INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000100080001-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 28
• Document Creation Date: December 22, 2016
• Document Release Date: January 7, 2011
• Sequence Number: 1
• Publication Date: February 25, 1983
• Content Type: REPORT

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Intelligence
International
Economic & Energy
Weekly
25 February 1983
Secret
DI IEEW 83-008
25 February 1983
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International
Economic & Energy
Weekly
25 February 1983
iii
Synopsis
1
Perspective-Oil Price Cuts
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2bAl
3
Briefs Energy
International Trade, Technology, and Finance
National Developments
11
Japan: Protectionist Trends
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15
Indonesia: Growing Strains in the Oil Sector
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Suriname: An Economy Under Siege
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Comments and queries regarding this publication are welcome. They may be
directed tol
I
Directorate of Intelligence,
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International
Economic & Energy
Weekly
Synopsis
Perspective-Oil Price Cuts I 25X1
The Gulf oil producers may not be able to stabilize the international oil
market. Unless OPEC members can forge an effective production and pricing
agreement quickly, oil prices could drop to $25 per barrel or lower.
Japan: Protectionist Trends) 25X1
Although the Japanese Government has largely eliminated formal barriers to
foreign trade, a wide variety of informal restrictions remain. Moreover,
Japanese industrial policy has resulted in legislation and actions that are
causing more problems for imports.
Indonesia: Growing Strains in the Oil Sector) 25X1
The soft oil market is creating the most serious problems for Indonesia's oil in-
dustry since the near-bankruptcy of Pertamina (the state oil company) in 1975.
Suriname: An Economy Under Siege 25X1
The suspension of Dutch aid following the December executions of 15 leading
critics of Suriname's Government is deepening the country's economic prob-
lems and raising the prospects for increased Cuban involvement.
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Perspective
Weekly
International
Economic & Energy
25 February 1983
early 1970s, they could be cut by about 400 million barrels.
The Gulf oil producers may not be able to stabilize the international oil
market. To do so they would have to come up with a new pricing structure and
production allocation scheme agreeable to all members, particularly Nigeria.
Iran could also be a spoiler. Unless something is worked out soon, a downward
oil price spiral is substantially possible. Even if agreement is reached, it might
not last very long if market speculators continue to unload inventories. If
inventories were reduced to the level maintained relative to consumption in the
more weeks before becoming concerned about stock levels
sumption. Although such rates of inventory depletion cannot be sustained
indefinitely, companies can probably continue to postpone liftings for several
Last week's Nigerian $5.50 per barrel oil price cut resulted in downward
pressure on oil prices as buyers delay liftings in anticipation of price
adjustments by other producers. Lagos's threat to match any other price cuts
also makes it likely that buyers will wait to increase their liftings of Nigerian
crude for a week or so. Current OPEC production is running well below 16
million b/d with reports that output is as low as 13.5 million b/d. At the mid-
February output level of 15.4 million b/d, buyers are depleting inventories at a
rate of 5-6 million b/d given our estimate of 45-46 million b/d for present con-
It is not clear how quickly or by how much other producers will follow with 25X1
cuts of their own. Mexico will reveal its new price structure at the end of this
week, and Libya will be under great pressure to follow the Nigerian cuts.
These countries currently have a combined surplus production capacity of
about 1.5 million b/d. 25X1
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The Persian Gulf producers will adjust their $34 prices downward as well; a $4
cut has been mentioned most frequently, although rumors of cuts of $5.50 to
$7 persist. Members of the Gulf Cooperation Council (GCC) met earlier this
week and reportedly agreed on an unspecified price cut. OPEC GCC members
were later joined by the oil ministers of Iraq, Libya, Venezuela and Indonesia
to reach an OPEC-wide agreement on production and pricing
Given the Nigerian cut, a $30 benchmark would not be sustainable without
agreement by Lagos to adhere to a production ceiling in the range of 1.2 to 1.3
million b/d. Buyers would prefer lifting Nigerian crude at the same price as
Persian Gulf crudes because of its higher quality and lower transportation cost.
As a result, in the absence of a production allocation accord, Persian Gulf
producers would see little recovery in sales until all of Nigeria's surplus
production capacity of 1.5 million b/d is exhausted.
A cut of $5.50 per barrel would reestablish the recent price differentials
between Arab Light and Nigerian crudes. Dropping the benchmark by $7 per
barrel would realign differentials in accordance with Saudi preferences. We
think that Riyadh believes this is about the price needed to further prevent
sharp erosion to its oil share of the world energy market. The Saudis,
therefore, probably see themselves caught between the need to cut prices for
long-term oil market purposes and the need to avoid sparking a downward
spiral.
OPEC has announced that a ministerial meeting will be convened next week.
Without an orderly approach to pricing decisions, market forces and buyer
psychology will eventually pressure producers into a round of unilateral price
cuts. Such cuts would do little to spark oil consumption and could easily cause
a sharp downward pricing spiral as each producer tries to maintain market
shares.
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Energy
OPEC Oil Production As of mid-February, OPEC's crude oil production had fallen to 15.4 million
Plunges b/d, down about 2 million b/d since January and the lowest level in over a de-
cade. Production probably has continued to decline as companies postpone
crude purchases and draw down inventories in anticipation of further price
In Nigeria crude production fell to about 500,000 b/d before Lagos's
unilateral decision to slash prices: The combined output of two other African
producers-Libya and Algeria-has slipped some 300,000 b/d since January.
Saudi Arabian ouput has dropped below 4 million b/d. Iranian production,
however, has been holding steady, and Iranian Oil Ministry officials have
expressed their intention to maintain high production levels to support an
export plan of 2.5 million-b/d.
Total
18.8
17.2
15.4
Algeria
0.6
0.7
0.6
Ecuador
0.2
0.2
0.2
Gabon
0.2
0.2
0.2
Indonesia
1.3
1.2
1.0
Qatar
0.3
0.3
0.3
Saudi Arabia
6.3
4.7
3.8
UAE
1.2
1.1
1.1
Venezuela
1.9
2.1
2.0
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Discounts Minimize Because several OPEC countries have been discounting prices on large
Impact of volumes of their oil exports-mainly through lower priced product sales-the
Oil Price Cuts expected official OPEC price cut on crude oil may not have much of an impact
on total revenues. We estimate that more than one-third of OPEC oil exports
are now being sold through methods that yield an effective crude price of
about $6 below the $34 Saudi Light benchmark. For many producers a $4
marker cut probably would reduce oil revenues by about $1 per barrel. Several
producers-including Algeria, Kuwait, and Venezuela-sell more than two-
thirds of their oil exports as products that do not come under OPEC guidelines.
Libya and Iran, which had a number of foreign crude processing deals, have
recently been replacing them with crude sales whose value is based on the price
received for product sales. Following Libya's success in marketing its crude,
several other OPEC countries-including the UAE, Saudi Arabia, Nigeria,
and Indonesia-have held discussions with international oil companies on
crude sales prices based on product prices.
OPEC: Production and Discounted Oil Sales
February Crude Oil
Production
Product and
Discounted
Crude Sales
Libya
1,200
600
Venezuela
2,000
1,410
Other
8,200
500
Romanian Coal A disappointing increase of only about 2.5 percent in Romanian coal output in
Problems Mount 1982 has severely undercut President Ceausescu's plan to offset declining oil
imports with huge increases in coal production. Output last year of 37.9
million tons fell short of the plan target by nearly 14 percent. The poor
performance was not only a setback for Bucharest's annual target of 85 million
tons of coal by 1985, but also well below the 7-percent average annual increase
in coal output achieved during the preceding five-years.
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To make up for the shortfalls, Bucharest recently set a goal of increasing 1983
coal production by 53 percent over 1982 levels. Energy guidelines for 1981-85
call for 60 percent of electricity to be generated with coal and shale by 1985,
compared with about 40 percent in 1980. According to a recent press report,
the regime hopes to achieve its goals by making the incomes of all miners de-
pendent on the amount of coal they produce. The plans, however, probably will
not be realized and will lead to a further slowdown in the rate of increase of in-
dustrial production, more grumbling among miners, and additional consumer
inconvenience
Shell To Cut Refining Royal Dutch Shell plans to reduce its crude oil refining capacity in Singapore
Capacity in Singapore by 46 percent, or 210,000 barrels per day. The reduction will trim Singapore's
overall capacity by nearly 20 percent to some 900,000 b/d and cost the city-
state some $600 million a year in net foreign exchange earnings. The cutback
will begin as new Indonesian refining capacity becomes operational early next
year. Indonesia is expanding three refineries to double the country's refining
capacity and eliminate the need to ship crude oil to Singapore for processing
into refined products for Indonesia's domestic market.
International Trade, Technology, and Finance
Canadian-Japanese Ottawa and Tokyo last week agreed to extend restrictions on Japanese
Agreement on Auto automobile exports to Canada. The new agreement, covering the first six
Exports months of 1983, limits passenger car exports to 79,000 units, which represents
a 3-percent increase annually over 1982 levels. Negotiations on export levels
for the second half of 1983 are expected to begin soon. Industry analysts
predict that new car sales in Canada will increase by 2 percent this year. Given
the extremely low level of dealer inventories of Japanese cars, analysts
estimate that Japan's share of the Canadian automobile market will drop from
25 percent to around 21.5 percent despite the increase in imports. Canadian
UAW President White has nonetheless criticized the agreement because it
allows additional imports at a time when the domestic automobile industry is
severely depressed. He also is concerned that the agreement does not cover
truck imports or Japanese investment in Canada's automobile industry. By
limiting the agreement to six months, the Japanese have maintained the
flexibility to increase imports in the second half if the market improves.
Danish Move To Recent action by the Danish parliament calls into question Copenhagen's
Abandon EC Sanctions further adherence to EC trade sanctions against the USSR. The sanctions,
imposed by the EC Council in response to martial law in Poland, were
extended an additional year in December. On 18 February, however, the
Danish parliament's EC Committee voted against continuing the measures.
Unless the full parliament approves legislation of its own to replace the EC
Council regulation, Denmark will cease applying import restrictons on
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If'Denmark reneges on the EC's sanctions policy, the Community could take
Denmark before the EC Court or negotiate an exception similar to that
granted Greece, which opposed the sanctions from the beginning. In either
case the other eight EC members will continue the sanctions for the near term.
Most agree that lifting the sanctions now, even though they are selective and
largely symbolic, would send a wrong signal to Warsaw and Moscow. The next
Council review will take place in two months, and Denmark's action could
weaken EC resolve at that time. Moscow almost certainly will intensify its
lobbying efforts with EC members to lift the sanctions as soon as possible.
EC Proposes Raising The EC Commission has proposed raising the compulsory quotas on steel
Steel Production production for second-quarter 1983 by almost 2 percent above the current
Quotas quarter's depressed level of 13.8 million tons. The Commission's decision is
based on an expected modest recovery in the EC steel industry and an EC
market forecast of a seasonal upturn in overall economic activity. The EC will
consult with the steel industry and steel consumers next month before
finalizing the quotas.
Although the quota system recently has brought about an improvement in
prices, the outlook remains discouraging for EC producers. The EC is
attempting over the next two years to reduce steel capacity by nearly 18
percent-at a time when governments are trying to reduce unemployment-
and failure of the expected economic recovery to materialize would force the
Commission to revise the quotas downward. Any further cutback in the quotas
probably would lead some producers to cheat on the system by lowering prices
to maintain or boost production.
Total, actual
18,037
17,609
16,235
Total, quota
18,574
18,699
17,541
16,676
15,881
14,027
Compulsory items
15,630
15,859
15,120
14,409
13,781
14,027
Voluntary items
2,944
2,840
2,421
2,267
2,100
a Includes only steel production subject to EC quotas; this accounts for roughly 60-70 percent of total
steel production in EC countries.
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Tokyo Wants Review At a press conference last week, Bank of Japan Governor Maekawa declared
of Floating Exchange that the major industrial countries must study alternatives to the current
Rate System exchange rate system. Maekawa claims that inflation and economic growth
rates among industrialized nations are converging, obviating the need for a
flexible, floating system of exchange rates. Earlier in February, Finance
Minister Takeshita confided to US officials that he has doubts about the
durability of the floating system. No consensus has emerged yet in Tokyo
about the best replacement. Maekawa, however, opposes systems that specify a
wide band of fluctuations for each national currency.
National Developments
Developed Countries
Canadian Government's The Newfoundland Supreme Court last week decided in favor of the federal
Offshore Oil government in its dispute with the Newfoundland provincial government over
Dispute With ownership and management of offshore oil and gas holdings. The court ruled
Newfoundland that Newfoundland does not own the resources off its coast. Because of the dis-
pute, oil and gas exploration in the area has been limited, and production from
the 1.8-billion-barrel Hibernia oilfield, originally set to begin 1986, now has
been delayed until 1989-90 and then only if a settlement is reached soon.
While the ruling strengthens Ottawa's negotiating position, a quick settlement
of the two-year-old dispute is not likely because of Newfoundland Premier
Peckford's vow to continue the fight. Peckford intends to appeal the New-
foundland court ruling to the Supreme Court of Canada, which has already
begun hearing a similar case on Newfoundland's offshore jurisdiction brought
by the federal government.
Financial Assistance Iraq obtained a $90 million loan from the Arab Monetary Fund earlier this
for Iraq month to help cover foreign exchange outlays, according to the US Embassy in
Abu Dhabi. Baghdad has received $200 million in direct aid from the United
Arab Emirates thus far this year and may have obtained another $180 million
from Saudi Arabia. It also has been promised $300 million from Kuwait and
$500 million from an international banking syndicate. If Iraq receives these
funds on schedule, financial aid this year would about match the monthly
average for 1982 when Baghdad obtained over $5 billion in assistance. Even if
the funds are received soon, bleak prospects for oil earnings will force Iraq to
reduce its imports further. Baghdad almost certainly will have to lower its oil
price and it has no way to increase production to compensate.
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Ethiopia Offers Foreign Ethiopia's Marxist government last month announced a series of incentives
Investment Incentives aimed at attracting much-needed private investment. A key element in the new
package is an offer to set up joint ventures in which Addis Ababa would retain
51-percent participation. The government guarantees foreign ownership for 25
years and the repurchase of company shares at an equitable price. Additional
inducements include a limited tax exclusion on imports and corporate income.
In turn, foreign participants will be required to make investments in convert-
ible currencies and fill the general or deputy manager positions with Ethiopian
nationals.
The new investment code took almost two years to prepare and was the subject
of bitter debate within the Ethiopian Government, according to US Embassy
sources. The decision to go ahead with the program suggests that Chairman
Mengistu does not view his Soviet benefactors as playing a significant role in
reviving the Ethiopian economy. We do not believe, however, that Mengistu
has any intention of moving away from Moscow, whose military assistance is
essential to the government's survival. Foreign investors probably will hold off
until Addis Ababa pays off Western firms for assets nationalized by the
government in 1974.
Soviet Interest in The director of the Soviet grain purchasing agency said publicly earlier this
New Grain Agreement month that Moscow is ready to negotiate a new long-term grain trade
With the United States agreement with the United States. He stated, however, that the USSR is
unwilling to increase the minimum amount it has to buy above the current re-
quirement of 6 million tons.
the USSR may be more flexible than it has indicated publicly and may agree
to some increase. in the minimum requirements. The Soviets want to maintain
an agreeemnt because the United States is the world's most stable producer
and largest exporter of grain. Nevertheless, Moscow continues to view the
United States as an unreliable supplier. Since the US embargo in 1980, the
Soviets have diversified their sources of grain imports by entering into
additional long-term agreements with other countries.
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Reduction in Soviet Recent Soviet press reports state the area sown to winter grains is 3.5 million
Winter Grains hectares, nearly 10 percent less than planned. The area-roughly 32.5 million
hectares-is the smallest in 10 years. The Soviets say inadequate soil moisture
at sowing time reduced the area planted. The press also reports plans to make
up the deficit by increasing the area sown to spring grains. The high-yielding
winter grains area of the Ukraine and North Caucasus was most affected. All-
source weather data show near drought conditions there at sowing time last
fall. The reduced plantings greatly lower prospects for winter grains, which
usually make up nearly one-third of total production. The success of the plan
to compensate for the winter grain shortfall by increasing the area sown to
spring grains will depend on favorable weather this spring and on the
availability of adequate seed and agricultural equipment.
Decrease in Polish The US Embassy reports that supplies of some foods, especially meat,
Meat Supplies decreased in February compared with last month, and lines for meat have
reappeared. Meat supplies are lower because of distress slaughtering late last
year caused by feed shortages. Supplies of bread and flour products have not
declined because the regime was able to make cash purchases of small
amounts of grain. Many consumer goods, especially shoes, are scarce, however,
and are too expensive for the average Pole.
The meat supply situation will become steadily worse this year with per capita
meat consumption likely to drop to the level of the early 1970s. Recent
livestock statistics show that in January the number of cattle was down
4 percent compared with last year, of hogs 8 percent, and of sows 25 percent.
Supplies of most manufactured consumer goods also will not increase signifi-
cantly this year because of the low priority accorded such goods by the
government.
Romania's 1982 Bucharest's efforts last year to ease its hard currency problems by reducing
Economic Results imports continued to take a toll on overall economic performance and
consumer welfare. Although separate hard currency trade data have not yet
been released, cuts in imports from the West-reflecting the regime's struggle
to meet its obligations to Western creditors-almost certainly were the major
factors in the 24-percent decline in overall imports last year. Exports,
meanwhile, fell 10 percent. Official sources report that national income grew
2.6 percent and industrial production 3.3 percent. Both figures represented a
slight increase from the record low postwar results posted in 1981, but they
were well below long-term performance levels. Energy shortages continued to
disrupt the economy as reductions in oil imports and slower rates of growth in
domestic energy supplies curtailed generation of electricity. Agriculture was
one of the few bright spots as the real value of agricultural production
increased 7.6 percent after declines in the preceding two years. Consumers
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bore the brunt of the Ceausescu regime's import cuts and economic austerity
measures, as they experienced factory closings and layoffs, pay cuts resulting
from unrealistic production targets, and the worst food shortages in over two
decades.
Status of Cuban Debt Cuba's government creditors expect debt rescheduling negotiations to be
Rescheduling completed by early March, according to the US Embassy in Madrid. Official
creditors, however, are showing some apprehension that the United States
might attempt to participate by reviving its claims on some pre-Castro debts,
which they believe would impede discussions. Cuba indicates it will not sit at
the same table with the United States. Successful rescheduling probably would
somewhat ease Cuba's ability to obtain short-term credits, thereby facilitating
hard currency trade. Convertible currency constraints will persist, however,
and force Cuba to continue buying less from the West. This, in turn, will lead
to reduced economic growth and increased austerity.
New State Markets In an apparent attempt to increase the distribution of goods and reduce black-
in Cuba market activity and free market operations by farmers, the Castro regime is
opening large supermarkets in Havana, some of which offer foodstuffs not
available elsewhere. The US Interests Section in Havana reports that prices
are high-comparable to those on the black market and farmers' free
market-but that demand is brisk. Havana reportedly also plans to open
several specialized retail outlets for such consumer items as clothing, shoes,
hardware, jewelry, and household goods.
The new state markets probably are intended to improve consumer morale and
productivity. They were opened soon after Cuba requested debt rescheduling
from its Western creditors and while the public was being informed once again
that it must sacrifice more and work harder. The scheme could backfire,
however, if Havana is unable to keep the stores stocked. Cuban officials claim
that hard currency constraints will not hinder their ability to stock the markets
because most of the goods are produced in Cuba, the USSR, or Eastern
Europe. Havana depends on hard currency imports for some of the materials
used to produce these goods, however, and has few prospects for immediately
improving foreign exchange earnings
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Japan:
Protectionist Trends
Although the Japanese Government has largely
eliminated formal barriers to foreign trade, a wide
variety of informal restrictions remain. Moreover,
Japanese industrial policy has resulted in legisla-
tion and other actions that are causing new prob-
lems for imports. Without strong foreign pressure,
we believe Tokyo will continue to erect new infor-
mal restrictions such as those embodied in legisla-
tion now being considered for aiding depressed
Removing Formal Barriers
Japan has dismantled most of its formal import
restrictions over the last 20 years. Tokyo reduced
the number of goods covered by import quotas from
more than 250 in the mid-1960s to only 27 this
year. Japan has agreed to cut duties on industrial
products that
will lower the average Japanese tariff level on
dutiable imports to 5.5 percent by 1987. In con-
trast, US tariffs will average 6.0 percent, compared
with a pre-MTN level of 8.2 percent.
Although quotas and tariffs do not present major
problems in most cases, government controls on
trading and government procurement are barriers
for some industries. The government controls trad-
ing in a variety of products, including wheat, rice,
barley, and tobacco.
these controls have not restrained imports of most
of these state-traded items. Government regulation
of manufactured tobacco products, however, has
hurt the sale of US products.
Tokyo has moved relatively slowly to liberalize
government procurement procedures. Japan finally
agreed to include Nippon Telephone and Telegraph
(NTT) among the public corporations covered by
the MTN code on government procurement in
December 1980. As of September 1982, however,
foreign contracts under the agreement were less
than 1 percent of total NTT purchases. Similar
results hold true in other areas of government
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Tokyo has also been reluctant to liberalize its 25X1
standards and approval procedures. Approval prob-
lems, such as unequal inspection systems, have
inhibited US sales of consumer items and other
products. The most recent example has been Japa-
nese use of more costly inspection systems for
imported metal softball bats than for bats produced
in Japan. On other products, exporters to Japan
charge that officials have deliberately delayed en- 25X1
try long enough to allow Japanese manufacturers to
introduce a competitive product. 25X1
One US study estimates the removal of remaining
formal restrictions would add, at most, $2-3 billion
to Japan's import bill, with half of the gain accru-
ing to the United States. Our own estimates show
similar results. For example, we project that if all
agricultural quotas were eliminated, imports would
increase by only $500-700 million.
Japan maintains a wide array of informal trade 25X1
barriers. Its close-knit industrial structure and
complex distribution system are formidable obsta-
cles to foreign competition. Major industries-
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steel, automobiles, and segments of the electronics
industry-are highly concentrated. The firms are
frequently members of large, self-contained indus-
trial groups-keiretsu-which provide most of
their own raw materials, intermediate products,
and marketing channels. Keiretsu members tend to
purchase within the group unless market forces,
particularly substantial price and quality differ-
ences, dictate otherwise.
Japan's highly segmented, multilayered distribu-
tion system also tends to inhibit imports. High
markups and distribution costs tend to decrease
foreign competitiveness. For example, markups on
foreign perfume add at least 50 percent to imported
prices, while markups on domestic brands are about
35 percent. Even if foreign goods are price competi-
tive, strong links between manufacturers, whole-
salers, and retailers emphasizing stable supplies
and reliable after-sales service have proved to be
formidable obstacles. In addition, long-held cultur-
al attitudes provide an important barrier. In many
cases, foreign goods are considered luxury items
and are bought only as gifts.
Recent Government Policy Trends
Mainly in response to US pressure, Suzuki's ad-
ministration put together trade packages in Decem-
ber 1981 and May 1982. The packages included an
acceleration of tariff cuts agreed to in the Tokyo
Round negotiations, unilateral reductions on some
other items, a commitment to improve customs
procedures, establishment of the Office of Trade
Ombudsman to deal with foreign complaints, and
foreign participation on standards drafting commit-
Tokyo's efforts will have little visible impact on
imports for some time, however. We believe the
new tariff cuts will boost foreign purchases by no
more than $1 billion over a 12-month period, less
than 1 percent of last year's total import bill. About
one-third of the increase would benefit US suppli-
ers. If properly implemented, some of the measures,
such as revising standards procedures, are poten-
tially significant. At a minimum, some of the
aggravation of doing business in Japan should be
reduced, although foreign companies burned in the
past are not likely to respond quickly to changes.
While taking steps to ease some barriers, Tokyo has
failed to act on others:
? In negotiations this month, Japanese officials
gave little ground on the issue of government
procurement.
? While increasing relatively minor agricultural
quotas, Japan has refused to budge on the major
items such as beef and citrus quotas because of
25X1
the political clout of the Japanese farmers in the
^
ruling Liberal Democratic Party.
With local and national elections scheduled for this
spring and summer and his political popularity
slipping, we do not expect Nakasone to take signifi-
cant action on sensitive trade issues.
tees.
Almost immediately after taking office in Novem-
ber, Prime Minister Nakasone asked the Cabinet to
draw up measures to open the market further. The
result was another package of tariff cuts in Janu-
ary, expanded quotas on agricultural products, an
enhanced Office of Trade Ombudsman, promises to
review all standards and certification systems, and
measures designed to increase foreign sales of
manufactured tobacco.
Secret
25 February 1983
public statements by Nakasone's Chief Cabinet
Secretary, Masaharu Gotoda, suggest that revi-
sions will fall: short of US and EC expectations.
25X1
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Japanese industrial policy is perhaps the most
significant barrier to imports, but its impact is
impossible to quantify. Tokyo's efforts to funnel
money into industries such as electronics has en-
hanced their competitiveness and retarded foreign
access in certain key industries.
Moreover, Tokyo is considering a revision of the
Aid to Depressed Industries Law that would keep
the provisions of the current law and add financial
and tax incentives for new technologies that would
make these industries more competitive. The cur-
rent Depressed Industries Law has allowed Tokyo
to inhibit foreign inroads into the basic materials
industries, such as aluminum smelting and petro-
chemicals. For example, MITI forced oil refiners to
lower the price of naptha to increase the competi-
tiveness of the domestic petrochemical industry.
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Indonesia: Growing
Strains in the Oil Sector '
The soft oil market is creating the most serious
problems for Indonesia's oil industry since the near-
bankruptcy of Pertamina (the state oil company) in
1975. Output slipped 500,000 b/d below capacity
to 1.1 million b/d in January. We believe
Indonesia's current account deficit in 1983 will be
between $8-11 billion. Government officials, fear-
ing a stiffening of lending terms by bankers later
this year, are increasing foreign borrowing and are
willing to pay interest rates considerably higher
than those of a few months ago.
Through most of 1982 Japanese customers pressed
Jakarta to match discounts granted by other OPEC
(particularly Iran) and non-OPEC producers. In the
face of the weakening oil market, Indonesia refused
to cut prices. Modest reductions of $0.47-1.90 per
barrel introduced in November were insufficient to
sharply boost sales. Oil company representatives
told US Embassy officials that price cuts of $2.50-
4.00 per barrel would be required to make Indone-
sian crudes competitive.
As a result, Indonesia has been unable to sell all the
crude oil it could produce. Buyers in Japan and the
United States, which together take over 80 percent
of Indonesia's oil exports, cut their combined pur-
chases of Indonesian crude by 20 percent in 1982.
Subsequently, output has fallen below 1.1 million
b/d compared to Indonesia's OPEC quota of 1.3
million b/d and capacity of 1.6 million b/d. F_
Jakarta so far has not allowed its oil production and
marketing problems to sour relations with other
OPEC members. Indonesia has continued to follow
' This article is a summary of a forthcoming Intelligence
Assessment.
Indonesia: Crude Oil Output and Exports
O
O O
o
I I
1974 75 76 77 78 79 80 81 82 83a
aProjected. The upper limit represents the government's optimistic
export and import goals. We believe earnings are likely to fall in the lower
end of the range.
the lead of Saudi Arabia and Kuwait on prices
while seeking a compromise on pricing and produc-
tion among OPEC's various factions. Indonesia
went into the December 1982 OPEC meeting in
Vienna wanting a 200,000 b/d increase in its
production quota. Although the meeting collapsed
without agreement on new production quotas or
differentials, Mining Minister Subroto told one
press reporter that Indonesia's output would be
held at 1.3 million b/d. In our judgment, the
Indonesians remain committed to seeking a com-
promise on output quotas within OPEC because
they fear a reduction in OPEC's official price could
lead to a downward price spiral.
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The Tougher Domestic Operating Environment
Foreign oil companies in Indonesia have found the
local operating environment toughening. Perta-
mina's new president, Judo Sumbono, who was
appointed in May 1981, has been more confronta-
tional than his predecessor toward the foreign oil
companies, which account for over 90 percent of
Indonesia's crude oil output. Under Sumbono, Per-
tamina is requiring that a field contain sufficient
recoverable reserves to supply the government with
at least 51 percent of the recoverable oil. On several
occasions since mid-1981, Pertamina has refused to
declare new fields commercial, thus preventing the
companies from beginning production and recover-
ing their exploration costs. Because Indonesia has
numerous small fields, Pertamina officials have
told news reporters they expect similar disputes in
the future.
The Caltex Negotiations
Caltex, the largest oil producer in Indonesia, cur-
rently is negotiating terms for a new production-
sharing contract to become effective in November.
Indonesian officials are trying to increase the coun-
try's share of Caltex's production above the 85-
percent government share of all other production-
sharing contracts. The Indonesians have proposed a
three-tiered approach that includes the standard
85- to 15-percent production-sharing split for the
first 150,000 b/d of output, then 90 percent to 10
percent for the next 100,000 b/d, and 95 percent to
5 percent for amounts in excess of 250,000 b/d.
This arrangement would give Pertamina over 90
percent of Caltex production. Although Caltex
officials are balking at the 95- to 5-percent part of
the formula, we believe the two parties will compro-
mise on some escalation formula before the No-
vember expiration date to avoid jeopardizing pro-
duction. Press reports indicate that other oil
companies are monitoring the negotiations to deter-
mine whether Pertamina might use the Caltex
negotiations as a precedent to change the terms of
their contracts.
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25 February 1983
Indonesia: Oil Export Earnings
I I I I I I I I
0 1974 75 76 77 78 79 80 81 82 83a
a Projected. The upper limit represents the government's optimistic forecast.
We believe earnings are likely to fall in the lower end of the range.
Indonesia and the World Market. Current condi-
tions in the world oil market promise continuing
weakness in Indonesia's oil export earnings. Indo-
nesia will do well to restore production to 1.3
million b/d this year. We believe Jakarta will
match any drop in official sales prices by other
OPEC members and would probably match any
unofficial discounts to maintain its market share
despite the impact on revenues. At 1982 export
volumes, each $1 per barrel drop in price would
reduce earnings by $320 million a year.
Grim Financial Prospects. The government has yet
to cope with the decline in oil earnings. President
Soeharto has cut subsidies for food, fuel, and
fertilizers, frozen civil servant and military wages,
and cut other spending. Stiffer austerity measures,
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however, including cuts in the country's previously
sacrosant industrial development programs, will be
necessary to avert a financial crisis resulting from
the prolonged slump in foreign exchange earnings.
We estimate Indonesia ran a $7.4 billion current
account deficit in 1982 and will probably do worse
this year. Even if the oil market were to rebound
somewhat, Indonesia would face a $6 billion cur-
rent account deficit this year. This projection as-
sumes a modest recovery in nonoil exports, a sharp
reduction in import growth to 8 percent in 1983,
and a very optimistic oil sector scenario that calls
for a 225,000-b/d increase in exports to 1.1 million
b/d at the 1982 price level of $33.60 per barrel.
More likely in our judgment is a further softening
in the world oil market that would lower oil
earnings and push Indonesia's current account defi-
cit into the $8-11 billion range.
In any event, Jakarta is already increasing its
foreign borrowing to help finance this year's deficit.
After reducing foreign exchange reserves by nearly
$3.5 billion in 1982, in our judgment Jakarta would
prefer to avoid reducing official reserves sharply
below the current level of $4 billion. Press reports
reveal that Central Bank officials are arranging a
$1 billion loan, and they expect to borrow more
later this year. To get the loan, Jakarta is offering a
considerably higher interest rate than it was willing
to accept last year.
The Threat to Exploration
We believe that exploration will continue to fall in
1983. According to the US Embassy, foreign com-
panies drilled only 149 exploration wells through
October 1982 out of 266 projected for the year and
cut back on seismic surveys. Companies have also
reduced the bonuses they pay when signing explo-
We believe Jakarta's efforts to spur exploration will
be weakened by the government's plans to transfer
all onshore drilling operations to Indonesian firms
within the next two years and to press ahead with
plans to force oil companies to hire Indonesians for
skilled positions. In addition, lower oil company
profit margins suggest that companies are likely to
take a much more cautious approach to new spend-
ing commitments in Indonesia. Oil company repre-
sentatives have told US Embassy officials that cash
flow problems of their parent companies are forcing
slowdowns in their Indonesian operations and elim-
ination of marginal projects.
A slowdown in oil exploration would seriously
affect Indonesia's oil production capacity later in
the 1980s, in our judgment. Most of Indonesia's oil
deposits occur in small reservoirs that are quickly
depleted, and active exploration programs are nec-
essary to maintain the country's production capaci-
ty.
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Suriname: An Economy
Under Siege
The suspension of Dutch aid following the Decem-
ber executions of 15 leading critics of Suriname's
government is deepening the country's economic
problems and raising the prospects for increased
Cuban involvement. The Bouterse regime's frantic
search for funds from several Latin American
countries so far has been futile as these countries
grapple with their own financial difficulties. With
cautious spending, Suriname probably has suffi-
cient reserves to tide its import-dependent economy
over the next few months. Tougher austerity mea-
sures will be needed, however, should replacement
aid not materialize by mid-1983. The regime's
clumsy handling of the economy and its leftist bent
suggest that any belt tightening will be haphazard,
with the business community bearing the brunt of
probable tax hikes and domestic credit restrictions.
Economic Slide Since the 1980 Coup
Under the tutelage of the Dutch, who provided the
lion's share of foreign aid, Suriname managed to
achieve robust economic growth during the initial
years following independence in 1975. The tiny
economy's heavy dependence on aluminum, howev-
er, left Suriname vulnerable to the global recession
and soft demand for this metal. Meanwhile, weak-
ening business confidence in the coalition govern-
ment's ability to rule slowed investment. In these
circumstances, real GDP growth declined 3 percent
The military-dominated government in place since
a group of noncommissioned officers seized power
in February 1980 was unable to brake the economic
decline that began in 1979. In 1980 real GDP fell
almost 4 percent, and the economy stagnated over
the next two years. A 35-percent drop in bauxite
output-owing to continuing world recession and
rising production costs-and the worsening invest-
ment climate at home drove this poor performance
between 1980 and 1982. Only the public sector
showed strong growth. Even then, government ex-
penditures were directed more toward consumption
than toward growth-sustaining investment. 25X1
The government's limited ability to prepare and
implement development projects increasingly con-
strained growth. Mismanagement, caused by a
shortage of technical and managerial talent in
government, badly delayed aid disbursements.
Suriname's weakening competitive position in a
softening world aluminum market also caused the
government to shift its development strategy. In
1981 the regime scuttled large bauxite and alumi-
num smelter undertakings, the Kabalebo hydro- 25X1
electric project, and construction of a new port.
Less ambitious agricultural projects, which would
provide quick benefits to small farmers, were left
intact. Output in the agricultural sector nudged
ahead, based primarily on expanded acreage culti-
vated for export-oriented rice and palm oil, but
high labor and transport costs continued to under-
mine Suriname's international competitiveness.
1 .1 .iav -iiv ~aaaav, liiv 1.,S-.# J 111V14a,L11g'1y 1G1 L1JL
tone and increasingly erratic approach to decision-
making started to alarm the business community.
Under the process of "Surinamization" (national-
ization or joint ventures with government participa-
tion), the state expanded its involvement in the
economy. Constrained by fixed prices, key commer-
cial enterprises with government participation-
such as sugar, shipping, and electricity-last year
alone required some $50 million in subsidies to
offset operating losses
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The Economy in a Nutshell
Suriname shares many of the economic constraints
common to the Caribbean area:
? High import dependence that leaves the country
vulnerable to world inflationary trends and com-
plicates domestic economic management; imports
are equivalent to 45 percent of GDP.
? An agricultural sector that contributes less than 10
percent of GDP; farming is handicapped by high
labor costs and poor utilization of existing re-
sources; dense rainforests cover 90 percent of the
country, while large tracts of cultivated land have
been left fallow by the steady exodus of Surinamese
and Dutch plantation owners.
? A one-commodity economy that holds the coun-
try hostage to world mineral prices; production
of bauxite, alumina, and aluminum provide 80
percent of total export earnings, nearly 20 per-
cent of GDP, and over 20 percent of government
revenues.
? A tiny domestic market that crimps development
of the manufacturing sector; Suriname's popula-
tion totals only 350,000.
? Substantial emigration that helps to relieve high
unemployment yet saps the country of skilled
labor; at least one out of every three Surinamers
lives in the Netherlands. Despite emigration,
unemployment is around 20 percent, supported
by an influx of Guyanese workers.
The foreign trade picture also deteriorated; in 1981
Suriname had its first balance-of-payments deficit
in five years. Spot world aluminum prices plum-
meted over 40 percent between 1980 and 1982. Led
by the aluminum industry, nominal export earnings
fell 15 percent during this period. Meanwhile,
foreign aid slackened as project priorities were
reshuffled. Rather than deplete its international
reserves or resort to a devaluation that would have
reduced foreign purchases of critical producer
goods, the regime selectively tightened import re-
strictions on consumer goods. Consequently, ac-
cording to official Surinamese reporting, the coun-
try retained international reserve holdings that
were roughly equivalent to about four months'
Dutch aid until recently had cushioned Suriname
from the severity of economic problems besetting its
Caribbean neighbors. At the time of Suriname's
independence in 1975, the Netherlands forgave all
outstanding Surinamese debt and agreed to supply
more than $1.5 billion in aid-about one and a half
years' worth of GDP-over a 10- to 15-year period.
This largess enabled Suriname to mount extensive
rural development and hydroelectric projects while
balancing government budgets and maintaining large
foreign reserve holdings and a low debt service bur-
den. At the same time, the aid inflows, combined with
large-scale emigration, contributed to a per capita
income that was among the highest in the non-oil-
exporting Caribbean countries and more than double
that of bauxite-rich Guyana or Jamaica.
Gloomy Outlook in 1983
Meeting Economic Needs. The regime's most
pressing economic needs are to find replacement
aid and to reassure the country's nervous business
community. Until the Netherlands suspended aid
following the December executions, the Dutch had
accounted for more than 90 percent of total bilater-
al aid to Suriname. Dutch aid had been scheduled
to reach some $90 million this year; more than half
of the $1.5 billion package promised in 1975 re-
mains to be drawn. Led by the United States, most
other Western donors have suspended their small
programs in response to the regime's brutal hand-
ling of its opponents. We believe private capital
import coverage at yearend 1982
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Real GDP Growth 15
Percent
flight continues to drain Suriname's international
reserves despite the recent banking clampdown.
The chilling effect of Bouterse's increasingly
heavyhanded tactics to quell dissent and to con-
solidate his power will make future aid unlikely.
The regime's frantic search for aid, trade, and
technical cooperation-aimed mainly at Brazil,
Venezuela, Colombia, and other Latin American
countries-is likely to prove disappointing. These
countries are suffering from serious financial trou-
bles and seem reluctant to support the Bouterse
Inflation Rate 15
Percent
International Reserves
at Yearend
Million US $
Central Government Fiscal 4
Deficit or Surplus as a Share
of GDP 2
Percent
Exports by Sector, 1980
Percent
regime.
Bouterse's staying power.
While prudent management would allow Suriname
to muddle through the next few months, probable
economic bungling could amplify problems late and
make the course of the economy through the rest of
1983 harder to predict. Much also will depend on
the Netherlands has indicated a willingness
to resume a dialogue with Surinamese officials only
r-1n I I f-1 with the removal of Bouterse-even if the next
leader is farther to the left-and with the return of
F Suriname to constitutional government. By brutally
eliminating his main opponents and intimidating
important elements of society, however, Bouterse
has reduced the chance of an internal uprising any
time soon. He will remain vulnerable to an exter-
nally launched attack, but the exile groups appear
fl N.A. disorganized and ineffective.
If the regime consolidates its power, the Surinam-
ese economy can be expected to become the chink
in Bouterse's armor. Even with aid later this year,
the Surinamese economy at best will stagnate in
1983. Weak world recovery and inherent lags in the
recovery of aluminum demand will leave export
earnings at about last year's level. Moreover, proj-
ect aid would be especially hard to restore quickly
to the levels originally planned.
Alternatively, if the near-total cutoff in Western
aid continues, Suriname would have to enact more
import cuts and adopt fiscal austerity measures
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Current account
63
-4
28
44
16
-25
-68
-75
Trade balance
45
22
68
74
61
-38
-76
-5
Exports, f.o.b.
304
346
411
444
515
474
434
430
Bauxite and derivatives
235
277
310
341
415
376
344
340
Imports, f.o.b.
259
324
343
370
454
512
510
435
Net services and transfers
18
-26
-40
-30
-45
13
8
-70
Grants from the Netherlands
89
77
56
81
74
96
90
0
Capital account
-38
-12
-10
- 6
3
43
37
- 30
Net direct investment
NEGL
-13
-7
-16
10
34
NA
-5
22
-1
NEGL
-1
NA
25
-5
11
-7
10
NA
-50
a Estimated.
b Projected on the basis of a near total cutoff in Western aid, private
capital flight of $70 million, and a drawdown on gross reserves to the
equivalent of two months' import coverage.
that would cause a sharp economic decline. Emi-
gration, mainly to the Netherlands, neighboring
French Guiana, and the Netherland Antilles,
would rise even faster as many of the 6,000 workers
assigned to Dutch-financed projects are laid off.
Although this exodus will help to vent political
frustration and cap unemployment, it will further
drain the availability of skilled labor needed to
maintain economic activity.
Threats to the Private Sector. We believe
Bouterse's political insecurity and reliance on a
shrinking circle of advisers probably will cause him
to take heavyhanded actions. The deteriorating
economy could goad him into both cajoling and
threatening the business community in the coming
months; businessmen already have been asked to
donate $300,000 to the coup anniversary celebra-
tions this week and have been prohibited from
Although some of Bouterse's closest advisers appar-
ently espouse nationalization of foreign firms, we
think that the soft world aluminum market, lack of
skilled technicians, and steep modernization costs
will cause Bouterse to resist such measures for now.
Ongoing tax negotiations between the regime and
the aluminum companies have been acrimonious
and could provide the first real test of Bouterse's
intentions toward them. While the regime may
unilaterally hike bauxite levies as a quick revenue
fix, this action would be shortsighted. More than 90
percent of Suriname's bauxite exports and 40 per-
cent of its alumina sales are directed toward the
United States and the Netherlands. Both countries
could easily shift to alternative suppliers. Large
stockpiles overhanging the world aluminum market
would make it hard for Suriname to find other
laying off employees.
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Agriculture as a Share of GDP, 1981
Percent
Haiti
Honduras
Guatemala
Suriname
Imports as a Share of GDP, 1981
Percent
Guatemala
Haiti
Honduras
Suriname
Jamaica
Opportunities for Cuban Mischief. Bouterse al-
ready has warned publicly that he will seek aid
from the Soviet Bloc should his demarches to
Western countries not pan out.
almost succeeded in March 1982, Bouterse turned
to Havana for political support. Exploiting
Bouterse's growing isolation and sense of insecuri-
ty, Cuba has gained considerable influence and is
likely to press for more. The Cuban Ambassador to
Suriname recently stated that Cuba wants to in-
crease trade with that country. The Soviet Ambas-
sador to Suriname has expressed interest in a
possible barter in which Surinamese rice and lum-
ber would be delivered to Cuba to save costs in
Western Official Development
Aid Per Capita, 1980
Us $
Debt Service Ratio, 1981
Percent
Guatemala
10
Suriname
Haiti
21
Guatemala
Honduras
28
Haiti
Jamaica
Honduras
Suriname
Jamaica
After a military coup
shipping Soviet supplies. In exchange, Soviet vehi-
cles, consumer goods, and possibly light machinery
would be sent to Suriname. 25X1
We believe Bouterse's reliance on the Cubans will
continue as long as he believes his domestic posi-
tion is insecure and Havana is not perceived to be
25X1 25X1
acting against his interests. I 25X1
Cuba does not want to provide much 25X1
economic support to Suriname because of its own
economic problems and a concern that Bouterse's
revolution may be reversed. Moreover, Havana is
acting cautiously to avoid jeopardizing its recent
efforts to improve relations with several South
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American countries and to avoid alienating West-
ern powers as Cuba attempts to renegotiate its
debt. Under these circumstances, the Castro re-
gime probably will pursue a low-key expansion of
its influence. We believe Cuban influence in Suri-
name would expand faster if Bouterse or another
leftist leader could demonstrate a firmer grip on
power.
Lasting Economic Problems. Even with political
stabilization and a reopening of the aid spigot, a
variety of factors probably would prevent a return
in the next few years to the high growth rates that
the country enjoyed following independence. De-
spite the rise in aluminum prices that probably
would accompany world economic recovery, earn-
ings from the aluminum sector will be constrained
by a diminishing supply of easily accessible baux-
ite, high operating expenses, and steep moderniza-
tion costs. Moreover, economic diversification will
be harder than in the past. The shrinking domestic
market will dampen further development of food
processing and other light industries. Surinamese
businessmen, foreign investors, and potential do-
nors understandably will be cautious and probably
will not undertake many projects until they can be
assured of long-term political stability. In addition,
the flight of technical and managerial talent will
have lasting repercussions throughout the economy.
Secret 24
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