INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000707060001-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 44
• Document Creation Date: December 22, 2016
• Document Release Date: October 20, 2010
• Sequence Number: 1
• Publication Date: June 29, 1984
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy o
DI /EEW 84-026
29 June / 984
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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
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Comments and queries regarding this publication are welcome. They may be
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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
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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
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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.
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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
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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
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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
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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.
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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.
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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
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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-
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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.
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29 June 1984
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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.
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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-
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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
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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
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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.
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.O
est German
Economics Minister
Resigns
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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:
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Compromise in West
Gerrr,~an Metalworkers'
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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
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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.
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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
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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.
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? 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
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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.
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Estimated Crop Conditions in the Winter Wheat Growing Regions
SOUth
China
Sea
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' Boundary represenfetion is
not necessarily authoritative.
Easi
China
Sea
Taiwan Sea'
7S1wan nat mclu4ltd+n Study
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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.
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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.
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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
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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
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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.
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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.
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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
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29 June 1984
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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.
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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
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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.
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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.
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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.
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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
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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. According.to 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.
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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.
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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
repayments.in 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.
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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.
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major US banks have publicly stated that they
would place their Argentine loans on nonaccrual
status.
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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.
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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.
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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.
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GNP Growth
Index: 1978=100
Eastern
Europeb
LDCs~
Billion US $
Exports
Imports
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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.
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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
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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
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Secret
Sanitized Copy Approved for Release 2011/03/07 :CIA-RDP97-007718000707060001-2