INTERNATIONAL ECONOMIC & ENERGY WEEKLY (SANITIZED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R001102640007-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 33
• Document Creation Date: December 22, 2016
• Document Release Date: March 15, 2007
• Sequence Number: 7
• Publication Date: September 3, 1982
• Content Type: REPORT

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3627 PEEL OFF LABEL AND REUSE ENVELOPE
International
Economic & Energy
- Weekly
3 September 1982
GI IEEW 82-036
3 September 1982
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Mexican Bank Lopez Portillo's failure once again to address the need for austerity measures
Nationalization0 in his last State of the Union address raises to a new level domestic and
international concerns about his willingness to take actions necessary to resolve
the financial crisis. Instead, Lopez Portillo announced nationalization of
Mexican banks and expanded exchange controls. The nationalization measure
will affect some 50 private banks with assets of about $26 billion. Banks will
be closed until 6 September while new policies are sorted out.
Lopez Portillo blamed Mexico's economic problems on international economic
trends and on domestic bankers and speculators who he said sent $22 billion
out of Mexico in the last two years. He characterized the finacial crisis as tem-
porary. Contrary to widespread expectations among Mexican and internation-
al observers that he would announce new austerity measures, Lopez Portillo
only stated that "enormous economic and political sacrifices" would be
required to overcome Mexico's problems. He also made vague references about
international financiers attempting to impose their economic prescriptions on
Mexico.
Organized labor has been calling for full exchange controls and increasing
intervention in banking and social sectors; the measures announced by Lopez
Portillo may have been designed to ensure labor's continued support. By
nationalizing the banks, Mexico City is guaranteeing continued solvency of
banks that have been hard hit by the growing inability of many private-sector
firms to repay loans. Nevertheless, private-sector confidence in the government
will probably diminish and the nationalization is unlikely to curtail capital
flight.
The imposition of more controls on the economy will complicate ongoing
negotiations with the IMF and reduce chances of reaching an agreement by
the mid-October target date. Meanwhile, international bankers will be
unwilling to lend new money. The administration's failure to put into effect a
viable austerity program soon would put even more strain on ruling party
cohesion during the transition period.
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International
Economic & Energy
Weekly 25X1
3 September 1982
iii Synopsis of This Issue
Perspective-Economic Recovery in the OECD 25X1
25X1
3 Briefs Energy
International Trade, Technology, and Finance
National Developments
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19 The Changing Structure of Western Bank Lending 25X1
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23 Caribbean Countries: Dimensions of the External Financing Problem
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29 China: The Economy at Midyear (u) 25X1
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Indicators
Comments and queries regarding this publication are welcome. They may be
directed to
25X1
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1
International
Economic & Energy
Weekly
Synopsis of This Issue
Perspective-Economic Recovery in the OECD
The long-awaited economic recovery in the industrial countries is developing,
but only weakly. Interest rates remain high, budget deficits are increasing,
profit margins remain low, and unemployment continues to rise. This poor
economic performance presages an environment in which alliance cooperation
will be difficult to muster.
The Changing Structure of Western Bank Lending
Over the last several years non-US commercial banks have greatly stepped up
their international lending to both corporate and government borrowers. In
addition, the maturity structure of loans has been shortened and the cost of
borrowing has risen, making it more difficult for borrowers to meet their
financial obligations. 25X1
Caribbean Countries: Dimensions of the External Financing Problem
25X1
Real economic growth in the Caribbean region fell to 2.5 percent last year. We
believe that the economic downturn is likely to bottom out in 1983.
China: The Economy at Midyear
Six months into 1982, Beijing is still struggling to restrain industrial growth,
particularly in heavy industry. Efforts to get managers to focus on energy
conservation and improvements in quality and productivity have met with little
success. 25X1
I
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Perspective
Weekly
International
Economic & Energy
3 September 1982
Economic Recovery in the OECD
The long-awaited economic recovery in the industrial countries is developing,
but only weakly. Interest rates remain high, budget deficits are increasing, and
profit margins remain low. Under these circumstances, it is hard to imagine
much of a rebound in either spending or investment in the major industrial
countries. This poor economic performance presages an environment in which
alliance cooperation will be difficult to muster.F____1 25X1
August, and about 16 percent of the Spanish labor force is idle.
Economic growth in the four major West European countries should average
about 2 percent in second-half 1982, up from 1.5 percent in the first six
months of the year and 0.6 percent in second-half 1981. The West European
unemployment problem in these circumstances will probably get worse. By
yearend 1982, total OECD unemployment could reach 29 million-about 15
percent above the 1981 level. In several countries, unemployment rates will
remain well above 10 percent; British unemployment stood at 12.5 percent in
import volume
2bAl
One thing industrialized countries now have going for them is that inflation
rates are tapering off. For the OECD as a whole, consumer prices in 1982 are
expected to rise by 8.2 percent, the smallest annual increase since 1978. The
improvement will not be uniform, and in some countries-such as France,
Italy, and Spain-large budget deficits, rapid monetary growth, and probable
currency depreciation against the dollar will contribute to continued double-
digit inflation rates. The OECD's current account deficit also has begun to im-
prove because of lower raw material prices, some export gains, and declining
increase foreign sales.
The meager recovery that seems to be materializing could easily falter. For 25X1
one thing, especially in Western Europe, recovery depends on an upturn in
export sales. Given economic conditions in other industrial countries and the
weakening position of major LDCs, this rebound may not occur. Japan, as in
the past, is also counting on export expansion for a large share of its economic
growth during the next 18 months. Among the major foreign countries, the
Japanese and West Germans are probably in the best competitive position to
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Altogether these conditions do not bode well for smooth international econom-
ic relations.
? Trade frictions will continue as countries attempt to bolster their own growth
by protecting weak industries and boosting exports.
? Weak OECD growth will mean continued soft commodity markets that will
hurt LDC capacity to handle debt and their role as markets for exports from
developed countries.
? Although they are coming down US interest rates still will be blamed for the
economic malaise in the West.
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Iran Moves To
Offset Iraqi Air
Attacks
Energy
National Iranian Oil Company is now offering crude oil at a
discount price of $28 per barrel. The new discount, $3.20 below official prices,
is intended to offset the tripling in insurance premiums and the doubling in
charter rates-now totaling $2.36 per barrel-resulting from the recent Iraqi
economic growth, oil use increased 3 percent over year-earlier levels, reflecting
in part the improvement in oil prices relative to the major competing fuel,
natural gas. The explosive growth in natural gas demand experienced during
the last two decades seems to have finally stopped, as gas usage recorded its
first decline in 30 years, down 1 percent through midyear. With prospects for
continued stagnation in the UK economy and gradually increasing gas prices
as a result of UK policy decisions, gas consumption for the balance of the
1980s could fall well below previous expectations. This could reduce the need
for additional Norwegian imports, thus freeing up supplies for the Continent.
25X1
Although exports may have fallen to around 1.5 million b/d immediately
following the recent Iraqi air attacks at Khark, we believe Iran will continue
substantially discounting to return exports to previous levels of about 2.0
million b/d. Buyers are reportedly still actively seeking tankers and owners are
accepting new charters to load at Khark. Only if Iraq inflicts major damage to
foreign tankers or oil export facilities, will Iranian exports be seriously
impeded for any length of time. 25X1
UK Oil and The United Kingdom was the only major industrial country to experience a
Gas Trends rise in oil consumption during first-half 1982. Despite continued sluggish
Indonesia Holds President Soeharto reportedly rejected last week a plan to trim Indonesian oil
Oil Prices Firm prices in an apparent move to maintain OPEC unity. Unless Japan steps up
purchases of Indonesian crude as a result of recent attacks on Iran's Khark Is-
land export facility, however, Jakarta will continue to experience difficulty
marketing its relatively high-priced crude. Japan, which presently buys nearly
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60 percent of Indonesia's crude, probably will continue to demand that Jakarta
find some way to boost the competitiveness of its oil. Indonesia's oil revenues,
the mainstay of the country's economy, have already dropped 25 percent this
year as a result of its production and pricing policies.
International Trade, Technology, and Finance
West European Lower The rapid decline in US interest rates has triggered a round of rate cuts in
Interest Rates Western Europe. In the last two weeks, six West European central banks-the
Belgian, Italian, Dutch, Swiss, Austrian, and West German-have cut
discount rates by as much as 1 percentage point. The Bundesbank trimmed its
discount rate to 7 percent from the 7.5 percent that had been in place since
May 1980; the Lombard rate-the rate for loans secured by bonds and
equities-was lowered by 1 percentage point to 8 percent. The financial press
reports that the Bank of England also is moving to ease interest rates. If US in-
terest rates continue to fall, however, West European rates are unlikely to keep
pace. The Bank of France has not cut its rates reportedly because it fears
downward pressure on the franc. Other central bankers in Western Europe
may well hold back on reductions in their interest rates in an attempt to
strengthen their currencies against the US dollar. Moreover, real interest rates
in most West European countries have been only one-third to one-half the level
of real rates in the United States.
IMF Meeting Next week's IMF meeting in Toronto will discuss increasing member country
contributions to the Fund under the Eighth General Review of quotas. Most of
the major foreign industrial nations support an increase in the IMF's current
$65.9 billion capital base by anywhere from 50 to 100 percent. No agreement
on the size of the quota increase is likely at this year's meeting, but in our
judgment, most industrial nations probably will not accept an increase below
$30 billion. The meeting comes at a time when a growing number of LDCs are
being forced to turn to the IMF because of the difficulties in servicing their
debt obligations. Mexico-the largest LDC debtor-has recently announced
its intention to go to the IMF for loans of $4-5 billion, while Argentina-the
third-largest debtor-has indicated it will draw amounts up to $1.5 billion.
LDC Textile The 12 less developed country textile and apparel exporters who have so far re-
Exporters Meet jected EC demands for new export restrictions under the Multifiber Arrange-
ment are meeting this week in Geneva to discuss their strategy for the second
round of bilateral negotiations scheduled for this month. Earlier this year the
three major textile and apparel exporters to the EC-South Korea, Hong
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EC Commission
Penalizes Steel
Producers
Kong, and Macao-refused to go along with EC demands that included a
yearly reduction in export quotas of 10 to 12 percent for three years. They
have been supported by nine other exporters, but 14 others, including Thailand
and Pakistan, agreed to the EC terms. Although a hard stand by the
developing country exporters might produce minor EC concessions, the
exporters have little leverage and probably will yield before the late September
negotiating deadline imposed by the EC rather than face the prospect of
selective restrictions. EC success in splitting the LDC exporter ranks makes it
unlikely the EC will withdraw from the MFA, a move which would have ended
the nine-year-old arrangement.
National Developments
Developed Countries
program for restructuring the industry, could be jeopardized.
25X1
5 Secret
The EC Commission's recent imposition of $15 million in fines against
European steel companies that have exceeded their production quotas indicates
the Commission is actively enforcing the production limitation system included
in the Community's overall steel restructuring program. The eight steel firms
involved together produced almost 200,000 tons of steel beyond their quotas
between the fourth quarter of 1980 and the third quarter of 1981. The fines,
however, may not be paid. Kloeckner, a West German firm that was assessed
the largest fine-about $9.8 million-intends to appeal the Commission's
decision to the European Court of Justice and if necessary will open
proceedings in West German courts. If Kloeckner succeeds in avoiding
payment of its fine, the quota system, along with the Commission's overall
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Less Developed Countries
Egyptian Economic President Mubarak's concern about growing domestic criticism of his failure
Ministers Shifted to deal effectively with Egypt's serious economic problems is reflected in
Wednesday's cabinet changes. Mubarak dropped Deputy Prime Minister for
Economic Affairs Ibrahim and abolished the position. The new Minister of
International Investment and Cooperation is Dr. Wagih Shindy, chairman of
the ruling National Democratic Party's Budget and Planning Committee and
head of the government-owned Arab Investment Bank. According to Embassy
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reporting, Shindy is well liked by the private sector and has demonstrated a
solid understanding of the need for economic policy changes as well as the po-
litical risks involved. In his new position, he will oversee foreign investment
outside the oil sector and be the point man for US aid relations. The new Min-
ister for Economy and Foreign Trade, Dr. Mustafa Said, also has worked on
key party economic committees and, along with Shindy, authored a long
critique of Egyptian economic problems and policies in 1980. Their recommen-
dations for improving the performance of public-sector industries and limiting
conspicuous luxury consumption were largely ignored by Sadat, but probably
The shift in economic ministers is intended to convince Egyptians that
Mubarak plans to deal more actively with Egyptian economic problems in the
months ahead. Mubarak has been pursuing a cautious approach toward the
economy in order to maintain stability after Sadat's assassination and to
ameliorate the erratic policies of former Deputy Prime Minister Meguid.
Mubarak's caution, however, has been interpreted as indecisiveness by a wide
range of Egyptian interest groups. We believe Mubarak probably has greater
trust in his new economic ministers and plans to give them more leeway in for-
mulating policy changes. Nevertheless, the new economic team is unlikely to
propose sweeping economic reforms that carry significant political risks
25X1
Argentina's New The 24 August resignation of Argentine Economy Minister Dagnino-after
Economic Team only seven weeks in office-has brought to power an economic policy team
likely to offer little effective resistance to President Bignone's growing use of
populist remedies to assuage public discontent. Buenos Aires announced on 26
August another 30-percent wage hike to stem labor unrest, although the new
salary adjustment will only drive inflation higher. Jorge Wehbe, the new
Economy Minister, has promised seemingly inconsistent policies aimed at
halting the inflationary spiral and improving government revenues, while
developing an emergency housing construction and public works program. In
contrast, Julio Gonazalez del Solar, the new Central Bank president, is a free
market proponent; the US Embassy reports he favors moves to reduce public
expenditures, tighten controls over monetary expansion, and promote Argen-
tine exports. The lack of coordinated economic leadership has worrisome
implications. Divergent priorities will probably undermine any effort to
formulate and implement a coherent stabilization program; this would both
heighten foreign lenders' concerns and foster resistance to new financing. In
the worst case, excessive policy zigzags could lay the foundation for economic
crisis by paralyzing industrial activity, disrupting export marketing, and
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Prospects For The PLO exodus from Beirut and the election of Bashir Jumayyil as President
Reconstruction in are unlikely to enable Lebanon to soon regain its status as the financial,
Lebanon transportation, and communications center for the Middle East. Political
instability and the Israeli presence will limit, at least in the short run, the
amount of funds multinational lending agencies and the wealthy Arab states
are willing to commit. A modest reconstruction effort to repair and replace
buildings and infrastructure in the heaviest hit areas is more feasible and could
get under way without much delay
Lebanese economic planners say at least $12 billion in grants and concessional
loans from abroad will be needed for reconstruction, according to a press
report. These funds would be used to repair damage inflicted during the Israeli
invasion, as well as damage that occurred during the 1975-76 civil war. The
Chairman of the Council for Reconstruction and Development said the
government will oversee the restoration of such things as roads, schools,
hospitals, and water and power supplies and leave housing to private compa-
nies subsidized by the government. Municipal authorities, according to a press
report, estimate that one-fourth the buildings in West Beirut are heavily
damaged or destroyed.
With foreign exchange reserves of $1.3 billion and an estimated $2 billion in
annual worker remittances, the Lebanese can cover some of the foreign
exchange costs of reconstruction themselves. Reduced output because of
damage inflicted during the Israeli invasion and lack of government control in
many areas of the country will, however, hinder efforts to collect taxes.
Lebanese political and business leaders have recently expressed the hope to US
Embassy officials that the United States will launch a "mini-Marshall Plan."
Saudi Arabia, other Arab oil-producing states, and the World Bank have also
been mentioned as possible donors. The World Bank has expressed a willing-
ness to take the lead on reconstruction efforts if a strong central government is
established and the government can exercise control throughout the country.
This will take some time.
With the election of Jumayyil, who has close ties to Israel, the Arabs may be
reluctant to provide reconstruction aid. Lebanon's Sunnis are extremely
distrustful of Jumayyil, and Arab leaders, whose populations are predominant-
ly Sunni, may find it difficult to grant large sums to a government dominated
by Jumayyil. If Jumayyil takes steps toward a reconciliation with the Sunnis,
the Arabs would probably be willing to provide some assistance. The Israeli
presence in southern Lebanon, where economic ties to Israel are already being
t
t
l
b
an
uc
e re
developed, is an additional complication. Potential donors would
to provide aid that could be perceived as beneficial to Israel.
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Even if Lebanon's massive political problems are resolved, there is little
economic incentive for the Arabs to pump money into Lebanon. Prior to the
civil war, Beirut was the hub of Arab trade, banking, transportation, and
communications. Since the civil war, however, most Arab countries have
developed their own service industries and Beirut may not be able to recapture
its preeminent position in the Arab world. Bahrain has become a major
financial center, and Saudi banking is developing rapidly. Saudi Arabia and
Jordan have greatly expanded their own airlines, and most Arab states have
installed their own communications facilities. Wealthy Arabs have found other
locations-Monte Carlo and London, for example-to enjoy the night life. The
younger generation is now being educated in England or the United States.
Most of the services Beirut once provided are now being supplied elsewhere.C
25X1
Zimbabwe May Seek Faced with shortages of bread and edible oils, Zimbabwe has asked US
PL-480 Assistance Embassy officials about the availability of PL-480 Title I assistance. Title I
aid would provide for concessional financing for the 70,000 tons of wheat and
8,000 tons of edible oil necessary to cover anticipated 1982-83 needs.
Consumer demand has been fueled by sharp increases over the past year in
government-mandated minimum wages, while domestic food supplies have
been reduced by drought. Harare claims, however, that only short-term
assistance will be needed as it expects that its policy of higher producer prices
and lower consumer subsidies will restore domestic self-sufficiency within two
years
Tanzania Scrambles Dar es Salaam's latest search for aid is yielding negligible results. Consequent-
for Assistance ly, Tanzania cannot pay for recent oil shipments from Abu Dhabi and Qatar,
and government officials fear that the country will run out of oil by October.
devaluation and the reduction of the burgeoning budget deficit.
This comes on top of Tanzania's disappoint-
ing talks with the IMF last month. Although Nyerere grudgingly devalued the
shilling 10 percent and raised domestic interest rates earlier this year to
placate the IMF, the Fund is insisting on a further 50 to 60 percent
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Financial Picture The financial picture has brightened considerably for Soviet grain buyers since
Brightens for purchases of 6 million tons of Canadian and Argentine grain were reportedly
Soviet Grain Buyers made in early June. During the past two months US grain prices have steadily
declined, reaching three-year lows, and the London Interbank Offered Rate-
used to determine the interest rate charged the Soviets for short-term grain
credits-has dropped by one-third. The result is a potential saving to Moscow
of roughly $20 million on every 1 million tons of grain purchased. In addition,
the price of gold, which Moscow has sold in the past to help finance grain im-
ports, has risen 27 percent to over $400 per ounce since June. Most observers
believe that the Soviets will gain little by a further delay in grain purchases,
but because sharp turnarounds in prices and interest rates are not anticipated,
Moscow can sit on the sidelines a while longer before making the major
purchases and still realize a savings. Large, grain stocks, particularly in the
United States, and the near certainty of another bumper global grain harvest
assure the Soviets that ample grain supplies will be available from exporters
until at least late next spring.
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Worsening Yugoslav Newly released data from the Yugoslav National Bank show earnings from
Financial Problems exports and services are running more than $3.5 billion below Yugoslavia's
initial projection for 1982. This shortfall and severe reductions in Western
credits are forcing the Yugoslavs to slash imports, resulting in a decline in in-
dustrial output. The data also indicate that even with import reductions, the
Yugoslavs are more than $1 billion short of covering their obligations for this
year. The National Bank's bleak projections provide more evidence that
Yugoslavia may be unable to meet scheduled payments in the months ahead.
Belgrade's official reserves already are low, and its new foreign exchange law
has not yet enabled the National Bank to tap the holdings of regional banks.
Western bankers are taking a more pessimistic view of Yugoslavia's cred-
itworthiness, and negotiations for a syndicated loan are stalled. The Yugoslavs
will find it difficult to cut imports further, because industry is already
suffering from shortages of energy and raw materials
Cuban Debt Havana has decided to seek rescheduling arrangements on its approximately
Rescheduling $3 billion hard currency debt. The Cuban National Bank is proposing the
rescheduling of principal payments on its medium- and long-term debt over a
10-year period. Cuba would continue to pay interest and administrative costs
associated with these loans, as well as both interest and principal on short-term
obligations. Because of the large number of institutions involved, an advisory
committee probably will be formed to handle rescheduling arrangements.
Creditors from Japan, France, Canada, and Spain-Cuba's most important
Western trading partners-would be likely to take an influential role in the
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Payments pressures have intensified markedly over the past year. Import cuts
have not relieved financial pressures brought on by the steep drop in the world
price of sugar, Cuba's major export. Cuban banking officials have tried to
secure Western loans, but in recent months bankers have become more wary of
lending to Cuba. Moreover, financial pressures will grow over the next few
years because Cuba's export prospects are poor and a large portion of
Havana's hard currency debt is coming due
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The Changing Structure of
Western Bank Lending
Over the last several years, non-US commercial
banks have greatly stepped up their international
lending to both corporate and government borrow-
ers. Although US banks' share of new loans in-
creased slightly last year to 29 percent, it was still
well below the 38-percent share reached in 1976. In
a more recent development, banks in general are
substantially shortening the maturity structure of
new loans, reflecting their concern about debt
reschedulings and borrowers' ability to maintain
payments on longer term instruments. The shorter
terms along with higher interest rates and fees are
making it more difficult for weaker borrowers to
meet their financial obligations. At the same time,
the greater internationalization of bank lending
along with increasing complexity of banking rela-
tionships is complicating the issue of who will be
the lender of last resort in the event of a liquidity
crunch.
Since the mid-1970s banks in foreign industrial
countries have increased their international lending
at an average annual rate of 25 percent compared
with average annual US loan growth of 18 percent.
As a result, US banks' share of outstanding inter-
national loans dropped from 38 percent in Decem-
ber 1976 to 27 percent in 1980. The US share
moved back up to 29 percent last year primarily
because of sizable increases in US bank lending to
developed country borrowers and because of appre-
ciation of the dollar.
The rapid growth in non-US banks' lending stems
from the same factors that first attracted US
banks. Particularly important has been the desire
of LDCs and the centrally planned economies to
obtain external financing for economic develop-
ment. Other factors are:
? The greater profitability of international com-
pared with domestic lending, which stems in part
from the absence of legal restraints on reserve
requirements, rates, or fees.
? The banks' need for asset diversification.
? Multinational corporations' demand for large-
scale, multicurrency funding.
? The opportunity to intermediate between surplus
and deficit countries.
? Political constraints on direct investments.
The accelerated foreign lending by West European,
Japanese, and Canadian banks has occurred across
the entire geographic spectrum. Most dramatic has
been the sixfold increase in non-US bank lending to
OPEC since the mid-1970s, which resulted from an
aggressive marketing effort.
25X1
Foreign banks have substantially increased their
share of what have traditionally been the largest
LDC lending markets for US banks. About three-
fourths of total US bank loans to non-OPEC LDCs
are concentrated in six countries-Brazil, Mexico,
South Korea, Argentina, Taiwan, and the Philip-
pines. The US share of these countries' bank debt
has dropped significantly in recent years, ranging
from a decline of 15 percentage points in Brazil and
the Philippines to about 25 percentage points in
Mexico and South Korea. Only in Taiwan has the
US share increased. The rise in non-US bank
lending to these countries can be attributed primar-
ily to the previously low exposure of non-US banks
in these LDCs. Moreover, according to a Comptrol-
ler of the Currency study, in the late 1970s many US
banks were nearing government-prescribed lending 25X1
limits in these countries and could not increase loans
rapidly enough to meet the demand.'
'Lending limits are imposed on banks by government regulators as
a constraint on the amount a bank may lend to a single borrower
These limits are stated as a ratio of bank capital (for example, 25X1
equity) to bank assets (for example, loans).
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Outstanding International Claims of Commercial Banks Reporting to the
Bank for International Settlements
Billion US $
World total a
411
514
650
839
1,029
1,233
1,416
Non-US banks
263
319
424
584
744
903
1,006
US banks
148
195
226
255
285
330
410
US share (percent)
36
38
35
30
28
27
29
G-10 countries and Switzerland a
204
236
291
387
472
578
650
Non-US banks
150
171
217
302
380
470
519
US banks
55
65
73
84
92
108
131
US share (percent)
27
28
25
22
20
19
20
Offshore banking centers
58
79
93
117
149
180
230
Non-US banks
24
28
35
51
73
94
114
US banks
34
51
59
66
76
86
116
US share (percent)
59
65
63
57
51
48
50
Smaller developed countries b
38
51
71
84
98
112
125
Non-US banks
28
37
55
67
79
90
98
US banks
10
14
16
18
19
21
27
Non-US banks
7
11
19
35
44
49
49
US banks
7
13
20
22
20
21
23
US share (percent)
52
53
51
39
32
31
32
Non-OPEC developing countries
63
81
99
122
159
195
230
Non-US banks
29
39
52
72
100
122
140
US banks
34
42
47
50
59
73
90
US share (percent)
54
52
48
41
37
37
39
East European countries d
23
32
42
53
63
69
71
Non-US banks
20
27
36
47
56
62
63
US banks
3
5
6
6
7
7
8
US share (percent)
14
15
14
11
11
11
11
Miscellaneous and unallocated a
9
11
15
19
24
29
38
Non-US banks
4
6
10
11
12
16
21
a Excludes claims on the United States. c Includes Bahrain and Oman.
b Other West European countries plus Australia, South Africa, and d Includes Yugoslavia.
Turkey. a Includes Liberia and New Zealand.
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Secret
Outstanding International Claims of Commercial Banks Reporting to the
Bank for International Settlements on Non-OPEC Developing Countries
December 1976
December 1981
Total US Banks
(billion US $) (billion US $)
US Share
(percent)
Total
(billion US $)
US Banks
(billion US $)
US Share
(percent)
Non-OPEC Developing
Countries
80.9 41.9
52
230.0
90.0
39
Mexico
17.9 11.7
66
55.4
21.6
39
Brazil
21.2 10.9
52
49.6
18.4
37
Argentina
3.4 1.9
57
22.9
9.5
41
South Korea
3.9 3.0
77
16.5
8.7
53
Chile
1.1 0.8
72
9.6
5.4
56
Philippines
2.6 2.0
76
7.2
4.4
61
Taiwan
2.6 2.0
77
5.6
4.5
80
Others
28.2 9.6
34
63.2
17.5
28
25X1 25X1
US banks began to accelerate lending to both on top of much higher interest rates. LIBOR, the
LDCs and developed countries in 1980 and 1981. base rate for most Eurocurrency loans (the largest
The acceleration followed the 1979 oil price in- market for international bank transactions), rose
crease, which increased the demand for interna- from an average of 12 percent in 1979 to 16.8
tional lending, and the clarification by US bank percent in 1981. It has come down somewhat this
regulators of a statutory provision on the amount year, averaging 15 percent for the first six months.
that can be lent to a single foreign government (up
to 10 percent of bank capital). According to the
clarification, a government is no longer necessarily
considered a single borrower. Each loan is now
subject to a "purpose and means test" that effec-
tively makes a government a multiple independent
borrower. Much of the increased US lending has
centered in the six big LDC borrowers, particularly
Mexico where new US bank loans rose 30 to 355
percent in each of the past two years.
25X1 Finally, international bankers are increasingly un-
Terms of Lending willing to lend long term. According to the Bank
for International Settlements, 54 percent of the
The cost of borrowing from banks has substantially total growth in bank lending to borrowers outside
increased in the past few years as terms have the BIS reporting area in second-half 1981 matures
stiffened. Although the increased competition in one year or less. Of the new lending to Eastern
among banks drove down spreads for LDCs to an Europe, 90 percent was in this bracket. Because of
average of 0.87 percentage point above LIBOR by the shorter maturity of new lending, the share of
1979, they have risen steadily since then-to 1.03
in first-half 1982. The increase in spreads has come
21 Secret
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Share of Total Outstanding
International Claims of
BIS Reporting Banks Maturing
in One Year or Less
issuance of more short-term debt increases uncer-
tainty for borrowers, especially if they are forced to
borrow short-term for long-term needs. As a result,
many countries must constantly roll over a large
portion of their external obligations, which in-
creases the likelihood of a foreign exchange crisis.
1976 1978 1979 1980 1981 1981
4th 2nd 2nd 2nd 2nd 4th
Qtr Qtr Qtr Qtr Qtr Qtr
outside the BIS
reporting area a
Eastern Europe 50.2 45.5 43.1 37.2 39.4 42.0
Less developed 46.5 46.3 45.3 46.2 49.3 49.7
countries
(including OPEC)
a The reporting area consists of the Group of Ten countries (United
States, Canada, United Kingdom, West Germany, France, Italy,
Japan, Belgium, Luxembourg, and Netherlands) plus Switzerland,
Austria, Denmark, and Ireland and certain of their bank affiliates.
International claims among these countries are excluded.
and many developed country borrowers.'
pean bank debt is now longer than for most
Western banks' outstanding international claims
maturing within one year has drifted back almost
to what it was in 1976-47 percent. Because of the
size of the Polish and Romanian debt reschedul-
ings, however, the maturity structure of East Euro-
We believe that the drift to shorter maturities in
international lending is due to bankers' concern
about the debt reschedulings and the risk that
many government borrowers will not be able to
earn enough foreign exchange to maintain the flow
of payments on a debt instrument of longer maturi-
From the creditors' point of view, the greater share
of lending being undertaken by non-US banks has
spread the risk among more countries and institu-
tions. However, questions have been raised about
who will act when borrowers and/or lenders get
into serious trouble. The recent liquidation of
Italy's Banco Ambrosiano is a case in point. The
Bank of Italy refused to take over the debts of
Banco Ambrosiano's operation in Luxembourg
partly on the ground that it is a foreign subsidiary
and therefore not the Bank of Italy's responsibility.
If other Western central banks adopt the Bank of
Italy's policy toward foreign subsidiaries, interna-
tional banking would be truly vulnerable in a severe
liquidity crisis.) 25X1
25X1
The changes in the structure of international bank
lending raise potential problems for borrowers. The
2 Typically, in a debt rescheduling the original loan contract is
amended to include a grace period or a stretching out of the
maturity structure. Some terms-usually the interest rate and often
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Secret
External Financing Problem ~
Real economic growth in the Caribbean region fell
to 2.5 percent last year, compared to nearly 4
percent in 1977; the combined current account
deficit ballooned from about $200 million in 1977
to an estimated $1.3 billion in 1981 (excluding the
French Overseas Departments of French Guiana,
Guadeloupe, and Martinique). Increased borrowing
to help finance the worsening current account
deficit has pushed the region's medium- and long-
term external debt from $3 billion to $5 billion over
the same period.
We believe that the economic downturn is likely to
bottom out in 1983. Current account deficits are
expected to level off and in some cases improve due
to a moderate upturn in the industrialized countries
and a leveling off of oil prices. Given projected
levels of foreign assistance, no major financing
problems are foreseen for 1983.
Factors Behind Widening
Current Account Deficits
The serious setbacks suffered by Caribbean coun-
tries in their external accounts since 1977 have
been due to a combination of factors. The OECD-
wide recession has cut tourism earnings and has
weakened the demand for traditional exports, par-
ticularly bauxite. In some countries, such as the
Bahamas and Barbados, the tourist industry has
'The Caribbean region is defined in this article to include Anguilla,
Antigua and Barbuda, the Bahamas, Barbados, Belize, the Cayman
Islands, Dominica, the Dominican Republic, Grenada, Guyana,
Haiti, Jamaica, Montserrat, the Netherlands Antilles, St. Christo-
pher-Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname,
Trinidad and Tobago, Turks and Caicos Islands, the British Virgin
Islands, and the French Departments of French Guiana, Guade-
Current Account Balance for the
Caribbean Region'
a Goods, services, and private transfers.
b Estimated.
also been hurt by high wage settlements. Unlike
1973-74, when commodity prices rose along with
oil prices, commodity prices have been weak since
1980. World market prices for sugar, for example,
have plummeted nearly 60 percent from 1980
levels, while bauxite prices have been flat. More-
over, for sugar producers that sell to the EC under
guaranteed prices, a stengthening US dollar has
reduced the dollar equivalent of the EC prices
received.
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Net Resource Flows and Official Development Million US $
Assistance (ODA) to the Caribbean Region a
ODA
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Net Resource Flows and Official Development Million us $
Assistance (ODA) to the Caribbean Region a (continued)
1975 1976 1977 1978 1979 1980
Haiti
All sources
56.5
70.1
88.0
94.5
128.7
120.7
ODA
59.3
71.8
87.6
92.8
92.6
105.2
Jamaica
All sources
93.8
-12.1
67.0
116.4
90.4
216.4
ODA
25.1
26.2
33.3
122.1
97.5
126.0
Martinique
All sources
200.6
227.6
238.8
287.4
334.6
738.6
ODA
164.7
194.6
202.1
235.4
296.1
568.8
Montserrat
All sources
4.5
3.4
3.2
1.4
1.4
3.9
ODA
4.5
3.4
3.2
1.4
1.4
3.7
Netherlands Antilles
All sources
421.3
274.7
605.0
851.2
110.7
204.8
ODA
33.3
49.3
41.6
48.0
56.9
96.6
St. Christopher-Nevis
All sources
1.6
2.6
2.3
2.2
1.8
6.2
ODA
1.6
2.6
2.6
2.1
1.8
6.2
St. Lucia
All sources
10.5
7.8
6.8
3.8
2.2
9.7
ODA
8.9
7.2
4.4
3.7
2.2
8.6
St. Vincent and the Grenadines
All sources
6.1
4.4
4.0
4.6
5.7
10.7
ODA
6.0
4.0
4.0
4.5
5.7
9.7
Suriname
All sources
56.8
104.9
106.5
66.8
94.6
80.1
ODA
52.8
103.8
90.2
65.6
94.6
82.2
Trinidad and Tobago
All sources
16.1
-4.0
-11.3
104.8
74.2
67.8
ODA
5.4
4.3
5.7
4.5
4.1
4.7
Turks and Caicos Islands
All sources
1.7
2.6
2.3
1.6
1.6
1.8
ODA
3.2
3.8
3.5
2.8
2.3
3.4
British Virgin Islands
All sources
3.7
3.4
2.8
-2.1
9.3
67.0
ODA
2.4
2.6
2.1
1.2
1.8
4.7
a Net resource flows include ODA (grants and concessional loans)
plus nonconcessional loans and direct investment. For individual
countries ODA will exceed flows from all sources if non-ODA flows
are negative.
25X1
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Manufactures
(US export
prices)
(Developed
country export
prices)
In addition, the production of key export commod-
ities has declined due to adverse weather, labor
problems, and industrial bottlenecks. The region
has not fully recovered from devastating hurricanes
in 1979 and 1980. As a result, banana production
in the Eastern Caribbean, a source of as much as
43 percent of export earnings in some countries, has
yet to regain 1979 levels. Sugar production for the
Caribbean as a whole fell by some 9 percent in
1981, largely a result of bad weather, crop disease,
and rapidly rising production costs.
Role of External Financing
Caribbean countries have continued to rely heavily
on external financing to keep their economies afloat
during the recent downturn. The net inflow of
direct investment, loans, and official grants has
risen from $1.3 billion in 1977 to an estimated $1.5
billion in 1980 (excluding the three French Over-
Secret
3 September 1982
Bauxite
(Guyana,
Baltimore)
Bananas
(Latin America,
US Ports)
seas Departments in the region). These resources,
however, have fallen relative to external financing
requirements: between 1977 and 1981 the sum of
current account deficits and official debt amortiza-
tion soared from $393 million to $1.8 billion. For
1982 net resource flows are projected at slightly
over $1.5 billion compared with financing require-
ments of $2.0 billion.
Grants and concessional loans provided 50 percent
of total resource inflows in 1980, with 70 percent of
this assistance coming from bilateral sources. The
role of multilateral institutions in the external
financing of Caribbean countries has been expand-
ing. Between 1977 and 1981 loan approvals to the
region by the Inter-American Development Bank
rose from $90 million to $206 million, while ap-
provals by the fledgling Caribbean Development
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Barbados' real GDP fell 3 percent in 1981. Set-
backs in the main economic sectors-sugar, other
agriculture, tourism, and manufacturing-because
of adverse weather conditions, labor disputes, and
weak external demand were major factors. Official
external debt more than doubled in 1981, reaching
$164 million. Barbados has implemented tax relief
to encourage further investment and continues to
focus on export promotion to foster economic
growth. The Central Bank has tightened credit
conditions to help ease balance-of- payments and
inflationary pressures. Tourism continues to falter
and we expect zero real economic growth this year.
Haiti's real GDP fell 2.1 percent in 1981. The
plunge in economic activity was largely attribut-
able to declines in coffee, sugar, and bauxite
production. Earnings from coffee, Haiti's largest
export, fell by two-thirds to $30 million. Although
external debt in 1981 totaled $320 million, debt
service was only $20 million because of Port-au-
Prince's access to concessional loans. The Haitian
Government continues to encourage export-orient-
edfirms through various incentives. The slight
economic pickup in the United States and the EC
during second-half 1982 and more stringent con-
trols on imports should hold the current account
deficit to no more than last year's $116 million.
However, the cost will be near zero real GDP
growth this year.
The Dominican Republic's rate of real GDP
growth fell from 5.4 percent in 1980 to 3.4 percent
in 1981 and will probably slow somewhat further
this year. Unemployment currently exceeds 25
percent. Exports this year are expected to be 30
percent below the 1981 level while imports are
projected to fall by 15 percent. The new govern-
ment intends to liberalize foreign investment laws
to attract badly needed foreign capital. The central
bank is allowing interest rates to rise to encourage
domestic saving.
Jamaica managed a 1.5 percent increase in real
GDP growth in 1981 after seven years of decline,
but external debt rose to $1.4 billion by yearend.
Foreign exchange earnings are being hurt by falling
sugar production and slow bauxite export growth.
Tourism is beginning to pick up but is still below
1979 levels. Economic policies to cope with the
current account deficit center around increased
allocations of foreign exchange for raw material
imports for industry and a renewed emphasis on
export promotion. Nevertheless, we believe the
current account deficit will widen to $550 million
this year, with the economy registering just under
2 -percent growth.
Guyana's economy is in critical condition. Real
output fell by 6 percent in 1981, putting real per
capita income nearly 30 percent below the 1975
level, while external debt rose to $635 million.
Poor performance in the bauxite and sugar indus-
tries have been a major reason for the worsening
economy. In an effort to cope with deteriorating
economic conditions, authorities have been laying
off public-sector employees and trying to improve
government efficiency. The government has in-
creased consumption taxes and raised interest
rates to encourage saving. To spur export activity,
Guyana is allowing more private-sector indepen-
dence in manufacturing and agriculture. Even so,
real GDP will probably decline another 10 percent
this year.
Among the other Caribbean countries, only St.
Vincent-with a 9-percent increase in real GDP-
avoided a growth slowdown in 1981. Even Trini-
dad and Tobago witnessed a plunge in growth
despite its profitable oil industry that was largely
responsible for the country's $300 million current
account surplus. Economic policy in most of these
countries has been directed toward monetary and
fiscal restraint in an effort to bring current account
and budget deficits under control.
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Secret
Bank climbed from $30 million to $48 million.
World Bank loan commitments have almost trebled
since 1977, reaching $134 million last year. F_~
Other economic assistance, including OPEC and
Communist disbursements, has been relatively
small. The Caribbean received only $75 million
from OPEC-mostly from Venezuela-between
1975 and 1980; $45 million of this went to Jamaica
and $20 million to Guyana. Communist aid over
the same period reached about $50 million, with
the lion's share going to Guyana and Jamaica.F_
bauxite/alumina and tourism industries.
Direct investment has played an important develop-
ment role, contributing 20 to 30 percent of total
financial inflows in recent years, according to
World Bank estimates. The United States has been
the single-largest source, with one-third share of
the $9.2 billion OECD total direct investment in
the region at yearend 1978, the last complete
reporting year. The US share has fallen since then.
Trinidad and Tobago, the Netherlands Antilles,
and the Bahamas have been the major beneficia-
ries, accounting for 63 percent of Western direct
investment in the region in 1978. Petroleum pro-
cessing facilities have been the primary investment
target in these countries. To a much lesser extent,
private capital has been attracted to Jamaica,
Suriname, and the Dominican Republic for the
We believe that the economic downturn in the
Caribbean region will bottom out in 1983. Key
elements in this outlook are stable oil prices, mod-
erate economic recovery in OECD countries, and a
related upturn in primary commodity prices. The
performance of the combined Caribbean current
account deficit next year will be driven to a large
extent by developments in the Dominican Republic
and Jamaica. Economic adjustment policies under
way in these two countries are likely to take firmer
hold next year, but only Santo Domingo is likely to
Secret
3 September 1982
reduce its current account deficit. For the Caribbe-
an as a whole, the current account deficit should
fall slightly from the 1982 level of $1.5 billion to
around the 1981 figure of $1.3 billion.
No major external financing problems are foreseen
for the region in 1983. Bilateral and multilateral
economic assistance will continue to bear the brunt
of the external financing requirements, while grace
periods on concessional loans received since 1977
will ease debt service requirements. Continuing
foreign assistance should give the Caribbean coun-
tries some breathing space to pursue economic
restructuring.
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China: The Economy at Midyear
I
Beijing is still struggling to restrain industrial
growth, particularly in heavy industry. We believe
the government reorganization has disrupted nor-
mal channels of economic control and communica-
tion, making implementation of this year's plan
particularly difficult. Efforts to get managers to
focus on energy conservation and improvements in
quality and productivity have met with little suc-
cess
Heavy Industry's Unplanned Surge
Beijing is particularly concerned about the pickup
in heavy industry, which is outpacing light industry
and sidetracking "readjustment" policies. Heavy
industry's rapid growth for four successive quarters
has raised production to a new record level, 10.7
percent above the low point of a year ago. The
unforeseen boom in heavy industry, where growth
of only 1 percent was planned for 1982, has caused
energy shortages in key industrial centers in east
and northeast China. Energy production, especially
coal, grew rapidly in the first six months, but failed
to keep up with heavy industry's growth. As a
result, the State Council in May issued new regula-
tions restricting the output of energy-intensive fac-
tories and tightening control over electricity alloca-
tion.
The need to curb industrial energy consumption-
which was planned to drop by 3 percent this year-
was a major theme of a July speech by Zhang
Jingfu, head of the State Economic Commission, to
a national industry conference in Beijing. Referring
to strains in the energy supply system, Zhang
reported that "electricity was overgenerated, the
volume of rail freight was excessive, and coal stored
in many localities was used up."
Zhang and Premier Zhao Ziyang, who also ad-
dressed the conference, emphasized that too-rapid
growth hinders efforts to improve efficiency, a
point Beijing has made repeatedly in recent
months. Production costs in state enterprises were
down by 0.2 percent in the first five months, falling
short of the planned cut of 1 to 2 percent. Both
Zhang and Zhao restated Beijing's threat that
enterprises not meeting energy consumption and 25X1
productivity targets will be closed.
Light Industry Curtailed
Light industrial production has declined from the
peaks of late 1981, but production in the second
quarter was still 6.8 percent above the year-earlier
level-high enough that the 7-percent growth tar-
get for 1982 remains within reach. Part of the
recent decline is due to the fact that some local
authorities are using for heavy industry materials,
energy, and transport that had been earmarked for
light industry. The decline in overall light industri-
al production also has occurred in part as a re-
sponse to large inventory buildups. Although retail
sales rose 9.2 percent in the first five months,
inventories of unwanted goods continued to rise in
the first six months, as consumers in both urban
and rural areas became more selective in their 25X1
purchases. In March the State Council ordered
cutbacks in the production of consumer durables
outside the plan. The cuts were aimed specifically
at new producers turning out poor quality goods.
The conservative policies of the past year remain in
effect in the foreign sector. We estimate that 25X1
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Index: 1977=100, seasonally adjusted
Total Industry
Heavy
120.3
121.5
Light
164.1
175.6
Energy
Percent Change b
Total Industry 4.1 4.0
Heavy -4.7 1.0
Light 14.1 7.0
Energy -0.6 0.3
147.5
148.8
149.1
125.7
127.9
129.9
175.6
175.3
173.0
116.4
116.7
117.7
5.8
7.6
0.8
4.5
11.9
6.7
7.0
-12.2
-5.2
3.8
8.9
3.7
a Estimated.
b Percent change over previous period at an annual rate.
imports in the first six months were cut by 15.4
percent from last year's pace, while exports were up
by 11.9 percent. The growing trade surplus has
been used to push foreign exchange reserves up to
record levels and to reduce debt; China's debt
service ratio has dropped to about 5 percent.
Grain imports, however, are running ahead of last
year, reflecting low prices. More than one-half are
still coming from the United States. In May,
Canada announced a new three-year agreement to
supply China with 3.5-4.2 million tons of grain per
year.
Of the 45 foreign oil companies that participated in
seismic surveys,.33 submitted bids on 17 August
for offshore oil exploration. More negotiations will
be needed before contracts are signed. Some com-
panies did not submit bids because of concern that
Chinese taxes and Beijing's share of crude oil
output will be too high to allow adequate profits,
and that requirements for technology transfer are
excessive.
Secret
3 September 1982
Agriculture
The 1982 summer grain harvest was about equal to
last year's. Major fall crops are doing well, and we
expect production to remain at or slightly above
last year's level. Grain output will approach, but
probably will not attain, the target level of 333.5
million tons
The Budget and Capital Spending
Beijing managed to post a budget surplus in the
first half, aided by the larger-than-expected reve-
nues from heavy industry. Zhang Jingfu, neverthe-
less, expressed concern that the deficits that ap-
peared in May and June portend fiscal difficulties
for the second half. These deficits probably were
caused by a combination of declining revenues in
other sectors and rising expenditures for capital
construction.
Despite attempts to restrain investment spending,
outlays for capital construction were up 30 percent.
Data for the first four months show off-budget
investment running 70 percent ahead of last year,
in contrast to the 8-percent budgeted increase
The unplanned surge in heavy industry and invest-
ment serves as a reminder that Beijing's policies
still encounter resistance, especially at the local
level. Beijing repeatedly has called for slower
growth to allow plant managers to focus on improv-
ing productivity and quality, but lower level offi-
cials and managers continue to resist. Rapid
growth remains a major objective, especially since
profits and bonuses of the enterprises they manage
remain closely linked to output.
Controversy over economic problems may become
increasingly apparent at the 12th Party Congress
and the National People's Congress later this year.
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Investment, the rate of growth, the role of light
industry, and foreign economic relations all remain
l
d
unsett
e
ibbues.l 25X1
The Chinese press has also been full of "plan versus
market" discussions. We believe opponents of Vice
Chairman Deng Xiaoping are attempting to dis-
credit his leadership by citing problems with the
market-type reforms introduced over the past three
years. This issue, as well as the campaigns now
under way in China to combat foreign influence,
the anticorruption drive, and politicking related to
the upcoming congresses could affect the overall
economic climate
25X1
Outlook for 1982
The energy situation and Beijing's continuing ef-
forts to improve efficiency will dominate the eco-
nomic picture for the rest of the year. Heavy
industrial growth will be slowed by the energy
crunch, but the growth targets set forth in the 1982
plan will probably be met or surpassed by the end
of the year. We believe the central authorities'
efficiency goals will not be met, however, because
managers are still concentrating mainly on raising
output. Budget constraints and continued shortages
of many consumer goods will prevent much of an
increase in living standards. If Beijing is unable to
restrain production in heavy industry, consumer
goods output may decline, further complicating the
effort to raise living standards.F __1 25X1
Beijing will begin to restrain export growth and
step up imports, especially of industrial supplies.
Nevertheless, we estimate this year's trade surplus
will reach a record $5 billion. Proceeds from the
surplus will be used to reduce debt and increase
foreign exchange reserves. Beijing is also likely to
use more of its foreign exchange earnings for
capital imports and investment abroad, especially 25X1
in Hong Kong.
25X1
31 Secret
3 September 1982
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