumper .crops expected in the West probably would offset most of any upward pressure on prices caused by such large Soviet purchases. In the event, however, of unfavorable weather in another major growing region-especially the United States or Canada- or of heavy Soviet grain buying in the near term, prices could rise substantially. According to international grain traders, the USSR bought as much as 7.5 million tons of grain from Canada, Argentina, and the European Community by mid-June as well:as 750,000 tons of new-crop US wheat. Deteriorating Soviet crop prospects .probably prompted these initiatives. Grain imports in 1983 cost Moscow an estimated $5 billion and accounted for almost 20 percent of all Soviet hard currency imports. Grain imports of 45 million tons in 1984 would raise the grain bill to over $6.5 billion. Secret 42 29 June 1984 .25X1 25X1 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2 Secret Secret Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2