THE IMPACT OF OIL PRICE HIKES ON SELECTED LESS DEVELOPED COUNTRIES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001900010115-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 20
• Document Creation Date: December 19, 2016
• Document Release Date: May 23, 2006
• Sequence Number: 115
• Publication Date: January 16, 1974
• Content Type: REPORT

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REMARKS: S-5828
The attached was handcarried to
Mr. Charles Coo er NSC, on ].6
Jan 74. with
contributions from S/EC, D/LA,
D/NE
Distribution :
1
1
- D/OER
- D/I
3
ST PC
1
SA ER
1
-
1
- D /LA
1
- D/D
1
- D/NE
1
- D/S
1
- S/EC
ROOM NO. `BUILDING
FORM NO .nA 1 R EPL,,Crs FCnM?r.e
1 FEC 55 G WHICH MAY BE USED.
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The. 1 7c,ct of U:i.' Price Ilikes on Selected
--
Overview
Overview
Prior to the energy crisis, the economic outlock
for sevexal major US aid recipients w:ls fairly bight.
In the case of South Korea, 1973 was a banner year, while
Thailand, the Philippines, and Turkey each recorded substantial
economic gains. In all four cases, the outlook was for
another good year in 1974. In South Vie;:nam and Cambodia,
war-related problems continued to cause economic difficulties.
Chile faced serious economic trouble, including an intractable
balance-of-paymenifs problem inherited from the Allende
government. Some improvement .In Chile's economic per:`ormance
was anticipated in 1974.
Energy-related problems will cause difficulties
for all seven countries this year. The immediate problem
will be substantially higher costs of oil imports. in
the case of South Korea, oil import costs will increase
at least $700 million in 1974, to about $1 billion --
in cost equals 20% of total exports last year. The other
countries face smaller increases in oil import costs, but
the amounts are substantial. relative to the size of their
economies and financial resources.
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The non-oil import bill for these countries also
will tend to increase considerably this year as a new
round of inflation hits their major trading partners,
including other LDCs. Although most of the aid recipients
are agricultural countries, several of them must import
large amounts of food and other agricultural products.
Prices of these commodities are likely to increase again
this year because of continuing tight world supplies. Chile
will be especially hard hit in this regard, since about
one-third of its non-oil imparts are foodstuffs. Imports
of consumer goods and capital equipment will carry higher
price tags as well.
The ability of several of the countries to boost
exports will be hindered by the expected sharp economic
slowdown in major industrialized countries. Real output
.in these countries will expand very slowly, and their
demand for raw materials is likely to stagnate. Japan's
raw material import requirements this year
probably will decline sharply. As a result world market
prices for some commodities exported by LDC's may well
be dropping while their import prices are rising. Beyond
this, the general weakening of world-wide business confidence
may well lead to a temporary slowdown in private investment
flows into LDCs.
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South Vietnam, Cambodia, and' Chile will be least
capable of handling the financial burden stemming from the
oil price hikes. All three were ha,'ing serious balance-
of-payments problems before the crisis. Neither their
economies nor their international financial positbns are
very resilient. South Vietnam and Cambodia will face
problems simply because of higher oil costs -- in the
case of Cambodia, security problems will make it difficult
to get oil. Chile's difficulty will stem primarily from
a possible sharp downturn in a;port earnings. All three
countries 2epe:nd heavily on foreign funds to maintain
economic stabil~.ty.
South Korea and t'ie Philippines will have smaller
financial problems. Bothrcountries face foreign exchange
constraints, but South Korea probably can avert a s--rious
.balance-of-payments problem a's long as private capital
inflows continue at near normal levels if foreign aid
flows continue at recent levels, the Philippines probably
can manage this year by drawing down reserves.
Thailand and Turkey are in the bes; position to cope
with problems arising from higher oil prices. Turkey
currently has foreign exchange reserves equal to a year's
imports and possibly could achieve a small balance-of-payments
surplus in 1974. Despite the increased oil bill, Thailand
probably will still have reserves equal to at least three
months' imports by the end of this year.
I _', ?.
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South Korea
Higher oil price:; in 1974 will boost South Korea's
oil import bill. by at least $700 million. Tota', oil import
costs will amount to about $1 billion, equivalent to almost
one-third, of last year's export earnings. The increased
oil bill will put a heavy but probably not critical strain
on South Korea's foreign reserve position. Domestic
economic activity will continue strong in spite of some
problems arising from the oil price hikes.
Although South Korea's balance of payments has improved
in recent years, it is still vulnerable. Exports,
largely light manufactures, grew by 80% in '1973, to
$3.3 billion, and imports increased rapidly, to $4.1 billion.
The deficit was more than offset by private capital inflows,
largely from the United States, and by foreign aid. As
a result, foreign exchange reserves have been rising.
Reserves reached $1 billion at the end of 1973, equal to
about three month's imports.
Increased oil import costs plus anticipated increases
in non-oil imports, especially foodstuffs, will boost the
value of South Korea's foreign purchases by at least
30% in 1974, to an estimated $5.3 billion. A substantial
portion of Korea's imports consist of machinery and equipment,
and prices for these goods are likely to increase appreciably.
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The value of grain imports should increase substantial clue
to higher prices.
While import costs will rise sharply, South Korea's
export growth will slow to perhaps 20% in 1974 -- about
half the average rate of the previous five years. The bulk
of Korean exports consist of light consumer goods, Foreign
demand for which will weaken this year. Almost
two-thirds of the growth in South Korean exports in
1973, for example, went to Japan, but the Japanese economic
growth is expected to slow dramatically. Sales to the
US market will increase, but not enough to increase total
exports as rapidly as in recent years.
Giver the outlook for imports and exports, South
Korea's current account deficit will increase from $400
million in 1973 to an estimated $1 billion in 1974. The.
deficit.will be offset to some extent by official and
private capital inflows. D f uring 1973, capital inflows
reached an estimated $800 million. The problem is that
world-wide business con.'idence has already been shaken by
the energy crisis, and this could lead to a decline in
private investment inflows to Korea. If capital inflows
about match last year's level, Seoul can probably cover
its payments deficit by drawing down official reserves.
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South Korea's unprecedented real growth in GNP of 17%
in 1973 was largely the result of growing exports, and
if their expansion slows, so will the rate of economic
growth. Beyond this, sonic weakening in domestic demand
is likely because of the contractionary effect of higher
oil import costs. Should demand fall sharply, many firms
would face bankruptcy within a fairly short period because
they depend so heavily on borrowing to finance their
operations. All things considered, we judge that South
Korea's real growth in 1974 will probably slow to 5% to 7%
because of the likelihood of slower export growth.
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Turkey
Higher oil prices in 1974 will boost Turkey's oil
import bill by at least $300 million. Total oil import
costs will amount to about $600 million, '..quivalent to
about half of last year's export earnings. Turkey should
be able to handle the rise in oil import costs without
great difficulty this year.
During the pact two years, Turkey's balance of payments
has improved significantly. Exports, largely agricultural,
grew by 54% last year to $1.2 billion, because of higher
wur'ld commodity prices. Imports also increased sharply,
reaching $2.0 billion. The deficit was more than offset
by remittances 'nom Turkish workers in Europe plus capital
inflows. As a result, Turkey's foreign reserves increased
dramatically. By October 1973, they totaled $2.2 b3.llion,
equal to a year's imports.
Increased oil import costs plus ai.ticipated increases
in non-oil imports will boost the Turkey's 1974 foreign
purchases by an estimated 50#, to $3.0 billion. Since
consumer goods make up less than 5% of imports, any
squeeze on purchases abroad would slow economic growth.
Turkey will be unable to boost exports as fast as
last year because of increasing domestic requirements for
agricultural goods and slower growth of output. Prices
may aga?.n increase substantially but the best we expect
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is a 25% hike in export earnings. Worker remittances,
meanwhile, will not increase much, if at all, since
West Germany is suspending recruitment of workers for
the duration of the fuel crisis.
Given the outlook for imports, exports, and worker
remittances, Turkey's current account balance is likely
to swing from an estimated $400 million surplus in 1973
to a $300 million deficit in 1974. The deficit will not
be extremely large compared with the country's foreign
exchange reserves and will be partly covered by normal
capital inflows. During 1972 nearly $600 million in
official aid (including $145 million from the U.S.) was
earmarked for Turkey. Approximately $450 million
consisted of project aid and remains in the pipeline.
Private foreign investment in Turkey amounted to $92
million in 1973. Debt service last year amounted to a
manageable $167 million.
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Higher oil prices will boost Chile's import bill
by some $180 million. The estimated $235 million that
Chile will have to pay for oil in 1974 equals about
20% of last year's export earnings. Because of t`he
expected decline in world-wide demand for copper, financing
this oil import bill will absorb an even larger share of
1974 export earnings.
The junta that replaced the Allende regime in September
1973 inherited an economy in shambles. Copper and
a,friculture, mainstays of the economy, had suffered serious
production drops. Chile's balance of payments had
deteriorated from a surplus of $123 million in 1970 to a
deficit of $908 million in 1972. Despite continued
deterioration through August, the 1973 balance-of-
payments deficit declined to: $255 million because of
increased exports and large capital inflows after the
military assumed power.
Even before the oil price hike, imports were expected
to increase by at least 15% this year, because of growing
requirements for food, industrial inputs, and copper
mining equipment. Santiago had planned to more than
offset this import rise by boosting copper production from
650,000 tons to as much as 800,000 tons. If copper prices
slide as expected, however, Chile would have found it
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difficult to balance its trade account even without a
sharp rise in its oil. import bill. A decline of 10 cents
a pound on the world copper market represent:; a 1