INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-00798R000400140005-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 59
• Document Creation Date: December 22, 2016
• Document Release Date: August 1, 2011
• Sequence Number: 5
• Publication Date: August 29, 1986
• Content Type: REPORT

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Directorate of
Intelligence 25X1
International
Economic & Energy
Weekly
DI IEEW 86-035
29 August 1986
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International
Economic & Energy Weekly 25X1
iii Synopsis
Perspective-Mexico: Dim Prospects for Foreign Investment
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Mexico: Energy Developments in Baja California
17 West Germany: Progress on Financial Reform
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directed to Directorate of Intelligence,
Energy
International Finance
Global and Regional Developments
National Developments
Comments and queries regarding this publication are welcome. They may be
Secret
DI IEEW 86-035
29 August 1986
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International
Economic & Energy Weekly
Synopsis
Perspective-Mexico: Dim Prospects for Foreign Investment
Mexico's longstanding aversion to foreign investment, in our judgment, is a major
constraint on much-needed structural economic reform. Should Mexico City
muster the political will to undertake the necessary reforms, foreign direct
investment could make an important contribution to Mexico's long-term economic
development.
7 Mexico: Energy Developments in Baja California
Baja California is becoming increasingly important to Mexico's economic develop-
ment, particularly with respect to energy resources. The export potential of
existing and planned projects will undoubtedly be exploited to earn much-needed
foreign exchange and lay the groundwork for future regional growth.
11 North Yemen: Economic Challenges Grow
North Yemen is facing growing economic pressures, but President Salih so far has
retained the support of tribal shaykhs and the business community, key supporters
of the regime. Oil revenues will ease the country's economic situation somewhat in
the late 1980s, but will not be the panacea that many North Yemenis probably ex-
pect.
17 West Germany: Progress on Financial Reform
West Germany, over the last two years, has been quietly pursuing a program to
liberalize and internationalize its financial markets, concerned that, without
deregulation, it will lose ground to fast liberalizing markets in Tokyo, London, and
Zurich. On the negative side, greater internationalization of the deutsche mark,
which will coincide with loosened capital controls in France and Italy, could induce
wider swings in West European currency values.
iii Secret
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29 August 1986
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23 India: Domestic Oil Prospects Diminish
On the basis of a detailed study of India's oil prospects, we believe India faces a
sharp decline in oil output over the next 10 years. Combined with a probable rapid
rise in domestic energy consumption and intractable problems in the coal and
electric power sectors, India's oil imports would have to rise significantly,
exacerbating perennial foreign payments problems.
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International
Economic & Energy Weekly I 25X1
29 August 1986
Perspective Mexico: Dim Prospects for Foreign Investment
Mexico's longstanding aversion to foreign investment, in our judgment, is a major
constraint on much-needed structural economic reform. President de la Madrid
has been more receptive to foreign investment than his recent predecessors but has
been unable to overcome nationalistic biases, a restrictive legal framework, and a
myriad of institutional obstacles. In fact, the Mexican investment climate has, in
some ways, deteriorated under de la Madrid. For example, two decrees implement-
ed by the present administration have expanded regulatory requirements in the
automotive and pharmaceutical sectors where foreign investment is highly concen-
trated. Moreover, the deterioration of Mexico's economy has further deterred
potential investors and structural reform.
Despite Mexico City's rhetoric to the contrary, foreign investors have long shied
away from what they see as an unfriendly environment. We estimate that net
foreign direct investment in Mexico averaged only 2.2 percent of gross fixed
investment over the last decade and never accounted for more than 5 percent of the
total. The Mexicans instead have shown a strong preference for borrowing, which
was roughly 12 times greater than net foreign investment in the period 1976-85. In
turn, access to foreign credit from commercial banks has given the Mexican
Government little incentive to make the reforms necessary to attract foreign
investment.
In order for Mexico to attract increased foreign direct investment, we believe
Mexico City must first dismantle many of the barriers. At the margin, even small
changes, such as continuing to reduce the amount of redtape faced by potential
foreign investors, would help. A major improvement in Mexico's foreign invest-
ment climate, however, will require structural reforms. Although domestic opposi-
tion would be strong, Mexico City could encourage foreign investors by phasing
out price controls; liquidating nonstrategic state-owned enterprises; improving
intellectual property protection; and liberalizing restrictions on majority foreign
ownership.
Should Mexico City muster the political will to undertake the necessary reforms,
foreign direct investment could make an important contribution to Mexico's long-
term economic development. In our view, the major contribution would not be
financial-even a doubling of last year's direct investment inflow would represent
only a small fraction of the foreign borrowing expected this year. Instead, we
believe the principal benefits of increased foreign investment would arise from the
introduction of foreign technology and management practices. Furthermore,
Mexican enterprises would be able to form valuable customer and supplier links to
foreign firms through their subsidiaries in Mexico.
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Mexico: Energy Developments
in Baja California
Baja California is becoming increasingly important to
Mexico's economic development, particularly with
respect to energy resources. The completion this year
of the Cerro Prieto geothermal project gives Mexico
another source of foreign exchange, which will earn
approximately $100 million annually from electricity
exports to the United States. There are also new
indications of petroleum resources in the Baja region
that, if commercially viable, would prove an economic
boon to Mexico's northern Pacific states. Other pro-
jects being discussed include a thermal power plant
that would generate electricity for export to the
United States and a tidal energy project. Domestic
demand for energy in the Baja region is increasing as
a result of population growth and a booming frontier
economy. Nevertheless, the export potential of exist-
ing and planned projects will undoubtedly be exploit-
ed to earn much-needed foreign exchange and lay the
groundwork for future regional growth.
Mexico ranks among the top nations in the world in
geothermal resources. With proven reserves of 920
megawatts (MW) of generating capacity and possible
reserves totaling nearly 12,000 MW, the country
possesses a tremendous potential for both domestic
use and export. Mexico has made great strides in
recent years in developing this resource; it is currently
third in the world in the exploitation of geothermal
energy, behind the United States and the Philippines.
The most productive site developed to date is at Cerro
Prieto, 30 kilometers south of Mexicali and the US-
Mexican border. Early in the 1980s the Mexican
Federal Electricity Commission (CFE) embarked on
an ambitious expansion project to install Japanese
turbine generators and more than triple the electricity
output at Cerro Prieto. Output, 180 MW in 1982, will
reach 620 MW by the end of this year, making the
plant the fifth-largest electricity-generating station in
The Baja Frontier
By far the most dynamic area of Baja California is
the northern frontier, where urbanization and indus-
trialization are increasing the demand for energy.
Tijuana, Mexicali, and Ensenada have all experi-
enced tremendous growth since the 1950s, largely
from migration population of the Baja border re-
gion is about 2 million. Although much of the recent
population is transient, as campesinos from Mexico's
interior flock to the Baja frontier to cross illegally
into the United States, many of these migrants settle
permanently in the burgeoning slum communities
surrounding the cities.
This region is now becoming one of Mexico's most
important industrial zones. Previously associated
with the tourist trade, the frontier is now a center for
high-technology border assembly operations under
Mexico's export-oriented maquiladora program. Un-
der this program, US and other firms, particularly
Japanese, have taken advantage of low labor costs
and good transportation connections with the lucra-
tive California market to set up plants assembling
products ranging from television components to stereo
cabinets. Employment in the Baja maquiladora in-
dustry increased over 12 percent in 1985.
Agriculture is also a major consumer of energy, and
the Mexicali Valley is one of Mexico's premier
farming areas. It is noted for cotton and vegetable
production as well as a large food processing indus-
try. Water quantity and quality have long been a
problem in the valley, dependent on the heavily used
Colorado River, but steps have been taken by both
the United States and Mexico to ensure an adequate
supply of usable water.
Mexico.
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The Cerro Prieto project, however, has suffered many
setbacks. It was dealt a serious blow in 1985, when an
accident destroyed one of four new power units and
disabled another. Total losses from the accident were
in excess of $60 million, including purchase and
installation of new equipment and lost revenues from
CFE have also slowed progress, and generating capac-
ity that was originally scheduled to be on line last year
is only now going into operation.
The Continuing Quest for Oil
Despite generally disappointing exploration efforts in
the 1970s, last year PEMEX, the state-owned oil
company, again became interested in the petroleum
potential of Baja California. Geologic tests in the Gulf
of California were promising, particularly in the area
off Isla Tiburon.
At some point PEMEX will probably renew its search
for oil in the Gulf. The discovery of commercially
exploitable oil deposits in the Baja region would
stimulate not only the Baja border economy but also
all of Mexico's northern Pacific coast. Because of the
remoteness of the border area from the oil-producing
zones in and around the Gulf of Mexico and the lack
of an adequate petroleum distribution network,
PEMEX has been forced into costly oil exchange
agreements with US companies. Thus, development of
the northern Pacific coastal states has been slow, in
part because of inadequate or unsure supplies of
petroleum.
Although electricity demand in the Baja frontier
region is likely to increase, there would still be a
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sizable export surplus for the US market. The comple-
tion of the Cerro Prieto complex and the dollars that
would be earned through export of electricity will
probably spur other energy projects, and further
exploration in the northern Baja may find additional
exploitable geothermal fields
would be well positioned to take advantage of any
increase in demand.
the nations of the Pacific Rim.
Likewise, there would be export potential for any
commercially exploitable oil discoveries in the Baja
region, particularly if the world oil market improves.
California is the second-largest consumer of petro-
leum products in the United States. Moreover, Baja
oil would complement existing Mexican oil supplies
by providing better access to potential customers in
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North Yemen:
Economic Challenges Grow
North Yemen (Yemen Arab Republic) is facing grow-
ing economic pressures, but President Salih so far has
retained the support of tribal shaykhs and the busi-
ness community, key supporters of the regime. Remit-
tances from Yemenis working abroad and foreign aid
have substantially declined over the past year while an
influx of exiles from South Yemen (People's Demo-
cratic Republic of Yemen) is increasing the strains on
Sanaa's scarce resources. The government has tried
various measures to arrest the economy's deteriora-
tion, but with little success so far. Sanaa has made
progress in developing the 1984 oil find and probably
hopes that it can contain the decline until 1988, when
oil exports are scheduled to begin. Oil revenues will
ease the country's economic situation somewhat in the
late 1980s, but will not be the panacea that many
North Yemenis probably expect.
The recent deterioration of North Yemen's economy
stems from a critical shortage of foreign exchange-
current reserves are sufficient to cover less than two
months of imports-and a growing budget deficit.
Foreign aid, primarily grants from Saudi Arabia and
the Gulf states, fell to $103 million last year, accord-
ing to the US Embassy in Sanaa, down more than
one-fourth from 1984. In addition, remittances from
the estimated 600,000 North Yemeni expatriate
workers in Saudi Arabia dropped to $939 million last
year from $1.3 billion in 1984:-,,Workers returning
home along with reductions in the wages of Yemenis
remaining abroad account for much of the decline,
but the increasing success of Yemenis in circumvent-
ing the banking system also plays a role. Yemenis
returning from abroad now more often bring goods
rather than cash. Moreover, the frequent devaluations
of the riyal over the past year have discouraged many
Yemenis from holding cash balances in local curren-
Sanaa's financial support to the approximately 15,000
South Yemeni exiles encamped in the border area
have aggravated the economic situation. The cost,
estimated at $4.5 million per month,
has become a severe financial drain
on the government. Sanaa has requested assistance
from other Arab countries to help pay for the refu-
gees, but, aside from $5 million recently provided by
Libya, none has been forthcoming.
North Yemen must cope also with declining economic
growth, rising unemployment, and worsening infla-
tion. GDP growth, which averaged 2.5 percent last
year, probably will reach 1 percent, at best, this year.
Many Yemeni workers returning from the Gulf are
remaining in Sanaa without jobs, despite government
requests that they return to their tribal lands and
work in agriculture. Import restrictions also have
created shortages of some goods and fueled inflation,
which has averaged 18 to 20 percent over the past two
years. The conditions have led to a loss of domestic
business confidence in the economy and capital flight,
Sanaa has few financial resources available to deal
comprehensively with the mounting economic pres-
sures and, instead, has implemented a potpourri of
policies to try to ease them. It has attempted to halt
the devaluation of the riyal by tightening controls on
foreign exchange. According to the Embassy, the
government has eliminated the branch offices of many
moneychangers to reduce their numbers and influ-
ence. The remaining moneychangers must register
with the Central Bank and maintain a large portion of
their reserves there. In addition, the government has
curtailed exit visas to stem the flow of hard currency
out of the country and limited those exiting to the
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North Yemen: Balance of Payments, 1982-86
-1,761
-1,394
-1,231
-1,290
Exports (f.o.b.)
10
9
10
10
Imports (c.i.f)
1,926
1,771
1,403
1,241
1,300
Services balance
875
1,038
1,021
816
815
Remittances (gross)
1,175
1,128
1,059
939
875
Private transfers
23
26
63
73
75
Current account
-1,023
-697
-310
-342
-400
Government grants
439
160
142
103
150
185
197
150
117
150
27
8
6
3
5
-104
-24
-147
72
45
69
168
112
24
25
-407
-188
-47
-23
-25
a Estimated.
b Projected.
equivalent of $50 in Western currencies,
These efforts probably will meet
cash. The Soviets also offered project aid as well as
unspecified amounts of credits and currency support.
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with only limited success. According to the Embassy,
over 85 percent of the remittances coming into North
Yemen flow through private channels.
Sanaa has taken other measures to try to control the
economic slide. To ease the foreign exchange crunch,
the government last spring declared a temporary
moratorium on the issuance of import licenses. It also
stepped up enforcement of price controls and further
tightened budget expenditures. To increase revenues,
Sanaa raised customs duties, licensing charges, taxes
on incoming foreign mail, and required expatriate
workers to pay a fee of $1,000 per year spent abroad if
they wished to return.
Sanaa has sought aid from various benefactors to tide
it over, but the recent commitments have been insuffi-
cient to meet North Yemen's needs. Riyadh has given
some cash aid-probably previously committed-and
has offered Sanaa project aid, fertilizer, and advisers,
but has not been forthcoming with much additional
Baghdad sent Sanaa
$10 million in July, probably payment for Yemeni
troops serving in Iraq.
North Yemen's debt service burden is relatively low-
less than 4 percent of current account receipts-and
the government reportedly is considering commercial
loans of $200-300 million, even though it is reluctant
to resort to borrowing to finance its expenditures.
Sanaa had sought a loan from the World Bank but
refused to accept the conditions set by the Bank.
Many North Yemenis for the first time are blaming
Salih personally for the country's economic ills. Salih
so far has managed to mollify tribal shaykhs, key
supporters of the regime, who had been angered that
government programs benefiting them had been cut
while huge sums were being spent to support the
South Yemeni exiles. The business community, which
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Real GDP Growth
Percent
Foreign Exchange Reserves
Billion US S
Consumer Price Growth
Percent
20
a Estimated.
t'Projected.
traditionally has supported Salih, also has criticized
the government's handling of the economy, according
to the Embassy. The government has responded by
replacing two cabinet ministers said to be blocking
Salih's economic policies.
Despite these economic troubles, Sanaa has been
forging ahead with oil development. Hunt Oil's efforts
to delineate the Alif field continue, and the Embassy
reports preliminary estimates of proved and probable
reserves of 600 million barrels. The government ex-
pects to begin production of 135,000 b/d by early
1988, increasing eventually to 200,000 b/d. Explora-
tion has yet to begin on most of the 12 other
promising structures in the Hunt concession. Exxon
plans to start preliminary seismic exploration of its
concession this month, according to the Embassy.
The government reportedly has been careful to under-
play the oil find, but Salih opened the Mar'ib refinery
last April with great fanfare. The refinery- which
will produce diesel oil, gasoline, and fuel oil-will
cover about 30 percent of the country's needs. Sanaa
is considering plans to build another refinery, but the
World Bank believes that importing refined products
and exporting crude would be more efficient.
Sanaa will begin accepting tenders for construction of
the underground pipeline from Mar'ib to Salif this
month. The pipeline is designed to pump 200,000 b/d
but can be modified to pump 400,000 b/d, according
to the Embassy. Construction is expected to begin in
November and to be completed by the beginning of
1988.
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Saudi Arabia
no
ae~~eaboooaa'y
Yemen Arab Republic
(North Yemen) Alif field
H
Kamaran BP
I Slane Ir asalif
HUNT ,
(Y.A.R.)
UNT
EXXON
Area of oil
* ' Oil f exploration
SANAAineY,'Mar'ib .
Proposed
underground
oil pipeline
S
t
Jabal Zuger~\
Ethiopia
ou
l Yemeni
exile camp Al
DJIBOUTI
? Boundary representation is
SO alia not necessarily authoritative.
no defined
boundary
People's Democratic
Republic of Yemen
(South Yemen)
= Oil concession
HUNT Lease holding company
Lease limit
--- Approximate lease limit
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Without sizable additional aid, Sanaa probably will
be able to do little to improve the economy over the
next few years. Continuing recession in the region will
prompt more Yemenis working abroad to return
home. Although the government probably will find
ways to pare imports and government expenditures,
the magnitude of the cuts will not be sufficient to ease
the government's financial problems. Nor will revenue
measures add substantial additional income. In the
past, North Yemenis have chosen to ignore tax in-
creases or increase smuggling through their porous
border with Saudi Arabia when faced with higher
customs duties.
If North Yemen's economy begins to deteriorate
rapidly, Sanaa can turn to outside sources for assist-
ance. Since the oil discovery, Saudi Arabia's fears
that its complex client relationship with North Yemen
is unraveling has made Riyadh increasingly tightfist-
ed in its aid payments to Sanaa. Riyadh probably
would offer large aid infusions, however, if North
Yemen's moderate regime appears threatened. More-
over, Sanaa is still considered a good credit risk and
could borrow on the international market if necessary.
Sanaa has been careful to limit its announcements
about the oil find, but the rising expectations of many
Yemenis and hopes that their economic woes will
evaporate in 1988 are among the most serious chal-
lenges facing the regime. Yemenis have witnessed the
rapid development of the Gulf oil-producing states,
and most probably expect similarly broad benefits.
The planned level of Yemeni production and low oil
prices, however, mean that the country's oil revenues
will be limited. Foreign aid probably will continue to
decline, and Yemenis working abroad probably will
return in hopes of finding work and reaping the
benefits of oil production. At worst, hard currency
earnings from these sources will decline enough to
entirely offset the oil revenues.
While continuing economic problems will undoubted-
ly lead to increased domestic criticism of the regime,
Salih probably will retain the support of the military,
tribal leaders, and the business community.
revenues to stimulate slow and balanced economic
growth, but probably will concentrate on using the oil
revenues to broaden and consolidate his regime's base
of power. Although a widespread conspiracy against
the regime is unlikely to develop-even if the econo-
my deteriorates markedly-a disgruntled Yemeni
might be able to penetrate Salih's tight personal
security network and assassinate him. His successor,
however, probably would be selected from Salih's
inner circle and would follow policies similar to those
of the present regime.
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West Germany: Progress on
Financial Reform
West Germany, over the last two years, has been
quietly pursuing a program to liberalize and interna-
tionalize its financial markets. The Bundesbank, re-
versing its traditional hesitance toward innovation,
has become the initiator of reform. The West Ger-
mans are concerned that, without deregulation, they
will lose ground to fast liberalizing markets in Tokyo,
London, and Zurich. We believe the recent reforms
will improve credit allocation in West Germany, lower
corporate borrowing costs, and better equip West
German financial institutions to compete overseas,
although these benefits will require time to accrue.
Foreign corporations and financial institutions, in
turn, will enjoy better access to West Germany's
broadening capital markets. On the negative side,
greater internationalization of the deutsche mark,
which will coincide with loosened capital controls in
France and Italy, could induce wider swings in West
European currency values.
A Rigid System
West German authorities characterize the recent
reforms as "residual liberalization" to emphasize
their contention that West German capital markets
have always been relatively free by international
standards. The mark is freely convertible, restrictions
on capital flows were generally eased in the 1960s,
and West German citizens can purchase any curren-
cy. Interest rate regulations for the banking sector
were abolished almost two decades ago. Unlike Japan,
Canada, and the United States, West Germany does
not demarcate its financial institutions by function:
West German banks are "universal," and can engage
in investment and trust activities as well as commer-
cial banking.
Banks dominate the financial system, both as lenders
to corporations and as recipients of private savings.
The chief factors inhibiting the development of ma-
ture capital markets in the past were discriminatory
taxes and collusive arrangements between the
Bundesbank and banking cartels. These cartels-
particularly those involving the "big three" of Deut-
sche Bank, Dresdner Bank, and Commerzbank-
acted to channel funds through the banking system
and to discourage foreign participation in the capital
markets. The Bundesbank tacitly endorsed this sys-
tem as a means to tighten domestic monetary control
and curb the reserve currency role of the deutsche
mark. The government was particularly concerned
during the 1970s that heavy capital inflows would
inflate the domestic money supply and appreciate the
mark, to the detriment of West German export
competitiveness.
Foreign investment in domestic deutsche mark (DM)
bonds was discouraged by a 25-percent withholding
tax on interest income. A "gentleman's agreement"
with the major banks allowed the Bundesbank to
tightly regulate the volume of DM bonds issued by
foreign borrowers, for which only domestic banks
could act as lead managers. The same agreement
precluded currency swaps and floating rate issues, and
the Bundesbank also prohibited short-term investment
instruments-such as certificates of deposit (CDs) and
money market funds-that could function as substi-
tutes for bank accounts. The domestic banks, whose
securities departments dominate both bond and equity
trading, have a strong incentive to limit the number of
financial instruments in order to keep both individual
savers and corporate borrowers dependent on tradi-
tional bank operations.
Despite this ostensible liberality, West German capi-
tal markets remain relatively primitive. The bond
market is dominated by government issues; the stock
market is anemic; and the short-term money market
consists almost exclusively of interbank dealings.
Secret
DI IEEW 86-035
29 August 1986
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West Germany: Financial Liberalization Measures
August 1984 Abolished 25-percent withholding tax
on interest of domestic bonds owned by
foreigners.
May 1985 Abolished volume controls on foreign
bond issues.
Permitted resident, foreign-owned
banks to lead manage foreign bond
issues.
Allowed new financial instruments
such as swaps, floating-rate, and zero-
coupon bonds.
Ministry of Finance Matched similar abolitions by
France and the United States.
Prenotification rules-though
eased last July-allow continued
monitoring by the authorities.
Bundesbank Reciprocity clause excludes the
Japanese.
Bundesbank, Ministry of Finance Applies to both domestic and for-
eign issues.
Bundesbank CDs subject to minimum reserve
requirements, which were lowered.
Despite their predilection for tightly controlled capital
markets, the West German authorities have felt in-
creasing pressure in recent years to relax the system.
The economic events of the early 1980s-deutsche
mark weakness, dollar strength, and the shift in West
Germany's capital account balance from surplus to
deficit-convinced them of the need to increase the
mark's attractiveness to foreign investors. The main
motivation for financial reform, however, probably
was the growing conviction in Bonn and Frankfurt
that, without deregulation and innovation, West Ger-
many would gradually be eclipsed as a world money
center. Domestic institutions were already circum-
venting regulations to some extent by transferring
operations abroad-by late 1985, domestic banks
were conducting about 12 percent of their business
volume overseas. The government and the central
bank surmised that liberalized rule at home was
preferable to no control over overseas activities.
For a nation somewhat suspicious of change, the
speed with which West Germany has pursued deregu-
lation has surprised financial analysts. The few re-
maining curbs on capital inflows were lifted in 1980-
81 and, more important, Bonn abolished the 25-
percent withholding tax on the interest earnings of
foreigners effective August 1984. Last year, the
Bundesbank authorized new capital market instru-
ments, such as swaps and floating rate notes, and
allowed foreign-owned banks to lead manage them
and traditional bond issues. Minimum reserve re-
quirements were eased this spring to help West
German banks compete in Euromarkets, and short-
term instruments-including CDs-were permitted.
Finally, foreign-owned banks last month were given a
share of the lucrative primary market for government
bonds.
As a result of these measures, foreign banks now
enjoy effectively equal treatment with domestic insti-
tutions. The number of such banks in West Germany
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Gross Sales of Deutsche Mark Bonds by
Foreigners, 1970-86
has increased appreciably in recent years-reaching
300 by last December. The newcomers face an uphill
struggle against the entrenched domestic banks, how-
ever, and few bond issues have thus far been success-
fully lead managed by non-Germans. The foreign-
owned banks also experienced difficulty placing their
initial allotments of government bonds.
Foreign corporate borrowers may actually enjoy bet-
ter-than-national treatment in West Germany be-
cause their bonds are not subject to the tough disclo-
sure and collateral requirements applied to domestic
companies. Gross sales of foreign DM bonds rose to
DM 31 billion last year, 63 percent higher than the
1984 level. Foreign corporations should find their
competitive position improved by access to West
Germany's low- rate capital markets, although the
volume of future borrowing will be sensitive to ex-
change rate expectations.
The West German stock market is small in relation
both to the nation's bond market and to stock
markets overseas. The recent bull market in West
Germany was due almost entirely to foreign buyers,
who accounted for about three-fourths of stock pur-
chases last year. Risk-averse West German savers
have never shown much enthusiasm for playing the
market.
Most West German companies shun the stock mar-
kets as a means of raising capital-debt/equity ratios
of West German firms are almost twice those of their
counterparts in the United States and the United
Kingdom. Only 450 companies are listed on the stock
exchanges as of last December, and only about 30
stocks are actively traded. Bonn abolished double
taxation of dividends almost a decade ago, which
should have spurred development of the stock mar-
ket. Recourse to equity financing, however, is still
discouraged by taxes on the issue and resale of
securities, the large fees charged by banks to sponsor
equity issues, and the burdensome regulatory envi-
ronment-including financial disclosure rules and
worker participation rights in management-faced by
firms that go public. Moreover, the many family-
owned firms are reluctant to dilute their control with
sale of stock to outsiders.
Reforms are in train to bolster the stock markets.
The eight regional exchanges, led by Frankfurt and
Dusseldorf, have formed an association to promote
cooperation, common technical standards, and gov-
ernmental lobbying. The Bundestag is considering
bills to give privately held companies indirect access
to the stock markets via investment companies or
unlisted stock exchanges. The government may also
ease regulations on equity purchases by institutional
investors. These reforms, at best, will prevent the
West German stock exchanges from falling further
behind their international competitors.
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Remaining Impediments
While the actions taken thus far will broaden and
internationalize West Germany's financial markets,
obstacles to free competition and efficiency remain:
? Taxes on financial transactions still inhibit equity
markets and short-term capital markets. The levy
on securities transactions, for instance, has driven
secondary trading of securities away from West
Germany to centers such as London.
? The Bundesbank requires that issues of DM bonds
and CDs be domestically based. This "anchored in
Germany" policy gives the authorities a latent
means of control, and it precludes development of a
true Eurobond market for deutsche mark securities.
? Bonds issued by domestic companies remain tightly
scrutinized and regulated by the Ministry of
Finance.
? Financial futures markets are still prohibited and an
extensive reform of the nation's stock exchanges is
needed.
Finance Minister Stoltenberg recently announced
that the security taxes will be repealed if the conser-
vative coalition remains in power after the January
1987 elections. Because the Finance Ministry must
decide how to replace the $450 million raised last year
by these taxes, however, they may not be abolished
until 1988 or 1989. West German banks also continue
to complain that the government's minimum reserve
requirements, although reduced last spring, still
handicap them in competing with London or Luxem-
bourg for Eurocurrency transactions.
Market Developments and Implications
West German financial markets over the last few
years have experienced a dramatic rise in the volume
and variety of financial transactions, especially those
linking the country to the rest of the world.
with foreigners have increased more than fourfold
since the early 1980s. Although large current account
surpluses-$30 billion in 1986 by our estimate-
destine West Germany to be a net capital exporter
over the next several years, financial liberalization
will promote a healthy, two-way capital flow. Particu-
larly since the abolition of interest withholding, \ or-
eign investors have shown a strong appetite for West
German bonds. In 1985, over 40 percent of domestic
bonds were purchased by foreign investors. The fo
eign bond market has been characterized by larger
volumes, longer maturities, and more participants,
with Japanese, US, and Scandanavian firms tapping
the West German market. The CD market has yet to
show much life-only one issue by a US bank subsid-
iary has been undertaken-but this market could also
flourish once the securities taxes are lifted.
Reversing a negative trend in the early 1980s, the
importance of the deutsche mark in international
transactions is increasing.
the mark last year accounted for 14.5 percent of
global exchange reserves while DM-denominated as-
sets captured 7 percent of the world securities market.
Because of the improved fundamentals of the West
German economy and the new types of securities
available, we expect the mark to continue to advance
as an international financial asset.
Greater integration of the world and West German
financial systems has important implications for ex-
change rate stability and monetary policy:
? The relative success of the European Monetary
System (EMS) in reducing exchange rate fluctua-
tions is, we believe, partly attributable to the limited
mobility of capital among the member states. Be-
cause financial liberalization in West Germany
coincides with major programs in France and Italy
to relax exchange controls, the cumulative effect
could be a tendency toward wider swings in West
European currency values, hampering the operation
of the EMS. In the long run, however, capital
controls are incompatible with the EMS agreement,
and liberalized West European capital markets are
essential if the EMS is ever to evolve into a
monetary union.
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? We attribute wide fluctuations in the mark's value
against the dollar partly to the inelastic supply of
mark-denominated international assets relative to
highly volatile demand of foreign investors. By
increasing the supply of such assets, financial liber-
alization might help stabilize the mark/dollar ex-
change rate.
The West German authorities fear that the accelerat-
ing integration of domestic financial markets with
those abroad will make the economy more vulnerable
to shifts in exchange rate expectations and interna-
tional interest rate differentials. They have reacted to
the possible dilution of traditional monetary policy
tools by turning toward more flexible, market-orient-
ed instruments, such as increased open-market opera-
tions. We cannot exclude, however, that the West
Germans might revert to some form of guidance over
capital flows if faced with dramatic exchange or
interest rate swings.
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India: Domestic Oil Prospects
Diminish
On the basis of a detailed study of India's oil pros-
pects, we believe India faces a sharp decline in oil
output over the next 10 years. Combined with a
probable rapid rise in domestic energy consumption
and intractable problems in the coal and electric
power sectors, India's oil imports would have to rise
significantly, exacerbating perennial foreign pay-
ments problems. The payments difficulties, which
would become particularly acute if world oil prices
increase much above current levels, would hinder
purchases of Western equipment and technology for
the oil sector and other parts of the economy. Mean-
while, the Indian bureaucracy remains ambivalent
about Western investment in the oil sector. At the
same time, Soviet participation in Indian oil explora-
tion and development is likely to diminish because of
Moscow's need for its oil-related resources at home
and the relatively low level of technology.
In the late 1970s prospects for India's future oil and
gas production brightened with the development of
the offshore Bombay High field, India's largest oil-
field, and increased government support for offshore
exploration by foreign companies. Some Indian offi-
cials publicly speculated that their country had a
chance of achieving oil self-sufficiency. Although now
less enthusiastic, the government still forecasts some
increase in oil production through 1990.
India's crude oil output has increased by an annual
average of 13 percent since 1976, slightly exceeding
580,000 b/d in fiscal year (FY) 1985.2 The Bombay
High field accounts for about two-thirds of national
production. Most remaining production comes from
onshore fields in Assam and Gujarat.
The five-year economic development plan (1985-89)
calls for production of 690,000 b/d in FY 1989, but a
review of public statements by Indian officials sug-
gests many are dubious that this level can be reached.
The Indians no longer talk of self-sufficiency, and the
US Embassy reports that unofficial estimates of
production range from 600,000 b/d to 700,000 b/d.
We estimate that Indian crude oil production will
decline to 490,000 b/d in FY 1989 and to 275,000
b/d in FY 1994. The area of India's undiscovered
recoverable oil reserves of 1.4 billion barrels is so vast
that there is substantial risk that no new commercial-
ly viable reserves may be found. Moreover, any
commercial reserves probably would require sophisti-
cated and expensive Western expertise and equipment
for exploitation, involving expenditures of scarce hard
tion increases are not likely in this decade.
currency. Even with outside help, significant produc-
The maximum feasible onshore crude oil production
India will attain over the next decade is 200,000 b/d,
only a 5,000 b/d increase over current output instead
of the 80,000 b/d increase being projected by the
Indians. In the most likely case, however, onshore
production will decline rapidly after FY 1987 to about
100,000 b/d by FY 1994. Discoveries in new areas
can be expected to contribute no more than 25,000
b/d in FY 1987, and decline to about 14,000 b/d by
FY 1994. Even this estimate may be optimistic
because it assumes that new discoveries will be
brought on stream continuously and without delay. If
the Indians were to substantially upgrade the efficien-
cy of their operations and produce existing reserves at
a faster rate, the decline could be postponed tempo-
rarily, but probably only at the expense of a more
rapid decline later.
Offshore production is expected to decline to about
350,000 b/d in FY 1987, stabilize at that level
Secret
DI IEEW 86-035
29 August 1986
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Capability of Domestic Oil Industry
India's strategy for increasing oil production over the
next few years is based on the assumption that most
of the remaining reserves are in small deposits, will
require deep drilling, and will be expensive and time
consuming to exploit. The current five-year plan calls
for intensified exploration in known oil producing
areas and extending exploration to inadequately ex-
plored and unexplored areas. The government intends
to drill a total of 2.8 billion meters of exploratory
wells during the five-year period, nearly triple the
drilling in the previous plan period. To carry out this
ambitious exploration program, the Petroleum Min-
istry plans to have over 120 active rigs by 1990-more
than double the current amount.
We believe the domestic oil industry will have a
difficult time doubling the number of rigs and operat-
ing them efficiently enough to triple exploratory
drilling. Indigenous drilling capabilities are poor by
US standards, and a strong tendency toward central-
ized "micromanagement" hinders efficient use of
India's existing fleet of rigs. The state oil companies
missed their onshore drilling targets in FY 1984 by
more than 25 percent and offshore targets by about
30 percent. As a result, the government will probably
need substantial foreign assistance if it is to even
come close to its targets.
The industry also will have a difficult time locating
new oil deposits that are likely to be in complex
geological formations. Locating these oil deposits will
require detailed seismic surveys and a large increase
in seismic data processing at a time when India
already has a several year backlog of unprocessed
seismic data. The state oil companies have limited
data-processing capability and are reluctant to re-
lease the data to foreign contractors. Once small
geological formations containing oil are found, so-
phisticated drilling, well servicing, completion, and
production techniques-now only available from for-
eign contractors-will be required to make them
profitable.
through FY 1989, and decline thereafter to about
175,000 b/d by FY 1994. This contrasts with the
Indian Government's assessment that it may be able
to increase offshore production by 15,000 b/d by FY
1989. Outside of the Bombay High area, the lead-
times involved in developing new areas offshore al-
most guarantee that none will be developed through
FY 1989. Even beyond FY 1989, prospects for new
areas offshore are not bright. India's most likely
remaining offshore potential is less than 1 billion
barrels of oil. Considering the large area involved,
there is a high risk that no commercial reserves will be
found in any given area.
Implications for India's Economy
Recent trends point to Indian demand for petroleum
products growing by at least 7 percent per year; the
government projects 6.4-percent annual growth. The
volume of petroleum imports is also almost certain to
increase faster than the 8-percent average annual
growth projected by the government. Prime Minister
Gandhi is pushing for faster industrial growth, liber-
alization measures are making more automobiles
available, many manufacturers are using diesel gener-
ators to maintain production when electricity from the
public grid fails, and many farmers have turned to
diesel pumps for irrigation.
Increased oil imports will offset major savings result-
ing from the fall in world oil prices in recent years. By
FY 1989 we estimate that the oil import bill will be
$2.5-3.9 billion.' In contrast, India's oil import bill in
FY 1985-with crude at slightly less than $30 per
barrel-was about $3.1 billion. As a result, declining
oil production would add to India's financial gap in
FY 1989 unless oil prices remain near the $10 per
' This estimate reflects the projected decline in domestic produc-
tion, estimated crude oil demand of 1.2 million b/d, and a world oil
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The Petroleum Industry in India
Afghanistan
KABUL*
Pakistan
Sri
Lanka
COLOMB
. J Offshore oil-exploration block
O Oilfield
Oil pipeline
Oil refinery
Selected state or union territory boundary
0 500 Kilometers
0 500 Miles
Hald,qii~~a
West Benga
Basrn
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Soviet influence and participation in the Indian petro-
leum industry is evident at all levels of operation,
from India's use of Soviet methodology for estimates
of reserves and resources-formulated by Soviet-led
teams-to onshore drilling and production operations
using Soviet methods. Soviet influence is enhanced
because many Indian engineers and managers are
Soviet trained, several have married Soviet citizens,
and they travel frequently to the Soviet Union.
India is continuing to look to the Soviet Union for
inexpensive and basic oil exploration assistance, but
we do not believe the Indians expect much Soviet help
in high-technology areas. We believe that Moscow
will be reluctant to increase dramatically its oil
exploration efforts in India when the Soviets have
both more critical problems and promising prospects
at home. The Soviets have declined an Indian invita-
tion to explore the onshore West Bengal basin or areas
in the Himalayan foothills.
Soviet influence and participation in the Indian petro-
leum sector probably has peaked. The experience of
exploiting the offshore Bombay High field has
brought Indian managers and key technical personnel
into close contact with Western firms having superior
equipment, materials, and technology. The Soviets
themselves, in contrast, have little experience with
offshore petroleum technology.
technical assistance missions use inferior equipment
and their least qualified technical personnel. Onshore
projects designed and implemented under the auspices
of the World Bank have demonstrated to the Indians
the technical efficacy of Western state-of-the-art well
servicing and recovery techniques. If New Delhi
cannot afford the services of Western contractors, it
probably will try to copy some of this technology
domestically.
The Indian Government is looking to foreign oil
companies to assist in the stepped-up exploration
activity, particularly in new areas where logistic and
technical problems are common. India's efforts, how-
ever, are being hamstrung by the vacillating policies
of the Petroleum Ministry and the relatively poor
terms being offered to contractors. Thirty years of
reliance on Soviet assistance and equipment also will
hamper efforts to incorporate more Western technol-
ogy and techniques. In addition, the small size and
widespread distribution of remaining petroleum re-
sources limit the willingness of contractors to risk
their own money to explore for oil in India
Nevertheless, India is making a strong effort to
attract bids from foreign companies to explore in 27
offshore blocks. New liberalized terms include a
greater share of oil production for the foreign operat-
ing companies, no royalty payments, and the elimina-
tion of minimum spending commitments or bids.
Foreign companies have until 30 November 1986 to
submit bids.
India's need to use sophisticated techniques in its
efforts to find more oil reserves and get maximum
recovery from producing fields will present Western
countries with a potential market for high-technology
goods and services. Offshore exploration, particularly
in deep waters, will require expertise and technology
that India does not possess and that the Soviets are
unable to provide. The onshore search will require
highly technical oilfield services, particularly in seis-
mic analysis, to find the small deposits that undoubt-
edly exist but that are hard to detect. Special en-
hanced recovery techniques contemplated by India to
maximize output from aging fields or complex forma-
tions will also require the assistance of outside ex-
perts.
The adverse impact of constant or falling oil produc-
tion on the balance of payments, however, will make it
more difficult for New Delhi to increase purchases of
Western oilfield equipment and services along with
the other high-technology and capital goods needed to
modernize the economy. India probably will seek
Western aid and concessional funds to finance oil
exploration and development.
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Secret
Spot Oil Spot oil prices have firmed over the past three weeks following OPEC's decision to
Price Trends reduce production by 3.5 million b/d in both September and October. Key North
Sea and US crudes are selling for $13.75 and $15.35 per barrel, respectively, and
the world average price has risen approximately $1.80 the past month to $13.05
per barrel. The market has stayed firm in response to evidence that OPEC
producers are taking steps to cut output next month. Saudi Arabia has notified its
customers that incentive discounts will not be offered after 1 September; Kuwait is
ending spot sales; and Nigeria, Abu Dhabi, and Qatar have informed their
customers that they will be reducing liftings. Despite their professed intentions,
OPEC countries have pushed production this month to its highest level since
January 1982, and the consequent buildup in stocks may dampen demand this
winter. In addition, we expect non-OPEC output to rise by as much as 500,000 b/d
over the coming months, which will reduce demand for OPEC oil even further.
Moreover, the production accord is temporary and tenuous-countries such as
Kuwait are prepared to increase production if they observe cheating and there may
be a new struggle for market share in November-leaving open the prospect of
''prices below $10 per barrel.
Cuban Foreign
Exchange Shortage
According to the US Interests Section, Cuban debt payments in August were
running about three weeks behind schedule, and
the delays
stemmed from
temporary liquidity problems.
stricter import criteria had been implemented, and the US Interests
increase hard currency assistance to Cuba over 1985 levels.
Section reports that all foreign purchases now have to be approved by the
economic commission appointed by President Castro in May. Havana apparently
has also tightened banking regulations for foreign exchange transfers and
strengthened efforts to acquire US dollars from Western visitors. Castro, however,
will have a difficult time extracting new loans from already nervous Western
bankers. According to the Interests Section, at least two West European commer-
cial banks have canceled Cuban credit lines recently, and other investors probably
will follow suit unless Havana brings arrearages up to date quickly. Moreover,
Havana probably will get far less than the $300 million in new credits it requested
from commercial creditors as part of debt rescheduling talks scheduled for early
September. Consequently, Havana may turn once again to Moscow to bail it out of
its hard currency difficulties, but there is no indication that Moscow is willing to
29 Secret
DI IEEW 86-035
29 August 1986
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Thai Budget Deficit Our calculations indicate a huge shortfall in tax revenues will push the Prem
Threatens IMF Credit government's 1986 budget deficit to at least $2.3 billion, exceeding by 13 percent
the ceiling fixed under its revised IMF standby arrangement. Missing compliance
is certain to endanger future Fund disbursements; as it was, the Fund earlier this 25X1
year delayed a disbursement and tightened up its review of performance criteria
when Bangkok failed to meet the original deficit target. The new government's
as the conservative Finance Ministry tries to hold the line on budget 25X1
increases and on borrowing. The Ministry is concerned that a cutoff of IMF funds
probably would make the country's commercial lenders uneasy and could adverse-
ly affect Thailand's good international credit standing.F__~ 25X1
Global and Regional Developments
Secret
29 August 1986
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Secret
Tokyo Pushing A recent hard-hitting speech by a Japanese Government official criticizing
Indonesia To Relax Indonesia's investment climate is probably part of a stepped-up effort by Tokyo to
Investment Regulations prod Jakarta to relax foreign investment regulations. The speech was given in
Jakarta by the Director of the Japan External Trading Organization (JETRO) in
Indonesia and included a list of problems-such as restrictive product pricing
regulations and the unavailability of local financing-facing Japanese firms in
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investment flows into Indonesia have declined. Tokyo's decision to go public may
reflect a belief in Japan that more progress is likely now, given Indonesia's poor
economic situation. In addition, Tokyo-which is Jakarta's largest aid donor-
may be reacting to pressure from Japanese firms that are struggling in Indonesia.
According to the Japanese Government, only 38 percent of Japanese firms in
Indonesia are making a profit. Although Jakarta may continue to marginally relax
regulations-several were eased in May-it is unlikely that they will move to
significantly open the economy to direct investment. Indonesian nationalists
remain staunchly opposed to foreign involvement in the economy.
China Renews China has agreed to provide a $3 million credit for the upkeep of the strategic
Aid for Tazara railway, running between Zambia's copperbelt and the Tanzanian port of
Tazara Railroad Dar es Salaam.
Although the railroad has been plagued with fuel shortages, poor management,
lack of spare parts, and equipment failures since its opening in 1976, Zambia
currently uses it for about two-thirds of its metal exports, which provide 90 percent
of foreign exchange earnings.
South African According to press reports, the South African Government probably will appoint
Preparations to Evade Fred Bell, an expert on boycott evasion, to coordinate its response to expected
Western Sanctions Western sanctions. Bell, an aggressive, hardline nationalist, was executive general
manager of the Armaments Corporation (ARMSCOR), the government-controlled
arms production conglomerate that has prospered since the 1977 UN-sponsored
arms boycott against South Africa. ARMSCOR not only has illegally acquired
foreign technology but has also independently developed and produced armaments
at home. In addition to developing sanctions-busting tactics, we believe Bell will
use his ARMSCOR experience to improve South Africa's ability to produce
domestic substitutes for imports.
31 Secret
29 August 1986
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Japanese Pump In mid-September Prime Minister Nakasone will announce an economic stimulus
Priming Measures package-the third this year-in connection with the submission to the Diet of the
traditional fall supplemental budget. Although the $19 billion supplemental
budget agreed to last week by Nakasone and Finance Minister Miyazawa is being
touted as Japan's second largest ever, we believe this package will involve very lit- 25X1
tle new money. The combined budget/stimulus package will probably include
housing incentives, additional measures to ease the impact of the strong yen on
small exporters, a modest increase in public works spending
It will probably not contain in- 25X1
come tax cuts because Tokyo is currently studying a major tax reform for 1987-88.
If the economy does not pick up by yearend, however, Nakasone may take the un-
usual step of proposing an additional supplementary budget in January.
French Budget The French Government's budget for 1987, which will be introduced on 17
Tightening September, is being described by Budget Minister Juppe as one more move in the
recent series of "near revolutionary changes" in economic policy put in place by
the conservative government of Prime Minister Chirac. Juppe told the US
Embassy that for the first time in 29 years expenditure growth-at 1.8 percent-
will be less than projected inflation. In particular, the new budget envisions sizable
cuts in government personnel, in subsidies, and in aid to industry. As a result, the
budget deficit will be lowered to $19 billion-4 percent of GDP-despite a $4
billion reduction of the tax burden on businesses and households. Juppe also stated
that the government plans to continue its program to decontrol prices, privatize
parts of the public sector, and liberalize foreign exchange and capital flows
regulations.
Denmark Despite the continued worsening of Denmark's current account deficit-$2.4
Resisting Devaluation billion in first half 1986 following a record $3.2 billion for all of 1985-the
Conservative-led coalition government opposes a kroner devaluation and has
dropped its long-held 1988 target date for balancing the current account. The
current account deficit is the government's biggest economic problem, and two
minor austerity packages implemented in December and March have failed to
stem the red ink. Copenhagen believes it has no further room to tighten fiscal poli-
cy because a budget surplus is likely this year and another is expected in the pre-
liminary budget submission for 1987. Prime Minister Schlueter is unwilling to
devalue, however, because he took office in 1982 pledging to maintain stable
exchange rates. He fears that a devaluation could damage investors' confidence in
his government's policies, and thereby jeopardize the strong economic recovery
that has pulled unemployment down from 10.5 percent in 1983 to 6.7 currently-
among the lowest in the EC.
Secret
29 August 1986
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400140005-0
Secret
Continued Libyan Libyan leader Qadhafi is continuing to pursue economic policies that contribute to
Economic Austerity antiregime sentiment. Tripoli has reduced
civil service salaries by 5 percent and cut back on government employee housing
allowances. In addition, government paychecks are increasingly late and with-
drawals from state accounts are restricted. Restrictions on travel allowances are
fueling a thriving black market; many Libyans traveling abroad purchase hard
currency illegally to supplement the reduced amounts available from banks. These
new austerity measures come at a time of unprecedented discontent over Qadhafi's
economic policies. Food lines are already long as imports-a primary source of the
domestic food supply-are at their lowest levels in seven years. Moreover, Qadhafi
has failed to implement low-cost measures such as restocking shelves with a few
consumer staples, which could help ease his deteriorating political position.
Moderate Economic Leftist delegates threatened this week to delay the commission drafting a new
Provisions Gain in Draft Philippine constitution after losing a bid to protect all domestic businesses from
Philippine Constitution foreign imports. Proponents of trade liberalization prevailed with a draft provision
that limits import protection only to cases of "unfair foreign competition." Leftists
also failed to win approval of draft language severely restricting foreign invest-
ment. The moderates' economic provisions-which now closely track the previous
constitution-limit foreign ownership to 40 percent of public utilities and to
businesses for which the legislature determines that the national interest is at
stake. Although nationalistic economic provisions are being defeated by the
moderates, leftists will almost certainly contest ratification of the consitution if
they judge that domestic economic interests are not sufficiently protected. In any
case, prolonged heated public debate on foreign ownership will probably keep
prospective investors on the sidelines until the constitution is ratified later this
year. Under these circumstances, the economy's recovery will be weaker than the
6-percent growth in output currently projected by Manila for next year.
25X1
Egyptians Enact Implementation last week of Cairo's long-anticipated customs reform is being
Customs Reform hailed by the Egyptian Government as an important step toward revitalizing the
economy. The reform measure abolishes most customs exemptions, reduces
substantially customs rates as well as the number of customs categories, and
increases the valuation of imported items by over 90 percent. Intended to be
revenue neutral, the new law is, nevertheless, likely to be used as a tool by the gov-
ernment to quietly raise duties. The ban on the importation of luxury goods and lo-
cally produced items, if not accompanied by exchange rate reforms, may, however,
lead to encouragement of high-cost domestic production with little economic
development impact. Cairo is likely to cite the customs changes as further
justification for US support in Egypt's effort to minimize the preconditions of an
IMF-endorsed standby program. 25X1
33 Secret
29 August 1986
i
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Secret
South Korea To Produce In a move that will enhance the vertical integration of the country's microelectron-
Electronics-Grade ics industry, two of South Korea's electronics firms will soon begin marketing
Silicon semiconductor materials. Beginning in January 1987, Lucky Advanced Materi-
als-under license from a US firm-will grow electronics-grade silicon ingots that
it will slice and polish into finished wafer substrates. Moreover, Korsil-a joint
venture between Dongbu and another US firm-by yearend will be importing
unfinished substrates for polishing at its local facility. We calculate the combined
annual output of these firms, projected at some 40 million
square inches of electronics-grade silicon, will be enough to supply approximately
85 to 90 percent of local demand for wafer substrates. South Korea currently
imports polished wafers largely from the United States and Japan. By acquiring
US technology, South Korea is building up its silicon-processing expertise in the
same way it developed a world-class semiconductor industry.
Indonesia Moves To The Soeharto government-expecting flat or negative economic growth this
Ease Unemployment year-is planning to subsidize training and create approved operating zones for the
"informal" sector work force-street merchants, food vendors, and pedicab
drivers. These moves will be coupled with an end of Jakarta's previous practice of
harassing the informal sector to discourage urban migration. Jakarta hopes the
new policy will enable the informal sector to absorb one-half to three-quarters of
the estimated 2 million new entrants to the labor force each year; we estimate that
unemployment currently averages 25 to 30 percent. Although the regime's
expectations are probably optimistic, its encouragement of the informal sector
would be an important symbolic gesture, and could dampen urban tensions of the
kind that contributed to the riots in Jakarta's port district in 1984.
New Moroccan Embassy reporting indicates Rabat may hike food prices this week to pave the way
Austerity Measures for a new IMF accord. The move would come at a time of a series of positive devel-
opments-low oil prices, a weaker dollar, falling interest rates, and an end to the
drought-that have raised public expectations of an economic recovery, not of new
austerity measures. Available foreign reserves total less than two weeks' worth of
imports, and Morocco needs an IMF agreement to garner new aid to cover at least
a $500 million financial gap this year. Rabat has requested a $250 million bridge
loan from the United States to cover payments needs until expected IMF monies
Without a significant infusion of funds, hard currency levels may not be enough to
prevent spot shortages of essential consumer goods, which could result in sporadic
outbreaks of violence.
Secret
29 August 1986
25X1
25X1
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Secret
Pakistani Islamic For the third straight six-month period since coming under Islamic banking
Banking Dividends statutes, Pakistani and foreign banks declared lower dividends to savers. Accord-
Decline ing to the US Consulate in Karachi, the lower dividends reflect the lack of
investment opportunities for banks' excess liquidity rather than weakness in
Islamic banking. Despite having ample funds to lend, banks are discouraged from
increasing loans by regulations that heavily penalize exceeding state-imposed
credit ceilings. The credit ceilings were imposed because of concerns that
additional lending may fuel inflation and the state bank's belief that investors
should utilize more of their own money rather than depend on funds from the
banking sector. Searching for ways to improve dividend performance, foreign
banks have asked the state bank governor to float a new security bond that would
yield a higher return than mandatory security investments held as reserves.
Moscow Reorganizing The Politburo has approved a reorganization of the Soviet foreign trade sector-to
Foreign Trade take effect at the beginning of next year-that will establish a state foreign trade
commission similar to the bureau recently created to coordinate the work of
machine-building ministries, according to the US Embassy. The decree-to be
issued within the next few days-reportedly will allow some enterprises to engage
directly in foreign trade, to have greater control over their hard currency earnings,
and to have more leeway in negotiating joint ventures. General Secretary
Gorbachev's plans for streamlining the bureaucracy are said to have included
reorganization of the foreign trade apparatus for at least a year. Moscow hopes the
changes will boost exports of machinery and equipment, but their effects will be
limited by other shortcomings in the system that inhibit product quality. The
potential of the reorganization to improve foreign trade operations will depend on
the new commission's authority, the degree to which the Ministry of Foreign
Trade's monopoly on trade transactions is reduced, the number of enterprises
involved, and the extent of their autonomy.
More Problems Heavy rains have added to construction woes at a key hydroproject in southern
for Key Chinese China at Tianshengqiao, site of a cofferdam collapse last December that killed 48
Hydroproject workers. China is building the dam with foreign, including some US, equipment
and is financing the project with low-cost Japanese loans. In the months since the
collapse, heavy rains have caused mudslides and damaged access roads; damage to
existing facilities has required repairs that threaten plans for partial operation by
1989.
35 Secret
29 August 1986
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Secret
Secret
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Directorate of
Intelligence
Economic & Energy
Indicators
DI EEI 86-018
29 August 1986
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This publication is prepared for the use of US Government
officials, and the format, coverage, and content are designed to
meet their specific requirements. US Government officials may
obtain additional copies of this document directly or through
liaison channels from the Central Intelligence Agency.
Requesters outside the US Government may obtain subscriptions to
CIA publications similar to this one by addressing inquiries to:
Document Expediting (DOCEX) Project
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or: National Technical Information Service
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Economic & Energy
Indicators
Money Supply
Unemployment Rate
Foreign Trade
Current Account Balance
Export Prices in US $
Import Prices in US $
Exchange Rate Trends
Money Market Rates
Agricultural Prices
Industrial Materials Prices
World Crude Oil Production, Excluding Natural Gas Liquids 8
Big Seven: Inland Oil Consumption 9
Big Seven: Crude Oil Imports 9
Crude Oil Prices 10
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Percent chan
seasonally adj
ge from pre
usted at an
vious period
annual rate
United States
2.6
-7.2
5.9
11.6
2.3
0.5
-2.7
-6.5
-3.8
Japan
1.0
0.4
3.5
11.1
4.6
0.7
0.9
4.0
4.0
West Germany
-2.3
-3.2
0.3
2.4
4.8
-0.3
-32.8
France
-2.6
-1.5
1.1
2.5
0.5
-4.9
5.1
-46.5
31.2
United Kingdom
-3.9
2.1
3.9
1.3
4.7
3.2
-2.7
-19.7
-13.5
Italy
-1.6
-3.1
-3.2
3.3
1.2
11.7
8.9
-43.5
36.7
Canada
0.5
-10.0
5.3
8.8
4.3
-0.9
-21.9
Percent chang
seasonally adju
e from previous period
sted at an annual rate
United Kingdom
-1.4
1.9
3.4
2.6
3.3
-1.1
1.8
2.9
Italy
0.2
-0.5
-0.2
2.8
2.3
1.0
2.3
5.3
Canada
3.3
-4.4
3.3
5.0
4.5
7.0
5.4
Percent change from previous period
seasonally adjusted at an annual rate
West Germany
6.0
5.3
3.3
2.4
2.2
-0.9
-1.1
0.4
-2.6
France
13.3
12.0
9.5
7.7
5.8
0.8
1.7
4.5
0.8
United Kingdom
11.9
8.6
4.6
5.0
6.1
4.5
0.4
1.2
0.7
I i
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Money Supply, M-1
Percent change from previous period
seasonally adjusted at an annual rate
United States b 7.1 6.6
11.2
7.0
9.1
7.9 16.8
15.8
18.3
Japan 3.7 7.1
3.7
2.8
5.0
7.7 9.5
7.2
West Germany 1.1 3.6
10.2
3.3
4.4
9.8 11.3
21.3
France 12.2 13.9
8.7
20.4 1.9
16.4
United Kingdom NA NA
13.0
14.7
16.7
9.2 33.0
14.7
14.0
Italy 11.2 11.6
15.1
12.3
13.7
8.9
Canada 3.8 0.7
10.2
3.2
4.1
-13.3 -1.9
28.7
42.3
a Based on amounts in national currency units.
b Including M1-A and M1-B.
1st Qtr
2nd Qtr
May
Jun
Jul
United States 7.5 9.6
9.4
7.4
7.1
7.0
7.1
7.2
7.0
6.8
Japan 2.2 2.4
2.7
2.7
2.6
2.6
2.8
2.7
2.7
West Germany 5.6 7.7
9.2
9.1
9.3
10.2
8.6
8.5
8.4
8.6
France 7.6 8.4
8.6
9.6
10.0
9.9
10.0
10.0
10.1
10.2
United Kingdom 10.0 11.6
10.7
11.1
11.3
11.5
11.6
11.6
11.7
11.7
Italy 8.4 9.1
9.9
10.4
10.7
11.5
Canada 7.5 11.1
11.9
11.3
10.5
9.7
9.6
9.6
9.5
9.9
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Foreign Trade a
United States b
Exports
233.5
212.3
200.7
217.6
213.3
Imports
261.0
244.0
258.0
325.7
345.3
92.9
90.8
28.8
30.3
31.8
Balance
-27.5
-31.6
-57.4
-108.1
-132.0
Japan
Exports
149.6
138.2
145.4
168.1
173.9
47.8
51.2
16.7
17.6
16.8
Imports
129.5
119.6
114.0
124.1
118.0
30.0
29.0
9.7
9.1
10.2
Balance
20.1
18.6
31.4
44.0
55.9
17.8
22.2
7.0
8.5
6.7
West Germany
Exports
175.4
176.4
169.5
171.9
184.3
55.1
60.5
21.9
17.5
21.1
Imports c
163.4
155.3
152.9
153.1
158.9
45.0
47.4
17.2
14.4
15.9
Balance
11.9
21.1
16.6
18.8
25.3
10.1
13.1
4.7
3.1
5.2
France
Exports
106.3
96.4
95.1
97.5
101.9
30.4
29.8
9.9
9.7
10.1
Imports
115.6
110.5
101.0
100.3
104.5
30.3
30.9
10.6
10.0
10.3
Balance
-9.3
-14.0
-5.9
-2.8
-2.6
0.1
-1.1
-0.7
-0.3
-0.2
United Kingdom
Exports
102.5
97.1
92.1
93.6
100.9
26.2
26.8
9.1
8.9
8.8
Imports
94.6
93.1
93.7
99.3
103.5
28.3
29.1
9.5
9.9
9.7
Balance
7.9
4.0
-1.6
-5.7
-2.5
-2.0
-2.4
-0.4
-1.0
-0.9
Italy
Exports
75.4
73.9
72.8
73.4
78.8
23.3
24.4
8.2
8.1
8.2
Imports
91.2
86.7
80.6
84.4
90.7
26.4
24.0
8.2
7.9
7.9
Balance
-15.9
-12.8
-7.9
-10.9
-11.9
-3.1
0.4
0
0.2
0.3
Canada
Exports
70.5
68.5
73.7
86.5
88.0
21.7
21.2
7.5
7.1
6.7
Imports
64.4
54.1
59.3
70.6
75.7
19.9
19.6
6.7
6.4
6.5
Balance
6.1
14.4
14.4
15.9
12.3
1.8
1.7
0.8
0.7
0.3
a Seasonally adjusted.
b Imports are customs values.
Imports are c.i.f.
United States
6.3
-8.1
-46.6
-106.5
-117.7
-33.7
Japan
4.8
6.9
20.8
35.0
49.2
12.7
23.2
7.9
7.7
7.6
West Germany
-6.8
3.3
4.3
6.7
13.8
6.9
8.1
3.6
2.6
1.9
United Kingdom
15.3
8.5
4.7
1.9
5.0
0.7
0.8
0.7
0.1
0.1
Italy
-8.6
-5.7
0.6
-2.9
Canada
-5.0
2.1
2.4
2.6
-0.4
-2.1
a Seasonally adjusted; converted to US dollars at current market
rates of exchange.
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Percent chan
ge from pre
at an
vious period
annual rate
United States
9.2
1.5
1.0
1.4
-0.7
-0.5
1.2
3.2
7.1
Japan
5.5
-6.4
-2.4
0.2
-0.6
26.1
24.9
12.9
-3.5
West Germany
-14.9
-2.8
-3.2
-7.1
0
40.7
16.6
20.4
-2.4
France
-12.0
-5.5
-4.8
-2.9
2.5
33.2
15.2
United Kingdom
NA
NA
-6.2
-5.1
2.3
-2.6
7.2
9.1
-1.7
Italy
-7.8
-3.0
-4.4
-5.2
-0.3
25.9
26.3
Canada
3.9
-2.0
0.2
-0.4
-3.5
-16.3
5.5
0.9
-0.8,
Import Prices in US $
Percent change from previous period
at an annual rate
United States
5.3
-2.0
-3.7
1.7
-2.4
-7.1
-10.8
-0.9
-0.4
Japan
3.6
-7.4
-5.0
-2.8
-4.3
-5.3
-49.2
-54.3
-2.2
West Germany
-8.6
-4.7
-5.2
-4.8
-1.5
9.8
-11.6
-7.3
-24.1
France
-7.8
-7.2
-7.0
-3.8
-0.3
10.3
6.6
United Kingdom
NA
NA
-5.7
-4.5
0.5
-0.5
2.4
3.9
-18.2
Italy
1.0
-5.3
-6.6
-3.7
-1.0
10.7
-19.2
Canada
8.7
-1.1
0.6
1.0
-2.1
- 8.9
3.6
0.3
-23.0
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Exchange Rate Trends
Percent change from previous period
at an annual rate
Money Market Rates
United States
90-day certificates of
deposit, secondary market
16.24
12.49
9.23
10.56
8.16
7.68
6.77
6.67
6.75
6.88
Japan
loans and discounts
(2 months)
7.79
7.23
NA
6.66
6.52
6.38
5.98
6.12
5.98
5.82
West Germany
interbank loans
(3 months)
France
interbank money market
(3 months)
United Kingdom
sterling interbank loans
(3 months)
Italy
Milan interbank loans
(3 months)
Canada
finance paper (3 months)
18.46
14.48
9.53
11.30
9.71
11.08
9.03
9.52
8.78
8.80
Eurodollars
3-month deposits
16.87
13.25
9.69
10.86
8.41
7.91
7.00
6.95
6.99
7.07
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400140005-0
1st Qtr 2nd Qtr Jun Jul
Bananas 214.0 217.0 232.0 243.0 110.3 109.8 108.5 109.5 NA
Fresh imported,
(Total world, $ per metric ton)
Australia
(Boneless beef,
f.o.b. US Ports)
United States
(Wholesale steer beef,
midwest markets)
Cocoa (Q per pound)
89.8
74.3
92.1
106.2
98.7
95.7
82.6
81.4
87.6
Coffee ($ per pound)
1.28
1.40
1.32
1.44
1.43
2.01
1.73
1.51
1.50
Corn
(US #3 yellow,
c.i.f. Rotterdam, $ per metric ton)
150
123
148
150
125
116
116
118
98
Cotton
(World Cotton Prices, "A"
index, c.i.f. Osaka, US 0/lb.)
Palm Oil
(United Kingdom 5% bulk,
c.i.f., $ per metric ton)
US (No. 2, milled,
4% c.i.f. Rotterdam)
Thai SWR
(100% grade B
c.i.f. Rotterdam)
Soybeans
(US #2 yellow,
c.i.f. Rotterdam, $ per metric ton)
Soybean Oil
(Dutch, f.o.b. ex-mill,
$ per metric ton)
Soybean Meal
(US, c.i.f. Rotterdam
$ per metric ton)
Sugar
(World raw cane, f.o.b.
Caribbean Ports, spot prices a per pound)
Tea
Average Auction (London)
(? per pound)
91.0
89.9
105.2
156.6
90.0
86.4
85.6
79.7
79.8
Wheat
(US #2. DNS
c.i.f. Rotterdam, $ per metric ton)
210
187
183
182
169
172
158
140
129
Food Index a (1980'=100),
88,
.78
86
92
81
95
94
88
83
The food index is compiled by The Economist for 14 food commodities which enter international trade. Commodities are weighted by 3-
year moving averages of imports into industrialized countries.
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400140005-0
Chrome Ore
(South Africa chemical
grade, $ per metric ton)
Copper a (bar, ? per pound)
79.0
67.1
72.0
62.4
64.5
64.5
64.5
64.1
60.6
Gold ($ per troy ounce)
460.0
375.5
424.4
360.0
317.2
342.6
341.6
342.5
348.4
Lead a (? per pound)
32.9
24.7
19.3
20.0
17.7
16.7
17.6
19.0
17.0
Manganese Ore
(48% Mn, $ per long ton)
82.1
79.9
Major producer
475.0
475.0
475.0
475.0
475.0
475.0
475.0
475.0
475.0
Metals week,
New York dealers' price
446.0
326.7
422.6
358.2
291.0
383.1
420.1
432.3
438.0
Rubber (? per pound)
Silver ($ per troy ounce)
10.5
7.9
11.4
8.1
6.1
5.9
5.2
5.2
5.0
Steel Scrap d ($ per long ton)
92.0
63.1
73.2
86.4
74.4
74.0
71.8
70.92
NA
Tin a (Q per pound)
641.4
581.6
590.9
556.6
543.2
357.4
250.5
244.2
244.0
Tungsten_Ore
(contained metal,
$ per metric ton)
18,097
13,426
10,177
10,243
10,656
8,673
7,567
7,474
7,112
US Steel
(finished steel, composite,
$ per long ton)
543.5
567.3
590.2
611.6
617.8
551.2
554.4
556.6
NA
Lumber Index e
95
84
(1980 = 100)
(1980=100) .
a Approximates world market price frequently used by major world
producers and traders, although ohly small quantities of these
metals are actually traded on the LME. As of February 1986 tin
prices from the Penang market.
b S-type styrene, US export price.
e Quoted on New York market.
d Average of No. I heavy melting steel scrap and No. 2 bundles
delivered to consumers at Pittsburgh, Philadelphia, and Chicago.
e This index is compiled by using the average of 10 types of lumber
whose prices are regarded as bellwethers of US lumber construction
costs.
f The industrial materials index is compiled by The Economist for
18 raw materials which enter international trade. Commodities are
weighted by 3-year moving averages of imports into industrialized
countries.
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400140005-0
World Crude Oil Production
Excluding Natural Gas Liquids
1981
1982
1983
1984
1985-
1986-
1st Qtr
May
June
July
World
55,837
53,092
52,625
53,674
52,931
54,029
Non-Communist countries
41,602
38,810
38,228
39,257
38,692
39,758
Developed countries
12,886
13,276
13,864
14,302
14,730
15,022
United States
8,572
8,658
8,680
8,735
8,933
8,898
8,848
8,808
8,800
Canada
1,285
1,270
1,356
1,411
1,457
1,480
United Kingdom
1,811
2,094
2,299
2,535
2,533
2,711
2,538
Norway
501
518
614
700
785
856
826
Other
717
736
915
921
1,022
1,077
927
Non-OPEC LDCs
6,036
6,633
6,823
7,515
7,845
7,556
7,998
Mexico
2,321
2,746
2,666
2,746
2,733
2,376
2,527
2,547
2,500
Egypt
598
665
689
827
874
758
845
Other
3,117
3,222
3,468
3,942
4,238
4,422
4,626
OPEC
22,680
18,901
17,541
17,440
16,117
17,180
18,000
19,300
20,320
Algeria
803
701
699
638
645
602
600
600
600
Ecuador
211
211
236
253
280
275
300
300
285
Gabon
151
154
157
152
153
160
160
170
170
Indonesia
1,604
1,324
1,385
1,466
1,235
1,223
1,305
1,235
1,250
Iran
1,381
2,282
2,492
2,187
2,258
1,890
2,100
2,200
2,300
Iraq
993
972
922
1,203
1,437
1,732
1,700
1,700
1,900
Kuwait b
947
663
881
912
862
1,169
1,400
1,500
1,600
Libya
1,137
1,183
1,076
1,073
1,069
1,000
1,100
1,200
1,150
Neutral ZoneC
370
317
390
410
355
276
220
300
340
Nigeria
1,445
1,298
1,241
1,393
1,464
1,417
1,550
1,490
1,600
Qatar
405
328
295
399
302
352
360
430
400
Saudi Arabia b
9,625
6,327
4,867
4,444
3,290
4,256
.4,250
5,100
5,600
UAE
1,500
1,248
1,119
1,097
1,146
1,287
1,405
1,505
1,505
Venezuela
2,108
1,893
1,781
1,813
1,621
1,541
1,550
1,570
1,620
Communist countries
14,235
14,282
14,397
14,417
14,239
14,271
USSR
11,800
11,830
11,864
11,728
11,350
11,350
China
2,024
2,042
2,121
2,280
2,496
2,496
2,496
Other
411
410
412
409
393
425
a Preliminary.
b Excluding Neutral Zone production, which is shown separately.
C Production is shared equally between Saudi Arabia and Kuwait.
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400140005-0
Big Seven: Inland Oil Consumption
1981
1982
1983
1984
1985
1986
Jan
Feb
Mar
Apr
May
June
United States o
16,058
15,296
15,184
15,708
15,726
15,923
16,056
16,188
15,743
15,852
16,150
Japan
4,444
4,204
4,193
4,349
4,123
4,661
5,002
4,570
3,951
3,576
France
1,744
1,632
1,594
1,531
1,493
1,626
2,009
1,525
1,702
1,245
1,284
United Kingdom
1,325
1,345
1,290
1,624
1,402
1,286
1,483
1,447
1,427
1,330
Italy b
1,705
1,618
1,594
1,513
1,516
1,718
1,855
1,535
1,495
1,345
1,506
Jul
16,309
a Including bunkers, refinery fuel, and losses.
b Principal products only prior to 1981.
Big Seven: Crude Oil Imports
1981
1982
1983
1984
1985
1986
Jan
Feb
Mar
Apr
May
June
Jul
United States
4,406
3,488
3,329
3,426
3,201
3,329
2,993
3,000
3,701
3,872
4,508
4,291
Japan
3,919
3,657
3,567
3,664
3,377
3,126
4,273
3,673
3,469
West Germany
1,591
1,451
1,307
1,335
1,284
1,321
1,258
1,429
1,285
1,340
1,263
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798ROO0400140005-0
OPEC Average a 30.87 34.50 33.63 29.31 28.70 28.14 28.09 28.08 28.07 28.11
(Official Sales Price)
a F.o.b. prices set by the government for direct sales and, in most cases, for the producing company buy-back oil. Weighted by the volume
of production.
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400140005-0
Average Crude Oil Sales Prices
N
The 1973 price is derived from posted prices, 1974-84 prices
are derived from OPEC official sales prices, and beginning
in 1985, prices are a measure of average world sales prices.
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 Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400140005-0
Declassified in Part - Sanitized Copy Approved for Release 2012/01/09: CIA-RDP88-00798R000400140005-0