INTERNATIONAL ECONOMIC & ENERGY WEEKLY 8 JULY 1983

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000200140002-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 51
• Document Creation Date: December 22, 2016
• Document Release Date: January 31, 2011
• Sequence Number: 2
• Publication Date: July 8, 1983
• Content Type: REPORT

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Intelligence
International
Economic & Energy
Weekly
ec
DI /EEW 83-027
8 July 1983
09~ ~~
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Weekly
International
Economic & Energy
8 July 1983
iii Synopsis
1 Perspective-South American Debt: The Risk of Misunderstandings
3 Briefs Energy
International Finance
Global and Regional Developments
11 Brazil: Critical IMF Negotiations
17 Venezuela: Stumbling Through Debt Talks
23 Argentina: Difficulties with the IMF Ahead
29 Andean Countries: Grappling with Payments Problems
35 Latin America: Prospects for Collective Action nn T)Phrl
The Philippines: Growing Financial Strains
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Indicators
Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence,
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International
Economic & Energy
Weekly~~
Synopsis
Perspective-South American Debt: The Risk of'Misunderstandings
The focus of attention among bankers and in the press is shifting to the South
American countries. We are concerned that there remains significant risk of
missteps and miscalculation in the coming months.
Brazil: Critical IMF Negotiations
Brazil's financial rescue package, hastily put together by the IMF and foreign
banks in December, has stalled. Although we believe Brazil will ultimately
reconcile differences with the IMF, the negotiations will be difficult. If a new
agreement cannot be worked out soon, Brazil will have little choice but to
declare at least a temporary moratorium on its debt servicing.
Venezuela: Stumbling Through Debt Talks
Venezuela, once one of Latin America's most attractive borrowers, has been in
serious financial straits for over a year. We believe the Herrera government
will seek to delay signing a refinancing agreement requiring IMF austerity
until after the December presidential elections.
Argentina: Difficulties With the IMF Ahead
Argentina has for now halted its economic slide as the current economic team
reversed the populist policies of its predecessors and managed to sign an
agreement with the IMF. We expect Argentina will have difficulty complying
with IMF targets as fiscal discipline is relaxed on the road to elections in late
October.
Andean Countries: Grappling With Payments Problems
Since January, cutbacks in private bank lending and weak export performance
have caused severe financal strains throughout the Andean region. Adjust-
ments are now under way to relieve these financial stringencies, but difficulties
persist.
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Latin America: Prospects for Collective Action on Debt
Latin American debtors have periodically raised the specter of collective
action to ease the burden of their debt service. Although there is no evidence
that the leadership of any of the large debtor countries is presently considering
such a radical move, the possibilities for joint action by Latin American
debtors to obtain better repayment terms are being more widely discussed.
Joint action would become far more attractive to the debtors if IMF-sponsored
The Philippines: Growing Financial Strains
Manila is attempting to avert a liquidity crisis that could force foreign debt re-
scheduling by late 1983. data on the size of the
short-term foreign debt, combined with a slow contraction of short-term credit
lines by private commercial banks, su~~est that the government has little room
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Perspective
Weekly
International
Economic & Energy
8 July 1983
South American Debt:
The Risk of Misunderstandings 25X1
way, will soon make Latin debt yesterday's problem.
With the Mexican debt situation seemingly under control, the focus of
attention among bankers and in the press is shifting to the South American
countries, which together account for $55 billion of active US loans. The
frenetic pace of negotiations and the flurry of public announcements leave the
clear impression that "something" will be worked out in each case. Indeed, the
more optimistic observers point out that world economic recovery, now under
and debtors will react to the problems which still lie ahead.
We are concerned, however, that there remains significant risk of missteps and
miscalculations. We-and other observers-are unable to predict how bankers
Already South American debtors are encountering difficulty with their IMF
agreements. In January, Chile acknowledged it was unable to meet IMF
monetary and foreign reserve targets; it is now operating under a revised
"shadow program." Brazil was denied more than $1 billion in loan payments
at the end of May because it was out of compliance with most of its
performance targets.
Numerous problems are plaguing the stabilization programs that are the
keystone of the current LDC financial rescue effort. The pace of economic
recovery in the OECD has not been rapid enough to support programed
growth in South American exports. Prices for the region's key export
commodities are firming, but are still below levels prevailing in 1980.
Moreover, the failure of bankers to meet their lending commitments to the
IMF programs has jeopardized the ability of some borrowers-notably
Brazil-to meet their financial targets. Additionally, the debtors are finding it
difficult to actually implement agreed upon economic reforms because of
International cooperation will be likely to avert the default of a major South
American borrower, but the difficulties with the IMF auger continued stress
for world financial markets. Although we judge that the IMF will allow a fair
amount of flexibility in administering the programs, temporary funding gaps
are likely as the parties negotiate midcourse corrections. With borrowings
temporarily cut, however, South American countries will have little choice but
institutional constraints within their own governments.
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to resort to commercial arrearages or payments suspensions to relieve financial
stringencies. At this juncture, we do not know how the commercial banks will
respond to continued disruptions to their debt repayments
The clearest present danger is that Brasilia will declare a moratorium on its
payments. At best, a decision to halt temporarily loan repayments-excluding
interest-would enable Brasilia to obtain some financial breathing room,
although at the cost of disrupting its short-term financing flows. Most bankers
judge-and we agree-that a temporary standstill on repayments would not
prove permanently damaging to Brazil's creditworthiness. In a worst case,
however, numerous bankers foresee that Brasilia would suspend all debt
payments and freeze foreign exchange deposits. They fear that such a move
would be followed by other South American debtors, thereby causing creditors
to halt trade financing and withdraw interbank deposits. Under such condi-
tions, the various rescue programs would collapse, and South America's
difficulties would probably spill over to other Third World borrowers.
Over the near term, we anticipate growing South American political difficul-
ties that will compound the situation. Tough economic retrenchments have
already caused rising unemployment and lower living standards throughout
the region. Protests against IMF-mandated austerity have erupted in Argenti-
na, Brazil, Chile, and Peru. We believe continued austerity and record
inflation will further lower living standards. South American political leaders
will face tough choices between policies to maintain austerity and those that
would be more conducive to near-term political stability.
Faced with these tradeoffs, we believe Latin leaders are likely to backslide on
their IMF commitments in an effort to ensure domestic tranquillity. Moreover,
political leaders are likely to resist taking the tougher steps demanded by
bankers because they could spark social unrest. Brazil is already moving in this
direction. In its latest adjustment program, announced on 9 June, Brasilia
refused to make a major overhaul of its indexation system because it feared the
social consequences. razilian Presi-
dent Figueiredo is now giving increase aut orlty or economic decision
making to his principal political adviser. We believe this means that political
considerations will play an even greater role in setting future economic
policies.
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Energy
Coal Boom Falters Rapid growth in international coal trade came to an abrupt end last year.
After jumping from 229 million tons in 1979 to 271 million tons in 1981, world
coal imports virtually stagnated in 1982 because of the world recession and in-
ventory adjustments. We expect trade to decline this year. Reductions in
stocks will continue to have a negative impact on coal imports, particularly in
Japan and Western Europe. In addition, the fall in oil prices is beginning to
slow the speed of coal conversions. Depending on the strength of the economic
recovery, world coal imports will likely range between 244 million and 269
million tons, according to industry estimates. As the high cost supplier, the
United States will bear the brunt of the fall-off in demand, with forecasters
predicting a 25- to 30-percent decline in exports from the 19821eve1 of 95 mil-
lion tons. Last year US coal exports reached $6 billion and provided over
50,000 jobs in the coal-mining industry.
World Coal Imports
Million cons
1979 1981
19828
1983b
Total
228.8 271.1
273.4
244-269
Western Europe
97.5 115.0
106.9
91-101
Japan
57.9 78.4
79.1
70-75
North America
19.5 17.5
18.4
16-18
Latin America
6.3 4.7
5.7
5-7
Eastern Europe
32.5 30.6
35.0
33-37
Other
15.1 24.9
28.4
29-31
8 Preliminary.
n Estimated.
Phillips Abandons Lower world oil prices and investment costs estimated at $1.7-2.1 billion have
Eko~sk Waterflood led the Phillips Petroleum group to abandon plans for afull-scale waterflood
Project project at Norway's Ekofisk field. The project would have allowed recovery of
an additional 190-220 million barrels of oil over a 10- to 20-year period.
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Indonesia and Caltex
Negotiate Production
Agreement
waterflood project should get under way this year.
According to the Phillips group, the project is uneconomic, given the current
tax structure. The Norwegian Oil Ministry remains strongly in favor of the
project and is expected to respond to the reported pullout later this month. Tax
concessions would alter Phillips' evaluation, but any tax changes would require
approval of the Norwegian legislature. In order to yield optimal results the
ertamina-Indonesia's state oil compa-
ny-may ease its demands for aproduction-sharing agreement with Caltex
later this year. An 85:15 production split in favor of the government currently
applies to all production-sharing arrangements, but Pertamina reportedly
suggested a 95:5 split for output above 250,000 b/d. Caltex-a consortium of
Texaco and Standard Oil of California~urrently produces nearly half of
Indonesia's total output of 1.3 million b d and has offered Pertamina an
86.5:13.5 production-sharing formula.
Mexico Reschedules Mexico City announced last week that it had reached agreement with 16
OJjrcially Guaranteed creditor nations to reschedule nearly $2 billion in officially guaranteed loans to
Private-Sector Debt private-sector borrowers. The agreement reschedules medium- and long-term
principal and interest unpaid as of 30 June and principal payments due during
July through December 1983 over six years with athree-year grace period. Ar-
rearages on short-term debt will be paid in four installments beginning in
September 1983 and ending in June 1986. Short-term credits coming due after
30 June will be paid on schedule. Principal payments due in 1984 will be
rescheduled on similar terms at the end of 1983
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Under the agreement the private sector will make payments in pesos to one of
two designated government banks, and the exchange risk will be assumed by
FICORCA, a government agency established to assist the private sector by
guaranteeing foreign exchange at a future date. Commercial risk, however,
will remain with the creditor, as Mexico City successfully fended off requests
from several creditors that it assume the debt in the event of a private
company default. We believe that this agreement may pave the way for the re-
lease of new trade credits promised earlier this year by foreign governments.
Progress in rescheduling nonguaranteed private-sector debt has been minimal.
The US Embassy estimates that only $200 million of the $9 billion under
renegotiation had been rescheduled under terms laid out by Mexico City in
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April. (many Mexican businessmen doubt
Mexico City's ability to deliver foreign exchange as promised. They cite earlier
inability of financial officials to provide the foreign exchange that the
government had guaranteed in an earlier scheme last fall. According to
Embassy reporting, Mexican financial officials plan to offer a series of
seminars to US bankers this month to explain the rescheduling scheme for
private-sector debt and to encourage bankers' participation.
Mexico To Cut Food Mexico City doubled the price of bread and raised tortilla prices 41 percent on
Subsidies Tuesday. Even so, Mexican officials indicate that corn and wheat subsidies
will still cost $500 million during the remainder of the year. To maintain
essential food supplies through September, Mexican financial and agricultural
officials project they need $500 million more in food imports. Because drought
and low farm support prices slashed grain output last year, Mexico already
greatly increased food imports, mostly by drawing all the $1.2 billion credit for
this fiscal year from the US Commodity Credit Corporation. Public reaction
so far has been subdued. Price increases were expected with the expiration of
the six-month price freeze on food staples and public transportation that was
part of the wage settlement last December. No increases were announced for
bus, subway, or rail fares.
The decision demonstrates President de la Madrid's willingness to take tough
steps to stay in compliance with the IMF program. Additional moves such as
large cutbacks in public employment are slated for Mexico to meet budget
targets. Nevertheless, plunging economic activity, near triple-digit inflation,
and falling consumption are causing a small but growing division amon
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Global and Regional Developments
European Community The EC Commission recently revised its member forecasts for 1983 GNP.
Revises GNP Forecast Commission expectations for the EC economies as a group have changed
little-0.5-percent growth as a group compared to 0.4 percent in the earlier
forecast-because greater expectations for growth in West Germany, the
United Kingdom, Italy, and Denmark offset a worsened outlook for the other
EC members. West German and British growth prospects have improved the
most, based primarily on an expected pickup in consumer demand and
industrial orders. The sharpest downward revisions have occurred in France
and Ireland, where new austerity programs have been adopted. Commission
economists are warning, however, that their present forecast may be too
optimistic if the recent uptick in US interest rates pushes up West European
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European Community: EC Commission GNP Growth
Forecasts, 1983
0.4
0.5
- 0.2
0.7
0.8
-0.8
Ireland
1.5
0.5
Luxembourg
-1.1
-1.4
Netherlands
0.1
-0.2
The Commission probably is too bearish on the EC economies. Industrial
production and unemployment data suggest that the EC economies bottomed
out earlier this year, and we believe that growth will advance almost 1 percent
for the year as a whole. Moreover, if the US economy expands more rapidly
than the 2 to 3 percent expected by the Commission-as seems likely-EC
countries would benefit from increased exports to the United States.
EC Steel Cutbacks The EC Commission on Thursday ordered large cutbacks in EC steelmaking
Ordered capacity but postponed determining how these reductions will be implemented.
For the Community as a whole, the Commission is requiring by 1985 a 15.8-
percent reduction in capacity-26.7 million tons-from the level of 1980.
Member governments now have until 31 January 1984 to submit national
plans to carry out the Commission's mandatory cutbacks. Commission officials
acknowledge that the reductions will add at least another 150,000 to the
250,000 steelworkers already unemployed and have called on the EC to
approve emergency social programs.
The required reductions in capacity will lead to a major test of the Commis-
sion's ability to regulate the EC steel industry. Although West Germany,
France, and the United Kingdom already are planning cutbacks close to those
ordered by the Commission, Italy and the Benelux countries will need to shut
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European Community: Cutbacks in Steel Production
Capacity by 1985
1980 Capacity
(million tons)
Governments'
Proposed
Reductions
(percent)
EC Commission
Ordered Cutbacks
(percent)
Tota18
168.3
10.9
15.8
West Germany
53.1
9.0
11.3
Italy
36.0
6.5
16.1
France
26.9
17.4
19.7
United Kingdom
22.8
17.5
19.7
Belgium
16.0
10.6
19.4
Netherlands
7.4
3.5
13.0
Luxembourg
5.2
10.8
18.4
Denmark
0.9
xn
7.0
e Excluding Greece and Ireland. Both are exempt from the cutbacks
because their steel industries are very small.
down more plants than planned. Indeed, the caretaker Italian Government has
already rejected Commission requirements. Failure to comply could lead to
fines and withholding of EC aid for restructuring programs.
UNCTAD VI UNCTAD VI, which concluded last week, failed to produce agreement
Concludes between industrial and developing countries on trade, monetary reform, and
commodity price stabilization but nonetheless managed to forestall a break-
down in the North-South dialogue. The developing countries are skeptical that
the international economic recovery will include them, and consequently they
refused to significantly reduce their demands. The industrial nations turned
back Third World proposals for massive resource transfers, structural reform
of international economic institutions, and an international monetary confer-
ence. The United States, however, was isolated in its opposition to resolutions
permitting UNCTAD to examine the IMF's Compensatory Financing Facility
and to continue work on trade in services. The meeting's most important result
probably was the impetus it gave to ratification of the Common Fund. Enough
countries now appear ready to join the Fund so that its entry into force will
hinge on US ratification
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Big Seven Trade D~cit The Big Seven trade deficit with OPEC fell to an estimated $8 billion in the
With OPEC Narrows first quarter as a result of a further drop in oil imports. The United States re-
ported the largest trade improvement despite the continuation of the export
declines to OPEC that began in second-quarter 1982. The Big Seven reported
improved trade balances with most OPEC members. Their largest trade gains
were with Saudi Arabia and Libya; Big Seven deficits with three financially
troubled oil producers-Ecuador, Indonesia, and Venezuela-widened in the
first quarter as these countries curbed their purchases from the industrial
West. A further reduction in the Big Seven trade deficit with OPEC is likely in
the second quarter as a result of soft oil prices.
Libyan-Italian
Commercial Payment
Problems Mount
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Big Seven: Trade Balances with OPEC Countries a Bl[lion Us $
1981
1982
1983
1st
Total
1st
Qtr
2nd
Qtr
3rd
Qtr
4th
Qtr
Qtr
Big Seven
-80.9
-45.4
-14.1
-8.3
-12.9
-9.6
-8.0
United States
-30.3
-9.9
-4.0
-1.1
-3.4
-1.4
-0.4
Japan
-32.0
-26.7
-7.9
-5.9
-6.4
-6.3
-6.1
West Germany
-1.2
2.2
1.0
0.8
0.5
0
0.7
France
-11.4
-8.2
-2.0
-2.0
-2.3
-1.9
-1.6
United Kingdom
3.8
4.5
1.2
1.3
0.7
1.3
1.2
Italy
-6.7
-6.7
-2.0
-1.4
-1.9
-1.4
-1.7
Canada
-3.1
-0.6
-0.4
0
-0.1
0.1
-0.1
a Quarterly trade balances were computed on the basis of seasonally
adjusted exports and imports. First-quarter 1983 figures include
March estimates for France, the United Kingdom, Italy, and
Canada.
Tripoli is again as much as $750 million in arrears to Italian firms
he payments slowdown probably is an attempt
by Qadhafi to extract trade concessions from Rome such as larger purchases of
Libyan petroleum. The regime successfully used its overdue payments position
with other suppliers last year to sharply increase sales of Libyan oil to help
resolve more than $6 billion in commercial payment obligations. Italy was part
of last year's deals and received $300 million and a sizable increase in
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deliveries of low cost oil. We doubt the Italians will publicly criticize the
Libyans because of Rome's substantial interest in developing Libya's offshore
oil resources. Rome may delay the completion of some petroleum projects in
Libya, however, if the arrearage problem is not redressed.
Cuba-Ecuador Cuba is continuing to urge Ecuador to accept development assistance. Last
Aid 0,1ler month Cuban officials offered economic aid to an unofficial Ecuadorean
delegation led by a university director and a Communist Party secretary
In January Ecuador accepted free Cuban medical
supplies for flood victims but turned down Havana's offer of medical
personnel. Quito has spurned similar overtures in the past, and the signing of a
formal aid agreement is unlikely. The latest offer may involve public health as-
sistance, including the construction of a hospital.
Libya-Ghana Oil Libya has decided not to provide Ghana with a $350 million oil credit that
Credit Denied would cover Accra's oil import needs for a year. The US Embassy reports
Ghana's oil situation is critical, with only enough stocks on hand to meet
normal consumption through the end of this month. Ghana has approached
Nigeria for assistance, but Lagos is withholding shipments until the Ghanaians
pay at least $20 million for past deliveries.
Libyan leader Qadhafi may have killed the oil deal to underscore his
disapproval of Ghana's tentative overtures toward the West. Earlier this year
Accra agreed to longstanding demands by the United States and other
Western donors to seek help from the IMF. Collapse of the oil deal, however,
removes a key feature of a proposed agreement with the IMF that could
provide Ghana with $260 million in foreign exchange. To encourage Libya to
reverse its decision, Ghana may resume its anti-US rhetoric.
National Developments
Developed Countries
Japanese Export Drive Anew Japanese export drive is probably under way. In May exports rose 0.5
percent from the year-earlier level, the first such gain in 16 months. Foreign
orders for machinery, which account for one-fourth of Japanese overseas sales,
also increased. More important, export letters of credit-a reliable indicator of
future trade trends-have been on the upswing for three months.
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Although Japan's Economic Planning Agency points to reductions in ex-
porters' overseas inventories and the US economic recovery for the turnaround,
the upturn in exports has yet to hit the United States. Japan's overall trade
surplus on a customs clearance basis in the first five months of 1983 was $5.3
billion above the year-earlier level, but Japan's surplus with the United States
was only $600 million higher. Much of the increase in Japan's global trade sur-
plus reflects lower oil prices. The bulk of the improvement for the remainder of
the year will most likely come on the export side.
Japanese Auto Export The recent statement by Trade Minister Uno rejecting an extension of the
Policy current restraints on auto exports to the United States may not be Tokyo's
final position. Other Japanese officials have said that Uno's statement did not
reflect a change in policy. The US Embassy believes Uno probably tailored his
n - r of Japanese automobile manufacturers.
Japanese officials are increasingly concerned
about the mounting trade surplus and are particularly worried that relations
with Washington will deteriorate as the US elections get closer. The current
agreement runs through March 1984, and the Japanese Government probably
has not yet ruled out another agreement. Uno's comment may reflect an
attempt to stake out an initial negotiating position. Similar statements were
made by the previous trade minister before the current agreement was
reached.
Australian Wage The National Arbitration Commission's extension last week of Australia's six-
Freeze Extended month wage freeze signals a temporary victory for Prime Minister Hawke,
who has argued that wage restraint is the crucial factor in Australia's
economic recovery. Canberra had been under pressure from militant trade
unions to reestablish wage indexation in June; last April's domestic economic
summit of business and labor leaders supported its resumption. The Commis-
sion will now tackle the job of reforming Australia's wage indexing system,
which it expects to complete by September.
Soviet Concern Over Soviet demographers have become skeptical that measures adopted in 1981 to
Low Birth Rate . stimulate the birth rate will prove effective. These measures included one-year
partially paid maternity leave and lump-sum grants for first, second, and third
births. The demographers are now convinced that these financial incentives are
too low~ne explicitly admitted this to an Embassy officer recently-and
must be supplemented by other steps. They seem doubtful, however, that even
a much more ambitious pronatal program will reverse unfavorable demograph-
ic trends. The Soviet birth rate has been declining for several years-from 24.9
births per 1,000 population in 1960 to 18.5 in 1981.
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Brazil: Critical IMF Negotiations
Brazil's financial rescue package, hastily put to-
gether by the IMF and foreign banks in December,
has stalled. Since April, the liquidity position has
weakened considerably because of shortfalls in
export earnings and the failure of foreign banks to
provide expected amounts of short-term financing,
thus forcing a run up of arrears. Brazil's cash-flow
problem grew acute in June when more than $1
billion in IMF and foreign bank loan disbursements
due to Brazil on 31 May were postponed because
Brazil failed to meet the terms of its agreement
with the IMF. To deal with this unanticipated
foreign exchange deficiency, Brasilia is resorting so
far to stopgap measures until it is able to resolve its
differences with the IMF.
Although we believe Brazil will ultimately recon-
cile differences with the IMF, the negotiations will
be difficult. The IMF, supported by foreign credi-
tor banks, is insisting that Brasilia adopt much
tougher austerity measures than those implemented
thus far. President Figueiredo, however, wants to
avoid harsh steps that could provoke social unrest
during the ongoing process of political liberaliza-
tion. If a new agreement cannot be worked out
soon, Brazil will have little choice but to declare at
least a temporary moratorium on its debt servicing.
Brazil's IMF stabilization program was in trouble
almost from the beginning because of unrealistic
goals, the unwillingness of banks to fulfill financial
pledges, and a lack of government aggressiveness in
pushing austerity. By February, it became obvious
that Brazil's current account deficit could not be
squeezed even close to the $7 billion goal because of
the slow world recovery and overvalued cruzeiro.
To get the program back on track, the government
carried out a large cruzeiro devaluation that
month. This action boosted exports but fueled
inflationary pressures. Accelerating inflation-to
well over 100 percent-automatically pushed pub-
lic-sector spending higher via the indexation sys-
tem, eroding Brazil's ability to stay within IMF
limits. Meanwhile, the reluctance of West Europe-
an and US regional banks to restore interbank
credit lines was largely to blame for Brazil's inter-
national reserve deterioration and an accumulation
of payments arrearages.
Brasilia subsequently demonstrated reluctance to
tighten fiscal and monetary policies to deal with
resurgent inflation. In early May, the IMF suspect-
ed that Brazil had fallen appreciably short on its
commitments. Later in the month, a technical team
found that Brasilia failed to meet major flrst-
quarter performance targets-particularly public-
sector spending and borrowing, domestic credit,
and international reserves. On the basis of its
findings, the IMF judged that Brazil did not
qualify for a second loan installment scheduled for
the end of the month.
The IMF's decision to suspend further loan pay-
ments to Brazil intensified the country's cash-flow
problem. Not only did the Fund defer payment of
its $410 million installment but foreign banks
postponed a planned 1 June transfer of $640 mil-
lion in medium-term commercial loans tied to the
IMF agreement. Brazil has been able temporarily
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to absorb this loss of funds by rolling over payments
on bridge loans due to the Bank for International
Settlements and other banks.
Since May, banker confidence in Brazil's ability
and determination to manage its economy has
dwindled. This has led to some erosion in short-
term financing support.
many banks have recently
reduced the volume of trade credits they are willing
to extend, and foreign banks have withdrawn some
$300 million in interbank deposits in recent weeks.
Renegotiations Under Way
With its loans cut, Brasilia recognized the need to
implement some midcourse corrections. In prepara-
tion for an impending visit by an IMF negotiating
team, the government's National Monetary Coun-
cil on 9 June announced part of a new austerity
package designed to raise government revenues and
reduce public-sector spending. Among the meas-
ures disclosed were trimmed subsidies for agricul-
ture and exports, higher prices for petroleum prod-
ucts, and increased taxes in the financial sector.
The package, however, omitted Planning Minister
Delfim's proposals for heavy cuts in state enterprise
budgets and changes in Brazil's wage and price
indexation system.
Since arriving in Brazil on 11 June, the IMF team
has stressed that Brazil must take stronger steps.
Particularly, the Brazilian Government has been
urged to slash public-sector spending. The team is
also pressing for deindexing wages.
Some progress has been made in the talks. Brasilia
reportedly pledged a quicker phaseout of subsidies
for wheat and sugar. The government cut public
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enterprise investment and made some cuts in public
employee benefits and cost-of-living adjustments.
While the IMF talks have proceeded, a new 14-
member bank advisory committee has been laying
the groundwork for steps to overcome Brazil's
?rowin? financial problems.
Brazil's major creditors have
indicated that they probably will arrange a new $3
billion medium-term commercial loan to see the
country through the end of 1983. A loan of this
size, would compen-
sate Brazil for shortfalls both in interbank deposits
and in export earnings. The committee reportedly is
prepared to begin consideration of Brazil's 1984
financing and debt rescheduling needs. The bank-
ers stress, however, that concrete actions must
await IMF approval of a new Brazilian austerity
program.
We believe major differences between Brazil and
the IMF remain:
? The announced public spending cuts appear inad-
equate for Brazil to reach its public deficit target
under the original IMF agreement. Recent large
protest demonstrations and strike threats are
likely to discourage Brasilia from making sharp
cuts in public employee compensation, and the
new investment controls will have little immedi-
ate impact on spending.
? The other sticking point in the negotiations is
Brazil's complex indexing system. Fearful of the
social consequences of dismantling the system,
Brasilia has proposed manipulating the index to
provide less than 100-percent linkage. The IMF,
however, wants a break in the automatic wage-
price adjustment mechanism
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We believe that Brazil will reach a settlement with
the IMF, but negotiations will most likely be
difficult. Both Brasilia and the IMF have consider-
able stakes in a successful outcome and both want
to avoid the consequences of a collapse. Still, the
Brazilian Government has become worried about
the political fallout of the deepening recession and
is resisting tougher steps.
The Alternative to an IMF Accord
If the IMF renegotations are not settled by the end
of July, the Brazilian Government probably will
declare a limited debt moratorium. By this time,
foreign payments arrears very likely will have shot
up sharply, perhaps to more than $2 billion. More-
over, growing uncertainty and diminishing confi-
dence would prompt bankers to withdraw more of
their short-term trade financing and interbank
deposit support, further aggravating Brazil's des-
perate foreign exchange reserve position.
rasa is as been devising a contingency moratori-
um plan. Such an action probably would be applied
only to principal payments and would be intended
only for a short period of time. We believe that
Brazil would hope that this type of a moratorium
would provide opportunities for a new debt resched-
uling plan-perhaps with substantial extensions of
repayments terms and a reduction of interest rates.
Economic Performance Scenarios
for the Rest of the Year
The direction that Brasilia chooses and foreign
banker reactions will influence the depth of the
country's recession. A decision by the government
to stay with an IMF program and accede to the
required conditions should net Brazil several billion
dollars of additional foreign funds to support cru-
cial import and investment activities. By contrast, if
the government opts for a moratorium, no net
inflows of foreign private loans would be forthcom-
ing until a new financial package is arranged. The
Brazilian Government undoubtedly will balance
these considerations against its own political exi-
The IMF Route. A revised stabilization agreement
would not only free disbursement of withheld IMF
and bank funds but would clear the way for Brazil
to solicit new funds. Despite sharp import cuts, we
estimate that Brazil would require at least an
additional $2.5 billion in new money to cover its
projected $7 billion current account deficit. Exports
almost certainly will not attain Brasilia's original
projected level of $23 billion because of slumping
demand for its manufactures and raw materials
such as iron ore. By putting its IMF program back
on track, we believe creditor banks will raise
another large loan to enable Brazil to fill its
financing gap. A few large money center banks are
recommending Brasilia seek $3-3.5 billion in new
funds, but the cautious positions of a number of
European and small US regional banks could re-
duce this amount.
Continuing foreign exchange constraints and more
austerity will lead to as much as a 5-percent decline
in Brazil's GDP this year. Brasilia will have to
continue squeezing imports through the remainder
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With IMF
Agreement
With
Moratorium a
Current account balance -14.5 -7.5
-6.0
Trade balance
0.8
5.5
7.0
Exports
20.2
21.5
20.0
Imports
19.4
16.0
13.0
Net service balance -15.3 -13.0
-13.0
Interest pay-
menu
11.0
9.0
9.0
Debt repayments
20.8
22.2
18.6
Long-term maturi-
ties
7.8
7.2
3.6
Short-term maturi-
ties
13.0
15.0
15.0
Gross foreign exchange
requirements
35.3
29.7
24.6
Financed by:
Net direct investment
1.0
0.5
0.4
Official and supplier
credits
5.2
4.0
3.0
Loans
27.0
27.8
23.8
Bridge operations
4.0
-3.6
-2.5 n
Short-term rollovers
10.0
15.0
15.0
Short-term borrow-
ings
0.5
1.0
1.5
Long-term credits
12.5
15.4 ~
9.8 d
Other
2.0
-2.6
-2.6
a Assumes Brazil declares a moratorium on amortization payments
at the end of July.
b Assumes Brazil suspends repayment of bridge loans to foreign
banks.
Includes $2.5 billion from the IMF and an anticipated new $2.0 bil-
lion foreign bank loan.
a Excludes not only new loan but also currently deferred IMF and
foreign bank payments on existing loans.
of the year, forcing manufacturers to scale back
production because of inadequate supplies of criti-
cal imported industrial materials. Furthermore,
large cuts in state enterprise spending and continu-
ing high real interest rates will assure declining
investment activity for some months to come. Fall-
ing national output will probably boost unemploy-
ment rates close to double digits and heighten the
risk of more wildcat strikes and cost-of-living dem-
onstrations.
The Moratorium Route. Brazil's choice of a debt
moratorium would very likely entail a freeze of
short-term funds-including trade financing and
interbank deposits-and a temporary deferral of
amortization payments on medium- and long-term
debt. Although a few large US money center banks
might favor a moratorium of this type, we believe
most banks would discontinue new lending activity
until new austerity measures and debt rescheduling
agreements can be arranged.
Denied access to its principal source of funds
through yearend, Brazil, we believe, would have to
slash imports by 40 percent in the second half.
Sharply reduced availability of imported oil and
raw materials would cause industrial and commer-
cial output to plummet, and GDP could drop more
than 10 percent for the year. Commodity shortages
would very likely send inflation rates into the 150-
to 200-percent range. Unemployment rates would
climb-probably to the flashpoint for major social
and political turmoil. The government's ability to
deal with the resulting unrest could be sorely
strained, and further movement toward political
liberalization could be threatened.
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Implications of a Moratorium
A decision to break off talks with the IMF and to
temporarily suspend amortization payments to for-
eign banks would most likely be accompanied by a
shakeup within President Figueiredo's three-man
economic policy team.
Planning Minister Delfim and Finance Minister
Galveas. Central Bank President Langoni also is
vulnerable because of his vast staunch defense of
foreign banks have lost considerable confi-
dence in the economic management abilities of
IMF austerity policies.
moratorium would imply past economic policy fail-
ures and would likely augur the emergence of a
new economic team.
The successors to Delfim and other economic poli-
cymakers would face two unattractive policy op-
tions. They could-as we believe likely-seek a
compromise with the IMF and a return to the
suspended stabilization program. Brasilia would
have to push harder to achieve important economic
adjustments than it has up to now. The political
price that the ruling government party would have
to pay could be heavy. Alternatively, Brasilia's
preoccupation with social discontent during the
early weeks of a moratorium could lead Brazil's
new economic leaders to adopt more growth-orient-
ed policies. Such policies probably would exacer-
bate existing distortions in the economy, drive up
inflation rates substantially, and enlarge the al-
ready major role of the public sector)
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Venezuela: Stumbling Through
Venezuela, once one of Latin America's most at-
tractive borrowers, has been in serious financial
straits for over a year. Sharply lower oil income and
rampant capital flight led in March to the imposi-
tion of exchange controls and forced Caracas to
suspend most principal payments on its large ma-
turing debt.
After three months of negotiations, Venezuela and
its bank advisory committee have made little prog-
ress in refinancing short-term debt. Bankers are
convinced that Caracas has neither the resolve nor
the skill to manage its economy and insist that
Venezuela submit to an IMF adjustment program.
We believe the Herrera government will seek to
delay signing a refinancing agreement requiring
IMF austerity until after the December Presiden-
tial elections. Instead, Caracas will implement a
patchwork of policies aimed at averting a liquidity
crisis and will appeal to Washington for direct
financial assistance rather than make necessary
economic adjustments.
The 10-Year Borrowing Binge, 1973-82
Despite the massive influx of oil revenues over the
past decade, Venezuela has been one of the Third
World's largest borrowers. Caracas turned to eager
international lenders to finance ambitious develop-
ment projects, while its state corporations borrowed
short term to cover funding shortfalls. Consequent-
ly, Venezuela's total external debt soared to an
estimated $34 billion by the end of 1982 from a
mere $4 billion in 1973.
Venezuela: Foreign Debt Profile
e Including public and private obligations.
b Excluding 11.46 million troy ounces of gold holdings, revalued in
1982 to $300 per ounce for a total of $3.4 billion. Includes reserves of
the National Oil Company (PDVSA) and the Venezuelan Invest-
ment Fund.
In a favored position as an oil supplier in a boom
market, Caracas exercised little control over exter-
nal borrowings, especially in the short-term mar-
kets, and managed its foreign funds poorly. As a
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result, nearly one-half of total foreign debt now
carries maturities of one year or less, leaving
Venezuela highly vulnerable to changing conditions
in international capital markets. Meanwhile, debt
servicing requirements rose steadily, from $400
million in 1973 to an estimated $6.8 billion last
year.
Debt Servicing Becomes Unmanageable
The depth of the problem became apparent as
Venezuela's financial position eroded steadily last
year, dealing a sharp setback to lender confidence.
Oil revenues-which account for about 95 percent
of export earnings~ropped 20 percent and
heightened banker concern about debt servicing:
Moreover, a serious loss of confidence on the part
of domestic businessmen caused capital flight to
escalate, draining more than $5 billion in foreign
reserves in 1982, according to Central Bank esti-
mates.
Poor financial planning added to Venezuela's debt
difficulties. A refusal to pay high interest fees
aborted the syndication of a large refinancing loan
in March 1982, which would have improved the
maturity structure of outstanding credits. Subse-
quently, the Mexican and Argentine repayment
problems reinforced lenders' reluctance to roll over
maturing short-term loans. In September lenders
began demanding repayment, which further
drained reserves.
The government's debt crisis deepened early in
1983. Against the Central Bank's nongold foreign
reserves of only $7.5 billion, Caracas faced poten-
tial demands for the repayment of $13.7 billion in
maturing short-term debt and the need to fund a
projected $2 billion current account deficit. Simul-
taneously, its access to new credit virtually ceased
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in January because of mounting fears of a precipi-
tous drop in OPEC oil prices, another surge in
capital flight, and the failure of Venezuelan state
companies to make debt servicing payments.
The Early Venezuelan Response
Caracas finally took some stronger actions in Feb-
ruary to shore up its financial position. It suspended
foreign exchange transactions for one week and
announced the imposition of exchange controls, the
first in 20 years. The government introduced a
three-tiered exchange system aimed at protecting
reserve levels while preventing sharp price increases
for basic consumer imports. These moves were not
well received by bankers, who continued to resist
new lending.
The government suspended principal payments on
most types of public external debt for 90 days in
March to gain some breathing room while it negoti-
ated with international banks on the rescheduling
of short-term credits. A 13-bank advisory commit-
tee was set up in New York to handle the Venezue-
lans' rescheduling requests.
Venezuela's capability to deal with its problems has
increasingly come into question. Even before seri-
ous discussions could begin, Venezuela's financial
team needed banker assistance in compiling accu-
rate data on the debt profile, the amounts to be
refinanced, and realistic economic and financial
projections for 1983. Moreover, political infighting
between the President's two main economic advis-
ers-Finance Minister Sosa and Central Bank
President Diaz Bruzual-reinforced bankers' be-
liefs that Caracas lacked a coherent strategy.
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Venezuela: Current Account
Billion US $
1979 1980
1981
19828 19838
Trade balance 4.4 8.3
8.0
3.4 4.3
Merchandise
exports, f.o.b.
14.4 19.0
20.1
16.6 14.3
Oil
13.7 18.3
19.1
15.7 13.3
Other
0.7 0.7
1.0
0.9 1.0
Merchandise
imports, f.o.b.
10.0 10.7
12.1
13.2 10.0
Net services and
transfers
-4.0 -4.7
-4.1
-6.9 -6.0
The Venezuelan economic team also demonstrated
reluctance to undertake adjustment measures. Al-
though Sosa hinted that policies would be tough-
ened, the Herrera administration has failed to
make any meaningful cutbacks in spending or
consumption. According to Embassy sources, Her-
rera refuses to implement tough austerity policies,
claiming they would precipitate social unrest in an
election year. Instead, Caracas has utilized stopgap
measures, such as restraining imports by limiting
dollar availability through both the government's
exchange office and commercial banks.
Bankers Get Tough
International lenders have been extremely critical
of the government's response to payments prob-
lems. he govern-
ment is proving itself incapable of administering
the patchwork exchange system and has obstructed
timely debt servicing. The private~sector has been
largely unable to obtain preferential dollars for
debt servicing purposes since the exchange system
was imposed, forcing some banks to move loans to
nonperforming status. Meanwhile, difficulty in ob-
taining foreign exchange has caused various state
corporations to fall behind on their interest pay-
Starting in May, bankers began insisting that
Caracas submit to an IMF adjustment program
before they would proceed with refinancing. Specif-
ically, the bank advisory committee urged Venezu-
ela to seek a standby agreement, which, according
to press and Embassy reporting, could garner a
maximum of $4.5 billion over three years. In return
for financial support, according to the same
sources, the IMF would require Caracas to:
? Gradually unify the present three-tiered ex-
change system and remove import controls.
? Eliminate consumer price subsidies, particularly
for domestic petroleum products and food.
Reduce budgetary expenditures, particularly for
state corporations, and increase prices of govern-
ment services.
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The Current Impasse
With his party trailing far behind in the campaign
for the December election, President Herrera con-
tinues to firmly resist adoption of what he considers
an unreasonably tough IMF program. Instead,
Venezuelan officials announced on 3 June they
would seek up to $2.8 billion in unconditional
drawings from the IMF to avert foreign financing
problems in 1983. Caracas hoped to obtain half of
that amount through use of its net credit position
with the Fund, and it has applied for another $1.4
billion from the Compensatory Financing Facility
based on the decline in oil export revenues. ~~
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The announcement that Caracas was not seeking
an IMF standby set back its efforts to gain banker
support for a rescheduling plan. As presented to the
banker advisory committee in early June, Sosa
requested that payments of $13.7 billion in 1983
maturities and $2.6 billion in 1984 maturities be
stretched out through 1991 with afour-year grace
period. In turn, Sosa promised bankers to eliminate
some price subsidies, reduce expenditures by 10
percent, and introduce fiscal reforms-but not until
1984.
Private bankers rejected Sosa's adjustment plan as
inadequate. They stressed that refinancing talks
will proceed only after Venezuela successfully ne-
gotiates an IMF adjustment program
Muddling Through 1983
Although negotiations are deadlocked, Caracas has
recently gained some breathing room. The banker
advisory committee recommended an extension of
the postponement on principal payments from the
end of June to the end of September because it
realized it lacked sufficient leverage to force Cara-
cas to adopt a standby. Until a comprehensive
refinancing scheme is concluded, however, lenders
will be likely to resist extending any new credits,
thus forcing Caracas to survive on existing reserves.
The Herrera government probably believes it can
avoid the political embarrassment of lender-
induced austerity through use of these reserves.
Indeed, according to Embassy reporting, the Cen-
tral Bank's nongold foreign exchange reserves-
now approximately $6 billion-are sufficient to
cover the projected balance-of-payments deficit
through the December election period without a
major injection of funds.
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The Herrera administration is gambling that it can
escape IMF austerity, obtain some debt relief, and
still avert serious cash problems. To attain these
objectives, the Venezuelans will most likely:
? Initiate negotiations with the Fund in an effort to
keep credit lines open but delay signing any
standby to avoid domestic political repercussions.
? Make some minor economic adjustments to pre-
vent abreakdown in cooperation with bankers
that would jeopardize the standstill on payments.
? Use reserves and unconditional drawings from
the Fund to maintain essential imports and inter-
est payments.
? Maintain severe restrictions on the availability of
dollars for nonessential imports to limit reserve
drawdowns
We believe this strategy will fail to achieve all of its
objectives. Bankers almost certainly will press Ca-
racas to adopt austerity. According to press reports,
the IMF has said it will set tougher economic
conditions on Venezuela's request fora Compensa-
tory Finance Loan. These would include the adop-
tion of an adjustment program for any drawings in
excess of 50 percent of the member's quota.
In our view, Venezuela will obtain only limited debt
relief. Their intransigence over the IMF's condi-
tions will reclude a long-term refinancing plan.
he banks would
then be likely to reschedule 1983 maturities for one
year only, forcing the new administration to negoti-
ate in 1984.
These lending cutbacks will probably cause Vene-
zuela's cash strains to intensify.
Venezuelan firms are already
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experiencing sharp cutbacks in trade credits. Si-
multaneously, Caracas will need to limit the avail-
ability of dollars for imports, and we anticipate
more serious shortages of key raw materials and
foodstuff imports.
Venezuela's domestic economic recession will deep-
en by the time of December elections, regardless of
whether Herrera succeeds in escaping the full
brunt of lender-imposed austerity measures. Ac-
cording to press reports, many plants have begun to
shut down operations because of a lack of key
imported parts, which will worsen as existing inven-
tories are depleted. Other firms are faced with a
severe profit squeeze because of price controls and
declining domestic sales. According to the US
Embassy, the government's policies are causing
mounting layoffs and bankruptcies. We estimate
that GNP will decline 4 to 7 percent this year, with
unemployment nearing 20 percent by December,
and inflation ranging between 15 and 20 percent.
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Herrera's policies will also heighten the country's
vulnerability to unanticipated external shocks. Any
deterioration in world oil markets will rapidly drain
remaining liquid reserve holdings. With easy access
to IMF funds blocked, Caracas would then soon
encounter severe cash management difficulties.
The government's delaying tactics could also pro-
voke an unexpected confrontation with bankers.
We remain concerned that smaller banks with
large interest arrearages on their loans to Vene-
zuela will take actions to force payments. Earlier
this year, some banks initiated legal action to
declare loans in default. Although a rash of court
actions is unlikely, bankers could also demonstrate
their pique by abruptly retracting existing trade
credits--comparable to the cessation of credits to
Chile in Januarv-precipitating a liquidity crisis.
US commercial interests have been hard hit by
Venezuela's intensifying foreign exchange squeeze.
Over the near term, we foresee continued delays by
Venezuelan borrowers on servicing their $12 billion
US debt and persistent difficulty in clearing ac-
counts with US suppliers. US exporters will be hurt
by import curbs. We believe Caracas will seek
financial assistance from the United States to blunt
the need for economic austerity.
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Argentina: Difficulties with
the IMF Ahead
Argentina has for now halted the economic slide
triggered by the Falklands conflict as the current
economic team reversed the populist policies of its
predecessors and managed to sign an agreement
with the IMF. Buenos Aires has stayed close
enough to its IMF program to allow continued
drawings. A major refinancing effort designed to
ease the servicing of nearly $39 billion in foreign
debt is also being put into place.
We expect Argentina will have difficulty comply-
ing with IMF targets as fiscal. discipline is relaxed
on the road to elections in late October. The
incoming civilian regime will inherit an economy in
need of austerity and reforms, but it will be under
pressure from constituents to push economic recov-
ery. We expect the new government will try to
balance these conflicting demands, but this proba-
bly will cause frictions with US and foreign bank-
ers if the civilians again opt for populist growth
policies.
Downward Spiral
Even before the Falklands crisis, Argentina had not
seen any substantial growth since 1979. The econo-
my contracted by roughly 5 percent in 1980-81.
Inflation hovered just above 100 percent and real
wages contracted. Payments problems mounted
because of the highly overvalued exchange rate,
higher oil prices, and rising interest payments. ~
In late 1981, Economics Minister Alemann aimed
at improving the economy by implementing free
market policies and austerity measures. His re-
forms cut inflation and restored stability to Argen-
tine foreign exchange markets in early 1982, but
they fell casualty to the Falklands conflict. Defense
spending pushed prices higher, while Argentina's
external accounts were weakened by war-induced
export shortfalls, capital flight, and the cessation of
new lending.
After the conflict, President Bignone and his new
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hikes, and initiated a domestic debt refinancing
program. Price controls were implemented in an
attempt to hold down inflation. The payments
accounts were bolstered by devaluing the commer-
cial peso to boost exports while retaining tough
import controls.
These policies were only effective in moderating the
economic slowdown. Although economic activity
was contracting at a 10-percent annual rate in the
first half, Buenos Aires finished the year with only 25X1
a 5.7-percent reduction in GDP. Despite promises
to control inflation, however, consumer prices pre-
dictably headed higher and were climbing at a
roughly 200-percent annual rate by yearend.
The switch to populist policies and a $1.4 billion
jump in public sector arrears caused foreign banker
confidence to collapse. Bankers refused long-term
refinancing for maturing debt and all new lending
requests. With debt servicing becoming unmanage-
able, Argentina hovered on the verge of insolvency. 25X1
Regaining Control
In August of last year Economics Minister Dagnino
and Central Bank President Cavallo resigned. They
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Argentina: Economic Indicators
Real GDP Growth
Percent
Current Account
Balance
Billion US $
Consumer Price
Growth
Percent
Agricultural
Production
Index: 1970=100
Manufacturing
Output
Index: 1970=100
a Estimated.
b Projected.
Public Sector Deficit
Percent of GDP
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IMF Standby Agreement
Argentina will remain eligible to draw under an
IMF standby agreement this year if it limits the
growth of'net central bank credit, maintains an
overall balance-of payments d~cit of'not more
than $S00 million, reduces the public-sector d~cit
to 8 percent of GDP, and keeps the growth of
.foreign debt to no more than $2 billion. Buenos
Aires is also required to drop rebates for exports to
new markets and gradually eliminate minimum
.foreign~nancing requirements.for imports. Exter-
nal arrears are to be eliminated by 30 June and a
schedule for phasing out both multiple currency
practices and restrictions on international pay-
ments must be agreed on with the Fund by 31 July.
Import restrictions.for balance-ol=payments rea-
sons are prohibited.
Beyond the IMF agreements, Argentina has estab-
lished some additional austerity targets:
? It has declared that it will limit real public-
sector wage increases to S percent this year.
? It will eliminate price controls as irtf'lation
subsides.
? Fuel prices are to be raised 3 percent monthly in
real terms during most of 1983.
? Controlled lending rates will be set equal to the
level of inflation.
were replaced by Jorge Wehbe and Julio Gonzalez
del Solar, respectively. To mend fences with the
international banks, the new economic team initiat-
ed discussions with the IMF. Despite resistance
from hardline nationalists at home, the Embassy
reported the economic team gained support for the
stabilization program by indicating that adjust-
ments were necessary to begin a recovery of real
output, to keep a lid on inflation, and to generate
an improvement in the balance of payments. ~
25
The hub of Wehbe's plan to bring the debt burden
under control is a $2.2 billion IMF package made
up of a $1.65 billion standby agreement and $570
million in compensatory financing for reduced ex-
port earnings. About $900 million was made avail-
able when the package was approved in January
1983, with the remaining $1.3 billion to be drawn
in four equal installments over the following 15
months as long as Buenos Aires complies with the
Fund agreement.
The Wehbe and Gonzalez del Solar program re-
flects areturn to more orthodox and austere poli-
cies. According to Embassy reports, they have
moved to bring government spending under control
and restrain credit. Public-sector prices-particu-
larly for electricity and petroleum products-have
been increased faster than inflation to eliminate
subsidies and reduce consumption. Higher interest 25X1
rates, a return to a unified exchange rate, and daily
depreciation of the official exchange rate to keep
pace with inflation have been implemented to 25X1
reduce capital flight and achieve a large trade
surplus.
The Early Results
Early indications are that Buenos Aires has man-
aged acreditable economic performance under the 25X1
IMF program. A record 15.1-million-ton wheat
crop has boosted agricultural production and export
earnings. The Embassy reports a $1.3 billion trade
surplus was recorded through April, fortifying the
Embassy's expectations of a $3 billion surplus for
the year. According to press reports, the favorable
trade balance has reversed the declining trend of
reserves and put them on the rise since mid-April.
With the return of some normalcy, capacity utiliza-
tion in the industrial sector has risen significantly
from a year earlier. As a result, Wehbe's claim of a
2-percent annual growth rate for the first quarter is
reasonable.
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e Estimated.
n Projected.
Includes trade-related lags and leads.
Inflation has yet to respond to the price controls.
Past rapid monetary expansion, cuts in government
subsidies, and higher imports costs have caused
consumer prices to increase 75 percent through
May. Moreover, press reports indicate that, in the
first two weeks of June alone, inflation jumped
another 15 percent as prices jumped in response to
the redenomination of the currency.
Economic recovery has helped the economic team
defuse some domestic criticism of austerity, there-
by keeping the IMF program on track. Delays in
starting the government investment program have
also kept spending down, assisting the team's ef-
forts to comply with IMF domestic performance
targets. As a result, Argentina was able to draw
$325 million from the Fund in May. All second-
quarter performance targets except the elimination
of arrears appear to have been met. Commercial
bank footdragging on providing new money has left
Buenos Aires short.the funds it had planned to use
in repaying arrears. At this juncture, we believe the
IMF is not likely to stop drawings under the
standby agreement; consequently, another $325
million will become available by late August
Despite compliance with the IMF thus far, Buenos
Aires has received only small amounts of new
credit from international bankers. The delays in
new lending, in turn, have forced Buenos Aires to
selectively delay repayments. Since October 1982,
there have been no debt principal payments other
than for the elimination of commercial arrears in
order to encourage a continued flow of short-term
trade credit. Additionally, Argentine borrowers
have fallen behind in meeting interest payments.
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8 July 1983
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Delays in making debt repayments has hindered
Buenos Aires' ability to draw new credit.
negotiations fora $1.5
billion medium-term loan have dragged on since
January. Progress has been blocked because of
Argentine arrearages, exchange restrictions on
British banks, and a dispute with bankers about the
Argentine bankruptcy code. With British banks
now eligible to apply for remission of profits,
creditors indicate they may finalize the $1.5 billion
agreement and disburse the money in July. ~
The government's rescheduling plans include con-
solidating $6 billion in 1982 principal arrears and
$8.7 billion in 1983 maturities into new loans it
hopes to repay over 7 years (including 3 years
grace). Buenos Aires has yet to conclude its private-
sector debt refinancing program, a technical im-
pediment for rescheduling loans held by the public
sector. Recently announced rules governing the
repayments of debts with exchange rate guarantees
may pave the way for future progress in stretching
debt into longer-term maturities. In May, creditors
agreed to accept new three-year maturities for $1.4
billion in currency swaps.
Difficulties Ahead for Bignone
The outgoing military government would like to
leave office on a favorable economic note. Based on
the Argentine financial press, we believe that Presi-
dent Bignone will loosen the purse strings in the
second half. In our view, the Bignone government
will very likely grant new wage hikes to placate
labor, increase public investments to buoy the
recovery, and tighten price controls to blunt the
impact of rising prices on living standards. Such
politically motivated largess would stand a good
chance, however, of undoing the progress Wehbe
and Gonzalez have been able to achieve.
At this juncture, most forecasts expect to see a
modest economic recovery in Argentina this year.
Growth in the 2- to 4-percent range is likely, led by
another good agricultural harvest and industrial ~
recuperation. Purchasing power and living Stan- 25X1
dards, however, are almost certain to be eroded by
inflation in the 200-percent range. Continuing
large grain exports will also help to create a $3
billion trade surplus.
By pushing more strongly for a recovery, however,
we expect-as do most private-sector economists-
that Argentina will encounter increasing difficulty
in complying with its Fund program by the fourth 25X1
quarter. The relaxation of austerity will likely push
public-sector borrowing and money supply growth
beyond IMF limits. Although international lenders
have taken a generally cooperative attitude toward
the Bignone government, we are unsure about how
they will react to such policy moves. If bankers feel
that higher spending is necessary to avert serious
social unrest, we believe there would be little, if
any, fallout. Alternatively, reckless spending would,
in a worst case, probably cause the IMF to suspend
drawings against the standby arrangement. Under
these conditions, we believe private bankers would
be quick to halt disbursements on any new portions
of the refinancing plan. The potential for such 25X1
actions will increase if campaign rhetoric comes .
down particularly hard on foreign lenders or if debt
repudiation becomes a central theme.
Economic Problems for the Civilian Regime
The election on 30 October will pit the Peronists
against the Radicals-two center-left parties-for
control of the next government. Whichever party
emerges victorious, they will inherit a sluggish
economy vulnerable to external shocks. Although
austerity will be required to lay the foundation for
economic improvements, such an approach will be
unappealing to any new government anxious to
reward its major constituents.
The new civilian government will most likely at-
tempt to broaden its political support by sustaining
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Secret
economic growth. Its ability to resort to massive
wage and spending hikes, however, will be con-
strained by the continuing heavy debt servicing
burden. With its options circumscribed, we believe
that the next government will most likely try to
follow a middle course between strict compliance
with the IMF program and growth-oriented poli-
Argentina: Disbursed External Debt
cies~
Insofar as we can now predict, future spending
policies probably will reflect the past tendencies of
these parties. To placate its labor support, a new
Peronist government---currently favored to win the
elections-will be likely to resort to policies favor-
ing income redistribution and higher public spend-
ing to improve the workers' lot. A government
headed by the Radical party-favored by the mid-
dle classes-would be more inclined to push busi-
ness-oriented policies. In any event, either party
will have a difficult time pushing economic recov-
ery while meeting IMF performance targets.~~
Argentina's current IMF agreement will expire
soon after the new civilian government takes office.
To retain foreign financial support, we expect the
civilian government to negotiate a new agreement.
Such an agreement will be required to sustain the
financial rescue plan and obtain new loans neces-
sary to sustain economic recovery. In a worst case,
however, a very weak civilian government facing
Debt
19.3 27.2
35.7
35.0
Private sector
9.1 12.7
15.6
14.0
Public sector
10.2 14.5
20.0
22.0
Debt service by original maturity
2.2 3.5
6.3
10.1
Percent
Public sector by creditor
International organizations
12.9 7.8
6.0
5.6 b
Official creditors
4.7 2.6
1.9
1.6 b
Banks
55.1 71.0
67.4,
64.2 b
Bond holders
14.7 10.1
18.7
22.9 b
Private firms
12.5 8.5
5.9
5.6 b
tough IMF demands for austerity might declare an
indefinite moratorium on debt principal and inter-
est. Although such a course would temporarily
alleviate financial constraints, it would probably
precipitate default actions by creditors and cut off
Argentina from necessary foreign credits for some
Secret
8 July 1983
e Estimated. Does not include $2.8 billion in arrearages.
n As of 30 September.
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Secret
Andean Countries: Grappling
Witb Payments Problems
Since January, the retraction of short-term credit
lines to Chile and Peru, cutbacks in private bank
lending to the other borrowers, and weak export
performance have caused severe financial strains
throughout the Andean region. Chile-forced to
suspend principal repayments in January-is still
struggling to get its financial program back on
track. Peru and Colombia are encountering diffi-
culty in obtaining new money, but have managed to
avert foreign exchange crises thus far. Bolivia and
Ecuador have resorted to allowing arrearages to
build up on commercial debt repayments while
seeking to resolve their differences with the IMF.
Adjustments are now under way to relieve these
financial stringencies, but difficulties persist. Un-
der IMF guidance, Andean countries are making
an effort to improve external accounts by pushing
exports and cutting imports. The Fund, in turn, is
pressing commercial bankers to provide the new
loans and refinancings necessary to shore up the
position of these beleaguered borrowers. Although
progress is being made, we believe US financial
institutions-with some $15 billion in loans to the
region-will remain vulnerable to debt servicing
disruptions. Cash strains will persist because of a
weak export recovery. New loan arrangements
could also be jeopardized by social unrest in the
region. Moreover, the smaller Andean debtors
could deal severe setbacks to banker confidence by
continuing to drum up support for a debtor's cartel.
An abrupt contraction in short-term credit lines
and a squeeze on new longer-term lending wors-
ened the financial position of the Andean countries
in early 1983. In January, Chile's cash position-
already weakened by declining exports, capital
flight, and a slowdown in lending-became critical
when bankers ceased lending in a financial dispute
with the government. Despite its compliance with
the IMF, Peru encountered difficulty in obtaining
new loans while facing demands for the repayment
of maturing credits. Colombia encountered prob-
lems in raising an $80 million balance-of-payments
loan early this year because creditors were reluc-
tant to increase their exposure in the face of
unattractive lending terms sought by Colombia.
Ecuador and Bolivia, both lacking IMF agree-
ments, were unable to obtain new credits and roll
over maturing loans.
With bankers reluctant to provide new loans, most
Andean countries moved unilaterally to relieve
financial stringencies, and moratoriums on debt
repayments proliferated early this year throughout
the region:
? Santiago declared a 90-day freeze on principal
repayments on bank loans in January and then
requested another extension in April.
? Lima decreed an extension of maturing short-
term credits in March and in May suspended
principal repayments on official debt in advance
of Paris Club rescheduling.
? Quito and La Paz-with meager reserve cush-
ions---continued to resort to commercial
arrearages.
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Andean Countries:
Financial Status at a Glance
Country/Total Debt Key Trends
Chile/$17 billion Principal payments still.frozen ...recorded small trade surplus through May
...temporarily out of compliance with IMF agreement, but operating under
"shadow program" with revised targets ... r~nancing program moving well
but encountering some resistance to new money requests.
Peru/$11 billion Encountered dkf~culty in obtaining new loans and trade credits despite
compliance with IMF ...Meager trade surplus unable to alleviate cash
strains ...seeking to r~nance nearly $4 billion in maturing debts ...eligible
to draw $310,from IMF through February 1984, but struggling to obtain $770
million commercial bank f Wanting ... oj~cial payments suspended until July
Paris Club meeting considers $1.3 billion debt.
Colombia/$10 billion Difficulties in obtaining new money tofnance external dercits ....fast rate of
.foreign exchange depletion despite corrective measures ...will have to pay
more jor credit later in the year ...may have to restructure debt by 1984. ~
Ecuadorl$7 billion Protracted IMF negotiations has caused bankers to cut new credit and trade
financing ... Despite a $197 million trade surplus through March, arrearages
now in $200 to $300 million range ...IMF recently approved $170 million
standby while bankers are arranging~nancial bailout package ...public debt
payments suspended until completion of $2.7 billion Paris Club rescheduling.
Bolivia/$4 billion Foreign exchange scarce despite small trade surplus and a $25-30 million
drawing under IMF compensatory financing program ...has renegotiated
$700 million in debt to its creditor banks by promising to reach agreement
with the IMF by October ...negotiations fora $119 million IMF standby
loan are stalled because offailure to implement austerity measures .. .
seeking to renegotiate debts on a bilateral basis.
In contrast, Bogota has remained current in mak- Payments Adjustments
ing payments, but at the cost of drawing down its
exchange reserves by $750 million in the first According to Embassy reports and available trade
quarter, exceeding the loss for all of 1982. ~~ statistics, three of the five Andean countries have
somewhat improved their trade accounts this year.
Secret 30
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Secret
Despite weak global recovery and a series of natu-
ral disasters, currency devaluations and import
cutbacks have generated small individual trade
surpluses throughout the region. Even so, cash
strains persist because the trade improvements
have fallen short of the continuing deficits in the
service accounts.
Chile has boosted exports while imports have de-
clined, resulting in a $544 million trade surplus
through May.
the current account deficit averaged
$120 million monthly in the face of continuing high
interest payments and capital flight during the first
quarter. The 90-day commercial debt moratorium,
however, slowed the rate of decline of reserves by
February.
Ecuador managed a $197 million trade surplus
through March by using tough import controls.
Export gains, however, were constrained by the
decline in the price of crude oil, agricultural export
shortfalls caused by recent floods, and depressed
world market prices for bananas, cocoa, and coffee.
Colombia slashed imports to alleviate payments
strains. With exports down during the first quarter,
the Betancur administration hiked tariffs and de-
preciated the peso to slow imports. These moves
helped produce a $235 million first-quarter trade
surplus but barely alleviated cash problems. Capi-
tal flight and declines in interest earnings, tourism
receipts, and remittances from Colombians living
abroad offset the trade gains.
Peru moved against the trend of trade improve-
ments. On the basis of the Central Bank's revised
projections, we believe trade was balanced, at best,
in the first quarter. Although capital goods imports
were slashed, export earnings from copper and oil
remained depressed while flood and drought added
to the food import bill. High interest charges and
some prepayments for Mirage aircraft quickly ate
up the available cash.
Andean Countries:
Price Fluctuations of Key Exports
Lower prices for Bolivia's key exports-natural gas
and minerals-cut the January-March 1983 trade
surplus 20 percent to $55 million, compared to the
same period last year. Additionally, foodstuffs im-
ports were increased to fill the gap .resulting from
weather-induced crop shortfalls.
Seeking Financial Rescue
To deal with debt servicing problems, international
bankers have tried to reestablish orderly financial
conditions. Nonetheless, the financial position of
the Andean countries remains precarious. The IMF
has moved to resuscitate negotiations with troubled
borrowers, but progress has been uneven in con-
cluding IMF negotiations. Consequently, private
bankers have resisted extending large amounts of
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Chile. Shortly after an $880 million Fund package
was approved in January 1983, Santiago acknowl-
edged it was unable to meet IMF targets for
reserves and net domestic assets of the central
bank. After consultations, the Fund determined
that Chile could get its program back on track by
September under a "shadow program" of revised
targets. In the interim the IMF would allow Santi-
ago to draw $54 million in late July.
Simultaneously, IMF Managing Director De Laro-
siere has taken the lead in dealing with internation-
al banks, urging them to commit the funds neces-
sary to keep Chile's rescue plan afloat. Chile will
obtain from bankers the refinancing of $2.4 billion
in commercial bank loans and short-term credits,
plus the restoration of $200 million in trade credits
that were withdrawn early in the year. In addition,
new medium-term loans totaling $1.3 billion are
being sought. Despite same resistance by European
and US regional banks,
about $1.1 billion o the me ium-term oan
ha.s been committed thus far and the short-term
loan has been oversubscribed.
Peru. Its financial rescue package mainly involves
the rescheduling of past debt. According to a press
report, Lima and commercial banks recently
agreed to consolidate about $2 billion in short-term
trade credits into a new one-year loan and refi-
nance $380 million in medium- and long-term
maturities. Over $1.3 billion in official debts to
Western governments are to be rescheduled
through the Paris Club; socialist states have been
asked to renegotiate terms on about $125 million
due, according to press sources, for armaments
purchased in the mid-1970s. The Paris Club is
expected to meet in July to set the terms for
refinancing of official debts, three-fourths of which
is owed to France, the United States, Italy, West
Germany, and Japan.
Secret
8 July 1983
Lima is requesting only modest amounts of new
money this year. Despite a series of natural disas-
ters, it stayed close enough to its specific IMF
performance targets to remain eligible to draw
some $310 million through February 1984 under its
three-year, $715 million program. Consequently,
commercial banks have agreed to provide $770
million in medium- and long-term loans-$320
million in debt rollover and $450 million in new
money, which Lima will draw upon in July.
Ecuador. New bank credits and import financing
dried up late last year in the wake of Ecuador's
protracted negotiations with the IMF, causing the
economy to falter. In May, however, the IMF
approved a $170 million one-year standby loan
under the condition that private creditors commit
new money and make loan rollovers. The IMF
financial bailout package requires bankers to (a)
refinance $1.1 billion in existing loans; (b) provide a
new $431 million line of credit; and (c) maintain
trade credits at the $500 million level. Meanwhile,
its public debt payments will remain suspended
until completion of $2.7 billion Paris Club resched-
uling, scheduled to begin at the end of July.
Bolivia. The Embassy reports that Finance Minis-
ter Machicado has promised to reach agreement
with the IMF by October. Current negotiations,
however, remain stalled on a $119 million standby
loan because of the government's continuing failure
to implement politically sensitive austerity meas-
ures. Despite the deadlock, La Paz has recently
renegotiated some of its debt to the Bank of
America-led consortium of 128 creditor banks.
Under the terms of the agreement, La Paz agreed
to pay $85 million in past due interest payments by
the end of September. In turn, bankers will grant a
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Andean Countries: Current Account Balances Million US $
BoGria Colombia (continued)
Trade balance 229 205 140 Nonoil 2,777 2,555 2,350
Imports, f.o.b. 680 655 660 Net services and transfers -307 -645 -1,365
Oil 0 5 10 Current account balance -1,969 -1,215 -1,865
. Nonoil 680 650 650 Ecuador
Net services and transfers
Current account balance
Cbile
Imports, f.o.b.
Oil
Nonoil
Exports, f.o.b.
Oil
Nonoil
Net services and transfers
Current account balance
Colombia
Oil 528 715 565
-500 Nonoil 2,727 2,515 2,465
3,000 Net services and transfers -1,132 -1,090
400 Current account balance -1,680 -1,647
2,600
2,500
150
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8 July 1983
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909 860 800 Trade balance 183 80 -100
3 30 20 Imports, f.o.b. 2,362 2,265 2,100
906 830 780 Oil 0 0 0
- 541 - 560 - 580 Nonoil 2,362 2,265 2,100
-312 -355 -440 Exports, f.o.b. 2,544 2,345 2,000
Oil 1,560 1,350 900
-2,598 200 1,000 Nonoil 984 995 1,100
6,558 3,600 3,450 Net services and transfers -1,210 -1,270 -1,500
960 615 575 Current account balance -1,027 -1,190 -1,600
5,598 2,985 2,875 Peru
3,960 3,800 4,450 Trade balance -548 -557 244
0 0 0 Imports, f.o.b. 3,803 3,787 2,786
3,960 3,800 4,450 Oil 0 0 0
-2,271 -2,600 -2,600 Nonoil 3,803 3,787 2,786
-4,869 -2,400 -1,600 Exports, f.o.b. 3,255 3,230 3,030
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two-year grace period on repayment of $440 mil-
lion in debt servicing arrears and afour-year grace
period on $250 million in principal maturing be-
tween now and 1985. Moreover, La Paz has ap-
proached the Netherlands, Belgium, and the
United Kingdom for bilateral debt rescheduling.
Representatives of these countries, however, report-
edly indicated any renegotiations would have to be
conducted through the Paris Club
Colombia. Bogota continues to experience difficul-
ties in raising new loans.
reditors are becoming unwl mg to su stan-
tially finance Colombia's deficits in the face of
mounting payments problems and sluggish domes-
tic economic conditions. If Colombia fails to raise
necessary funds in coming months, the government
may be unable to avoid a debt financing crisis.
The Dangers Ahead
The financial position of the Andean countries will
remain difficult this year. Despite import cuts, we
estimate the region will still show a combined $6.4
billion current account deficit in 1983. Weak ex-
ports will limit improvements and will most likely
result from the sluggish rebound in world economic
activity and the modest recovery in commodity
prices.
The inability to eliminate their payments deficits
will leave the Andean countries vulnerable to addi-
tional lending cutbacks. Over the near term, we
Secret
8 July 1983
remain concerned about the increasing potential for
social unrest in some of these countries. Labor
unrest in Chile and terrorist activity in Peru will
probably cause international bankers to drag their
feet in honoring lending commitments necessary to
obtain breathing room for economic adjustments.
Moreover, additional economic-related protests in
Bolivia and Ecuador would probably heighten
banker concern about the ability of these govern-
ments to implement necessary stabilization pro-
grams.
At best, the Andean countries will continue to
bump along until the world economy strengthens. If
periodic funding gaps develop, as we believe is
likely, the Andean debtors probably will attempt to
avoid default, mainly by selectively delaying repay-
ments. We also anticipate that these debtors will
turn to Washington for direct assistance and new
debt-rescheduling efforts.
At worst, however, the smaller Andean debtors
could resort to radical moves, causing a breakdown
in cooperation with creditors. Although an outright
debt repudiation is unlikely
the Presidents of Bolivia and Ecuador
are proponents of collective action to force renego-
tiation of foreign debts.
y. ~~
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11
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Latin America: Prospects for
Collective Action on Debt
Latin American debtors have periodically raised
the specter of collective action to ease the burden of
their debt service. Although there is no evidence
that the leadership of any of the large debtor
countries is presently considering such a radical
move, the possibilities for joint action by Latin
American debtors to obtain better repayment terms
on their more than $200 billion debt are being more
widely discussed. While such a move would be
highly disruptive to the current efforts to resolve
the Third World's debt crisis, joint action would
become far more attractive to the debtors if IMF-
sponsored refinancing programs should falter.
Heightened Discussion
Mounting debt servicing difficulties have once
again led some Latin countries to propose jointly
confronting bankers to force renegotiation of their
debts. smaller
states like Ecuador, Nicaragua, and Bolivia have
recently been proponents of collective actions to
improve their bargaining weight. Last November,
for example, Nicaraguan officials tried to drum up
support for a joint debt moratorium, while Ecua-
dorean President Hurtado proposed in February
1983 a common response to the region's financial
crisis.
Although these initiatives failed to gain support,
public demands for collective actions have in-
creased. As austerity has taken hold, international
bankers have reported that some Brazilian private
businessmen have discussed the idea of a complete
repudiation of foreign debt. Moreover, several Bra-
zilian academics have publicly called for joint
actions to foster easier repayment terms. In Argen-
tina, Peronist leaders-likely to control the new
civilian government in 1984-have espoused joint
negotiations to achieve better refinancing terms,
according to recent press reports. The economic
adviser to Radical Civic Union presidential candi-
date Raul Alfonsin-the current underdog in the
campaign-has proposed that a new Argentine
civilian government should negotiate its external
debt in concert with other Latin countries.~~ 25X1
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Simultaneously, Latin governments have sponsored 25X1
talks aimed at seeking ways to lessen collective debt
problems. In April, the Group of 77 proposed that
UNCTAD VI call on creditors to improve repay-
ment terms for developing countries. The Economic
Commission for Latin America issued a report in
May calling for regional discussions and a common
approach to the debt crisis. Moreover, the OAS
recently scheduled a conference for September to 25X1
study a joint approach to Latin American financial
problems. Although these groups strongly deny any
intent to form a debtor's cartel, they have height-
ened some banker's fears about the potential for
such action.
Banker Concern in Perspective
Some international bankers are concerned that
persistent debt servicing difficulties may cause
Latin American countries to confront the banks as
a bloc. In late April, for example, US bankers gave
some credence to rumors that Brazilian President
Figueiredo discussed such a proposal with Mexican
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Chronology of Latin American Debt Talks
Bolivian President's invitation to talk with other Bolivian President Herman Siles Suazo invited the
government leaders about joint debt action leaders of Colombia, Ecuador, Panama, Peru, and
Venezuela to confer on joint actions to renegotiate
external debt. We have no evidence that meeting took
place.
November Nicaraguan support revealed Nicaragua supported President Suazo's proposal and
talked with several Latin American countries about a
joint debt moratorium.
February Ecuadorean President's letter The US Embassy reports President Hurtado sent a
proposal letter to ECLA, SELA, and all Latin
' American countries to seek a common response to the
region's economic crisis.
Latin American Economic System (SELA) At a SELA meeting held in Cartagena, Colombia,
meetings Latin countries called for improved loan terms. A
month later, SELA called for industrial nations to
create a fund to help LDCs meet interest payments on
their foreign debt.
Venezuelan call for a regional debt conference A Venezuelan representative to the Organization of
American States (OAS) proposed holding a regional
debt conference within the OAS forum in September
1983.
March New Delhi Nonalignment Summit A measure under consideration at the Summit calling
for "collective debt negotiations" was softened at
Latin American insistence-probably that of Argenti-
na-to read as calling for an "exchange of informa-
lion on debt negotiations."
Inter-American Development Bank meeting in An Ecuadorean proposal to band together smaller
Panama Latin American nations to obtain more advantageous
terms from foreign banks received little support from
other delegates.
April G-77 ministerial meeting in Buenos Aires Proposed that UNCTAD VI adopt measures that call
for conversion of ODA loans to grants for all least
developed countries and improved rescheduling
terms-longer grace periods, lower interest rates, and
extended periods of maturity~n official debt for all
other LDCs.
Proposed Meetings, 1983
July
Secret
8 July 1983
The Economic Commission for Latin America The commission issued a report calling for regional
(ECLA) report discussions to develop a common approach to the
Latin debt crisis.
A group of Latin economists issued a call to world
leaders, private banks, and international financial
institutions to make available additional resources to
smooth debt servicing difficulties.
The economic working group will meet in Santo
Domingo for followup discussions on Latin debt
problems.
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Secret
President de la Madrid during his state visit.
calls for regional financial cooperation could
lead to a joint action by Latin debtors.
Despite bankers' apprehensions, the leaders of large
debtor countries are resisting radical alternatives to
current financial programs:
? President de la Madrid has consistently reaf-
firmed his commitment to repay debt and has
opposed calls for collective action.
? President Herrera in Venezuela has stated pub-
licly that the upcoming Organization of Ameri-
can States debt conference should deal mainly
with international financial reform, not proposals
for radical action.
? A leading Chilean spokesman indicates the Pino-
chet regime will not join a cartel, while Peruvian
President Belaunde continues to support his Fi-
nance Minister's rejection of calls for a joint
moratorium.
These leaders are motivated largely by economic
self-interest.
they still believe their countries are better credit
risks than their neighbors. Moreover, large banks
are continuing to cooperate with them in their
rescheduling programs, while the active involve-
ment of the IMF is also tempering frictions be-
tween debtors and creditors. As long as bankers
cooperate in refinancing, the larger states will most
likely believe they have a better prospect of lining
up refinancing on their own-and with better
financial terms-than as part of a heterogeneous
new money.
Latin American governments-with the exception
of Ecuador, Nicaragua, and Bolivia-are not call-
ing for a joint payments moratorium or debt repu-
diation at the moment. Most countries appear
willing to explore regional discussions-partly in
the hope that these actions alone will prompt
bankers to be more forthcoming-but apparently
are not seriously pursuing bloc action. Indeed,
without the participation of at least one of the
major debtors-Brazil, Mexico, Argentina, or Ven-
ezuela joint action lacks much hope of forcing
bankers to provide significantly better terms and
Nonetheless, we remain concerned about the poten-
tial for mutual miscalculation to heighten the
potential for conflict. We anticipate growing popu-
lar, albeit rhetorical, support for joint action in
Latin America in the wake of mounting political
resistance to IMF-mandated austerity. Moreover,
election year rhetoric in Argentina and Venezuela
probably will lead to some public clamor for collec-
tive moves to confront international bankers. ~
Such criticism could cause bankers to worry about
the increased risks involved in additional lending.
Any heightened perception of risk could make US
regional banks and smaller European and Japanese
banks more reluctant to roll over loans and increase
their exposures in Latin America. Should the major
banks not be able to get these creditors on board or
should they not be able to cover the resulting
shortage of funds, one or more of the current
refinancing plans could be derailed.
Similarly, growing public criticism of IMF-
mandated austerity programs could cause bankers
to question the ability of Latin governments to
follow through on economic adjustments. Any sub-
stantial relaxation of spending constraints by a
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Latin American group.
Secret
8 July 1983
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Secret
debtor country to ease domestic unrest could then
shake banker confidence, significantly slow IMF
disbursements and commercial lending, and there-
by cause rescue programs to unravel. 25X1
A single collapse could set off others, ultimately
triggering initiatives by one of the large debtors to
seek extreme changes in the terms of its debt
service and causin other debtor countries to follow
suit. razil, 25X1
in particular, bears close watching. Should the
Latin American crisis reach a critical stage, region-
al forums that now are discussing common finan-
cial problems could serve as negotiating blocs try-
ing to force bankers into extending easier terms.0 25X1
Secret 38
8 July 1983
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The Philippines:
Growing Financial Strains
As its consortium of foreign aid donors meets in
Paris, Manila is attempting to avert a liquidity
crisis that could force foreign debt rescheduling by
late 1983. Several times during the last month,
major US commercial banks have appealed to
senior government officials-including President
Marcos-to seek emergency commercial financing
of up to $1 billion. Manila has responded by
implementing financial austerity measures, but ap-
pears to be undecided on whether to privately
refinance debt or hope to scrape by without the new
funds. the
size o t e s ort-term oreign debt combined with a
slow contraction of short-term credit lines by pri-
vate commercial banks suggests that the govern-
ment has little room to maneuver.
The Philippines' external finances have grown in-
creasingly precarious since the OPEC price hikes of
1979-80. Government financial and trade data now
place the total foreign debt at $18.5 billion-more
than one-half higher than at the end of 1980. Our
own methodology-which includes the obligations
of Philippine financial institutions-places the debt
at $22.7 billion, about 57 percent of GNP. ~~
The current account deficit shows no sign of imme-
diate improvement. The Philippines posted its worst
balance-of-payments performance ever last year,
when the current account deficit ballooned to $3.3
billion-a record 9 percent of GNP-at the same
time that net direct foreign investment inflows
The Philippines: The Foreign Debt
At a Glance, June 1983
$18.5 billion, excluding interbsnk
borrowing. $22.7 billion otherwise.
Medium- and long-term debt $14 billion. Two-thirds owed to
private banks, 40 percent at floating
rates.
Average maturity 10 years. $1.3
billion due this year, over $1.5
billion in 1984.
$1.4 billion in 1983, over $1.5
billion next year.
$4.5 billion in revolving credits and
other trade financing. Commercial
bank short-term debt slightly over
$2 billion. Central Bank owes about
$2.2 billion.
About $700 million annually, net of
Central Bank reserve asset
earnings.
$1.6 billion in foreign exchange
reserves, about two months' im-
ports. $715 million in gold holdings.
Liquidity net of short-term obliga-
tions: $173 million.
US banks: $6 billion. Largest US
nine hold about $4 billion. Non-US
commercial banks hold about $5
billion. US Government holds over
$900 million, Japan just over $800
million, with multilateral creditors
holding about $2.5 billion.
About $3.4 billion in 1983, or
roughly 8 percent of GNP, 64 per-
cent of merchandise exports.
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Current account
Merchandise trade
Exports, f.o.b.
Of which:
Coconut products
Sugar
Imports, f.o.b.
Oil
Others
Services (net)
Interest payments
Transfers (net)
Capital account
Of which:
Direct investment (net)
Medium- and long-term loans (net)
Short-term ~ loans (net)
Balance
a Estimated.
n Projected.
Including errors and omissions.
-1,101
-828
-1,172
-1,576
-2,072
-2,589
-3,347
-2,900
-1,113
-840
-1,307
-1,541
-1,939
-2,667
-2,805
-2,450
2,519
3,075
3,425
4,601
5,788
5,733
4,995
5,300
537
729
812
965
759
756
647
600
451
527
213
238
474
609
324
430
270
280
250
330
679
544
340
500
268
261
324
484
433
383
340
400
573
770
1,076
1,520
1,135
1,294
1,050
1,245
3,632
3,915
4,732
6,142
7,727
8,400
7,800
7,750
936
1,019
1,030
1,385
2,248
2,458
2,396
2,190
2,696
2,896
3,702
4,757
5,479
5,942
5,404
5,560
-257
-248
-178
-390
-555
-392
-992
-900
-258
-302
-440
-591
-846
-1,101
-1,811
-2,200
1
54
262
201
291
709
819
1,300
269
260
313
355
422
470
450
450
1,151
963
1,082
997
1,720
2,029
2,212
1,950
144
216
171
99
49
407
259
300
1,014
859
908
1,061
1,044
1,185
1,252
1,600
-87
-90
83
-193
446
37
423
50
50
135
-90
-579
-352
-560
-1,135
-950
dropped by one-third. Worse, to cover the gap, the hikes prior to 1982 swelled the oil import bill by
Central Bank ran down reserves to $1.7 billion. nearly $1 billion, ballooning the trade deficit even
This equaled about 10 percent of the foreign as rising remittances from workers in the Middle
debt-less than half the 22-percent level at the end East buoyed the service and transfer account. Last
of 1980. year, in contrast, oil imports were down in both
value and volume as the recession slowed petroleum
Although Philippine balance-of-payments problems demand, domestic geothermal fields began produc-
are longstanding, 1982 represents a watershed in tion, and the government oil company drew down
the Philippines' external accounts. OPEC price
Secret 40
8 July 1983
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inventories. This accomplishment was more than
offset as interest obligations on the foreign debt
increased by $700 million. Medium- and long-term
principal payments also grew by over $200 million,
as the term structure of the debt shortened.
The actual size of the short-term debt, a controver-
sy that first arose in the international financial
community early in 1982, continues to elude both
the Central Bank and private analysts. Internation-
al short-term claims against the Philippines rose to
nearly $6.9 billion in mid-1982, according to Bank
for International Settlements data-nearly twice
the government's official June 1982 figure of $3.65
billion.' We believe that the Philippines' gross
financial requirements, including repayment obli-
gations on medium- and long-term foreign loans,
renewals of outstanding short-term credits, and the
trade deficit itself, reached nearly $9 billion-last
year, representing a $1 billion increase from 1981.
When the obligations of financial institutions are
included, the Philippines' gross financing require-
ments reached about $13 billion.
New Liquidity Problems
Manila is currently attempting to cope with an
international liquidity squeeze, while biding time
until recovery in the United States improves the
Philippines' external accounts. First-half 1983 bal-
ance-of-payments data show a small improvement
in the current account deficit. At the same time,
' The BIS data include double counting errors and foreign debts
covered by foreign assets, but also exclude several categories of
legitimate short-term debt, such as claims against the Philippines
by banks that are not members of the BIS reporting system and
supplier loans. Philippine Government data, on the other hand,
exclude short-term obligations by domestic financial institutions
relent to then government and private firms. Much of this relending
is on a medium- and long-term basis, so that the burden of rollover
is borne by the domestic financial institution extending the credit.
however, a variety of sources confirm that short-
term credit lines to Philippine borrowers are in-
creasingly restricted. Both regional and money
center banks in the United States are passing up
chances to renew existing credit lines or to add
more Philippine obligations to their portfolios. So
far, this has more than offset any improvement in
the current account; the resulting need for addi-
tional Central Bank financing reached $800 million
in the first half, substantially more than the gov-
ernment's target for the entire year.
Press reports that internationally respected Premier
and Finance Minister Virata may be replaced have
contributed to private bankers' nervousness about
their Philippine portfolios. In April, a ruling party
caucus over which President Marcos presided at-
tacked Virata's conduct of economic policy bitterly,
charging that he had mortgaged Philippine nation-
al interests to the World Bank and the IMF, while
severely depressing the domestic economy.
attack, which was fueled by pork-barrel politics
and complaints from the financially strapped busi-
ness community. Virata subsequently offered his
resignation-a gambit he has used in the past to
force Marcos to reaffirm his support-and Marcos
refused to accept it, announcing later that he would
retain Virata as both Prime Minister and Finance
Minister at least through the end of 1983. None-
theless, the entire episode highlighted Virata's
shaky political base, and this may have lasting and
adverse effects on Manila's credit rating.
Foreign commercial banks appear increasingly con-
vinced that foreign debt rescheduling may be re-
quired. In May, senior representatives of several
major US banks approached Central Bank Gover-
nor Jaime Laya about possible emergency financ-
ing for the rest of the year.
Secret
8 July 1983
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management. Also coordinates for-
eign borrowing program through
Monetary Board. Monitors foreign
debt and repayment profile through
Foreign Debt Management Office.
icant relending to private sector,
mostly distressed firms and state
enterprises. Converting to commer-
cial bank status, broadening domes-
tic resource base.
Philippine National Bank State owned commercial bank, also
prominent foreign borrower. Ac-
quiring DBP's development portfo-
lio, but so far financially healthier.
Large deposits in United States.
National Development Responsible for heavy industrial de-
Company velopment, mostly through joint
ventures and foreign borrowing.
Foreign borrowing operations
trimmed recently.
Prime Minister Virata Premier and Finance Minister.
Widely respected by international
banking community, but under Ere
at home politically.
The KBL caucus Ruling party policy organ. Closely
controlled by Marcos, in April vent-
ed criticism of Prime Minister Vira-
ta's austerity measures. Belatedly
implemented its own in June.
Nine largest US banks Holders of over $4 billion in Philip-
pine obligations-most of Philip-
pine commercial debt.
commercial debt. Have halted most
short-term loan renewals.
Most prominent Began discussions with government
US commercial creditors officials in late June regarding up to
$1 billion in emergency financing.
Prefer private refinancing, but fear
rescheduling necessary. Want
bridge arrangement to cover all
contingencies over next 18 months.
Consultative Group Consortium of aid donors. Holding
annual meeting now in Paris.
International Monetary
Fund
Chairs Consultative Group, holds
over $1 billion in claims on
Philippines.
Largest Philippine creditor. Recent-
ly critical of Philippine economic
policy.
Secret
8 July 1983
~he banks believe that Manila cannot meet its
debt service obligations later in 1983 and are
seeking a solution that would carry the government
through 1984. Laya agreed that the banks' con-
cerns were justified, and at his invitation the banks
began discussing up to $1 billion in bridge financ-
ing in talks with government officials in Manila in
late June.
the Cen-
tral Bank is revising its own estimate of the short-
term debt upwards.
short-term debt alone totals $13 billion,
bringing the total to about $27 billion. Although
some of the short-term liabilities of private finan-
cial institutions are covered by foreign deposits,
these new data have convinced the bank that
formal rescheduling later this year is a near cer-
tainty. At the urging of the banks, Manila has
begun an inventory of its creditors in case resched-
uling is necessary.
Manila recognizes it faces serious financial prob-
lems and has begun to take action. In January, the
government implemented sharp cutbacks in capital
spending and Prime Minister Virata announced a
ceiling of $2 billion on new foreign loans for 1983
that has begun to take action. The Central Bank
also curtailed the expansion of short-term debt by
announcing new restrictions on foreign loan appli-
cations of less than one-year maturity. Further-
more, in a move that, according to US Embassy
officials, surprised both the business community
and the country's official creditors, Manila placed
a 3-percent duty on most categories of imports,
introduced a prepayment system of import duties
designed to ensure customs collections and make
import financing more expensive, and implemented
a lottery system designed to channel more remit-
tances from overseas workers through the govern-
ment banking system.
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The Philippines: Financial Flows
Under Alternate Assumptions
Commercial bank 1
financing
0,910 1
0,340 1
0,040
Rollovers c
8,000
6,250
5,500
Net new loans a
2,860
2,990
3,140
Exceptional financing
Debt rescheduling
(principal)<
50
100
800
Bridge loans
0
1,000
600
Reserve drawdowns
1,100
950
1,250
e Base case-rollover of short-term credits, successful bridge
financing.
n US bankers' case~ontinued contraction of short-term credit
lines.
Includes World Bank Structural Adjustment Program.
a All maturities.
Private sector only in 1982 and base case 1983. Public and private
sector, US bankers' case 1983.
Manila also reached agreement with official credi-
tors about its economic policies, ending a confron-
tation that delayed official balance-of-payments
support during 1982. The government obtained a
12-month $347 million IMF standby loan in Febru-
ary, a $170 million credit from the Fund's Com-
pensatory Financing Facility to replace the short-
fall in export earnings, and a $300'million
Structural Adjustment Loan from the World Bank.
The Fund's program requires limits on foreign
borrowing, domestic credit creation, and Central
Bank credit to the public sector.
The World Bank and IMF, however, have left
Manila no margin for error in trimming the current
account deficit by requiring that it implement
appropriate adjustment policies. The World Bank
loan required reform of energy pricing, further
liberalization of trade policy, and along-promised
streamlining of foreign investment regulations. Dis-
bursement of most of the IMF loan was held in
abeyance pending a comprehensive June review of
Philippine budgetary performance, exchange rate
management, interest rate policy, external borrow-
ing activity, and efforts to curtail the growth of the
short-term debt.
US Embassy reporting indicates that, when the
review was completed last week, the Fund ex-
pressed unhappiness with Manila's slow response to
its balance-of-payments problems. It appears, how-
ever, that the Fund will disburse the remainder of
the standby credit rather than risk provoking a
crisis of confidence among Manila's private credi-
tors. In any case, in late June President Marcos
announced austerity measures formerly promised
to the Fund and the Bank. Manila devalued the
peso by 8 percent, indefinitely suspended several
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Secret
major industrial projects, removed domestic oil
price subsidies, and announced a thorough review
The actions of the international banking communi-
ty itself, however, will determine whether formal
debt rescheduling is necessary. Of greatest poten-
of foreign borrowing.
The annual meeting of the Philippine Consultative
Group this week in Paris-Manila's consortium of
aid donors chaired by the World Bank ~ will pro-
vide aforum for the Philippines' international
creditors to examine the country's prospects. The
meeting will feature an unprecedented "third day"
for the international commercial banking commu-
nity to participate and will thus provide a unique
opportunity for all of Manila's creditors to examine
the proposed adjustment program. For its part, the
Central Bank will almost certainly regard the
special sessions as an opportunity to assuage the.
bankers' fears about the government's ability to
repay its debts.
We believe the Philippines' financial problems will
be only slightly eased by international economic
recovery this year. Philippine Government agencies
and the US Embassy calculate on the basis of
studies of previous business cycles that six months
will be required for the benefits of economic recov-
ery in industrial economies to be felt in the Philip-
pines through higher prices for industrial raw
materials and agricultural products. Even the Phil-
ippine commercial press reports that most business-
men have already written off 1983.
Manila may decide on a voluntary refinancing of
the short-term debt. If it adopts this course of
action-which we believe would be held in abey-
ance until Virata returns to Manila in mid-July-
the Philippines' medium- and long-term debt serv-
ice would rise substantially. Manila's own laws that
limit medium- and long-term debt service to 20
percent of the previous year's foreign exchange
earnings would then have to be modified, and the
dimensions of Manila's financial,problems would
become public knowledge.
Secret
8 July 1983
tial short-run consequence is the increasing trend
among small US and European banks to refuse to
roll over existing short-term credit obligations.C
he largest US banks,
which hold about 40 percent of the Philippine
external commercial debt, are aware of this prob-
lem and increasingly concerned by it. Indeed, sev-
eral money center banks have begun to withdraw
from the Philippine market.
The size of the short-term debt makes bank reluc-
tance to roll over debt by far the most serious
problem. We believe that the exposure of the small
US and European banks is sufficiently small that
the Central Bank could continue drawing down
reserves to prevent a foreign exchange crisis, but
only if money center banks roll over their remain-
ing short-term credit lines. This course, however,
would leave the Central Bank with very low re-
serves in late 1983. The late June devaluation of
the peso may ease the pressure on reserves substan-
tially, but further devaluations will be necessary if
credit lines shrink. Manila's outstanding short-term
liability of over $1.2 billion in bankers' acceptances
is especially vulnerable and would provide advance
warning of further liquidity problems
the Central Bank's official
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reserve figure overstates liquidity because it in-
~1
cludes about $1.3 billion in time deposits that are
~~x1
tied to credit lines as compensating balances.
25X1
the Bank will face
25X1
liquidity problems between July and October, when
foreign exchange receipts are traditionally slow.
We believe, however, that the Central Bank may
still have some breathing room because of about
$450 million in undrawn credit lines which the
government has been reluctant to utilize. Draw-
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downs of these credits would thus also provide
advance warning of impending liquidity problems.
mies beyond 1983.
Over the longer term, all of the measures required
to stabilize the balance of payments carry a poten-
tially heavy political price. Reducing government
financial support to the private sector as a means of
reducing the budget deficit will produce new corpo-
rate bankruptcies and, coupled with reduced invest-
ment in state enterprises, higher unemployment.Z
Additional breathing room would be created if
Manila took even stronger measures to trim the
trade deficit. Suitable exchange rate depreciation
during the next two years will be a critical step to
capitalize on any upturn in industrialized econo-
'About three-fourths of the medium- and long-term debt is now
either public or publicly guaranteed, versus one-half several years
ago. This reflects the extent to which private foreign liabilities
recently have become public obligations as a result of government
Even if it scrapes by in 1983 and 1984, Manila still
faces the task of restructuring the economy, there-
by alleviating fundamental balance-of-payments
problems attributable to an uncompetitive manu-
facturing sector and the changes in international
petroleum, sugar, and coconut oil components of
the terms of trade. The Philippines' official credi-
tors recognized the need for this in 1979 when the
IMF negotiated the first of a series of credits
intended to facilitate Manila's gradual adjustment
to higher oil prices, and the World Bank committed
up to $800 million over five years in the form of a
"structural adjustment" program, which requires
reform of industrial policies and the development of
labor-intensive export manufacturing.
Secret
8 July 1983
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~ecrr~
Secret
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