INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000807670001-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 26
• Document Creation Date: December 22, 2016
• Document Release Date: August 8, 2011
• Sequence Number: 1
• Publication Date: August 30, 1985
• Content Type: REPORT

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Directorate of
Intelligence
Weekly
International
Economic & Energy
30 Amt 1985
-eret-
DI IEEW 85-033
30 Aurut 1985
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Secret
International
Economic & Energy Weekly
30 August 1985
Synopsis
1 Pers ective-Mexico: Ridin the Economic Roller Coaster
Iraq: Higher Oil Exports Will Not Solve Financial Problems
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Latin America: Faltering Export Performance) 25X1
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Energy
International Finance
Global and Regional Developments
National Developments
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Comments and queries re arding this publication are welcome. They may be
directed to Directorate of Intelligence, telephoneF-----] 25X1
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DI IEEW 85-035
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Secret
International
Economic & Energy Weeklybb 25X1
Synopsis
7 Iraq: Higher Oil Exports Will Not Solve Financial Problems
We do not expect any significant improvement in Iraq's financial situation
next year because increased oil export volumes will largely be offset by
reduced aid from Saudi Arabia and Kuwait, lower oil prices, and increased
debt service obligations.
11 Latin America: Faltering Export Performance
The continuing setbacks in Latin American exports will lead to slower
economic growth as well as increasing difficulties in making payments on
foreign debts.
15 Portugal: Economic Problems Persist
Austerity measures introduced under the IMF's guidance during 1983-84 cut
Portugal's current account deficit-from $3.2 billion in 1982 to about $500
million last year-but serious structural problems remain
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Iraq: Higher Oil Exports Will Not
Solve Financial Prob!ems
We do not expect any significant improvement in
Iraq's financial situation next year because in-
creased oil export volumes will largely be offset by
reduced aid from Saudi Arabia and Kuwait, lower
oil prices, and increased debt service obligations.
Iraq has been rescheduling debts and arranging
new loans based on expectations of higher oil
revenues from a new pipeline through Saudi Arabia
and planned expansions through Saudi Arabia and
Turkey. Moreover, Iraq's stubborn push to increase
oil exports is likely to add strong downward pres-
sure on oil prices. Financial difficulties compound
Baghdad's frustration over its inability to bring
Iran to accept a peace settlement and will encour-
age more Iraqi strikes on Iranian economic targets,
such as Khark Island)
Iraq: Foreign Payments, 1986 Billion US $
Small Oil
1985 a Price Fall b
Large Oil
Price Fall
Imports (including
invisibles)
15.0
15.0
15.0
Principal payments
on debt
3.0
3.5
3.5
Sources of foreign exchange
Export revenues
(over 90 percent oil)
11.1
15.1
12.3
Arab aid
3.0
1.1
0.7
Rescheduling and new
credits
3.9
2.3
5.5
Imports and Rescheduling Debts
After slashing imports in 1983, Baghdad has set-
tled on annual imports of about $15 billion that, for
political reasons, they are reluctant to cut further.
Baghdad wants to avoid the political risks of eco-
nomic austerity on a populace where most families
have experienced a war casualty. In addition to
weapons expenditures, this spending level allows
the government to provide a reasonably comfort-
able supply of consumer goods, some expensive
perks-such as imported automobiles-to military
and government officials, and a scaled back, but
still substantial, development program
War-related disruptions of oil exports, a soft oil
market, and military spending have forced Iraq to
borrow from its trading partners to finance imports.
This occurred despite $30 billion in economic aid
from Arab allies and a drawdown of $29 billion in
Iraqi foreign assets since 1980. Non-Arab debts
currently total about $8.5 billion mostly in two-
year loans. Saudi crude oil sales on Iraq's behalf
have fallen from 180,000 b/d in 1984 to about
100,000 b/d in the first half of this year,
Since early 1983,
a Projected.
b Assumes an average of 1.65 million b/d oil exports, spot oil prices
of about $24.50 per barrel for Iraqi crude, and Arab oil aid
averages 120,000 b/d.
c Assumes 1.65 million b/d oil exports, spot oil prices of about
$20.00, and Arab oil aid averages 100,000 b/d.
Baghdad has also been receiving the cash equiva-
lent of 248,000 b/d from sales of Kuwaiti and
Saudi Neutral Zone crude. In July, however, these
payments were cut by at least one-half because of
falling Neutral Zone production, according to the
US Embassy in Kuwait.F_~
Baghdad failed to meet some debt payments due
last April, and continues to borrow to meet its
financial needs:
? In July Baghdad settled its most difficult re-
scheduling negotiations when Japanese firms
agreed to defer most of an estimated $700 million
in debt payments due this year until 1987, ac-
cording to the US Embassy in Baghdad. While a
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common front failed as individual firms made
concessions, the Japanese refused to accept pay-
ment in oil.
? A West German official told the US Embassy
that new financing is likely for the $200 million
due in October. West Germany is also reluctant
to accept payment in oil.
? Press reports indicate that Yugoslavia has agreed
to reschedule $1 billion owed by Baghdad and
take payment in oil. The oil will be valued at
official prices that, in effect, reduce Iraq's obliga-
tion because of the gap between official and
market prices. Other East European countries
may also settle their debts with oil.
In addition to rolling over old loans, Iraq is seeking
new loans to heln tide over until oil revenues rise.
that Iraq is seeking a
medium-term oan or several hundred million dol-
Moreover, Baghdad continues to insist that compa-
nies engaged in development projects either ar-
range financing or accept oil as payment for the
contract
Banking on Oil
We believe lender willingness to provide funds
stems from Iraqi assurances that it will increase oil
exports. ank offi-
cials in West Germany and Japan remain Optimis-
tic about Iraq's eventual ability to pa
US bankers told the US Embassy in Bagh-
dad-they are considering credit offers.
Iraq is determined to increase its oil production and
exports. Iraq's Deputy Petroleum Minister recently
told US diplomats that Iraq will increase its oil
exports to 2 million b/d as quickly as possible with
or without an increase in its 1.2 million b/d OPEC
quota-Iraq consumes about 300,000 b/d. Iraq
currently exports just over 1 million b/d through its
pipeline through Turkey and another 100,000 b/d
by truck through Jordan and Turkey. Iraq plans to
increase exports by 500,000 b/d when its pipeline
through Saudi Arabia reaches full capacity early
next year; as much as 300,000 b/d could be flowing
through the line by October. Moreover, Baghdad
has shown a willingness to sell or barter oil at
whatever price is necessary to move it
Although Baghdad will probably be unable to
export 2 million b/d before 1987, it is pursuing
several means-in addition to the Saudi pipeline- 25X1
that could allow exports of 1.8 million b/d by next
spring. that Bagh- 25X1
dad plans to use drag-reducing chemicals to raise
the flow of oil through the Iraq-Turkey pipeline by 25X1
400,000 b/d. We suspect, however, that Iraq will
not be able to sustain a flow rate increase of more 25X6
than 200,000 b/d, and even this level would risk 25X6
damage to the pumps. Press reports indicate Iraq is
buying more trucks and wishes to expand exports
by an extra 100,000 b/d.
[::Jpriority railway projects under construction in
northern Iraq are for exporting oil to Turkey,
much could be moved by
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Beyond 1986, Baghdad plans additional pipeline
capacity which would permit a total of 3 million
b/d in exports in 1989. (Should the war end, an
additional 1 million b/d could be exported through
the Persian Gulf within six months.) Press reports
indicate that construction should begin this fall on
a second pipeline through Turkey, which will paral-
lel the first and have a capacity of 500,000 b/d.
Construction is expected to take 18 months. The
second phase of Iraq's pipeline through Saudi
Arabia is also moving ahead, and would enable
Iraq to export a total of 1.5 million b/d through
Saudi Arabia by 1989.
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Iraq's drive to increase exports will not stop even if
oil prices fall further. Iraqi officials have said it is
up to others, especially the Saudis, to support oil
prices. Riyadh's declaration that it wotild abandon
its role as OPEC's swing producer if others do not
share the burden of price support, however, makes
it likely that increased Iraqi exports will place
strong downward pressure on oil prices
Despite continued political support of Iraq's war
effort, the level of Arab aid will decline further. We
believe Arab oil aid will average 120,000 b/d next
year despite statements by Kuwait's Oil Minister
that all oil aid would end when the Iraq-Saudi
pipeline opens. We expect that Saudi Arabia will
phase out its bilateral oil aid when the Iraq-Saudi
pipeline approaches full capacity, but Kuwait and
Riyadh will continue providing Neutral Zone oil
aid through the end of 1986. Arab donors, however,
will probably not press Baghdad to repay its huge
debts to them for several years, if ever)
Baghdad should be able to maintain a $15-billion
import level next year as long as there is only a
small decline in oil prices. The 1985 payments gap
was largely closed by rescheduling debts and some
additional credits. We project Iraq will have a
smaller need for rescheduling and new credits next
year-assuming no large fall in oil prices. Nonethe-
less, Baghdad could find it more difficult to re-
schedule payments after promising this year that
such requests were temporary until its new pipeline
was finished.
If oil prices fall significantly Iraq's financial posi-
tion would deteriorate sharply. Faced with even
larger debt payments in 1987, Iraq would face
politically risky import cuts. This would pose a
major dilemma for Saudi Arabia and Kuwait. Both
want to avoid conditions that would threaten the
regime in Baghdad, but with lower oil revenues
they would be tempted to allow Iraq a thinner
economic margin.
With little chance of rapid economic improvement,
we believe Baghdad's frustration over its inability
to bring Iran to accept peace will continue to grow.
Diversification of its export routes and higher
exports may encourage more Iraqi strikes on Irani-
an economic targets, such as Khark Island. More-
over, should Iraq succeed in stopping Iranian oil
exports this would help shore up oil prices and
make room for increased Iraqi exports. Indeed,
Iraq's Oil Minister was quoted last week in the
Iraqi press as saying that the destruction of Khark
would help restore stability to the world oil market.
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Latin America: Faltering
Export Performance
Latin American countries blame their declining
export revenues this year on external factors be-
yond their control, especially low commodity prices
and protectionism. In addition, however, their own
governments' delays in devaluing currencies are
also reducing their competitiveness. The continuing
setbacks in the export markets will lead to slower
economic growth as well as increasing difficulties
in making payments on foreign debts.
Reports from US Embassies indicate that most
Latin American countries suffered declines in ex-
ports during the first half of 1985:
? Mexican exports were down 14 percent from the
same period last year, reflecting the 14-percent
falloff in oil sales and drops in agricultural,
manufacturing, and mining exports.
? Moreover, Venezuela and Ecuador-maintaining
oil prices above world market levels-lost sales,
causing their overall exports to decline.
? A dropoff in key manufactured exports-espe-
cially steel, orange juice, and shoes-left Brazil
with an overall reduction in export earnings of
7 percent.
? Argentine exports fell an estimated 10 percent
amid dropping world grain prices.
The region's smaller debtors recorded export de-
clines of 5 to 10 percent over the period. Based on
official trade statistics, Chile's exports fell 7 per-
cent while Peru's were off 5 percent, both victims of
falling fishmeal and copper sales. A drop in prices
for tin and other mineral products contributed to
Bolivia's export slump
Underlying Factors
Latin American governments have blamed lower
world commodity prices for their drop in export
earnings. According to IMF statistics, overall com-
Key Latin American Debtors:
First Half Export Performance
Billion US $
Percent
Change a
1st Half
1st Half
1984
1985
Brazil
12.5
11.6
-7.3
Mexico
12.8
11.0
-14.0
Argentina
4.6
4.1
-10.0
Venezuela
8.0
6.5
18.2
Chile
2.0
1.9
-6.6
Peru
1.5
1.5
-5.0
modity prices fell nearly 13 percent in the first
quarter of 1985 from the same period last year.
Additionally, financial press reports indicate the
strong dollar-to which Latin American countries
peg their exchange rates-is responsible for the
decline in export sales to Western Europe and
Japan. Moreover, sales to the United States have
leveled off-after brisk increases last year_25X1
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While terms of trade have moved against Latin
debtors, their trade policies also have contributed to
the export decline. US Embassy reports indicate
that some of the region's debtors are slowing
devaluations in an attempt to suppress domestic
inflation, and these policies are undermining their
export competitiveness. Although Mexico, Argenti-
na, and Chile depend on periodic minidevaluations
to try to keep their exchange rates in line with
domestic inflation, they have decreased their daily
rate of depreciation to moderate the impact of
import price increases on the cost of living. Similar-
ly, Brazil and Peru have slowed the pace of their
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devaluations in 1985, in an effort to match domes- International Commodity Prices
tic inflation. Bolivia's failure to devalue, in the face
of raging inflation, has left its exchange rate
substantially overvalued as measured by the premi-
um the dollar fetches in the black market.- Note scale change
All commodities
Thus far, the Latin American debtors have covered Index: 1980=100
their export shortfalls primarily by reducing im- 100
ports and drawing down reserves. On the basis of
US Embassy reports, Mexico drew down $3 billion za
or 35 percent of its gross reserves in the first half of 90-
this year, while Chile tapped $500 million. Brazil,
Peru, and Colombia have adjusted their external
accounts by reducing imports. In addition, the drop
in world interest rates to a seven-year low has saved 80
the major debtors $2.0-2.5 billion in service pay-
ments this year and thus helped prevent export
losses from translating into resurgent cash prob- 70
lems.
With the major forecasting services projecting sim-
ilar world economic trends for the second half of
this year, we believe Latin exports will continue to
falter. We now project that the current account
position of the key Latin American debtors' will
swing from a $3.7 billion surplus in 1984 to a
$6.3 billion deficit this year. In the face of this
large deterioration in the payments postion we
believe some debtors will be unable to rely on
reserve drawdowns and import cuts because such
policies have drawn increasing fire from domestic
sectors already upset over slowing economic
growth. This discontent will likely encourage pres-
sures for additional debt relief. For example, press
reports indicate Mexico will approach bankers for
another rescheduling by the end of the year.
Argentina and several
other countries already are recommending that the
Cartagena group push for an interest capping or
relending scheme to take the debt reform initiative
away from Castro.
For the longer run, some countries are beginning to
recognize that, as has been the case historically,
Copper
US $ per pound
Petroleum
US S per barrel
Wheat
US S per bushel
Coffee
US S per pound
Fishmeal
US S per metric ton
500
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export promotion policies could again be an engine
for economic growth and financial solvency. Sever-
al governments are moving to provide new incen-
tives to exporters. Argentina has announced it will
reduce or remove some export taxes, and Chile has
revitalized its export promotion efforts. Meanwhile,
Peru and Mexico recently have announced more
aggressive exchange rate policies, while the new
Bolivian Government is promising massive devalua-
tions to revive exports. Nevertheless, in our view,
heightened concern over controlling inflation and
the backlash from competing domestic interests
probably will lead Latin governments to backpedal
on these efforts at trade reform. As a result,
halfhearted efforts will fail to stem the export
decline and will leave Latin debtors vulnerable to a
resurgence of debt servicing difficulties
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Portugal: Economic Problems
Persist
Austerity measures introduced under the IMF's
guidance during 1983-84 cut Portugal's current
account deficit-from $3.2 billion in 1982 to about
$500 million last year-but serious structural prob-
lems remain. The collapse of the coalition govern-
ment in June, parliamentary elections this fall, and
campaigning for the presidential elections in 1986
make it almost certain that Lisbon will be unable to
adopt economic reforms necessary to continue the
improvement in its international financial position.
Belt-Tightening Under the IMF
The Soares government negotiated a $480 million
standby program with the IMF in 1983 after hard
currency reserves dwindled to less than two weeks
of imports. The new IMF standby program aimed
primarily at curbing domestic demand and spurring
exports. Prodded by the Fund, Lisbon devalued the
escudo 12 percent in June 1983, after a 2-percent
devaluation three months earlier. The terms of the
program obliged Lisbon to slash the combined
budget deficit of the government and public-sector
enterprises, slow domestic credit growth, hold down
public-sector wage increases, and raise interest
rates and prices of subsidized goods. The govern-
ment also promised to trim investment by state-
owned companies, curb their borrowing needs, tie
budgetary subsidies to restructuring programs, and
undertake a structural adjustment program with
the World Bank.
In response to the austerity measures, Lisbon's
trade deficit shrank by more than one-half during
1983-84, with a fall in imports accounting for most
of this improvement. A cumulative 26-percent drop
in import-intensive real gross fixed capital forma-
tion resulted from tighter fiscal and monetary
policies and difficulties in borrowing abroad. The
steep decline in real wages also curtailed import
demand. At the same time, lower real wages,
devaluation, and an upturn in world trade fueled a
32-percent increase in export volume during 1983-
84.F___1
Despite a good showing on the current account,
fundamental problems continue to plague the large
state-owned sector of the economy. Lisbon has yet
to correct the damage done to public-sector en-
terprises' financial positions through misguided
government policies. These firms account for 18
percent of gross fixed capital formation, 14 percent
of value added, and 40 percent of domestic borrow-
ing. The government now owes these companies
$2.5 billion-equivalent to nearly 13 percent of
Portugal's GDP. Back payments owed to the state
electricity company alone account for about $1
billion. The remainder primarily represents back
payments owed by the Supply Fund. The Supply
Fund is designed to subsidize public enterprises by
using revenues from taxes on petroleum products to
pay state firms the difference between domestic
controlled prices and the actual cost of purchasing
or producing goods. As the planned subsidies under
this scheme far outstripped tax revenues, the Sup-
ply Fund quickly accumulated a huge debt to state
enterprises.F_~
According to World Bank estimates, the public-
sector enterprises themselves have amassed another
$1.2 billion in arrears to nationalized banks, the
private sector, and other government entities. These
arrears have, in turn, weakened private-sector
firms' finances. Domestic borrowing by state com-
panies has been partly to blame for Lisbon's failure
to comply with the IMF's ceiling on public-sector
domestic credit growth, and the crowding out of
private-sector investment.
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Portugal: Economic Indicators
In addition, state enterprises have been hurt by
inappropriate borrowing, pricing, and investment
decisions. Previous governments used state enter-
prises as a front for current account financing by
compelling these firms to borrow beyond their own
needs and obtain short-term loans to finance essen-
tial imports such as food and petroleum. As a
result, state firms' borrowing accounted for more
than half of the growth of foreign debt, which more
than doubled as a share of GDP during 1980-84 to
78 percent. Four import monopolies hold nearly 90
percent of Portugal's short-term debt and all but
one are suffering liquidity problems. Another half
dozen firms-including the national steel company,
a shipbuilding firm, and the national airline-are
in an even more precarious situation as a result of
overambitious investment projects, rising labor
costs, and price hikes inadequate to cover produc-
tion costs.
Lisbon has made only limited progress in paring the
combined budget deficits of the government and
state enterprises; last year the deficit jumped back
to 17 percent of GDP from 15 percent in 1983
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Portugal: Current Account, 1980-85
-1,251
-2,850
-3,245
-1,640
-472
-500
-4,206
-5,194
-4,833
-3,076
-2,029
-1,850
4,575
4,088
4,108
4,569
5,210
5,350
8,781
9,282
8,941
7,645
7,239
7,200
-45
-544
-1,092
-735
-638
-650
Net tourism
859
777
609
591
724
750
Interest payments
733
1,109
1,370
1,196
1,348
1,400
Transfers, net
3,000
2,888
2,680
2,171
2,195
2,000
Of which:
a Preliminary.
b Projected.
because of rising subsidies to state-owned firms and
shortfalls in tax revenues. A decision to postpone
introducing the valued-added tax and the govern-
ment's failure to cut investment programs in state
enterprises-particularly in the electricity compa-
ny-almost certainly will raise the deficit.
The agricultural sector is increasingly adding to
Portugal's foreign payments problems as well.
Yields have fallen since the 1974 revolution be-
cause of land seizures, uncertainties of property
ownership, and drought. The country is now highly
dependent on imported food even though about
one-fifth of the population is employed in the farm
sector. Since 1973, production of wheat and rice
has dropped 20 percent, and grain imports have
doubled to 12 percent of total imports. Purchases of
foreign grain now account for 69 percent of total
food imports, as compared with 46 percent in 1973.
Entry into the EC is certain to boost the cost of
Portugal's agricultural imports. While Lisbon cur-
rently imports nearly all its grain from non-EC
countries, it has agreed to purchase 15 percent
from more expensive EC suppliers during the first
five years of membership. Afterwards, the Commu-
nity preference system will come into effect, oblig-
ing the Portuguese to apply import levies on agri-
cultural imports from third countries to raise prices
to the EC level-and to transfer the levies to the 25X1
EC. These levies could amount to $125 million per
year for corn imports alone, according to World
Bank estimates
The Soares government initially moved quickly to
introduce reforms in compliance with its IMF
program. Lisbon began to reform its Byzantine tax
system and inefficient labor market, drew up a plan
to restructure the financial system, and announced
concrete steps to redress the financial straits of
some public-sector enterprises-such as laying off
workers at a loss-making shipyard and scaling back
investment plans for the state steel plant. The
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program, however, has lost momentum amid inter-
nal political squabbles and disagreements on eco-
nomic policy. In particular, Soares' own Socialist
party has been reluctant to support measures that
might cut into its working-class support. Negotia-
tions with the World Bank for a structural adjust-
ment loan have stalled because of opposition to the
Bank's demands for institutional reform and the
government's failure to repay arrears to the state
electricity company. Decisions on agricultural de-
velopment programs and agrarian and labor reform
bills also have been paralyzed by the unraveling of
the coalition.
We expect little progress in the near term on
Portugal's structural economic problems either un-
der the caretaker government or the next govern-
ment-elections will be held this fall. The new
government will almost certainly be reluctant to
address the problem of overstaffing in state enter-
prises as have been past governments. Hiring at
state firms since the 1974 revolution has reflected
political needs and has been aimed at keeping
employment pressures-created by the return of an
estimated 700,000 expatriates from Portugal's for-
mer African colonies-within acceptable levels. To
eliminate surplus labor, the World Bank reckons
public-sector firms would have to shed between 10
and 40 percent of their workforce. We expect that
layoffs of this magnitude would generate more
political heat than any political party would be
willing to face. Lisbon is unlikely to make much
headway in reforming the agricultural sector be-
cause of its poor record of utilization of World
Bank agricultural credits, limited ability to provide
matching funds to obtain EC regional development
aid, and Communist opposition to reform in the
south
other hand, the difficult financial position of many
firms and crowding out by public-sector enterprises
suggest that investment will decline slightly.
Financial Implications
Although the recovery this year probably will hold
the current account deficit to about $500 million,
Lisbon is likely to face a new round of foreign
payments problems, perhaps as early as 1986. A
generally expected slowdown in world trade and a
tax on emigrants' deposits almost certainly will
lead to slackening exports and declining worker
remittances. EC accession next year probably will
cause Portugal's trade deficit to widen because of a
shift to higher priced EC cereals and the effects of
phasing out nontariff barriers and lowering high
tariffs on competitive Spanish goods. Because of
delays in program approval and domestic budget-
ary strains, we expect Portugal to be unable to
obtain enough regional aid from the EC to offset
the increase in its import bill. If Lisbon primes the
pump before the elections as we expect, looser fiscal
policy will aggravate this trend because Portuguese
import demand is highly sensitive to changes in
income.
According to the Embassy, the IMF anticipates a
deterioration of Portugal's current account deficit
that will be serious enough to prompt Lisbon to
seek another IMF program. The Embassy reports
that Fund officials are willing to provide assistance
again, despite Portugal's failure to abide by domes-
tic credit limits during each of its standby pro-
grams since 1977. The next stabilization program is
more likely to be an extended three-year program
to address Portugal's structural economic problems.
They would require a less severe tightening of
domestic demand but would probably give the
Fund more leverage in encouraging economic re-
forms
Portugal's economy probably will show only a few
bright spots this year. Real GDP growth is likely to
pick up to about 1 percent, compared with a 2-
percent decline last year, mainly because of a gain
in both private and public consumption. Inflation is
expected to drop from 29 percent to 20 percent and
real wages should rise about 2 percent. On the
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World Gas
Production Rises
Briefs
Energy
customers and the stretchout of deliveries to France.
World gas production in 1984 rose nine percent over 1983 levels to a record 1.7
trillion cubic meters. The USSR continued as the largest producer-587
billion cubic meters (bcm)-and the largest exporter-68 bcm. Of total world
production, about 200 bcm was traded internationally by pipeline or as
liquefied natural gas (LNG). Pipeline trade rose 8 percent, mainly due to
increased sales by the USSR. Continental West European countries received
about 32 bcm of Soviet gas in 1984, or nearly 20 percent of their total gas con-
sumption. LNG trade rose by 16 percent to 48 bcm, and Indonesia replaced
Algeria as the leading LNG exporter. Increased deliveries to Japan from
Indonesia and Malaysia more than offset reduced Algerian LNG sales to US
South A rican US Embassy sources report concern over political uncertainties in South
Financial Problems Africa has led many West European, Japanese, and US banks to reduce the
reluctance by bankers to extend maturing loans and provide short-term credit
could soon result in unmanageable financial strains. Pretoria probably would
be forced to approach the IMF for assistance, a move that would trigger strong
international opposition. 25X1
on major US banks, A growing 25X1
availability of short-term credit and to demand repayment of most existing
loans as they come due. South Africa reportedly has some $7 billion in loans
due for payment in the next six months. Even with a prospective current 25X1
account surplus, Pretoria has only about $500 million in liquid assets and
$2 billion in gold holdings, according to recent IMF data. South African banks
had been turning to European banks to diversify away from a heavy reliance
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Foreign Bank
Branch in China
French Export Credit
Program Overhaul
influence of, foreign banks.
Beijing has announced that it will allow a Hong Kong bank to be the first for-
eign bank to establish a branch in China since 1949. The branch, to be opened
in the Shenzhen Special Economic Zone, will provide foreign exchange loans,
handle foreign trade transactions, and offer foreign currency deposits to
foreigners. The branch must follow strict state guidelines in setting interest
rates on loans and deposits, however, and can offer foreign currency only at the
Chinese official exchange rate. Other banks reportedly are interested in
establishing branches in the Special Economic Zones, and Beijing is likely to
grant approval soon. Many foreign bankers remain wary, however, because of
restrictions on bank activities and potential problems in remitting foreign
currency earnings. Beijing may hope that, by limiting foreign banks branches
to the Special Economic Zones, it can gain experience from, while limiting the
France is considering a major overhaul of its export credit program to reduce
the cost of export subsidies to the budget, according to the US Embassy.
Finance Minister Beregovoy would also like to simplify and give a market
orientation to France's export programs, as well as increase autonomy for the
banks and exporters in export finance. Beregovoy intends to announce the
changes in the coming weeks. While details are lacking, the mixed credit
program apparently will remain. France may wish to avoid discussing subsidy
reduction at the 16-20 September OECD Export Credit Group meeting in
Paris until the final decision on the future of its export credit program is made.
West European France, West Germany, and the United Kingdom are coordinating more
Progress on EUREKA closely on EUREKA-Western Europe's initiative on civilian high-technology
research-in anticipation of the meeting of West European foreign and
research ministers on 5 and 6 November. French and West German research
experts will meet next week to discuss possible projects. In the near future
London will host a conference of financial experts from West European
industry. According to press reports, Paris will appoint Yves Sillard, a former
head of its space agency, to organize EUREKA activities in France. Bonn and
Paris undoubtedly wish to avoid additional discord and delays at the Novem-
ber meeting by sorting out beforehand a list of EUREKA projects on which
participating governments can move ahead quickly. With EC and national
research budgets already strapped, the British probably hope their conference
J
Secret
30 August 1985
Global and Regional Developments
will stimulate private funding and test industry's support for EUREKA
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N
Tough Talk on UK
Energy Technology
Policy
Spain to Maintain
Austerity
economic growth accelerated. Nonetheless, the anticipated pickup in the US
economy later this year should help Canadian exports and thereby ensure that
Canada will achieve a record surplus with the United States for 1985 as a
whol
ture licensing rounds
In remarks probably reflecting London's position, a British Energy Depart-
ment official reiterated to US Embassy officers last week that the policy-
which favors British-based firms in granting contracts for technology used in
offshore oil and gas development-does not discriminate against US firms. He
said London wants the "new" technologies-required for the development of
deepwater and marginal North Sea fields-to be centered in UK-controlled
firms to foster a competitive British offshore services industry. The official
admitted, however, that the British also want to place technology "outside the
umbrella of US Government extraterritorial reach." He said he understands
US firms are amenable to forming joint ventures with British partners in order
to meet London's goal. He stressed that US Government efforts to challenge
the policy at an OECD committee meeting next month would harden the
British position. The EC Commission raised the issue of discrimination against
non-British firms with London earlier this summer, but apparently has for the
moment been appeased by promises to change the wording of guidelines for fu-
Madrid's draft budget proposal for 1986 reflects Finance Minister Solchaga's
intention to adhere to the austerity program launched in 1982. Government
spending is targeted to fall about 1 percent in real terms, assuming an
8-percent inflation rate next year. To curb expenditures, Madrid plans to cut
real public-sector wages, pare down government employment and lower
23 Secret
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 interest payments on public debt. It may also raise workers' contributions to
social security. The government estimates revenues will increase 4.6 percent in
real terms, based on real GDP growth of 2.5 percent. According to these
projections, the budget deficit will fall to 4.3 percent of GDP, versus
4.5 percent this year. Although this plan almost certainly will generate
criticism within the Socialist party-particularly because it could cost votes in
next year's general election-we expect few changes in the final version of the
budget
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Por guese
9 T ecommunications
ontroversy
Lisbon's exclusion of ITT and-AT&T from the last stage of negotiations for a
$1-2 billion telecommunications project has caused a dispute that will likely
force the government to reconsider its decision. Portuguese officials limited
final bidding-to supply a digital exchange system for the nation's telephone
network-to Siemens of West Germany and CIT/Alcatel/Thompson of
France because their bids were 40 to 50 percent lower than US bids. The US
firms were suspicious of the European cost calculations and have called for an
independent audit. At the same time, they have sought US embassy help to
pressure Lisbon into reopening the negotiations. Although far from settled, the
controversy is unfolding in a favorable direction for the US companies. The in-
ternal battle among ministers in the caretaker Socialist-Social Democratic
government will likely postpone the contract award until after the October
legislative elections which will increase the chances of the new government
reopening the competition to all four firms.
Less Developed Countries
2hanges in Brazil's President Sarney's naming of Dilson Funaro to replace Finance Minister
Economic Team Dornelles probably will prove popular at home but is likely to heighten
alvadoran
Private-Sec
difficulties with creditors abroad. The press reports that Funaro is an associate
of Planning Minister Sayad, who has opposed tough austerity measures.
Funaro is a supporter of private enterprise and has criticized IMF policies as
harmful to Brazil's interests. The new appointments almost certainly will make
already stalemated negotiations with the IMF more difficult and will reduce
the chances for an early agreement on bank debt rescheduling. Sarney's
continued opposition to tight austerity measures probably will boost his
popular standing before the November elections. By selecting his own Finance
Minister, Sarney has gotten a tighter grip on the Cabinet and will strengthen
Sarney's standing with the Brazilian tic Movement Party, the senior
partner in the coalition government.
President Duarte's already strained relations with the private sector have
tor Unrest worsened following recent decrees that restrict profits on food items, pharma-
ceuticals, and auto parts. The business community has threatened a general
strike over what they claim are new precedents for government intervention in
the economy. In an effort to defuse the situation, Duarte suspended the decree
for a 15-day cooling-off period and is meeting with private-sector representa-
tives to discuss ways to make the profit margin controls more palatable. Deep
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Secret
divisions over principle remain, however. Even if a compromise is reached,
serious damage has been done to the improving investment climate that was
helping to sustain the tentative economic recovery begun last year. 25X1
Libyan Agriculture The sharply reduced flow of US parts and expertise to Libya since the 1982
Hurt by US Embargo US trade embargo has had its greatest impact on Tripoli's priority agricultural
percent at some facilities since 1982 because of poor nutrition maintenance, a
service formerly provided by US agricultural technicians 125X1
Libya may increase the 400,000 b/d of oil set aside for barter purchases 25X1
of-equipment and expertise-especially from Austrian, French, and Spanish
firms. says that Libya plans a joint 25X1
venture facility to produce up to 500 pivot units annually which would require
US-origin computer hardware and software. Tripoli will probably be even
more aggressive in looking for ways to circumvent n providing
agricultural spare parts and technical assistance 25X1
Libyan-Maltese Economic benefits anticipated by both Tripoli and Valletta from various
Maneuvering Continues technical and financial arrangements have not materialized, 25X1
The US Embassy in Valletta reports that Tripoli has 25X1
supp ie a large part of Malta's crude oil needs at concessional rates and is
providing some jobs in Libya and work for the nation's depressed shipyards. 25X1
The Maltese, however, are not satisfied. Meanwhile, the Libyans are dis-
tressed over Prime Minister Bonnici's resistance to Qadhafi's requests for
expanded military ties. Nevertheless, Bonnici probably will try to extract more
economic benefits from Qadhafi, primarily to reduce Valletta's burdensome
unemployment problem before elections scheduled for 1987. Qadhafi will
continue the relationship as long as he perceives a chance for a Libyan military
presence on the island to enhance Tripoli's ability to monitor US military
activities in the central Mediterranean. 25X1
unisia Revises Tunis is expanding government control over all imports in its drive to contain
V Import Policy
development program, In great 25X1
demand is US expertise on large, pivot irrigation systems, essential to reverse
declining productivity in desert areas. Dairy herd losses have exceeded 50 25X1
Bourguiba's successor.
burdensome trade and budget deficits. Tunis anticipates that the new regula-
tions will trim $100 million off the projected $720 million current account
deficit. The US Embassy reports that the government hopes to forestall
devaluation of the dinar, a measure which many Tunisian officials advocate as
a more direct, and ultimately necessary, means of dealing with the deficits.
Regulatory officials, however, have no clear directions on policy implementa-
tion. Trade controls in place since April already have resulted in businessmen
criticizing Prime Minister Mzali's economic management. Additional restric-
tions almost certainly will further alienate wealthy and middle-class Tunisians,
a key political constituency for Mzali if he is to emerge as President
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audi Arabia
Delinquent on French
Arms Payments
This has led to a slowing of construction and training
activity. operations at some facilities have been
limited and that no agreement is in place for long-term maintenance support
from France. The Navy has been hard hit by defense budget cuts
however, is unlikely to curtail its arms sales programs because of the funding
constraints.)
Soviets Increase
Control Over
Afghanistan's
Civilian Airlines
Soviet pressure has resulted in the merger of Afghanistan's international
carrier, Ariana, with the domestic line, Bakhtar. The newly formed airline will
be under direct government control and will be headed by the former president
of Bakhtar. Afghanistan sold its DC-10 last spring and is now negotiating the
sale of its remaining Western aircraft, two Boeing 727s
they will be replaced by Soviet TU-154s. This will provide Afghanistan some
hard currency, remove the embarrassment of Western aircraft in a state run
enterprise, and allow the Soviets to more closely control the airline. Flight
crews for the new Soviet aircraft are reportedly carefully screened by the
Afghan intelligence service and given heavy doses of indoctrination to reduce
defections. These changes are not likely to have any effect on the Western
sanctions on Afghan aviation imposed in response to the 1981 hijacking of a
PIA flight to Kabul.
aiwan's New
I'lF Minister
Robert Chien became Taiwan's new Finance Minister last week following the
resignation of Loh Jen-kong. The Ministry's mishandling of what may be
Taiwan's worst financial scandal-the failure of the Tenth Credit Cooperative
bank and related businesses of the Cathay Group earlier this year-had been
widely criticized. Before Chien's appointment, a senior Kuomintung official
told AIT officers that Chien himself might be "slightly tainted" by the
scandal, but that his conservatism and close ties to the Prime Minister clearly
made him the front-runner. Chien, a 15-year veteran of the Central Bank, now
faces the difficult task of trying to resolve the still unfolding scandal. He will
probably move cautiously on reform of Taiwan's financial structure. He
advocates tight restrictions on personal and business credit and a strong link
between the dollar and Taiwan's currency. Chien, 56, is the older brother of
Fred Chien, Taiwan's unofficial representative in Washington
I/
Soviets Order
J US Wheat ,
Secret
30 August 1985
the Soviets have ordered 600,000 metric
tons of US wheat, reportedly worth about $77 million and scheduled for
delivery between late September and November Moscow
will take advantage of depressed US wheat prices to meet and exceed their
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outstanding obligations under the Long-Term Grain Agreement. The Soviets
have not purchased US wheat since March 1985, but, to meet their obliga-
tions, they would have to buy another 500,000 tons and ship the entire 1.1 mil-
lion tons by 30 September. The Soviets have cited the relatively high price as a
reason for their reluctance to buy US wheat. Nonetheless, the stated price on
this grain is substantially above prices the Soviets have recently paid for
vSoviet Contract for received a contract to provide process technology and engineering services for a
Coal Slurry Pipeline 250-km coal-slurry pipeline in the USSR. The pipeline project-reportedly
Italian Firm Wins According to a Western news service, the Italian firm Snamprogetti Spa has
valued at about $250 million-will transport 3 million metric tons of coal
annually from a mine in the Kuznetsk coal basin to a power plant in
Novosibirsk. Although the Soviets have been working on developing coal- 25X1
slurry technology since 1978, they lack the necessary expertise in all major
aspects of direct-burning, coal-slurry pipeline systems. Direct burning of coal
slurry requires state-of-the-art technology, and long-distance transport has not
been demonstrated on a commercial scale. if the 25X1
technology proves economically and technically easa e, t e USSR may
undertake the construction of a high-capacity (25 million tons-per-year) coal-
slurry pipeline from the Kuznetsk coal basin to the Urals and European
USSR 25X1
French wheat
supplies.
. 25X1
China Plans Joint China's Ministry of Petroleum, a US firm, and a Chinese-controlled Hong
Computer Center in Kong electronics company have agreed to set up a computer center in Hong
Hong Kong Kon to process seismic data for China's petroleum industr 25X1
Th
t i
l
fi
IBM 3083
i
f
t
hi
h LbX1
j
e pro
nvo
ves
ve
ma
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rame compu
ers, w
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ec
1X"1
27 Secret
30 August 1985
prospects for
East European
Grain reduction
Grain production for the region this year is estimated at 104 million metric
tons, the fourth consecutive good crop. Poland, East Germany, and Czechoslo-
vakia are expected to have bumper crops. Growing conditions have been less
favorable in Hungary and Yugoslavia, but above-average harvests are still
within reach. In contrast, Romania and Bulgaria are headed for below-average
grain production. Prolonged drought in both countries heavily damaged winter 25X1
grains and has reduced prospects for corn. The successful harvests should
enable the grain-importing northern countries-Poland, East Germany, and
Czechoslovakia-to keep their purchases at the low levels of recent years,
helping to maintain hard currency trade surpluses. For the southern coun-
tries-which push grain exports to earn hard currency-trade prospects are
mixed. Hungary should be able to maintain its grain exports. Yugoslav corn
exports should more than offset the cost of wheat Belgrade may have to buy to
cover a shortfall resulting from the decreased wheat area this year. The US
Embassy in Sofia reports that Bulgaria, usually a wheat exporter, is now trying
to buy wheat. In Romania, lack of credit will limit wheat purchases, while the
disappointing corn crop will reduce exports and further strain domestic
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7
Chinese Computer
Network Planned
are controlled under US and COCOM guidelines. Although the US firm will
own the computers initially that ownership will be
transferred to the Chinese in the future. The partners reportedly selected Hong
Kong as the site to improve prospects for obtaining export licenses, and this is
likely to be an effective means of bypassing export controls.
may, in fact, be directly involved in the rail project
China's Ministry of Railways plans to set up a nationwide computer network
using US equipment and technology. The Ministry reportedly intends to
procure 300 US minicomputers as well as large amounts of networking
equipment and software through a Hong Kong company in which it has
controlling interest. The Ministry is also negotiating for US fiber optics
technology to connect the computers with high-speed data communications
links. Although computerized reservations, scheduling, and track control are
needed to expand rail capacity, this project would also contribute to the
military data communications capabilities. The military would probably
assume control over the railroads' computer network in a time of need and
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Western China Told A recent conference on the development of China's 11 western provinces has
To Speed Development highlighted growing inequities between western and coastal areas. Sparsely
populated, underdeveloped, but'strategically important, China's western re-
gions are languishing under Beijing's current policy of directing development
funds and foreign investment to coastal areas. Beijing is sensitive to criticism
of the growing inequities, but is unwilling to divert scarce central resources ex-
cept for specific energy and transportation projects. Western provinces are
instead being encouraged to use local resources to improve and diversify the re-
gion's livestock-based economies, develop tourism, and increase trade with
coastal areas. Although the region's foreign trade potential is limited, north-
west provinces will benefit from growing cross-border trade with the Soviet
Union. ~hinais also seeking Western assistance to develop the region's oil
reserves.
Secret 28
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