INTERNATIONAL ECONOMIC & ENERGY WEEKLY 8 APRIL 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000200010006-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 43
• Document Creation Date: December 22, 2016
• Document Release Date: January 4, 2011
• Sequence Number: 6
• Publication Date: April 8, 1983
• Content Type: REPORT

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Directorate of
International
Economic & Energy
Weekly
DI IEEW 83-014
8 April 1983
863
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International
Economic & Ener y
Weekly
iii Synopsis
1 Perspective-South America: Managing Financial Crisis
3 Briefs Energy
International Trade, Technology, and Finance
National Developments
15 Brazil: Bleak Economic Prospects
23 Venezuela: Worsening Economic Outlook
29 Spain: Socialist Economic Policy
33 Protectionist Trends in Developing Countries
37 The Philippines: Economic Decisionmakinj
Comments and queries regarding this publication are welcome. They may be
directed to ~~ Directorate of Intelligence
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8 April 1983
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International
Economic & Energy
Weekly
Perspective-South America: Managing Financial Crisis 25X1
The payments problems besetting Brazil and Venezuela illustrate continuing
tensions that confront the international financial system. We believe that
Washington will likely be caught in the middle. Debtors will probably turn to
the US Government for direct financial assistance, while creditors will likely
insist that Washington press the debtors to sustain politically unpopular
Brazil: Bleak Economic ProspectsF__1 25X1
Brazil continues to face foreign exchange difficulties despite the conclusion of
new loan agreements. The government is now making the adjustments
required to retain crucial bank support, but, with the austerity program
already drawing fire, it is likely to waver and fail to meet all IMF targets. 25X1
Venezuela: Worsening Economic Outlook) 25X1
The government's unwillingness to adopt a strict adjustment program has left
international bankers reluctant to cooperate in refinancing Caracas's large
external debt. To regain banker support, we believe that Venezuela will
ultimately resort to the IMF this year. F__1
Spain: Socialist Economic Policy) 25X1
The Socialist government has proposed a conservative economic program for
1983 and will do little to promote economic recovery. Registered unemploy-
ment probably will continue to grow and may approach 20 percent by the end
of 1983.
Protectionist Trends in Developing Countrie~ 25X1
Most LDCs have traditionally relied on import barriers to protect emerging
industries. Currently, many LDCs are increasing barriers to imports in an
attempt to deal with burgeoning debt problem
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The Philippines: Economic Decisionmaking
The Philippines's economic decisionmaking system has been geared to striking
a politically acceptable balance between the views of Western-educated
technocrats, creditors such as the IMF and the World Bank, and influential
domestic business interests. The balance currently favors the technocrats and
creditors, chiefly because Marcos recognizes that the economy is in its worst
shape in a decade.
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International
Economic & Energy
Weekly
8 April 1983
Perspective South America: Managing Financial Crisis
The payments problems besetting Brazil and Venezuela illustrate the continu-
ing tensions that confront the international financial system. Brasilia faces
difficulties in servicing its $85 billion foreign debt, despite the disbursement of
new loans last month. Caracas has recently declared a postponement on
maturing public-sector principal payments through the middle of the year
because of the breakdown in its refinancing program.
Brasilia's failure to adjust its economy after the successive oil shocks in the
1970s is at the root of its problems. The government resorted to heavy foreign
borrowing to sustain the growth perceived as necessary to prevent social
unrest. By and large, the borrowing program was well managed and Brazil's
debt servicing record is impressive. Easy access to foreign credit, however,
undermined the incentives to take the tough, unpopular steps necessary to
defeat triple-digit inflation, root out external imbalances, and sweep away the
inefficiencies plaguing the economy.
Caracas is now paying the price for blatantly poor economic management.
This year, for example, it has been lax in meeting debt payments and has yet
to define exchange controls announced in late February. These problems are
symptomatic of persistent bumbling in development planning. Despite a large
investment program facilitated by the oil bonanza, Caracas has been unable to
diversify its economy. It also has failed to implement necessary economic
reforms, devise an effective debt restructuring program, and provide incentives
needed to develop a strong private business sector. We anticipate-based on
solid evidence from international bankers-that the economic team will have
difficulty pursuing needed stabilization measures.
In these-as well as other South American countries-the major unknown
remains how the IMF and commercial bankers will react to the failure of
debtors to meet their stabilization targets. If creditors demonstrate reluctance
to continue lending, the rescue programs will quickly unravel. Lacking reserve
cushions and with exports still depressed, most debtors will have little choice
but to move unilaterally to relieve financial strains. The pattern is already set:
? Chile suspended debt payments in early January after bankers cut credit.
? In early March Argentina announced a postponement in meeting some debt
repayments, while Peru declared an extension of maturing short-term credits.
? Uruguay recently announced a 90-day delay in principal payments as a
prelude to formal debt rescheduling.
? Brazil is now running commercial arrears because bankers remain reluctant
to provide standby financial support.
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These events suggest that-at least implicitly-a "debtors' revolt" is already
under way. South American countries have already rewritten most of the time-
honored repayment rules by unilaterally suspending payments. Bankers will
not be the only commercial parties affected. Major debtors, especially Brazil,
also are pressing suppliers for more liberal terms. Moreover, they are looking
to new barter trade deals and increased intraregional trade to ease their
payments stringencies, mainly at the expense of developed country exporters.
Under these conditions, we believe that Washington probably will be caught in
the middle. Debtors probably will turn to the US Government for direct
financial assistance, help in backing efforts to secure additional financing from
banks, and new initiatives to reschedule official credits. They will also look to
increase exports to the United States. Creditors, on the other hand, probably
will insist that Washington press the debtors to sustain politically unpopular
adjustment programs. They also probably will seek greater official assistance
in meeting debtors' new money requests and will lobby for more expansionary
policies in the developed world.
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Energy
OPEC Oil Production OPEC's first-quarter crude oil production of 15.6 million b/d was off 22
percent from year-earlier levels. March output of about 15 million b/d-
essentially unchanged from February-reflected the continuing weak demand
for OPEC oil. After a surge late in the month, Saudi production averaged
about 3.3 million b/d; output early in March was below 3 million b/d. This in-
crease probably represents delays by customers in purchasing crude until
announcement of the OPEC price cut; the late-month increase in demand is
unlikely to carry over into April.
OPEC: Crude Oil Production Million b/d
Total 18.8
Algeria 0.6
Ecuador 0.2
Gabon 0.2
Indonesia 1.3
Iran 2.3
Iraq 1.0
Kuwait 0.7
Libya 1.2
Neutral Zone 0.3
1.3
0.3
6.3
1.2
17.5
16.9
14.9
14.9
15.6
0.725
0.7
0.6
0.6
0.6
0.2
0.2
0.2
0.2
0.2
0.15
0.2
0.2
0.2
0.2
1.3
1.1
1.0
1.2
1.1
2.4
2.7
2.6
2.4
2.6
1.2
0.8
0.8
0.8
0.8
1.05
0.6
0.8
0.8
0.7
1.1
1.4
1.2
1.2
1.3
b
0.3
0.2
0.2
0.2
1.3
0.8
0.7
0.9
0.8
0.3
0.3
0.2
0.2
0.2
c
4.6
3.7
3.3
3.9
1.1
1.1
1.0
1.1
1.1
a Preliminary.
b Neutral Zone production is shared about equally between Saudi
Arabia and Kuwait and is included in each country's production
quota.
c Saudi Arabia has no formal quota; will act as swing producer to
meet market requirements.
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Buyer uncertainty also dropped Iranian production to 2.4 million b/d despite
the cut in official prices to $28 per barrel for Iranian Light. Iranian production
could go lower because the current price differential of only $1 per barrel
between Tehran's crudes and Arab Light may not be sufficiently attractive to
maintain sales. Nigeria increased its production to 900,000 b/d but continued
to have difficulty selling oil as buyers waited for further price developments. If
sales fail to pick up soon, high levels of oil in storage could begin to hamper
Nigerian operations.
Saudis Cut Riyadh has cut in half the 50 cents per barrel transit fee it charges for Arab
Pipeline Fees Light crude oil delivered to the Red Sea via Petroline, its cross-country
pipeline. The original fee has long been considered excessive, and most
customers have refused to accept deliveries from the Red Sea port of Yanbu
since early in the year. The United States Liaison Office in Riyadh estimates
average throughput for the pipeline is currently about 300,000 b/d-one-sixth
its capacity-forcing Petroline to cease operations recently for one- to two-
week periods when the line's minimum flow rate of 450,000 b/d could not be
sustained. The new 25 cents per barrel fee still may not be enough to generate
increased Red Sea liftings, however, because the majority of Saudi crude oil
now goes to the Far East. Stiff price competition from higher quality African
and North Sea crudes have effectively pushed Saudi oil out of the European
market.
West German West Germany has again delayed exercising its option as to its willingness to
Decision on Soviet purchase the maximum volume of Soviet gas that was provided for in contracts
Gas Postponed initialed in November 1981. Last year, natural gas consumption in West
Germany declined by 7 percent, and Embassy commercial sources continue to
believe there is no demand in West Germany for the full 10.5 billion cubic me-
ters of gas originally under contract. Given the postponement, any further
decision by the West Germans to exercise their option to reduce volumes by 20
percent will now be delayed until October at the earliest. Because of declining
oil prices and potentially higher economic growth, the West Germans are
probably keeping this option open to determine the extent to which gas
demand recovers. If pressed on the issue by the Soviets, however, the German
purchasers are likely to immediately exercise their options to reduce the
volumes taken on a permanent basis.
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Big Seven Electricity Sluggish economic growth in the Big Seven was primarily responsible for an
Consumption Falls unprecedented 1.4-percent decline in total electricity consumption in 1982.
Electricity use in the United States and the United Kingdom dropped by 2.7
and 2.0 percent, respectively. Some modest economic growth in France and
Japan led to a slight increase in electricity demand. Most industry analysts
now expect electricity demand to return to previous growth rates as the
economic recovery gains momentum.
Big Seven: Electricity Consumption
Billion Kilowatt-hours
Total
4,012.2 4,060.2 4,107.1
4,050.8
Canada
322.0 339.4 344.7
344.1
France
235.4 248.7 258.3
261.3
West Germany
349.5 351.4 352.7
350.3
Italy
174.7 180.2 179.2
179.6
Japan
580.0 579.7 569.7
575.5 a
United Kingdom
279.5 266.4 258.7
253.6
United States
2,071.1 2,094.4 2,143.8
2,086.4
New Chinese (China and Occidental Petroleum probably will 25X1
Coal Project reach a final agreement by July to develop the Pingshuo open pit coal mine; an
interim agreement was signed in March following completion of a feasibility
study. Financial arrangements with the US institutions backing the project are
the only remaining obstacles. Occidental is funding 52 percent of the costs and
will sell its share of the coal back to the Chinese, who intend to export it. Chi-
na will use its own share domestically. 25X1
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The Pingshuo coal mine will use large-scale extraction equipment imported
from the United States and could produce 15 million tons of coal annually by
1987 if construction begins next year. Two additional mines in the same field
could eventually add another 20-25 million tons of coal, making the Pingshuo
complex one of China's largets coal producers. China currently ranks third in
the world in coal production, with an output last year of 650 million tons. F_
Australian-Japanese Because of declining projections of future gas demand, Japanese firms have
LNG Project Delayed decided to delay the $2.5 billion Northwest Shelf liquefied natural gas export
project-the second delay in two years. Japanese projections of 1990 gas
demand have fallen by 15 percent since 1980. Preliminary engineering work on
the project, which was to have begun late last year, will probably not get under
way until at least 198
the plant will not be
completed until 1990 at the earliest-three years later than the original
completion date.
The delay will cost Australia nearly $1.5 billion a year in export revenues at
current world prices. It is unlikely, however, the project will be scrapped.
France Relaxes France has lifted a two-year-old policy that requires oil companies to maintain
Inventory Requirements extra distillate and gasoline stocks above the compulsory 90-day level. The
requirement was instituted in late 1980 in response to the outbreak of the Iran-
Iraq war. According to a press report, the action was taken to reduce the
French trade deficit. These extra stocks reportedly amount to less than 22
million barrels. French oil import demand would be reduced by more than
100,000 b/d if the excess is drawn down over a six-month period.
Renewed Soviet The USSR reentered the world grain markets last week, buying up to 3.5
Grain Buying million tons of grain The Soviets
purchased 500,000 tons each of Canadian barley and EC wheat; 2 million tons
of corn and sorghum from Argentina; and 200,000 tons of US corn.
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Grain traders had anticipated that the Soviets would be buying to fulfill
purchase commitments made earlier under various long-term grain agree-
ments and to ensure steady deliveries this spring. As a result, the market has
taken the reports in stride. If all reports are acccurate, the buying brings total
Soviet grain purchases for the marketing year ending 30 June to 34-36 million
tons. It now looks as though total purchases from the United States will be lit-
tle more than the 6 million tons of grain stipulated under the US-USSR long-
term grain agreement-far short of the 15.4 million tons purchased last year.
Japanese Improving The Japanese have told US officials that Tokyo is moving to improve
COCOM Enforcement enforcement of restrictions on exports of high technology to Communist
countries. Special funds have been allocated to upgrade liaison among the
ministries and government agencies charged with enforcing COCOM restric-
tions and to retrain personnel directly involved. Tokyo plans to increase public
awareness of the restrictions by publishing a handbook on arms control and
COCOM lists. The Japanese also have indicated a willingness to discuss
enforcement questions with the United States more often and to support a
meeting this year of the COCOM Subcommittee on Export Controls. These
moves are part of Tokyo's continuing efforts to satisfy US concerns about
Japanese export control procedures. For the most part, they are in direct
response to suggestions made by US official visitors. A stricter policy on
entrance visas for visiting Soviet technical delegations is another example of
Tokyo's growing sensitivity to US appeals.
The extent to which these moves will stem the flow of strategic technology to
the USSR and China is unclear. The Trade Ministry's apparent willingness to
cooperate could improve Japanese performance. On the other hand, the
Japanese have made no mention of expanding the role of the National Police.
The National Police monitors the involvement of Soviet intelligence services in
illegal trade and scientific and technical collection. It also is partly responsible
for investigating trade violations.
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EC Steel Capacity According to EC Industry Commissioner Davignon, the EC steel industry has
Begins To Decline cut its capacity by nearly 10 million tons since 1980, from around 203 to 193
million tons. This is the industry's first significant retrenchment since the steel
crisis began in 1975. It is also the first evidence that years of financial losses
and EC Commission pressure on the steel companies to reduce their excess
capacity may finally be having some effect. Meanwhile, the US steel industry
is beginning to trim down, reducing capacity from 139 to 136 million tons last
year.
There is little doubt that the trend toward a smaller steel industry will
continue. West Germany has announced a plan to cut about 14 million tons of
capacity if the EC Commission will authorize a subsidy payment of about $1
billion to its steel industry. After a survey of current planning by the major
producers, a leading private steel analyst has predicted that the EC and US
steel industries together will scrap 15 to 20 percent of their combined capacity
by the mid-1980s. Despite this loss, however, capacity will remain well above
the production levels that most analysts believe will be required even at the
peak of the current economic recovery, and excess capacity probably will
continue to burden the steel market throughout the 1980s.
IMF Financing A suspension of IMF lending to El Salvador over the remainder of this year
for El Salvador appears increasingly likely. According to Central Bank President Benitez, the
in Peril Salvadoran Government may be unwilling to effect IMF-prescribed austerity
measures in return for the $35 million offered under standby loan arrange-
ments.
L--__FWith elections scheduled for late this year, however, we believe the IMF
probably will balk at signing a new agreement with an outgoing government.
National Developments
Developed Countries
South African Budget The Government's FY 1983/84 budget, presented to Parliament last week by
South African Finance Minister Horwood, projects a deficit of about $2 billion
and conforms almost exactly to the guideline of 2 percent of GDP established
by the IMF as a condition for balance-of-payments assistance last year.
Overall spending is set to rise by more than 11 percent-slightly less than the
12-percent rate of inflation projected by the goverment for this year-while
revenues are to increase by nearly 10 percent.
Keeping spending down to the budgeted level and controlling the deficit will be
difficult. Severe drought probably will force Pretoria to import food, and it
may become necessary to raise further the level of relief spending for farmers.
Defense, which has received only a 7-percent increase, appears to be under-
budgeted and-for the second year in a row-may require a supplemental
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appropriation to cover actual spending. Many prominent South African
bankers believe that the government's revenue assumptions are overly optimis-
tic, according to the US Embassy. Revenue will be reduced further when a
5-percent surcharge on imports is eliminated by the end of the year to satisfy
an IMF condition. Although Horwood probably used a conservative estimate
of the price of gold in his revenue projections, gold's volatility will be a key fac-
tor in determining the actual budget outcome.
Less Developed Countries
Serious Shortage Growing import shortages are further slashing private-sector production. New
of Imported Goods official trade data indicate that merchandise imports plunged 73 percent in
in Mexico January from year-earlier levels. Imports fell 56 percent during September
through December 1982. We estimate that imports in February and March
remained at least 60 percent below last year. Mexico's debt moratorium
interrupted normal trade credit lines, limiting imports to goods that could be
paid for by cash or barter.
Mexican industrial and government officials predict, and we agree, that no
rebound in imports will be possible soon, despite the $5 billion commercial
credit signed in March. The bulk of the initial $1.7 billion installment is being
used to repay a $500 million bridge loan, catch up on public- and-private
sector interest obligations, and partially rebuild depleted reserves. With no
quick resolution of the debt moratorium or reversal of capital flight in sight,
we believe imports will remain drastically reduced during the next six months
at least.
Because of shortages of critical imported raw materials, manufacturers have
closed numerous factories, and many industries report current production off
50 to 65 percent.
Many exporters have not been able to maintain
production because of exchange losses suffered under Mexico's tight foreign
exchange controls. As a result, bankruptcies are up sharply, unemployment is
growing, local supplies of final goods are dwindling, and inflationary pressures
are mounting.
Iraq Seeking Iraq is negotiating new financial arrangements with France, West Germany,
Financial Assistance and Japan to help cover payments for arms purchases and civilian projects.
Baghdad reportedly agreed last week to provide France $530 million worth of
crude oil annually to help finance about 60 percent of its $5 billion arms debt.
Iraq is. seeking the necessary 50,000 barrels of oil per day from Qatar. In addi-
tion, the Iraqi Foreign Minister says Kuwait will finance at least $100 million
for the purchase from France of Super Etendard naval strike aircraft and
Gazelle helicopters. West German companies have offered to defer for two
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years payments due in 1983 on an estimated $1.2 billion that Iraq will owe for
work on industrial projects, according to the US Interests Section in Baghdad.
Last week the West German agency that insures export credits agreed to
guarantee these payments. The Iraqis, however, have turned down a Japanese
proposal that would enable them to defer only until 1984 payments due Japan.
Iraq, meanwhile, finally has received a $500 million commercial loan syndicat-
ed primarily by Arab banks. This syndication is in addition to the $1,050
million in concessionary loans that Iraq has received thus far from the other
Arab states of the Persian Gulf. Last year Baghdad received about $5.5 billion
from those states. Western governments and companies probably will continue
to beat least partly responsive to Iraqi requests for concessions in hopes of sal-
vaging their already heavy financial commitments and of gaining lucrative
contracts in Iraq when the war ends. At the same time, the limited Western
participation in the commercial loan does not augur well for new bank credits.
Iraq is likely to count on the Persian Gulf states to provide additional financial
aid.
Kuwait Drawing on The decline last year in Kuwait's oil revenues by almost 35 percent has created
Investment Income cash flow problems. Kuwait's investment income of some $7 billion, however,
now is about the same as its income from oil revenues and provides a cushion
to cover revenue shortfalls. the government is
using an increasing share of investment income-normally reinvested in
foreign assets-to cover current expenditures, such as salaries and subsidies.
In addition, officials are shifting some of the $70 billion in foreign assets to
high-yield, short-term dollar investments from long-term investments-antici-
pating that the government will be forced to draw on them. Kuwait is probably
in a better position to weather the current slack oil market than most Gulf
states because of its small population, its small-scale domestic capital invest-
ment program, and its large buildup of foreign assets.
Cuban Crop Losses Almost constant rain and high winds have resulted in serious crop losses for
Cuba. A Western embassy in Havana places the loss of sugar at 1 million tons,
or about $150 million in hard currency at current market prices. Cuban press
reports indicate that nearly 30 percent of the tobacco crop was destroyed for
an additional loss of $25 million. Sixty-five percent of the tomato crop and 25
percent of other basic foodstuffs also were destroyed, according to the Cuban
press. Moreover, spring plantings have been interrupted and agricultural
facilities have been damaged
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Although Havana may be exaggerating the extent of the damage to manipu-
late the international price of sugar or use weather losses as an excuse for not
reaching its planned output for sugar,
excessive rains have delayed the harvest. The heavy press coverage given to
crop losses by Havana suggests that it will opt for increased consumer
austerity rather than significantly increase its hard currency debt to accom-
modate food imports. Without additional Western credits, Havana may appeal
to Western countries, particularly sympathetic ones such as Spain, for
favorable financing terms for food imports and may request increased aid from
the USSR. Moscow will be reluctant to provide much, if any, convertible
currency assistance to Cuba but may permit Havana to decrease its protocol
commitment of sugar exports to the Soviet Union, freeing these exports for
hard currency markets in the West. A loss of revenue from lower sugar and to-
bacco exports would decrease Cuba's already slim chances for meeting trade
targets established in its recent debt rescheduling agreement.
their operations still more, further depressing economic activity.
Banana Crop Damage Foreign exchange losses as a result of extensive wind damage last month to
in Honduras Honduras's banana crop could reach $70 million, equal to a 10-percent cut in
and Guatemala already depressed export projections for 1983. Guatemala stands to lose about
$50 million because of similar damage. The resulting reduction in export taxes
could widen troublesome budget deficits in these countries. Moreover, the
suspension of a total of 5,000 banana workers will aggravate unemployment in
the banana-growing regions and could lead to labor unrest. Because the
multinational fruit companies will be hard pressed to raise the $15 million
needed in each country to replace ruined banana trees, they may scale down
package that satisfies the unions without alienating the IMF.
Possible Labor Zambia's powerful trade union confederation has threatened to call a nation-
Unrest in Zambia wide strike this month if the government does not agree to negotiate with the
unions on wage and price issues. Government officials have been unwilling to
meet with labor leaders to discuss their demands for repeal of a wage ceiling
and restoration of price controls on essential commodities. The wage restric-
tions and deregulation of prices were among a series of austerity measures
imposed by President Kaunda in December and January to meet IMF
conditions for a major loan, which is now being negotiated. Kaunda, who is
mindful of severe labor unrest in 1981 and anxious for strong support from the
unions in the national elections scheduled for November, probably will try to
negotiate a compromise. Nonetheless, he may have difficulty coming up with a
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Trinidad and Tobago's Trinidad and Tobago's oil facility, which Port-of-Spain had hoped would
Oil Financing Facility establish the oil- and gas-rich ministate as a leader among its Caribbean
To End neighbors, probably will lapse soon because of falling oil revenues and inept
administration of the program. Modeled after the Mexican and Venezuelan
programs, Trinidad's version was to make concessional loans to its regional oil
consumers. According to US Embassy reports, only $78 million of the $200
million promised in 1980 has been disbursed-$75 million to Guyana and the
rest to Barbados. The Guyanese regime is so widely despised in Trinidad that
the full extent of disbursements has been hidden. Credits to Jamaica never
materialized because Trinidad tried to wring routing concessions for its
money-losing national airline out of Kingston. Other Caribbean ministates
could not comply with the complicated documentation demanded, and addi-
tional help for Barbados fell victim to wrangling over technicalities. Approval
of the $50 million in pending applications is unlikely. Trinidadian officials will
likely benefit politically at home by letting the program expire.
IMF Assistance for According to Embassy reporting, the IMF has approved a new $730,000
Bangladesh standby loan for Bangladesh. The disbursements are particularly timely, with
earnings from jute exports depressed, foreign exchange reserves equivalent to
less than one month of imports, and access to international credit limited. The
IMF-mandated restrictions on credit and government spending, however, will
moderate any economic recovery in 1983. Moreover, Chief Martial Law
Administrator Ershad will be hard pressed to keep public spending within IMF
guidelines.
Status of Soviet
Gas Pipeline
Construction
Secret
8 April 1983
This daily average of nearly 20
kilometers is roughly the same rate that Soviet press reports claim has been
achieved since the beginning of the year. The Soviet media also report that a
total of about 3,500 kilometers have been laid, leaving less than 1,000
kilometers to be completed this year, perhaps by as early as August.
could be made to Western Europe.
These claims probably are accurate, because winter is the peak construction
season in Siberia and additional crews have been assigned to the project in re-
cent months. Nevertheless, pipelaying is the least technically demanding part
of the project, and much remains to be done in the construction of the
compressor stations. The current plan to complete 17 of these this year appears
ambitious. Even if these stations are not completed on time, however, the
pipeline could be operated at less than full capacity, and initial gas deliveries
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Secret
Improvements at Soviet The USSR has begun a major program to install advanced grain-handling
Grain Ports equipment. The Soviets have ordered 32 high-output, pneumatic unloading
towers from West Germany at a cost of about $120 million. Since early
February, eight of these towers have been put into operation at three grain
ports ach of the new 25X1
towers can handle at least 300 tons of grain per hour, three to five times the ^
output of most Soviet dockside equipment now in use. 25X1
The 12 towers will increase the rated capacity of all unloading equipment in
major grain ports by 25 percent, or to at least 6.2 million tons per month. The
20 towers on order could increase capacity by almost 2 million additional tons
per month. It is unclear, however, why the Soviets are acquiring so much new
offloading equipment. Seasonal shortages of grain railcars have prevented full
year-round use of existing port equipment for several years, and little storage
capacity is being added at the ports to hold grain awaiting rail transportation.
Secret
8 April 1983
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Secret
Brazil: Bleak Economic Prospects
Brazil continues to face foreign exchange difficul-
ties despite the conclusion of new loan agreements.
The government is now making the adjustments
required to retain crucial bank support but, with
the austerity program already drawing fire, it
probably will waver and fail to meet all IMF
targets. At best, Brazil this year will experience a
contraction of 3 to 5 percent in economic activity
accompanied by a 95-percent rate of inflation, and
growing political unrest.
The risk remains that Brasilia may yet declare a
payments moratorium; indeed, the financial press is
openly speculating that a payments suspension is
imminent. Such an event would lead to a cessation
of all new lending, causing economic activity to
plummet at a 10-percent annual rate while driving
inflation into triple digits. Under such conditions,
Brazil's economic crisis would severely test the
government's ability to cope with political stress,
spill over to other South American borrowers, and
adversely affect US bank and business interests
The Government Responds
Since December, Planning Minister Delfim Netto
has tried to engineer a major rescue operation. To
regain banker support, he promised a variety of
policy adjustments. A stabilization plan, endorsed
by the IMF, calls for tough measures to slash the
1983 current account deficit 50 percent to $7
billion and to reduce inflation to an annual rate of
70 percent by December.
According to Embassy and press reporting, Brasilia
has moved to slow the economy and strengthen the
external accounts. To reduce the public deficit,
Brasilia ordered new cuts in Treasury spending, a
20-percent reduction in state corporation invest-
ment, tax increases, and hikes in public-sector
tariffs. The National Monetary Council tried to
slow rapid monetary expansion by increasing agri-
cultural interest rates, tightening eligibility stand-
ards for some subsidized credits, and ordering price
hikes aimed at phasing out wheat and petroleum
product subsidies. The government's economic
team also announced a modification of wage policy,
a large devaluation to stimulate exports and re-
strain imports, and cuts in overseas tourist allow-
ances.
The economic retrenchments have provoked sharp
criticism of government policies from opposition
politicians, the media, and union leaders. The
abrupt shifts in policy have drawn fire, especially in
the new Congress. Embassy and press reporting
also indicate that Brazilian businessmen have be-
come increasingly critical of the government's eco-
nomic strategy. Moreover, restrictions in the salary
law and rising unemployment are causing frequent
Without violating its IMF agreement, Brasilia has
taken steps to assuage its domestic critics and
regain business confidence. In February the gov-
ernment reinstituted price controls on 273 products
in an effort to dampen inflation. On 4 March the
government announced three new programs to help
small businesses obtain additional financing and
promote exports. Later in the month, the National
Monetary Council announced a series of measures
aimed at lowering domestic interest rates and
ending speculation in the financial markets. Addi-
tionally, Brasilia has attempted to offset some of
the adverse impact of the February devaluation by
instructing banks to make available new credits at
preferential rates to firms with dollar-denominated
debts and lowering import taxes on purchases of
mineral, metal, and chemical products.
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Following the extension of the $1.2 billion loan from
the United States in December, Brasilia still found it
had serious financial problems. This made it impera-
tive to obtain IMF financial assistance and commer-
cial bank lending support.
? Rollover of principal payments owed to commerical
banks maturing this year. The rollover would be
made directly to Brazil's Central Bank for eight
years and contains a two-and-one-half-year grace
period.
The IMF
The IMF will provide Brazil with $5.9 billion in
financial assistance through 1985 in return for its
pledge to make economic adjustments. This includes
$4.8 billion under a three-year Extended Fund Facil-
ity, and $1.1 billion from the Compensatory Financ-
ing Facility. Brazil withdrew $500 million from the
CFF in December and plans to take $2.5 billion from
both facilities this year.
The Private Banks
Support from the IMF was contingent upon assist-
ance from private banks. On 20 December 1982
Brasilia petitioned its leading creditors for a four-
part financial package including:
? Continued access to $8.8 billion in short-term trade
related credits-mostly for raw material imports
and export prefinancing.
? Restoration of $5 billion in interbank credit lines
with Brazilian bank branches abroad.
Brazil completed the first two parts of the financing
program in February. Bankers have committed an
estimated $10 billion in short-term trade financing
facilities
? A $4.4 billion medium-term loan, which would
increase bank exposure in Brazil by 7 percent.
Brasilia has a long and treacherous path yet to
travel. The last few months have seen inflation
spurt to an annual rate of 105 percent in February,
and the $330 million trade surplus through Febru-
ary was nearly 70 percent short of the level needed
to meet the IMF target. According to Embassy
reporting, the economic team has begun to lose
credibility, and no near-term successes are in sight.
The large devaluation in late February will push
inflation higher in March while doing little to
strengthen the trade accounts.
The Eye of the Storm
Over the next several months we anticipate a
resurgence of external financial difficulties. Even
with the disbursements of most of the new loans in
mid-March, Brasilia is already encountering re-
newed foreign exchange difficulties.
[ntil bankers resume short-term
lending and exports strengthen, Brazil probably
will have difficulty covering its daily cash position.
Unless bankers reactivate standby credits, either
Brazil's arrearages will continue to increase in the
flowing in and the recession will worsen sharply.
face of roughly $2 billion in monthly import and
interest payments or sorely needed goods will stop
Failure to stop capital flight will add to persistent
cash-flow difficulties.
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8 April 1983
25X1
I
25X1
25X1
25X1
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growing doubts about Brazil's economic pros-
pects caused businessmen to channel funds into
overseas money market accounts this year. Re-
newed speculation about another large devaluation
will provide new incentives to get funds out of the
initial expenditure cuts and revenue measures prob-
ably will prove inadequate to offset automatic
spending increases triggered by rising inflation. F-
country
Despite the large devaluations, we anticipate lack-
luster export performance until at least late sum-
mer. Although Brazil may reach its $22 billion
export target for 1983, exports will be stalled for a
while by weak recovery in consumer and industrial
demand in the developed countries, weak commod-
ity prices, and tougher import restrictions in Bra-
zil's major Third World markets. Beyond this, a
continuation of exports outside of official channels
could also hinder the government's ability to
achieve its goals.
We judge that Brasilia's economic team will also
have problems in complying with the IMF's domes-
tic performance targets.' The failure to increase
interest rates for export credits, the lack of a
precise timetable for phasing out product subsidies,
and the application of only a moderate increase in
agricultural interest rates is already translating
into stronger-than-anticipated demand for funds.
According to Embassy reporting, monetary expan-
sion surged to a 97-percent annual rate in February
compared with 85 percent for 1982. Beyond this,
the large devaluation and the failure to apply tough
wage restraints will continue to fuel inflation.
Based on Embassy reports, we doubt that Brasilia
will meet its public-sector financing targets. The
' Some problems have already arisen. On 5 March, Brasilia
amended the original IMF agreement. Because of the large devalu-
ation, the government revised its inflation target to 85 to 90 percent
in December. It also respecified quarterly balance-of-payments
performance requirements but did not modify the annual external
These problems augur renewed tensions in dealing
with the international banking community. With 25X1
arrearages again building, Central Bank President
Langoni has renewed appeals to creditors-without
success thus far-to provide new standby credits to
meet immediate obligations. We and a number of
banking sources expect Brasilia will seek $2-4
billion in new loans before the end of September.
Any such request for funds probaly will be greeted
by demands for even tougher austerity measures
Even as difficult new adjustments are required, we
believe Brasilia will encounter intensifying domes-
tic criticism of its stabilization program. Based on
past experience, state corporations, agricultural
producers, and businessmen probably will bid for
concessions to blunt the impact of austerity. As
consumer prices and unemployment rise, opposition
will broaden to include the middle class and labor.
The increased assertiveness of the Congress and
state governors that has grown out of recent politi-
cal liberalization will complicate efforts to carry
out the austerity program. At this juncture, we
believe the government is likely to hold the line on
the measures already enacted but waver on imple-
menting unpopular new measures that could spark
political problems.
The Economy in 1983
We believe the only plausible scenarios for Brazil-
ian economic performance entail declines in real
output this year. The severity of the decline will
depend on the willingness of Brazil's foreign credi-
tors to provide additional financial support. We
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8 April 1983
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Monetary Expansionb Government Deficit Urban Unemployment
Percent Percent of GDP Percent
Business Failures in Agricultural Productione Oil Production
Sao Paulo Index: 1980=100 Thousand b/d
Thousands
a December to December.
b Change in the money base.
c Estimated.
dRange estimates, best case assumes Brazil is able to finance an $8 billion
current account deficit; worse case assumes Brazil declares a payments moratorium.
e Production of beans, corn, manioc, rice, soybeans, and wheat.
f Interest payments and long-term principal repayments.
gMainly illiquid in 1982 and 1983
International Reservesg
Billion US $
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8 April 1983
Debt Service f
Billion US S
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-2.8 1.2
20.1 23.3
22.9 22.1
Service balance, net -9.6 -12.2
Interest payments 7.4 10.3
Debt repayments 12.7 16.3
Longer term maturities 6.7 7.3
Short-term maturities 6.0 9.0
Gross foreign exchange requirements 25.1 27.3
Financed by:
1.1 1.6
Official and supplier credits 4.2 3.4
Loans 18.4 24.2
Bridge operations
Short-term rollovers
a Estimate.
b Assumes Brazil obtains bank support.
c Assumes Brazil declares a moratorium in the summer of 1983.
have analyzed the domestic and international re-
sults for the Brazilian economy-drawing upon our
own work and that of econometric services and
independent analysts-under the assumption that
international bankers accommodate a request for
some additional financial support. In the worst
case, we have tried to assess the consequences for
Brazil if its foreign funding dries up later this year.
The Likely Course. Although world economic re-
covery and lower oil prices probably will lead to a
$4-5 billion trade surplus for Brazil in 1983, this
will still fall short of the $6 billion IMF target.
Even with the fall in world interest rates, the
-14.5 -8.0 5.5
0.8 4.5 7.0
20.2 21.5 20.0
19.4 17.0 13.0
-15.3 -12.5 -12.5
12.0 9.7 9.7
20.8 20.2 20.2
7.8 7.2 7.2
13.0 13.0 13.0
35.3 28.2 25.7
1.1 1.0 1.0
5.2 4.0 3.5
27.0 24.7 22.7
4.0 -3.0d -3.0d
10.0 13.0 13.0
d Central Bank of Brazil estimate.
e Includes $2.5 billion from IMF.
government probably will reduce its current ac-
count deficit only to some $8 billion this year. As
the trade shortfall becomes apparent, the Brazil-
ians probably will have to ask creditors for another
loan.
Based on recent conversations, we believe bankers
will accommodate Brazil if the government is
perceived to be making a good-faith adjustment. 25X1
The bankers appear willing to extend some addi-
tional financial support as long as Brasilia sustains
its stabilization program, its efforts to increase
exports, and its willingness to service the debt. Even
so, we foresee temporary funding gaps.
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Belt tightening and foreign financing constraints
will cause national output to fall by 3 to 5 percent.
The economic contraction-borne by industry and
domestic commerce-will be accompanied by
growing unemployment and business failures. De-
spite wage restraints and price controls, the Decem-
ber over December inflation rate will approach
triple digits because of the large devaluation, in-
creases in public utility rates, and import restric-
tions.
Another year of worsening economic performance
will heighten social unrest. Economic deprivation
following retrenchment and persistent triple-digit
inflation probably will increase violent crime, wild-
cat strikes, and cost-of-living demonstrations. Be-
cause of its firm monopoly on the instruments of
force, we believe the Figueiredo government will be
able to avoid serious problems. Moreover, the gov-
ernment probably will appeal to Brazilian willing-
ness to make sacrifices for grandeza, major power
status.
A Worst Case Scenario. If the government misses
its stabilization targets by a wide margin, however,
bankers probably will refuse new credit requests.
With its reserves depleted, Brasilia would have
little choice but to declare a temporary moratorium
on debt payments. Such a declaration would cause
a cessation of all foreign lending until new austerity
and rescheduling arrangements are worked out.
With its borrowings cut, we believe Brasilia would
be forced to reduce the current account deficit to
$5.5 billion, mainly by slashing imports.
The economy probably would go into a severe
tailspin. The reduced availability of critical raw
material imports-metals, oil, chemicals-would
cause severe disruptions in industrial production.
We estimate that real growth would fall at a
10-percent annual rate as the industrial downturn
reduced new investments and caused declines in
construction and commercial activities. A severe
cash-flow squeeze probably would result in a wave
of business failures, sending unemployment into
double digits. In these circumstances, commodity
shortages would boost inflation above 100 percent.
Secret
8 April 1983
Such an economic crisis would severely test the
government's ability to cope with political stress.
At this juncture, however, we cannot judge the
likely consequences.
Signs To Watch
New external shocks could quickly gut Brasilia's
stabilization program. With the debt service ratio
hovering at the 80-percent level, any export short-
falls induced by climatic disaster, low commodity
prices, or continued recession in industrial nations
would pose unmanageable financial strains. Brazil
also remains vulnerable to higher world interest
rates; a 1-percentage-point increase in LIBOR
would add an estimated $500-600 million annually
to debt servicing obligations. Beyond this, Brasilia
may yet be forced to declare a payments moratori-
um if its major creditors split over the country's
financial strategy and thereby prevent the syndica-
tion of a large new credit.
Failure to regain public confidence could also have
serious economic consequences. Speculation in the
financial markets would intensify, preventing any
increase in domestic capital formation. Business-
men probably would continue to postpone most new
investment programs at home and persist in capital
flight.
Implications for the United States
We believe Brazil will increasingly look to the
United States for support in resolving its financial
problems. Until private bankers reconstitute the
safety net arrangement, Brasilia probably will call
on Washington from time to time for emergency
financial support. Based on Embassy reporting, we
also expect the Brazilian Government to press
Washington to lead the effort to reschedule official
credits maturing in 1983. As the need for new
money becomes apparent, Brasilia may expect the
United States to back credits to finance imports
and assistance in discounting trade receivables with
US banks.
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Any disruption in debt servicing could spur Brasilia
to seek debt relief. A formal debt rescheduling
would be forced to consider stretching principal
and interest payments to lessen Brazil's foreign
exchange stringencies. Interest payments are now
the single-largest outflow in the current account,
claiming 45 percent of export earnings. If, in the
worst case, bankers were unwilling to cooperate, a
prolonged interest moratorium would further re-
duce US bank profits and could cause some severe
problems. Moreover, Brazil's troubles would ad-
versely affect other South American borrowers,
further intensifying the adverse impact on the US
economy as they make even tougher import cuts
and suspend repayments.
A payments moratorium remains a continuing pos-
sibility. Much of the immediate impact of a mora-
torium would fall on the nine largest US commer-
cial banks' profit positions. Brasilia would also face
the need to make larger-than-anticipated import
cuts, thereby reducing even further US exports to
that market.
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8 April 1983
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Venezuela:
Worsening Economic Outlook
Venezuela's economic problems reflect in part its
extreme dependence on oil exports and bankers'
reluctance to lend in Latin America. Its basic
problems, however, are the government's over-
spending of the oil bonanza, its failure to diversify
the economy, and its poor management of foreign
debt. For 1983, Caracas's ability to pursue effective
adjustment policies will be hampered by mounting
political pressures spawned by the upcoming
December presidential elections.
The government's unwillingness to adopt a strict
adjustment program has left international bankers
reluctant to cooperate in refinancing Caracas's
large external debt. Indeed,
the Venezuelan Government has yet to realize the
seriousness of its financial position. To regain
banker support, we believe that Venezuela will
ultimately resort to the IMF this year. The imposi-
tion of a tough IMF stabilization program will
contribute to further economic decline in the near
term.
Venezuela's current financial stress emerged over a
year ago as oil revenues dropped abruptly. In 1982
oil export revenues fell by 20 percent. Dependent
on oil for 70 percent of all budget revenues,
Caracas was forced to trim planned central govern-
ment expenditures for 1982 by over $4 billion and
introduce new revenue measures, including a sharp
increase in gasoline prices. The government was
able to avoid even tougher spending cuts-particu-
larly for politically sacrosanct social programs-by
boosting oil production from 1.5 million b/d in
second-quarter 1982 to 2.3 million b/d by the end
of the year.
The decline in oil revenues contributed to a loss of
foreign lender confidence. Wary bankers began
insisting on sharply higher rates for new borrow-
ings. Caracas refused to accede to banker demands,
awaiting a rebound in its oil prospects and credit-
worthiness. It postponed plans to restructure into
longer maturities some $8.8 billion in maturing
short-term debt. This move backfired, however, in
the wake of Argentine and Mexican repayment
problems. In September, Caracas was stunned by
demands to pay off large loans for two cash-
strapped government agencies suddenly unable to
roll over debt. A subsequent restructuring attempt
attracted only half the targeted amounts even
though Caracas accepted tougher borrowing terms
and offered to guarantee the debt of less credit-
worthy state corporations. Looming financial prob-
lems undermined domestic business confidence and
promoted large-scale capital flight, which, accord-
ing to Central Bank estimates, totaled $5 billion for
the year.
The decline in oil revenues and consequent spend-
ing slowdown caused GNP to contract by 2 percent
in 1982, according to US Embassy estimates. On
the external front, the current account deteriorated
by some $6 billion; Venezuela registered a $2.2
billion deficit on this account as exports dropped 20
percent. Moreover, the combined effect of loan
payoffs and capital flight caused international re-
serves to drop by over 50 percent to $8.5 billion,
excluding a $3 billion boost from a gold revalua-
tion. The dropoff in economic activity and a mea-
ger 1.2-percent increase in the money supply re-
duced inflation to an 8-percent annual rate.
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1979
1980
1981
1982a
1983 a
Best Worst
Case Case
Trade balance
4.4
8.3
8.0
2.6
2.8
5.0
Merchandise
exports, f.o.b.
14.4
19.0
20.1
16.0
14.1
12.5
Oil
13.7
18.3
19.1
15.5
13.3
11.7
Other
0.7
0.7
1.0
0.5
0.8
0.8
Merchandise
imports, f.o.b.
10.0
10.7
12.1
13.4
11.3
7.5
Net services and
transfers
-4.0
-4.7
-4.1
-4.8
-5.0
-5.0
Mounting Pressures for Retrenchment
Anticipating little immediate improvement in the
world oil market, Venezuelan President Herrera
had planned to continue austere economic policies
this year, his last in office. The 1983 budget
originally called for a 10-percent cut in spending to
$18.1 billion, petroleum tax revenues of $11.1
billion, and a zero deficit. For the second year in a
row, nonoil investment programs bore the brunt of
the cutbacks. With the latest OPEC accord, how-
ever, Venezuelan oil exports probably will be limit-
ed to only 1.4 million b/d instead of 1.6 million
b/d, while Caracas will also receive at least $1.50
less per barrel. This would cause projected oil tax
revenues to decline 25 percent to $8.7 billion. To
balance this shortfall, even tougher budget and
import cuts will be required.
Continuing reserve losses, demands for payments of
maturing short-term debt, and disarray in oil mar-
kets are causing Caracas to take stronger measures
to bolster its external payments position. In late
February, the government suspended foreign ex-
change transactions for one week, implemented
exchange controls, and introduced a three-tiered
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8 April 1983
Best Worst
Case Case
Oil export revenues
(billion US $)
13.7
18.3
19.1
15.5
13.3
11.7
Average production
(million barrels/day)
2.36
2.16
2.11
1.89
1.75
2.3
Average exports
(million barrels/day)
2.12
1.86
1.76
1.55
1.40
1.97
Average price per
barrel of export crude
(US $)
17.70
26.95
29.70
27.40
26.00
16.22
Fiscal petroleum
revenues (billion US $)
7.7
10.6
16.5
11.7
8.7
7.2
multiple exchange rate-the first in 18 years. At
the same time, prices on all goods and services were
frozen for 60 days to prevent offsetting price
increases in the wake of the implicit devaluation.
An additional source of pressure on the government
comes from international banks who want stricter
austerity measures before committing any funds.
At a minimum, the current bank advisory group is
demanding the formation of an intergovernmental
team to devise a coordinated response to the present
crisis.
Resorting to the IMF
We are skeptical that Caracas will be able to
initiate an effective stabilization program on its
own. With the President's Social Christian Party
trailing in the presidential campaign that is now
under way, Herrera continues to resist needed
adjustment measures. He probably will remain
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extremely reluctant to implement measures that
would raise unemployment and inflation in the
short run. Moreover, intense squabbling over eco-
nomic policies between the President's two main
economic advisers, Finance Minister Sosa and Cen-
tral Bank President Diaz Bruzual, has prevented
effective implementation of some policies already
adopted.
The government's poor management abilities have
been alarmingly evident recently. Caracas has
demonstrated itself incapable of administering the
complex exchange system that it has been slowly
defining over the past few weeks. Powerful interest
groups have been lobbying for access to preferential
exchange rates, potentially undermining the effec-
tiveness of the system. Meanwhile, in recent meet-
ings with bankers, Sosa had been unable to detail
the actual amount of debt Venezuela wished to
refinance or to present a realistic economic and
financial outlook.
In a recent domestic press conference, Finance
Minister Sosa indicated that Venezuela would re-
sort to the IMF if debt refinancing bogs down and
exchange controls are ineffective in stemming for-
eign reserve losses. We believe Caracas will soon
have little choice but to begin formal debt resched-
uling negotiations in conjunction with the IMF.
According to the US Embassy, a formal standby
arrangement with the IMF could enable Venezuela
to obtain a maximum of $4.5 billion over three
years.
Tough adjustments will be required if Venezuela is
to reach an agreement with the IMF. Press reports
indicate that an IMF technical mission that recent-
ly paid a visit to Caracas proposed: (a) cuts of 20
percent or more in public spending, (b) the restruc-
turing or liquidation of state-owned enterprises, (c)
the removal of price controls and the withdrawal of
consumer subsidies, (d) reductions in the public-
sector wage bill, (e) continued tight monetary poli-
cy, and (f) a sharp devaluation.
Venezuela's Downward Financial Spiral
The initial debt restructuring plan formulated by
Caracas last fall fell apart early this year. In
January international lenders suspended refinanc-
ings of maturing credits because of mounting
arrearages on debt repayments and fears of a
precipitous drop in Venezuela's oil earnings. Con-
sequently, public entities began informing their
creditors that only interest would be paid pending
the conclusion of government rescheduling efforts.
An international advisory committee was set up in
early March to respond to Finance Minister Sosa's
request to stretch debt repayments through 1990 or
beyond and grant a one- to two-year grace period.
With bankers unwilling to move forward on Sosa's
request, Caracas announced on 22 March that the
suspension of principal payments for most public
debt was formally extended to 1 July to give the
government sufficient time to reschedule the entire
$13 billion in principal due this year. More recent-
ly, press reports indicate that bankers considered
the stabilization plan Sosa detailed to them early
this month inadequate because it failed to incorpo-
rate many of the tough recommendations proposed
by the IMF technical team that just left Caracas.
The Economy in 1983
For much of the remainder of this year, we expect
Venezuela to be laboring under an IMF austerity
program. Caracas will be forced to struggle with
several budget-balancing tactics at the urging of its
foreign creditors. These would include increased
taxation of nonoil revenues, greater efforts to pro-
mote government efficiency, selected cuts in both
investment projects and social services, and reduced
subsidies for some consumer products.
Secret
8 April 1983
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While this adjustment program probably will be
successful in regaining banker cooperation for the Shaded portion of bars
refinancing program, it will contribute to a further Note change in scales indicate range
decline in economic performance this year. We Real GNP Growtha External Debt
Percent Billion US $
t GNP to decline at least 3 percent in 1983
expec and official unemployment to rise to 10 percent.
This forecast assumes a decline of 15 percent in the
oil sector and a 1-percent decline in the nonoil
sectors. We believe that inflation would rise to 20
percent due to a sharp increase in the bolivar cost
of imports and the elimination of some price con-
trols. Despite a 15-percent drop in imports, we
estimate that Venezuela will have to finance anoth-
er $2 billion of the current account deficit. Al- Innationa
though debt rescheduling will be messy, Caracas Percent
6
35
30
3
25
0
zo
15
JE
_3
10
5
1 1 1 I i
-9
0
probably will be able to restructure maturing debts 30 0 20
and lift the payments suspension before the end of 25
the year. zo 15
dl
Oil Export Earnings
Billion US S
f
In the event that Caracas fails to adopt a coherent 0
adjustment strategy or an OPEC' oil price war
erupts, the resultant financial crisis would cause a
Unemployment International Reservesb
Percent Billion US S
much sharper decline in the economy. Foreign 12
exchange shortfalls would cause a scarcity of key to
imports, leading to shortages of consumer goods
and food (over half of which is imported), and
would create serious industrial bottlenecks. GNP
probably would decline up to 9 percent, while 4
inflation would surge to 30 percent. To bring the 2
current account into balance, imports would have
to be slashed more than 40 percent, probably
through a large devaluation.
Such an upheaval would place unaccustomed
strains on the political system. The strict austerity
moves that would be required probably would
provoke increased demonstrations and strikes by
labor. We believe that serious unrest would be kept
under control by expectations that labor would be
given a significant role in fashioning economic
policy under the likely new administration of the
Democratic Action Party, to which it is closely
allied. We think military intervention is unlikely.
Secret
8 April 1983
0 1974-78 79 80 81 82C 83C
a Average annual.
b Excludes reevaluation of gold holdings.
c Estimated.
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Secret
Signs To Watch
The current oil and liquidity crises are highlighting
the failure to diversify the economy, which has left
Venezuela's economic fortunes closely tied to
trends in the world oil market. The adoption of
needed reforms, as urged by international creditors,
is now being echoed by officials of both major
parties. We expect some restructuring of unprofit-
able state corporations to free resources for more
productive uses. We also anticipate the cutting
back of the swollen bureaucracy of 1.2 million
people to improve government services and efficien-
cy. As depressed oil revenues cause public expendi-
tures to drop off, officials of both major parties, as
well as international lenders, are citing the need to
spur private-sector performance. New initiatives
are being aired to permit market forces freer rein.
This changing attitude also may lead to greater
interest in attracting more foreign investment,
which could eventually help correct the country's
existing shortages of capital, technology, and
skilled management.
We are concerned, however, about the impact of
austerity on the highly profitable and efficient oil
industry. Depressed profits and declining reserves
already have caused the state-owned oil company,
PDVSA, to scale back by roughly one-third the $37
billion initially planned for investment during
1983-88 and to reconsider its overall development
strategies. Oil Ministry officials now say they will
concentrate on increasing production of light and
medium crudes from traditional fields rather than
accelerate production from the more costly Orinoco
Heavy Oil Belt.
The United States has much at stake in Venezuela:
? Venezuela is our largest trading partner in South
America and has traditionally relied on the Unit-
ed States for half of its imports.
? Venezuela remains our third-largest supplier of
petroleum.
? US banks hold at least one-third of Venezuela's
total estimated foreign debt of approximately $32
billion, and US businesses have sizable direct
investments there.
? Venezuela also remains a strong moral and finan-
cial supporter of democracy in Latin America.
ing US help in coping with their financial dilemma.
_____These include the opening of an
emergency line of credit to the US Treasury, the
extension of credit for Venezuela's wheat imports,
prepayment for future petroleum deliveries, and a
gold swap arrangement. The Venezuelans have
confirmed that they are especially seeking the
cooperation of US banks in their debt refinancing
efforts.
Declining resources may jeopardize the joint
Venezuelan/ Mexican oil financing facility. Since
1974 over $6.5 billion has been disbursed in various
forms'of economic assistance to the Caribbean
Basin. Although $400 million was paid out in 1982,
Venezuela has recently been discouraging the ex-
pectations of some recipients that it will either
increase aid or soften credit terms. According to a
US Embassy source, several administration offi-
cials have said that prospects are not encouraging
for renewing the facility for another year when it
expires in August. The source implied that if
Mexico withdraws and the agreement lapses Vene-
zuela probably will continue providing some re-
duced level of aid and look to the United States to
step up its assistance. Meanwhile, the prospect of
increasing Mexican-Venezuelan competition for
the US oil market will, we believe, complicate
Washington's relations with both countries.
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Secret
Spain: Socialist Economic Policy
The Socialist government has proposed a conserva-
tive economic program for 1983 that will do little to
promote economic recovery. In the election cam-
paign last fall the Socialists promised to boost real
economic growth this year to 2.5 percent and to
create 800,000 new jobs over the next four years.
Now, however, their primary objectives appear to
be reducing the inflation rate and the trade deficit.
Consequently, monetary and fiscal policies will be
tightened; these policies are unlikely to alleviate
Spain's growing unemployment problem. Accord-
ing to Finance and Economic Minister Miguel
Boyer, the government has no other option because
expansionary policies would lead to renewed infla-
tion and even larger payments deficits.
The Protracted Slump
According to preliminary estimates, the Spanish
economy stagnated in 1982 for the fourth consecu-
tive year. Real GDP growth was approximately 1.1
percent compared with -0.3 percent in 1981; the
increase derived almost entirely from the growth of
public consumption and exports. Agricultural pro-
duction improved from the drought-affected levels
in 1981/82, but industrial production was held
back by continuing problems of overcapacity, over-
manning, low investment, and slack demand. The
tourist industry was one of the brighter spots; the
number of visitors during January- November 1982
was up about 5 percent from the previous year,
while gross tourist revenues increased approximate-
ly 23 percent in pesetas and about 6 percent in
dollar terms.
Economic stagnation has produced an unemploy-
ment rate second only to Turkey in Western Eu-
rope. Registered unemployment rose by 400,000
during 1982 reaching 2.2 million, 16.5 percent of
the labor force, by the end of the year. The number
of jobless rose most sharply in the industrial and
service sectors, which employ about two-thirds of
the labor force. Increased spending on public works
prevented an even further increase in unemploy-
Inflation has slowed for five consecutive years but,
according to provisional statistics, was still 14.4
percent in 1982. While real wages rose by 2 to
5 percent each year during 1978-81, they fell last
year by about 1 percent. The reduction in real
wages resulted from the 1982 National Employ-
ment Agreement-a pact involving government,
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Spain: Balance of Payments
Current account balance
1,633
1,126
-4,988
-4,977
-4,058
Trade balance
-4,024
-5,671
-11,461
-10,115
-9,238
Exports, f.o.b.
13,480
18,352
20,928
20,450
19,918
Imports, f.o.b.
17,505
24,022
32,389
30,565
29,156
Invisibles balance
5,657
6,796
6,472
5,138
5,180
Tourism
4,917
5,558
5,720
5,708
6,050
Long-term capital (net)
1,718
3,216
4,194
4,254
1,250
Private
2,113
2,835
4,020
3,413
215
Official
-395
382
174
841
1,035
Short-term capital, including errors, omis-
sions, and other monetary movements
538
-1,357
-548
-58
-678
business, and labor aimed at preventing further
increases in unemployment in return for wage
moderation. Labor unions will have to make even
greater concessions, however, to achieve Madrid's
goal of pushing inflation rates closer to those in
other industrial nations. Spanish inflation has ex-
ceeded the average rate in the OECD by at least 3
percentage points in each of the last five years, and
last year the differential widened to nearly 7
percentage points.
Despite high inflation and world recession, the
current account deficit narrowed by $900 million to
$4.1 billion in 1982. Export volume increased by
2.5 percent over 1981, even though the growing
differential between inflation rates in Spain and the
rest of the OECD reduced export competitiveness.
The dollar value of exports shrank by half a billion
dollars suggesting that exporters accepted lower
profit margins in return for a larger share of the
market. Imports are estimated to have fallen $1.4
billion over the previous year, reflecting lower
Secret
8 April 1983
energy imports. Consequently, the trade deficit
narrowed by annroximately $900 million to $9.2
billion.
To finance its 1982 balance-of-payments deficit,
Madrid was forced to draw down its reserves by
$3.5 billion. Private long-term capital inflows tradi-
tionally have been large, ranging from $2 billion to
$4 billion annually in 1978-81. Last year, however,
negative interest differentials, the continuing de-
preciation of the peseta, and the introduction of
peseta-denominated syndications by foreign bank
branches prompted a shift in corporate borrowing
from the Eurocurrency market to the domestic
market. Firms were discouraged from seeking new
loans abroad by the prospect of rising interest
payments; in addition, many outstanding foreign
debts were prepaid and replaced with domestic
credits. As a result, net private external borrowing
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Secret
dropped from $2.5 billion to $650 million. More-
over, increased trade financing contributed to the
expansion of net private external lending from $627
million to $1.4 billion.
Socialist Policy Response
Despite the severity of Spain's unemployment prob-
lem, the Socialist program emphasizes controlling
inflation and improving the balance of payments.
Consistent with these objectives, the government
plans to tighten monetary policy this year by
holding money growth to 13 percent, compared
with about 16 percent in both 1981 and 1982. In
addition, Madrid has cut about $1 billion from the
banks' lendable reserves by increasing the amount
of cash reserves private banks must hold from 5.75
percent to 6.75 percent of non-interest-earning
deposits. The government may tighten credit fur-
ther by increasing the reserve requirement on se-
lected interest-earning deposits.
The government's preoccupation with the trade
imbalance probably was a factor in the decision to
stop supporting the peseta in December 1982.
During the first 11 months of 1982 the peseta had
depreciated by 18 percent against the dollar, and
on 4 December Madrid announced a further 8-
percent devaluation. Although critics charged that
a devaluation of 25 to 30 percent was needed to
stimulate export growth, Boyer argued that a larg-
er devaluation would have caused excessive in-
creases in import costs. Since December 1982 the
peseta has depreciated another 7 percent. Never-
theless, the Bank of Spain is not planning a second
devaluation. Instead, it intends to manage the
peseta's downward float.
The 1983 budget has not yet been presented to
Parliament, but it is expected to call for a $12
billion deficit; the 1982 deficit of $10 billion
equaled 6 percent of GDP. Public statements by
government officials suggest that greater social
security and unemployment benefits will be respon-
sible for most of the increase. Growth in real
public-sector investment will be limited to about
3 percent, a sharp drop from the 15- to 20-percent
increases in the 1981 and 1982 budgets. In addi-
tion, taxes on larger incomes will be increased, and
13.4 percent to 14.5 percent. 25X1
the proportion of taxes to GDP will be raised from 25X1
During the election campaign the Socialists prom-
ised to create 200,000 new jobs each year for the
next four years. They envisioned that this would
take care of the 140,000 new entrants into the job
market each year and reduce the number of unem-
ployed by 60,000 annually. The plans advanced to
date have been rather modest and have not entailed
any government expenditure. The administration
has sent a bill to Parliament proposing a reduction
of the workweek from 44 hours to 40 hours and the
establishment of a minimum 30-day vacation. Ac-
cording to Joaquin Almunia, the Minister of Labor,
the measure was intended to prevent job losses in
the near term. When the economy recovers, the
Socialists hope that firms will hire more workers.
The administration has also lowered the permitted 25X1
ratio of temporary workers to permanent employees
and reduced the duration of temporary contracts in
the hope of forcing employers to create permanent
jobs.
The Socialists probably will be unable to achieve all
their economic objectives. Their conservative poli-
cies, coupled with a weak recovery at best among
other West European countries, suggest that their
revised goal of attaining 2-percent real growth in
GDP is too optimistic. Because of depressed de-
mand in the developed countries, it is highly likely
that real export growth will fall well short of the 25X1
impressive 12-percent average rate of growth over
the last 10 years. High interest rates and high
unemployment probably will continue to depress
private investment and consumption. Most of the
impetus for economic growth thus will have to
come from the public sector. The Socialists, howev-
er, intend to increase expenditures only moderately
in order to prevent sharp increases in the budget
deficit and additional inflationary pressure. I 25X1
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Madrid's monetary targets are shaky. Money stock
growth could exceed the planned 13 percent if-as
is likely-the budget deficit is financed through
money creation to the same degree as in the last
two years. In 1981 and 1982, borrowing from the
Bank of Spain covered nearly three-fourths of the
government's total financing requirement. The cen-
tral bank attempted to offset the inflationary im-
pact of this approach by limiting the amount of
credit available to the private sector. If the
Socialists monetize a similar proportion of the
deficit through central bank borrowings in 1983,
they will either have to impose even greater credit
restrictions, which could dampen private invest-
ment, or raise their liquidity target.
The government's ability to meet its targeted infla-
tion rate of 12 percent will depend on its monetary
policy and on its success in promoting wage moder-
ation. Another round of real wage reductions is
needed to lower inflation to 12 percent. A collective
bargaining agreement was signed in January be-
tween the employers' association, the General
Workers' Union, and the Confederation of Work-
ers' Commissions, which set the range for 1983
salary increases at 9.5 to 12.5 percent. Although
the initial wage increases could on average be
somewhat lower than the government's target, the
agreement stipulates that if the consumer price
index rises by more than 9 percent by 30 Septem-
ber 1983, wages will be revised in order to maintain
the workers' real purchasing power.
Government increases in administered prices, such
as fuel, electricity, and public transportation, will
make achievement of Madrid's inflation and wage
goals difficult. Shortly after taking office, the
Socialists announced price hikes of approximately
20 percent for petroleum products. Government
officials estimate that these increases will add 1.5
to 2 percentage points to the inflation rate next
year. A proposed 7-percent increase in electricity
rates and boosts in coal and natural gas prices of 10
and 17 percent, respectively, will further aggravate
inflation.
Secret
8 April 1983
Registered unemployment probably will continue
to grow and may approach 20 percent by the end of
1983. A study completed by the National Institute
of Employment estimates that in order to prevent
further increases in unemployment, real GDP
would have to grow by at least 3.5 percent this
year; we believe that Spanish growth will only be
about 1 percent in 1983. Moreover, the labor
proposals advanced by the Socialists may have a
detrimental effect on the job market. For example,
the Spanish Confederation of Business Organiza-
tions contends that a shorter workweek would
increase employers' costs and reduce productivity
without providing incentives to hire more workers.
The confederation also argues that increases in
employers' contributions to social security make
labor more expensive. Moreover, government plans
to rationalize the textile, footwear, shipbuilding,
and steel industries will cut the work force in these
industries as much as 20 percent.
As the ranks of the unemployed grow, Prime
Minister Felipe Gonzalez probably will face
mounting pressure to change the direction of eco-
nomic policy. The Socialists currently have the
support of the labor unions, but failure to reduce
unemployment could result in labor unrest. More-
over, there is a lack of unanimity within the
government over the priority attached to control-
ling inflation. Almunia and Boyer appear resigned
to the proposition that little can be done to prevent
rising unemployment without rekindling inflation.
Vice Prime Minister Alfonso Guerra, on the other
hand, is more concerned about the political ramifi-
cations of following a conservative policy. In the
short term, Almunia and Boyer probably will have
their way. By the end of the year, however, domes-
tic pressure for more expansionary policies-partic-
ularly from the Socialists' working-class constitu-
ency-probably will be too strong for the
government to ignore. Government leaders will be
hoping in the meantime for a worldwide economic
recovery strong enough to allow them to ease their
policies somewhat without doing serious damage to
the balance of payments.
25X1
^
25X1
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Protectionist Trends
in Developing Countries
Most LDCs continue to rely heavily on import
barriers to protect local industries from foreign
competition. Although the levels of protection re-
main high, they tend to rise and fall with the
countries' foreign financial positions. Recently,
many LDCs have raised barriers to deal with
burgeoning debt problems. There are a few excep-
tions. The more dynamic exporters such as South
Korea and Taiwan have steadily eased barriers
since the late 1970s.
Developed nations have accepted the LDC need for
protection for both "infant industry" and financial
reasons. In GATT negotiations, for example, LDCs
benefit from all developed country trade liberaliza-
tion on a most-favored-nation basis, but they are
not obligated to extend reciprocal concessions. In
practice, many LDCs have interpreted their exemp-
tion from selected GATT obligations as a license to
maintain restrictive import regimes. Although ar-
rangements between LDC debtors and the IMF for
financing packages customarily include trade liber-
alization objectives, all parties recognize that a
reduction in protectionism will be possible only in
later stages of economic recovery.
Argentina. Argentina's military government liber-
alized the country's traditionally protectionist im-
port policies over the last several years, but strict
import control measures imposed during the April
1982 Falklands conflict remain in effect. In April
1982 a licensing requirement was imposed on all
imports, and in May nonessential imports, includ-
ing most consumer goods, were banned. Before the
Falklands conflict, only about 200 items-primari-
ly machinery and equipment-required licenses.
Banned items had been reduced from 700 in 1975
to a handful in early 1982. As is currently the case
in other countries with severe payments problems,
issuance of import licenses may depend on foreign
exchange availability, administrative determination
of need for the import, or the influence or pressure
an importer can exert on government officials
Brazil. Brazil's import policies have become con-
siderably more restrictive in the past year in re-
sponse to its balance-of-payments problems. About
1,900 items-largely chemicals, pharmaceuticals,
and machinery-were added to the list of banned
imports, which consisted mostly of luxuries and
nonessential goods. The ban, however, does not
apply to imports from other Latin American Inte-
gration Association members. Private firms are
now being required to cut imports by 5 percent on
top of the announced 10-percent cuts imposed in
July 1982. State-owned firms have been forced to
cut back as well. In addition, the Foreign Trade
Department of the Bank of Brazil is supposed to be
clamping down on import licenses.
India. India began to liberalize its import policy
slightly in the late 1970s when its foreign exchange
position was comfortable. Licensing-the main ve-
hicle for controlling imports-has been simplified.
Raw materials and components may be imported
relatively easily, and the government now tolerates
limited import competition for domestic manufac-
turers. Exporters receive special consideration in
the granting of import licenses. Nevertheless, im-
ports of most consumer products are still prohibit-
ed, and New Delhi views import substitution in
petroleum, fertilizer, steel, and cement as a major
aspect of its economic policy. Moreover, India now
faces a huge foreign trade deficit, and higher tariff
rates were announced last December and again this
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Automotive Import Barriers:
An Illustration of LDC Protectionism
To stimulate industrialization and create employ-
ment, most advanced developing countries maintain
extensive barriers to automobile and truck imports.
Barriers include tariffs, quotas, and import licensing
requirements, as well as harsh local content rules.
These policies have forced US, Japanese, and West
European manufacturers to establish manufacturing
and assembly facilities or joint ventures in many
LDCs in order to participate in local markets. Local
content rules for selected LDCs are as follow:
Mexico 50 percent local content required for
cars, 65 percent for trucks, but recom-
mended levels are 75 percent and 85
percent.
Venezuela 55 percent local content required, ris-
ing to 59 percent in 1985. Producers
can satisfy part of requirement by
exporting.
Argentina 96 percent local content rule-a virtual
import ban-was being liberalized be-
fore the 1982 import clampdown, with
some auto imports and exchanges of
components between domestic and for-
eign plants allowed.
Brazil Autos must be 99 percent Brazilian by
value. Rules include partial or total
bans on imports that compete with
domestic components.
Chile 1973 local content rule of 70 percent
has been phased down to 15 percent.
Auto consumer tax and tariff had also
been falling until this year.
Colombia Stated goal is 25 percent local content,
but parts imports are denied only when
local product is competitive.
February. New Delhi may be tempted to tighten
import controls when its annual import-export poli-
cy is announced in April, but it presumably would
have to convince the IMF that such moves would
not violate the conditions laid down for further
disbursements of the Fund's $5.7 billion loan. F_
Secret
8 April 1983
India Local sourcing required whenever
possible.
Indonesia Generally required to use local compo-
nents whenever available. Japanese
firms have exploited this by establish-
ing affiliated parts makers.
Philippines Tariff breaks on unassembled vehicles
promote local labor content.
South Korea Usually required to use local parts
when available. The government pres-
sures foreign firms to develop local
sourcing.
Thailand 50 percent local content will be re-
quired later this year.
increased.
Morocco 14 percent local content is required for
autos, 21 percent or trucks. May be
Mexico. Last September Mexico substantially
raised import barriers in response to the mounting
financial crisis. Licensing requirements were im-
posed on all imports, and only food and capital
goods may be imported at the controlled exchange
rate. The emergency measures reversed a program
begun in 1977 to remove import licensing require-
ments from a large number of items and replace
25X1
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them with higher tariffs, thereby improving the
predictability of import regulation
the de la Madrid
cut 11 to 25 percent in 1979 and are now around 5 ^
to 10 percent for raw materials, 20 to 30 percent 25X1
for capital goods, and 50 to 60 percent for finished
goods. Uncompetitive domestic industries, produc-
government is beginning to take a more practical
approach on import policy and is allowing excep-
tions to the import licensing rules where controls
have hurt efficiency and hindered investment
some operations are unable to import
needed supplies because of limited foreign ex-
change availability.
Nigeria. Before Nigeria's current financial diffi-
culties, import restrictions were very limited. The
few items that did not enter freely were controlled
through licensing and import bans-such as those
on goods coming from South Africa and Namibia.
In April 1982, however, licensing requirements and
import bans were broadened significantly, and im-
port deposits from 25 to 250 percent of the value of
the import were required. Additional restrictions
announced in January added 150 general catego-
ries to the import licensing system, thereby includ-
ing all remaining significant imports. Lagos also
raised tariffs substantially-some to 175 percent-
while reducing compulsory import deposits. F_
Philippines. With Philippine accession to GATT in
1980, Manila instituted a four-year program of
tariff and import license liberalization. A World
Bank structural adjustment program begun in 1981
has also resulted in liberalization of trade and
foreign exchange controls. Some items are no long-
er restricted, and 960 of 1,300 restricted goods are
being liberalized over three years beginning in
1981. Average tariffs have been reduced from
42 percent in 1978 to 28 percent at present.
Nevertheless, in response to its worsening payments
position, Manila in January imposed a 3-percent
surtax on all imports and required that duties and
taxes be paid when opening letters of credit. Im-
ports used in the production of exports are exempt.
South Korea. South Korea is much less protection-
ist than most developing countries. In 1979 Seoul
instituted a plan to liberalize 90 percent of South
Korean import classifications by 1986. Tariffs were
ers of strategic items, and many agricultural pro-
ducers will continue to be protected, but rules for
machinery, electrical and metal products, petro-
chemicals, and products in which South Korea is
internationally competitive have been or are sched- 25X1
uled to be liberalized. 2.5X1
25X1 ^
Taiwan. Taiwan has been steadily easing its import
restraints over the past several years. In 1979 the
government stated its intention to drop tariffs to
levels maintained by developed countries, and the
following year announced plans to drop average
tariffs from 32 to 13 percent by 1983. Priority was
given to cutting tariffs on raw materials and capital
goods not produced in Taiwan. Although all im-
ports require licenses, about 97 percent of all
categories are licensed automatically and can be
imported subject only to the availability of foreign
exchange. The remaining items, primarily luxuries
and consumer goods, are controlled to protect
domestic industries; licenses for them are granted
on a case-by-case basis.) 25X1
Venezuela. Venezuela's traditionally protectionist 25X1
stance toughened substantially in January of this
year. Two hundred agricultural and industrial
products were banned for balance-of-payments and
competitive reasons, and tariffs, already high on
consumer goods, were increased. Import licenses
were made mandatory on 565 new items, including
foods, auto parts, and construction materials. Also
in response to the payments crisis, the Venezuelan
Government announced foreign exchange controls
in February, with only imports of essential goods
qualifying for foreign exchange at the preferential
rate. Press reports quote a Colombian Andean Pact
official as saying the actions could cut pact trade
with Venezuela in half this year. In response,
Venezuela has attacked other members' nontariff
barriers that harm Venezuelan exports.
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8 April 1983
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The Philippines:
Economic Decisionmaking
Manila is in the midst of its most thorough over-
haul of economic policy since the 1950s-a two-
track effort designed both to cope with the current
global recession and restructure the economy over
the long run. Economic policy currently is the
product of a decisionmaking framework created by
constitutional amendments of President Marcos's
own design that closely followed the dismantling of
martial law in January 1981. The Philippines's
economic decisionmaking system has been geared
to striking a politically acceptable balance between
the views of Western-educated technocrats, credi-
tors such as the IMF and the World Bank, and
influential domestic business interests. The balance
currently favors the technocrats and creditors,
chiefly because Marcos recognizes that the econo-
my is in its worst shape in a decade. Though it is of-
ten difficult to tell how actively Marcos is involved
in the economic policy process, we are certain that
all major decisions require his approval.
Manila's present staff of technocrats rose to posi-
tions of prominence during the financial crisis of
1981 when the collapse of the domestic commercial
paper market left the private sector without short-
term financing and the existing government de-
cisionmaking apparatus with severely damaged
credibility both at home and abroad. Best known
among them is a group respectfully referred to
within government as "the gang of four"-Prime
Minister and Minister of Finance Virata, Central
Bank Governor Laya, Minister of Trade and Indus-
try Ongpin, and Planning Minister Mapa. A back-
ground of training in US graduate schools and a
strong inclination toward nationalism mark the
technocrats' intellectual makeup. All recognize the
strength of market forces in designing policy and
each has earned a reputation for honesty and
expertise.
Policy planning and coordinating mechanisms
headed by the technocrats are being strained by the
recent growth of government. The Monetary
Board, chaired by Virata with representation from
most ministries and government agencies, meets
weekly to plan financial policy. Its management of
the foreign borrowing program is well above Third
World standards, but the expansion of foreign
borrowing since 1980 has sometimes placed too
many loans in the international capital market at
once, making potential lenders nervous and occa-
sionally aborting the borrowing plans of state agen-
cies. The board's efforts to develop local capital
markets by reforming financial regulations have 25X1
sometimes been at odds with growing government
deficits, which have soaked up an increasing share
of national savings even as reforms were imple-
mented to stimulate savings. Economic nationalism
has also compromised financial planning by limit-
ing the role of foreign investment in the Philippines.
The budget process has become unwieldy and has
yet to adapt to the recent growth of public-sector
investment spending. In the early 1970s, capital
expenditures constituted only 10 percent of the
national budget, and the role of the state enterprise
sector was relatively small; capital spending took 30
percent of total government outlays in 1981, ac-
cording to the World Bank. Last year, ministries
and state corporations prepared individual capital
budgets that exceeded available resources by over
65 percent, according to reports published by the
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The Philippines:
Key Institutions in Economic Policy Formulation
Decisionmakers
Within Government
Central Bank Most powerful single institution in
influencing the direction of the
economy. Generally favors conser-
vative monetary policies and ex-
change rates that somewhat over-
value the peso. Philippine equiva-
lent to the US Federal Reserve.
Along with other ministries, advo-
cates free-market policies with se-
lected price-distorting mechanisms
that favor domestic entreprenuers.
Ministry of Finance Has supported expansionary spend-
ing policies. Equivalent to the US
Treasury.
Ministry of Energy Among the most favored ministries
in the budget.
Ministry of Agriculture Least influential single ministry.
Ministry of Labor and Manages overseas employment
Employment programs and domestic industrial
relations. Industrial relations policy
debated by tripartite government,
business, and labor groups in a
highly publicized manner atypical
of other policy issues.
Ministry of Human Run by Imelda Marcos. The Philip-
Settlements pine equivalent to the US Depart-
ment of Health and Human Ser-
vices.
Ministry of Trade and Functions sharply expanded in re-
Industry cent years.
Coordinating Bodies
The Monetary Board Financial coordination: foreign and
domestic government borrowing,
monetary and exchange rate policy.
Chaired by Virata.
National Eco- Coordinates long-term planning.
nomic Development Weaker institution than several
Authority, (NEDA) years ago. Advocate of high interest
rates and small budget deficits as a
technique of balance-of-payments
management. World Bank and
IMF restructuring program advo-
cated for a decade by NEDA before
being implemented as policy in
1980.
Overall Policy Design
Office of the President
Decides all matters of consequence,
channels issues to other institutions
via Executive Committee.
Overall Policy Design
(Continued)
Office of the Prime Has acquired much of palace's deci-
Minister sionmaking machinery since 1981.
Incumbent an advocate of market-
oriented economic policies, but
strongly nationalistic.
The Executive Committee Considers largely technical matters
according to agenda forwarded
from President through Prime
Minister.
The National Assembly Essentially a rubber stamp, com-
pletely dominated by ruling party
apparatus. Nonetheless plays more
active role in discussion of policy
than several years ago.
Domestic Think Tanks and
Business Institutions
The Center for Research A privately funded policy analysis
and Communications and forecasting group without for-
mal ties to the government. Exer-
cises some influence on government
through its ties to private investors
and informal links to the techno-
crats, but under political pressure
has reportedly tailored some of its
judgments to what the government
wants to hear. Headed by Harvard-
trained economist Bernardo
Villegas.
SGV Accounting (SyCip, A financial consulting and account-
Gorres, and Verrano) ing firm; trained Laya, Virata,
Ongpin, and other technocrats in
the practicalities of financial man-
agement. Not an active advocate of
a particular economic strategy, we
believe its alumni nonetheless are
imbued with a bias against multina-
tional corporations.
The Makati Business A loose conglomeration of business
Club interests, including several opposed
to Marcos. During the summer of
1982, conducted a public reexami-
nation of economic policy, calling
for far-reaching changes amid
charges of a "crisis of confidence"
in government. Headed by Enrique
Ayala-Zobel, an oligarch whose
wealth predates the Marcos era.
The Philippine Chamber Key lobbying group of local busi-
of Commerce and ness interests. Vigorously opposed
Industry to economic restructuring program.
Advocates discretionary assistance
to the private sector. Headed by
Fred Elizalde, an industrial oli-
garch with ties to the President.
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Secret
World Bank. As for the long-term planning pro-
cess, the National Economic Development Author-
ity (NEDA), which sets development priorities
every five years, and Planning Minister Mapa
function largely as coordinators between the Cen-
tral Bank and key ministries. The coordination
process is described by NEDA officials as "consen-
sus seeking" and nonconfrontational.
Recent Battles Over Policy
The most widely reported and controversial contest
between the technocrats and influential interest
groups during the past several years has concerned
the coconut levy-a tax on processed coconut that
finances a price stabilization scheme. Several fi-
nancial institutions run by Assemblyman Eduardo
Cojuangco administer the program, and the scheme
has financed industrial consolidation under an um-
brella organization controlled by Cojuangco and
Defense Minister Juan Ponce-Enrile. Worried by
Communist insurgent gains in the coconut-growing
regions in late 1981, Virata persuaded Marcos to
drop the levy in favor of higher prices for farmers.
Industrial management later prevailed to have the
levy reinstated, prompting a threat by Virata to
resign. In January 1982 he persuaded Marcos to
"float" the levy on a sliding scale dictated by
international prices and later in the year succeeded
in suspending the levy completely when prices fell
further.
The traditionally good relationship between the
government and its international creditors has been
strained during the last year. Negotiations with the
IMF for a new standby loan stalemated over
domestic fiscal policy. Lack of an agreement with
the Fund was partly responsible for the deteriora-
tion in the Philippines's international credit rating
and has held up the second structural adjustment
loan from the World Bank. In the face of rapidly
deteriorating external accounts, however, Manila
early this year capitulated to IMF demands. The
$304 million Fund credit stipulates a comprehen-
sive midterm review of exchange rate management,
foreign borrowing, budgetary performance, and
efforts to trim the estimated $4 billion-plus short-
term foreign debt. To ensure Manila complies, the
release of most of the funds will be held in abey-
ance pending satisfactory policy.
Manila's economic policymaking during the 1980s
will depend critically on the urgency Marcos atta-
ches to the economic problems and the ensuing
political fallout. We believe that the economic
outlook over the next several years is poor and that
the most formidable tests of Marcos's economic
decisionmaking system are just beginning. As a
result, the technocrats probably will continue as
prominent actors in the policy arena during the
next several years, and creditors such as the IMF
probably will continue exercising substantial lever-
age on Manila's decisions.
The system will be tested by two long-term prob-
lems that may turn out to be more serious than the
slowdown produced by the global recession: demo-
graphics assure extremely rapid labor force growth
during the 1980s, and the maturity structure of the
foreign debt assures continuing balance-of-pay-
ments strains. Furthermore, the outlook for impor-
tant agricultural crops is bleak.
Manila still has basic decisions to make about the
direction of policy. These concern the choice be- 25X1
tween keeping inefficient firms afloat with public
money and a more realistic approach to economic
policy. No one, including high-level Philippine offi-
cials, knows how this dilemma will be resolved.
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The technocrats' suggestions have yet to slow the
momentum to larger government, however. Gov-
ernment investment in state enterprises, according
to Philippine data, reached 5 percent of GNP last
year, up from 3 percent in 1978. At the same time,
the public sector has significantly expanded its
holdings of equity in the private sector because of
the technocrats' financial rescue program. Manila
thus faces the task in the 1980s of divesting itself of
inefficient enterprises if expertise provided by gov-
ernment financial organizations proves insufficient
to sort out their problems. A more awkward choice
financially may turn out to be whether to divest the
public portfolio of sound enterprises, thus resisting
the trend to state capitalism.
Marcos's decisionmaking system must also find
ways to revitalize the deteriorating rural economy,
which will not be able to capitalize on the full
effects of recovery in industrialized countries with-
out substantial restructuring. The shift out of sugar
and coconut production-a stated objective of gov-
ernment agricultural experts-promises to be re-
tarded by vested interests close to the President. A
rural investment program begun in 1981, the $125
million National Livelihood Movement sponsored
by Imelda Marcos, is not sufficient to offset the
effects of otherwise weak agricultural policy.
The key indicator of the decisionmaking system's
ability to deal with economic and financial strains
during the next several years will be management
of its single most powerful policy instrument-the
foreign exchange rate. Rising debt service obliga-
tions and a weak balance of trade will demand
more rapid depreciation of the peso than Manila
has permitted in the past. The country's estimated
$1.1 billion balance-of-payments deficit for 1982
and the simultaneous failure of the peso to depreci-
ate rapidly against currencies other than the US
Secret
8 April 1983
dollar are evidence of vigorous Central Bank de-
fense of the exchange rate. Failure to allow suffi-
cient depreciation could produce serious foreign
debt management problems by rapidly expanding
imports beyond a sustainable level of financing.
The IMF has already concluded that the current
account deficit, at a record 9 percent of GNP in
1982, was three times the sustainable level.
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