A YEAR LATER: IMPACT OF HIGHER OIL PRICES ON LATIN AMERICA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R002000010023-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 12, 2016
• Document Release Date: May 15, 2000
• Sequence Number: 23
• Content Type: REPORT

C' /~ ~rl? 0 ri o O 64 5 APPr For R eea~ ~ : CIA 09;ypp7109010023-6 API '
C v T I C S~ nN LATI N AMERICA C T
 Approved For Release 2001/09/2
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A Year Later: impact of Higher Oil Prices on
Latin America
-General
1. High oil bills are now creating serious balance--
of-payments problems for the majority of Latin American
countries that are significant oil importers. Most of
their governments are being forced to curb other imports,
slowing economic growth and adding to inflationary
pressurfs. The impact has been the most severe on
Brazil, Chile, Paraguay, Uruguay, the six Central
American countries, and most of the Caribbean countries.
2. The balance of payments impact on the countries
.that supply most of their own petroleum requirements --
.Argentina, Colombia, and Peru --- has been moderate. At
the same time, net oil exporters -- Venezuela, Ecuador,
.Bclivia, and since June, Mexico -- have benefited
substantially from higher prices.
3. During much of 1974, the impact of high oil prices
on the foreign payments positions of-the oil importing
countries was cushioned by booming prices for the region's
major export commodities, such as coffee, grains, and
minerals. Additionally, several countries were able to
obtain loans from the International Monetary Fund (IMF)
Oil Facility to help finance the increased oil costs.
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4. Nevertheless, economic activity was hit by the
high oil bills. Government reliance on curbing oil
consumption through high prices for consumers added to
already severe inflation problems. Economic growth
rates slipped as governments introduced anti-inflation
programs and losses of oil payments from the income
stream began to be felt. The situation worsened in
the second half of the year as recessions in the indus-
trial countries began to reduce world market prices for
the region's exports.
5. During 1975, the depressing effects of higher
oil bills and recessions in the industrial countries
will lead to a further deterioration in the payments
positions of. the oil importing counties. Prices of
many primary commodity exports are continuing to decline,
while prices of imported food and manufactured goods
are likely to remain high. Thus, the governments
probably will have to further reduce raw materials and
capital goods imports needed for economic growth to
maintain essential oil supplies. The outlook for 1975
therefore is for a substantial slowing of economic growth
and rapidly mounting inflationary pressures in the
majority of Latin American countries.
Brazil
6. Brazil's balance of payments deficit is likely
to reach $1.5 billion this year, in contrast to a surplus
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of $2.2 billion in 1973. The trade deficit will exceed
$6.0 billion this year, up from nearly $800 million last
year. Imports are booming because of higher cost oil
and manufacturers efforts to stockpile imported
materials in short supply. At the same time, export
growth has declined to less than 20% in 1974, compared
with 55% last year. Brazil's export performance was
limited by a weakening coffee market, a poor cotton
crop, restrictions on beef exports, and the sale of
most of the soybean crop when prices were at their
lowest for the year. Despite-large capital inflows,
more than $1.0 billion of the country's foreign reserves
will have to be drawn down to finance the current account
deficit. Slower export growth and the dampening impact
of anti-inflation measures has reduced GNP growth to
9%-10$, down from nearly 12% in 1973.
7. The economic growth rate will slow even-more in
1975. Import growth will be curbed severely in order
to prevent a further heavy draw down of foreign reserves.
While export performance should improve because of the
booming sugar market and strong soybean prices, the vital
inflow of foreign capital has faltered badly in recent
months and its outlook for next year is uncertain.
Moreover, interest payments on foreign debt will rise
sharply in 1975 absorbing 3 significant share of the
expected increase in export earnings.
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Chile
8. Record copper production and world prices
combined with rescheduling of foreign debt payments and
a $60 million loan from the IMF Oil Facility are largely
offsetting Chile's sharply higher oil bill this year.
The balance-of-payments deficit, although still $200
million, is the smallest since 1970. Efforts to halt
runaway inflation,- caused in part by higher oil prices,
are hampering economic recovery from the Allende period.
The expected 5% 1974 gain in real GNP will only restore
output to the 1972 level. Next year, lower copper
prices will cause a sharp deterioration in the balance'
of payments. Export earnings could fall by as much as
two-fifths -- if copper prices remain near the present
60 cents per pound -- forcing Santiago to cut back'
imports and thus further slowing economic growth.,
Uruguay
9. Uruguay, among Latin countries, is experiencing
the greatest difficulty financing the higher oil import
bill, although it has received $20 million -- equal to
Beef, the country's majcr export, has been hit by a
Japanese ban on beef imports in February and the European
Economic Community (EC) ban in July. Because of Uruguay's
poop credit rating and limited foreign reserves,
Montevideo is cutting back imports of raw materials and
intermediate goods. Economic activity is not growing and
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may even be declining this year. Next year will bring
little improvement, particularly if the EC retains its
ban on imported beef.
Central America
10. The six Central American countries have
experienced increased balance-of-payments problems
this
year partly because of high oil import bills. Higher
prices for the region's main exports, particularly
coffee and cotton, offset only part of the oil bills.
Despite IMF Oil Facility loans to Costa Rica and
El Salvador, all may well incur payments deficits in
1974. Honduras'econon;ic problems have been compounded
by hurricane damage to bananas, its leading export.
Balance of payments problems probably will become more
severe next year because of continuing high prices for
imported oil and capital goods, although the problems
of.Guatemala and Nicaragua could be eased if cotton
prices remain high. The slowing-of world economic
activity may hit Panama's financial industry in 1975,
reducing previously large capital inflows and factor
receipts.
Caribbean Area
11. The benefits to most.Caribbean sugar and bauxite
producers from strong export markets are offsetting much
of their higher oil bills. The Dominican Republic, for
example, is likely to have a trade surplus, largely
 Approved For Release 2001/09/28 : CIA-RDP85T00875R002000010023-0
reflecting booming sugar prices. -Rising earnings from
bauxite and alumina are boosting foreign exchange
earnings in Jamaica and Guyana. Economic growth in
the Dominican Republic has been strong this year and
could remain so in 1975. On the other hand, domestic
economic problems are offsetting improved exports in
Jamaica and Guyana. Little growth is likely this year
or next. Most of the smaller islanas are having a
difficult time financing higher oil bills. Their sugar
and banana export industries are deciininggor, in some
cases, have been abandoned. 'Moreover, prospects for
tourism next year are dim.
Other Countries
12. Countries that are nearly self-sufficient in
oil -- Argentina, Colombia, and Peru -- are experiencing
little difficulty in financing oil imports. High prices
for major exports, especially in the first half of the
year have boosted foreign exchange earnings, keeping the
oil bill below 12% of projected export earnings. The
net oil exporters -- Venezuela, Ecuador, Bolivia, and
since June, Mexico -- obviously are gaining substantially
from higher foreign exchange earnings. Trinidad and
Tobago and the Netherlands Antilles, which process
imported crude oil for reexport, are benefiting from
higher receipts from oil companies.
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Exploration Activity
13. Greatly increased oil exploration offers
promise for the long-term for several countries but
little relief in '-he near term. Exploration is continuing
in the promising areas east of the Andes Mountains and
one million barrels per day. Stepped up exploration and
maximum development policy, 1975 production could reach
large new fields. If :.he Mexican government adopt; a
Central American coasts, and Mexico recently discovered
and Caribbean. Offshore oil has been found along the
in coastal and offshore areas in the Atlantic, Pacific,
by 35% in 1975 although large imports will still be
development in Brazil is.likely to increase oil output
.required.
14. In contrast, government policies in some
countries are slowing exploration activity. In Venezuela,
proved reserves have been declining because of limited
government exploration and Caracas' unwillingness to
grant new concessions to.private companies. Current
low petroleum prices in Colombia hinder increased exploration
while oil companies await a new price policy.
Additionally, increasingly nationalistic policies in
Ecuador have reduced foreign companies' interct in
exploring for oil.
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higher oil ornatz.on on the impact of
prices o -
n
economy c Par?ormance of Latin
lease contact = "mow . to tion,
. 29 November 1974
(4"
01/09/28: CIA-RDP85T00875R002000010023-0
MEMORANDUM FOR:
Arlington Hall -Ro-an-y~.."Y
,
MOW: 11-25099 D1-5C4
The attached report is i
n response to your
26 November request fcr i
f
DATE)
The attached report is in response to your 15 Nov-
ember request for information on the impact of
higher oil prices on the econanic performance of
Latin American countries. If we can be of further
assistance, please contact our
regional analyst, or me on Code 143, lion 5541.
Latin America Branch
Office of Economic Research
'Central Intelligence Agency
ef, Latin America Branch
Office of Economic Research
Central Intelligence Agency
29 November 1974
DATE)
FORM NO. 'Q' RCPLACES FORM 10.101
1 #ue a?
25X1A
25X1A
 Approved For Release 2001/09/28 : CIA-RDP85T00875R0020000100
Distribution: (S-6645)
:...1;- DIA (LDX)
1 - Department of State, ARA/ECP (LDX)
1 - D/OER
1 - D/D
1 - St/P
1 - NIO/LA
2 - D/LA
OER/D/LA:
:BC/5541 (2 Dec 74)
Approved For Release 2001/09/28 : CIA-RDP85T00875R002000010023-0