INTELLIGENCE MEMORANDUM CHILE: IMPLICATIONS OF THE WORSENING TRADE AND PAYMENTS POSITION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00608R000500180008-1
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 9, 2016
• Document Release Date: March 5, 1999
• Sequence Number: 8
• Publication Date: April 1, 1975
• Content Type: IM

h~il~:= In~piications of the Wors~n.ir~g .T
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confidential
No Forril;n T)tssrrn
Intelligence 1V~emorandum
Chile.? I~nplicationr of the Wo~:rening Trade
and Payments Position
confidential
ER IM 75-8
April 1975
COPY N0 78
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NATIONAL SECURITY INFORMATION
Unaut~lorized Disclosure Subject to Criminal Sanctions
Claulli~d by OIS]19
Ex~mpf Irom O~n~ral D~cla~flllcaflon Sch~dul~
01 E.O. 11632 ?x~mpflon calepory~
yen(1~1 (2), and SJ)
Automatlca y ~claulF ?d om
dab fmpouy6l~ fo d~hrmlm
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No f%nrelrp~ I)Lsserr~
Chile: Implications
of the Woncning Trade
and Payments Positit>n
J KEY JUDGMENTS
Chile faces a large balance-ol-Payments deficit this year.
? Lower upper prt~.:ta and Participation in a ('IPRC export-restriction
scheme arc likely to cut total export earnings ~0`%~.
? Rising world market prices I'~r manufactures are incretrsirg Chile's import
costs by about 7`/~.
? I~orcign aitl is very low, mainly because of international distaste for the
milit;~ry governnrei t.
? Although the junta has applied to the Paris Club for debt n~licf, it stands
little chance of getting its I~)75 debt service Payments of US x,710 million
voluntarily reduced by more than ~~?(~ million.
('hile:ut foreign reserves are minuscule, and extensive commercial financing
is precluded by Chiles already enormous foreign debt. Santiago thus would be
forced to slash imports from the current r,!te by as much as ~ I billion - a 45;'%
rrtluction in vt,lumr from 1~t74 - if it were to fully meet its debt service
commitments. So far, no steps to restrict imports have been taken.
[hsPite its strong desire to improve Chiles international credit standing, the
military governnunt may default on 1 ~t75 debt service payments due to most
Communist anti some West European countries. Ikfault is most likely on the
obligations to countries that are Icast willing to provide new aid or show flexibility
in debt negotiations.
The potential foreign exchange savings from defaulting on debt service
Payments are probably not more than S 135 million, because Iess selective defaults
wcndd irreparably damage the country's international credit Position. Some
Note: Comments and yuerics regarding [his ntrmorandum arc welcomed. They may
tx~ directed to of the C-ftice of Economic Research, Code '. ^3,
F~xU?nsion 5079.
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additional reiicl' probably will be available through a small bank loan the government
is nuw seckint;. Chile ncvcrthcltss will probably have to slash imports by X80!)
million, or sonic :;S"~~ in volume, in 1975. A reduction of this nrignitudc will reverse
the economic recovery after the Allende period and derail government economic
rcfornrs.
? Kcal (;I)1' nuiy decline c-.uring the latter part of the year by as much
as 10'i~~ at an annual rate (3'/r4'%~ in 1975 ),with industry suffering nrorc
than this.
I~urther rises in unemployment and declines in real wages will incrcasc
public unrest.
? The govcrnmcnt ;rill be forced to incrcasc its intervention in the
economy, and pressure from within the military ~s~ll mount for the att.~.:k
on ('hilt's triple-digit inflation to be abandoned.
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I ? 13y the ~ nd ol? I~)74, ('bile's eeununty was rrruvrring (runt the shanthlcs
of the Final year of Allrnd~ t;ovrrnntrnl ;Intl the Sehtemhe~ 1 c.73 military takeover.
L;thor disrihline had been restored, essential services reinstate,l, and brier and labor
controls and other regulations that fettered hrodurtion largely r~?nx~wcd. Kcal (~!)1'
grew 5'~;, in I~)7~}, relCaining Ihr 197' level (see I~igur~~ I ). Alihuugh the
govrrnnu~nt's anti-inllalion hrugrant increased unenthloynte,tt and lowered real
wages, it surre.ded in only halving 197,i's 70O'%~ inllaliun r~~te.
'. Rrrovery was must hrlhrd by a hike in ex hurt earnings ul' Wrote than
one-h;tll', a sii.ahlr inl'luw ut tl)fl'I~;It rrunomie assistance, and rrl'inancing by the
1';n'i~ ('luh of SU'~ ol~ Ihr 1974 ('hilr;ut debt service haymrnt ul' $til2 Writ ion.
Rrrurd world rubber briers - averaging 93 rents a hound, compared with tit cents
in 1173 -- and ;t I:u~ge rise in rubber exhort vuluntr weer antral lu the exhort
reruvrry. I?xl~u ?I rereihts plus inrreasrd foreign assist:utre hcrntitted a near-d~r~thling
in the ~~oluntr of imhur~ls ul? furls, raw nwter~als, and semi-ntanufarturrd gouck
deshih? Wroth hither briers fur oil. grain, and other goods. An HO'/~ cumula!ivc
dr~aluation of the escudo during the ye;u? enruura(;ed exhorts and disrourat;ed
nonrssrnti;tl inthorh. Altiuutgh the trade ~.Iefiril v :-s slashed by 30~~~ I?rum Ihr 1973
Ir~~rl, net foreign reserve;; slipped by about `1;110 million, mainly rctlcrling
disahpuintinely small inllows ul' hrivatr rahital.
Pour World C~~irlxr Price ?utluol: in 1975
3. ('untinurd rrrovrry in 1~~75 is now threatened by the dehrrssed world
ruplkr nt:~rket. Rrressiun-induced derlinrs in th:? runsumhtion of copper by the
industrial nations, growing inventories, ;;nd a rising supply of scrap have kept the
Lc~ndun A1?:tal I~:xrh;utge prier tlurtuating rl~~se to 60 cents a pound for the first
three months of 1975, following a lzreeihitous fall from the April 1974 teak ol?
51.5' a pound.
4. Plans by Chile, in cooperation with the ether CIPEC countries, to reduce
exhorts by 15;~~ probably will forestall further substantial price declines this
year. They will not raise prices significantly, however. Accurnu~atrd stocks must
lx educed before new production can br sold at higher priers. An average world
copper prier of 60-65 rents a pou~~d appears to be the best that Chile can hope
for this year, compared with 93 rents a pound in 1974.
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CONFIDEN11Al
CMILE: %canomic Inr~icators
Inflation Rato Unemployment Rato
i'on:ont, CoclCrx nnnunl nvoratlo, Parcont
0!)3
i I
Real GDP Growth
Parcont
7.7
376
!).7
Public Sector Deficit
>JS a Percent of Exrandituros
-4.0
Real Wage Changes
Percent, Jon/Jan
8.7
Net Foreign Roservea'
Million US$ at Yearend
1911 191? 1973 1974
ses~r~ ~ re
1971 1972 l~i3 1874
J. lob! nrrrva rrnur rAorr hnq /irdi/lN,r.
38.0
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Impact on Export Earnings
S, ('bile's copper export earnings will be clown about two-fifths in 1975.
CIPI?("s control schentc will reduce the 1975 voluntc of Chilean copper exports in
two steps te; 782,000 tons front 887,000 tons in 1974. AL a world price of G2 ce,tts
a pound, 1975 earnings would i)c about'~920 million, compared with $1,560 million
last year.
6. Although prospects fur earnings from exports other than copper ac, good,
the ~~. exports contribute Duly 3G"~~ of` the. total. Agricultural exports-chielly ,;ulses
and fruits--will benefit froru a br;ller ha-vest. removal of export restrictions, artu
government efforts to open neN rnarkets. Nitrate exports will be strengthened by
incretrsed world dcntand for 1'crtilizrr and rehabilitation of processing facilities,
1'rospccts for such export-oriented industries as ccllulosc and l aper also l:,rvc
improved. Larnings fr~~m non-copper cxportti should reach about $52.5 mil~ion in
1975, about IOf~ above last year. "Total 1975 exports nonetheJcss will not exceed
~ 1.5 billion. compared with $2 billion in 1974.
Soaring "I'raclc Ucficit
7. While export earnings arc falling, imports continue to rise, A second
successive good harvest and rower grain prices arc reducing the ~aluc of food
imports. 13ut, although the anti-inflation program is holding clown demand for other
imports, their prices arc rising and total import outlays arc still increasing slowly. If
recent import trends continue, ('hib~ is hcacling for a thumping trade deficit of X900
million, contparcd with only Si200 million last yeat'(s;.e. Fignrre ?).
Slipping Capital Account
8. "there is no chance Chile could finance a trade deficit of anywhere; near
x,900 million. It would have to retrench even if foreign creditors were favorably
inclined. But most of Chile's creditor arc unwilling to provide any rc!ief to the
military government in the light ol` the repeated charges of violations of human
rights. Thus, deliveries of of`ticial aid, which rose a little last year after tl~r fall of the
Allende go~~crnnunt, will drop by about X130 million this year. Only US bilateral
aid and assistance from international institutions totaling $267 million will rem:un,
ss shown below:
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IM~~
Itt7
W~~rld Bank
4U
US AID and 1'1,~4HO
:~(1
:D13
I0
9. The outlook for private capital inllows rcnwins poor. 1)cspilc csxtcnsive
Promotional effort, the govcrnnlenl has been unable to attract a sit!nificant
movement of direct foreign inveshnent. 'thus, a smt~ll net inflow of some $150
million in Private capital--mainly supplier crccLls is the best U?at :an be expected
for the year. Chile Probably has already acquired as much as $?0(~ c~~hlion in supplier
credits to cover the January-Pdarch paymen!s deficit. As the silualle:l~ deteriorates,
,1[owever, we estimate that as much as $SU m~lliotl of tl[em cc~:.1:.' 1~e offsc~f ,y caPiial
flight.
Disappointing Debt Relief
I'ruspccts
lu. We. cstinr.Uc that
CHILE: Trade Baltlnce
ice payment ,vil! be voluntarily ~"~ ~ ~
renegotiated in 1975 (sce'hablc , ti ~ \
1). Santiago probably will "I \
v ~
apply to the Paris ('luh fora k' \
rollover of a substantial share. t,5oo r'' \ 1
of the ~5(i5 fnillion due nlcnr N ~ ~
lx.~s this yrar. Club guidelines, ~ ~~/ ~
how~~vcr, define only about ~ ~ ; ~
$~70 mill;on in obligations as Exports t.o.b. ~~ \~
eligible. for renegotiation. OI. 1.000 ~,,,,~^,~~'
this amount, Club prcrcdenl .,.~+...` ^ `
cttcuttes that ontt..; ~?~~; or ~.:~o '/~~ ~ ?
million, wiil actually he consid- f ~~
creel for :enrgutiation. shout Coppor Exports La.6. ~
500
S50 million of this amount
probably cannot hr resched-
uled heeauu the United King-
dom and Italy intend to t~ov-
cott the renegotiations, and the o __._ I_ ._ l I _ I__ ___!.
1988 69 70 71 72 73 74
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Tal-Ic 1
(:bite: Summary of Extcnull Debt Srrvic.: Paynu,nty
- __ _ ___ Million US $
United
Stalcs
Other
Mcmbcr
Coon-
(rll`V
'rOt71t
tnterna-
tional
Insliht-
(lOnS
Otbl`r
'I'Ot71t
I')7~1
Ikht service payments
due
'
.157.0
:1~IU..1
(,')7.3
S2.H
(r2.1
H12.2
(
arried over fron- I r)7.~
I~
104.7
l a l .b
2.i(,.3
21.5
12.')
270.7
allinl; due in Ir)7?t
t
r
I(rl.')
I'%3.S
.155.4
.11.3
47.:1
43~t.0
ther
~
P
')0.4
15.'
105.(,
....
I.')
107,5
.stinrtlcd paynrcr7ts
....
11>I..t
'-h
3)(f1,0
'Ikht relic(
I)75
....
....
400.0
~
IH._
t..4...
`~
Ikht service payments
due
.12 i.0
'41.5
564.5
S_t. I
') I .h
710.2
Iteyuircd payments
?..7.6
54.1
72,6
484
3
I?:xl~ cted voluntary
clcht relief
...
20(,.'t
....
Ir).0
.
225.9
1. Including aunpensatinn payments due in 1974 fur natiunali~cd properties and estimated inten?st payments
nn rcfinaucin7t loans from the 1974 renegotiation.
United Kingdo-n prob,lhly will succeed in persuading three other I:uropcan menthers
to join thrru.
I I . 'I~hc renwinin); ~ I ~i5 million due in I r)75 represents obliga!iuns to
international linanci;71 agencies, ('onununist countries, and Latin nnterican
countries. Payments due the international financial agencies arc not renegotiable.
/lppcals to roll ;tver the X50 ntillinn due the ~~o1TlIT111111St countries probably will tali
on deaf ears. nlthentgh relief front the Latin nnteriran countries is likely, it could
total only R 19 million.
Closing the Pavmcnts (:ap
I'. ('bile's irnprnding balance-of-paynx'nts crunch has put the rnilitarv
govenunenl in a difficult position. The soaring potential track deficit cornhined with
a rising services deficit and a smaller prospective capital account surplus will leave a
payrr7ents gap of about $1 billion (see Table ~). Foreign reserves, already ~(, 15
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Chile: Ilalnncc of 1'nymcnte
,'
'
1173
1974
Pro;cctcd
After
Corrective
Mcnsures
lixpct is (f.u.h.)
I ,325
2,037
I ; t45
I ,445
Co~~i1>L r r
I ,088
I ,SGO
920
920
Ot'ICr mining
IU2
ISO
170
170
A?;riculturc atn.i ,is!tinr;
24
SS
GO
60
Industrial product,
III
272
295
295
Impttri a (c.i.l'.)
l ,608
2,234
2,330
; ,545
Foodstuffs
595
472
330
330
1'ucls ;Ind lubricants
7O
348
400
3(i0
Capital goods
285
338
390
Materials and intcrntccliatc gu, ,is
544
978
I ,100
745
Uthcr
114
98
110
IIO
Track halanrc
-283
-197
?885
-100
Net x:rviccs and transfers
?19O
?244
?290'
?2~1U3
Current account balance
-473
?441
?1,175
-390
1'rivatc capital
116
148?
150
1 SO
Official capital
?(>4
-242
-223
-223
I)rlwml!s
341
396?
267
267
Anxr, tization
1t05
?638
-490
-490
IXbI relief
337
424
226
3(i05
~bl)rl?ICrITI Cal)1181
f
6
....
103
Capital acanurt balance
389
330
153
39O
l2cs;:rvcrnovcntcnts (increase+)
?84
?111
-1,022
....
I. Net topper crports assume a discount of H.5 crnts per pound (torn the price of 62ccnts for copper wirebar
c.i.f, huntpe, to allow (ur quality deviation, freight, and insurance.
2. Includinl; b174 milling interest payments nn Ibrcil;n debt.
3. Includinl; 5220 rnillinn r~terest payments un (oreil;n debt.
4. 1?:xcludinl; a ESSn million Debit lu private capital and a currcsponding credit to official capital repreunlin(;
;h~~ l;uvernmcnt's assumption of responsibility for paying c~nmpensation to the former owner of properties
nationalir_?d by the Allende l;ovcrnmcnt.
5, Includinl; default oI S 134 million.
G. Included in private and official capital.
million short of short-term foreign liabilities, cannot provide much h.;;lp. Large-scale
commercial borrowing is precluded by both Chile's already enormous foreign debt
and low reserves.
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13. Ucspite its strong desire to improve Childs credi~ standing, the militt~ry
government probably will choose to default on the debt service payments due most
of the Communist countries to help close the gap. Faced by ref~.tsa:'~itf so`':tite Paris
('tub members, especially the United Kingdom and Italy, to tell over th~.~ir debt,
it also may def;tult rm payments to titan. In addition, Sar.t~.ago is scek~~~ng and
probably will get short-term conunerc~ial funds to cover the 'b 103 million in the
Paris Club obligations tlwt represent compensation payments for nationalized US
properties. '1'hesc steps at best would still Icave a payments gap of $800 million.
14. Santiago unqucstionitude we believe may
be necessary in 1975 would be extremely disruptive to the still weak Chilean
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economy. Supplies of raw materials, intermediate products, and capital goods will
be down to the 1968 Ie~~cl, when real industrial, mining, and construction output
totaled only abou~ 80`/~ of +hc 1974 level. Because no rc!icf is likely before
mid-1976, when economic recovery in the incfustr;al nations may oegin to push
world copper prices back up, Chilean output and employment almost certainly
will be focccd rJown sharply.
l8. [n the second half of 1975, real GDI', currently stagnant because of the
anti-in[ation program and the reduction in copper output under the CIPEC
agreement, seems likely to drop at an annual rate of as much as 10`%. This could
reduce (:,Ui' for the calendar year by 3`Ir4'/~. If the $50 million worth of fertilizer
imports required for farming i~ maintained, agriculture would be the only economic
sector likely to register an increase in output. Severe shortages of raw materials
and semi-manufactures could reduce output in manufacturing by as much as 25`~~,
and by 5'%10`% in mining and construcaion (annual rates). Tite swollen services
sector, accounting for about hail of total output, will be dampened by the -ieclincs
in mining and manufacturing.
19. Our estimate for real GUP in 1975 differs sharply from a recent IMF
forecast, which envisions a S`/~ gain. The difference reflects mainly higher IMF
projections of earnings fr;~m copper exports and of official short-teen and long-term
capital. On this basis, the IMF believes that a reduction of only $260 million in
imports from last year will be required and that this can be made with only a
5'i'~ decline in spending for imports of materials, intermediate products, and capital
goods. We believe the IMF estimates and analysis are much too optimistic.
20. Uespite the economic decline we project, the regime clearly will try for
a time to hold to its anti-inflation program. Indeed, it may consider strengthening
it by further, restrictions on nominal wage rates and increased budget austerity.
Except for a rise in debt service payments, government expenditures arc slated
to remain at the 1974 level. I~evenuc from a new value-added tax and stronger
tax collection efforts will nearly offset increased debt service payments and falling
revenues from copper, and the government deficit probably will grow only slightly.
The junta also will persist in its efforts to trim the government payroll, thus adding
to unemployment.
21. Later in the year, however, the deteriorating economic situation will place
serious strains on the programs to curb inflation and reduce government intervention
in the economy -programs that have constituted the main hope for eventually
putting Chiles ailing economy on a sound footing. Import liberalization will have
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to he lerminatccl, and foreign exchange will have to he rationed. Moreover, large
rises in unemplciyment. and decli,ucs in real wages will cause mounting public unrest
antl put slronl; pressure ou th.; government from within the military to exp;uul
public employment and to take other public welfare measures that in ef~fecf will
~onslilulc abandonment of its programs.
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