SOUTH AMERICA: STRUGGLING WITH DEBT

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• Collection: General CIA Records
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• Document Page Count: 31
• Document Creation Date: December 22, 2016
• Document Release Date: March 29, 2010
• Sequence Number: 1
• Publication Date: April 1, 1984
• Content Type: REPORT

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7 > Intelligence
, F.7
South America:
Struggling With Debt
SL
ALA 84-10036
GI 84-10065
April 1984
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s7` ill Intelligence
South America:
Struggling With Debt
This paper was prepared by
Office of African and Latin American Analysis, with
contributions by
of the Office of
Global Issues. It was coor mated with the Directorate
of Operations. Comments and queries are welcome
and may be directed to the Chief, South America
Division, ALA,
Secret
ALA 84-10036
GI 84-10065
April 1984
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2bAl
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South America:
Struggling With DebtF- 25X1
Key Judgments South American countries face major challenges in obtaining the $62
Information available billion we consider necessary to meet foreign financing obligations this
as of 30 March 1984 year. Unless a high degree of international financial cooperation continues,
was used in this report.
the temporary payments suspensions that are already occurring could grow
into an outright debt repudiation.
In our judgment, the major contentious issues affecting the cooperation of
debtors and creditors will be:
? Political resistance to IMF conditionality, which is already intensifying
in several key countries, including Argentina, Brazil, and Peru.
? Debtor demands to ease the repayment burden, which will be better
coordinated and reinforce tougher bargaining by individual countries,
especially by the Argentines and Ecuadoreans.
? Bank lending, which will be suspended if, as we expect, debtors backslide
on IMF programs.
The current Argentine bank negotiations are bringing these issues into
focus, but the same issues will have to be dealt with in Brazilian and
Peruvian talks later this year.
Our estimates indicate that debtors will be able to manage the liquidity
strains we expect to persist in 1984. Lenders are now moving to provide
loans and refinance debts, although the disbursements of credit will most
likely fall short of South America's new money requirements. Only about
half of what we estimated to be a $13 billion regional requirement for
financing to cover the current account deficit has been met. The greatest
unmet gaps are now in Argentina, Colombia, and Peru.
With limited reserves and heightened resistance to making additional
import cutbacks, we foresee most borrowers again resorting to temporary
payments suspensions to cope with cash strains. The Argentines and
Venezuelans are from one to three months behind in their payments, while
the Brazilians will probably again resort to arrears if cut off from bank
funds. These payments delays will most likely be grudgingly tolerated by
international creditors, although they will create frictions with bankers.
Overall, we believe the region's debtors will remain committed to honoring
external obligations and sustaining necessary adjustments, progress will be
made in refinancing old credits, and liquidity strains will ease. In that
event, we believe headway will have been made toward easing the debt
crisis.
iii Secret
ALA 84-10036
GI 84-10065
April 1984
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Argentina will probably provide the clearest near-term indicator of
whether our moderately optimistic scenario will hold. The Alfonsin
government is facing substantial domestic resistance to austerity and has
become increasingly tough in negotiations with bankers. Although most
bankers now believe the Argentines will compromise, continued intransi-
gence by Buenos Aires in negotiating its debt would cause a financial
impasse, heightening prospects that Argentina might cease all payments, in
essence, a debt repudiation.
In our judgment, Brazil would also probably resort to radical actions later
this year if bankers ceased cooperating with its rescue program. Any
unilateral moves by these two regional leaders would be likely to tempt
Chile, Peru, and Venezuela-all encountering strong domestic pressure to
engineer recovery-to follow, probably causing the rescue programs to
collapse.
The rescue programs could also unravel from external shocks. The
immediate danger is a major jolt to confidence caused by an unanticipated
action on the part of creditors or debtors such as Argentina or Brazil. Even
a modest increase in world interest rates, a slowdown in OECD recovery, or
growing protectionism would pose major dangers. A less likely possibility is
that another sharp cutback in foreign lending-such as occurred in late
1982-would undermine South American political leaders' willingness to
honor their debts. At a minimum, we believe the IMF programs would be
derailed, leading to a cessation of foreign exchange payments from the
region and serious financial losses for US banks. At worst, South American
leaders would repudiate their debts. In any case, the region's problems
would probably spill over to other Third World borrowers, such as Mexico
and Nigeria.
South America's progress, albeit uneven, in resolving its financial plight
will continue to hurt US commercial interests. US banks have some $55
billion in outstanding loans to the region, while US exporters ship some $15
billion in products annually. As the debtors continue their export drive and
the use of foreign exchange controls, Washington is likely to be involved in
increasingly contentious commercial disputes. For the longer run, US
commercial and political interests would be damaged if South America
turns to a new round of import substitution or puts in place trade, finance,
and investment policies that depart substantially from the free market.
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Key Judgments
Financial Adjustments in 1983
Lending Arrangements ' 2
Financing Needs in 1984 6
Signs To Watch
10
Political and Regional Trends
10
Implications for the United States
11
A.
South America's Current Account Adjustments in 1983 and
Plans for 1984
13,
C.
South America's Detailed Current Account Statistics
23
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Table 1.
South America:
Debt Held by US Banks, 1983 a
South America:
Struggling With Debt
Introduction
After a year and a half of international efforts to
battle South American debt problems, controversy
still surrounds the efficacy of the "weapons" used so
far. Most financial analysts acknowledge that the
rescue programs have smoothed initial financial
shocks and prevented the default of any South Ameri-
can debtor in 1983. Others, however, believe that the
present case-by-case approach for treating these debt-
troubled countries is not a solution to the debt crisis
and impinges on longer term issues of concern to US
bankers and businesses
This assessment examines the progress made by South
American countries in managing their payments defi-
cits in 1983 and the role of the new lending and debt
reschedulings by the IMF and commercial banks.' It
discusses debtors' plans for improving external ac-
counts in 1984 and creditor support for these adjust-
ments. It also assesses the likely results of the rescue
programs and the factors that could undermine order-
ly adjustment. Finally, this assessment identifies the
difficulties in resolving the Latin debt crisis and the
risks to the United States if the rescue programs
falter.
Financial Adjustments in 1983
The rescue programs put in place since the debt crisis
hit in 1982 have smoothed initial financial shocks,
reduced payments deficits, and enabled economic
adjustments in the debtor countries to take hold.
While the debtors made impressive current account
progress, the improvements were not enough to bring
deficits in line with new lending and left the region
grappling with tough payments problems.
Payments Improvements. Economic retrenchment, the
gathering momentum of world recovery, and the
application of tight foreign exchange controls enabled
the region, according to our estimates, to reduce its
current account deficit nearly 60 percent to $12.4
billion last year. Despite a 1-percent decline in South
America's exports, the region's trade surplus quadru-
pled to $17 billion. The trade improvements resulted
' This assessment excludes Guyana, Paraguay, Suriname, and
Uruguay because of their relatively smaller debt problems and their
External US Bank
Debt Share
(billion US $) (percent)
Total 220 26
93 24 25X1
18 33
10 35
from a 25-percent cut in imports as a consequence of
the regional economic slowdown, cutbacks in import
financing, and the use of import restraints. Moreover,25X1
the reduction in the six-month London Interbank
Offer Rate (LIBOR), which generally determines the
interest on loans, from an average 13.5 percent in
1982 to 10 percent last year was responsible for a
large share of the nearly $4.6 billion decline in the
service deficit to $29.5 billion. The region's foreign
borrowing requirements, however, declined only 10
percent to $41 billion as the improvements in the 25X1
current account were largely offset by increases in
scheduled principal repayments. 25X1
The payments performance on a country-by-country
basis was uneven (appendix A). Although the major
debtors improved their payments accounts, the small-
er countries suffered setbacks:
? Among the key debtors, Brazil posted one of the
best performances, slashing its current account defi-
cit 60 percent to $6.9 billion. Argentina managed
only a 20-percent reduction to $2 billion.
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Table 2
South America: Foreign
Financing Requirements
In 1982, South American countries encountered se-
vere difficulty in servicing. their combined $220 bil-
lion foreign debt. Reduced export earnings, high
world interest rates, and an abrupt cutback in bank
lending caused severe financial strains for the re-
gion's largest borrowers. Major debt defaults were
avoided, however, with a set of financial rescue
packages coordinated by the IMF.
The Fund thus took the lead in preventing an interna-
tional financial collapse in late 1982. With creditors
demanding that debtor countries submit to IMF
stabilization programs for financial assistance, the
Fund conducted negotiations with Argentina, Brazil,
Chile, Peru, and Ecuador. The IMF became the focal
point for securing cooperation between private banks
and foreign governments and pushed commercial
banks to extend new medium-term loans and re-
schedule maturing debts. The Fund also was instru-
mental in arranging cash transfusions from the Bank
For International Settlements and from the US Gov-
ernment for some of South America's debtors. All the
essential elements came into place to complete the
rescue packages.
Under IMF auspices, most South American debtors
aimed at reducing external deficits and foreign bor-
rowing requirements. By March 1983, Argentina,
Brazil, and Chile joined Peru in making IMF adjust-
ments. In June, Ecuador resolved its differences with
the Fund and qualified for assistance. Some borrow-
ers, however, refused to submit to IMF-backed pro-
grams. The Bolivian Government appears to have
judged itself too weak politically to negotiate an
agreement while Venezuela refused to submit to IMF
discipline in an election year. Colombia did not seek
Fund assistance in 1983, relying instead on tightened
exchange controls to cope with foreign exchange
stringencies.
? South America's largest oil exporters posted striking
gains. Venezuela's current account swung from a
$3.5 billion deficit in 1982 to nearly a $3 billion
surplus last year; Ecuador reduced its payments
deficit 60 percent to $570 million.
4.2
17.1
18.6
57.5
56.9
61.0
20.0
17.9
18.0
37.5
39.0
43.0
Imports
53.3
39.8
42.4
Oil
11.8
9.3
8.5
Nonoil
41.5
30.5
33.9
Net services
-34.1
-29.5
-31.6
Interest payments c
25.2
21.0
23.5
Other
-8.9
-8.5
-8.1
Current account balance
-29.9
-12.4
-13.0
Arrearages
0
3.3
6.8
Scheduled principal repayments
14.9
24.9
41.7
Foreign financing requirements d
44.8
40.6
61.5
a Estimated.
b Projected.
c Scheduled interest payments minus arrears.
d Foreign financing requirements equals current account balance
plus scheduled principal repayments on medium- and long-term
debt plus previous year's arrearages.
? Despite depressed minerals prices, Chile cut its
payments deficit 40 percent to $1.4 billion while
Peru's declined nearly half to $0.9 billion because of
sharp import cuts.
Moving against the trend, Bolivia's current account
deficit widened 20 percent to $375 million and Co-
lombia's jumped 30 percent to a record $3 billion.
Both countries were only partially able to offset sharp
declines in exports by import retrenchments.
Lending Arrangements. While commercial banks re-
scheduled and refinanced old debts, they remained
reluctant to resume large-scale new lending in 1983, a
factor that kept the financial rescue programs on a
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South American Financing Arrangements in 1983
Argentina's creditor banks agreed to a three-part
financing package that included a $1.1 billion bridge
loan, a $1.5 billion medium-term loan, and the
rescheduling of principal falling due in 1983. The
bridging loan and the first tranche of the medium-
term loan were disbursed, but the rescheduling of
maturing public-sector debt has not been completed.
In addition, the IMF and foreign banks have post-
poned the disbursement of $1 billion each, leadin to
the current difficulties in financial negotiations.
however, causing Brazil's foreign exchange situation
to remain difficult for most of 1983.
Brazil initiated discussions with international banks
in late 1982 to request a four-part package. In
February 1983, Brazil's creditor banks agreed to
provide $4.4 billion in new medium-term loans and to
refinance about $4.8 billion of 1983 maturities.
Moreover, Brazil requested the rollover of $8.8 bil-
lion in trade-related debt and the reestablishment of
about $10.8 billion in interbank lines. Short-term
financing fell below these proposed levels,
knife edge. Because voluntary lending was negligible
and export recovery slower than expected, South
American debtors were plagued by cash strains
throughout 1983.
Nearly all of the South American borrowers that
raised new loans did so only in connection with IMF
packages. Although foreign banks committed over
$8 billion under these programs, the funds were
disbursed unevenly during the year because they were
tied to compliance with quarterly IMF performance
reviews. Noncompliance with Fund programs resulted
in a cutoff of disbursements for Brazil in May 1983,
Argentina in August and November, and Peru last
September and December. With scant foreign ex-
change reserves, these debtors had little choice but to
make even deeper economic and import retrench-
ments and delay payments on a selective basis. F_-]
Arrearages-in effect a type of forced lending from
banks-were used to defer immediate cash needs.
Consequently, South American countries are now
nearly $7 billion behind in payments, according to
estimates developed from press and US Embassy
Chile obtained a $1.3 billion medium-term loan from
commercial banks and refinanced about $1.3 billion
in short-term debt in July 1983. Creditor banks also
agreed to reschedule over $2 billion of public and
private debt due in 1983 and 1984. Bank disburse-
ments had been held up as rescheduling negotiations
dragged.
Peru signed an agreement in June 1983 with foreign
banks for an $830 million financial rescue package, 25X1
which included $380 million to pay off debt maturing
between March 1983 and March 1984 and $450
million in new money to balance its foreign accounts.
Two bank disbursements of $100 million each were
not released because of Peru's noncompliance with its.
IMF program.
reporting. Press reports indicate the Argentines owe
nearly $3 billion in public- and private-sector debt
payments, and banking sources indicate the Brazilians
are more than $2 billion behind in debt servicing and
import payments. Embassy sources indi-
cate Venezuela's private sector has nearly $1 billion
outstanding to creditors while Ecuador and Bolivia
together have another $1 billion past due.
The Costs. The external improvements exacted high
political and social costs. Import retrenchments and
tough exchange controls have contributed to recession
everywhere in the region except Colombia and Argen-
tina. According to Embassy and press sources, the
decline in economic activity-measured by trends in
real gross national product-in 1983 ranged from 1
percent in Chile to 12 percent in Peru and Bolivia.
Moreover, economic adjustments-such as devalua-
tions and removal of subsidies-caused more inflation
than Latin leaders expected. The consequent decline
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in real wages accompanied by growing unemployment
squeezed living standards, intensifying social strains
throughout much of the region. Growing popular
discontent, manifested by protests against austerity in
Brazil, Chile, Peru, and Argentina, created further
political problems in implementing adjustment pro-
grams.
The Challenge
This year, the IMF must delicately try to maintain
the cooperation of both debtors and creditors when
both sides apparently feel they are reaching the limits
of flexibility. The financial rescue strategy continues
to rely on the case-by-case approach for treating the
debt-troubled countries (appendix B), and bankers are
again looking to the Fund to oversee the needed
reforms in return for financial assistance. Although
less restrictive adjustment programs would meet the
.political needs of the debtors, they could fall short of
what lenders view as minimally acceptable, causing
another credit contraction.
South American political leaders are intensifying
pressure on creditors to ease the adjustment burden.
For example, the participants at the conference of the
Economic Commission for Latin America in Quito in
January called on the IMF to soften conditionality.
According to recent Embassy reports, the Venezue-
lans and Colombians have joined the Argentines in
issuing joint communiques urging lenders to demon-
strate flexibility in the adjustment programs.
An increasing number of South American debtors are
also voicing opposition to the high interest rates and
front-end fees charged by banks for new and restruc-
tured loans. We calculate that interest payments
alone will claim nearly 40 percent of the region's
exports earnings for the second consecutive year. At
the Quito conference, according to an Embassy re-
port, the participants proposed longer grace periods
and reduced interest rates that would be compatible
Hurdles. The financial position of most South Ameri-
can debtors remains precarious, according to
Embassy reports. We estimate South America
will probably require nearly $62 billion to meet
foreign financing requirements in 1984. The Argen-
tines are getting tougher with bankers to get them to
release embargoed loans necessary to repay arrears
and to obtain better terms. Venezuela is at an impasse
in its debt reschedulings, while Ecuador is having
difficulty convincing bankers to make new credits
available. Continuing the trend of last year, Colombia
is encountering growing resistance this year to its
borrowing requests that are likely to result in some
debt servicing disruptions in the months ahead.
Embassy, I sources anticipate
tough problems for financial negotiations. In our
opinion, the major financial hurdles are:
Meeting past-due interest payments and negotiating
a revised IMF agreement for Argentina; these are
essential to progress in rescheduling loans, obtaining
new money, and defusing the tensions surrounding
the current talks with bankers.
o Negotiating new money for Ecuador and Peru.
Working around Bolivian, Colombian, and Venezu-
elan unwillingness to submit to adjustment pro-
grams because of domestic political problems.
Incentives. Bankers are negotiating agreements to
reschedule debts and provide new funds to South
America. open sources
indicate that international lenders agree that they
must continue financial support to:
c Enhance the ability of the borrowers to repay debt
by rescheduling and providing new money.
c Maintain the willingness of South American politi-
cal leaders to honor debt obligations by easing the
external constraints to domestic recovery.
e Encourage the debtors to continue the stabilization
programs necessary to restore a healthy economy
and reduce future borrowing requirements.
Indicative of this mood is banker willingness to lower
interest spreads and extend repayment periods for
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South America: Outstanding Debta
I I I I I I I I I I I I I I I I I I I I
70 1980 81 82 83 84 20 1980 81 82 83 84 22 1980 81 82 83 84 8 1980 81 82 83 84
I I I I I I I I I I I I
1980 81 82 83 84 6 1980 81 82 83 84 4 1980 81 82 83 84 1.5 1980 81 82 83 84
a Medium- and long-term debt held by the
public and private sectors.
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Brazil and Ecuador in rescheduling agreements con-
cluded earlier this year. Despite Argentina's hardline
rhetoric, bankers continue to seek compromises to
keep the financial negotiations on track. Moreover,
Chile's creditors , have
agreed in principle to provide some $800 million in
fresh credits this year
The leaders of the large debtor countries generally
support the overall objectives of the financial rescue
programs
Qnost leaders recognize the need to retain access
to world capital markets to secure necessary trade
credits and future development loans, and to pay for
technology transfers. Beyond this, the rescheduling of
maturing debts is reducing immediate repayments
obligations. Moreover, the economic adjustments, al-
beit painful, appear to be improving fiscal and mone-
tary discipline and rooting out distortions in price and
resource allocations-steps that are necessary to lay
the foundations for economic improvements through-
out the region.
Pressure Points. These incentives to cooperate are
partly offset by political resistance to austerity in
most of South America, making some backsliding on
Embassy
reports indicate that Peruvian President Belaunde will
have difficulty complying with IMF adjustments with
elections scheduled for 1985 and his political position
substantially eroded. Argentina's newly elected gov-
ernment is also under pressure to drive a-hard bar-
gain-lower interest rates and longer repayment
terms-to demonstrate it is able to handle the debt
problem more effectively than the predecessor mili-
way will cause difficulties in completing new loan
syndications and disbursing the credits to the South
American borrowers in 1984.
Financing Needs in 1984
South American governments have little choice but to
continue foreign borrowing to meet their payments
obligations. According to our estimates, the region's
import requirements and interest payments will ex-
ceed earnings by nearly 10 percent in 1984. After a
year of severe cutbacks in foreign purchases, most
South American countries have little room-and ap-
pear unwilling-to cut imports further to avoid caus-
ing domestic economic disruptions. Moreover, the
region's limited reserve cushion precludes a substan-
tial drawdown in foreign exchange reserves to close
the balance-of-payments gap in 1984.
Our research indicates that the South American
debtors will require some $13 billion in new loans this
year to finance the current account deficit. Even
though we believe real growth will rise to 3.7 percent
in the OECD, thus raising the demand for LDC
exports, and oil prices will remain at $29 per barrel,
the region's trade surplus is likely to increase only
9 percent to $18.6 billion. In our judgment, imports
will begin to rise moderately in 1984 to support plans
for domestic economic recovery, thereby offsetting
most of the 7-percent projected increase in export
earnings. Additionally, the service deficit will rise
nearly 7 percent to $31.6 billion. Although we believe
that the LIBOR interest rate will remain at about
9 percent, the region's larger amount of outstanding
debt will drive interest payments higher. Moreover,
our estimate assumes that, because of the persistence
of tough exchange controls, there will be no large-
scale, short-term capital flows into or from South
America that affect these borrowing requirements.
tary regime.
We believe that difficulties in complying with the
IMF accords will make new loans by commercial
bankers harder to contract than in 1984. In the past,
according to research by the Federal Reserve Bank of
New York, new bank lending to Third World coun-
tries has depended on the debtors' implementation of
economic adjustment programs. Moreover, some 30
IMF-endorsed financial rescue programs now under
Private bankers and official creditors have already
started negotiations with South American countries to
meet their financial requirements (appendix C). Bank-
ers have already committed $6.5 billion in new credit
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Table 3
South America: Lender Commitments
Versus Foreign Financing Requirements, 1984
Foreign
Exchange
Requirements
Lender
Programs
Firm
Commitments a
Current
Foreign
Exchange
Gap b
Foreign
Financing
Under
Negotiation e
Exchange
Gap or Surplus
end of 1984 d
Current account deficit e
7.0
New money
6.5
0.5
4.1
3.6
Principal repayments
7.9
Reschedulings
7.9
0
0
0
Argentina
Current account deficit e
0.4
New money
0
0.4
0
-0.4
Principal repayments
1.0
Reschedulings
0
1.0
1.0
0
Colombia
Principal repayments
0.6
Reschedulings
0
South America
Current account deficit
13.0
New money
6.7
6.3
9.2
2.9
Principal repayments
42.2
Reschedulings
13.7
28.5
28.5
0
a As of January 1984. e Analyst estimate.
b Column (1) "minus" column (2). r Embassy estimate.
e Includes IMF credits. s Includes 1983 and 1984 principal repayments.
d Assumes that all financing under negotiations is disbursed by the h Central Bank estimate.
end of December.
to Brazil, promised $800 million to Chile, and re- indications of progress, it seems most likely to us that
leased $200 million in frozen funds to Peru-about 60 lender financial support will fall short of borrowing
percent of the region's current account requirements. requirements. Because of last year's experience, we
They have also refinanced about one-fourth of the $42
billion in principal payment due. Despite these early
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believe that loans will be disbursed unevenly through-
out the remainder of 1984 while rescheduling agree-
ments will be difficult to conclude. As a result, we
foresee South American borrowers facing persistent
cash-flow difficulties this year. We also expect three
possible outcomes-persistent liquidity strains, an un-
raveling of rescue programs, or real financial prog-
ress-depending on creditor willingness to cooperate
with the debtor adjustment programs.
Liquidity Strains Persist. In the most likely outcome,
we foresee-about a 7 in 10 probability-lender
financial assistance falling short of South America's
current requirements. Such difficulties will most like-
ly result from two factors:
c Temporary suspension of IMF and commercial
bank loan disbursements because South American
governments backslide on their IMF commitments.
e Continued difficulty in syndicating new credits,
especially if the debtors step up pressure for easier
terms.
We believe that the debtors.are unwilling to bridge
the current foreign exchange gap by new import cuts
or large reserve drawdowns. Instead, we believe they
will move to alleviate cash strains by running large
arrears and delaying payments.
In this scenario, the region continues to grapple with
cash-flow difficulties throughout 1984. Because of
last year's precedent we
believe that several debtors will be temporarily cut off
from foreign funds because of difficulties in meeting
IMF commitments:
c Brazil will probably backslide in implementing its
IMF program, especially as the January 1985 presi-
dential election gets nearer, and again face a cutoff
of credit and difficulty in syndicating new loans.
o The Belaunde government in Peru will be unable to
comply with its ambitious IMF program because of
political discontent, thereby causing bankers to
freeze promised credits.
o The lameduck government in Ecuador will be likely
to ease up on its stabilization program, causing
difficulties in negotiating a $500 million credit.
Such events will create stumblingblocks, but probably
not insurmountable obstacles, to the financial rescue
programs. Based on precedent, we believe the IMF
will react flexibly and renegotiate these agreements,
enabling the borrowers to regain access to commercial
The most serious financial strains, in this scenario,
would be caused by delays in obtaining new money.
We believe that difficulties in implementing IMF-
backed stabilization programs will probably result in
delays in syndicating credits for several of the region's
borrowers:
Loan negotiations with the Argentines will remain
in abeyance until interest arrears are cleared and a
new IMF agreement is in place,
Because formal IMF approv-
al o a new program is not expected before late
May, Buenos Aires is not likely to make progress on
new bank loans until June.
c Bolivia's request for new loans will be rejected,
until it submits to an
c Colombia, based on Embassy
eports, is
now being advised to begin negotiations with the
IMF to counter resistance to its request for new
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Because of last year's experience, we foresee some
South American borrowers resorting to payments
suspensions to cope with such cash strains. Some
debtors, notably the Argentines, are even likely to
implement long delays, in part to pressure banks to
make funds available on better terms. As long as they
are willing to continue steps necessary to avoid having
regulators classify their loans, such suspensions prob-
ably would be grudgingly tolerated by international
bankers.'
The occasional resurgence of cash problems is likely
to be headline catching and partly obscure the inter-
national cooperation that will continue to move the
' Suspensions greater than 90 days would force loans into "nonper-
forming" categories under US law and require banks to deduct past
due interest from earnings and set aside loan loss reserves. Regula-
tors do have discretion in classifying loans and probably will avoid
this action if there is a reasonable prospect the debtor will pay past-
due interest and become current in their payments to creditors.
credits.
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financial system toward adjustment. In this scenario,
payments delays enable the debtors to bridge cash
shortages until the influx of new credits eases liquidity
strains. Moreover, the continued extensions of past
due principal repayments will provide enough time to
conclude rescheduling agreements. Under these con-
ditions, the debtors remain willing to honor their
external obligations, and their economic adjustment
programs lay a foundation for progress in resolving
the debt crisis in 1985
The Programs Unravel. Although we think it unlike-
ly-less than 2 chances in 10-the financial rescue
programs could begin to unravel if bankers refused to
supply new loans beyond those already obtained. For
example, Brazil recently struggled to obtain commit-
ments for the $6.5 billion jumbo loan, as many Arab
banks refused to participate in the syndication be-
cause they believed there was little prospect for
repayment. The more immediate danger is a South
American debtor-notably Argentina-adopting
hardline bargaining tactics with bankers that cause
the creditors to take retaliatory measures, such as
freezing all credits. Inability to obtain promised funds
probably would result in the debtors becoming intran-
sigent in refusing to honor traditional repayment
norms, implementing their IMF programs, and more
willing to resort to radical actions.
A cutoff in new lending would also cause unmanage-
able liquidity strains. In this scenario, foreign credit
could fall as much as 40 percent short of covering
South America's estimated $13 billion current ac-
count deficit. Under these conditions, we see South
American debtors putting a prolonged moratorium on
principal repayments and curtailing interest pay-
ments. Without new loans:
? Bolivia, Chile, Colombia, Ecuador, and Peru would
probably suspend debt repayments for lengthy
periods.
? Argentina would remain in a de facto moratorium
and refuse to make any payments.
? Brazil would resort to prolonged delays on trade and
debt repayments to cope with financial strains.
In the end, regional action to force bankers to provide
debt relief-perhaps by threatening a collective repu-
diation-would become more likely. The breakdown
of international cooperation would ultimately lead to
the near cessation of foreign exchange payments by
Table 4
South America: The Impact of
External Shocks
Brazil
Argentina
A 1-Percent-
age-Point
Change in
LIBOR
A 1-Percent-
age-Point
Change in
OECD Growth
A $1 Change
in Crude Oil
Prices
800
700
300
400
150
200
20
100
125
20
250
50
500
South American governments. Moreover, unwilling-
ness to cooperate would increase the probability of an
outright repudiation by one of the debtors, especially
the Argentines.
Financial Progress. If lenders made every effort to
provide promised financial assistance-and the inter-
play of forces, as we see it, makes this only a faint
chance-liquidity strains would ease dramatically. In
this scenario, the lenders might disburse some $16
billion in new loans-about 25 percent more than
necessary to meet 1984 current account require-
ments-in support of sustained adjustment efforts
and the need to replenish reserves by debtors. More-
over, bankers would reschedule all outstanding obliga-
tions.
Even under these best conditions,'however, the finan-
cial rescue programs would have little margin for
error. Brazil, Chile, and Venezuela would be able to
replenish reserves slightly, but probably would still
have trouble obtaining additional credits to fund new
development projects. Bolivia and Colombia probably
would grapple with cash-flow difficulties unless they
submitted to IMF-backed rescue programs.
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Vulnerability to External Shocks. New external
shocks would heighten the odds for a worst case
outcome and substantially change the probabilities we
assigned to the above scenarios. A major jolt to
confidence caused by an unanticipated action by
debtor or creditor will remain a continuing danger.
We cannot preclude a debtor, especially the Argen-
tines, taking unilateral actions against bankers in a fit
of pique. Moreover, bankers may move to attach
debtor assets to pressure a debtor to become current
on past due payments. Such unpredictable actions
probably would harden positions on both sides, lead-
ing to a collapse in negotiations.
A runup in world interest rates and oil prices, or an
aborted OECD recovery, would be likely to exceed the
creditors' ability to make new money available quick-
ly to cover larger deficits. With only a thin reserve
cushion, most debtors would face unmanageable cash
strains. According to the estimates of a respected
financial journal, a 1-percentage-point increase in
world interest rates-a growing concern in financial
markets-would add $1.6 billion to South America's
annual debt servicing requirements in 1984. More-
over, a 1-percentage-point slowdown in OECD recov-
ery adds an additional $1.5 billion to the region's
annual payments deficit from lower exports while a $1
rise in oil prices would cause the region's trade surplus
to worsen by some nearly $800 million
In these cases, Brazil is the most severely affected and
would require at least $1.8 billion in new loans beyond
our present estimates because it has little room to cut
imports or draw down reserves.
however, Brasilia would probably encounter
serious difficulties in obtaining new funds of such
magnitude, setting the stage fora confrontation with
its creditors.
The danger in such a confrontation is that Brasilia-
facing widespread domestic opposition to austerity-
would declare a payments moratorium. Instead of a
decision to halt temporarily loan repayments, numer-
ous bankers foresee that Brasilia would suspend all
debt payments and freeze foreign exchange deposits
for a lengthy period. They and we fear that such a
move would be followed by other South American
debtors, thereby causing creditors to halt trade fi-
nancing and withdraw interbank deposits. Under such
conditions, the various rescue programs would col-
lapse, and South America's difficulties would proba-
bly spill over to other Third World borrowers.
Signs To Watch
The ability and willingness of South American bor-
rowers to repay their debts as well as support by
lenders for the IMF-backed rescue programs are
dependent on a number of important variables.
Ability To Export. Any abrupt change in South
America's export prospects would affect the rescue
ro rams
sustained export recovery, major improvements
in the terms of trade, and sound exchange rate
policies would enable the Latin debtors to resume
regular debt servicing payments by 1986. We will
continue to monitor growth in foreign markets; the
behavior of metal, mineral, and agricultural export
prices; and the pace of devaluations in tracking South
America's export recovery. Moreover, we are con-
cerned about the willingness of industrial countries to
absorb the region's exports. Growing protectionism-
manifest in increasing numbers of countervailing
duties, import restrictions, and voluntary export re-
straints-would be likely partially to offset the bene-
fits of world recovery this year and heighten the
prospects for debt difficulties.
Political and Regional Trends. A shift in South
American political leaders' support for the current
financial rescue strategy remains a danger. Embassy
reporting reveals support for a
tougher posture against creditors-such as a pay-
ments moratorium-gaining political popularity in
Argentina, Brazil, Ecuador, and Peru. It is likely to be
manifest in:
An emerging consensus among Latin financial offi-
cials that bankers are unresponsive to requests for
improved debt repayments terms.
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necrer
International creditors and South American debtors
seem to be talking past each other about financial
reforms to ease debt servicing. Bankers are willing to
ease repayment terms as seen in new lending to Brazil
and Mexico at lower spreads and bearing somewhat
longer grace and repayment periods.
Ecuador and Peru are benefiting
from easier terms in their lastest reschedulingsF
The debtors, however, are beginning to press for
bolder actions. The Declaration of Quito, for exam-
ple, appeals to creditors to place a ceiling on debt
servicing payments as determined by export earnings.
The issue could polarize financial negotiations be-
cause it would severely depress bank profits.
Similarly, some influential Latins are proposing new
financial reforms. Carlos Langoni, the former head of
Brazil's Central Bank, is calling on bankers to extend
repayments over much longer terms, sharply reduce
interest rates, and capitalize some interest payments..
Although bankers are likely to resist such proposals,
Langoni claims that the major debtors may take
concerted action to force such changes.
? The increased influence of nationalists and the
willingness of influential policymaking groups-
Brazil's National Security Council, Argentina's
Economy Ministry, and Venezuela's Finance Minis-
try-to recommend more confrontational tactics in
dealing with bankers.
? Rhetorical stridency at Latin debt conferences and
growing support for a collective approach to the
debt crisis. Argentina is likely to be a bellwether for
such sentiment.
Banker Cohesiveness. A split among bankers in sup-
porting the adjustment programs is another vulnera-
bility. The key sign to watch is the ability of bank
advisory committees to assemble and complete loan
syndications. Inability to assemble new loans for
Chile, Argentina, Ecuador, and Peru or renewed
disruptions in the interbank market would probably
Table 5
United States: International Transactions
With South America a
1980
1982
Percent
Change
17.3 '
15.1
-13
2.7
+2.3
-15
0.2
Earnings on direct
investment
1.5
1.6
doom the rescue programs unless alternative fund-
ing-such as from the US Government or the Bank
for International Settlements-was found.
Implications for the United States
South America's financial difficulties will probably
continue to hurt US commercial interests in 1984.
According to our estimates, the US current account
surplus with the region had already been reduced by
more than half to $2.3 billion in 1982 and probably
moved into a deficit last year. This shift into red ink
reflects the sharp decline in US exports-merchan-
dise sales to the region plunged 35 percent through
September 1983-in the wake of import controls
retrenchments; a sharp increase in US purchases-up
18 percent through three quarters-from the debtors
as US recovery got under way; and the reduction in
interest income as the region delayed repayments.
South America's financial difficulties will also draw
the United States into acrimonious commercial dis-
putes. We believe Washington officials will be caught
between US interest groups seeking relief from trade
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Table 6
South America: Decline in US Exports
Peak Year
Exports at
Peak Year
(billion US $)
Decline
From Peak
Year to
1983 a (percent)
Argentina
1980
2.6
81
Bolivia
1981
0.2
60
Brazil
1980
4.4
71
Chile
1981
1.5
77
Colombia
1982
1.9
55
Ecuador
1980
0.9
70
Paraguay
1982
0.1
36
Peru
1982
1.5
73
Uruguay
1981
0.2
42
Venezuela
1981
5.4
68
competition versus South American debtors' requests
for trade concessions. According to press reports, US
businessmen are increasingly critical of South Ameri-
ca's restrictive commercial policies. Tight import con-
trols and exchange restrictions are causing difficulties
for US exporters and direct investors desiring to
repatriate funds from their subsidiaries,
US financial institutions will continue to be vulnera-
ble to debt servicing disruptions. This year, we expect
selective delays in repayments by South American
debtors. such delays are likely to
exert a drag on US bank profitability, by forcing some
writeoffs and increased loan loss reserves. These
financial setbacks, by heightening bankers' perception
of risk, would have an adverse impact on the continu-
ation of new lending to the region. In our opinion,
commercial banks will be less attracted by lending to
South America especially as the demand for funds
rises in the United States to sustain recovery.
For the longer run, we are concerned about the
damage that US commercial and political interests
could suffer so long as South America's external
finances are precarious. These would include:
? The increased exposure of US banks in the region to
keep rescue programs on track.
? The attractiveness of import substitution policies
that would permanently restrict US sales and in-
vestments to the region.
? The rise of economic nationalism in South America
translating into even tougher current restrictions on
US exporters and businesses.
? The potential for economic discontent to translate
into political instability and much greater hostility
toward the United States.
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Appendix A
South America's Current
Account Adjustments in
1983 and Plans for 1984
Argentina
Buenos Aires began 1983 under an IMF program that
projected a 60-percent reduction in the current ac-
count deficit to $800 million. The Fund program
expected a $3.5 billion trade surplus based on $9.5
billion in export earnings against only $6 billion of
imports. Reductions in interest payments were expect-
ed to reduce the services deficit by nearly 20 percent
to $4 billion. The Fund agreement also stipulated that
the $2.9 billion in external payments arrears be
eliminated by June.
The Argentines did manage to improve their current
account some 20 percent to $2 billion. Although
export earnings only moved up slightly to $7.7 billion
in spite of a bumper grain crop, the lack of foreign
exchange and weak domestic demand contributed to a
20-percent fall in imports and enabled Buenos Aires
to record a $3.5 billion trade surplus. The deficit on
the services account, however, rose 15 percent to $5.5
billion; although world interest rates declined, the
Argentines' increased use of expensive short-term.
credit forced interest charges higher.
Despite banker pledges of $3.5 billion in new financ-
ing, the Argentines received only $2.2 billion in
disbursements during 1983. This forced Buenos Aires
to resort to arrearages to cope with foreign exchange
stringencies; press reports indicate they were probably
left with $2.5 billion in interest arrears at the end of
1983. Argentina entered into a de facto payments
moratorium late in the year, able to make interest
payments only upon receipt of foreign exchange from
lenders.
To improve the current account in 1984, the newly
elected civilian regime of Raul Alfonsin intends,
according to press reports, to stimulate exports. The
government is planning to boost agricultural exports
by lowering the tax on foreign commodity sales and
providing farm exporters easier access to imported
inputs such as fertilizer. Moreover, the government
claims it will continue to devalue the exchange rate
daily at the pace of domestic inflation in order to
encourage nonagricultural exports and restrain im-
ports.
Simultaneously, Buenos Aires is also tightening re-
strictions for imports of nonessential products and
military goods. Taken together, Economy Minister
Grinspun expects at least a $3.3 billion trade surplus
this year. Grinspun will use some $3 billion of the
trade surplus plus new commercial bank loans to
cover the current account deficit and settle past due
interest payments.
Bolivia
President Siles's tenuous political position caused him
to shy away from implementing the unpopular re-
forms necessary to resolve the country's payments
problems in 1983. Although he enacted some tougher
measures in November, Bolivia has yet to reconcile
with the IMF and has had growing difficulty meeting
foreign obligations.
Bolivia's current account deficit widened 21 percent
to $375 million in 1983. The trade accounts swung
from a $110 million surplus in 1982 to a $30 million
deficit last year. Exports sank 14 percent to $620
million because of low tin prices, labor unrest and lack
of spare parts in the mines, an overvalued peso, and a
falloff in sales of nonmineral exports to Bolivia's cash-
strapped neighbors. Imports rose '7 percent to $650
million as La Paz had to double food purchases to
cover weather-induced crop shortfalls and increase oil
purchases because of declining domestic production.
Despite the trade setbacks, debt renegotiations en-
abled Bolivia to reduce the service deficit by 18
percent to $345 million, mainly by stretching interest
expenses. As the year ended, however, delays in
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Argentine payments for natural gas restricted La
Paz's ability to meet scheduled interest payments and
forced it into arrears.
Siles decreed new economic policies last November to
improve the payments account and qualify for IMF
assistance. The government devalued the peso by 60
percent to 500 pesos per US dollar and reduced food
and gasoline subsidies. Although La Paz is counting
on some strengthening of minerals prices, the peso
devaluation should help the trade account mainly by
reducing imports. Moreover, increases in food and
gasoline prices are aimed at reducing contraband
exports to neighboring countries. The service deficit
should improve slightly as negotiations resume with
creditors for additional relief on interest payments.
Argentina has also promised to resume payments for
natural gas shipped last year.
Brazil
Brazil's efforts to strengthen its external accounts
under an IMF stabilization program ran into obsta-
cles in early 1983. Much of Brazil's troubles resulted
from unrealistic adjustment goals and the unwilling-
ness of banks to fulfill financial pledges in support of
the IMF program. Against the assumption of a strong
world recovery, Brazil's export performance in the
first two months of 1983 fell short of expectations. To
improve its trade position, the government in late
February undertook a large devaluation. Meanwhile,
a number of European and US regional banks refused
to restore short-term trade credits, causing a buildup
of arrears. By May, Brazil also fell out of compliance
with its IMF agreement and more than $3 billion in
scheduled loans were suspended. Brasilia was forced
to implement tougher exchange controls to husband
its reserves.
Eventually, however, the combination of the devalua-
tion, the pickup in the US economy, and the foreign
exchange controls enabled the government to cut its
current account deficit for the year by 60 percent to
an estimated $6.9 billion. Brazil achieved a record
$6.5 billion trade surplus on a 9-percent rise in
exports and a 20-percent reduction in imports, sur-
passing the IMF target by a comfortable margin.
Brazil's services deficit fell some 22 percent to $13.4
billion mainly on the basis of reductions in world
interest rates. The trade improvements coupled with
the resumption of lending in December following a
revised IMF agreement allowed Brasilia to cut arrear-
ages to about $2 billion from a peak of $3.5 billion in
November
In keeping with the revised IMF agreement, Brasilia
aims to reduce the current account deficit to $6 billion
in 1984 and reach a trade surplus target of $9.0
billion. Its adjustment program calls for exports to
rise to $25 billion as a result of competitive exchange
rate policies; higher prices for soybeans and other
export crops; a major rebound in agricultural produc-
tion, weather permitting; and rising sales of manufac-
tured products in response to economic recovery. On
the import side, Brasilia wants to hold imports again
to $16 billion. Depressed oil demand, increased na-
tional production, and stable oil import prices are
expected to trim more than $1 billion from its oil bill.
The government expects some deterioration in the
service accounts because the growing foreign debt is
driving interest payments higher.
Chile
In January 1983, Chile's cash position-already
weakened by declining exports, capital flight, and a
slowdown in lending-became critical when bankers
ceased lending because of a financial dispute with the
government. This abrupt confrontation also caused
Santiago to miss its domestic monetary and foreign
reserve targets under its IMF program. For the rest of
1983, Chile moved to get the rescue program back on
track, and strengthen its external accounts.
Chile's current account deficit improved by 40
percent to $1.4 billion in 1983. Although the decline
in copper prices reduced exports 2 percent, the trade
surplus nearly quintupled to $1 billion as a result of a
25-percent drop in imports caused by reduced domes-
tic demand, devaluations of the peso, and a doubling
of the tariff rate to 20 percent. Although interest
payments increased 19 percent to $1.6 billion in 1983,
net services and transfers were nearly even with the
previous year as Chileans reduced transportation and
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foreign travel expenses. The current account shortfall
was covered by $1.3 billion in loans from international
bankers.
reserves fell from $3.9 billion to $1.6 billion. Bankers
also became increasingly reluctant to provide new
credits to Colombia. Bogota had difficulty raising an
$80 million balance-of-payments loan in April, and,
The Chilean Central Bank expects the current ac-
count deficit to stay about the same. According to
government studies, the trade surplus is likely to
decline 10 percent to $900 million in 1984. The
government expects that a rise in public-sector de-
mand as well as increased purchases by the private
sector to spur imports by 24 percent to $3.3 billion.
Exports should rise only 14 percent to $4.2 billion;
although international demand for Chilean agricul-
tural products is likely to strengthen, minerals exports
will be held back by depressed prices. Interest pay-
ments are slated to rise 12.5 percent to $1.8 billion
but purchase of foreign services should continue to
decline, leaving the services deficit at the $2.3 billion
level. Santiago plans to
borrow $1 billion to help cover the deficit.
Colombia
Bogota counted on a strong world recovery to improve
external accounts in 1983. Instead, exports headed
lower and foreign financing became harder to obtain,
forcing the Colombians to move to improve the trade
accounts. The Betancur administration hiked tariffs,
accelerated the depreciation of the peso, and in-
creased export subsidies. Bogota also halved the travel
allowance for citizens abroad and declared illegal
private transfers abroad to halt capital flight.
Despite these moves, Colombia's current account
deficit increased 31 percent to a record $3 billion.
Bogota was only able to reduce its trade deficit by
7 percent to $1.8 billion because import retrench-
ments were partially offset by declining exports. Sales
were off 11 percent to $2.9 billion as coffee reve-
nues-half of total export earnings-declined because
of lower prices and demand in developed countries.
Moreover, protectionism and import cutbacks in Co-
lombia's Andean Pact neighbors hurt nonagricultural
export sales. Bogota's services deficit more than tri-
pled to $1.2 billion because of falling tourism, interest
earnings, and remittances from Colombians working
abroad.
Bogota drew down foreign exchange reserves to cover
the widening payments gap. From the end of 1982
through the end of September 1983, foreign exchange
it took four months to
syndicate a $210 million loan at the end of 1983.
Despite World Bank cofinancing guarantees, bankers
would not commit new loans for Colombia's ambitious
1983-86 investment program at the October Consul-
tative Group meeting in Paris.
Embassy reports indicate the Betancur government is
counting on a strong export recovery and continued
import restraints to generate a large trade surplus in
1984. We doubt that Colombian exports will post the
strong rebound to achieve the sizable trade surplus
required to eliminate its current account deficit. We
also believe that international bankers will resist
financing another large payments deficit and that
Bogota will have to undertake unpopular economic
adjustments under IMF guidance
Ecuador
President Hurtado implemented policies last year to
end the financial crisis. Under the IMF's guidance,
Quito devalued the sucre to restore price competitive-
ness and eliminated export taxes to spur nonoil ex-
ports. Simultaneously, interest rates were raised to
slow capital flight. To stave off cash strains, import
.controls were tightened while efforts were intensified
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These moves paid handsome dividends. Quito reduced
the payments deficit to $566 million, down 60 percent
compared with 1982. According to the US Embassy,
the trade surplus more than tripled to $750 million
largely because imports were cut one-third to $1.4
billion. In contrast, export earnings dropped 4 percent
to $2.1 billion because of soft prices for oil and coffee,
weather-induced export shortfalls, and depressed de-
mand for Ecuador's products in the Andean region.
The successful 1983 debt renegotiation package al-
lowed Quito to reduce the service deficit by 20 percent
to $1.3 billion. Drawings from the IMF and commer-
cial banks covered the deficit and enabled the Hur-
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With economic reforms in place and a return to
normal weather, Quito expects additional improve-
ment this year. According to government estimates,
the deficit will shrink another 8 percent to the $520
million level. The Ecuadoreans are counting on a
hefty rise in exports to increase the trade surplus. To
spur oil sales, Quito has recently lowered its crude
prices for contract sales; improved weather conditions
will increase exports of tropical products. Continued
currency devaluations and a slow domestic recovery
should hold down import demand. Quito is negotiat-
ing with its bank advisory committee for a new $500
million loan to cover its external deficit.
Peru
The 1983 IMF program expected that a strong recov-
ery in minerals prices would increase exports, thereby
halving the current account deficit to $900 million.
Peru, however, fell victim to floods and drought that
disrupted minerals production and exports, while min-
eral prices remained depressed. As a result, the
government was forced to slash imports to improve its
external accounts.
According to recent Embassy reporting, Lima met its
target for reducing the current account deficit, despite
declining exports. Depressed copper and silver prices
plus weather-induced disruptions caused a 10-percent
reduction in export earnings to $3 billion. Cutbacks in
import financing and the plunge in domestic economic
activity, however, pushed imports down 29 percent to
$2.7 billion. Lima's inability to reduce its public
deficit as promised under the IMF program, however,
resulted in the delay of some $350 million in sched-
uled loan disbursements. Lima was forced to draw
down reserves heavily to cover the payments gap.
According to its recent projections, Peru's Central
Bank expects the current account deficit to remain
unchanged this year. The Central Bank foresees world
economic recovery and a return of normal weather
bolstering export earnings a slight 3 percent to
$3.1 billion. With export earnings depressed, they
recognize that imports must still be pared to prevent
cash strains. This will result in further improvement
in the trade acounts, which should record a $600
million surplus. The Central Bank expects a deterio-
ration in the services accounts, which will offset the
trade gains. Lima has no additional plans to bolster
the current account, but some moves are likely if Peru
encounters trade setbacks. The new IMF agree-
ment-which calls for a cut in the public-sector
deficit from 10 to 4 percent of GDP, no loss of foreign
reserves, a limit on the current account deficit to
5 percent of GDP, and a reduction in inflation from
125 percent to 70 percent-will be difficult to comply
with given domestic political pressures against further
belt tightening.
Venezuela
Caracas faced unmanagable financial strains early in
1983. Against $7.5 billion in foreign exchange re-
serves, Venezuela faced potential demands for the
repayment of $16 billion in maturing debt and the
need to fund a projected $2 billion current account
deficit. Venezuela's access to new credit, however,
virtually ceased in January because bankers ceased
lending in the face of continuing capital flight, delays
in meeting scheduled debt repayments, and fears that
a drastic decline in oil prices would weaken debt
servicing capabilities. The government resorted to
tough import and exchange controls and suspended
principal repayments in March to avert a cash crisis.
These measures improved Venezuela's external ac-
counts in 1983. According to the Embassy, the cur-
rent account swung from a $3.5 billion deficit in 1982
to nearly an estimated $3 billion surplus. Despite a
10-percent decline in oil exports, Venezuela posted a
$7 billion trade surplus by slashing imports with
higher tariffs, direct import controls, and a de facto
devaluation of the bolivar. Moreover, tough exchange
controls and delays in meeting scheduled interest
payments-Caracas now has some $900 million in
interest arrears-reduced the service deficit by one-
third to $4.2 billion. As a result, Caracas was able to
rebuild reserves from $7.5 billion in January to $11
billion currently, providing the new Lusinchi adminis-
tration with some flexibility in negotiations with its
creditors.
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Embassy reporting lbe-
lieve Caracas will work to maintain a current account
surplus this year to avoid the need for new borrowing.
oil export earnings
probably will be flat at $14.0 billion because oil prices
are depressed, averaging $25 to $27 per barrel.
the government plans to
unify exchange rates by gradually devaluing, in part
to boost nonoil exports. Despite a modest nonoil
export recovery, the trade surplus will probably de-
cline 11 percent to $6.2 billion because of government
plans to stimulate the sluggish economy. Such pump-
priming will require a rise in total imports, mainly
producer goods, from $8 to $9 billion. Tough foreign
exchange controls are likely to remain to prevent a
resurgence of capital flight and restrain the import of
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Appendix B
Financial Rescue Programs
in 1984
International bankers and South American debtors
are already moving to resolve debt problems in 1984.
The rescue strategy continues to rely on the case-by-
case approach for treating the debt-troubled coun-
tries. In this appendix, we review the new lending and
rescheduling programs being assembled by the credi-
tors against the best available estimates-analyst,
Embassy, or Central Bank-of South America's abili-
ty to reduce foreign borrowing requirements by im-
proving their current account position.
Banker Commitments
Private bankers and official creditors have already
started negotiations with South American countries in
support of their financial rescue programs. This sec-
ond wave consists of rescheduling 1984 maturities and
raising new money.
The Major Debtors. Financial negotiations for. the
Brazilians are going well but the Argentines have yet
to implement their program:
? Brazil has obtained agreements from creditors to
help meet its financing needs for 1984. Its bank
advisory committee is assembling an $11.8 billion
package consisting of a $6.5 billion new money
facility and a rescheduling of about $5.3 billion in
1984 debt maturities. Western governments agreed
to reschedule $3.8 billion through the Paris Club
and several industrial countries have committed
about $2.5 billion in official export credits. Addi-
tionally, Brazil will be able to draw $1.5 billion from
the IMF if it complies with program requirements.
? Argentina-currently out of compliance with the
IMF-is having difficult negotiations with creditors
for 1984 financing. According to press reports,
Buenos Aires is seeking some $12 billion in debt
reschedulings, $2.5 billion to clear arrears, and $3.2
billion in new money. The government has recently
resorted to hardline rhetoric to pressure banks to
extend credits, but is also working to resolve out-
standing issues with the creditors.
rgentina will 25X1
require approximately $1 billion in new money from
commercial banks in 1984 in addition to the $1
billion in undisbursed funds. Buenos Aires is negoti-
ating with the IMF for a new program that could
allow up to $1.5 billion in new lending and reopen
private financial support.
The Oil Exporters. Bankers have suspended negotia-
tions with the Venezuelans until the new government 25X1
gets organized; Ecuador is encountering resistance to
its requests for new money:
? Venezuela continues to extend the debt moratorium
on all public-sector principal repayments that was
started in March 1983. President Jamie Lusinchi
has stated that his first priority after taking office 25X1
would be to reschedule his country's foreign debt.
Negotiations with the bank advisory committee
concern the rescheduling of some $16.5 billion of
debt due in 1983 and 1984. To break the financial
impasse, Caracas will need to impose enough eco-
nomic discipline to appease the bankers and elimi-
nate all debt arrearages. As long as Venezuela does
not request any new money for 1984 and has a
workable economic program, an IMF facility may
not be viewed as necessary for the reschedulings.
? Ecuador's bank steering committee has agreed in
principle to refinance the public and private sector
debt falling due in the first six months of 1984-
about $300 million. They have postponed a decision
on the second half 1984 refinancing package until
Ecuador reaches a new agreement with the IMF (it
still remains eligible to draw $85 million under the
current agreement) and the new government takes
office in August 1984. Ecuador has requested a new
$500 million medium-term loan for 1984 but the
bankers are resisting
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The Copper Producers. Chile's compliance with the
IMF and Peru's recent reconciliation with the Fund
have smoothed negotiations with bankers:
Chile's creditor banks agreed in principle in July
1983 to restructure over $1.6 billion of public and
private debt due in 1983 and 1984. Individual debt
reschedulings-modeled on the Central Bank agree-
ment-began in December 1983. Santiago has re-
quested a medium-term bank loan of $780 million
for 1984 financing needs, while continued compli-
ance with its IMF program will result in $230
million in new credits from the Fund.
Peru's successful conclusion of its IMF negotiations
will probably cause bankers to disburse $200 million
in frozen loans. We expect Peru's new agreement
with the IMF will result in $170 million in new
credits if Lima complies with the program targets.
We also expect the Peruvians to ask for $400 million
in new money. We believe at least $300 million in
medium-term maturities falling due in 1984 are
likely to be rescheduled. Lima will also need to
extend $2 billion of short-term debt falling due in
1984
Payments Prospects
South American debtors are again aiming to reduce
their current account deficits and borrowing require-
ments. Most countries expect an export rebound, tight
import controls, and stable oil prices and world inter-
est rates to result in improvements.
The Major Debtors. The Brazilians are unlikely to
record improvement again in 1984 while the Argen-
tines expect some worsening:
Brazil's current account deficit, in the most likely
scenario, increases slightly to $7 billion. We believe
the Brazilians will realize a $8 billion trade surplus
as exports jump to $24.5 billion but imports increase
to $16.5 billion. Despite steady interest rates, a 20-
percent increase in interest payments underlies a
growing service deficit.
We and the US Embassy expect Argentina's current
account deficit to deepen slightly to $2.3 billion. We
project that improved prices for corn and oilseeds
will boost agricultural earnings by $300 million to
the $6 billion level but sales of manufactures and
petroleum products will remain constant. Embassy
projections of a 12-percent rise in imports this year
are based on estimates of purchases abroad required
to support modest economic growth. Interest pay-
ments will range between $5 and 5.5 billion.
The Oil Exporters. Depressed world oil prices will
limit the external improvements managed by Venezu-
ela and Ecuador:
We estimate Venezuela's current account surplus
will decline by one-third to $1.8 billion in 1984.
Imports can be expected to rise about 12 percent to
$9 billion to support domestic recovery, causing the
decline in the trade surplus. We projected a $6
billion surplus because oil exports remain flat de-
spite more aggressive marketing of oil products. We
expect exchange controls will again hold down the
service deficit. Interest arrears, however, will rise to 25X1
$1.1 billion as private companies find it difficult to
obtain foreign exchange for debt repayments.
Ecuador's current account deficit will shrink
8 percent to $520 million. We and the US Embassy
project a 4-percent increase in the trade surplus to
$780 million. Export revenues will rise 14 percent to
$2.4 billion, benefiting from increasing oil sales, the
impact of improved weather conditions on agricul-
tural production and fisheries catch, and continued
currency adjustments. We expect imports to rise 20
percent to $1.6 billion as restrictions for capital
goods and industrial inputs are eased after July
when the current agreement with the IMF expires.
The Copper Producers. Despite a rebound in exports,
Chile and Peru will witness slight deterioriation in the
external accounts:
Chile's current account deficit, according to our
estimates, is likely to rise 3 percent to about
$1.4 billion. Although exports probably will increase
14 percent to $4.2 billion, stimulative monetary and
fiscal policies will stimulate depressed demand for
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industrial and consumer goods imports. As a result,
the trade surplus will decline 10 percent to $900
million. We expect the service deficit to decline to
$2.3 billion as Santiago cuts trade-related services
to offset higher interest payments.
? We concur with Central Bank projections that
Peru's current account deficit will remain at $900
million this year. Oil exports are expected to recover
most of the volume lost last year and contribute to a
40-percent jump in foreign sales. The trade surplus
will rise to $600 million as a result of increased oil
sales and further import cuts, but an expected
expansion of the net services deficit as activity
increases will wipe out the trade gains keeping the
need for foreign financial assistance high again this
year.
Primary Product Exporters. Export recovery enables
Bolivia and Colombia to improve their external ac-
counts. In our view:
? The new economic policies decreed by Bolivian
President Siles last November will probably produce
some improvement in the payments account. The
current account deficit is likely to contract by
5 percent to $355 million. The trade deficit probably
will be slashed in half to $15 million as mineral
prices strengthen and the peso devaluation holds
down imports. The service deficit is likely to shrink
by 1.4 percent to $340 million.
? Colombia's current account will decline nearly
20 percent to $2.4 billion on the strength of trade
improvements. Lower coffee prices and slow growth
in its Andean trading partners will keep export
growth to 4 percent to $3 billion. Imports, however,
will decline 10 percent as Bogota takes economic
adjustments under IMF guidance to obtain foreign
financing.
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Appendix C
South America's Detailed
Current Account Statistics
Table 7
Argentina
Net services and -4.8 -5.5 -5.5
transfers
Foreign financing 5.2 4.9 16.7
requirements
Table 8
Bolivia
Exports (f.o.b.)
Oil
Nonoil
Natural gas
Imports (f.o.b.)
Oil
Net services and
transfers
Interest
payments b
Current account
balance
Arrearages
Principal repayments
Foreign financing
requirements c
Debt servicing to 105 71 69
exports d
Interest payments 70 71 69
to exports
Interest payments 108 104 69
and arrears to ex-
ports
Current account 4
deficit to GDP
a Embassy estimates.
b Scheduled interest payments minus arrears.
c Foreign financing requirements equals current account balance
plus the previous year's interest arrearages plus principal repay-
ments on medium- and long-term debt.
d Interest payments and principal repayments.
e These ratios are probably not meaningful given the sharp inflation
and exchange rate movements as they would heavily reflect mone-
tary changes.
Debt servicing
to exports d
Interest pay-
ments to exports
Interest pay-
ments and arrears
to exports
Current ac-
count deficit to
GDP
720
620
625
30
20
10
690
600
615
338
382
300
610
650
640
5
10
15
-420
-345
-340
250
455
300
264
503
1,000
574
1,128
1,810
41
89
167
39
82
55
5
6.7
7
a Analyst estimate.
b Scheduled interest payments minus arrears.
c Foreign financing requirements equals current account balance
plus the previous year's interest arrearages plus scheduled principal
repayments on medium- and long-term debt.
d Interest payments and principal repayments.
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Table 9
Brazil
Billion US $
0.8
6.5
8.0
20.2
22.0
24.5
Oil
1.4
1.2
1.0
Nonoil
18.8
20.8
23.5
19.4
15.5
16.5
Oil
9.3
7.8
7.0
Nonoil
10.1
7.7
9.5
Net services and
transfers
-17.1
-13.4
-15.0
11.4
Other
-4.5
-3.9
-3.6
Current account balance
-16.3
-6.9
-7.0
Arrearages
0
2.3
2.0
Principal repayments
8.2
7.2
7.9
Foreign financing
requirements c
24.5
14.1
17.2
Debt servicing
to exports d
Interest pay-
ments to exports
Interest pay-
ments and ar-
rears to exports
Current account
deficit to GDP
103
76
79
62
43
47
62
54
55
6
3
2.5
e Analyst estimate.
b Scheduled interest payments minus arrears.
Foreign financing requirements equals current account balance
plus the previous year's interest arrearages plus scheduled principal
repayments on medium- and long-term debt.
d Interest payments and principal repayments.
Table 10
Chile
Trade balance
Exports (f.o.b.)
Oil
Nonoil
Net services and
transfers
Interest payments b
Other
Current account balance
Arrearages
Principal repayments
Foreign financing
requirements
Debt servicing to
exports d
Interest payments
to exports
Interest payments
and arrears to
exports
Current account .
deficit to GDP
3,798
3,672
4,200
3,580
2,671
3,300
282
461
475
3,298
2,210
2,825
-2,522
-2,363
-2,300
1,350
1,600
1,800
-1,172
-763
-500
-2,304
-1,362
-1,400
0
0
0
1,300
1,800
1,550
3,604
3,162
2,950
70
93
80
36
44
43
36
44
43
14
7
7
a Analyst estimate.
b Scheduled interest payments minus arrears.
Foreign financing requirements equals current account balance
plus the previous year's interest arrearages plus scheduled principal
repayments on medium- and long-term debt.
d Interest payments and principal repayments.
25X1
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Table 11
Colombia
Trade balance
Exports (f.o.b.)
Oil
Net services and
transfers
Interest payments b
Other
Current account balance
Arrearages
Principal repayments
Foreign financing
requirements c
Debt servicing to
exports d
Interest payments
to exports
Interest payments
and arrears to
exports
Current account
deficit to GDP
1982
1983
1984 a
Million US $
-1,946
-1,805
-1,200
3,230
2,875
3,000
290
260
280
2,940
2,615
2,720
5,176
4,680
4,200
592
490
455
1,045
995
950
699
-200
-285
-2,292
-3,000
-2,435
0
0
0
670
746
550
2,962
3,746
2,985
53
61
50
32
35 ,
32
32
35
32
a Analyst estimate.
b Scheduled interest payments minus arrears.
c Foreign financing requirements equals current account balance
plus the previous year's interest arrearages plus scheduled principal
repayments on medium- and long-term debt.
d Interest payments and principal repayments
Table 12
Ecuador
Trade balance
Exports (f.o.b.)
Oil
Imports (f.o.b.)
Oil
Net services and
transfers
Interest payments b
Other
Current account balance
Arrearages
Principal repayments
Foreign financing
requirements d
Debt servicing to
exports e
Interest payments
to exports
Interest payments
and arrears to
exports
Current account
deficit to GDP
Million US $
201
750
780
2,189
2,100
2,400
1,341
1,484
1,732
1,988
1,350
1,620
-1,641
-1,316
-1,300
710
215
500
-931
-1,101
-800
-1,440
-566
-520
125
600
200
598
691
1,100
1,998
1,382
2,220
60
72
75
32
10
21
38
39
29
a Embassy estimate.
b Scheduled interest payments minus arrears.
c Includes payment of 10 percent on 1983 refinancing.
d Foreign financing requirements equals current account balance
plus the previous year's interest arrearages plus scheduled principal
repayments on medium- and long-term debt.
Interest payments and principal repayments.
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Table 13
Peru
Billion US $
-0.5
0.3
0.6
Exports (f.o.b.)
3.3
3.0
3.1
Oil
0.7
0.5
0.7
Nonoil
2.6
2.5
2.4
Imports (f.o.b.)
3.8
2.7
2.5
Net services and
transfers
-1.2
-1.2
-1.5
Interest payments b
1.0
1.0
0.9
Other
-0.2
-0.2
-0.6
Current account balance
-1.7
-0.9
-0.9
Arrearages
0
0
0
Principal repayments
1.2
1.0
1.1
Foreign financing
requirements c
2.9
1.9
2.0
Debt servicing to
exports d
Interest payments
to exports
Interest payments
and arrears to
exports
67
67
65
30
33
29
30
33
29
Current account 8.8 5.9 6.3
deficit to GDP
a Central Bank estimate.
b Scheduled interest payments minus arrears.
c Foreign financing requirements equals current account balance
plus the previous year's interest arrearages plus principal repay-
ments on medium- and long-term debt.
d Interest payments and principal repayments.
Table 14
Venezuela
Oil
Nonoil
Net services and
transfers
Other
Current account balance
Arrearages
Principal repayments
Foreign financing
requirements c
Debt servicing to
exports d
Interest payments
to exports
Interest payments
and arrears to
exports
Current account
deficit to GDP
Billion US $
3.1
7.0
6.2
16.3
15.0
15.2
15.5
14.0
14.0
.8
1.0
1.2
13.2
8.0
9.0
-2.6
-2.0
-2.2
-3.5
2.8
1.8
0
0.9
1.1
0
0
16.4
3.5
1.9
15.5
25
15
122
25
15
15
25
21
22
5:0
0
0
a Analyst. estimate.
b Scheduled interest payments minus arrears.
c Foreign financing requirements equals current account balance
plus the previous year's interest arrearages plus scheduled principal
repayments on medium- and long-term debt.
d Interest payments and principal repayments.
Secret
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