INTERNATIONAL: IMPACT OF A DEVELOPED COUNTRY SLOWDOWN ON THE LATIN AMERICAN DEBT CRISIS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T01017R000404320001-7
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 17
• Document Creation Date: December 22, 2016
• Document Release Date: May 9, 2011
• Sequence Number: 1
• Publication Date: September 25, 1986
• Content Type: MEMO

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DATE /G FiLL~
DOC NO /, ' Al Y6-doll G
OIR
P $PDI
Central Intelligence Agency
25 September 1986
INTERNATIONAL: IMPACT OF A DEVELOPED COUNTRY SLOWDOWN
ON THE LATIN AMERICAN DEBT CRISIS
Summary
A recession of any magnitude among developed
countries during the next two years would be a serious
setback to efforts to resolve the Latin American debt
situation and could place the solvency of many Latin
American countries in jeopardy. A series of
simulations using our Linked Policy Impact Model (LPIM)
shows a developed country recession would have a
dramatic negative impact on Latin economies. Its
precise overall effect would depend on its severity and
length. In any event, Latin debtors' loss of exports
to developed countries would swamp any relief they got
from lower interest rates. A recession's impact among
individual Latin American countries, meanwhile, would
hinge upon oil price trends. For example, net oil
exporters--Mexico and Venezuela--would be additionally
hurt if oil prices fell, while Brazil and other oil
importers would receive benefits that partially would
offset the damage done by a recession.
Even in the case of a mild recession, commercial
banks and Latin American countries would have serious
trouble sticking to their current strategies for
dealing with the debt problem and would require
stepped-up assistance from developed country
governments and multilateral institutions to do so.
Latin debtors, assuming they could not slash imports
25X1
This joint memorandum was requested by Richard McCormack, US
Ambassador to the Organization of American States. It was drafted
by Office of European Analysis, with contributions 25X1
from analysts in the Office of Global Issues, the Office of African
and Latin American Analysis, and the Office of East Asian
Analysis. Simulations using the LPIM were run and tables prepared
by Office of European Analysis. Comments and 25X1
queries are welcome and may be addressed to the Chief, Issues and
Applications Division 25X1
25X1
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further, would need a total of at least $15 billion in new
money in the period 1987-88, according to our model. A mild
recession undoubtedly would give rise to calls for debt
relief from Latin American leaders and increased efforts on
the part of commercial banks to protect themselves from
default. A deep recession, on the other hand, almost
certainly would create a rift between Latin governments and
commercial banks that, in all likelihood, would lead to
massive arrearages in Latin America without a fresh approach
to the debt problem. Under these circumstances, the minimum
amount of new money needed by Latin debtors would soar to
almost $27 billion. In either a mild or deep recession,
capital flight would add to the financing needs of Latin
American countries, ma>,Cing the situation even more difficult
to manage.
Fears of a recession have been engendered by
disappointing growth figures for developed countries in 1985
and the first half of 1986, although most private
forecasters remain optimistic about the continuation of the
current recovery. This paper takes a first look at the
threat a recession poses to the Latin American debt
situation. It does not, in any way, advocate the view that
a developed country recession is imminent.
Model Simulations
A series of simulations using the LPIM indicates that a recession
among developed countries would have a dramatic negative impact on the
Latin American debt situation. The immediate consequence of such a
recession would be a severe cutback in demand for Latin American
exports. Dwindling export earnings, in turn, would curtail the
ability of Latin American countries to service their debt. Individual
Latin American countries are unlikely to suffer equally during the
slowdown because of the pivotal role of oil. Nonetheless, a fall in
oil prices, on balance, would aggravate the Latin debt crisis.
Although some of the damage caused by a developed country recession
might be offset by the advantages of lower interest rates, our
simulations show that the drawbacks of reduced export earnings
overwhelm the benefits of smaller interest payments.
To assess the impact of a developed country slowdown on Latin
American debtors, we estimated, first, the impact of the current
outlook for developed countries (see Annex) on the debt situation--the
baseline case--and then ran two recession scenarios on our LPIM. Oil
prices in the baseline are assumed to remain at $15 a barrel. Under
baseline conditions, the aggregate Latin American current account
deteriorates in 1986 as exports fall more than imports, but recovers
in 1987 and moves into surplus in 1988 (see Table 1). Latin American
countries require at least $3 billion in net new lending in 1987 and
1988. The total debt figures drawn from our simulations represent the
minimum total requirements of Latin debtors to cover current account
deficits. Capital flight under worsening economic and political
conditions as well as any decision to build up reserves would make
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borrowing needs greater. We also assume a two-year grace period for
repayment of principal and a 12-year principal repayment period on new
loans, so that the debt-service ratio (interest and principal payments
divided by exports) shows a gradual decline in the baseline and no
alarming trends in our scenarios, since principal repayments on the
new debt do not begin falling due until 1989. 25X1
The two recession scenarios assume a decline in interest rates
and no cut in Latin American imports. For debtor countries, lower
interest rates partially offset the negative impact of the downturn in
export demand by reducing the servicing burden on the floating rate
portion of their debt. The situation would worsen more quickly if the
recession were provoked by tight monetary policies among developed
countries that caused interest rates to rise during the slowdown. The
scenarios assume that Latin governments do not reduce their import
volumes by implementing contractionary policies as they have in the
past. They are unlikely to have much political maneuvering room to do
so again. 25X1
Scenario 1
Scenario 1 assumes OECD growth rates 3 percentage points below
the baseline during 1987 and 1988, with oil prices steady at $15 a
barrel. This would considerably damage the overall current account of
Latin American debtors as lower demand for Latin exports, assuming
imports hold steady, would cause the current account deficit to worsen
from baseline projections by about $3.5 billion in 1987 and $8 billion
in 1988. Latin American exports of nonfuel goods and services to OECD
countries would fall by around $7 billion in 1987 and $16 billion in
1988 compared to the baseline, not only because of a steep drop in
volume, but also because of a drop in export prices. The weaker
export performance easily outweighs the favorable effects of the
accompanying 1 to 2 percentage point drop in interest rates. Under
this scenario, Latin debtors would need an infusion of at least $15
billion--$12 billion in additional emergency financing plus the
baseline requirement of $3 billion--during 1987 and 1988. Lower
interest rates and rescheduling of old debt would allow the debt
servicing burden to decline slightly.
Scenario 2
Scenario 2 assumes OECD growth rates 5 percentage points below
the baseline, with oil prices declining to $10 a barrel. This would
lead to a grave debt crisis, especially for heavy Latin oil
exporters--Mexico and Venezuela. Mexico's predicament probably would
be alleviated somewhat by its agreement with the IMF last month that
stipulates a contingency fund based on the price of oil. Under this
scenario, Latin America's current account deficit grows about $9
billion in 1987 and $14 billion in 1988 compared to baseline
projections. Nonoil exports to OECD countries would fall about $20
billion in 1987 and $35 billion in 1988. Borrowing needs would
balloon to nearly $27 billion--approximately $24 billion in addition
to the $3 billion baseline requirement. The debt-service ratio rises
in this scenario due to the comparatively steep drop in Latin exports.
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The outcome for individual oil exporting countries in Latin
America would hinge on oil price trends. If oil prices do not
decline, Mexico, for example, would experience only a slight
deterioration in its current account in 1987--less than $200
million--from baseline projections, whether developed country growth
falls 3 or 5 percentage points below the baseline. Mexican growth
probably would slow no more than 1 percentage point. If oil prices
fall to $10 a barrel, on the other hand, Mexico's current account
deficit would soar by an additional $2.5 billion in 1987 and $3
billion in 1988, and the outlook for growth would darken considerably.
If oil prices hold steady, the Venezuelan current account deficit
would increase less than $200 million in 1987 over the baseline, in
the event of a developed country recession. If oil prices fall to $10
a barrel, the deficit would swell by nearly $2 billion in both 1987
and 1988. 25X1
Damage to Brazil and Chile--heavy oil importers--would be reduced
considerably if oil price declines accompany a developed country
recession; oil prices do not play a pivotal role for Argentina because
its oil exports and imports almost balance. With oil prices at $10 a
barrel, Brazil's current account would deteriorate less than $1
billion in 1987 and growth prospects would hardly dim.
Brazil--climbing back to financial respectability--would suffer a
setback if developed countries sank into a recession and oil prices
held steady. Its current account would deteriorate at least $1.5
billion more than baseline projections in 1987. Brazilian growth,
which has been buoyant the last two years, would be slowed by as much
as 2 percentage points. Brazil, nevertheless, almost certainly is the
Latin debtor best prepared economically to cope with a developed
country recession. 25X1
Longer Term Consequences
Our scenarios indicate that as a developed country recession
drags on, its impact would become more drastic and uniformly felt
among Latin American countries. Latin America's aggregate current
account would deteriorate substantially more the second year of a
slowdown than the first, compared to the baseline. The borrowing
needs of Latin debtors also would be greater in 1988 than 1987. If a
recession dragged on until 1989, the capacity of Latin American
countries to meet their repayment obligations would deteriorate
further as scheduled principal payments on new debt would come on
line. A prolonged slowdown would tend to wipe out the advantages
obtained by oil importing countries from the decline in oil prices.
Consequently, Latin debtors that had been in bad shape before would be
far worse off after the second year of a recession, and those that had
been making progress would be pushed back. 25X1
A developed country recession of any magnitude--even less than 3
percentage points below the baseline--almost certainly would make
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relations among Latin debtors, commercial banks, and developed country
governments more difficult. Banks would be likely to try to extricate
themselves from the situation, and Latin American countries generally
would look to developed countries to share more of the burden of
adjustment. They would renew calls for preferential trade treatment
and more lending by multilateral banking institutions.
In our judgment, criticism by Latin debtors of developed country
policies would depend heavily on the cause of the recession. A
slowdown induced by tight monetary policies, loading them with the
burden of higher interest rates in addition to lower export earnings,
would significantly raise the likelihood of radical action by Latin
debtors. Individual Latin governments, in any case, would face
heightened pressure to take a get-tough attitude toward their
creditors:
o In Mexico, we believe President de la Madrid would curry 25X1
domestic political favor by blaming developed country
governments for any hardships and call on the United States to
boost its imports from Mexico. We would not expect him to take
the lead on any coordinated Latin American position
unless the downturn were severe and developed countries
did not come through with offsetting aid.
o The Sarney administration in Brazil would decry the damage
inflicted on its ability to meet its debt obligations.
Brasilia would permit only a limited drawdown of its reserves
and would resist import cuts. Although it would seek new bank
loans with no strings attached, it already has declared it will
not submit to IMF conditions.
o Other Latin debtors would try to preserve access to at least
some types of foreign credits but might be pushed to unilateral
action. Argentina, Venezuela, and Chile probably would seek
increased lending from multilateral institutions and commercial
banks as well as generous concessions on previous debt to make
up their external shortfalls. President Garcia of Peru-- who
already has taken unilateral action--would be unlikely to seek
any reconciliation with his commercial bank creditors or the
IMF. 25X1
Cooperation between the major Latin debtors and the large banks,
in our view, would be sorely tested even by a short, mild downturn and
would endure only with substantial new assistance from developed
country governments and multilateral institutions like the IMF. A
long, deep recession almost certainly would drive debtors and
creditors to extreme measures, especially if they viewed developed
country governments as indifferent to their plight.*
*Although it is not possible to determine the exact threshold where a
short, mild recession turns long and deep for any one country, we
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A mild to moderate developed country slowdown, in our view, would
engender a torrent of calls from Latin American leaders for relief and
could lead some to unilateral action. Latin debtors already are
lining up to make their case for concessions. Mexico is asking
commercial banks for a stretchout of its repayment schedule and a link
between interest payments and oil prices along the lines of its
agreement with the IMF. Other debtors are watching Mexico's talks
with its creditors closely and are bound to put in for breaks
equivalent to what the Mexicans get. Latin American leaders
undoubtedly would press harder for these types of concessions in the
event of a mild developed country recession and might up the ante by
requesting even more generous relief. Under a short downturn
scenario, we expect that the differences among Latin debtors would
become more distinct as some continued to make progress and others
slipped back in handling their debt problems. Meaningful joint debtor
action would be unlikely as Latin American countries less seriously
hurt--Brazil, for example--would not want to throw their lot in with
those put on the ropes by a mild recession--Argentina, and, if oil
prices fell, Mexico and Venezuela. Most Latin American countries, we
believe, would not risk cutting themselves off from all forms of 25X1
finance by making nonnegotiable demands or taking unilateral action
unless their governments came under strong political fire.
The steps commercial banks are taking to protect themselves from
widespread default in Latin America are likely to enable some of
them--especially European and smaller US regional banks--to assume a
tougher stance than in the past with debtors. Banks are shoring up
their balance sheets by increasing their capital base while making few
new loans to troubled debtors. Some banks, however, are further along
than others. For example, West European banks--encouraged by generous
tax breaks and accommodating regulations--have been a lot more
vigorous tha
loans. Many
n US banks in building up their reserves against bad
regional banks, in the United States and elsewhere,
have
25X1
reduced thei
r exposure by writing off the relatively small sums
they
have lent Latin debtors or selling off Latin loans at a discount.
We expect the regional banks--with little at stake--to continue
to bail out in growing numbers in the event of even a mild recession.
believe that an economic slowdown more than 3 percentage points below
the baseline for a period longer than a year represents a likely
crossover point which would threaten debtor-creditor
relations--precipitating widespread interruptions in debt
servicing--and force major changes in the current debt strategy. The
crossover point would be different for each country and would depend
on public and debtor attitudes toward the crisis. For a Latin
government not seeking a confrontation with developed countries, the
IMF, and commercial banks, the ability to contain the crisis within
current strategy would depend on how well the government was able to
handle opposition criticism.
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The big banks, consequently, would have to provide the lion's share of
any new lending. We believe these banks would have to be prodded to
go along with new packages of so-called involuntary lending and would
insist that the IMF and developed country governments chip in with new
lending facilities. Furthermore, their varying degrees of portfolio
vulnerability and the different regulatory environments in which they 25X1
operate would lead to dissension in their ranks and make these
packages much more difficult to put together than in the past.
If a recession hits developed countries and they do not snap back
after a year, we believe Latin American countries, either individually
or as a group, would act unilaterally to lighten their debt load in
the absence of substantial outside relief. Most major Latin debtors
so far have avoided this strategy, but they are unlikely to let their
debt burden drag down economic growth indefinitely. If they failed to
cut a deal with their creditors, we believe they would move on their
own by linking debt payments to growth or exports--a step Peru already
has taken. A long recession, in our view, would unify Latin American
countries by shoving the few that had been doing well into the same
camp as all the rest. Latin governments already have a forum, the
Cartagena Group, to discuss debt-related matters. So far, Cartagena
has been a moderating influence, but a severe developed country
slowdown could create a more radical consensus.
Conversely, a deep recession would lay waste the common front
commercial banks have tried to maintain. A growing number of them,
especially in Western Europe, probably would come to view the debt
situation as a lost cause. Banks are chafing at the demands of Latin
debtors already. They overwhelmingly repudiated several planks of the
proposal Mexico made during refinancing negotiations, including
interest capitalization, the elimination of interest rate spreads, and
the tie between interest payments and oil prices. They also rejected
a scheme Venezuela floated to pay off its private debt. Although the
banks do not want to see a string of de facto defaults in Latin
America, we believe they would face enormous difficulties maintaining
unity if the strain of a severe slowdown jarred them out of the
present cycle of involuntary lending. For example, the Swiss Bank
Corporation's recent push for interest capitalization that almost held
up a bridging loan for Mexico shows the disproportionate power just
one bank has under the current unanimous participation rule in
commercial bank reschedulings. We believe that, in the event of a
deep recession, commercial bank support for any new lending to Latin
American countries would disintegrate quickly. The regional banks
left in the game, in our view, would be the first to jump ship. Large
foreign banks--already having absorbed much of the cost of
default--then would be in a position to threaten to leave major US
banks holding the bag if arrangements for new lending did not suit
Implications for US Debt Strategy
A developed country recession of any magnitude would be a setback
to current efforts--such as the US debt initiative--to resolve the
Latin American debt crisis. The US initiative, put forth in October
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1985, stresses the adoption of market-oriented growth policies by
debtor countries as well as stepped-up lending by commercial banks and
multilateral institutions. It retains the case-by-case approach
traditionally taken by banks and the IMF to deal with debtors that run
into trouble. The IMF and World Bank endorsed the plan and are
studying ways they can contribute to this kind of strategy.
The object of the US debt initiative, to lay the foundation for 25X1
long-term growth while keeping all the players in the game, would
experience some difficulties during a short, mild recession.
Nonetheless, we believe that if developed country governments and
organizations like the IMF stood ready to give extremely generous
assistance to those Latin debtors that faltered, the US strategy could
be held together. However, it would be unlikely to withstand a long,
deep recession, which probably would require an even bigger and
qualitatively different role for developed country governments and
multilateral institutions.
A mild slowdown among developed countries undoubtedly would
hamper the growth aspects of the current US debt strategy but
developed country governments and multilateral banking institutions,
if needed, probably could prevent a financial collapse in Latin
America by activating new and substantial resources. In these
circumstances, a new IMF facility--similar to the oil and compensatory
financing facilities--geared to troubled debtors probably would come
under consideration. The World Bank, meanwhile, would be likely to
take a bigger role in the debt situation. It already is considering
providing more medium-term financing not attached to specific
projects. Other organizations--the Bank for International Settlements
and the Group of Ten--could be mobilized to give short-term emergency
financing to tide debtors over a short downturn. For their part,
commerical banks would hesitate to put up more new money even if
governments and international organizations were willing to expand
their role.
A deep developed country recession would encourage all actors in
the debt situation to implement progressively more radical measures
that would eventually overturn the current debt strategy. Commercial
banks and Latin debtors both would be likely to try to bail out of the
situation. Developed country governments almost certainly would have
to mount a series of major financial rescue operations to stave off
financial collapse in Latin America. Most Latin leaders, already
coping with several years of sluggish growth, probably would be
uncooperative or even hostile. These leaders almost certainly would
face turmoil in their own countries which would make it impossible to
assert any kind of economic discipline. Under these circumstances, we
believe that developed countries, if they chose to keep Latin debtors
from default, would have to fall back on some major new scheme to take
over their debt either through existing multilateral banking
institutions or a new agency established for that purpose.
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Annex: Risks in the Outlook for Developed Countries
Economic forecasters are optimistic about the continuation of
the current recovery among developed countries but are backing away
from the projections for strong short-term growth that they made on
the heels of the sharp drop in oil prices earlier this year.
Forecasters are revising their growth figures for 1986 downward and
reducing the odds-against a recession. They believe their earlier
forecasts were too optimistic about the effect of lower oil prices and
the ability of developed countries to rectify the imbalances lurking
behind the scenes of the recovery. Slow expansion in the United
States during the second quarter of 1986 has raised questions about
the health of the US economy. Most forecasters, nevertheless, believe
that the factors hindering growth are temporary and that developed
countries will enjoy an upturn in 1987.
Growth among OECD countries now is expected by most forecasters
to weaken in 1986 to 2.3 percent, from 2.7 percent in 1985, and then
rebound in 1987 to about 3 percent. The dip in 1986 is a pattern
common to forecasts for most major developed countries:
o Growth in the United States, according to the consensus of
private forecasters, will remain sluggish at around 2.2 percent
in 1986 but recover sharply to more than 3 percent in 1987.
The weakness in 1986 has been brought about by a downturn in
business investment, due to what some observers see as
uncertainty over tax reform, and a lopsided deficit in the
current account. The comeback in 1987 probably will be
propelled by consumer spending, an improved performance by US
exporters, and business investment, particularly if budget
issues are resolved.
o Japanese growth is likely to slow to 2 percent in 1986--the
lowest rate since 1975--as the strong yen forces exporters to
trim investment spending. Growth should recover to over 3
percent in 1987 as the real income benefits of the yen's rise
take hold and business steps up investment in nonexport
industries. Tokyo's recently announced stimulus package is
unlikely to have any effect in 1986 and probably will provide
only a mild fillip to growth in 1987.
o West Germany probably will experience unspectacular growth
rates in the short term as it faces a similar transition away
from export-led growth. After a disappointing first quarter
this year, the West German economy appears to be bouncing back.
Its growth--bolstered by tax cuts--should hold steady at around
2.5 percent in 1986 and 1987.
o Growth in other major OECD countries should be about 2.5
percent overall in both 1986 and 1987 as, in most countries,
consumer spending holds up demand and disciplined fiscal policy
encourages investment. The French economy is likely to follow
this pattern. Growth in the United Kingdom, however, may be
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somewhat lower, particularly if lower oil prices continue to
depress the energy industry. 25X1
Although most forecasters view the current low growth among
developed countries as a pause rather than an end to the recovery,
some trends are making them nervous, particularly about the US
economy. They believe that, although US policymakers are coming to
grips with the budget deficit, if they fail, government borrowing
would push interest rates higher than otherwise and crowd out private
investment. Moreover, many are worried that the surge in US business
investment is over and policies designed to cut interest rates are
more likely to reignite inflation than revive real domestic demand.
Given this fear, along with the prospect that the public sector
stimulus to the economy will decline, a slip in consumer
confidence--which still is running strong--would deal a hard blow to
growth. 25X1
Forecasters, however, are most troubled by the international
arena and the difficulty developed countries are having straightening
out the imbalances that many believe threaten the recovery. The
dollar's slide, for example, was supposed to give US exporters a lift
and turn back mounting US current account deficits. Instead, it is
starting to hurt Japanese and West German exporters, with
newly-industrialized-country exporters rather than US firms reaping
the benefits. Developed countries, furthermore, are experiencing
difficulty reaching agreement on new coordinated economic policies.
Tokyo and Bonn have been reluctant to cut interest rates to boost
demand despite low inflation and a cloudy growth picture.
Consequently, rather than making up for the slowdown in US demand that
occurred in the second half of 1985, domestic demand actually fell in
Japan and West Germany in the first quarter of 1986. 25X1
Although forecasters are displaying, on balance, a positive
attitude, the elements hindering growth could drag on, sweeping
developed countries into a recession and buffeting other economies.
If factors apart from exchange rates are behind the US current account
deficit, they might continue to stymie attempts to put US exporters
back on their feet. In addition, most forecasters see little room for
US policymakers to maneuver if the domestic economy begins to slip.
Tokyo and Bonn, meanwhile, appear intent on waiting for proof of a
downturn before acting, although a sharp appreciation of their
currencies probably would speed them up. Tokyo's fiscal tightness and
Bonn's overall cautious policies run the risk of choking off growth in
their own countries, fueling protectionist sentiment among their
trading partners, and, consequently, inducing a contraction in world
trade. Whatever its source, a developed country slowdown undoubtedly
would have serious implications for the entire world economy.
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F0
81
LATIN AMERICA: TOTAL FOREIGN DEBT*
82
SCENARIO 1
BASELINE
83 84 85 86 87 88
YEARS
* BASELINE AND ALL SCENARIOS ASSUME DEBTORS CAN RAISE
THE FUNDS NEEDED TO COVER CURRENT ACCOUNT DEFICITS.
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? SCENARIO 2
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LATIN AMERICA: BASELINE CASE
(Billions of Dollars)
1985
1986
1987
1988
Current Account Balance
-4.3
-7.0
-4.0
.8
Trade Balance
24.0
18.8
19.7
22.1
Exports of Goods
102.0
96.0
100.7
108.0
Exports of Services
32.0
34.9
36.6
40.0
Imports of Goods
78.0
77.2
81.0
85.9
Imports of Services
68.0
65.3
64.3
64.8
Total Debt
394.0
401.0
405.1
404.2
Total Interest Payments
32.8
28.1
26.2
25.4
Debt Service Ratio
34.3
32.0
29.1
26.5
Oil Trade Balance
23.6
15.0
13.1
12.3
OECD Real GDP Growth Rate (%)
2.7
2.3
3.0
3.2
Latin American Exports of Nonfuel
Goods and Services to OECD
110.9
107.5
112.7
121.6
London Interbank Rate (%)
8.2
6.5
6.0
6.0
Oil Price ($ per Barrel)
27.0
15.0
15.0
15.0
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OECD RECESSION: IMPACT ON LATIN AMERICA
(Changes fran Baseline Scenario)
Assumptions Results
Change in OECD Change in Change in World Change in Latin
Real GDP Growth Interest Rate Oil Prices American
rate (percentage points) ($ per Barrel) Current Account
(percentage points) Balance
(US $ billion)
1987 1988 1987 1988 1987 1988 1987 1988
Scenario 2: -5.0 -5.0 -3.0 -4.0 -5 -5 -9.4 -14.3
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Table 3
Scenario 1
Latin America:
CHANGES FROM BASELINE CASE
(Billions of Dollars)
Current Account Balance -3.6 -8.1
Trade Balance -4.0 -7.8
Exports of Goods -5.0 -11.7
Exports of Services -2.8 -6.4
Imports of Goods -1.0 -3.8
Imports of Services -3.1 -6.2
Total Debt 3.6 11.7
Total Interest Payments -2.8 -5.2
Debt Service Ratio -.4 -.3
OECD Real GDP Growth Rate (% pts) -3.0 -3.0
Latin American Exports of Nonfuel
Goods and Services to OECD -7.0 -16.0
London Interbank Rate (% pts) -1.5 -2.0
Oil Price ($ per Barrel) .0 .0
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Table 4
Scenario 2
Latin America:
CHANGES FROM BASELINE CASE
(Billions of Dollars)
Current Account Balance
-9.4
-14.3
Trade Balance
-10.7
-15.8
Exports of Goods
-16.9
-28.4
Exports of Services
-5.1
-11.6
Imports of Goods
-6.3
-12.7
Imports of Services
-6.4
-13.0
Total Debt
9.4
23.7
Total Interest Payments
-5.6
-10.6
Debt Service Ratio
.7
0
OECD Real GDP Growth Rate (% pts)
-5.0
-5.0
Latin American Exports of Nonfuel
Goods and Services to OECD
-19.7
-35.0
London Interbank Rate (% pts)
-3.0
-4.0
Oil Price ($ per Barrel)
-5.0
-5.0
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Table 5
Latin American Debtors: Impact of an Economic
Slowdown Among Developed Countries*
(US $ billions)
Baseline
Scenario 1
Scenario 2
1988
1987
1988
1987
1988
Total Latin America
Current account balance
-7.0
-4.0
.8
-7.6
-7.3
-13.4
-13.5
Total foreign debt
401.0
405.1
404.2
408.6
415.9
414.4
427.9
Debt-service ratio
32.0
29.0
26.5
28.7
26.2
29.8
26.5
Selected Net Oil Exporters
Mexico
Current account balance
-3.0
-1.9
-1.4
-2.0
-2.2
-4.6
-4.5
Total foreign debt
106.0
107.9
109.3
108.0
110.2
110.6
115.1
Debt-service ratio
52.9
47.2
42.5
45.7
41.6
50.0
44.6
Venezuela
Current account balance
-.8
-2.0
-1.3
-2.1
-1.5
-4.0
-2.9
Total foreign debt
36.0
38.0
39.3
38.1
39.6
40.0
42.9
Debt-service ratio
35.3
32.3
30.6
31.7
29.6
36.4
32.7
Selected Net Oil Importers
Brazil
Current account balance
0.8
1.3
1.5
0
-2.2
0.4
-3.1
Total foreign debt
109.0
109.0
109.0
110.3
114.0
109.9
114.5
Debt-service ratio
33.6
29.6
26.2
28.9
26.8
27.4
25.5
Argentina
Current account balance
-1.6
-1.7
-1.6
-2.2
-2.8
-2.5
-3.4
Total foreign debt
51.8
53.5
55.1
54.0
56.8
54.3
57.7
Debt-service ratio
24.5
21.3
18.8
21.1
19.3
20.7
18.5
Chile
Current account balance
-1.0
-1.1
-1.3
-1.2
-1.7
-1.2
-1.8
Total foreign debt
22.0
23.1
24.4
23.2
24.9
23.2
25.0
Debt-service ratio
47.2
41.6
36.9
40.9
37.8
39.2
36.6
*Debt-service ratios decline in the baseline case primarily because of reduced principal
repayments negotiated in debt reschedulings. Last year Latin American countries' debt-
service payments included only 3 percent of the principal outstanding, in addition to the
interest paid. For both scenarios, we assumed rescheduling agreements already negotiated
remain intact.
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Distribution:
External
1 - Addressee
1 - Rozanne L. Ridgway, Department of State
1 - W. Allen Wallis, Department of State
1 - Douglas W. McMinn, Department of State
1 - Douglas Mulholland, Department of the Treasury
1 - Stephen Danzansky, National Security Affairs
Internal
1 - DDI
1 - D/EURA
2 - EURA Production
4 - IMC/CB
1 - NIO/WE
1 - NIO/Economics
1 - PES
1 - C/EURA/IA
1 - EURA/IA/RE
1 - D/ALA
1 - D/NESA
1 - D/SOVA
1 - D/CPAS
1 - D/OEA
1 - OGI
1 - D/LDA
1 - D/OIR
1 - D/OIA
1 - D/OSWR
1 - Author
DDI/EURA/I
(3Oct86)
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