INTERNATIONAL ECONOMIC & ENERGY WEEKLY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84-00898R000400070006-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 46
• Document Creation Date: December 22, 2016
• Document Release Date: January 10, 2011
• Sequence Number: 6
• Publication Date: December 16, 1983
• Content Type: REPORT

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STAT
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Directorate of
Weekly
International
Economic & Energy
DI IEEW 83-049
16 December 1983
Copy 068 1
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International
Economic & Energy
Weekly
iii Synopsis
? 1 Perspective-Major Latin American Debtors; Economic Difficulties Ahead
Briefs Energy
International Finance
Global and Regional Developments
National Developments
15 International Financial Situation: Political Update
This article was prepared by analysts from a1 a nFe ,..,,I nnr
17 International Financial Situation: Trade Financing Cutbacks
21 Mexico: Policy Choices and the Economic Outlook
27 Brazil: Medium-Term Financial Outlook Under Alternative Economic
Scenarios
35 Argentina: Economic Prospects in 198
1 Colombia: Weaken the Economy)
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Comments and queries regarding this publication are welcome. They may be
directed to Directorate of Intelligence,
Secret
16 December 1983
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International
Economic & Energy
Weekly
Synopsis
1 Perspective-Major Latin American Debtors: Economic Difficulties Ahead
The Brazilian, Mexican, and Argentine economies will not experience rapid
growth soon even if a strong recovery in world import demand begins to ease
financial strains in 1984. Even if the IMF eases its conditions for continued
lending, the economic adjustment programs that would still be required by
debtors will preclude a strong demand-led recovery
15 International Financial Situation: Political Update
This article is part of our series on the economic and political aspects of the in-
ternational financial situation. The domestic political climate has improved
during the last month in a number of financially troubled Third World
countries-Argentina, Venezuela, Jamaica, and Brazil-while slightly wors-
ening in others-the Philippines, Peru, and Bolivia.
17 International Financial Situation: Trade Financing Cutbacks
This article in the series on the economic and political aspects of the
international financial situation examines the cutbacks in Western trade
financing for debt-troubled LDCs. Continued difficulties in obtaining trade
credits for vital imports will impede many LDCs' ability to expand production
21 Mexico: Policy Choices and the Economic Outlook
President de la Madrid will be forced next year to choose between continued
tough austerity or limited economic expansion to ease immediate social
problems. Regardless of which course he follows, it is unlikely Mexico can
regain its previous access to foreign capital and sustainable economic growth
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DI IEEW 83-049
16 December 1983
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27 Brazil: Medium-Term Financial Outlook Under Alternative Economic
Scenario
While Brazil's foreign financial situation would improve under favorable
global economic conditions through the end of the decade, it will remain
vulnerable to economic shocks. Recognizing the high probability of such
shocks in the coming years, we believe Brazil will be plagued by financial
difficulties through the rest of the decade.
35 Argentina: Economic Prospects in 1984
Raul Alfonsin, who assumed the Argentine presidency on 10 December, faces
a stagnant economy, 400-percent inflation, and a de facto foreign payments
moratorium. We expect the government to have a few initial successes but to
encounter economic difficulties by midyear.
41 Colombia: Debt Difficulties Weaken the Economy
The lackluster world economic recovery and banker resistance to new lending
so far have blunted President Betancur's ambitious domestic economic poli-
cies.
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Perspective
International
Economic & Energy
Weekly
Major Latin American Debtors:
Economic Difficulties Aheadl 25X1
The Brazilian, Mexican, and Argentine economies will not experience rapid
growth soon even if a strong recovery in world import demand begins to ease
financial strains in 1984. Moreover, difficulties in obtaining new credits and
investment bottlenecks will impede any strong near-term recovery. Instead, we
expect another year of stagnant economic performance and depressed living
Even if the IMF eases its conditions for continued lending, the economic
adjustment programs that would still be required by debtors will preclude a
strong demand-led recovery:
? Brazil has been battered by rising unemployment and a 7-percent decline in
real per capita income in 1983.
? With the 30-percent drop in real wages in 1983, consumer demand in
Mexico is extremely weak.
? Although the new civilian government in Argentina hopes to stimulate a
recovery, the need to cut a deal with the IMF will limit the rebound in activi-
Brasilia and Buenos Aires, moreover, tried to restrain inflation by resorting to
price controls in 1983, but their efforts have only weakened their economies.
Persistent triple-digit inflation in both countries has caused financial specula-
tion, high free market interest rates, and a squeeze on business profit margins
These Latin debtors will encounter difficulties in obtaining any credits not
already committed to support their rescue programs. According to the
financial press, the key debtors were unable to syndicate loans necessary to
build infrastructure or to start new development projects in 1983. In addition,
banking sources report the major debtors encountered difficulties in obtaining
trade credits necessary to finance export sales and obtain the imports required
that will hinder any future rebound.
Moreover, investment bottlenecks have emerged that will also restrain the
major Latin economies:
? New investment by the private sector-a major engine of growth in the
past-will remain depressed because of limited access to foreign exchange
and domestic credit, import retrenchments, curtailed demand, and price
controls.
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? The public sector will be unable to pick up the slack. The Mexican
Government plans virtually no real increase in 1984 capital outlays, while
Brazilian and Argentine state corporation investment spending will remain
depressed because of the need to reduce the public deficit.
The interdependence of the Latin economies portends tough challenges for
keeping financial rescue programs on track. Over the past decade, for example,
intra-Latin exports have grown to some $15 billion, about 15 percent of the re-
gion's earnings. Moreover, if rising protectionism in the industrial countries
thwarts these debtors' ability to increase exports, Latin debtors will be forced
to seek additional lending commitments or adopt even more restrictive policies.
Rising domestic economic discontent will make it hard for Latin governments
to comply with their IMF agreements, leading to renewed difficulties with
bankers. As the reality of prolonged recession bumps up against expectations
of improved living standards, political resistance to IMF-backed rescue
programs will intensify. We believe that anti-IMF sentiment could translate
into anti-Americanism throughout the region
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OPEC Production
Steady
Energy
100,000 b/d
OPEC's November output of 19 million barrels per day (b/d) kept pace with
October levels, contrary to widespread industry speculation that production
had slipped significantly. The cartel's total output remained steady as Saudi
Arabia and Kuwait continued to produce about 300,000 b/d as war relief
assistance for Iraq. The possible escalation of hostilities between Iran and Iraq
apparently prompted the Saudis to store approximately 20 million barrels of
oil in tankers in the Gulf of Oman as a precaution against short-term supply
disruptions. Technical problems caused output to slip in the Neutral Zone.
Libya's production topped its OPEC-mandated ceiling for the first time since
March, and Qatar, hoping to meet its quota allocation for 1983, raised output
OPEC: Crude Oil Production, 1983
Total
17.5
18.9 19.0 19.0
Algeria
0.725
0.8 0.8 0.8
Ecuador
0.2
0.2 0.2 0.2
Gabon
0.15
0.2 0.2 0.2
Indonesia
1.3
1.4 1.4 1.4
Iran
2.4
2.5 2.4 2.4
Iraq
1.2
1.0 1.0 1.0
Kuwait
1.05
1.0 1.0 1.2
Libya
1.1
1.1 1.1 1.2
Neutral Zone
b
0.5 0.5 0.3
Nigeria
1.3
1.4 1.3 1.3
Qatar
0.3
0.3 0.4 0.5
Saudi Arabia
5.0 C
5.6 6.0 5.9
United Arab Emi
rates 1.1
1.2 1.2 1.2
Venezuela
1.675
1.7 1.7 1.7
a Preliminary.
b Neutral Zone production is shared equally between Saudi Arabia
and Kuwait and is included in each country's production quota.
c Saudi Arabia has no formal quota; it acts as swing producer to
meet market requirements.
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OPEC Ministerial OPEC oil ministers meeting in Geneva reaffirmed the current benchmark
candidate for Secretary General.
price of $29 a barrel and the cartel's output ceiling of 17.5 million barrels a
day, turning aside demands by Iran and several other members for higher
quotas. After acrimonious debate, Saudi Arabia agreed to. continue as the
cartel's swing producer but refused to accept the specific quota of 5 million
barrels a day. The ministers also agreed to name a special group to help
OPEC's monitoring committee enforce discipline but failed to agree on a
deteriorate early next year.
The outcome of the meeting essentially leaves OPEC's problems with the
market unchanged. Despite reaffirming its output pact, the cartel still faces
the problem of enforcing compliance. The need for a committee to enforce
production and pricing guidelines reflects OPEC's fear that some members
will not hold the line. Continued violation of the accord will put OPEC in a
poor position to confront the weak oil market when conditions further
Downward Oil Price The British National Oil Company has proposed freezing North Sea oil prices
again about an uncontrolled oil price decline.
the proposal in the hope of price cuts.
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Dutch Natural
Gas Policy
Lagos has threatened to cut oil prices if London initiates a reduction. While
the British National Oil Company will try to hold the line on the price of its
major export crude, prices of its other crudes could be lowered slightly.
Continued market weakness and the threat of losing an important contract,
however, could force the company to cut prices and would raise concerns once
at current levels for the first quarter of 1984. With spot prices running more
than $1 below official levels, some industry analysts expect buyer resistance to
riod would lessen the need for additional Soviet gas.
The Economic Committee of the Second Chamber of Parliament has endorsed
the Dutch Government's proposed revisions to natural gas policy including
higher gas export volumes, higher domestic residential gas prices, and
termination of the gas allocation policy. The committee also recommended
that new export contract prices reflect the flexible offtake obligations and
security implications of Dutch gas. The committee's general endorsement of
the revised policy suggests that the Second Chamber will accept the proposals
in parliamentary discussions in January. Although the volume of additional
gas exports has not been set, it could amount to at least 175 billion cubic me-
ters, or more than four times last year's exports. Because of ample near-term
supplies, Dutch export customers will probably be interested only in signing up
for gas to be delivered in the 1990s. Any increase in Dutch gas during that pe-
Big Seven Oil Oil consumption in the seven major developed countries during the third
Consumption Registers, , quarter rose a scant 0.2 percent-the first year-over-year increase since 1979.
Small Gain Oil consumption rose 2 percent in the United States and Japan in response to
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strong economic growth; demand in the major West European countries
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Mexico Reaches
IMF Agreement
Oil Consumption Trends, Third-Quarter 1983
Percent change from
year-earlier levels
Total Gasoline
Diesel
Fuel
Light
Fuel
Oil
Heavy
Fuel
Oil
Big Seven
0.2 1.9
5.4
0.6
-12.4
United States
2.2 2.4
6.3
7.4
-12.3
Japan
2.3 3.0
7.5
5.0
-0.9
Canada
-5.1 -1.6
5.7
-25.6
-23.2
Western Europe
-4.6 0.6
3.4
-12.3
-20.4
West Germany
-5.2 1.7
2.7
-16.3
-18.1
France
-6.6 -0.2
0.9
-14.9
-38.4
United Kingdom
-0.8 1.7
11.0
-1.3
-13.8
Italy
-5.0 -1.8
2
8
-0
7
.
.
-16.4
(France, West Germany, Italy, and the United Kingdom) and Canada,
however, dropped by about 5 percent from year-earlier levels. Sales of all
major products except heavy fuel oil increased during the third quarter. Sales
of gasoline, diesel fuel, and light fuel oil in the seven countries rose by about 2
percent, 5 percent, and 1 percent, respectively. Increased light fuel oil sales in
the United States and Japan more than offset continued declines in Western
Europe and Canada. In contrast, heavy fuel oil use dropped by 12 percent and
has declined by nearly 45 percent since 1979 in response to substitution of oth-
International Finance
During the negotiations, the IMF held fast to a $4 billion ceiling on external
borrowing in 1984. This stipulation will force Mexico City to turn to internal
sources to finance the reserve fund. US Embassy officials believe, and we
agree, that such domestic borrowing would push growth in the move supply
beyond the 1984 monetary expansion goal.
first quarter and noninflationary financing is available.
Mexico City has reached preliminary agreement with the IMF for a 1984
program that continues to emphasize austerity. Mexico's desire that economic
recovery begin soon, however, led its negotiators to demand modification of the
definition of the public-sector budget deficit, according to US Embassy
reporting. As a result, the administration will be able to disburse money from a
$1.65 billion reserve fund aimed at generating employment and supporting
investment but still claim that the deficit is 5.5 percent of GDP instead of 6.5
percent. Outlays, however, will be made only if recovery is not evident in the
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South American
Regional Debt
Discussions
Yugoslav Debt
Refinancing
probably press for IMF accommodations on spending limits.
Fund program, is expected to start negotiations early in the year
Although we believe collective action still remains unlikely, the January
meeting in Quito will provide Latin leaders an opportunity to vent their
growing dissatisfaction with IMF austerity. According to numerous Embassy
reports, most Latin debtors object to IMF standby accords that require rapid
improvements in their foreign payments at the expense of domestic economic
growth and slashed social welfare spending. Venezuela, for example, is trying
to bypass the IMF in its rescheduling negotiations with creditors. Peru,
Bolivia, Costa Rica, and the Dominican Republic are facing difficulties in
negotiating with the IMF for 1984 agreements and may not resume talks
before the Quito meeting. Argentina, currently out of compliance with its
debt negotiations.
A new initiative by former Peruvian Economic Minister Ulloa also bears
watching. According to the US Embassy in Lima, he is urging Argentina to
spearhead negotiations with creditors aimed at turning short-term credits into
longer term, low-interest debt. The US Embassy in Buenos Aires has reported,
however, that the Peruvian approach is being resisted by Argentine financial
officials who have lobbied against Alfonsin's accepting a central role in bloc
information on debt renegotiations.
After a temporary respite, discussions are again being held among South
American debtors to consider joint action. According to press reports, Ecuador
is urging Latin American and Caribbean countries to devise a common
position to solve the region's financial problems that can be discussed at an up-
coming conference of Latin American heads of state in Quito during January.
Ecuador hopes to build a united front to press foreign bankers to ease
repayment terms. The Ecuadoreans are proposing longer repayment terms
with extended grace periods, a ceiling on debt servicing determined by the level
of export earnings, easier IMF adjustment programs, and the exchange of
terms, but some may be reluctant to extend new export credits.
Western bankers have offered to refinance Yugoslavia's commercial debt that
matures in 1984, extending the payments over seven years with four years'
grace, according to US Embassy sources. A 90-day moratorium on payments
beginning on 1 January has been granted to give Yugoslavia time to work out
the package. The bankers, however, rebuffed the IMF request for new loans of
$300 million to $400 million because the bankers believe Yugoslavia does not
need new money in 1984. Completion of the commercial refinancing, however,
will depend on conclusion of an IMF standby agreement and a refinancing
agreement with Western governments. IMF negotiations apparently will not
be completed until January at the earliest, and final arrangements could be
substantially delayed if the Fund continues to insist that bankers provide new
loans. Government creditors meeting next month are likely to offer refinancing
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1984 Poultry Meat
Exports
Global and Regional Developments
Although the negotiations were heated, Thatcher apparently did not threaten
again to withhold future EC budget payments until her demands are met. The
next EC summit is scheduled for March, but France-which assumes the EC
presidency in January-is likely to push for a special meeting before then. The
Ten will have to agree on how to raise new revenues by the middle of next year
if the EC is to avoid running out of funds. The summit's failure to agree on the
future course of its agricultural policy will complicate negotiations with the
United States. Although the EC leaders seemed near consensus on limiting
imports of US corn gluten feed, they apparently remain divided on whether to
deal with the United States bilaterally on the issue or to take emergency
government did not have time to address foreign policy issues.
The failure of EC leaders to resolve budget and agricultural problems at their
recent summit in Athens deepens the EC fiscal crisis. A deadlock developed on
ways to limit runaway farm spending and on the burden of the budget. Prime
Minister Thatcher, with the support of West Germany, again threatened to
block new revenue measures until British and West German payments to the
Community are cut. French President Mitterrand, however, rejected new
British budget proposals. The budget dispute was so intense that the Ten failed
for the first time to issue a final communique. Aides prepared draft statements
on the Middle East, Cyprus, and Central America, but the heads of
Weak LDC demand is expected to cause a small dip in world poultry meat ex-
ports next year. Intense competition from subsidized exporters, especially the
European Community (EC), probably will prevent the United States from
Poultry Meat Exports
Total
1,173
1,453
1,834
1,767
1,836
1,814
United States
228
316
375
261
237
237
Brazil
81
170
296
350
382
351
605
678
829
829
859
872
267
345
462
477
519
537
338
333
367
352
340
335
196
207
287
302
322
320
63
82
47
25
36
34
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sidies as part of IMF austerity measures.
making up market share it has lost since 1981. A strong US dollar and
projections of record EC poultry sales next year-resulting from export
subsidies that currently approximate $175 per metric ton and producer
subsidies-will limit 1984 US poultry sales to this year's level. Brazil's
dramatic growth in poultry production and exports in recent years will be put
in check next year because of rising feed prices and a cutback in producer sub-
Indo-Soviet Trade The Indo-Soviet trade protocol for 1984, signed on 9 December, reflects the in-
Growth Planned terest of both governments in resuming trade growth as a symbol of overall co-
operation. During late 1982 and 1983, Indian exporters complained bitterly
about a cutback of Soviet purchases to compensate for an earlier payments
surplus in India's favor. By mid-1983, Moscow opened the way for a revival of
Indian exports within the framework of balanced bilateral payments by
agreeing to sell more crude oil to India. The new protocol projects a six-percent
increase over 1983 targets-to about $2 billion-in the value of Indian exports
to the USSR next year. Soviet exports under the agreement, which does not
cover military sales, are slated to rise as well. Indian preference for Western
technology continues to inhibit a more rapid expansion of bilateral trade even
though Moscow has been courting the Indian private sector to increase Soviet
sales of machinery and equipment.
National Developments
Developed Countries
1984 West German The West German parliament has approved a 1984 budget that calls for
Budget Approved expenditures of $95.2 billion and a $12.4 billion deficit. The spending level
represents a nominal increase of just 1.5 percent over 1983, well below
anticipated nominal GNP growth of 5.7 percent. The deficit is $1.4 billion
lower than originally planned and about $1.5 billion below the 1983 figure.
West German
Unemployment Down
Secret
16 December 1983
avoid.
The Kohl government is fulfilling its campaign pledge to check government
spending, largely at the expense of social programs. Holding to the govern-
ment's austere financial plan, however, will pose several difficulties. Important
elements within the governing coalition are urging a relaxation of tight-fisted
policies for fear of jeopardizing the economic recovery. The government will
also face risks of increased expenditures, such as hikes in EC contributions and
subsidies to the beleaguered coal and steel industries that it may not be able to
Seasonally adjusted unemployment fell slightly in November to 2.25 million-
about 9.3 percent of the labor force. This was the third month without an in-
crease in joblessness following 42 months of steadily rising unemployment. The
leveling off results from recovery, increased industrial training programs, and
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the mild fall weather that extended the working season for the construction in-
dustry. The respite will help dampen criticism of the government's austerity
program, but this will probably prove temporary. We expect unemployment to
start rising again next year and remain a major problem through the 1980s.
Anticipated growth of the West German economy will not be strong enough to
absorb the growing number of labor, force entrants, who will far exceed
French Farmers Protest Farmers throughout France have mounted peaceful protests to emphasize their
policies to raise French agricultural prices by 3 percent.
concern about declining farm income and their opposition to proposed changes
in the European Community (EC). Poor harvests, increased costs, and reduced
government subsidies are blamed for reducing real farm income this year by
nearly 4 percent. Hog farmers are irate over increased imports of Hungarian
pork that sells for roughly 60 percent of the price of domestic pork. While wine
and vegetable producers are particularly concerned with the proposed entry of
Portugal and Spain into the EC, French farmers in general are opposed to any
reform of the EC's Common Agricultural Policy that would reduce their
incomes. Instead several powerful agricultural unions have called for EC
Swedish Wage Wage negotiations begin this month in Sweden under a new system that has
Negotiations Begin individual labor unions and employer organizations bargaining directly for the
Under New Bargaining first time in 26 years. The trade union confederation (LO) sought the new
System system because Swedish wok h ff
r
d
Expansionary Greek
Budget Unveiled
various other benefits. The Swedish Employers Confederation, on the other
hand, is proposing only a 1.3-percent wage increase. The Social Democratic
government will probably press its union allies to moderate wage demands in
an attempt to bring inflation down to 4 percent in 1984 and help maintain
Negotiations probably will be protracted. The LO announced in November it
would seek one-year agreements with wage increases averaging 7 percent and
include nonmonetary benefits in the wage-bargaining process.
era ave su ere
a fall in real disposable income
for three straight years. The LO hopes to obtain more favorable settlements
from employers in the more profitable sectors, such as the auto and aircraft in-
dustries. For their part, business leaders have wanted a change in the form of
collective bargaining for some time because they want more flexibility to
higher taxes on private business and high-income groups.
tai outlays will decline, the Social Services Ministry share will increase-
jumping almost 30 percent in nominal terms. The budget projects a real
increase in revenues, with reduced taxes on lower income groups offset by
The Greek Government last week announced an expansionary 1984 budget
that will disappoint its foreign creditors. The public-sector deficit will be no
lower than 1983's 15 percent of GDP. While defense spending as a share of to-
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ness to provide loans.
The new budget is likely to undermine the willingness of foreign bankers to
loan money to Greece. According to the US Embassy, international bankers
were hoping that Athens would implement an austerity program that would
help its foreign financial situation. Creditors had recommended cuts in public
expenditures and encouraged increases in exports and private investment. The
bankers probably will conclude that the Papandreou government is unable or
unwilling to take the needed economic steps and could reassess their willing-
Agriculture Spurs The record wheat harvest and good harvests of other cereal crops will boost the
Australian Economy Australian economy in 1984-GNP growth is expected to be 5.2 percent.
Australia expects to harvest 20 million metric tons of wheat, nearly triple last
year's drought-blighted crop and 2 million tons above the previous record. The
Bureau of Agricultural Economics expects farm incomes to increase by 75
percent, replenishing farmers' cash reserves and increasing demand for farm
equipment. The strong harvest should improve Australia's foreign financial
position as well because Canberra has been successful in marketing this year's
crop overseas
Australia Shelving
Resource Tax .
Iranian Import
Problems
Secret
16 December 1983
the Hawke government is backing away from
plans for a resource tax on crude oil and coal exports. The tax on profits had
been proposed by the newly elected Labor government last March. Under
pressure from mining companies and state governments, Canberra apparently
has decided the tax would further depress the Australian c 1 industr and
discourage new investment and jobs in coal and petroleum.
Less Developed Countries
Growing congestion at Iranian points of entry will add to Tehran's economic
nrnblems, particularly in major cities that depend on imports for daily needs.
Early this month, more than 100 ships were in queue to unload at the
Persian Gulf port of Bandar-e Abbas and in September delays at the port
were running four to six weeks, Even
high-priority military cargo is being delayed two to three weeks before
unloading, Goods ordered by Iran are
building up in Turkish and Pakistani ports awaiting overland transshipment.
Tehran has had to shift import traffic away from its major Persian Gulf port of
Bandar-e Khomeyni as a result of Iraq's attempts to interdict shipping in the
northern Gulf. The resulting dislocation has been worsened by a 30-percent
increase in Iranian imports this year. Much of the increase is probably to
compensate for declines in domestic production, especially in agriculture. In
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Major Iranian Ports of Entry
Caspian
Sea
Bandar-e Anzali
Now
Shahr
Persian
Gulf
Gulf of
Oman
New
Arabian
Sea
0 200
Kilometers
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Iran's transportation and economic problems will increase.
addition, the regime has restarted some large, import-intensive projects begun
under the Shah. The arrival of winter will slow imports further and delay the
flow of goods within Iran. If Iraq further disrupts shipping at Bandar-e
Khomeyni-where 20 percent of Iranian imports still are being handled-
Burma's Industrial Burma's Central Executive Committee (CEC) has initiated a number of
Reforms
Polish Economic
Reform Stalled
problems of serious shortages of fuel and foreign exchange.
ments in the economy, however, because they will not solve the primary
industrial reforms in response to a party committee study detailing the failure
of the country's four-year plan. The study cited shortages of electrical power,
transportation, and proper storage as factors causing most industrial projects
to be behind schedule and over cost. The CEC called for modernizing existing
factories and the development of natural gas reserves and hydroelectric
projects. The CEC reforms are not likely to result in any near-term improve-
these decision.
Progress toward economic reform is being stalled by the regime's concern
about maintaining political control. Over the last two years the government
has not permitted most firms to use their own hard currency earnings, has con-
tinued to bail out firms in financial troubled instead of permitting bankruptcy,
and has severely curbed workers' self-management powers. These actions
conflict with what were once considered the most important of the reforms.
Furthermore, at last month's party Central Committee plenum, the new head
of the Planning Commission, Manfred Gorywoda, pledged tighter central
control of wages, prices, production, and raw material procurement. In
January 1982 the government agreed-on paper-to allow enterprises to make
to help deal with the debt problem.
The regime has weakened economic reform because it fears the political
consequences of further price increases and links between wages and produc-
tivity. It also fears that economic reform eventually will intensify pressure for
political reform. Without economic reforms, however, prospects remain dim
for economic recovery and for the improvements in export performance needed
Inflation in Yugoslavia Yugoslav retail prices rose 7.2 percent in October after jumping a record 7.6
at Record High percent in September. Prices in December are now expected to be at least 50
percent higher than levels a year earlier, far in excess of the government's
target of 20 percent and of last year's rise of 32 percent. The primary causes of
the acceleration in inflation are buoyant aggregate demand, the sharp
depreciation of the dinar-47 percent against the dollar so far this year-and
the lifting of a price freeze on 1 August. Prices of some food products soared
by 400 percent in September.
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16 December 1983
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the dinar should keep inflation high at least through 1984.
Real wages could fall by 10 percent or slightly more this year, continuing the
trend since 1978. Worker pressure to reverse the decline is likely, and
grumbling probably will be most noticeable this winter as price increases for
heating oil and electricity are felt. Government-sponsored trade unions, which
so far have supported austerity, are now beginning to call for wage increases as
real buying power falls. Worker demands and the likely further depreciation of
USSR Seeking To The USSR is pressing those trade partners with which it traditionally runs
Increase Exports
large trade deficits to increase purchases of Soviet goods. I 25X1
recent grain negotiations with the Canadians broke down 25X1
the Japanese for large-dial
Soviets demanded that the
machinery and equipment.
when Moscow insisted on achieving a better bilateral trade balance. Talks on 25X1
terms for a possible Australian meat sale were terminated as a result of
demands that Australia buy more Soviet goods. In October negotiations with
pipe.
The Soviets for years have been urging their trade partners to keep bilateral
accounts in better balance by increasing their purchases of Soviet goods. They
have had only limited success, however, because of the poor quality of their
products. The good Soviet grain crop and record meat output this year,
however, have improved the Soviets' negotiating position. As the USSR has
begun to produce its own large-diameter pipe, Moscow also may believe it is in
a stronger position to demand concessions from companies that export such
Limited Soviet Gold Soviet gold sales this year will probably be about equal to those of 1982-
Sales approximately 100 tons-because additional revenues are not required to cover
hard currency import payments.
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International Financial Situation:
Political Update
This article is part of our series focusing on the
economic and political aspects of the international
financial situation.
Political developments in the past month have
improved the domestic climate in a number of
financially troubled Third World countries. Re-
cently concluded national elections in Argentina,
Venezuela, and Jamaica have temporarily put op-
position parties on the defensive. Mexico's ruling
party swept municipal elections in November, al-
though opposition groups are protesting alleged
ballot fraud in some towns. In Brazil the govern-
ment has managed over the past month to gain
IMF and banker approval of new austerity mea-
sures providing a few months' respite from opposi-
tion political agitation.
In a number of other countries the situation has
taken a turn for the worse. Government opponents
remain highly active in the Philippines, Peru, and
Bolivia. We expect unrest in the Philippines to
center increasingly on economic issues as the im-
pact of harsh austerity measures begins to be felt.
In Peru's municipal elections on 13 November
voters repudiated President Belaunde's austerity
Although by far the majority, moderate opposition
groups in the Philippines have been forced to yield
ground to new alliances of radical groups that are
taking the lead in organizing protests. As many as
50,000 workers participated in a 27 November
rally in Manila to commemorate the birthday of
murdered opposition leader Benigno Aquino. The
rally was sponsored by several organizations, in-
cluding the May First Movement, a national labor
organization that is a front organization of the
Communist Party of the Philippines. Increasing
leftist penetration of the "Justice for Aquino, Jus-
tice for All" alliance, a new coalition of about 90
professional, labor, and human rights groups op-
posed to Marcos, is the main reason for the recur-
ring anti-US themes in demonstrations.
We believe the opposition's success in organizing
large demonstrations-more than three months af-
ter Aquino's death-confirms that the breach be-
tween President Marcos and the people is deep and
possibly irreversible. In addition, the apparent abil-
ity of the May First Movement to stage a large
rally suggests that the economy has become a
critical political issue. Rescheduling negotiations
are on hold because of an impasse with the IMF
over the size of the Philippines' financial gap in
1984. In the meantime, foreign exchange markets
are in disarray, and the Central Bank has enacted
foreign exchange controls. Philippine business
groups are predicting that even with new loans
there will be massive layoffs in coming months
because of the sharp drop in imports and domestic
production.
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The swing to the left in Peru's municipal elections
will increase pressure on President Belaunde to
adopt more populist policies. The voters' repudia-
tion of his economic austerity program mainly
helped the center-left American Popular Revolu-
tionary Alliance, which captured most major mu-
nicipalities except Lima and 38 percent of the total
vote. A Marxist group, the United Left coalition,
came in second overall and won the important
mayoralty in Lima, where the government finished
a distant fourth.
Belaunde has announced plans to change his eco-
nomic team and its policies in an attempt to
improve his party's chances for the presidential and
congressional elections in 1985. Such moves would
be politically popular, but they would damage
Peru's position in talks with the IMF. Failure to get
the IMF program restarted soon will jeopardize
Lima's chances for rescheduling existing debt and
obtaining new loans.
In Bolivia, the survival of the 13-month old Siles
government is threatened by popular unrest
The governme to
announcement in mid-November of a 60-percent
devaluation and price increases for basic goods and
services-moves designed to pave the way for an
IMF loan and renegotiation of the country's foreign
debt-provoked a demonstration in La Paz and
strikes by transport workers and civil servants.
Secret
16 December 1983
tors have called for the Supreme Court to take over
of a new cabinet of national unity and establish "
political and economic truce." Opposition legisla-
resignations were intended to permit the formation
try. Foreign Minsiter Ortiz told the press the
down most economic activity throughout the coun
government's austerity measures, prompting the
resignation of Siles's 18-member cabinet. This ac
tion followed a two-day general strike that closed
On 14 December Bolivia's legislature rejected the
the government and call general elections.
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International Financial Situation:
Trade Financing Cutback
This article is part of our series focusing on the
economic and polit'cal international
financial situation.
Cutbacks in trade financing pose yet one more
complication to economic management by the debt-
troubled LDCs. Prior to mid-1982, Western export-
ers readily assumed short-term risks and extended
trade credits, thus supporting rising LDC imports.
LDC financial problems, however, have disrupted
short-term trade financing by prompting Western
exporters and bankers to demand prepayment or
collateral. Continued difficulties in obtaining trade
credits for vital imports will impede many LDCs'
ability to expand production for export and in turn
service their debts.
Recent Developments
Debt reschedulings and foreign exchange shortages
have seriously undermined the confidence of West-
ern traders in the integrity of traditional short-term
financial instruments used to conduct international
trade. Liquidity problems of some debt-troubled
LDCs have required lenders to refinance short-
term trade-related debts, converting them into
longer term maturities. Strict foreign exchange
controls have also prevented many importers in
these countries from acquiring foreign currencies
needed to clear their trade bills, resulting in arrear-
ages. While reliable statistics on the contraction of
trade credits are unavailable, Department of Com-
merce officials report that exporters have stopped
doing business in many debt-troubled LDCs on the
basis of short-term lines of credit because they
expect defaults or other repayment difficulties.
A similar aversion to risk-taking has affected
Western banks and trade finance houses. Prior to
mid-1982, most banks considered short-term,
trade-related financing to be low risk and assumed
trade credits would not be included in debt resched-
uling packages. Now export credit managers of
trade finance houses are under strict orders from
senior management not to increase exposure in
countries with widely publicized financial prob-
lems, according to Commerce officials F
'') Z v'I
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fill the financing gap created by the cutback in
exporter credits.
Among the key LDC debtors:
? Brazilian importers are having a hard time secur-
ing Western financing for imports.
? Philippine companies are unable to purchase for-
eign exchange for trade transactions, according to
Embassy reporting. New commitments for letters
of credit or bankers' acceptances are unlikely
during Manila's 90-day moratorium on principal
repayments.
Lagos is negotiating with its
major nonbank creditors to refinance $3-5 billion
of overdue short-term trade credits over a five-
year period, according to press reporting.
? Western exporters are wary of shipping goods to
Argentina without prepayment or a confirmed
letter of credit. Strict exchange controls, lack of a
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Trade credits refer to open account transactions,
sight and time drafts, confirmed and unconfirmed
letters of credit, bankers' acceptances, and similar
instruments used to finance specific trade transac-
tions. Typically these lines of credit mature in less
than one year. Most financing (for example, open
accounts, unconfirmed letters of credit, and drafts)
places the exporter at risk if default occurs. Other
instruments (for example, confirmed letters of
credit and bankers' acceptances) have the banks
assuming the risks.
An open account is an open book (charge) account.
After shipping goods, the exporter sends an invoice
to the importer indicating when payment must be
made.
A draft is a written demand for payment. The
importer makes payment to the exporter by a
check drawn on the importer's demand deposit
account. A sight draft is payable upon presentation
and a time draft matures on a fixed or determin-
able future date.
A bankers acceptance is a time draft accepted by a
bank. If a bank accepts a time draft, it agrees to
pay the face value of the draft at its maturity in the
event the importer does not pay. Banks may sell
the acceptance at a discount prior to its maturity.
A letter of credit is a contractual letter issued by a
bank. Letters of credit are flexible, varying in
format, phraseology, and content. Generally when
a bank opens a letter of credit for an importer, the
importer agrees to reimburse the bank and the
bank agrees to pay the exporter upon presentation
of specific documents (that is, an order bill of
lading) in exact conformity with the terms of the
letter of credit. Most letters of credit are irrevoca-
ble. If a letter of credit is confirmed, then a well-
known second bank has agreed to guarantee the
primary bank opening the letter of credit.
Secret
16 December 1983
new IMF standby program, and the de facto
payments moratorium are delaying repayment of
some trade credits and increasing the difficulty of
securing new trade financing.
? Many Western banks are hesitant to provide Peru
new trade credits because Lima is attempting to
include some outstanding trade bills within its
1983 debt refinancing plan and the banks oppose
this action.
? US bankers express concern that any new credits
offered Ecuador are likely to be rescheduled later
because Quito is arranging a $750 million trade
financing facility, effectively extending existing
short-term trade debts another 13 months.
? Venezuelan importers are unable to purchase
foreign currencies to clear their trade bills be-
cause of strict foreign exchange controls. Embas-
sy reporting indicates that many Venezuelan
companies have had their foreign lines of credit
closed, with Western exporters requiring con-
firmed letters of credit
In contrast, Mexico's previously cut trade credits
have been partially restored. Mexico has been able
to secure trade credits primarily because of its
strong performance in meeting the 1983 austerity
targets.
Implications
Exporter and banker reticence to continue extend-
ing trade credits will hamper debt-troubled LDCs'
financial recovery. Not only are most debt-troubled
LDCs reducing imports as part of their austerity
programs, but the shortage of trade financing is
preventing purchases of goods required for export
production. If foreign exchange earnings suffer, the
ability of these countries to service their debts will
be further eroded. Cutbacks in trade financing will
also strain liquidity, forcing the debt-troubled
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LDCs to draw from already depleted reserves to
finance imports. Although we anticipate that medi-
um-term borrowing will replace some short-term
trade financing, this will mean stretching out re-
payment problems.
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Mexico: Policy Choices and
the Economic Outlook
President Miguel de la Madrid's tough austerity
measures have eased considerably the economic
crisis he inherited last year. By bringing Mexico's
foreign financial accounts largely into balance he
has helped the country regain some access to
foreign capital markets, but to continue making
progress he will have to hold the economy on a tight
leash during the next two years. If de la Madrid
can hold fast to austerity and lay a sounder founda-
tion for eventual economic recovery, inflation
would be reduced, the foreign exchange rate would
begin to stabilize, and financial independence
would be partially regained through restraining the
expansion of the debt service burden. Accompany-
ing such a policy, however, would be greater unem-
ployment and a steeper drop in living standards.
His task will not be easy. De la Madrid will be
forced to weigh whether reducing unemployment
through a partial rebound in industrial production
is worth the costs of continued high inflation and
expanded foreign debt. He will also be under some
pressure to loosen investment and trade controls to
reduce the number of bankruptcies of inefficient
domestic firms and show he has not forfeited
control of national decisionmaking authority.
Regardless of which course is followed, we believe
it is unlikely that Mexico will regain normal access
to foreign capital markets and reestablish economic
growth-and job creation-on a sustainable basis
within the next few years. The depth of Mexico's
problems and the magnitude of its foreign debt
overhang ensure that it will be two or three years
until production reaches the level of the early
1980s. Real personal consumption will remain be-
low the 1980-81 levels during the remaining five
years of de la Madrid's term
De la Madrid's Economic Objectives
Mexico's economic agenda for the next couple of
years will largely be determined by de la Madrid's
priorities and his actions in the coming months.
Mexico's National Development Plan. recent
speeches
indicate President e a Madrid has four basic
economic objectives-each backed by various polit-
ically relevant groups and commanding wide sup-
port in Mexican society. These goals, however,
cannot all be achieved simultaneously.
Price and Exchange Stability. During the past two
years, hyperinflation has shaved one-third off real
minimum wages and led to a drop in the value of
the peso. The higher costs of imports has antago-
nized organized labor and the middle and upper
classes because of their great dependence on for-
eign purchases. In de la Madrid's only formal press
conference in October and during the 1984 budget
presentation in late November, the President em-
phasized that the fight against inflation would
remain the core of his economic policy.
Regain Financial Independence. De la Madrid is
scaling back development projects and increasing
local taxes to pay government debt and capital
purchases out of domestic savings so Mexico can
live within its means. This has led to a greatly
reduced foreign borrowing program and delays in
loan drawdowns when possible.
gravate underemployment
Economic Recovery and New Jobs. Only if the
economy recovers can ambitious Mexicans achieve
upward mobility and the growth in unemployment
and underemployment be stemmed. Currently,
Mexico is resorting to job sharing and reduced
labor productivity while cutting real wages to hold
the line on unemployment, even though these ag-
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Mexico: Foreign Revenues and Import Capacity
1980
1981
1982
1983 a
1984 b
1984 c
1985 b
1985 c
Foreign exchange income
26.2
32.0
31.3
30.7
33.0
31.7
36.0
33.5
Merchandise exports
16.8
20.9
22.2
22.0
23.0
22.5
24.5
23.5
Oil
10.3
14.4
16.4
15.5
15.8
15.5
16.5
16.0
Other
6.5
6.5
5.9
6.5
7.2
7.0
8.0
7.5
Services
8.1
9.9
8.5
8.4
9.5
8.9
10.5
9.5
Tourism (including border sales)
5.4
6.5
5.6
5.7
6.5
6.2
7.0
6.5
Other
2.7
3.4
2.9
2.7
3.0
2.8
3.5
3.0
Direct foreign investment
1.3
1.2
0.6
0.3
0.5
0.3
1.0
0.5
Nonimport outflows or obligations
22.4
34.4
34.1
26.8
28.5
30.1
31.2
35.2
Debt service due
10.8
15.0
19.4
19.4
20.6
21.2
23.0
24.0
Interest
5.5
8.4
10.9
11.4
11.6
12.2
12.0
12.5
Principal (medium and long term)
5.4
6.6
8.5
8.0
9.0
9.0
11.0
11.5
Other service obligations
7.9
11.0
8.1
6.4
7.4
7.9
8.2
9.2
Tourism (including border purchases)
4.2
6.2
4.4
3.7
3.7
3.9
4.0
4.5
Remittance of profits, royalties, etc.
0.4
0.6
0.5
0.2
0.3
0.4
0.4
0.5
Transportation, freight, and insurance
1.9
2.4
1.8
1.2
1.7
1.8
2.0
2.2
Other
1.3
1.9
1.4
1.3
1.7
1.8
1.8
2.0
Errors and omissions
-3.6
-8.4
-6.6
-1.0
-0.5
-1.0
NEGL
-2.0
Net foreign exchange earnings before imports
3.8
-2.4
-2.7
3.9
4.5
1.6
4.8
-1.7
Change in reserves
1.1
1.0
-3.2
3.0
2.0
NEGL
2.0
-1.0
Foreign exchange earnings available for
merchandise imports
2.7
-3.4
0.4
0.9
2.5
1.6
2.8
-0.7
Foreign borrowing
16.1
27.3
14.0
8.1
8.5
11.4
10.2
15.7
New medium- and long-term capital
10.9
17.1
12.1
6.1
3.5
6.4
10.2
15.7
Rescheduled medium and long term
4.0
19.0 d
5.0
5.0
Net short-term capital
5.2
10.2
-2.1
- 17.0 d
NEGL
NEGL
NEGL
NEGL
Merchandise imports
18.8
23.9
14.4
9.0
11.0
13.0
13.0
15.0
Memorandum items
Trade balance
-2.0
-3.0
7.8
13.0
12.0
9.5
11.5
8.5
Current account balance
-7.2
-12.5
-2.7
3.6
2.5
-1.6
1.8
-3.7
External debt (at yearend)
50.7
74.9
80.8
84.1
83.6
86.5
82.8
91.2
Short term
11.1
22.5
25.0
10.0
10.0
10.0
10.0
10.0
Debt service ratio (percent)
Due
43.5
48.7
63.1
63.6
63.4
67.3
65.7
72.7
After debt relief
43.5
48.7
53.3
43.9
48.0
51.4
65.7
72.7
a Projected.
b Projected, assuming Mexico maintains tough austerity through
the three-year IMF stabilization program.
c Projected, assuming Mexico relaxes austerity, increasing imports
and public spending.
d Includes $14 billion short-term debt rescheduled as long-term
obligations.
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Balanced Economy. Economic nationalism has long
been an overriding principle that has led to protec-
tion of local industry, restrictions on foreign invest-
ment, and conservation of natural-and especially
uil-resources. This has forced the government-
and large public enterprises-to assume larger
roles in the economy. Even so, Mexico's private
sector provides the bulk of employment, and deci-
sionmakers believe free enterprise is most likely to
generate the jobs needed to satisfy the rapidly
expanding labor force.
The unprecedented foreign debt expansion during
Lopez Portillo's six years as President-and the
recent restructuring of the debt-ensure that Mexi-
co's debt service burden will rise in coming years.
While debt reschedulings have postponed most
principal payments, this will produce a bunching of
amortization payments in later years. Moreover,
debt rescheduling has substantially increased inter-
est rate spreads charged to Mexico, largely offset-
ting the decline in international interest rates. Debt
service in 1983 and 1984 will average $15 billion
per year-nearly matching earnings from foreign
oil sales. Unless Mexico undergoes another massive
debt rescheduling in 1985, debt service will exceed
$23 billion that year. In 1987, debt service will
again soar when the roughly $30 billion resched-
uled during 1982-84 by the public and private
sectors begins to come due at a rate of about $8
billion each year.
The huge and growing debt burden and continuing
weakness in world oil prices have seriously under-
mined Mexico's import capacity.' Our analysis
indicates that-as in the recent past-imports are
likely to be only slightly greater than gross foreign
borrowing. In 1983, largely because of the need to
'We calculate Mexico's foreign purchasing power by projecting its
available cash flow during 1984-85. Net Mexican resources avail-
able for imports each year are calculated by subtracting nonimport
obligations and projected changes in foreign exchange reserves
from foreign exchange earnings. These net domestic resources plus
gross foreign borrowing-including new loans and rescheduled loan
replenish depleted foreign exchange reserves and
repay short-term emergency loans, import capacity
from domestic resources remained depressed and
imports plunged 40 percent for the second consecu-
tive year. In 1984 import capacity will recover
slightly with expanded exports and a stronger
initial foreign exchange reserve position. Thus, a
major boost in imports next year will depend on
new foreign loans. For 1985, even with tough
austerity, we project Mexico would need to increase
foreign borrowing substantially to support import
volume at even one-half the 1981 level.
The public sector will absorb the bulk of what
foreign loans are available because of the financial
problems of Mexico's private firms. We believe it
will be several years at least before foreign com-
mercial bankers consider extending limited credits
to the private sector. Restructuring privately held
commercial debt has proceeded slowly, and many
firms are in de facto default. Despite recent agree-
ments to reschedule private debt under the gener-
ous terms offered by Mexico City, foreign and
domestic business sources are gloomy about long-
term repayment prospects. Many businessmen now
expect defaults on one-fourth to one-half of these
loans. As a result, firms reorganized from the
remnants of former high-riding enterprises will
have difficulty obtaining new foreign credits.
Alternative Projections
To understand the bounds of likely economic trends
during 1984 and 1985, we compared the results
from maintaining tough austerity to those of con-
siderably relaxing the stabilization program. We
see actual policy and economic trends falling be-
tween these paths. In either case, during the next
two years, we believe Mexico's financial problems
and limited access to world capital markets will
preclude any substantial increase in Mexico's pro-
ductive capacity. Nevertheless, by shifting imports
toward raw materials and intermediate goods,
Mexico City can increase capacity utilization,
boosting the supply of goods for the consumer
market or export.
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Mexico: Macroeconomic Implications of
Alternative Courses
Continued Tough
Austerity a
Relaxed
Austerity b
1984
1985
1984
1985
GDP growth (percent)
0
2
4
6
Jobs created
NEGL
250,000
500,000
750,000
Growth in per capita
consumption (percent)
-3
-1
1
3
Inflation (percent)
45
25
80
100
Public-sector deficit
(percent of GDP)
5.5
3.5
12.0
15.0
balance (billion US $)
E 1 d bt C
xterna e
836
828
86.5
91.2
next year-close to Mexico City's 1984 target of 40
percent. Nevertheless, the economic and political
costs of continued austerity would be substantial:
? Per capita consumption would decline for the
third straight year.
? Unemployment would gradually increase to the
25-percent range
Stimulating the Economy
We believe poor economic performance could lead
to political pressure to adopt expansionary policies.
According to recent US Embassy reporting, the de
la Madrid administration has been negotiating for
additional flexibility under the IMF program if
economic expansion is not under way by the second
half of 1984. If Mexico relaxes austerity in 1984,
(billion US $) we project the economy could grow as much as 4
a Assumes Mexico City keeps imports and public spending percent. The costs would be substantial, however,
depressed. including:
b Assumes Mexican policymakers relax austerity by increasing
imports and public spending. ? Greatly increased government deficits and near
c Yearend. triple-digit inflation.
Continued Tough Austerity
As revealed by the late November presentation of
the 1984 budget and by other recent public and
private statements, austerity is Mexico City's
planned policy course next year. De la Madrid
intends to further reduce the public deficit as
a share of GDP from 8.5 percent in 1983 to
5.5 percent next year. The government plans to
hold growth in spending even with inflation, while
revenues are expected to increase faster because of
more efficient tax collection and higher prices for
public-sector goods. At the same time, net foreign
borrowing is projected to fall by $1 billion to
$4 billion for all of 1984.
Our analysis indicates that because of depressed
private-sector demand and stagnant government
spending, there would be no change in economic
activity next year; current government projections
call for at most economic growth of 1 percent. On
the other hand, inflation would fall to 45 percent
? Sharply higher foreign borrowing requirements.
? A faster plunge in the exchange rate.
Mexico could sustain such policies only if the
economy were opened to foreign investment and
foreign bankers were provided with guarantees that
encouraged them to renew and increase loan and
trade credit lines. Unemployment and underem-
ployment, however, would not improve much from
current levels because of the large numbers of new
labor force entrants.
Should de la Madrid pursue this course, Mexico's
economic stabilization program would be endan-
gered, probably postponing self-sustaining econom-
ic recovery. If higher spending causes Mexico to
miss IMF performance targets by a wide margin,
we believe de la Madrid would find it necessary to
clamp down on the economy again in late 1984 to
ensure continued access to essential foreign fund-
ing. Such a start-stop course could drag out eco-
nomic recovery and undercut the government's
longer term objective of creating enough jobs for a
rapidly growing labor force.
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Impact of External Factors
Despite the broad array of choices that are open to
de la Madrid, the course of the economy during the
next two years also will depend on factors outside
of Mexico City's control. Either a setback in the
current world economic recovery or a deterioration
in the international lending climate-perhaps
brought on by a debt default in another country-
could preclude Mexico City's current option of
relaxing austerity. A drop in demand for Mexican
oil or a reduced availability of credit would severely
circumscribe Mexico City's options. For example,
each dollar change in oil prices-Mexico currently
gets an average $27 per barrel-would cost Mexico
about $500 million in annual oil revenues, and each
one-percentage-point increase in world interest
rates boosts debt service obligations roughly $800
Implications for Longer Term Policy Options
The measurable consequences for the balance of
the de la Madrid administration (1985-88) are
clear. Under any policy option-barring a dramatic
rise in world oil prices-Mexicans face continuing
economic adjustments and depressed levels of
personal consumption. We believe that economic
management problems will mount once the clear
justification for austerity fades, political pressures
for noticeable improvement intensify, and the pri-
vate sector continues to experience financial diffi-
culties. Moreover, distortions, inefficiences, and
waste are likely to grow and encroach further on
private decisionmaking. In this setting, nonoil ex-
port expansion necessary to increase import capaci-
ty and revitalize economic activity is unlikely.
million each year.
On the other hand, a major disruption in world oil
supplies-perhaps brought on by trouble in the
Middle East-could boost oil revenues and allow
Mexico City to spur a noninflationary economic
recovery. In these circumstances, as oil revenues
increased, Mexico's import capacity would be in-
creased markedly. The government could prepay
principal obligations and, at the same time, reopen
factories and rapidly boost industrial capacity utili-
zation. Higher imports and lower domestically fi-
nanced public deficits could reinforce anti-infla-
Because well-organized interest groups have a
hearing at the highest level in Mexico's political
system, the government will face intense pressures
for high subsidies, generous wage increases, and a
return to an overvalued exchange rate during the
remaining de la Madrid years. Social problems
papered over by the oil boom and now festering
under the constraints imposed by the economic
crisis, will increasingly demand the government's
tionary policies.
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Brazil: Medium-Term Financial
Outlook Under Alternative
Economic Scenarios
Although creditor concerns over Brazil's interna-
tional financial situation recently eased when the
IMF resumed disbursements following approval of
Brasilia's stabilization program, many bankers are
skeptical that Brazil can secure sufficient funds
from private and official sources to cover its longer
term financing needs. Our projections suggest that
under favorable global economic conditions the
country's credit needs could decline considerably
over the decade to levels that can be financed. In
the event of global economic shocks, however,
Brazil's financial requirement could grow to an
amount that would keep the country in financial
crisis. Recognizing that the world economy is un-
likely to follow our favorable assumptions and,
instead, that economic shocks will occur in the next
several years, we believe Brazil probably will face
serious financial difficulties through the rest of the
Setting the Stage
During the past few years, steadily rising debt
service obligations and depressed foreign exchange
earnings have caused Brazil's foreign borrowing to
surge. Since 1979, debt service payments have
grown by an average of $4.5 billion a year while
foreign exchange earnings have grown only one-
third as fast. As a result, debt service payments in
the past five years exceeded foreign exchange
earnings by $17 billion. To finance this shortfall
and imports, Brazil's gross borrowing rose steadily
over the period, reaching $31 billion in 1983-$12
billion more than in 1979. This borrowing increase
' This article is the first in a planned series that assesses the longer
term financial outlook for key debt-troubled LDCs based on
pushed the country's outstanding debt to its present
level of slightly more than $90 billion.
To examine whether Brazil's demand for credit will
continue to grow in the next several years, we
constructed a balance-of-payments simulation
model. Given assumptions about future global eco-
nomic conditions-such as economic growth, inter-
est rates, inflation, and oil prices-and the future
course of the Brazilian economy, the simulation
model projects trade trends, debt service payments,
gross borrowing, outstanding debt, and other vari-
ables required to determine financing needs. We
then used the model to examine Brazil's financial
requirement under four sets of assumptions. One
scenario assumed favorable global economic condi- 25X1
tions through 1990, while each of the others as-
sumed that the world economy would be buffeted
by a different economic shock.
Favorable Economic Conditions: Dwindling Credit
Needs
We first projected Brazil's financial requirements
through the rest of the decade assuming favorable
global economic trends. We assumed that during
the next seven years:
? Brazilian and world real GDP grows at an aver-
age annual rate of about 3 percent.
? Interest rates decline by 2 percentage points.
? Oil prices rise by $2.00 per barrel each year.
? World export prices grow, on average, at about 6
percent each year.
In addition, we assume in this, and the other
scenarios, that prices and volumes of Brazilian
exports and imports will respond to changing condi-
tions as they have done in the past two decades.
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Under these favorable global economic assump-
tions, Brazil's projected financing needs would
lessen considerably in the 1984-90 period. Net
borrowing-the amount of new money borrowed-
could drop off to about $7 billion in the next two
years, down one-third from 1981-82. During the
rest of the decade, net borrowing should steadily
decline, turning negative in 1988 when principal
payments exceed gross borrowing. Gross borrowing
would still remain in the $28 billion range through
1987-down $3 billion from 1983-before falling
by about $1 billion each year through 1990. Based
on these projections, outstanding debt would peak
in 1987 at $110 billion before returning to the $90
billion level by the end of the decade.
Growing trade surpluses would be responsible for
the bulk of this projected reduction in Brazil's
longer term financing needs. We project that Bra-
zil's exports and imports in real terms would grow
at average annual rates of 8.0 and 4.5 percent,
respectively, through 1990. As a result, the trade
surplus would rise to $23 billion in 1990, up from
its current level of $4 billion. The growing trade
surplus would outstrip increases in principal and
interest payments and would allow Brazil to reduce
its level of annual foreign borrowing throughout the
decade.
Global Economic Shocks: Multiplying Credit Needs
In contrast to the relatively optimistic assessment
of Brazil's future financial situation under favor-
able global economic conditions, our projections for
scenarios incorporating economic shocks indicate
that credit needs could grow rapidly-and in some
cases rise to record levels. While the timing and
magnitudes of the three shocks-a classical reces-
sion, a tight money recession, and an oil supply
disruption-differ, the severe damage inflicted on
Brazil's financial position in the long run would be
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16 December 1983
similar. In the three years after the shock, however,
the degree of damage done would be different.7
and slack credit demand.
Classical Recession: Credit Needs Rise Moderate-
ly. As one alternative to the favorable economic
conditions case, Brazil's financial requirement was
projected assuming the occurrence of a classical
recession. Specifically, we assumed in this scenario
that in 1985 a worldwide recession hits due to
sagging demand. In this case:
? World real GDP growth and world export price
inflation decline because of reduced demand.
? Oil prices hold steady in the face of lower
industrial production.
? Interest rates fall in response to lower inflation
Of the global economic shocks examined, a classi-
cal recession should do the least immediate damage
to Brazil's financial position. Under these assump-
tions, Brazil would have to borrow about $32
billion annually during the 1985-87 period-$8
billion of which is new money. This $8 billion of net
borrowing compares to the $11 billion of net bor-
rowing during 1981-82. Compared with the favor-
able economic condition case, the additional
amount of borrowing generated in this period by
the recession would be about $10 billion. The bulk
of the additional $10 billion increase in borrowing
would result from sharply lower exports. Slower
world economic growth and reduced export price
inflation would cause this to occur. Based on higher
borrowing levels, Brazil's outstanding debt would
rise steadily from its current level of $90 billion to
about $130 billion at the end of the decade under
this scenario.
Tight Money Recession: Credit Needs Boosted
Significantly. As another alternative to the favor-
able economic conditions case, Brazil's longer term
credit needs were projected under the assumption
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Brazil: International Financial Trends
Exports
Imports
- Trade balance
Principal payments
Gross borrowing
Net borrowing
Favorable
conditions
4111 Classical
recession
MENIF
I I I I
-10 1980 85
Borrowing Requirement
Capital requirement
Trade balance (inverted)
nr
LJ
90
Borrowing Requirement
Favorable conditions
----- Classical recession
- - Tight money recession
Oil supply disruption
L1
90
ME
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that a tight money recession occurs. This recession,
assumed to occur in 1984, could evolve if the
central banks of industrial countries adopt restric-
tive monetary policies. In particular we assumed:
? Tight monetary policy drives up interest rates.
? Higher interest rates stifle spending, leading to a
slowdown in GDP growth.
? Lower demand for imports results in lower world
export price inflation.
? Lower demand for energy, by increasing the oil
glut, keeps oil prices from rising.
In terms of its effect on Brazil's medium-term
financing needs, our projections indicate that a
tight money recession would be worse than a
classical recession. If such a recession were to occur
in 1984, the model projects that in the following
three years Brazil would be required to borrow $32
billion annually, including $10 billion of new mon-
ey. The additional borrowing that would be re-
quired if the global economy is struck by a tight
money recession can be traced to lower exports and
higher interest payments compared with the favor-
able economic conditions case. As a result of
increased borrowing, outstanding debt would peak
at about $130 billion in 1988 before declining
slightly through 1990
Another Oil Shock: Credit Needs Jump Dramati-
cally. We assess the impact of an oil shock on
Brazil's financial requirements by assuming an oil
supply disruption in 1984 similar in magnitude to
what would occur if Persian Gulf oil shipments
were disrupted. Specifically, we assumed an oil
shock would set off the following chain of events:
? The oil supply shortfall would cause a rapid
runup of oil prices to the $60 per barrel level.
? Higher oil prices would stunt world GDP growth
and cause export price inflation to accelerate.
? Increased inflation would drive up nominal inter-
est rates despite slackening credit demand.
Our projections indicate that an oil supply disrup-
tion of this magnitude. would increase Brazil's
credit needs more rapidly than the other cases. In
the three years after the oil shock, the country's
gross borrowing requirements could average $35
billion annually-$ 12 billion of which would repre-
sent infusions of new money. Moreover, net bor-
rowing in 1985 could reach the unprecedented level
of $14 billion-$3 billion higher than the 1982
level that precipitated financial crisis. In terms of
cumulative damage, the shock could raise borrow-
ing in the 1984-86 period by almost $20 billion
above the level projected under favorable economic
conditions. This dramatic increase in borrowing
would push outstanding debt to $136 billion in
1988-a five-year increase of over $45 billion.
We estimate that significant increases in Brazil's
imports and interest payments, in comparison with
the favorable economic conditions case, would be
responsible for most of the additional borrowing
that the oil shock would generate. In this scenario,
Brazil's average annual imports and interest pay-
ments in the 1984-86 period would be $27 billion
and $15 billion, respectively, compared with $23
billion and $12 billion under the favorable econom-
ic conditions case. Rising oil prices and interest
rates would be responsible for these increases.
Can Projected Credit Needs Be Satisfied?
While it is difficult to predict the future behavior of
international lenders, we believe that Brazil's credit
needs under the favorable economic conditions
case-an annual average of $6 billion of new
money in the next three years-probably could be
satisfied. Lenders-both official and private-
could be willing to loan this amount of new money
in the future for the same reasons they did in the
past two years; they may continue to believe that
Brazil's problem is one of illiquidity rather than
insolvency, especially when they see the country's
trade surplus beginning to grow. Lenders could
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Brazil: Key Assumptions for Alternative Scenarios
Favorable Economic Conditions
Brazilian real GDP growth:
? Negative in 1983 and 1984
? Accelerates from 2.0 percent in 1985
? Reaches 5.0 percent in 1989
World real GDP growth:
? Developed countries-averages 3.0 percent over the
period
? Developing countries-rises steadily after no growth in
1983
Interest rates:
? Hold steady in 1983 and 1984
? Fall slowly over the next six years
Oil prices:
? Hold steady in 1983 and 1984
? Rise slowly through 1990
World export price inflation:
? Negative in 1983
? Accelerates peaking in 1985
? Declines over the rest of the decade
Brazilian inflation and exchange rate:
? Close parity between inflation and dev ates
? Both fall sharply from their 1983 level
Brazilian real GDP growth:
? Same
World real GDP growth:
? 2.5 percentage points lower in 1985
? 1 percentage point lower in 1986
Interest rates:
? 1.5 percentage points lower in 1985
? 1 percentage point lower in 1986
? 0.5 percentage point lower in 1987
Oil prices:
? $3 lower 1985 through 1990
World export price inflation:
? 6 percentage points lower in 1985
? 4 percentage points lower in 1986
? Same
a Compared with the favorable economic conditions case
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16 December 1983
Oil Supply Disruption a
Brazilian real GDP growth:
? Same
World real GDP growth:
? 3 percentage points lower in 1984
? 2 percentage points lower in 1985
? 1 percentage point lower in 1986
Interest rates:
? 2.5 percentage points higher in 1984
? 3 percentage points higher in 1985
? 2 percentage points higher in 1986
? I percentage points higher in 1987
Oil prices:
? $50 per barrel vs. $29 in 1984
? $60 per barrel vs.$32 in 1985
? $55 per barrel vs. $34 in 1986
? $50 per barrel vs $36, $38, $40,
and $42 in 1987 through 1990
World export price Inflation:
? 4 percentage points higher in 1984
? 3 percentage points higher in 1985
? 2 percentage points higher in 1986
? 2 percentage points higher in 1987
? Sams
Tight Money Recession a
Brazilian real GDP growth:
? Same
World real GDP growth:
? 2 percentage points lower in 1984
? 1 percentage point lower in 1985
Interest rates:
? 3 percentage points higher in 1984
? 1.5 percentage points higher in 1985
Oil prices:
? Same
World export price inflation:
? 2 percentage points lower in 1984 and 1985
Brazilian inflation and exchange rate:
? Sam
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make new loans that would bridge this period of
illiquidity and keep old loans current if they believe
a turnaround is possible. Writing off nonperform-
ing loans would damage short-term earnings, while
making new loans to keep old loans current would
notJ
We believe, however, that Brazil's annual new
money requirements of $8 billion to $12 billion
following a global economic shock could approach
amounts that lenders would be unwilling to finance.
Although lenders financed similar large amounts
during 1981-82, they may balk next time. If lenders
begin to question Brazil's longer term ability to
repay loans, they may decide to cut their losses.
Under these conditions, Brazil and its creditors
would be forced to reach some comprehensive
agreement rescheduling the terms of outstanding
debts.
Based on our estimate of the size of future credit
needs, there is a high probability that Brazil will be
haunted by financial difficulties throughout this
decade. The determining factor would be whether
the global economy in the next several years is hit
with adverse shocks. If the past 10 years are any
guide, we would expect at least one major economic
shock to the global economy in the next few years.
In that case, Brazil's financial problems would
linger through 1990.
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Argentina: Economic Prospects in 1984
Raul Alfonsin, who assumed the Argentine presi-
dency on 10 December, faces a stagnant economy,
400-percent inflation, and a de facto foreign
payments moratorium. According to his initial
statements, he is determined to use his electoral
mandate, the rebound in public confidence, and
improved economic expectations to support plans to
stimulate the economy and at the same time slow
price increases. Moreover, his economic team has
indicated to world bankers its willingness to facili-
tate the refinancing of some $18 billion in foreign
debt in 1984 and to enter into a new IMF agree-
ment provided it allows for some stimulation of the
economy.
We expect improvement in the economy during the
first half of 1984. Inflation should drop sharply,
both because of increased confidence and expected
policies under the new Radical Civic Union govern-
ment
.
This may enable the n
w
e
P
res
id
t
en
to con-
clude wage and price settlements that will further
lower inflation to a monthly rate of about 5 per-
cent. At the same time, his plans to stimulate
growth by increasing government spending for
housing and welfare programs should generate a
modest economic recovery during the first six
months. Foreign exchange problems are expected
to ease early next year as a result of the seasonal
resumption of foreign grain sales.
Beyond mid-1984, however, economic and political
pressures will build. We expect that inflationary
pressures will increase and that Alfonsin will dis-
cover that his tax restructuring and collection
Argentina: Balance of Payments
Billion US $
Current account balance
-0.5 -4.8
-4.7
-2.5
-2.0
Trade balance
Q.3 -2.4
-0.3
2.3
3.5
Exports, f.o.b.
9.6 8.0
9.1
7.6
7.7
Imports, c.i.f.
9.3 10.4
9.4
5.3
4.2
Net invisibles
(noninterest)
-0.3 0.3
0.2
0.5
0
Interest payments
-0.5 -2.7
-4.6
-5.3
-5.5
Capital account balance
4.6 2.4
1.4
-2.9
0.5
Direct investment
0.3 0.7
0.9
0.3
NA
Short-term nonbank
borrowing
1.6 -1.6
-8.2
-5.3
NA
Other, including errors
and omissions
Financing
-4.1 2.5
3.3
5.4
2.5
Reduction in reserves
-4.4 2.8
3.8
0.7
-0.2
Other, including accumu-
lation of arrears
0.3 -0.3
-0.5
4.7
2.7
budget deficit by halting disbursements and re-
stricting new lending, Alfonsin's economic team
will have little choice but to rely on monetary
expansion, leading to a resurgence of inflation
efforts have not generated sufficient funds to cover The Economy in 1983
increased public spending. If the IMF and interna-
tional bankers later next year react to a growing After the economic chaos triggered by the Falk-
lands conflict, Argentina began 1983 on a hopeful
note. A default had been staved off by a $1.1 billion
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Argentina: Economic Indicators
Real GDP Growth
Percent
Current Account 2
Balance
Billion US $
Manufacturing
Output
Index: 1970=100
a December over December.
b Estimated.
c Projected.
1977 78 79 80 81 82b 83 c
Consumer Price
Growth a
Percent
Agricultural
Production
Index: 1970=100
Public Sector
Deficit
Percent of GDP
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commercial bank bridge loan and a $2.2 billion
IMF rescue program. Moreover, a projected re-
bound in export earnings after a 16-percent decline
in 1982 and a $1.5 billion loan scheduled for
disbursement in the second half of 1983 were
expected to cover foreign financing requirements.
This year did not turn out as well as expected,
however, and the Alfonsin government inherited
rampant inflation and a stagnant economy. Infla-
tion was never brought under control; consumer
prices will probably reach 400 percent for 1983,
discouraging production and new investment while
encouraging speculation. The military govern-
ment's inability to deny high wage demands eroded
fiscal discipline. Despite some initial improvements
in industrial capacity utilization, economic growth
will probably be no more than 1 percent for the
year.
The foreign financial rescue program ran into
difficulties as a result of a dispute with bankers
over domestic legal issues affecting the debt. Be-
cause Buenos Aires was unable to access promised
loans, it failed to eliminate interest arrears by the
end of June as agreed upon with the Fund, thus
stalling bank and IMF loan drawings. Despite
having drawn foreign reserves down to precariously
low levels in September to make external payments,
Argentina still had substantial interest arrears.
These past-due payments and meddling in debt
negotiations by Air Force officers and a maverick
judge in October triggered another series of delays
in the disbursement of loans, forcing Argentina into
a de facto payments moratorium. Noncompliance
with IMF targets halted drawings against some
$950 million in Fund credit and $1 billion remain-
ing in a medium-term loan arranged earlier in
1983.
Alfonsin's Ambitious Program for 1984
Press statements indicate that the Radical Party
wants to promote growth, mainly through demand-
stimulation policies. They are expected to follow
through on their party platform pledge for housing
and antipoverty programs that Alfonsin expects to
fund, according to the US Embassy, by cutbacks in
military spending and badly needed tax reform and
collection efforts. Private industrial activity will be
stimulated by subsidized interest rates.
At the same time, the Alfonsin government believes
that the strong mandate from voters and the rees-
tablishment of a constitutional government will
brake uncertainty and speculation, reducing price
hikes to about 10 percent a month. Economy
Minister Grinspun plans to capitalize on the initial
reduction in the inflation rate to reach wage and
price control agreements with labor and business.
He hopes to limit real wage increases to 6 percent
annually and reduce monthly price hikes to a
5-percent pace.
Alfonsin also plans to:
? Proceed with IMF negotiations. By the time
Grinspun develops an economic plan to present to
the IMF, however, Argentina probably will be so
far out of compliance with its present program
that disbursement of IMF money is unlikely
before April.
? Discuss rescheduling and new loans with com-
mercial bankers to settle past due payments and
to purchase imports needed to activate industry.
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? Welcome foreign investment that is beneficial to
Argentina but control it closely. 25X1
Likely Successes-The First Six Months
We agree with Grinspun's assessment that inflation
will drop sharply as the civilians come into power.
The Embassy points out that high wage demands 25X1
and sharp price hikes in the immediate preelection
period were in anticipation of wage and price
controls following the election. The outgoing mili-
tary regime was particularly receptive to popular
wage demands because of its strong desire to
maintain domestic tranquility before the elections.
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The civilian administration, in our view, will not
feel the need to be as generous. Additionally, the
easing of speculation and the impact of price
controls will tend to slow price hikes
The initial easing of prices makes Grinspun's goal
of a 5-percent monthly inflation rate a realistic
target in our view and will support his demands for
union and business cooperation with the new
government. Behavior of the free market foreign
exchange rate since the election indicates that
inflationary expectations have already diminished.
Alfonsin's attempts to stimulate the economy are
certain to prove popular and at least create an
impression of positive change. Businesses will be
pleased initially with subsidized interest rates and
reductions in military spending that should make
more credit available to the private sector. Similar-
ly, support for more housing, higher real wages,
and antipoverty programs should likewise encour-
age wage earners.
Argentina's external payments difficulties are like-
ly to abate temporarily. Seasonal foreign grain
sales are scheduled to resume this month and will
generate new flows of foreign exchange. The recent
disbursement of $500 million in new loans will
relieve some bank pressure to reduce growing inter-
est arrears. We also expect lenders will be willing to
allow small reductions of the interest rate spread
and extend grace and repayments periods to coop-
erate with the new government.
There is a small risk that the performance criteria
in any new IMF program could stall a quick
reconciliation with bankers. We judge that there is
ample room for reduction of the Argentine budget
deficit-likely to be near 15 percent of GDP in
1983-but we expect Grinspun's projection of a
deficit totaling 7 percent of GDP in 1984 to be a
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16 December 1983
point of contention with the Fund. Grinspun's plans
for import and capital controls and export subsidies
are also likely to delay an agreement and could
prevent the anticipated cash-flow improvements
from materializing
We believe Alfonsin ultimately will be forced to
establish a new IMF program to gain access to new
bank loans. The US Embassy indicates that as
much as $4 billion in additional credit will be
required by Buenos Aires to clear past-due debts,
obtain imports to nourish a recovery, and rebuild
foreign exchange reserves in 1984. Any agreement
Grinspun brings home, however, has the potential
to cause trouble. Unless presented to the public as a
growth program with which the banks are assisting,
it could trigger a backlash, fueling demands for a
long-term moratorium.
A Tougher Second Half
cies for their own political ends.
After a good start, we expect economic difficulties
to increase substantially around mid-1984. Even if
Alfonsin forges an initial consensus to limit price
and wage increases, we anticipate a resurgence of
inflationary pressures by mid-1984. The sharp in-
crease in the public-sector deficit in late 1983 and
the attendant monetary expansion will translate
into renewed pressure on prices. Any resurgence of
inflation would ultimately undermine labor cooper-
ation on moderating wages. Old-line labor bosses
would be quick to exploit any restiveness, and
Peronist political chiefs would set aside internal
differences to oppose Radical Party economic poli-
Alfonsin is likely to find that he has been overly
optimistic in estimating the fiscal gains from the
tax restructuring and new collection efforts. If he
nonetheless sticks to an expansionary program-
higher public investment, more spending for hous-
ing, higher salaries, and social welfare-he could
quickly lose control over the size of the government
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deficit. We would then expect the IMF to halt
disbursements under any new loan programs. This
would rule out foreign borrowing, and the Radicals
would have little choice but to resort to domestic
monetary expansion, furthering inflationary pres-
sures.
The reductions in industrial costs derived from
subsidized interest rates would be quickly over-
whelmed by another round of salary increases.
With tight price controls, profit margins would
then be squeezed and bankruptcies would increase.
Resulting rises in unemployment would gut the
initial gains in purchasing power by wage earners.
Stagflation would then be likely to emerge by late
Implications for the United States
A breakdown in Argentina's debt renegotiations-
should it occur-would have serious implications
for US banks. Buenos Aires was the fourth-largest
debtor to the United States with $8.2 billion out-
standing to US lending institutions at the beginning
of 1983. A long-term moratorium, or some selected
default, would quickly push some Argentine loans
into the nonperforming category, seriously eroding
the profits of some US banks and perhaps necessi-
tating a US Government bailout or bank mergers.
We consider a major confrontation with interna-
tional lenders to be unlikely during the first six
months of the administration, but after that the
odds will grow if the economy worsens. Grinspun is
an unproven debt negotiator, however, and his 25X1
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lead to an impasse at any time. 25X1
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Colombia: Debt Difficulties
Weaken the Economy
The lackluster world economic recovery and banker
resistance to new lending so far have blunted
President Betancur's ambitious domestic economic
policies. As a result, we believe the Colombian
economy has grown by only 1 percent this year-
the worst performance since 1950-with inflation
remaining at about 25 percent. Despite import cuts,
declining exports and capital flight continue to
drain foreign exchange reserves at a time when
foreign bankers are increasingly reluctant to extend
substantial new credits to Colombia, thereby
heightening the prospect of debt servicing disrup-
If Bogota is unable to obtain substantial new
international loans-as seems likely-it will be
forced next year to join other South American
countries in rescheduling its external debt under
IMF auspices. At this juncture, we believe Bogota
will have to undertake a politically unpopular
economic adjustment program to improve its exter-
nal accounts and reduce inflation. The Colombian
economy will probably suffer through yet another
year of near-zero growth, high unemployment,
double-digit inflation, and falling real wages. Mea-
sures to resolve economic problems will continue to
adversely affect US interests and, at worst, Presi-
dent Betancur may shift to an even more inward-
looking, nationalistic economic strategy.
A Weakening Economy
During the late 1970s Colombia registered solid
economic gains through buoyant external condi-
tions and conservative fiscal policies:
? Real growth averaged 5.5 percent during 1976-80
because of growing exports, industrial develop-
ment, and new construction.
? Inflation averaged 24 percent annually-not ex-
cessive by Latin American standards-reflecting
relatively tight fiscal and monetary policies.
? Booming exports of coffee and sugar-and mari-
juana-combined with small increases in imports
to generate an annual average $185 million cur-
rent account surplus; foreign borrowing require-
ments were moderate.
Colombia's economic performance, however,
changed markedly after 1980. The overvalued peso
and depressed prices for key agricultural exports in 25X1
the wake of a severe recession in the industrial
countries gradually undermined both the domestic
economy and Colombia's favorable payments posi-
tion. By the end of 1981 the current acccount
deficit plummeted to $1.9 billion and increased a
further 20 percent in 1982.
Betancur's Economic Game Plan Goes Awry
Taking office in August 1982 during a period of
worsening economic performance placed Betancur,
the populist, in a dilemma. Betancur was under
heavy political pressure to adopt more expansionary
policies and gave highest priority to reviving the
economy. He increased public spending and grant- 25X1
ed new subsidies-tolerating a higher fiscal
deficit-to spur growth. Betancur also loosened
monetary restraints by lowering interest rates and
eased access to credit for financial institutions,
importers, and farmers. At the same time he was
implementing these stimulative policies, Betancur
was also pledging to reduce inflation.
Betancur counted on a strong world recovery to
improve the external accounts this year. Instead,
exports headed lower and foreign financing became
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harder to obtain. Coffee revenues-which tradi-
tionally account for half of total export earnings-
have declined because of lower prices and demand
in developed countries. Protectionism and slower
growth in Colombia's Andean Pact neighbors-
who absorb 30 percent of Colombia's exports-are
also adversely affecting sales in the nontraditional
export sector. As a result, debt servicing as a
percent of total exports rose from 15 percent in
1980 to nearly 40 percent this year.
Colombia: Selected Economic Indicators
Real Economic Growth
Percent
Consumer Price Inflation
Percent
Current Account Balance a
Billion US $
Domestically, Betancur's efforts to curry political Billion US $
favor by relaxing fiscal discipline hindered efforts
to reduce inflation. Increased public spending this to
year is pushing the public deficit beyond the 4.5
percent of GDP recorded in 1982. In order to
finance the deficit, Bogota is again increasing the
money supply, thereby perpetuating high inflation.
In addition, some of Betancur's other ambitious
plans are making little headway. Although the
President predicted that 70,000 new jobs would be
created this year by the housing program, construc-
tion has not strengthened, dashing Betancur's plans
to reduce unemployment.
In order to deal with the growing external financ-
ing problem, Betancur has been forced to move
away from his expansionary policies. Earlier this
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a Excluding official transfers.
b Excluding gold.
C Estimated.
Foreign Exchange Reserves,
End of Yearb
Billion US $
Debt Service Ratio
Percent
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year he declared emergency tax reform measures to
bolster the government's coffers. Although legal
problems delayed their implementation several
months, these measures could limit next year's
budget deficit. Bogota has also accelerated peso
devaluations, hiked tariffs, tightened import con-
trols, and taken steps to prevent capital flight.
1983: A Dreary Year
Economic growth is unlikely to exceed 1 percent-
the worst performance in 30 years. Inflation is
outpacing wage gains, resulting in reduced de-
mand; a large proportion of merchants report sales
'
below last year
s levels. New orders during the
second quarter reached the lowest point in years,
based on a survey of industrial executives, causing
Colombia: Current Account Million US $
Current account
balance
-159
-1,895
-2,292
-3,000
Trade balance
-238
-1,544
-1,946
-1,805
Exports, f.o.b.
4,062
3,219
3,230
2,875
Coffee
2,375
1,459
1,577
1,500
Imports, f.o.b.
4,300
4,763
5,176
4,680
Net services and
transfers
79
-351
-346
-1,195
believe international bankers will resist financing a
The US Embassy reports that the unemployment large payments deficit, and Bogota's unwillingness
rate for the four largest cities climbed from 10.8 to cut public spending augurs another large budget
percent in March to 12 percent at the end of deficit. Further increases in the money supply and
June-the highest rate since 1974. The impact of upward pressures on prices appear inevitable.
Betancur's stimulative economic policies will cause
the inflation rate to hover near the 25-percent level.
Despite corrective measures already in effect, Bo-
gota's current account deficit rose to an estimated
$3 billion. Although import retrenchments offset
declining export earnings, Colombia's services defi-
cit increased twofold to $1.2 billion this year
because of falling tourism, interest earnings, and
remittances and a 10-percent increase in interest
payments. Thus far, Bogota has drawn down for-
eign exchange reserves to cover the payments gap,
but its foreign exchange cushion is dwindling. From
yearend 1982 through the end of September, for-
eign exchange reserves fell from $3.9 billion to $1.6
billion.
Betancur will be unlikely to engineer either eco-
nomic recovery or lower inflation in 1984. Accord-
ing to our estimates of recovery in the developed
countries, Colombian exports will not post the
strong rebound needed to spur the economy. We
To regain foreign banker support, Bogota will have
to undertake unpopular economic adjustments un-
der IMF guidance next year. This probably will
entail further peso devaluations, reining in large
budget deficits, and limiting generous wage and
salary increases. These moves will conflict, how-
ever, with Betancur's personal political convictions.
Development lending will have to be restored be-
fore Colombia can exploit untapped energy and
mineral resources. More than half of the invest-
ment funds needed for these longer term projects
are expected to come from international agencies
and foreign banks. Ultimately the development of
coal and nickel deposits could boost the domestic
economy, but there is little hope this will occur in
the near term
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Implications for the United States
Colombian measures to deal with its foreign pay-
ments problems are adversely affecting US inter-
ests. US exports of processed foods, wine, and fresh
fruit have been hurt this year, and more cutbacks
can be expected. US sales to Colombia declined
from $900 million in the first half of 1982 to $425
million during the same period this year. By the
end of 1983, Colombian import cuts will probably
turn last year's $1 billion trade surplus enjoyed by
the United States into a $150 million deficit.
President Betancur could shift to more inward
looking and nationalistic economic policies that
would further harm US interests. He could resort
to increased tariffs, tougher import quotas, and
tighter restrictions on dividend payments or capital
repatriation. The Betancur administration also
could follow the example of other major Latin
American debtor countries by slowing interest and
principal repayments to US commercial banks.
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