INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: FOIA
• Collection: FOIA Collection
• Document Number (FOIA) /ESDN (CREST): 05743492
• Release Decision: RIPPUB
• Original Classification: U
• Document Page Count: 51
• Document Creation Date: December 28, 2022
• Document Release Date: August 28, 2018
• Case Number: F-2017-01874
• Publication Date: March 27, 1987

Approved for Release: 2018/08/22 C05743492
Directorate of
Intelligence
k.JCCIT t
International
Economic & Energy
Weekly (u)
27 March 1987
Sccrct
DI IEEW 87-013
27 March 1987
Copy 856
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Warning Notice
Intelligence Sources
or Methods Involved
(WNINTEL)
National Security Unauthorized Disclosure
Information Subject to Criminal Sanctions
Dissemination Control
Abbreviations
NOFORN (NF) Not releasable to foreign nationals
NOCONTRACT (NC) Not releasable to contractors or contractor/consultants
PROPIN (PR) Caution�proprietary information involved
ORCON (0C)
Dissemination and extraction of information
controlled by originator
REL...
FGI
This information has been authorized for release to...
Foreign government information
WN WNINTEL�Intelligence sources or methods involved
A microfiche copy of this docu-
ment is available from OCR/
DLB ; printed copies
from C
Regular receipt of DDI
reports in either microfiche
or printed form can also be
arranged through CPAS/IMC.
All material on this page
is Unclassified.
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
(b)(3)
International
Economic & Energy Weekly (u)
27 March 1987
Synopsis
1
Perspective�Global Agricultural
Issues: The Context for Negotiations
(b)(3)
(b)(3)
(b)(3)
3
International Financial Situation:
Update on LDC Debt
(b)(3)
7
Summit Issues: Agriculture in the GATT Round
(b)(3)
(b)(3)
(b)(31
11
Global Grain Glut: Pervasive
Trade Impacts
(b)(3)
(b)(3)
15
Argentina: Troubled Agricultural
Sector
(b)(3)
19
International Financial Situation:
Delayed Lending Postpones Mexican Economic
Growth
(b)(3)
(b)(3)
(b)(3)
23
France: Privatization Going Well
(b)(3)
27
Smaller Gulf States: Mixed
(b)(3)
Economic Performance and Prospects
(b)(3)
31
Briefs Energy
International Finance (b)(3)
International Trade
Global and Regional Developments
National Developments
(b)(3)
Comments and queries regarding this publication are welcome. They may be
directed t Directorate of Intelligence, telephone
i
geeret
(b)(3)
Approved for Release: 2018/08/22 C05743492
DI IEEW 87-013
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
--Serzet
(b)(3)
International
Economic & Energy Weekly (u)
Synopsis
1 Perspective�Global Agricultural Issues: The Context for Negotiations
As agricultural surpluses have piled up over the past year, agricultural policies
have become a more prominent international economic issue. The agricultural
trade situation has become so bleak, however, that some reform�albeit delayed
until after key elections�seems inevitable.
3 International Financial Situation: Update on LDC Debt
7 Summit Issues: Agriculture in the GATT Round
The biggest roadblock for US objectives for agricultural trade liberalization in the
Uruguay Round will be French and West German reluctance to open the EC's
Common Agricultural Policy to negotiation. On the positive side, newly emerging
Cairns group of nonsubsidizers and support from the resurrected Morges group of
farm exporters probably will provide the necessary leverage to press Paris, Bonn,
and Tokyo for agricultural reforms.
11 Global Grain Glut: Pervasive Trade Impacts
World grain production is likely to reach a record 1.4 billion metric tons this year
while global grain trade will remain at the depressed level of last year. With grain
stocks more than double global grain trade, we see little chance the glut will
diminish over the rest of the decade without major progress in agricultural policy
reform and in multilateral negotiations on agricultural trade.
15 Argentina: Troubled Agricultural Sector
Argentina's farm sector�the world's second-largest exporter of agricultural
products and the country's economic mainstay�is performing poorly, with grain
production down for the second consecutive year. Although President Alfonsin is
belatedly stepping up efforts to aid producers, we believe that persistent low world
prices will cause continued hardship for the farm sector and for the Argentine
balance of payments.
19 International Financial Situation: Delayed Lending Postpones Mexican Economic
Growth
The delay in securing final approval of the commercial bank lending package has
postponed President de la Madrid's economic plans and is already causing him to
abandon fiscal and monetary prudence in favor of measures designed to bring
quicker results.
iii Secret
DI IEEW 87-013
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
23 France: Privatization Going Well
The privatization of a large number of nationalized French companies�one of the
key aspects of Prime Minister Chirac's economic "revolution"�has proved less
controversial than expected and is one of the most successful of the government's
economic initiatives. If completed as planned, the scheme will return 65 banking,
insurance, and industrial companies, worth an estimated $35 billion, to the private
sector by March 1991 and reduce direct government ownership in the economy
from an estimated 28 percent to about 10 percent
27 Smaller Gulf States: Mixed Economic Performance and Prospects
Bahrain, Qatar, and the United Arab Emirates all have limited prosepcts for
economic growth in the near term. The still substantial financial resources of the
three states, however, will allow ruling regimes to shield their nationals from the
continuing recession in the Middle East and to cover current financial shortfalls.
CLI C
iv
_Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
�Semi
(b)(3)
International
Economic & Energy Weekly
27 March 1987
Perspective Global Agricultural Issues: The Context for Negotiations
As agricultural surpluses have piled up over the past year agricultural policies have
become a more prominent international economic issue. Moreover, bilateral
disputes have become more contentious as the number of players has grown and
the agricultural trade system has become more interconnected. At the same time,
agricultural markets are facing unprecedented structural problems, and the
pressures for reform have never been greater.
Bilateral disputes have taken on an especially critical dimension this year. The
lengthy EC accession dispute, changes in US rice and sugar policy, and recent pro-
posals for an EC vegetable oil tax have sparked strong protests from trading
partners. Agricultural trade issues increasingly have taken center stage as the
stakes have become higher and rounds of retaliation threaten industrial as well as
farm products.
Market trends have also complicated the context for negotiations:
� Falling prices�now at their lowest level in decades�have slashed export
earnings for all agricultural exporters and especially burdened LDC exporters
struggling to maintain debt payments. LDC agricultural export volume to the
OECD, for example, was lower in 1985 than five years earlier, and some
estimates indicate a further drop last year.
� To maintain export receipts in the current depressed markets, newly emerging
Third World producers have in some cases doubled production levels, further
adding to glutted markets. Brazil, for example, has boosted soybean output by
one-third in the past five years.
� Huge stock overhangs have created yearlong buffers that would limit commodity
price rebounds�even in the event of a sizable crop disaster. Global wheat and
coarse grain stocks, for example, stand at more than double world trade flows�
in the late 1970s the excess was only 20 percent.
Given these complicating factors and the existing political pressures, it will be
difficult for the GATT to agree to an approach toward agricultural reform.
Domestic farm groups in key GATT countries will continue to lobby stridently for
sustained production supports and import barriers, fearing a collapse of their
incomes if current world prices are allowed to prevail. These farm blocs are
especially important in France, West Germany, and Japan�the countries vital to
rapid success in GATT. Moreover, French Prime Minister Chirac is struggling to
reverse his slumping popularity before the election scheduled for May 1988, and
West German Chancellor Kohl�whose government faces five important state
1 �Ssafet--
DI IEEW 87-013
27 March 1987
(b)(3)
(b)(3)
(b)(3)
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
elections�will not jeopardize his party's chances by agreeing to reforms that
reduce West Germans' farm income. Japanese Prime Minister Nakasone's
chances of staying in office beyond the end of his present term in October are slim,
and his Liberal Democratic Party successor may have difficulty securing farmers'
acceptance of rapid or far-reaching reforms.
The agricultural trade situation has become so bleak, however, that some reform�
albeit delayed until after key elections�seems inevitable. The growing fiscal
burden of income support and export subsidy programs�both EC and US
agricultural support programs will each cost more than $25 billion this year�is
bringing a political consensus on the imperative for reform. Though there is little
hope for rapid progress in GATT agriculture negotiations, most participants
remain optimistic about the outlook for eventual agricultural trade reform through
a phased reduction in subsidies and protectionism.
Secret 2
Approved for Release: 2018/08/22 C05743492�
Approved for Release: 2018/08/22 C05743492
--Seeget_
International Financial Situation:
Update on LDC Debt
Major developments on the LDC debt situation this week focus on Brazil, Mexico,
the Philippines, Venezuela, Chile, and a consortium of Japanese commercial
banks:
� Press reports indicate that Brazil requested that the country's creditors extend
short-term credit lines for another 60 days after they expire 31 March.
� Mexico signed the $7.7 billion commercial bank loan package last Friday with
99 percent of the total funds committed. According to press reports, more than
360 banks ratified the accord out of a total of about 400 banks named in the
agreement; the remaining banks have the option of accepting the loan package
within the next few weeks. The signing paves the way for a $3.5 billion
disbursement, including $1 billion in cofinancing with the World Bank, probably
by the end of April.
� Venezuela approved a series of foreign bond issues totaling nearly $900
million�the first government borrowing in foreign capital markets since 1982,
according to press reporting. Caracas has not indicated when the bonds will be
offered, however.
� Chile will meet its Paris Club creditors on 2 April to request $140 million in debt
relief. Santiago will propose that 85 percent of payments due from 15 April 1987
to 31 December 1988 be postponed until late 1991 when payment in eight
semiannual installments will begin. Another 10 percent will be paid at a date to
be set in 1989. Technical difficulties may surface during the April talks. The
Paris Club usually requires IMF performance targets to be in place throughout
the rescheduling period, but Chile does not have set Fund targets for the period
after 1987. Chile expects its official creditors to proceed with the rescheduling if
Santiago agrees to a follow-on IMF program to cover late 1988 and a Paris Club
review of IMF performance targets set for next year.
� Japanese commercial banks formed an offshore company�JBA Investments,
Inc�that will buy bad loans from Japanese banks at a discount, presumably at
rates prevalent in secondary markets. Payments the company receives from
LDCs on the troubled loans will be passed along to its commercial bank
3
DI IEEW 87-013
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Key LDC Debtors:
Economic/Financial Indicators
Total
Debt a
International
Reserves b
Other
Indicators
Brazil
110
2.0 (Feb 87)
3.5 (Nov 86)
Trade surplus $260 million in February, double
January's surplus; slow start to reaching 1987 target
of $8 billion.
Mexico
104
6.3 (Dec 86)
4.0 (Jul 86)
Inflation rising, estimated 130% by yearend, up from
106% in 1986; money supply growth up.
Argentina
50
2.0 (Dec 86)
3.5 (Sep 86)
Inflation projected at 94 percent for 1987, up slightly
from 82 percent in 1986.
Venezuela
36
5.0 (Jan 87)
6.1 (Oct 86)
Loss of $3.7 billion in reserves during 1986; inflation
estimated at 20% for 1987.
Indonesia
40
8.1 (Dec 86)
9.6 (Sep 86)
GDP stagnant in 1986 after 2.0% rise in
1985; growth of less than 1% projected for this year.
Egypt
30
0.9 (Dec 86)
0.9 (Sep 86)
Inflation running at annual rate of 30 percent up from
17 percent rate last year
Philippines
28
2.6 (Jan 87)
1.9 (Oct 86)
1986 GDP growth 0.1%, first increase in three years;
project 3.0% to 3.5% in 1987.
Chile
19
2.3 (Jan 87)
2.2 (Oct 86)
Trade surplus of $1.3 billion in 1986, 54% higher than
1985; inflation declined to 17% in 1986.
Nigeria
19
0.5 (Mar 87)
0.7 (Dec 86)
Trade surplus deteriorated to $0.9 billion in 1986,
steep drop from $4.4 billion 1985 surplus.
Peru
14
0.8 (Feb 87)
0.9 (Dec 86)
Inflation at 100% annual rate during January-
February.
a Billion US $, yearend 1986.
b Billion US $.
SCCE ct
4
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Boldface indicates indicates change
over the previous week
Status of Debtor-Creditor Relations Domestic Political Scene
No formal date set for commercial bank talks; Brazil
will seek multiyear rescheduling and $4 billion in new
money.
Moratorium quieted some criticism, but Sarney's
popularity remains low.
Signed $7.7 billion commercial bank package last
week; disbursement of $3.5 billion available by end of
April
Moderate GDP growth will limit political problems,
helping to ensure a smooth PRI victory in 1988.
Bank talks began mid-February, now discussing Congressional and gubernatorial elections in
terms; $1.8 billion IMF package approved in Feb- September.
ruary.
Bank agreement reached; interest rate spread re-
duced; saves Caracas $2 billion in payments over
three years.
Leftist protests raising concerns of economic and
political pressures on Lusinchi government.
Jakarta likely to reschedule if oil prices fall below $15 Parliamentary election in April; may determine
per barrel; still maintains limited access to commer- timing of rescheduling or reforms.
cial credit.
IMF letter of intent signed, but many details Mubarak unlikely to state reforms until after April
remained to be completed in technical annex. election to reduce political risk.
Bank talks began 2 March; Manila seeking reschedul-
ing and interest rate relief; rejected bankers recent
interest rate proposal.
Preparing for May House and Senate elections.
Bank agreement concluded 24 February�no new
lending, but lower rate spreads and single annual
interest payment. Paris Club meeting 2 April.
Retiming could aid growth, but not enough to over-
come political difficulties.
IMF standby approved in February; finalizing Lon-
don Club package; Paris Club bilateral talks under
way.
Babangida implementing economic reforms; discon-
tent may rise if economy remains weak, however.
Bank negotiations in limbo; IMF owed $250 million in Garcia remains highly popular; worried about 1987
arrearages. economic prospects.
5 Secret
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Secret
"shareholders" as dividends. This scheme would provide the Japanese banks tax
relief because the discount would be fully tax deductible. Moreover, these
creditors will improve their capital adequacy by reducing the amount of loans
they hold. For other creditors, this plan brings greater prominence to the issue of
new mechanisms that could be employed in dealing with the LDC debt problem.
--Secret-- 6
27 March 1987
_
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
V�..1 V
Summit Issues: Agriculture
in the GATT Round
The biggest roadblock for US objectives of agricultur-
al trade liberalization in the Uruguay Round will be
French and West German reluctance to open the EC's
Common Agricultural Policy to negotiation. In partic-
ular, domestic political and economic constraints limit
the ability of France, West Germany, and Japan to
offer concessions. On the positive side, growing bud-
getary burdens have prompted these key GATT mem-
bers to seriously consider agricultural reform. In
addition, the newly emerging Cairns group of nonsub-
sidizers�led by Canada, Australia, and Argentina�
and support from the resurrected Morges group of
farm exporters probably will provide the necessary
leverage to press Paris, Bonn, and Tokyo for agricul-
tural reforms.
Negotiating Strategies
In our judgment, the EC, which negotiates as a single
entity, wants to preserve the status quo�to maintain
its present Common Agricultural Policy (CAP) based
on flexible import levies and export subsidies. Given
its priorities, the EC will probably continue to delay
and attempt to narrow the negotiations. Nonetheless,
there is substantial difficulty in reaching a common
negotiating strategy on agriculture, since a consider-
able divergence of views exists among the member
states on the future course of EC internal policy.
France and West Germany hold the key to progress
on agricultural reform.
Overall, France will hold the frontline of resistance to
rapid progress on agriculture. The basic French posi-
tion, in our view, will be to wait until the United
States reveals its strategy and then react to it. Ac-
cording to press reports French
GATT representatives will also continue to press for a
grain exporters' cartel to buoy grain prices. They will
argue that progress on agricultural reform is better
achieved through the managed elimination of surplus
stocks and cautious adjustments to present agricultur-
al support systems. In the unlikely event that Paris
7
The Cairns and Morges Groups
The Cairns group of 14 self-proclaimed nonsubsi-
dizers joined forces in mid-1985 to develop a common
negotiating strategy for agriculture in the new GATT
Round. After having threatened to boycott the talks if
agriculture was not negotiated, the group still de-
mands top priority for domestic farm reform and
market liberalization. The Morges group�originat-
ing in the Tokyo Round to discuss agricultural trade
issues�consists of 10 major farm traders, including
the United States and the EC a as well as many
Cairns members.
MORGES
Argentina
Australia
Brazil
Canada
EC
India
Japan
New Zealand
Nordic countries
United States
CAIRNS
Argentina
Australia
Brazil
Canada
Chile
Colombia
Fiji
Hungary
Indonesia
Malaysia
New Zealand
Philippines
Thailand
Uruguay
a Community representatives as opposed to the member states. Any
final EC negotiating position must integrate member country
views.
agrees to speed the negotiations, Bonn will present a
substantial second obstacle. The farm sector in West
Germany�as in France�wields political influence
out of proportion to its size and to a certain extent
dictates the Kohl government's negotiating parame-
ters.
Secret
Approved for Release: 2018/08/22 C05743492
DI IEEW 87-013
17 March 1987
Approved for Release: 2018/08/22 C05743492
-Searr
GATT Agriculture: Key Country Views
United States
Seeks to remove farm trade barriers and export
subsidies across the board on a fast track�specifi-
cally, freeze on the current level of barriers and
subsidies, and then phaseout existing ones . . . wants
significant movement toward free trade through de-
coupling farm income supports from production deci-
sions . . . wants greater international harmonization
of food, plant, and animal health regulations and
stronger dispute settlement.
European Community
France
Opposes fast track for agriculture in the new
round . . . wants to confine farm discussions to the
agriculture group and proceed at same pace as other
issues . . . maintains the basic structure of the Com-
mon Agricultural Policy (CAP) should not be open to
challenge in the Uruguay Round. . . pressing for a
cartel of grain exporters to increase world prices. . .
unwilling to make large concessions on agricul-
ture . . . farm bloc politically important to Prime
Minister Chirac.
West Germany
Unlikely to press for fundamental agricultural re-
form . . . defender of the CAP with France. . . farm
groups still wield considerable political influence. . .
prepared to cut surplus agricultural production with
quotas . . . willing to support curtailing some export
subsidies, but only if it receives assurances that it can
support domestic farm income through state
programs.
United Kingdom
Wants to ensure that all forms of agricultural sup-
port are covered in Uruguay Round negotiations . . .
strong concern over the high cost of farm expendi-
tures. . . agricultural sector has some influence with
the Conservative Party, but less political pull than in
any other EC country.
Japan
Internal discussion on agricultural reform has be-
gun . . . in GATT, anxious to divert attention from
domestic farm subsidies. . . especially protective of
politically important rice and beef farmers . . major
concessions unlikely.
Cairns Group
Argentina
Hard line Cairns member . . . demands total elimina-
tion of agricultural export subsidies . . . willing to
grant concessions on services in exchange for strong
gains in agriculture. . . emphasizes harm to export
earnings and debt-repayment prospects from export
subsidies and falling commodity prices.
Australia
Wants GATT members to agree on the parameters of
global agricultural trade reform within the next two
years . . . seeks removal of import barriers and sub-
stantial reductions in farm subsidies during an early
phasing out period.
Brazil
Wants firm commitments not to expand existing
restrictions and to eliminate barriers to trade. . .
moderate Cairns member. . . wants to preserve multi-
lateral forum and to avoid bilateral solutions . . .
does not want to show excessive hostility to CAP
when the EC has helped forge a compromise on
services.
Canada
Stresses urgent need to resolve the market-depressing
effects of grain surpluses and export subsidies . . .
prefers to pursue agricultural reform in the multilat-
eral context of GATT, rather than in the US-Canada
Free Trade Agreement talks.
Malaysia
As vocal ASEAN member, feels special treatment for
LDCs must be strictly maintained . . . wants elimina-
tion of agricultural export subsidies. . . highest prior-
ities include tropical products.
Thailand
Wants Cairns group to take lead in mapping out
strategies for further collective action in pressing for
agricultural trade reform. . . especially critical of US
rice support program and proposed EC vegetable oil
tax . . . wants to actively participate in all forums on
agricultural reform�including Morges Group.
V
8
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Key Countries: Agriculture Negotiating Stance, 1987
Willing to
discuss
domestic
subsidies
Negotiate
export
subsidies
Fast-track
talks
Talks confined
to one
committee
Lower access
barriers
Strengthened
dispute
settlement
United States
0
0
0
0
0
European Community
France
0
0
0
0
West Germany
0
0
0
0
United Kingdom
0
0
0
Japan
0
CAIRNS:
Argentina
0
0
0
0
Australia
0
0
0
0
0
Brazil
0
0
0
0
Canada
0
0
0
0
Malaysia
0
0
0
0
Thailand
0
0
0
0
Japan's goal is a limited but strongly held one: to
divert attention away from its domestic agricultural
subsidies�especially those on rice and beef. Tokyo,
for its part, will maintain that it is exempt from
agricultural adjustment measures because Japan is
not an exporting country. In our view, Tokyo may
attempt to deflect US and EC pressure for reductions
in Japanese domestic subsidies and rice liberalization
by making limited concessions on oranges, walnuts,
and to a lesser extent beef�the major farm trade
irritants apart from rice.
The Cairns group of 14 agricultural exporters is
pressing hard for early progress on agriculture�
primarily a freeze on subsidy levels and rapid phase-
out of current supports. To attain their goals of
9
3122663-87 (b)(3)
substantial changes in agricultural policy, the Cairns
group will emphasize timing in its pursuit of rapid
reform. Though GATT members have agreed on a
broad timetable for negotiations, according to the US
Embassy in Geneva, the Cairns group is still pressing
for examination of proposals this year followed by
substantive negotiations in 1988. The Morges group
similarly wants to set specific deadlines for progress
on agricultural reforms. Provided no drastic increases
in export subsidies occur, we believe the Cairns and
Morges groups will probably support US interests and
provide the necessary leverage to eventually move
French and German intransigents.
--SeeFet--
(b)(3)
(b)(3)
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Implications for US Strategy
While there continues to be strong political resistance
to substantive reform, we believe GATT members
have become more realistic about the necessity for
change as the costs of agricultural programs have
escalated. Nevertheless, the biggest obstacles to suc-
cessful negotiations will be keeping the French and
Germans at the table. With Paris and Canberra
holding the most divergent views on agriculture, the
Cairns group will probably lend its support to a
moderate position. In our view, while it will be
difficult to prod Brasilia to play more than a marginal
role in Cairns, the strength of Buenos Aires's and
Canberra's commitment virtually guarantees the sur-
vival of the group. As a result, the primary challenge
will be effectively utilizing Cairns pressure in acceler-
ating the pace of EC reform by focusing on its most
reluctant member�France. We believe, however, a
direct attempt to force EC concessions in agriculture
will force France to block such a strategy even at the
expense of stalling the new round.
In pursuing reform-oriented objectives, negotiators
may realize benefits from directing GATT attention
toward Japan. According to US Embassy reporting,
Denmark believes success in opening the Japanese
market would transform the agricultural reform de-
bate from the current focus on negative aspects to an
attractive proposition for politically influential US
and EC farm sectors. Moreover, a brighter spotlight
on Japan would encourage the French to participate
in the new round by adding an issue�Japan's huge
trade surplus with the EC�which greatly concerns
Paris.
10
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Global Grain Glut:
Pervasive Trade Impacts
World grain production probably will reach a record
1.4 billion metric tons this year while global grain
trade will remain at the depressed level of last year.
The resulting stiffening competition and falling grain
prices are likely to increase both domestic and inter-
national tensions over agricultural issues. One major
beneficiary, the USSR, however, could save perhaps
30 percent from last year's grain import bill. In our
view, without extremely aggressive marketing, it is
unlikely that the US share of the world grain trade
will significantly recover. With grain stocks more
than double global grain trade, we see little chance
the glut will diminish over the rest of the decade
without major progress in agricultural policy reform
and in multilateral negotiations on agricultural trade.
The Global Grain Glut
Global grain trade for market year 1987 'is likely to
remain at a depressed level; USDA, for example,
estimates global exports of 172 million tons. Not only
are Soviet imports down, but non-Soviet grain trade
also continues to be depressed. We believe the lacklus-
ter demand for imported grain reflects both the
sluggish world economy and increased grain produc-
tion by traditional grain importers:
� For the LDCs as a whole, USDA projects record
production for MY 1987 of 272 million tons, up 20
percent over last year. Imports are likely to stagnate
or rise at most 1 percent.
� In Africa, record production-72 million tons�is
projected, up 36 percent since the drought levels of
1983/84. Imports are likely to be up only 1 percent
above last year's level.
� OPEC countries are also recording record grain
production and with oil prices depressed, grain
imports probably will be at most 1 percent above
last year's level.
1 July 1986-30 June 1987. (u)
11
Major Exporters: Wheat and
Coarse Grain Production
and Exports, 1986-87
Million metric tons
Production a
Exports a
1986
1987b
1986
1987b
United States
340.9
309.7
61.4
68.9
Canada
49.3
59.5
22.7
26.0
Australia
23.9
24.2
21.0
18.3
Argentina
25.6
24.4
15.8
12.5
European Community
160.0
152.7
47.2
48.3
a Data for the period ending 30 June of the stated year.
b Projected.
This table is Unclassified.
� East European countries probably have achieved
their second-highest level of grain production ever
and may be able to cut back grain imports as much
as 20 percent.
World grain production will probably hit a record 1.4
billion tons and push world grain stocks to peak levels.
According to USDA estimates, global stocks at the
end of MY 1987 will probably be 376 million tons,
surpassing last year's level by 20 percent
Benefits to the USSR
The USSR will reap significant benefits from this
buyers' market�very attractive prices will greatly
reduce Moscow's hard currency grain import bill.
Combined with lower Soviet grain import require-
ments�probably down 10 percent from last year's
level�we believe Moscow's grain import bill will be
about 30 percent lower than last year. To date in MY
Sccrct
Approved for Release: 2018/08/22 C05743492
DI IEEW 87-013
27 March 1987
Approved for Release: 2018/08/22 C05743492
Comparison of Grain Stocks and US
Export Prices, 1981-87 a
Stocks
Million metric tons
230 United States
180
130
80
Major US
competitors b
30 1981 82 83 84 85 86 87C
Beginning stocks as of 1 July of the stated year.
b Canada, European Community, Australia, and Argentina.
US Gulf No. 2 H.W.
d US Gulf No. 3 Yellow.
C Projected.
f January prices.
Note scale change
US Export Prices
US $ per metric ton, fob.
180
150
120
90
Wheat c
Corn d
60 1981 82 83 84 85 86 87 f
Unclassified
1987 Moscow has lined up about 25 million tons of
wheat and coarse grain. It has come to the United
States for only 2.6 million tons of corn�preferring
instead to purchase grain from US competitors for
$20 to $30 per ton below US prices
Moscow reportedly is also well aware of the huge
grain surplus facing the United States
The United States, with a projected 219
million tons of grain stock ending MY 1987�up
nearly 50 million tons since last year�has enough
wheat and coarse grain in reserve itself to cover all
world trade for more than a year.
312289 3.87
Aggravating Trade Tensions
US competitors are resorting to increased concessions
and arm-twisting techniques to maintain or capture
markets:
� According to US Embassy reports from Canberra,
in the recent 2-million-ton sale to Egypt, the Aus-
tralian Wheat Board was only able to strike a deal
by selling wheat at $16 a ton under the guaranteed
12
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Secret
Global Grain Trade, 1980-87'
Million metric tons
170
150
% Non-Soviet
130 1980 81 82 83 84 85 86 87b
a Data for the marketing period ending on 30 June
of the stated year. Grain refers to wheat
and coarse grains.
b Projected.
Unclassified
312288 3-87
fixed price paid to its farmers, by extending three-
year-credits to Cairo, and by donating a bonus of
50,000 tons of wheat.
As countries vie for one another's markets and prices
remain low, US competitors in the short run are being
forced to increase domestic subsidies to provide relief
to their farmers. According to US Embassy reports
from Canberra, Australia will probably pay wheat
farmers $200 million in price supports this year to
offset falling world prices of grain. In the recent sale
to Egypt alone, the Australian Wheat Board will be
forced to pay its farmers $30 million. Moreover, this
past December, Ottawa was forced to initiate subsi-
dies of $750 million to its grain farmers to offset
falling world grain prices.
Similarly, West European grain trade officials report-
edly believe that the EC will not reduce its subsidies
and will continue to match or undercut the US grain
prices in the Export Enhancement Program (EEP).
13
Moscow's Changing Trade Strategy
The glut in the world grain market is, in our opinion,
contributing to changes in Moscow's grain buying
strategy. Moscow has a five-year Long-Term Grain
Agreement with the United States; however, this is
the third year that Moscow is failing to live up to its
agreement, and the first year in a decade of purchas-
ing under its LTAs with the United States, Moscow
has waited five months to purchase its first million
tons of US corn�the longest delay in a decade.
Moscow's grain import needs most likely will be in
the mid-to-upper 20 MMT range Qf grain this market
year and Moscow clearly believes�and we agree�
that US competitors can supply all of Moscow's
needs as long as they remain in this range.
Accordingly, Moscow's strategy seems clearly to
make the United States its supplier of last resort.
Should Moscow decide to come more heavily into the
US grain market, we believe it most likely will only
be for corn and in amounts less than called for by the
LTA. Moscow is cur-
rently buying wheat from US competitors in the mid-
$70 per ton range and feed wheat in the mid-$60 per
ton range. Should the United States extend the
Export Enhancement Program (EEP) to the USSR,
Moscow may buy US wheat under the LTA.
Last year,
however, when the EEP was offered, Moscow failed
to make any wheat purchases under this US offer,
claiming even with the subsidies they could purchase
grain more cheaply from US competitors. In addition
to economic reasons for not buying US grain, Moscow
may be expressing its displeasure with the status of
bilateral relations and indirectly be pressuring the
United States to grant it most-favored-nation status.
--Seeret�
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Secret
The EC reportedly will not use an aggressive sales
strategy to high credit risk countries, but will push for
cash buyers or good credit risks.
Last, Australian trade and industry ministers have
recently attacked both the EC and the US subsidy
policy and have spoken strongly for global agreements
in GATT to alleviate the present agricultural trade
situation. Canberra is spearheading the drive by the
14 Cairns member countries to ensure that the effects
of subsidies and other agricultural issues are included
within the scope of negotiations at the GATT. Austra-
lian Government officials reportedly view the round of
the GATT currently under way as providing the
opportunity to begin discussions for global agricultur-
al agreements.
Outlook
We believe that without concerted effort by major
producers�both at the domestic and at the interna-
tional level�to curtail production, it is likely that
global grain production will continue to outstrip de-
mand in MY 1987, in MY 1988, and quite possibly
throughout the remainder of the decade. Moreover,
the current world stock situation is so outbalanced
that all world grain trade for the next two years could
be met from existing stocks�even if moderate growth
in world trade were to resume. Even an extreme
scenario�where Moscow imports a record amount of
grain of 56 million tons for MY 1988; all other
importing countries increase grain imports 10 percent;
and competitors suffer a bad crop forcing a 20-million
ton drawdown in stocks�would only pull 90 million
tons out of stocks. Without major agricultural policy
reform by grain exporting countries, this would leave
nearly 290 million tons of grain stocks on hand�still
the third-highest stock level on record and enough to
cover well over a year of global grain trade. Over the
long run, however, we believe budgetary pressures
associated with domestic grain price support programs
are likely to exert pressure for agricultural reform.
Secret
In the near term competition for markets will further
intensify, international grain prices probably will con-
tinue at their depressed low levels, or may even fall
further, and domestic pressures for governments to
provide relief to the hard-hit agricultural communities
will mount. Under these circumstances, it is our
judgment that both domestic policy initiatives and
multilateral negotiations in the current GATT round
will be paramount to management of what amounts to
a potential global grain crisis.
The implication of this situation for US exports in our
view is particularly bleak. Even if a modest recovery
in international grain demand in response to lower
world prices were to occur, we believe that without
extremely aggressive marketing, it is unlikely that the
US share of the world grain market will significantly
recover. In our opinion, the US market share will be
kept at its presently depressed level by the aggressive
strategies of US competitor nations, particularly the
EC whose heavy subsidies permit it to continue to
undercut US wheat sales, and by relatively low-priced
feed wheat from Canada and Australia, which is
cutting into traditional US coarse grain markets.
14
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Seeret
Argentina: Troubled
Agricultural Sector
Argentina's farm sector�the world's third-largest
exporter of grains and oilseeds in 1985 and an eco-
nomic mainstay�is performing poorly, with grain
production down for the second consecutive year. Low
grain prices, competitors' export subsidies, and Bue-
nos Aires's own policies have hurt agricultural export
earnings, in turn causing higher current account
deficits and increased borrowing needs. Although
President Alfonsin is belatedly stepping up efforts to
aid producers, we believe that persistent low world
prices will cause continued hardship for the farm
sector and for the Argentine balance of payments.
Farmer Woes
Argentine agriculture, which provides 75 percent of
export earnings and roughly 17 percent of federal
revenue, is experiencing serious difficulties. The cur-
rent global grain glut has caused commodity prices to
plummet; 1986 wheat prices were only 54 percent of
1982 levels. While Argentina itself has contributed to
the current overproduction, it is also hurt by US and
EC agricultural policies. Argentines blame EC export
subsidies for lower Soviet purchases�only about
500,000 metric tons of grain last year instead of the
4.5 million tons specified in the Soviet-Argentine
long-term grain agreement. Buenos Aires was further
upset when Washington offered to subsidize agricul-
tural sales to Moscow, according to the press. As a
result, Buenos Aires has become a vocal member of
the Cairns Group of 14 nonsubsidizers pushing for
agricultural trade reform in the new GATT round.
Although severe flooding last year had a major
impact on output, Argentina's own agricultural policy
has also harmed farm production. The Argentine
farmer receives only about 50 percent of the f.o.b.
export price, versus 75 percent for US producers,
according to the USDA. Export taxes account for
one-fifth of the export price of corn and one-fourth of
the price of soybeans, according to a private Argen-
15
tine study published last spring. Farm receipts are
also diminished by a continually overvalued exchange
rate vis-a-vis the dollar and by port costs that are
among the highest in the world. In addition, high real
interest rates�they equaled up to 60 percent at an
annual rate during the latter part of 1986�make
credit in the loan-dependent agricultural sector pro-
hibitively expensive.
Because of these factors, production of major grains
and oilseeds decreased from a record 41 million tons
in crop year '1984 to 38 million tons in 1985, and a
further drop to 35 million tons is projected for 1986,
according to the USDA. Cereal and oilseed export
revenue fell 25 percent from $3.6 billion to $2.7
billioA, and will drop to $2.6 billion this year, accord-
ing to IMF estimates. The revenue loss led directly to
a worsening of Argentina's current account deficit,
from nearly $1 billion in 1985 to $2.6 billion in 1986,
and will contribute to a current account shortfall�
and financing need�of about $2.4 billion this year.
President Alfonsin's Response
Last year, Buenos Aires worked to diversify trade
partners�the Soviet market accounted for 50 percent
of Argentine wheat sales in 1985. Argentina increased
marketing efforts in Japan and Iran, as well as among
intraregional partners such as Mexico and Venezuela.
The 1986 economic integration agreement between
Brazil and Argentina established specific purchase
goals for wheat, corn, and rice, but Brazil will almost
certainly have to cut back on imports this year
because of its debt problems.
In an effort to boost farm income, Buenos Aires also
reduced export taxes to 5 percent for wheat and an
average of 15 percent on other major grains, foregoing
$420 million in revenue, according to government
'June-May
Secret
Approved for Release: 2018/08/22 C05743492
DI IEEW 87-013
27 March 1987
Approved for Release: 2018/08/22 C05743492
Secret
Argentina: Selected Economic Indicators,
1982-86
Note scale change
Export Volume of Leading Commodities
Index: 1982=100
300
200
100
Corn
Soybeans
Wheat
Export Prices of Leading Commodities
Index: 1982=100
150
Soybeans
N Corn
�Wheat
50
0
Grain and Oilseed Production a
Million metric tons
42
39
36
33 1982
83 84
85
86 b
'Data for planting period beginning June of the stated year.
Includes wheat, corn, sorghum, soybeans, sunflowers, and flaxseed.
b Estimated.
Unclassified
312267 3.87
Argentina: Difference Between Parallel
and Official Market Rates for the
US Dollar, 1984-87
Percent
75
0
1984
85
86
87
Unclassified
312268 3.87
statistics. It obtained $350 million from the World
Bank to switch from the export tax to a land tax
designed to encourage the most productive use of
land. However, the land tax bill�opposed by farmers
who already pay local land taxes�is currently lan-
guishing in Congress.
With congressional and gubernatorial elections sched-
uled for September, Alfonsin has stepped up efforts to
address farmers' concerns this year. He recently
replaced an agricultural secretary seen by many as
indifferent toward the farm sector with an experi-
enced farmer and politician, Ernesto Figueras, who
instituted support prices�albeit at symbolic, low
levels�for corn and sorghum soon after taking office.
In addition, Alfonsin halved interest rates and deval-
ued the austral by 7 percent in late February. More-
over, he recently approved a major rescheduling of
farm debt owed to official banks and created a new
90-day bond to finance planting. He also appears to
Seerot 16
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Sac-
Argentina: Cattle Inventory, 1977-87 a
Million head
63
61
59
57
I I I I I I I I I I I
55
1977 78 79 80 81 82 83 84 85 86 87
a As of 1 January of the stated year.
Unclassified
312287 3-87
support some efforts to decrease transportation and
port costs, such as making the state-owned railroads
more efficient and allowing privately run port eleva-
tors, and is considering the elimination of most export
taxes, according to press reports. Nevertheless, we
believe Alfonsin opposes expensive farm programs
that serve to boost production regardless of market
forces
Outlook and Implications for the United States
Over the short term, Alfonsin's actions are likely to
undercut a nascent farmer movement to halt farm
debt payments, while serving to increase farmer share
of the export price and decrease the cost of credit.
Given the Argentine Government's track record of
taxing agriculture to support industry, however, farm-
ers may wait to see if Alfonsin's profarm policy
continues beyond the election before they change
production strategy. Over the longer term, a switch
back to livestock spurred by current high meat prices,
and an increase in fruit and vegetable production�
many Argentines are impressed by Chile's success�
could aid some producers. We believe, however, that
persistent low world prices will cause continued diffi-
culties for the vast majority of farmers and for the
Argentine foreign payments position
Although US farmers may marginally benefit from a
drop in production on the part of a major competitor,
an increased emphasis on intraregional trade could
make US sales to traditional Latin partners more
difficult. In addition, unless Argentina can signifi-
cantly boost industrial exports, US bankers, among
others, will probably be called upon to finance current
account deficits for some time to come. Moreover,
even if export taxes on soybean meal and oil were
eliminated, a small tax on soybeans could remain.
This would allow Buenos Aires to continue its indirect
subsidy to the oilseed crushing industry, something
the United States opposes
17 �Secret
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
International Financial Financial Situation:
Delayed Lending Postpones
Mexican Economic Growth
The delay in securing final approval of the commer-
cial bank lending package has postponed President de
la Madrid's economic plans and is already causing
him to abandon fiscal and monetary prudence in favor
of measures designed to bring quicker results. Mexi-
co's goal during negotiations with creditors last sum-
mer was to obtain financing for an economic recovery
sufficient to ensure a resounding victory for the ruling
Institutional Revolutionary Party (PRI) in the 1988
national election. De la Madrid's negotiators were
successful, but the reluctance of European and small-
er US regional commercial banks resulted in a nine-
month lag between the banks' agreement in principle
to lend $7.7 billion' and finalization of the package
on 20 March.
Current Economic Situation
The Mexican economy currently is sputtering along
awaiting the infusion of foreign lending, and the delay
has been costly to de la Madrid's economic growth
goals.1
According to press and US Embassy
reporting, to achieve a turnaround from last year's
GDP decline of 3 to 4 percent:
� De la Madrid planned to use foreign loans to
finance a 15-percent real increase in government
investment in such labor-intensive areas as housing,
infrastructure, and other public works.
' Mexico's total financial package amounted to $13.7 billion. The
$7.7 billion commercial bank portion is in three parts: $6 billion is
direct lending, while $1.2 billion and $500 million are contingent on
Mexican oil export prices and manufacturing growth, respectively.
Although Mexico will qualify for the $500 million loan, lending
under the oil contingency only is made available if prices fall below
$9 per barrel
19
Compensating for Lost Oil Revenues
Mexico was able to meet its external obligations last
year despite an $8.5 billion drop in oil revenues and
an absence of new net commercial bank lending.
Given these setbacks, yearend current account results
came as a surprise to most observers:
� Capital flight was reversed as an estimated $1.5
billion was repatriated last year.
� Nonoil exports grew 34 percent over 1985 levels. At
the same time, imports were reduced by 15 percent.
� These trade figures combined with lower than
expected interest payments to limit the current
account deficit to only $1.1 billion, after initial
projections of up to a $3 billion gap
Mexico achieved these results largely through its
aggressive devaluation of the peso, extremely tight
monetary policy, and the slowing of domestic de-
mand. On the monetary side, tight government credit
policies�necessary to finance the budget deficit�
forced Mexican businessmen to return their assets
from abroad to keep business afloat.
This year, oil revenues will again be well below 1985
levels. However, the measures that proved effective
last year in limiting the current account deficit will
not be repeated again this year, we believe, because
the economic recovery de la Madrid has promised
will require cheap imports and easy credit. Although
Mexico was able to adjust to lost oil revenues largely
on its own last year, this year's political realities
demand that 1986's unpopular policies be replaced by
relatively painless foreign borrowing
� Indirectly, he further expected the injection of
foreign lending would relieve the liquidity squeeze
that gripped private businessmen last year and,
combined with a new tax law, stimulate a 10-
percent increase in private investment.
SecretDI IEEW 87-013
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
vi vt
Mexican Balance of Payments, 1984-88
Million US $
1984
1985
1986a
1987b
1988"
Current account
4,238
541
-1,127
-3,093
-3,133
Trade balance
12,942
8,405
4,377
3,552
4,126
Exports, f.o.b.
24,196
21,866
15,760
17,652
19,644
Oil
16,601
14,767
6,259
7,391 c
8,870d
Other
7,595
7,099
9,501
10,261
10,774
Imports, f.o.b.
11,254
13,461
11,383
14,100
15,518
Public sector
4,790
4,354
3,216
4,800
5,520
Private sector
6,465
9,106
8,167
9,300
9,998
Services and transfers balance
-8,704
-7,865
-5,504
-6,645
-7,259
Interest payments
-11,716
-9,917
-8,734
-9,695
-10,520
Public
-9,337
-8,012
-6,894
-7,557
-8,259
Private
-2,379
-1,905
-1,840
-2,138
-2,261
Maquila
1,155
1,282
1,305
1,462
1,608
Net tourism
1,304
1,052
1,171
1,288
1,352
Other
553
-281
754
300
300
Capital account
39
-1,276
1,662
6,144
5,088
Long term
3,617
295
348
7,214
5,132
Liabilities
3,913
530
548
7,414
5,332
Public
3,136
471
-672
5,800
3,402
Gross borrowing
3,353
1,997
3,076
8,109
5,580
Amortizations
-1,691
-2,006
-3,748
-2,309
-2,178
Other net income
1,474
480
Private
777
59
1,220
1,614
1,930
Foreign investment
391
490
1,042
1,225
1,480
Other liabilities
386
-431
178
389
450
Assets
-296
-235
-200
-200
-200
Short term
-3,578
-1,571
1,314
-1,070
-44
Liabilities
-1,972
-712
-211
-180
310
Public sector
175
88
20
10
10
Private sector
-2,147
-800
-231
-190
300
Assets
-1,606
-859
1,525
-890
-354
Errors and omissions
-924
-1,688
-263
-1,500
-2,500
Change in net reserves
3,353
-2,423
272
1,551
-545
a Estimated.
b Projected.
c Oil assumption: export price of US $ 15 per barrel and exports of
1.35 million b/d
d Oil assumption: export price of US $ 18 per barrel and exports of
1.35 million b/d.
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Secret
To expedite economic recovery, Mexico now is turn-
ing to looser monetary policies and a slower devalua-
tion of the peso, a reversal of the strategy that last
year allowed the country to meet its external obliga-
tions while weathering an $8.5 billion loss in oil
revenues. Until new bank loans are disbursed at the
end of April, Mexico City will continue relying on
domestic resources to finance its budget deficit. This
approach has resulted in monetary growth of nearly
70 percent and an annual inflation rate of 125 percent
last month, according to the US Embassy. Despite
rising inflation
the head of Mexico's central bank is under pressure to
reduce interest rates.
Politics Shaping Economic Policy
Next year's election is clearly the driving force behind
economic policy, in our view. Following Mexican
tradition, de la Madrid will name the PRI's presiden-
tial candidate, most likely next fall, and he will be
elected in September 1988. Until the successor is
named, three current contenders�Salinas; Alfredo
del Mazo, the Secretary of Energy, Mines, and
Parastatal Industries; and Manuel Bartlett, the Interi-
or Secretary�will support populist policies in an
effort to make themselves acceptable to key interest
groups within the ruling party. Salinas in particular is
mindful that his political stock will rise or fall with
the economy and, as a result, is bucking the conserva-
tive Bank of Mexico to continue along the expansion-
ary monetary path
Among the groups backing the ruling party, orga-
nized labor is the most powerful, and we believe the
Mexican leadership will reward it for its support.
Labor has sacrificed the most as a result of de la
Madrid's austerity program, which, in retrospect, has
done little to improve the economy. Workers now are
looking for a restoration of living standards, which
have fallen 40 percent since de la Madrid took office.
Recent developments demonstrate its influence:
� Last October an unprecedented third wage hike was
granted in addition to the traditional midyear and
end-of-year increases.
21
� The cost-conscious, anticorruption head of Mexico's
state-owned oil company was replaced'
-
The additional concessions we expect labor to achieve
as the election nears�quarterly wage increases and
additional jobs, for example�will come at the ex-
pense of reducing inflation and the massive federal
budget deficit
Outlook
The next 18 months will be crucial for the PRI with
the approach of the presidential election and lagging
support for the party. New lending, expansive govern-
ment policies, and an appreciation of the peso proba-
bly will produce a modest economic recovery this year
and somewhat better performance in 1988. Neverthe-
less, this growth will come with some painful trade-
offs, particularly in terms of higher inflation. On the
basis of our econometric forecasts, we project:
� Real GDP growth of 2 percent this year and 3 to 4
percent in 1988.
� Private consumption rising 1 to 2 percent this year
and 2 to 3 percent next year, after a 4.4-percent
decline in 1986.
� Only modest increases in private investment of 3 to
4 percent and 2 to 3 percent in 1987 and 1988,
respectively.
� Despite job creation efforts, the rapidly expanding
labor force will drive unemployment 2 to 3 percent-
age points higher before de la Madrid leaves office.
Although the results we project are far from spectacu-
lar, we believe they will be sufficient to satisfy the
party's political objectives. However, by late 1988, we
foresee financial problems again for Mexico. We
believe foreign bank lending and a healthy level of
foreign exchange reserves will allow Mexico City to
finance its current account deficit this year, but in
1988 it will take another large infusion of capital if
Approved for for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Mexico: Selected Economic
Indicators, 1982-88
Note scale change
Real GDP Growth
Percent
6
3
0
-3
-6
Consumer Price Inflation
Percent
160
120
80
40
Current Account Balance
Billion US $
8
4
0
-4
-8
1982 83 84 85
a Estimated for GDP only.
b Projected.
86a
87b 88b
312293 3-87
the country is to remain solvent. Because Mexico is
unlikely to make tough economic adjustments be-
tween now and the 1988 election, we think it likely
that de la Madrid's successor will face a financial
crisis soon after he takes office. The difficulty in
arranging the latest financial bailout, however, does
not bode well for continued lending, in our view
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
France:
Privatization Privatization Going Well
The privatization of a large number of nationalized
French companies�one of the key aspects of Prime
Minister Chirac's economic "revolution"�has proved
less controversial than expected and is one of the most
successful of the government's economic initiatives.
Although denationalization has gotten off to a slow
start, the first public offerings were carried out
relatively smoothly and were popularly received. As a
result, the government has decided to try to speed up
the program. If completed as planned, the scheme will
return 65 banking, insurance, and industrial compa-
nies, worth an estimated $35 billion, to the private
sector by March 1991 and reduce direct government
ownership in the economy from an estimated 28
percent to about 10 percent. The government has
stated that it will use the money _generated to reduce
the national debt or to financially strengthen remain-
ing public corporations.
A Pillar of the Economic Revolution
Inaugurated in March 1986, the Chirac administra-
tion aimed to transform an economy dependent upon
government intervention into one based on free mar-
ket principles. The government's economic plan, guid-
ed primarily by Economics Minister Balladur, includ-
ed: privatization of nationalized firms; decontrol/
reform of prices, exchange rates, and financial mar-
kets; tax cuts and tax reform; and measures to
increase labor market flexibility. Most of these poli-
cies had been tried to some extent in previous�even
Socialist�administrations. Privatization, however,
was solely a Chirac government initiative
The privatization plan was the first issue to cause a
"cohabitation" confrontation between the conserva-
tive Chirac and Socialist President Mitterrand. In
July 1986, when the government sought authorization
for denationalization by decree without prior parlia-
mentary debate and Mitterrand refused, the Chirac
23
government then moved quickly, using deft parlia-
mentary maneuvering to get the bill passed in two
weeks. Implementation of the plan was slow and
cautious, however, as the government wanted to en-
sure success and to avoid selling off public assets at
"bargain basement prices"�a charge that the Social-
ist opposition was already leveling
As a result the first three companies' earmarked for
privatization were profitable, financially sound, and
attractive to private and institutional investors. At the
same time, the government appointed a seven-member
commission to advise it on the valuation of these
companies. The Economics Ministry also began hiring
outside auditors to prepare financial reports on the
companies and to solicit bids from financial institu-
tions that wished to act as advisers and/or market
makers for each privatization
' Saint Gobain, a glass and packaging manufacturer; Paribas, an
investment bank. and Assurances Generales de France, an insur-
ance firm.
DI IEEW 87-013
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
The Government's "Golden" Share
The privatization law stipulates that the government
may�at the discretion of the Minister of Economy,
Finance, and Privatization�retain a golden or special
share in companies being sold for up to five years.
This rule is to counter criticism that the privatization
plan would lead to foreign domination of French
companies and to keep the government's hand in some
business. Use of a special share allows the Minister to
approve or disapprove ownership of more than 10
percent of the privatized company by any domestic or
foreign firm. French officials point out that, unlike
the British golden share, the law does not give the
government the right to intervene in management
decisions. French officials also have said the govern-
ment would use its share option sparingly and only in
special cases. The government did invoke this privi-
lege for the early limited sale of stock in the oil
company Elf Aquitaine and has stated that it will
apply to the sale of the Havas advertising agency and
the computer company Bull. The special share will
probably also be invoked for defense-related compa-
nies such as Matra and Thomson.
The privatization law also imposes a 20-percent limi-
tation on the amount of company equity that can be
sold to foreign interests during the initial offering, and
the Economics Minister has the right to lower this
limit. There is, however, no statutory limit as to how
much equity foreigners may purchase on the second-
ary markets once the company is privatized. The only
exception is that the Economics Minister still must
approve foreign investment over 5 percent in compa-
nies whose activities involve national security, public
health, or public order. Nonetheless,
the Treasury does plan to closely
monitor the secondary markets to ascertain the aggre-
gate amount of shares held by foreigners in a compa-
ny.
Every Frenchman a Capitalist
The Chirac government, hoping that its privatization
scheme will promote "popular capitalism" in France,
has tried to ensure that denationalized shares are as
e
widely held as possible. The government's aim was not
only to assure public acceptance of the plan, but also
to make it more difficult for a subsequent government
to renationalize the companies. Toward this end, 10
percent of the shares are offered to the firms' employ-
ees at a 5-percent discount and purchasers receive a
bonus rebate for holding their shares more than 18
months. The government also financed extensive pub-
licity campaigns�extolling the benefits of share own-
ership�prior to the initial offerings. The shares were
sold through France's 17,000 post offices as well as
banks and stockbrokers. Other bonus schemes includ-
ed fractional shares for small private shareholders
who keep their stock over 18 months. Last, the
government has sold the shares at attractive prices,
although not so low as to validate Socialist Part
criticism about giving away government assets.
All of these moves have paid off. The government
kicked off its program last September by selling 11
percent of its holdings in Elf Aquitaine. These shares,
which were priced about 10 percent below market
levels at the time, were quickly grabbed up. The
offering was oversubscribed sixfold and attracted
390,000 buyers of 10 shares or less. The first full-scale
denationalization occurred in November with the sale
of St. Gobain. This offering proved to be an even
greater success. The sale was 14 times oversubscribed
and the original 20-percent allotment for foreign
buyers had to be cut to 18 to satisfy domestic demand.
The sale of Paribas was 40 times oversubscribed and
shares were sold to more than 3.8 million investors. As
a result the allocation of shares to investors had to be
cut considerably with individual French buyers being
given a maximum of four shares each. As before, the
overseas allocation had to be cut to meet internal
needs.
The government now plans to accelerate the privatiza-
tion schedule. It recently announced that Societe
Generale�France's fourth-largest bank�will be sold
in the second half of this year along with four smaller
banks. This sale will be especially significant in
political and psychological terms because it will mark
the first time a company nationalized in the wholesale
takeovers of 1945 has been totally returned to the
private sector. In addition, the government is selling
the Havas advertising agency and, in "off-market"
24
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
sales to investor groups, France's premier television
station TF-1 and the telecommunications switch sup-
plier Compagnie Generale des Constructions Tele-
phoniques. The CGCT sale has been delayed in the
past and has become controversial because of stiff
competition for the 20 percent of the company to be
sold to foreigners. The next market privatization,
expected in May, will be the giant electrical engineer-
ing and telecommunications group Compagnie Gener-
ale d'Electricite.
Chirac's Major Success
The French privatization program will probably be
Chirac's most popular and lasting legacy. Most of the
government's social initiatives have been abandoned
in the face of opposition from students, workers, and
other interest groups. The government's other eco-
nomic initiatives�while important�had their roots
in past regimes and seem to pale in the public mind in
comparison to the radical about-face in French eco-
nomic policy embodied in privatization.
If privatization follows its planned four-year course,
65 firms including nine major manufacturing compa-
nies and 42 banks and finance companies will be
returned to private ownership. The total value of
shares quoted on French stock markets will have
increased by 40 percent and millions of Frenchmen
will have become shareholders. The number of inves-
tors who purchased Paribas stock alone is more than
double the estimated 1.5 million stockholders in
France before privatization began.
The sales will have returned $35 billion or more to the
French Treasury, and the government's direct owner-
ship in the economy will be cut from an estimated 28
percent to 10 percent. It is impossible to predict at this
point whether or to what extent a new government�
probably elected in 1988�will proceed with further
privatizations. The success of the program suggests,
however, that denationalized companies�with the
probable exception of TF-1�will be left in the private
sector and that even the Socialists�if they took over
the government�might be tempted to carry out a few
more selective privatizations
25 Secret
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Secret-
Smaller Gulf States:
Mixed Economic Performance
and Prospects
Bahrain, Qatar, and the United Arab Emirates all
have limited prospects for economic growth in the
near term. The still substantial financial resources of
all three states, however, will allow ruling regimes to
shield their nationals from the continuing recession in
the Middle East and to cover current financial short-
falls. Nonetheless, the recession increases pressure on
ruling families to broaden political and economic
opportunities. Failure to accommodate or co-opt
growing discontent among youth, the economically
disadvantaged, religious fundamentalists, or the large
foreign labor forces probably will create the potential
for internal instability or external meddling over the
long term.
Coping With Lower Oil Revenues
The economies of Bahrain, Qatar, and the United
Arab Emirates (UAE) differ sharply in structure and
scope from their larger neighbors, but share a depen-
dence on crude oil. The differences in these economies
produced a mixed response to the contraction in oil
prices over the past year. The UAE and Qatar, which
depend on oil for about 45 percent of GDP, increased
petroleum exports by 200,000 b/d and 30,000 bid,
respectively, to compensate for lower prices. The
UAE's greater production capacity helped contain the
drop in real GDP to about 3 percent for the year
compared with a 9.6-percent decline in Qatar. Bah-
rain's greater economic diversification�only 20 per-
cent of GDP comes from crude oil�helped hold the
decline in GDP to 4 percent.
Within these countries, the burden of austerity has
not been evenly shared. For the most part, the large
expatriate communities have borne the brunt of fall-
ing oil revenues. Nonetheless, the departure of many
foreigners has not opened jobs suitable for domestic
workers' ambitions and skills, which has contributed
to a small, but growing unemployment problem. In
Bahrain, slow economic growth has exacerbated gov-
ernment neglect of the underprivileged Shia major-
ity�about 70 percent of the population. Qatar has
27
progressively trimmed its extensive welfare system
and curtailed plans to build additional housing and
medical care facilities. Lower oil prices led Abu
Dhabi and Dubai to reduce aid to the five smaller
emirates while heightening competition between the
two larger emirates for remaining oil customers.
Trade and budget positions also have suffered since
1985. Imports in all three states were trimmed by as
much as 17 percent last year to slow the deterioration
of their trade surpluses. The real impact of the cuts is
even greater, however, because all three states peg
their currencies to the US dollar, which has eroded
vis-a-vis the currencies of their trading partners. At
the same time, sharply lower revenues forced all three
states to slash planned expenditures by 15 to 18
percent in 1986 and to scramble for new sources of
financing, according to US Embassy reporting. De-
spite minimal debt burdens, the small Gulf states
have refrained from borrowing and moved instead to
raise taxes, user fees, and trim subsidies to cover
widening budget deficits.
Revenue constraints and import cuts have slowed the
pace of development programs to a crawl. Lower
prices for petrochemicals, aluminum, cement, and
agricultural goods have stifled growth of some prom-
ising sectors. More important, the downturn in Gulf
economic activity has taken a serious toll on the
booming financial services sectors. Bahrain, which has
the largest banking services industry, has been hard-
est hit with many institutions burdened by nonper-
forming loans or facing bankruptcy
Governments have been slow to deal
with the problem to avoid confronting influential
investors with their debt obligations
Bahrain, Qatar, and the UAE all face sharply higher
defense costs because of growing security concerns.
Territorial problems between Bahrain and Qatar over
the Fasht ad Dibal Reef and the Hawar Islands have
Sceret
Approved for Release: 2018/08/22 C05743492
DI IEEW 87-013
27 March 1987
Approved for Release: 2018/08/22 C05743492
seerer�
Small Persian Gulf States: Selected
Economic Indicators, 1982-87
Bahrain
Note scale change
Real GDP Growth
Percent
10
5
0
-5
Qatar
Current Account Balance Foreign Exchange Reserves
Billion US $ Billion US $
0.9
0.6
0.3
-0.3
2.0
1.5
1.0
0.5
0
Real GDP Growth
Percent
-4
-8
-12
Current Account Balance Foreign Exchange Reserves
Billion US $ Billion US $
2.1
1.4
0.7
0
-16 -0.7
United Arab Emirates
0.6
0.5
0.4
0.3
0.2
Real GDP Growth
Percent
4.5
-4.5
Current Account Balance Foreign Exchange Reserves �
Billion US $ Billion US $
6
4
2
0
-9.0 -2
1982 83 84 85 86 87 - 1982 83 84 85 86 87b
a Yearend data. Excluding gold.
b Projected.
4
3
2
0
1982 83 84 85 86
871)
312265 3-87
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
--Secret_
brought the two states to the brink of hostilities. As a
result, Manama has requested F-16 fighters and other
equipment from the United States at a cost that
would exceed $1 billion. Saudi Arabia probably will
pick up much of the cost, but the package will still
burden Bahrain's small economy. Qatar has planned a
more modest air defense modernization program that
could cost several hundred million dollars. The grow-
ing proximity of the Iran-Iraq war was brought home
to the UAE last November by the attack�probably
by Iran�on an oil production platform in Abu Dhabi
waters. The government is seeking perhaps $1 billion
in US aircraft and other air defense equipment.
Political Dynamics
The downturn in small Gulf state economies is fueling
already well-entrenched disgruntlement over the lack
of political and economic opportunity, over corruption
and greed in the ruling families, and over generational
differences. The wealth disparity in Bahrain is one of
the most pronounced in the Gulf. The military is
increasingly resentful of the privileges granted expa-
triate personnel who predominate in Bahrain's mili-
tary, Nonethe-
less, calls for a return to representative government
are largely ignored and the Amir and the government
rely instead on traditional family ties and the security
services to remain in control.
Qatar has similar problems. The Amir rules as a
tribal autocrat in conjunction with the extensive Al
Thani family, leading merchant families, and the
religious establishment. Poverty is not an issue in
Qatar, but competition for important and prestigious
positions by young, foreign educated Qataris could
spark resentment against Al Thani family domination
of domestic business, especially if the economic reces-
sion continues. Moreover, the regime depends on the
still large foreign work force�two-thirds of the popu-
lation�to operate much of the economy. Although
currently quiescent, expatriates may cause problems
for the regime if faced with large-scale job loss or
nonpayment of contracts. The high standard of living,
substantial proved oil and gas reserves, and an effec-
(b)(3) tive security force, however, reduce the chances for
serious opposition to the Amir's authority.
29
Limited oil revenue prospects are a threat to the
stability of the loose federation of seven emirates,
which comprise the UAE. Abu Dhabi's predominant
oil wealth has enabled it to control federation politics
since independence in 1971, but the increasingly
educated populace and the growing economic inde-
pendence in the northern emirates has brought calls
for a greater say in federation politics. In addition,
Abu Dhabi's small and lesser educated population
limits its ability to retain control. Like Bahrain and
Qatar, the UAE depends on a large foreign work
force�including a sizable number of Iranians�
whose allegiance is suspect. The power struggle and (b)(3)
personal rivalry between Abu Dhabi and Dubai com-
plicate the issue of federation leadership. Growing
public disillusionment with the federation increases
prospects for internal instability and external med-
dling.
Outlook
The near-term prospects for economic growth in
Bahrain, Qatar, and the UAE are limited. Real GDP
probably will decline again in Qatar and the UAE if
they stick to their new OPEC quotas. Trade surpluses
in these two states also are projected to decline to
their lowest levels of the decade. Bahrain's economy
may grow slightly if oil prices remain near current
levels. Nevertheless, all three states have substantial
foreign investments and borrowing capacity at their
disposal to maintain their relatively high living stan-
dards and cover current financial shortfalls.
The smaller Gulf states' growing economic and politi-
cal problems leave all three vulnerable to external
meddling or subversion. Even so, the likely continua-
tion of substantial Saudi payments and a loyal securi-
ty force probably will be sufficient to keep Bahrain's
economic concerns from posing a significant threat to
domestic stability. Likewise, Qatar's substantial oil
wealth and security apparatus should keep economic
issues from boiling over. The disparity in wealth
among the United Arab Emirates and the security
concerns of the individual emirates probably will be
enough to keep them together and even strengthen the
federation.
Secret
(b)(3)
(b)(3)
(b)(3)
(b)(3)
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Briefs
Energy
Saudi Pipeline
Construction
Problems Persist
New Brunei Oil
Production Target
More Philippine
Electrical Problems
Mechanical problems are restricting the capacity of Saudi Arabia's East-West
Petroline to some 2.6 million b/d rather than the planned 3.2 million b/d.
\ Riyadh this month has increased Baghdad's oil exports
through the Iraqi spur line to about 500,000 b/d, raising concern among the
Petroline's operators that a poorly designed connection between the two lines could
lead to a significant disruption if the Petroline is forced to shut down quickly while
Iraqi crude continues to flow. The capacity restriction will limit the Petroline's role
as the only alternative outlet for Persian Gulf oil normally shipped through the
Strait of Hormuz. When Saudi refinery deliveries are considered, only about 2
million b/d of Gulf crude will be able to move through the line. Even if the
mechanical problems are solved, loading limitations at Yanbu, the Saudis' Red
Sea terminal, will restrict exports to some 2.5 million b/d.
Brunei, a non-OPEC producer, plans to stabilize oil output at about 155,000 b/d
for several years, down slightly from last year's nearly 167,000 b/d, according to
US Embassy reporting. Although it might oblige neighboring Indonesia by
claiming the cut is in support of OPEC goals, we believe Brunei's decision reflects
the need to slow production to maximize output from the country's aging fields.
There is little incentive for financially secure Brunei to mount an extensive effort
to find new fields at current, relatively low crude oil prices. The low level of
exploration underway now is more likely to turn up additional natural gas deposits,
(b)(3)
(b)(1)
(b)(3)
(b)(3)
Drought and maintenance problems may result in major electrical shortages in the
Philippines' industrial heartland of Luzon, hurting production and the investment
climate. According to the US Embassy, rainfall in many areas has dropped below
50 percent of normal levels, threatening hydropower production that accounts for
roughly 15 percent of the island's power supply. A similar drought in 1986
contributed to brownouts and blackouts that upset Manila's business community.
Moreover, five (b)(3)
major nonhydropower plants�accounting for more than 25 percent of Luzon's
total capacity�were shut down in mid-March for equipment failures, fires, or
scheduled maintenance. At least two of these plants will be out of commission
through midsummer, during peak demand on nonhydropower sources, and several
others need substantial maintenance. President Aquino recently took several
steps�such as obtaining Japanese financing for a new coal-fired plant�to reduce
Luzon's electrical woes by the 1990s. Little immediate relief can be expected,
however, until hydropower reservoirs begin refilling with the late summer onset of
the rainy season (b)(3)
31
--Seeret..
DI IEEW 87-013
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
International Finance
Indonesia Finds Japan
a Willing Lender
Zambia and the
IMF Agree on
New Auction
EC To Possibly Limit
Japanese Auto Imports
Spanish Interest
in the European
Monetary System
Sccret
Japanese banks are prepared to provide Indonesia with a $328 million 10-year
general purpose loan. The continued willingness of Japanese banks to commit
sizable amounts to Indonesia, despite its faltering international credit rating,
apparently reflects their belief that world oil prices are stabilizing. Moreover,
Tokyo is sensitive to the long-term economic importance of Indonesia as a
relatively secure source of strategic resources�especially oil and natural gas. We
believe Tokyo views Indonesia's current economic crisis as an opportunity to
strengthen the bilateral economic relationship and establish a firm foothold in the
potentially lucrative Indonesian market.
The Bank of Zambia has announced a new two-tier foreign exchange auction
system scheduled to begin 28 March. The previous system was halted for two
months because of the rapid decline of the kwacha and riots over IMF-
recommended food price hikes last December, according to US Embassy report-
ing. Under the new auction system sanctioned by the IMF, foreign exchange will
be allocated at both an official exchange rate of 11 cents per kwacha�a
significant appreciation from the final auction rate of 7 cents under the former sys-
tem�and an auction rate set by bidders�primarily importers�competing for a
share of the weekly allotment of foreign exchange. The weekly allottment, not to
exceed $9 million, depends heavily on foreign assistance, which will be in jeopardy
until an IMF standby agreement can be reached. US and World Bank funding un-
der existing programs, however, will probably ensure a smooth start up of the
auction system. The viability of the system will depend on private-sector willing-
ness to pay the premium auction rate.
International Trade
The European Commission will most likely impose an annual 1.1-million unit
import quota on Japanese passenger cars by the fall of 1987
Recent Japanese press reports
state that Japanese automakers plan to cut exports to Western Europe this April
following warnings from MITI that exports to the EC were increasing too rapidly.
Japanese car sales to Western Europe rose by a record 19 percent in 1986 to take a
record market share of 10.7 percent; January sales were up 38 percent over
January 1986.
Global and Regional Developments
Prime Minister Gonzalez's goal of joining the European Monetary System (EMS)
in 1989 or 1990 will most likely be met, despite some internal and external
opposition. The EC Commission is wary, however, because of the instability a
potentially weak currency could add to the EMS�just when the system is gaining
credibility. In addition, some Spanish economic officials argue that EMS
32
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
�Seeret�
Intra-German Electric
Power Proposal
membership would mean less domestic control over fiscal and monetary policies.
Nevertheless, membership has strong support in business circles, as well as from
the Bank of Spain and the Economics Ministry�which believe that Britain's
possible EMS entry in 1988 could pave the way for the peseta. Before joining, Ma-
drid probably would seek a wider fluctuation band for the peseta�similar to that
for the Italian lira�because of its concern about Spain's inflation rate vis-a-vis its
EC partners. Madrid has already demonstrated its intention to keep inflation near
its 5-percent target for 1987, and we expect it to take other steps to ensure the sta-
bility of the peseta.
East German leader Honecker, whose country faces serious electric power
shortages, last week proposed linking the East German and West German power
grids. Honecker's proposal, according to the press, calls for East Germany to buy
power from West Germany and to deliver electricity to West Berlin. The East
Germans would in turn use the proceeds from this arrangement to purchase much-
needed air pollution control equipment. The deal would help East Germany with
chronic winter power shortages, currently aggravated by a major power plant
accident. Bonn appears interested, but any agreement involving West Berlin's
electricity supply would have to satisfy longstanding Allied and West German
concerns about the security of the city. West Germany has excess generating
capacity and might eventually use such a link to supply other CEMA countries.
South American Several key South American debtors backpedaled from aggressive devaluation
Exchange Rate strategies last year. Free market exchange rates in Brazil, Argentina, Venezuela,
Misalignment Peru, and Paraguay traded at an average 60-percent premium over the official
rates in 1986. In these countries exchange rates were fixed for most of the year or
adjusted behind the pace of prevailing inflation, leading to a public perception that
export competitiveness was eroding�we estimate the trade surplus for this group
of key debtors fell by approximately $8 billion last year. In contrast, Colombia,
Chile, Uruguay, Ecuador, and Bolivia, whose policies are to doggedly keep official
exchange rates near free market levels, boosted their aggregate trade surplus by
about $1 billion. In response to weakening trade accounts, many South American
countries are moving to bolster export competitiveness. Brazil is increasing the
frequency and size of its minidevaluations, while Argentina recently announced a
large devaluation in an attempt to keep pace with rising prices and close the
spreads between official and free market exchange rates. Caracas and Asuncion
devalued in December, but the free market rates still exceed the official rates by
70 and 95 percent, respectively. Responding to rapidly accelerating inflation, Lima
reduced the share of exports transacted at the official exchange rate and, since
January, adopted monthly devaluations. Nevertheless, the perception that these
currencies remained overvalued will continue to undermine export efforts.
33 Secret
27 March 1987
(b)(3)
(b)(3)
(b)(3)
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Thailand Concerned
About Vietnamese Trade
Ties to Japan
Japan Considers
Public Works Spending
Sceret
27 March 1987
Bangkok is worried that Hanoi's efforts to obtain credits and technology from
developed countries, particularly Japan, will ease pressure on Vietnam to withdraw
its forces from Cambodia. the Thai Foreign
Ministry is seeking support from ASEAN members to condemn the increasing
business activities in Vietnam of the Japanese trading company Nissho Iwai.
Bangkok wants Tokyo to restrict the firm's activities, but we believe the Japanese
Government will almost certainly reiterate that it has little control over the private
sector. We believe other Japanese companies and a few West German firms are in-
terested in establishing trade ties to Hanoi and probably will watch the new
leadership's progress on economic reform to pace their efforts. The public probing
these companies are likely to make over the next year is almost certain to provoke
additional Thai, and possibly ASEAN, demarches as well as requests that
Washington lobby Tokyo and Bonn.
National Developments
Developed Countries
According to press reports, Tokyo is considering the unusual step of including $12
billion of public works spending in the $59 billion provisional budget designed to
tide the government over�for 50 days beginning on April 1�while the Diet
impasse on next year's budget is resolved. Provisional budgets generally cover only
essential operating expenses. The Nakasone government probably believes that
putting off public works projects at this time, however, could slow the already
struggling economy, which grew by only 2.5 percent last year. Although the public
works spending in this provisional budget represents about twice the amount that
would be spent in 50 days under the full budget if expenditures were spread evenly
throughout the year, it does not signify a change in the Nakasone government's
austere fiscal policy. Indeed, Tokyo had already planned to push forward many of
the programs originally scheduled for later in the year. In any event, Nakasone
probably hopes that such public works spending will help defuse Diet criticism of
his fiscal policies.
34
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
(b)(3)
Strong Strong Mark Hurting
West German Trade
Italy Lowers
Discount Rate
Preliminary data indicate West Germany's seasonally adjusted trade balance
dropped 20 percent in real terms in fourth quarter 1986. This is the sharpest fall in
three years and the sixth consecutive quarterly decline�the longest downturn in at
least 10 years. Moreover, because trade volumes react with a lag to exchange rate
changes, the surplus is likely to weaken further. The decline in net foreign demand
lowered GNP growth in the fourth quarter by 1.5 percentage points. In addition,
by threatening a loss of West German market share, the downturn may also be ad-
versely affecting investment decisions and hence medium-term growth potential.
The worsening trade performance comes at an inauspicious time for Chancellor
Kohl, whose Christian Democrats face five state elections by early fall
The Bank of Italy has reduced the official discount rate by one-half percentage
point to 11.5 percent while imposing a 25-percent reserve requirement on the
foreign exchange liabilities of commercial banks. Both measures reflect the effort
of Italian monetary authorities to curb increases in foreign borrowing. The
decrease in the discount rate, although smaller than expected, will narrow the still
large interest rate differential between Italy and other major industrial countries.
Moreover, according to unofficial estimates, the new reserve requirement could
raise the cost of foreign borrowing by 1 percentage point. The measures are
significant because they represent a break with the use of direct controls�such as
a ceiling on foreign indebtness�toward more market-oriented solutions
35
--Secret--
27 March 1987
(b)(1)
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Secret
Spain Plans Massive
Railway Improvements
Brazil's Economic
Slide Continues
As part of its economic modernization program, Madrid has announced plans to
spend $22 billion during 1987-2000 to renovate Renfe, the troubled state-owned
railway system. Transportation Minister Caballero has indicated that the bulk of
expenditure�one-third from the central government and two-thirds from Renfe�
will occur by 1992 to prepare for the Olympic Games and the fifth centenary
celebration of Columbus's discovery of America. Major features include the
expansion of single-lane tracks, the improvement of suburban services, a new line
to Andalucia, and the use of modern, high-speed trains on heavily traveled routes.
While these ambitious improvements would make Spain's railways comparable to
some of the best in the EC, we think they will be difficult to achieve�particularly
in the early years of the program. Renfe is likely to be hard pressed to come up
with the necessary funds�annual losses are currently $1.5 billion and total debt is
estimated at $4.7 billion.
Less Developed Countries
Brasilia's current policy of allowing rapid price increases is politically risky for
President Sarney. Economic growth is almost certain to slow to about 3 percent
this year�sharply lower than the 8-percent annual rates since 1985�and
inflation will probably top 300 percent for the year. Increased unemployment and
lower real wages will probably further erode Sarney's standing with the public, the
governing coalition, and, the Congress. Preliminary data indicate that rising prices
are cooling consumer demand and new investment. Press reports say that
industrial production also is slipping because of a squeeze on imports, constraints
on capacity, and strikes. The lack of a coherent economic plan is fueling financial
speculation and rising inflation, according to the Embassy. Estimates by private
industry indicate the monthly rise in prices was close to 20 percent in February,
and Brasilia is reindexing the economy to blunt the impact on living standards.
Nevertheless, strikes are increasing as workers seek new wage hikes.
A senior Finance Ministry official told the US Embassy last week that a new
economic plan will be ready by the end of the month. The program will have to be
approved by the National Congress, however, and Central Bank President Gros
told foreign creditors that it will not be implemented until June. Finance Minister
Funaro told the press last week that the new plan will continue to emphasize
growth.2
\ The government's continued unwilling-
ness to implement strong stabilization measures risks runaway price increases�
possibly triggering widespread social unrest and calls to cut short Sarney's term of
office.
36
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
V
Guerrilla-Labor Links
to Colombian Oil
Industry
(b)(3)
Guerrilla ties to labor are an increasing threat to foreign oil investors and to
Ecopetrol, the state-owned oil company. Since the Cano Limon�Covenas oil
pipeline in northeastern Colombia was completed last March, the National
Liberation Army and other guerrilla have increased their attacks on oil facilities
and have begun to mobilize labor support for their activities.
the guerrillas have organized a determined campaign to recruit oil workers (b)(3)
and that their efforts have been particularly successful with employees whose
pipeline construction jobs are being phased out. We believe guerrilla influence over
organized labor, particularly among oil workers, is likely to grow and could
seriously jeopardize the Colombian oil industry. (b)(3)
Ecuador's Battle Over Ecuador's highest judicial body�the Constitutional Guarantees Tribunal
Domestic Interest Rates (TGC)�has declared unconstitutional a floating interest rate system that Presi-
dent Febres-Cordero implemented last August as part of an economic reform
package. According to US Embassy sources, the TGC claims the measure gave
commercial banks too much control over interest rates violating a constitutional
provision that prohibits favoritism for any economic group. Commercial banks are
charging 36 percent interest on business loans, compared with 22 percent before
the reforms were enacted. During the same period inflation has risen only 6
percentage points to 25.5 percent, raising real interest rates to 10.5 percent. The
ruling is the latest example of efforts by the leftist-controlled TGC and other
opposition groups to discredit administration economic reforms. Febres-Cordero
says he will ignore the ruling, and the Tribunal lacks an enforcement mechanism.
Zambia Diverts
Copper Exports
New Philippine Land
Reform Program
Zambia over
the past year has gradually ceased shipping its copper exports through South
African ports. As a result, nearly one-fourth of Zambia's total copper exports�
about 10,000 metric tons per month�are currently being shipped from the ports
of Beira, and Dar es Salaam. Copper exports, which totaled about 460,000 tons in
1986, account for approximately 90 percent of Zambia's export earnings. In
addition, the government has directed the mining parastatal not to purchase South
African equipment on spares if available elsewhere. Zambia's inventory of South
African mining equipment and its technical equality, however, will probably
frustrate efforts to shift to other suppliers. Although rerouting of the copper
reduces Zambian dependence on South Africa, the relatively disruption-prone
alternate transport routes and less reliable ports in Tanzania and Mozambique are
likely to result in reduced export earnings. Moreover, Lusaka still relies on the
South African route for essential imports and exports such as coffee, tea, and
tobacco.
The Aquino government has approved a six-year, $3 billion land reform program
that it hopes to get under way before the plan becomes bogged down in
congressional politics when the newly elected legislature convenes in July. In the
first phase, 2.2 million hectares�about one-fourth of all farmland�will be
(b)(3)
(b)(3)
(b)(3)
37 Secret
Approved for Release: 2018/08/22 C05743492
27 March 1987
Approved for Release: 2018/08/22 C05743492
New Thai Trademark
Bill Likely
Indonesian Devaluation
Cuts Real Wages
Poor Soviet Economic
Performance Continues
ca. v
27 March 1987
distributed to tenant farmers over the next three years, at a cost of $1.7 billion,
with more land to be distributed later. Funding will be a major problem, however.
In a move to raise at least $1.4 billion, President Aquino early this month directed
that all proceeds from the sale of government corporations and assets sequestered
from associates of the former Marcos government, and from non-performing loans
held by government financial institutions, be devoted to the land reform plan.
Finance Secretary Ongpin is seeking an additional $500 million from bilateral and
multilateral aid donors, who will consider Manila's request at a special meeting in
Tokyo next month.
Prime Minister Prem's government probably will submit a new trademark bill
when the National Assembly reconvenes next week, according to the US Embassy.
The government's aim is to step up protection of intellectual property rights and
hopefully remove a source of bilateral friction with the United States. Bangkok
last year agreed to improve its trademark law to bolster its chances of retaining
trade benefits under the US Generalized System of Preferences, but the bill is
almost certain to face a tough fight. Several small but vocal opposition parties�
and probably some dissident members of Prem's coalition�probably will attempt
to head off the legislation because of potential losses by politically powerful
business groups and because of growing dissatisfaction with US trade policy. With
the National Assembly preoccupied with a number of serious financial scandals,
we believe the government may be unable to ensure passage during this parliamen-
tary session, which runs until July.
Jakarta's overall resistance to across-the-board pay increases since the 31-percent
devaluation last September has left the majority of Indonesian workers worse off,
according to the US Embassy. Indonesian labor economists estimate that higher
prices triggered by the devaluation, coupled with increased public transport fares,
have reduced workers' purchasing power by more than one-fourth. Jakarta,
however, seems determined to avoid wage hikes that would raise the costs of
manufactured exports and undermine a key objective of the devaluation. The
government has convened a committee of government, labor, and business leaders
to study the wage issue, and permitted some selective wage settlements�moves
aimed at defusing a potentially explosive issue on the eve of next month's
parliamentary election.
Communist
Last month, for the second straight month, the Soviet machinery sector failed to
meet the goals of General Secretary Gorbachev's ambitious revitalization cam-
paign, thereby threatening the attainment of this year's economic growth targets
and posing a further challenge to Gorbachev's program. Although industrial
performance improved somewhat from January to February, it was down by more
than 1 percent when compared with the first two months of last year, according to
our calculations. The machinery sector, which accounts for most of the decline in
38
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Secret
overall industrial production, continues to suffer from the effort to modernize
plants while increasing production and improving quality. Stringent enforcement
of more rigorous quality control standards is the dominant factor in holding down
growth. The lackluster performance opening the year implies that Soviet industry
will have to grow at more than 5 percent for the remaining months to meet this
year's targets. Moscow has yet to indicate, however, that it will compromise any of
Gorbachev's ambitious plans to ease the burdens on industry.
Slow Progress on
Soviet Joint Ventures
/Many details about joint ventures remain vague,
casting doubt on their profitability. Western firms are interested in projects
involving goods that will sell in the large Soviet domestic market, but Moscow's
main objective is to expand hard currency earnings. Additional deals are likely to
be signed over the next few months because some Western firms may be willing to
risk small investments for the sake of gaining entry to the Soviet market.
Tactics on Polish
Price Hikes
The Jaruzelski regime reportedly hopes to blunt protest against price hikes
planned for this spring by introducing the increases gradually and instilling a sense
of public resignation.?
Nonetheless, union leader
and Politburo member Miodowicz last week called the planned price increases
economically pointless and socially risky, and union leaders threatened to use their
legal right to strike if the regime goes through with the price hikes. The
government argues that real income is up, and price hikes are needed to avert a re-
duction in market supplies. Poland needs to limit subsidies and raise prices to
impress its creditors and the IMF with its resolve in order to gain access to
Western credits. Pressure from the increasingly outspoken unions will probably
force Jaruzelski to accommodate demands for offsetting wage hikes, however, and
such a compromise would largely cancel the positive effect on consumer demand
and market supplies.
Yugoslav Public Belgrade last week broadened price controls following nearly 70 strikes and
Pressure widespread criticism of recent wage restraints. The decision rolls back prices for
Forces Price Freeze many food items, consumer goods, and other products and freezes them for 90
days. Workers, union leaders, and regional politicians had attacked wage restraints
imposed last month as devastating to living standards at a time of triple-digit
inflation. Premier Mikulic is trying to end the furor without backing down on his
39
�Seeret--
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
China Reorganizing
Auto Industry
China Opens Door
to Western Researchers
Record Low Cuban
Sugar Harvest
wage controls�even at the risk of a major confrontation with Western creditors.
The decision to move only weeks before pivotal debt rescheduling negotiations with
Western creditors suggests that the government is increasingly desperate. Belgrade
almost certainly realizes creditors will view this as a retreat from Yugoslavia's
commitment to economic reform and will now demand tighter external supervi-
sion�a condition Belgrade rejects�in exchange for further reschedulings. Miku-
lic, however, may try to turn weakness into strength by citing his problems as
grounds for greater Western understanding.
Beijing is scrapping its China National Automotive Industry Corporation
(CNAIC)�established in 1982 to centrally direct the industry�in order to give
greater decisionmaking powers to independent companies and local governments.
A new China National Automotive and Motorcycle Industrial Federation is to
serve as consultants and coordinators.
'The 15.6-percent drop in vehicle output last year probably
contributed heavily to the decision. Apparently at least three major independent
manufacturers will be formed directly under China's State Council, but details
will not be finalized for some time. The reorganization, and especially the delay in
implementing it, will create confusion among Western investors and will raise new
concerns about the validity of pending deals, adding to the problems already
encountered by foreign carmakers in China.
The Chinese Academy of Sciences recently announced that the first four Western
scientists will carry out postdoctoral studies in Chinese laboratories. The scien-
tists�from the United States, Sweden, France, and Canada�will study systems
science, biochemistry, optics, and metallurgy. China announced last year that its
institutes in the basic sciences would be opened to foreign researchers. Beijing is
eager to showcase laboratories that have been upgraded with Western equipment,
and to learn from resident foreign scientists. The numbers will probably remain
small, however. Beijing will most likely limit the program to topics and institutes
in which Chinese capabilities are exceptionally strong, and will have difficulty
attracting Western scientists, who are generally skeptical about the research value
of study in China. In contrast, China has sent more than 20,000 scholars abroad
since 1978, and the number sent each year will probably increase.
Cuba's current sugar crop may be the lowest in eight years, according to US
Interests Section estimates Drought followed
by harvest rains could reduce the harvest to 6.5 million metric tons. The poor
Sccret
27 March 1987
40
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
�SOGFOt�
harvest has already shut down sugar mills and caused delivery delays and could (b)(3)
mean as much as a 10-percent fall in Havana's sugar exports. This would worsen (b)(1)
already poor prospects for economic recovery and raise the cost to Moscow of
supporting the Cuban economy.'
41 --6eeFet---
27 March 1987
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
___Approved for Release: 2018/08/22 C05743492
 Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
 Approved for Release: 2018/08/22 C05743492
(b)(3)
t
,,.
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492
Approved for Release: 2018/08/22 C05743492