(UNTITLED)

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP97-00771R000706860001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 41
• Document Creation Date: January 12, 2017
• Document Release Date: October 20, 2010
• Sequence Number: 1
• Publication Date: February 17, 1984
• Content Type: REPORT

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International
Economic & Energy
Weekly
17 February 1984
ecret
DI IEEW 84-007
17 February 1984
Copy 17 n
Directorate of
Intelligence
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Secret
International
Economic & Energy
Weekly
17 February 1984
iii Synopsis
1 /Pers ective-Su 1 Res onse to an Oil Disruption
Energy
International Finance
Global and Regional Developments
National Developments
13
Internation
al Oil Market: Role of Surp
lus Capacity
19
South Kore
a: Strong Econom
y Boosting Chun's Pros
pects
/
23
Nicaragua:
The Search
for Oil Supplier
27
Internation
al Financial Sit
ua
tion: Current Account O
utlo
ok for Major
Troubled D
ebtors
31
Internation
al Financial it
ua
tion: LDC Trade Restri
ction
s
33 Congo: Liv
ing With the Oil Slump
Comments and queries re arding this publication are welcome. They may be
directed to ~ Directorate of intelligence,
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17 February 1984
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International
Economic & Energy
Weekly
Synopsis
1 Perspective-Supply Response to an Oil Disruption
Recent shelling of border towns by Iraq and Iran and an Iraqi attack on a
petrochemical plant at Bandar-e Khomeyni may presage a major escalation in
the fighting that could threaten oil exports from the Persian Gulf. The 3
million b/d of surplus capacity presently outside the Gulf could offset less than
half of the oil that would be lost by a complete closure of the Strait of Hormuz.
13 International Oil Market: Role of Surplus Capacity
While the current supply cushion is ample to keep the oil market soft under
present circumstances, it is not adequate to overcome a major supply
disruption in the Persian Gulf.
19 South Korea: Strong Economy Boosting Chun's Prospects
South Korean President Chun's political standing has been given a big boost
by the economy's strong performance in 1983. We believe the odds favor
continued high growth and low inflation in 1984 and beyond, which will help
undercut criticism by Chun's opponents and broaden public support for his
government.
23 Nicaragua: The Search for Oil Suppliers
Nicaragua's short-term economic prospects hinge on enlisting foreign patrons
to foot a substantial share of its $135 million annual oil bill. Most likely
candidates are the USSR and such sympathetic Middle East countries as
Algeria and Libya)
27 International Financial Situation: Current Account Outlook for Major
Troubled Debtors
This article is part of our series on economic and political aspects of the
international financial situation. We estimate that the 10 largest troubled
debtors outside the Soviet Bloc will record a combined current account deficit
of about $10 billion this year-a $3 billion improvement over last year and $30
billion better than the deficits registered in 1981 and 1982.
iii Secret
DI IEEW 84-007
17 February 1984
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31 International Financial Situation: LDC Trade Restrictions
This article in our series on economic and political aspects of the international
financial situation examines the increased use of import controls by most LDC
33 Congo: Living With the Oil Slump
Congo, once one of black Africa's most ardent Marxist states, has drifted to
the right after recognizing that earnings from its Western-operated oil
industry are crucial to the nation's economic health.
Secret iv
17 February 1984
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Secret
International
Economic & Energy
Weekly
17 February 1984
Perspective Supply Response to an Oil Disruption
Recent shelling of border towns by Iraq and Iran and an Iraqi attack on a
petrochemical plant at Bandar-e Khomeyni may presage a major escalation in
the fighting that could threaten oil exports from the Persian Gulf. Baghdad
has been threatening such an escalation because of its economic difficulties,
Iran's rejection of mediation efforts, and Tehran's apparent intention of
pursuing a war of attrition. To reverse its financial disadvantage and raise the
stakes for the major powers to intervene in the stalemated conflict, Iraq has
threatened strikes against Iranian oil exports. Iran in turn has warned that, if
its oil exports are significantly reduced by Iraqi attacks, it would close the Gulf
and attack oil installations throughout the area.
Physical damage to oil export facilities and attacks against oil tankers pose the
greatest threats to Gulf supplies. Lloyds of
London is currently considering raising insurance rates for tankers calling at
Khark Island-Iran's main oil export terminal. Increased security precautions
at oil installations in Saudi Arabia, Kuwait, and the United Arab Emirates
(UAE) also reflect heightened concern over more widespread fighting. The
Saudis have increased their oil in storage outside the Gulf to 45-50 million bar-
Unilaterally, the UAE has offered the United
States the use of its ports during an emergency. Iran has the capability to
blockade or mine the Strait of Hormuz as long as its actions are not contested
by Western navies.
Should a disruption occur, the willingness of nonaffected producers to increase
production and the availability of oil stocks will be the major factors in
determining how much of the shortfall can be offset. While we estimate that
surplus oil productive capacity worldwide is presently about 8 million b/d,
most of this-about 5 million b/d-is in the Persian Gulf. The nearly 3 million
b/d of surplus capacity presently outside the Gulf could offset less than half of
the oil that would be lost by a complete closure of the Strait of Hormuz.
Another problem is Libya. With about 700,000 b/d-of:spare capacity, Libya is
one of the major producers outside the Gulf holding a big chunk of the surplus
available that could mitigate a Persian Gulf oil disruption. The others-
Nigeria, Venezuela, Mexico, and Indonesia-are all likely to raise output and
prices during an emergency to boost foreign earnings as much as they can.
Libya is not as financially needy, and, because Tripoli is an ally of Iran, it may
well refuse to help offset a shortfall precipitated by Tehran.
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DI /EEW 84-007
17 February 1984
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Inventories-particularly government-owned stocks-can also play an impor-
tant role in helping to offset a supply shortfall. At present, we consider only
about 300 million barrels of commercial stocks in industralized countries as
surplus to normal operating needs. An additional 500 million barrels are held
in government-owned stockpiles. The lack of policies prescribing the use of
these government-held stocks, however, would limit their effectiveness in
calming the market during a disruption if companies believe they will not be
available.
Chances are slim that a disruption in the Gulf, if it occurs, will be of such size
and magnitude as to exhaust the market's surplus capacity and oil stockpiles.
Nonetheless, given uncertainties about the likely supply response from excess
capacity and stocks, the adjustment to a disruption in the Gulf is likely to be
difficult. Based on past experiences, stockholders will be reluctant to deplete
inventory supplies until the duration of the disruption is clear. Moreover,
because companies profit from appreciation of the value of stocks while prices
are rising, speculative pressures will reinforce precautionary motivations to
hold on to stocks pending resolution of the crisis. Once normal supply is
resumed, the large overhang of surplus capacity probably would drive prices
back down.F__~
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17 February 1984
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Energy
/OPEC Production Contrary to industry forecasts that OPEC production would fall precipitously
remains weak because of OPEC's continued output above its ceiling.
its quota. Despite a recent cold snap that firmed spot prices, the market
in January, OPEC output averaged 18.3 million b/d-the seventh consecutive
month that production has exceeded the cartel's self-imposed ceiling of 17.5
million b/d. Saudi output dropped 400,000 b/d from month-earlier levels but
remained above its implicit quota of 5 million b/d. Buyer hesitancy to enter
Persian Gulf waters and a dropoff in Japanese liftings during contract
negotiations caused Iranian output to fall 100,000 b/d,1 according to our latest
estimate. Output in Indonesia and Nigeria increased 100,000 b/d, respective-
ly. Nigeria hasi planned to further
boost output in February to more t an million b/d for 300,000 b/d above
Million b/d
Quota
1982
1983 a
January b
1984
Total
17.5
18.9
17.7
18.3
Algeria
0.725
0.7
0.7!
0.8
Ecuador
0.2
0.2
0.2;
0.2
Gabon
0.15
0.2
0.21
0.2
Indonesia
1.3
1.3
1.5
Iran
2.4
2.4
2.4
2.2
Qatar
0.3
0.3
0.3,
0.4
Saudi Arabia
d
6.3
5.0
5.2
United Arab Emirates
1.1
1.2
1.2
1.2
Venezuela
1.675
1.9
1.8
1.7
a Estimated.
b Preliminary.
c Neutral Zone production is shared about equally between Saudi
Arabia and Kuwait and is included in each country's production
quota.
d Saudi Arabia has no formal quota; it will act as swing producer to
meet market requirements.
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17 February 1984
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Japanese Maneuver
for Lower Priced
Crude
Japan Increases
overnment-Owned
Oil Stocks
Growing West
E ropean Interest in
ibyan Petroleum
Operations
introduced a pricing formula to make its oil more competitive.
Soft oil market conditions have prompted Japanese companies to turn away
from long-term contracts and increase spot market purchases and deals with
producers offering discounts. Besides giving the Japanese access to lower
priced crude supplies, these tactics are designed to pressure Japan's other
suppliers to be more competitive. Abu Dhabi's failure to meet Japanese
demands for discounts and longer credit terms led the Japanese to refuse to re-
new some of their contracts that expired in January. Abu Dhabi was forced to
cut its oil production in midmonth by 70,000 b/d. Abu Dhabi has offered a
90-day extension, rather than the standard 30 days, on credit terms but
remains firm on prices. Previously, Japanese companies successfully pressed
Iran to tie crude prices to spot prices in renegotiating contracts that expired in
January. The Japanese are threatening to cut back on contracts with Iran due
to expire in February and March, probably to gain additional concessions.
Japan has increased its crude supplies from Oman, which is offering term
contract buyers an extension of payments from 45 to 75 days, and has
Middle East countries-60 percent of total import requirements.
Japanese government-owned oil stocks rose by 9 million barrels last year and
stood at 83 million barrels at yearend-about 20 days of net oil imports. The
government plans to increase the stockpile to 189 million barrels by 1988. A
reduction in commercial stocks more than offset higher government-owned
stocks, leaving total oil stocks at yearend at 440 million barrels or down 24
million barrels from 1982. Total stocks, however, still represent 103 days of net
oil imports in contrast to the period prior to the Iranian revolution when stocks
represented only 82 days of net imports. Efforts to increase the government
stockpile probably reflect Tokyo's concern over continued high dependence on
Middle East oil supplies. Last year Japan imported 2.5 million b/d from the
West European firms are showing more interest in participating in Libya's
petroleum production facilities.
Embassy in Vienna reports that OEMV, the Austrian national energy
company, is interested in purchasing a partial interest in US oil company
holdings. OEMV apparently wishes to diversify its oil supply sources at
minimal cost by investing in proven oil reserves. The willingness of European
companies to assume a greater role in Libya's petroleum sector provides
Tripoli with an alternative to its heretofore strong reliance on US firms for the
expertise needed to exploit the country's hydrocarbon potential.
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Secret
F' and To Increase Under a new gas supply agreement signed in Helsinki on 10 February, Finland
_,--Purchase of Soviet Gas will boost imports of Soviet gas from 700 million cubic meters per year at pres-
Sabotage at Philippine Since late last year, several cases of sabotage have been reported at the US-
Yugoslavia's Hardline
Tactics With the IMF
Greece, and Sweden.
ent to over 2.5 billion cubic meters per year by the end of the century. Finnish
gas demand will be increased by hooking up new customers-mainly industries
and district heating plants-through an extension of the current pipeline
network to Helsinki and Tampere. Although neither Finnish nor Soviet
officials would disclose the agreed price of additional gas supplies, they
indicated that-in contrast to previous agreements-the price would, not be
linked solely to oil prices. The agreement will increase Finland's already
sizable dependence on Soviet energy supplies, and the apparent price flexibility
evidenced by Moscow bodes well for other Soviet gas sales efforts to Turkey,
built and financed Philippine Nuclear Power Plant (PNPP) on the Bataan
Peninsula. Electronic cables were severed from critical plant systems on at
least two occasions, and in another incident, pumps were destroyed. These
particular damages are not expected to cause significant delays. We believe
dissident construction workers on site probably were responsible for the
sabotage. We believe that additional acts of sabotage can be expected because.
the PNPP has become the focal point for vigorous opposition from antinuclear 25X1
groups as well as anti-Marcos elements. The large number of temporary
employees and the numerous construction deliveries make it almost impossible
to protect a nuclear construction site against sabotage. Although the New
Peoples' Army, an insurgent group, is active in the area, there is no evidence
that they have targeted the PNPP. 25X1
lacceptance of the
Fund's condition that interest rates match inflation this year could bankrupt
many Yugoslav enterprises and cause severe political problems.
the Western banks and governments ready to
offer debt relief for Belgrade this year still expect Yugoslavia to reach an IMF
agreement. F--]
political costs.
Bank and government debt relief agreements are conditioned on the Yugo-
slavs' reaching a 1984 standby agreement. The Yugoslav Government's tough
position probably is designed to extract concessions from the IMF. Rejection
of the IMF program would entail even more serious economic dislocations and
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17 February 1984
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 investment was not desired in this sector.
borrowed heavily abroad in the early 1980s and then saw its debt service
obligations double because of peso devaluations. The brewery's problems have
been compounded by a 40-percent decline in its domestic beer sales. The
company's inability to reach a rescheduling agreement on $300 million in
foreign debt brought its financial crisis to a head when one foreign creditor
filed bankruptcy proceedings. Mexico City has already allowed the firm to
defer payment of value-added taxes and is devising a rescue package that
would include increased equity participation by the brewery's principal
shareholders, restructuring of foreign debt, and additional tax relief. Accord-
ing to the financial press, a Mexican official said an offer by a large US brew-
ery to purchase a controlling interest was rejected because additional foreign
program.
Mexican officials do not want the firm to go bankrupt because it would mean
the loss of 5,000 to 8,000 jobs. In our judgment, they also fear that the firm's
default would hurt efforts to complete the 1984 jumbo loan now being
syndicated and would discourage banks, particularly US regionals, from
reopening short-term credit lines. Mexico City has indicated its bailout will
stop short of acquiring the firm, a move it could not afford given its austerity
Peru's Successful Peru has successfully negotiated agreements with its private creditors and the
Financial Negotiations IMF, providing a political boost for the Belaunde government. Last week in
New York Peruvian negotiators and the bank advisory committee agreed to
stretch out $2 billion in short- and medium-term debt repayments over a nine-
year period at sharply reduced interest rates. The agreement cut interest
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Mexico Rescues Mexican treasury officials are preparing a financial bailout of a major brewery
a Brewery and have asked foreign creditors not to force the company into bankruptcy, E
Like several Mexican firms, the brewery
Secret
17 February 1984
charges by one-half percentage point to 1.75 percent over LIBOR, allowed a
five-year grace period for principal repayments, and reduced front-end loan
fees by one-half point. The financial package received favorable press
treatment at home where both President Belaunde and Finance Minister
Rodriguez-Pastor have been under fire for their handling of the economy.
Rodriguez-Pastor indicated publicly that Peru has requested no new funds in
1984 beyond disbursements of the $200 million in loans delayed due to Lima's
failure to meet IMF targets. Bankers have now agreed to disburse these funds
Peru and the IMF have signed a new letter of intent for an 18-month standby
agreement worth some $265 million; it will replace the $700 million Extended
Fund Facility initiated in mid-1982. Embassy sources report that the new
program calls for limiting payments for military imports to $200 million in
1984, down from an estimated $350 million last year. We expect that Lima
will agree to hold the public-sector deficit to near 4 percent of GDP, limit the
loss of foreign reserves, and reduce inflation from 130 to 70 percent this year.
We and most other experts believe that, compliance with the new program will
be difficult given strong domestic pressures against further belt tightening. F
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Secret
Tanzanian Fuel and
F ign Exchange
hortages
East Germany To
Build Engines
/for Volkswagen
Foreign exchange shortages are threatening oil imports needed to ease gasoline
shortages, according to the US Embassy. Although 59,000 metric tons of
crude .oil from Libya recently arrived in Tanzania, the delivery of 80,000 tons
of crude oil from Iran and 24,000 tons of products from Bahrain scheduled for
later this month are being held up by Tanzania's inability to secure $20 million
in financing. Should the deals fall through, a recurrence of last June's severe 25X1
transportation problems is likel and this will curtail the harvesting and
export of key cash crops. 25X1
Global and Regional Developments
Volkswagenwerk AG last week announced plans to join East Germany in
building a VW car engine plant, which would begin production in 1988. The
announcement is another example of intra-German economic cooperation
despite the political chill many expected would be caused-by INF. Bonn, which
owns 20 percent of VW and will be criticized for the loss of jobs at home, con-
tinues to push for better intra-German relations. East Berlin probably sees the
venture as a politically low-cost arrangement with important economic
benefits.
possibly expanded access to the East German market.
The agreement calls for moving an existing VW assembly line in Hanover,
West Germany, to an as yet undetermined site in East Germany. The East
Germans are to deliver 100,000 engines each year in 1988-93 in return for fin-
ished vehicles. Agreement to build the 1,300-engine-per-day plant should help
East Germany by:
? Providing enough engines for the bulk of its own auto production, even after
deliveries to VW.
? Licensing a more advanced engine technology that will save fuel and help re-
duce air pollution.
? Saving hard currency by making the deal largely an exchange of goods and
cutting East Germany's hard currency import requirements.
VW will benefit from East Germany's considerably lower labor costs and
Cuts in Australian Australia's two.largest iron ore producers have quietly acquiesced to a 12-
Iron Ore Prices percent cut in the price of iron ore shipped to Japanese steel mills. The
Japanese pushed hard for the cuts, which lowered prices to 25 percent of 1982
levels. According to the US Embassy, the Australian firms feared that
maintaining prices would have resulted in the Japanese switching purchases to
Brazilian and Indian companies that already had reduced rates. Australia's
smaller iron ore producers are expected to follow suit, and total earnings this
year from Australia's fourth-largest export will fall about $120 million.
7 Secret
17 February 1984
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Taiwan Seeking To
Curb Trade Surplus
With the United States
Taiwan is seeking to reduce its growing trade surplus with the United States,
which reached $6.7 billion last year. The government recently eased import
restrictions on 86 items, although none are major imports from the United
States. Government panels are considering several other steps-relaxing
additional import restrictions, promoting US goods, establishing offshore
export bases, and diversifying export . markets. This goes beyond Taipei's
previous efforts of calling on the United States to sell Alaskan oil and
advanced arms to Taiwan and of sending buying missions. US purchases,
predominately consumer goods and textiles, account for about half of Taiwan's
total exports
Taipei is aware of Washington's concerns about trade imbalances and wants to
head off any US economic retaliation. Taiwan also is worried about the recent
improvement in Sino-US relations and probably will attempt a further
loosening of trade restrictions to improve its own standing in the United States.
National Developments
Developed Countries
Big Seven Inflation The acceleration in economic activity in the major industrial countries is
on the Rise starting to push up inflation. The 12-month rise in the combined Big Seven
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Secret
17. February 1984
consumer price index edged up 0.6 percentage point to 4.4 percent in
Big Seven: Consumer Price Inflation, 1983
I I I I I I I I I I I
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/Introduces Savings
Incentives
December 1983 from the August 1983 low. The pickup came from the
economies that have been in economic recovery the longest-the United
States, Japan, and the United Kingdom-leaving them with the same rates
they had in December 1982. The United Kingdom posted the largest increase
from the low reached in June-1.6 percentage points-ending the year with a
5.3-percent inflation rate. After dipping in September, Japanese price hikes
quickened by December but still remained the lowest among the Big Seven.,
With wage demands slowing under the pressure of record unemployment,
Canada slashed its inflation rate in half in 1983. Still plagued with the largest
price gains among the Big Seven, Italy nonetheless managed to cut inflation by
the end of the year to 12.8 percent as the continuing Italian recession reduced
domestic demand. West German inflation slowed by 1.4 percentage points
since January 1983 to 2.5 percent as economic recovery only started to get un-
der way. Despite the austerity program and price controls imposed by the
Mitterrand government in 1982, French inflation seesawed during 1983,
finishing the year at 9.3 percent.
modernization or expansion programs.
At the initiative of. Finance Minister Cohen-Orgad, a number of measures
designed to encourage savings have been approved by a committee composed
of cabinet members with economic-related portfolios. The measures include:
? Adding indexation for the last month that a deposit is held to avoid losses re-
sulting from inflation.
? Establishing savings plans fully linked to the consumer price index that will
pay real interest of up to 7 percent.
? Introducing one-month government bonds.
Cohen-Orgad pushed these proposals in an effort to reduce private consump-
tion and to provide funds for investment, which has been anemic in recent
years. We believe, however, that Israelis primarily will react by shifting the
composition of their financial portfolios to take advantage of the new
instruments. Businessmen, concerned about Cohen-Orgad's forecast of a 3-
percent decline in real growth this year, remain reluctant to invest in
Black South African The 1 March enactment of a new income tax code could trigger black labor
Unions Oppose Tax unrest. The code will eliminate racially separate income tax systems thereby
anges enabling unskilled and semiskilled black workers to pay less. Tax payments by
married black women and skilled workers, however, will rise by up to 40
t
Alth
h th
d
ill
d
f
b
t 90
f bl
k
e w
percen
.
oug
e co
re
uce payments
or a
ou
percent o
ac
taxpayers, a group of South Africa's largest black unions, representing over
250,000 workers, n,.s called on the government to withdraw the new code.
According to the US Embassy, the unions-many of which have a high
proportion of skilled members-oppose Pretoria's unilateral action and tax-
ation without representation. Many employers reportedly fear the tax change
could cause widespread industrial strife because it has unified the rapidly
growing and increasingly powerful black unions. The depressed economy and
black vulnerability to layoffs, however, could brake the unions' response
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Tokyo Provides Funds Japan's National Project to develop robots for use in hazardous environments
for Robot R&D is getting under way with the formation of a research association and
could have significant military applications
substantial government funding. The eight-year, $95 million project was
allocated only $170,000 in FY 1983 (April-March) largely because of budget
austerity. In the FY 1984 budget, however, the project will get nearly $5.5
million, almost the entire amount requested, according to the Managing
Director of the research association. In January, MITI announced the
formation of the research association made up of 17 robot manufacturers and
two industry associations. Of the seven research areas proposed, MITI chose
three-a marine oil-exploration robot, a nuclear power plant robot, and a robot
for disaster situations, such as fires or earthquakes. The technologies that must
be developed for these applications-vision, sensors, mobility, control-will
have broad applicability to industrial robots. Moreover, designing robots to
operate in extreme conditions-high pressure, intense heat, and radiation-
Less Developed Countries
Western Companies Chevron officials suspended all operations in Sudan last week because of
Moroccan Grain
Crop Jeopardized
Secret
17 February 1984
We believe CCI will now abandon the canal project.
recent dissident attacks on company personnel and facilities. This is a setback
to one of the few bright spots in the Sudanese economy. Chevron was
preparing the Unity oilfield for production of 60,000 b/d in 1986. A pipeline to
transport the oil to the Red Sea was expected to be completed the same year,
but its construction by an Italian consortium also will be put on hold. In
addition, Chevron has stopped exploration work in a promising area of
southern Sudan and we expect the French company Total, which is also
looking for oil, to follow suit. Another French company, Compaigne de
Construction Internationale (CCI), stopped work on the Jonglei Canal after
nine of its workers were kidnaped in November. The canal had been scheduled
for completion in 1986 and would bring additional Nile water to Sudan and
Egypt. Last week dissidents blew up a CCI truck, killing 13 Sudanese workers,
and a few days later attacked a CCI camp and captured six French nationals.
Inadequate rainfall threatens Morocco's important winter grain harvest-90
percent of annual grain production. Southern production areas were devastat-
ed by drought in 1983, and prospects for this year's crop are rapidly waning. It
is increasingly unlikely that total grain production in 1984 will exceed last
year's 3.5 million metric tons, which was 20 percent below normal. Grain
imports of 2 million tons could be necessary to meet demand in 1984 and this
will jeopardize Rabat's foreign payments position and economic stabilization
program. This would make it extremely difficult for the government to keep its
austerity program on track without sharply increasing the risk of additional
social disorders.
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Secret
Ecuadorean Economic Ecuador's external accounts strengthened in 1983 under an IMF stabilization
Update
Malaysia Cancels
uel Subsidies
Uncertainty Over
Zairian Mining
orms
program, and this has paved the way for further gains this year. Despite
progress, arrears on loan repayments continue to concern bankers. Devaluation
and import controls allowed Ecuador to double its trade surplus to $750
million last year. Imports were cut about 30 percent to $1.3 billion, while
exports held steady at $2.1 billion because of the soft oil and coffee prices and
depressed demand in the Andean region. The trade surplus, coupled with a
rescheduling of interest payments, enabled Quito to reduce its current account
deficit by 60 percent to $566 million. Foreign payments progress, however,
came at the cost of a 3-percent decline in economic activity. Consumer prices
increased more than 50 percent because of devaluation, reduced price
subsidies, and weather-induced declines in farm output.
Quito is looking for further improvements this year as a result of the IMF re-
forms, a return to normal weather, and increased oil production. The current
account deficit is expected to shrink as exports rise and imports remain
constrained. Rising agricultural output and austerity policies should cause a
slowing of inflation. The goverment hopes the economy will grow slightly.F
Ecuador's creditor banks recently agreed, in principle, to refinance debt
maturing during the first half of 1984 and to suspend second-half payments
until December. This will give a new administration taking office in August
time to negotiate an accord with the IMF and international bankers later this
year. In the interim, however, bankers remain skittish about lending $500
million in new money because of concerns about arrears and the ability of the
lameduck Hurtado administration to maintain austerity. If bankers do not
provide new money, Quito probably will run up arrears above last year's $500
million level.
In another move aimed at reducing its large budget deficit, Kuala Lumpur
recently removed government subsidies on diesel fuel and kerosene. Govern-
ment officials expect the action to reduce the projected 1984 budget deficit of
$3.25 billion by 5 percent. Not all of these savings may be achieved. Under
pressure from fishing associations, Kuala Lumpur is devising a program to
give direct diesel credits to fishermen. Moreover, tin miners, who are hard hit
by the action, are expected to lobby the government to repeal the decision. F
A change in leadership at Gecamines, Zaire's national mining company, has
created uncertainty over the future of IMF and World Bank requested reforms
in the mining sector. Pierre de Marre was named last week as the new director
of Gecamines, replacing fellow Belgian Robert Crem. According to US
Embassy sources, Crem had antagonized the Belgian Government by trying to
loosen Gecamines's ties to Belgian mining conglomerate, Societe Generale
Minerais (SGM). In addition, Prime Minister Kengo reportedly criticized
Crem for Gecamines's refusal to pay increased taxes and tariffs-losses that
could undermine meeting IMF program targets.
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 some observers believe contributed to corruption.
According to the US Embassy, it is likely that many of Crem's steps to reduce
Gecamines's unprofitable dependence on commercial relations with SGM
subsidiaries will be reversed to help patch up Zaire's economic relations with
Belgium. De Marre's reputation from a previous stint at Gecamines suggests
he will be more malleable and have closer ties to SGM. Renewed dependence
on SGM probably will lead to the reintroduction of financial practices that
China Buys The Canadian firm Spar Aerospace Ltd. will sell 26 satellite earth stations to
Ground Station the People's Republic of China under five contracts signed during Chinese
Canadian Satellite Premier Zhao's visit to Canada last month. The equipment and related
jquipment technology, valued slightly in excess of $20 million, is the largest sale of
Canadian-designed telecommunciations equipment to China. In addition,
Chinese engineers will receive technological training in Canada.
The latest sale apparently came as a surprise to the Canadians who believed
the contracts would go to a US supplier. 'The Chinese decision to complete the
sale with Spar Aerospace-at a cost of $2 million above comparable US
offers-was probably based on political factors. In the aftermath of Zhao's
visit to the United States, China may have wished to demonstrate that it could
find alternative markets if the US was unwilling to provide for the transfer of
sophisicated production technology and technical data to China. China may
also take advantage of the sale to press US firms to lobby Washington for
greater concessions to the Chinese. Ottawa has been eager to participate in the
development of China's ground satellite system to boost Canada's international
reputation in the telecommunications field and to increase exports of high-
technology goods to China.
Hungary Limiting Hungarian authorities are acting more aggressively to curb consumer spending
Cisumer Spending in an effort to deal with foreign payments problems. Hungary devalued the
forint by 2 percent in early February to encourage exports to the West and re-
duce imports. stringent wage and price policies-
including the 25 percent cut in consumer price subsidies-should lead to a f-
or 2-percent fall in real disposable income in 1984. This compares with an av-
erage annual increase of 1 percent a year during the past five years. To siphon
off excessive liquidity, especially from the overheated private sector, the
National Bank on 1 March will raise the interest rate on personal savings and
time deposits by an average of 2 percentage points.
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International Oil Market:
Role of Surplus Capacity
The growing risk of a major escalation of the Iran-
Iraq war increases the possibility of a disruption of
oil flows from the Persian Gulf region. Free World
surplus productive capacity, which at present ap-
proximates 8 million b/d, is concentrated in the
volatile Persian Gulf. Moreover, some of the nearly
3 million b/d of excess capacity located outside the
Persian Gulf may not be available should a disrup-
tion in the Gulf occur because one-fourth of it
belongs to Libya. Inventories-both government
and privately owned stocks-can also play an im-
portant role in minimizing a supply shortfall, but
commercial stocks have been drawn down over the
past year and policies to utilize government-owned
stockpiles during an emergency remain uncertain.
Sources of Supply
Based on our analysis, Free World available pro-
ductive capacity this year will be slightly more than
52 million b/d.' This includes available capacity of
27 million b/d in OPEC countries. Non-OPEC
producers have another 25 million b/d productive
capacity, including 500,000 b/d in refinery gains
and 1.5 million b/d in net Communist exports.
Under current market conditions, available produc-
tive capacity in the Free World is more than
adequate to accommodate this year's consumption
needs, projected at about 45 million b/d by most
industry forecasters. Under these conditions, we
expect non-OPEC production to average about 25
million b/d this year, up slightly from 1983 levels.
Although demand for OPEC crude in 1984 should
' Available capacity includes only those facilities on line and
capable of responding almost immediately to a decision to raise
production. Production ceilings imposed by individual producers for
policy reasons are also taken into account. This discussion focuses
on available capacity that most accurately measures the possible
rebound by about 1 million b/d from year-earlier
levels, OPEC's share of non-Communist production
will remain less than half for the second consecu-
tive year.
The Present Capacity Cushion
in the Gulf
Given these oil supply and demand forecasts, and
combined with our assessment of worldwide capaci-
ty levels, we believe surplus capacity in non-Com-
munist countries will average about 8 million b/d
this year. Seasonal variations in consumption and
stock changes, however, can cause production and
surplus capacity to vary as much as 2-3 million b/d
during the course of the year. For example, we
expect surplus capacity to swing from 'a high of
about 9 million b/d in the second quarter to 7
million b/d in the fourth quarter.
Barring a disruption in Persian Gulf supplies, an oil
shortfall originating outside the Gulf can be met.
Most surplus capacity is concentrated in the Per-
sian Gulf-about 5 million b/d. Moreover, many of
the countries in the Gulf with surplus capacity-
notably Saudi Arabia, Kuwait, and the United
Arab Emirates (UAE)-are pursuing policies de-
signed to keep oil prices stable at least through
1984 to avert a further decline in demand for their
oil. in our view, these countries are likely to
respond to a disruption elsewhere by raising output.
Individually, Gulf countries-excluding Saudi
Arabia-have surplus capacity as follows:
? Kuwait's surplus capacity currently is about
300,000 b/d. Continued market weakness has
prompted Kuwait to slash its maximum sustain-
able capacity by 1 million b/d to 1.5 million b/d;
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Free World Surplus Productive Capacity,a
1983 and 1984
Consumption
Inventory change
Production
Free world capacity
Non-OPEC
OPEC
Surplus capacity
Non-OPEC
OPEC
I
II
III
IV
Year
44.6
42.7
42.7
44.7
43.7
-3.7
-0.8
1.7
0.1
-0.7
40.9
41.9
44.4
44.8
43.0
24.2
24.3
24.7
24.8
24.5
16.7
17.6
19.7
20.0
18.5
53.5
53.0
52.5
51.9
52.7
24.8
24.8
25.0
25.1
24.9
28.7
28.2
27.5
26.8
27.8
12.6
11.1
8.1
7.1
9.7
0.6
0.5
0.3
0.3
0.4
12.0
10.6
7.8
6.8
9.3
a Including 1.5 million b/d net Communist exports.
b Estimated.
c Projected.
I
II
III
IV
Year
46.0
43.0
43.2
46.0
44.6
-2.2
0.2
1.1
-0.6
-0.3
43.8
43.2
44.3
45.4
44.3
25.0
24.7
24.8
25.2
24.9
18.8
18.5
19.5
20.2
19.4
52.3
52.2
52.5
52.8
52.5
25.4
25.2
25.3
25.6
25.4
26.9
27.0
27.2
27.2
27.1
8.5
9.0
8.2
7.4
8.2
0.4
0.5
0.5
0.4
0.4
8.1
8.5
7.7
7.0
7.8
Kuwait's self-imposed production ceiling of 1.2
million b/d has been in effect for nearly three
years.
? The UAE has imposed ceilings on individual
fields that limit its surplus capacity to about
400,000 b/d. While the UAE is the most likely
Persian Gulf producer to add capacity in the near
term, sluggish demand and the OPEC production
quota are retarding capacity development.
? Iraq presently has no spare export capacity avail-
able, and production has been limited to about 1
million b/d for over a year.
? We believe Iran could still raise output to 3.2
million b/d with little difficulty-about 1 million
b/d above January 1984 production. Iran's export
capacity has not been significantly affected by
the war, but postrevolutionary policies deempha-
sizing oil production and Western participation
have led to a sharp reduction in productive
capacity.
Secret
17 February 1984
Saudi Arabia: A Special Case
Much of the erosion in Free World productive
capacity that has occurred in the past year or so
took place in Saudi Arabia. The combination of
lower oil revenues and prospects for a continued
weak market has led to large-scale cutbacks and
"mothballing" of Saudi production equipment in an
effort to reduce costs. This effort involves the
shutting in of the southern Ghawar oilfield, Khur-
saniyah, and several other small fields. In addition,
the Khurais field has been made part of the Saudi
national reserve and taken out of production. As a
result of these measures and the removal of selected
facilities from the production system in other fields,
available capacity was reduced to 8.1 million b/d
by November 1983,
This capacity level is intended to include act ittes
on line and capable of responding in 30 days to a
Saudi decision to raise production. As a result, this
removes a minimum of 2 million b/d of capacity
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Non-Communist Oil Supplies, Million b/d
January 1984 a
Available
Capacity
Production
Surplus
Capacity
Persian Gulf
17.0
12.0
5.0
Saudi Arabia
8.1
5.2
2.9
Iran
3.2
2.2
1.0
Iraq
1.0
1.0
1.2
0.9
0.3
United Arab Emirates
1.6
1.2
0.4
Qatar
0.6
0.4
0.2
Neutral Zone
0.6
0.5
0.1
NGL
0.7
0.6
0.1
Non-Persian Gulf
33.3
30.5
2.8
OPEC
9.7
7.3
2.4
1.6
1.5
0.1
Libya
1.8
1.1
0.7
Nigeria
2.2
1.4
0.8
Venezuela
2.4
1.7
0.7
0.9
0.8
0.1
0.2
0.2
Gabon
0.2
0.2
NGL
0.4
0.4
23.6
23.2
0.4
Mexico
3.2
2.9
0.3
Norway
0.7
0.7
0
United Kingdom
2.5
2.5
0
Canada
1.8
1.7
0.1
United States ...
10.2
10.2-
0
Other b
5.2
5.2
0
Total
50.3
42.5
Refinery gains and net
Communist exports
2.0
2.0
a Estimated.
b Includes natural gas liquids (NGL).
from year-earlier levels that is immediately avail-
able to offset a disruption elsewhere.
The Saudis-with nearly 3-million-b/d excess
available capacity right now-would still like to
maintain the capability to restore capacity to 8.5
million b/d within 90 days and to 10 million b/d
within a year. Reported problems in maintaining
mothballed equipment, however, put into question
the Saudi ability to raise production much above 8
million b/d. So far, the Saudis have been highly
secretive about the capacity reduction, apparently
in the belief that their market leverage depends as
much on their perceived as actual capacity and that
in an emergency they will have time to restore
capacity. Riyadh remains interested in helping to
insulate Saudi and Western economies from the
effects of a disruption, having invested in a 1.9-
million-b/d pipeline to the Red Sea in 1981 and
having placed some 45-50 million barrels of crude
into floating storage outside the Gulf late last year.
Surplus Capacity Outside
the Persian Gulf
Over the next 12 months, only about 3-million-b/d
excess capacity will be located outside the volatile
Persian Gulf area, and nearly 90 percent of this
total will be concentrated in OPEC member coun-
tries. Since non-OPEC producers have more flexi-
bility to adjust prices to maximize sales, most are
already producing at or near full capacity. The
prospects that excess capacity in countries outside
the Gulf would be made available during a disrup-
tion differ considerably, particularly among OPEC
member countries. Nigeria, Indonesia, and Vene-
zuela would be strongly motivated for financial
reasons to raise output, but they also would be apt
to take advantage of price pressures and charge as
much as the market would bear. We believe that
the response of Libya, an ally of Iran, would likely
be motivated as much by political as economic
reasons:
? Although Venezuela's financial situation over the
past few years forced cutbacks in development of
promising heavy oil reserves, we believe Caracas
has the resources available to raise production
quickly by about 700,000 b/d over recent output
levels-to a level of 2.4 million b/d.
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? In our view, Indonesia currently has about
100,000-b/d spare productive capacity. Extensive
foreign participation in Indonesia's oil production
and development probably would facilitate Jakar-
ta's ability to raise output within 90 days.
? Based on industry assessments of Nigeria's oil
production potential, we believe Nigeria probably
could raise output to 2.2 million b/d on short
notice from recent levels of about 1.4 million b/d.
? With current production of slightly more than 1.1
million b/d, Libya controls about 700,000 b/d of
surplus capacity-one-fourth of Free World sur-
plus capacity outside the Persian Gulf. Tripoli
has enforced a self-imposed production ceiling of
1.8 million b/d in recent years, and we believe
that available capacity has deteriorated to close
to this level since the state oil company took over
much of production responsibilities from US
companies.
We estimate that surplus available capacity in
major non-OPEC producers outside the Gulf-
Mexico, Canada, the North Sea, and the United
States-currently is about 400,000 b/d, only about
5 percent of total Free World excess capacity.
Mexico, which has about 300,000 b/d in shut-in
excess capacity, is the only non-OPEC producer
that we expect to maintain a sizable amount of
spare capacity through 1984. As for other non-
OPEC producers, we believe Canada has roughly
100,000-b/d spare capacity at present. North Sea
producers have almost no surplus capacity as out-
put continues to reach new peaks in the United
Kingdom. The Department of Energy estimates
that this year US productive capacity could fall by
as much as 80,000 b/d.
Inventories: An Addition to
Available Supplies
Inventories-particularly government-owned
stocks-can play an important role in minimizing
the shock of a supply shortfall. At present, com-
mercial stocks in industrialized countries represent
2.7 billion barrels, only 300 million of which are
Secret
17 February 1984
considered surplus to normal operating needs, in
our view. An additional 500 million barrels are held
in government-owned stockpiles.
A large portion of these commercial stocks-about
55 days of consumption-represent minimum oper-
ating stocks needed to ensure a smooth functioning
of the distribution system. Another 15 days repre-
sent compulsory stocks that companies maintain to
meet government requirements. The balance of
about nine days of consumption represents usable
commercial stocks that provide added flexibility to
meet seasonal as well as unexpected changes in
demand. In addition, major oil-exporting countries
hold about 200 million barrels in storage. Most of
these are working stocks intended to provide some
measure of flexibility to raise exports for a short
period.)
Implications
While the current supply cushion is ample to keep
the oil market soft under present circumstances, it
is not adequate to overcome a major supply disrup-
tion in the Persian Gulf. A disruption in this
critical area could well cause a supply loss that
exceeds the. level of supplies available to offset the
shortfall. Moreover, not all of the 2.8 million b/d of
available surplus capacity outside the Gulf would
necessarily be brought into immediate production.
The Libyan response to a disruption is particularly
In our view, uncertainties about the supply response
from surplus capacity could have a harmful effect
on the market reaction to a disruption, particularly
if oil inventory holders perceived that sufficient
additional production might not be forthcoming. As
it is, commercial stocks provide only a small cush-
ion to cope with a major oil cutoff, especially in
view of the tendency of companies to hold or even
add to inventories until the end of a disruption is in
sight.
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We believe that the lack of specific plans for
government-owned stocks during an emergency is a
major drawback to the effectiveness of calming
market fears at the onset of a disruption. A reluc-
tance to use these government stocks except as a
last resort would reinforce widespread company
perceptions that such supplies are inaccessible and
could lead to a scramble among purchasers for
remaining oil supplies.
17 Secret
17 February 1984.
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Secret
South Korea: Strong Economy
Boosting Chun's Prospects
South Korean President Chun's political standing
has been given a big boost by the economy's strong
performance in 1983. The numbers are impressive:
export volume rose 15 percent, real GNP grew 9.2
percent, inflation was halved to 3.4 percent, and the
current account deficit was held below $2 billion.
We believe the odds favor continued high growth
and low inflation in 1984 and beyond, which will
help undercut criticism by Chun's opponents and
broaden public support for his government. Never-
theless, the fiscal austerity needed to keep the
government deficit in line will prevent Seoul from
moving as quickly as promised on welfare pro-
grams.
Strong Expansion
Following a 5.6-percent increase in 1982, last
year's real GNP growth of 9.2 percent put South
Korea once again among the world's growth lead-
ers. The high growth was particularly important for
Chun because it was the first time his government
achieved the type of growth Koreans had become
accustomed to during the years under President
Park.
The industrial sector led the economic advance
with a production increase of about 15 percent in
1983. Gains were broad based with the biggest
advances coming in heavy industry and technology-
intensive industries. Electronics output, notably
color TVs, video tape recorders, and. semiconduc-
tors grew especially fast.
Domestic demand, which provided most of the
stimulus to the economy in the first half of the
year, benefited from stable prices. Private con-
sumption rose 7 percent as real wages increased
about 8 percent annually in 1982-83 because of the
decline in inflation. Consumers stepped up spend-
ing especially rapidly on consumer durables such as
autos, color TVs, refrigerators, and washing ma-
chines.
In the second half of the year, exports took over as
the main driving force in the economy. For all of
1983, export volume rose about 15 percent with the
gains concentrated in the US and Middle Eastern
markets. Electronics and ships were South Korea's
biggest sellers in 1983, while shipments of textiles
and steel were flat.
Private investment increased about 14 percent. in
1983. Lower interest rates sparked an extremely
strong increase in construction. Investment in plant
and equipment rose briskly because of rising capac-
ity utilization rates, increased profits, and improved
business confidence.
Among the most positive developments in 1983 was
the dramatic reduction in inflation. Consumer
prices rose 3.4 percent last year-down from 29
percent in 1980-while wholesale prices rose less
than 1 percent. Tight government fiscal and mone-
tary policies, lower import prices, good grain crops,
and slower growth in unit labor costs contributed to
the decline.
Seoul not only achieved high growth with low
inflation-a goal few economists thought possi-
ble-but also reduced the current account deficit
from $2.6 billion in 1982 to $1.6 billion last year.
The decline in oil prices and the payoff from import
substitution efforts held down the growth in im-
ports while exports rose rapidly. In addition, lower
international interest rates benefited the services
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Secret
South Korea: Major Economic
Indicators, 1978-84
a Preliminary.
b Projection.
Secret
17 February 1984
Growth in Government
Spending
account. Seoul's economic performance impressed
foreign bankers and South Korea had little trouble
attracting foreign capital to meet its financing
Austere Policy Framework
President Chun and his economic advisers can take
much of the credit for current economic conditions.
In 1979 the Park government had begun to tighten
fiscal and monetary policies, curtail labor cost
increases, and slow private investment plans to deal
with a seriously overheated economy. The Chun
government strengthened these policies when it
came to office in 1980 in order to wring high
inflation and inflationary expectations out of the
economy and to curtail the growth of the foreign
debt. Korean economic planners believed stable
prices were a prerequisite for maintaining high
growth during the 1980s. Seoul was willing to
accept several years of lackluster growth and de-
clining living standards in exchange for low infla-
tion and a manageable balance-of-payments posi-
tion. Real GNP grew by only 1.7 percent per year
during 1980-82 while import volume fell 1 percent
annually. Real wages declined a total of about 5
percent during 1980-81. The government's policy
mix has won praise from the IMF and foreign
lenders who credit Seoul's policy package for the
Restraint remains the watchword for 1984. The
growth in the money supply, which was reduced
from 28 percent in 1982 to 15 percent in 1983, is
targeted at only 12 percent this year. An austere
budget has been put in place, which cuts spending
below the 1983 level and reduces the government
deficit from 4 percent to 2 percent of GNP. In
addition, Seoul has jawboned wage increases down
from 25 percent annually in 1978-82 to about 12
percent in 1983 and is hoping to hold the increase
to 6 percent this year.
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Bright Outlook
Barring external shocks, we project a strong year
for the Korean economy in 1984. South Korea is
well positioned to achieve its goal of 7.5-percent
real GNP growth. Stronger global demand and a
solid competitive position will enable South Korea
to maintain rapid export growth in 1984. Exports
have strengthened considerably in recent months;
in November and December foreign sales were
more than 30 percent above year-earlier levels. By
gradually depreciating the won relative to the
dollar and maintaining low inflation, Seoul has
bolstered its competitiveness. We expect South
Korea to achieve stronger export growth in Japa-
nese and West European markets this year and to
score big gains with its increasingly sophisticated
protectionist tendencies in the developed countries
could hurt Korean exports. The greatest danger,
however, would be a cutback in private bank
lending. South Korea is potentially vulnerable be-
cause of its $40 billion foreign debt-the third
largest among developing countries-about one-
third of which is short term.
Bankers are monitoring South Korea closely, and
any one of several events could undermine Seoul's
currently strong international credit rating. Politi-
cal instability in South Korea or a series of terrorist
acts by North Korea, for example, could quickly
lead to a loss in banker confidence. Under such
conditions, we believe Seoul would impose extreme-
ly tough austerity measures that would reduce
growth and employment and push up inflation.' F-
electronics products
Private consumption should increase about 5 per-
cent in 1984 on the strength of rising real wages
and employment. The growth in private investment
will probably moderate somewhat from the ex-
tremely rapid 1983 pace because of tight credit
conditions but will remain brisk in response to
strong export demand,. FI
Government restraint, moderate import price in-
creases, and a good rice harvest should enable
Seoul to hold inflation below 4 percent for the year.
We expect slightly more rapid price increases in the
second half of 1984 as the recovery enters its
second yearF__1
The current account deficit, in our judgment, will
be somewhat smaller than last year's $1.6 billion.
Export growth will be strong, but imports will pick
up as producers rebuild inventories and raw materi-
al prices increase. The services' deficit may widen
because of a reduction in overseas construction
revenue. We believe Seoul has excellent prospects
of attracting foreign funds to cover the red ink;
South Korea's credit rating is good, and recent
syndicated loans have been easily arranged. F_
Political Implications
Although rapid economic growth has given Chun a
boost, the size of the federal deficit and concerns
over rekindling inflation have prevented the govern-
ment from cashing in fully on the country's pros-
perity. The policies needed to keep a healthy
expansion going constrain Chun's ability to deliver
on politically attractive programs:
? Tight fiscal measures have prevented Seoul from
moving as rapidly as promised in implementing
welfare-oriented programs. South Korea's Fifth
Five-Year Plan (1982-86) was publicized for the
high priority it placed on housing, education,
medical care, and other social programs. These
plans have now been scaled back.
? Reduced government grain subsidies have an-
gered farmers. To slash the budget deficit, Seoul
has picked farm subsidies for major reform.
Farmers will receive no increase in prices paid by
the government for their rice this year.
Where Things Could Go Wrong
External factors loom as the most significant threat
to the South Korean economy in 1984. Growing
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Secret
? Tight credit conditions in the second half of the
year have also generated criticism from the busi-
ness community. Businessmen in Pusan and Tae-
gu have been especially gloomy because of the
shortage of funds.
In addition to the austerity program, two major
financial scandals-one of which was rumored to
involve relatives of the President-have tarnished
Chun's image. The scandals underscored the weak-
nesses of South Korea's banking system and Seoul's
unwillingness to reform it.
Nonetheless, we believe that the strong perform-
ance of the South Korean economy has significant-
ly strengthened Chun's ability to build popular
support and political stability. Most Koreans con-
tinue to rank improvements in their living stand-
ards as an important priority-more important
than greater political participation-and exceeded
only by national security. Continued high growth,
low inflation, and increases in real incomes in the
coming year will further consolidate Chun's posi-
tion and help contain dissident activity.
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Nicaragua: The Search for Oil Suppliers
Nicaragua's short-term economic prospects hinge
on enlisting foreign patrons to foot a substantial
share of its $135 million annual oil bill. Mexico-
which until 1 February had supplied virtually all of
Nicaragua's oil on long-term credit-is curtailing
its concessionary financing. Most likely new suppli-
ers are the USSR and such sympathetic Middle
East countries as Algeria and Libya. Whatever the
final arrangements, the Sandinistas will have to
start paying for part of their oil, perhaps as much
as $40 million over the next 12 months-a difficult
task given already severe hard currency shortages.
The complexities of timing oil deliveries from sev-
eral distant sources will make the economy more
vulnerable to periodic oil disruptions. In addition,
economic slowdown and increased shortages that
will accompany rising oil costs are likely to gener-
ate further popular unhappiness with the regime.
In late 1982 Venezuela cut off its shipments of
7,500 barrels per day (b/d) of crude-half of
Nicaragua's oil supplies-because of $18 million in
Nicaraguan arrearages. Venezuela has remained
adamant that the overdue bills be paid before
shipping any more oil. Caracas had supplied the
crude under a 1981 Mexican-Venezuelan accord,
which was intended to ease the burden of high oil
prices on Central American and some Caribbean
nations. The accord-which must be renegotiated
each July-calls for Mexico and Venezuela each to
ship Nicaragua 7,500 b/d of crude. Like all other
recipients, Nicaragua was required to pay US
dollars for only 70 percent of the oil on delivery,
Nicaragua: Current Account Million US $
Balance, 1982-83
-369
-450
406
400
Coffee
124
157
Cotton
70
108
Imports (c.i.f.)
775
850
Of which:
Oil
160
135
Net services and transfers
-84
-195
with the remainder due over five years. Mexico, 25X1
however, never demanded that Managua meet the
cash payment requirements.
Mexico Steps In ... And Out
Mexico moved quickly to fill the gap created by
Venezuela, doubling Mexican shipments to 15,000
b/d. Moreover, then President Lopez Portillo pro-
vided all the crude on long-term credit, thereby
saving Nicaragua some $115 million annually in
hard currency outlays.
President de la Madrid reassessed the bilateral
relationship on taking office in December 1982.
Without backing down from Mexico's basic com-
mitment to support the Sandinistas, de la Madrid
wanted to reduce Mexico's role as sole oil supplier.
In an effort to prod Managua into finding some oil
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supplies elsewhere, he began to gradually reduce oil
delivery commitments at last July's accord renego-
tiation. Mexico cut its scheduled deliveries from
15,000 to 12,100 b/d for August 1983 through
January 1984. For the six months thereafter-
February through July 1984-de la Madrid scaled
back commitments to 9,500 b/d and stipulated
that, like all other accord beneficiaries, the Sandi-
nistas now would have to pay cash for 80 percent of
each shipment. Finally, de la Madrid required that
in 1985 Managua would have to start repaying its
previously accumulated oil debts-about $300 mil-
lion.
The Sandinistas have turned primarily to the
USSR and secondarily to sympathetic Middle
Eastern regimes for concessionary oil: In an unusu-
al departure from its cash-only policy, the USSR
has contracted to deliver about $30 million worth
of oil, accepting payment in Nicaraguan cordobas.
In the expectation of receiving substantial quanti-
ties of concessionary Soviet petroleum, the Sandi-
nistas will cut their oil purchases from Mexico,
These expected Soviet and Mexican deliveries, plus
current inventories, should allow the Sandinistas to
maintain their roughly 12,000-b/d current con-
sumption. Assuming Mexico sticks to its demand
for 80-percent hard currency payment, the Sandi-
nistas will have to pay more than $25 million for
their oil over the next six months-not an easy task
for their depleted treasury, particularly as
$13 million in interest payments must also be met.
We have no indication that the Soviets intend to
provide additional concessionary supplies after
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17 February 1984
June. Nonetheless, a precedent has been set.
Having demonstrated its willingess to provide
major (in the Nicaraguan context) hard-currency-
equivalent support, Moscow may not want to be
perceived as backing away from the regime the
next time the Sandinistas ask for oil. We believe,
however, that Moscow eventually will insist on
either using its cordobas to buy Nicaraguan export
crops-thereby reducing hard currency earnings-
or being paid at least partly in hard currency for
The Sandinistas are testing the waters with the
sympathetic regimes in Algeria, Libya, and Iran by
proposing to swap sugar-at twice the world
price-for oil. Algeria reportedly has contracted to
buy 80,000 metric tons of Nicaraguan sugar-
about 80 percent of Nicaragua's 1982 export vol-
ume-at double the world price.
The deal would finance perhaps $30 million worth
of crude oil to the Sandinistas-about two and a
half months of consumption. This agreement would
be consistent with the willingness of Algiers to dole
out assistance to revolutionary socialist regimes of
the Third World. Algeria would not, however, wish
to do much more, to avoid being identified as a
principal, long-term benefactor of the Sandinistas.
Libya has offered to supply an unspecified quantity
of oil if the Sandinistas arrange for the shipping,
Tripoli would also accept sugar in
supplier.
return. We believe that Libyan leader Qadhafi
remains interested in strengthening the Sandinista
regime to help undermine US interests in Latin
America, and thus might agree to a deal similar to
the Algerian arrangement. Given Qadhafi's fre-
quent failure to keep aid promises, however, the
Sandinistas probably will find him an unreliable
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Days Required to Ship Oil to Puerto Sandino, Nicaragua
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Junta coordinator Daniel Ortega recently an-
nounced to the press that Iran would begin provid-
ing "large quantities" of oil to the Sandinistas. We
have no further information on such an arrange-
ment, but Tehran could well see the provision of
concessionary oil to Nicaragua as another way to
counter US interests.
In the unlikely event that all the Sandinistas'
efforts to find concessionary oil elsewhere fell
through and Managua became desperately short of
oil, Mexico probably would be willing to provide
some additional supplies. Mexico City, however,
would expect Managua to use whatever dollars it
could to pay for the oil.
Managua's hopes that Venezuela will resume oil
shipments are overly optimistic. Nicaraguan Fi-
nance Minister Cuadra reportedly has proposed
that Caracas give Managua 20 years to pay off its
oil debts and immediately begin shipping 7,500 b/d
of crude under concessional terms. New Venezue-
lan President Lusinchi, however, has indicated to a
US official that Caracas will continue to insist that
the arrearages first be paid off in cash and would
strictly apply the accord's requirements to any
additional shipments
Domestic Repercussions
Overall, we believe Managua may have to part with
as much as $40 million in cash or hard currency
export crops for its oil supplies over the next 12
months-up from practically nothing last year.
Such an increase in oil costs will further reduce
output and living standards. The higher bills for oil
would roughly approximate the damage inflicted by
anti-Sandinista insurgents in Nicaragua in 1983.
The oil costs, however, would be more difficult for
the Sandinistas to handle because they are all in
foreign exchange
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17 February 1984
In any event, assuring timely deliveries of adequate
oil supplies from perhaps four or five different
sources-particularly when Nicaragua is so periph-
eral to the interests of some of them-is likely to be
difficult. The diversification implies much greater
transport times, thus increasing the risk of periodic
fuel shortages. The current priority given to mili-
tary and industrial needs for fuel will magnify the
impact on ordinary citizens, particularly if sudden
shortfalls occur. Existing popular unhappiness with
the regime over the widespread shortages and
rationing of consumer items could worsen. More-
over, the petroleum link to the Soviets is hastening
Nicaragua's reorientation of its economy away
from the West and toward the CEMA countries.
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International Financial Situation:
Current Account Outlook for
Major Troubled Debtors
This article is part of a series focusing on economic
and political aspects of the international financial
situation.
We estimate that the 10 largest troubled debtors
outside the Soviet Bloc' will record a combined
current account deficit of about $10 billion this
year-a $3 billion improvement over last year and
about $30 billion better than the deficits registered
in 1981 and 1982. We expect Mexico will again
post the most favorable current account perfor-
mance-about a $3 billion surplus-and Brazil the
largest deficit at about $7 billion.
The trade account continues to be the bright spot in
the troubled debtors' economies. We project a $6
billion increase in their combined exports this year,
sufficient to enable the first-although small-
overall import rise in three years and a trade
surplus of about $31 billion. Two key factors will
spur exports:
? Real GNP in the OECD countries, which ac-
counts for over 70 percent of these 10 countries'
foreign sales, is projected to rise about 3.7 per-
cent, the largest annual increase in six years.
? World agricultural and mineral prices, according
to World Bank projections, will increase 6 per-
cent and 4 percent, respectively. This is less than
last year, but is in marked contrast to the 1981-
82 declines.
Like most other economic forecasters, we expect oil
prices to remain stable, barring an increase in Iran-
OECD real growth
2.0
-0.3
2.5
3.7
OECD import volume
-2.0
-0.5
3.3
6.2
OECD dollar export
price
-4.2
-3.5
-3.2
2.2
OPEC oil prices
11.0
-6.0
-10.0
-2.5
Agricultural prices
-12.0
-18.0
10.0
6.0
Minerals prices
-10.0
-14.0
7.0
4.0
Iraq hostilities, which could lead to a disruption of
oil supplies. Oil accounted for about 40 percent of
this group's exports last year
Even with the $3 billion increase in combined
imports we project for 1984, nominal imports of
these countries will still be almost 40 percent below
1981 levels; because import prices also are down,
we estimate real imports for the group will be about
one-fourth lower than the 1981 level. Moreover, we
believe Nigeria, Philippines, Morocco, and Peru
will have to reduce imports even further in 1984. If
IMF programs and financial packages for Argenti-
na, Philippines, and Nigeria continue to be delayed
beyond the first quarter, their imports could be
lower than we presently forecast.
In contrast to the improvement in the trade ac-
counts, these countries' net services deficit will
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Key Debt Troubled Countries: Billion US S
Exports and Imports, f.o.b.a
Exports
112.2
99.2
97.6
104.0
Imports
118.2
97.8
70.3
73.3
Argentina
Exports
9.2
7.6
7.7
8.0
Imports
8.4
5.3
4.2
4.7
Brazil
Exports
Imports
22.1
19.4
15.4
16.0
Chile
Exports
4.0
3.8
3.7
4.2
Imports
6.6
3.6
2.7
3.3
Mexico
Exports
20.9
22.2
22.1
23.0
Imports
24.0
14.5
8.5
11.0
Morocco
Exports
2.3
2.0
1.9
2.1
Imports
3.8
3.8
3.4
3.3
Nigeria
Exports
17.7
12.9
11.4
12.5
Imports
18.4
16.8
10.1
9.0
Peru
Philippines
Exports
5.7
5.0
4.8
5.3
Imports
8.4
7.8
7.2
6.1
Venezuela
Exports
20.2
16.4
15.0
15.2
Imports
12.1
13.2
8.0
9.0
Yugoslavia b
Exports
5.7
5.8
6.2
6.5
Imports
10.6
9.6
8.0
8.2
a For 1981-82 trade data are IMF figures, for 1983 they are
estimates based on preliminary reporting, and for 1984 data
represent CIA projections.
b Convertible currency area.
remain near $40 billion, primarily because of inter-
est payments. World interest rates in 1984 proba-
bly will average slightly less than they did in 1983,
but the estimated $25 billion rise in total external
debt of the 10 countries to an estimated $350
billion at yearend 1983 will add more than $2
billion in interest payments over the average level
of the past two years. We expect improvement in
other net services, such as tourism, travel, and
profit repatriation, will nearly offset the additional
interest payments.
Implications
While our current account estimates, which for
many debtors are in line with official projections,
point to larger export earnings and a cumulative
trade surplus for these 10 troubled debtors this
year, all of the surplus will be consumed by debt
service payments. Moreover, real imports continue
at very low levels. In our judgment, with foreign
exchange surpluses transferred abroad to service
debt, debtor governments are likely to question the
benefits of the current debt strategy and its effec-
tiveness in meeting LDC development needs. They
may decide that, in the absence of lower interest
rates, it is in their interest to consider postponing
debt servicing in order to buy imports to fuel their
economic recovery
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Key Debt Troubled Countries:
Current Account Balances a
Current account
balance
-44.3
-43.2
-13.1
-10.3
Trade balance
-6.0
1.4
27.3
30.7
Interest payments
-33.2
-40.9
-39.5
-41.9
Argentina
Current account
balance
-4.6
-2.5
-2.0
-2.2
Of which:
Trade balance
0.8
2.3
3.5
3.3
Interest payments
-4.6
-5.3
-5.5
-5.5
Brazil
Current account
balance
-11.7
-16.3
-8.0
-6.7
Of which:
Trade balance
1.2
0.8
6.5
8.0
Interest payments
-10.3
-12.6
-10.5
-11.4
Current account
balance
-4.8
-2.4
-1.4
-1.4
Current account
balance
-12.5
-3.0
4.4
2.8
Current account
balance
-1.9
-1.9
-1.8
-1.6
Of which:
Trade balance
-1.5
-1.8
-1.5
-1.2
Interest payments
-0.8
-0.9
-1.0
-1.0
a For 1981-82 trade and current account data are IMF figures, for
1983 they are estimates based on preliminary reporting, and for
1984 data represent CIA projections.
b Convertible currency area.
Current account
balance
-6.0
-7.3
-1.9
0.0
Interest payments
-0.5
-0.6
-0.9
-1.1
Peru
Current account
balance
-1.7
-1.6,
-1.1
-0.9
Of which:
Trade balance
-0.6
-0.5
0.1
0.5
Interest payments
-1.0
-1.1
-1.2
-1.4
Philipines
Current account
balance
-2.6
-3.4
-3.2
-1.5
Of which:
Trade balance
-2.7
-2.8
-2.4
-0.8
Interest payments
-1.1
-1.8
-2.2
-2.2
Current account
balance
2.4
-3.4
1.8
0.8
Current account
balance
-0.9
-1.4
0.1
0.4
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~ecrec
International Financial Situation:
LDC Trade Restrictions
This article is part of our series focusing on the
economic and political aspects of the international
financial situation.
Foreign payments problems have caused a number
of developing countries to tighten import restric-
tions over the last two years. Among major LDC
debtors, only South Korea and, to a lesser extent,
Peru have gone against the tide.
Regulatory Climate
Import controls in developing countries tend to be
complex, highly protective, and discretionary in
nature. Mexico, for example, uses a combination of
high tariffs, surcharges, import quotas, import li-
censes (for which high fees are sometimes charged),
and prior approval requirements on imports by
government entities. Import licensing is a particu-
larly widespread technique because governments
can use it to favor selected industries, regions,
firms, or individuals. Such.controls are often ap-
plied inconsistently and arbitrarily with disruptive
effects on the private sector. The controls are
usually portrayed as devices to help infant indus-
tries,, but the primary motivation-particularly in
recent years-usually is to improve the current
account.
Since LDC debtors urgently need to improve their
export performance, imports used for the produc-
tion of exports often are exempt from controls.
Mexico requires licenses on virtually all imports,
but among the items it exempts are spare parts and
materials used to produce exports. The Embassy in
Brasilia reports that, despite pervasive import con-
trols, any firm with substantial exports has been
able, sometimes with a struggle, to obtain needed
import licenses.
Recent Developments
import controls.
During the last two years the financially troubled 25X1
LDCs have used a variety of techniques to reduce
imports. For many of the LDC debtors, foreign
exchange controls have been of great importance.
In Nigeria, for example, most potential importers
simply do not have access to foreign exchange and
thus do not have to contend with the elaborate 25X1
Licensing has been one of the methods most fre-
quently used by LDCs to limit imports. Most
countries have simply tightened existing controls
rather than establishing new ones. Examples of
import licensing in key LDC debtors include:
? Argentina's new licensing system classifies tariff
items into several categories, including banned
goods, goods that automatically receive permits,
and items that must be cleared by a new import
advisory committee.
? Brazil has tried to achieve targeted reductions in
imports through selective issuance of import li-
censes. These are issued only if a shipment is in
line with a firm's previously submitted annual
import plan. Moreover, Brazil bans most goods
for which there is a domestic substitute.
? Chile has required licenses on all imports over
$500 since March 1983, and in some cases uses
licensing to ration foreign exchange. In addition,
Chile has increased tariffs across the board from
10 percent to 20 percent, and duties on some
consumer goods have been raised to 35 percent.
? Indonesia allows only Indonesian nationals to
import, and the Foreign Trade Ministry decides
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? Since 1982 Mexico has applied quantitative re-
strictions on the issuance of some import permits..
It imposed licensing on imports into free trade
zones in 1983.
? Philippines requires licensing on some imports
and imposed a 3-percent surcharge on all imports
last year. Prepayment of all duties and taxes is
now required before letters of credit can be
obtained
A few debt-troubled LDCs have talked about eas-
ing their import restrictions but only as their
financial problems subside. According to Embassy
reporting, Brazilian officials hope to start phasing
out controls in 1984, beginning with industrial
materials and foodstuffs. The Mexican Govern-
ment promised in its 1984 Economic Strategy
Statement that it would ease existing emergency
import restrictions. In our judgment, tough import
control systems now in place in many other LDCs
are unlikely to be relaxed any time soon
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LJ .^~l
Congo: Living With the Oil Slump
The sharp falloff in oil earnings has prompted
Congo to rein in an ambitious development plan,
and as a result urban unemployment and business
failures have increased. Congo, once one of black
Africa's most ardent Marxist states, has drifted to
the right after recognizing that earnings from its
Western-operated oil industry were crucial to the
nation's economic health. At the same time, Presi-
dent Sassou has recognized the need to preserve
relations with Moscow to ensure continued access
to military hardware. Sassou is likely to continue to
seek financial assistance from Washington and
other major Western governments, hoping that
such aid will lessen the chances of a popularly
supported move by his more radical critics to
remove him while still courting the Soviet Union
for military assistance.
The dramatic change in the world oil market in the
early 1970s offered Congo an opportunity to invigo-
rate an economy saddled with a large government
payroll and dependent on the small timber, sugar,
and potash industries owned by the French. The
leap in international oil prices in 1973-74 coincided
with large new discoveries-particularly the 3.5-
billion-barrel Emeraude field-and petroleum sud-
denly became Brazzaville's chief moneyearner. F_
Following the example of other Third World oil
producers, Congo climbed aboard the economic
development bandwagon by borrowing against fu-
ture oil sales to fund an ambitious modernization
program. The bubble burst when real oil prices
slumped in 1975 and Congo was saddled with
record current account deficits and a growing list of
unpaid bills. When the USSR showed no inclina-
tion to provide either financial or technical assis-
tance, Brazzaville looked toward the West for help.
When President Sassou took power in 1979, he
adopted policies not markedly different from his
predecessors'. Western reluctance to adopt
Moscow's "no strings attached" policy of military
aid reinforced his determination to preserve ties to
the Soviets and access to their arms, a critical
element in ensuring Army support. At the same
time, Sassou continued to reach out to the West for
financial and technical assistance to keep the coun-
try's oil-led economy healthy and to build for the
time when oil reserves run dry-possibly in the
early 1990s.
Sassou's ability to pursue his policies was aided by 25X1
another dramatic increase in oil revenues in the
wake of the Iranian revolution and the Iran-Iraq
war. US Embassy reporting indicates that between
1979 and 1982, oil production increased nearly 60
percent, and earnings tripled to $1 billion. This
sudden influx of funds significantly strengthened
Congo's foreign payments position and permitted
the government to more than double expenditures
each year from 1979 to 1982.
Led by the petroleum sector, real GDP growth
averaged nearly 8 percent annually during 1979-
82. Foreign businessmen, bouyed by Congo's 25X1
brighter economic prospects and pent-up consumer
demand, invested heavily in the domestic market.
Production in the forestry sector climbed substan-
tially, construction activity picked up markedly,
and even the beleaguered transport sector posted
some gains.
The boom was not without cost. Increasing num-
bers of Congolese migrated to the cities searching
for their share of the oil wealth. The result was a
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Congo: Foreign Payments, 1979-83
-142.2
-229.9
-504.7
-505.0
-755.0
Trade balance
132.7
365.4
269.1
285.0
55.0
Exports f.o.b.
495.7
910.5
1,072.7
1,135.0
950.0
Petroleum
338.5
664.0
906.0
1,000.0
800.0
Imports f.o.b.
363.0
545.1
803.6
850.0
895.0
Services and transfers
-274.9
-595.3
-773.8
-790.0
-810.0
Capital account balance
181.0
258.0
556.3
517.8
NA
Official capital
98.6
256.7
173.2
166.2
NA
Private capital
82.4
1.3
383.1
351.6
NA
Balance on current and capital accounts
38.8
28.1
51.6
12.8
NA
Errors and omissions
16.7
53.2
NA
Increase in central government
deposits abroad
55.5
81.3
51.6
12.8
NA
sharp decline in agricultural production and record
food imports. The rapid urban migration over-
whelmed public services. Shortages of food and
other necessities appeared, and urban joblessness
grew. Inflation reached 18 percent in 1982, and
housing costs doubled; corruption proliferated.n
service ratio soared to over 30 percent in 1982
compared with only 9 percent the year before.[
The soft world oil market caused oil earnings last
year to fall about 20 percent short of expectations.
Not only were prices below the level projected in 25X1
the development plan, but export volume also was
down. Imports of goods and services, however, did
not decline, reflecting Brazzaville's determination
to keep the development plan on track. Foreign
borrowing continued to be heavy, and we estimate
the external debt reached $2 billion by yearend.
We estimate the country's debt service needs in
1983 absorbed slightly more than one-third of total
The Sassou government embarked on an ambitious
$3 billion five-year investment program in 1982,
heralding it as the blueprint for economic develop-
ment against the day when oil runs out. The goal
was to open up the inaccessible hinterlands to
future development and to establish a variety of
agricultural projects and light industries. The plan
was based on the assumption that oil prices and
production would both continue to rise.
Although there was some increase in Western aid,
Sassou borrowed heavily to facilitate a rapid start-
up of the development plan. The result was a
doubling of the country's foreign debt in 1981 to
$1.2 billion. Because most of the increase was in
the form of short-term commercial loans, the debt
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17 February 1984
foreign earnings.
The deteriorating financial situation coincided with 25X1
worsening problems in the agricultural sector. Food
production continued to fall because of the increas-
ing migration out of rural areas, low producer
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secret
Congo: Selected Economic Indicators, prices, and inadequate rural roads for getting the
Real GDP Growth
Percent
^
product to market. For example:
? The production of cocoa and coffee for export
plunged from an annual average of 10,000 metric
Shaded portion indicates range tons during the 1970s to about 2,000 tons last
Inflation
Percent
year.
? The French-operated Nyaki sugar complex,
which produced 100,000 tons at its peak in the
20 late 1960s, produced only about 30,000 tons.
? Congo's timber industry-previously the primary
15 ,_--, export commodity-operated at half of capacity.
External Public Debt
Billion US $
Debt Service Ratio
Percent
Foreign Exchange Reserves
Million US S
There are some signs that the government is com-
ing to grips with its financial problems. According
to the Minister of Planning, the government has
decided to pull back from some development goals.
Priority transport and communication projects,
such as the Congo-Ocean railroad, will proceed as
originally planned, but proposals to improve pro-
ductivity in industry and agriculture will be de-
layed. A new agreement with ELF that provides
the company with a greater return is expected to
spur exploration and oil production.
The need to rein in the country's development plan
already has brought Sassou under fire from influ-
ential leftists within the party. They have long been
critical of Sassou's ties with the West and cite the
continued erosion in food production as a conse-
quence of his policy of opening the economy to
greater private and foreign participation. They also
have pointed out the declining output in the sugar
and timber industries and the inefficiencies in the
government-owned enterprises.1
We believe Sassou will have to juggle a myriad of
competing interests to hold his political constituen-
cy together while dealing with the realities of
reduced oil revenues. Economic problems have
fanned longstanding tensions between the wealthier
tribes in the south and those in the north who have
held political power since 1968. Despite the alliance
with some southerners and military leftists that
Secret
17 February 1984
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allowed him to come to power, we believe that the
continued political dominance by Sassou's northern
Mbochi tribe rankles the better educated tribes in
the more developed south.
Sassou will have to ensure that cutbacks in develop-
ment projects do not weigh too heavily on any
particular group and that the surviving projects are
allocated equitably. To mute continued criticism of
his Westward-leaning economic policies, Sassou
will have to placate the more leftist elements in his
party with Marxist ideology, continued anti-West-
ern rhetoric, and radical Third World stands in
international forums. At the same time, however,
we believe he will attempt to maintain good rela-
tions with the West to secure continued access to
aid and investment funds. His job will not be any
easier if oil prices do not improve in real terms until
after 1985.
Looking to the West
Sassou will seek Western support. In return for
more generous terms, he expects ELF to move
ahead on an ambitious $1 billion steam reinjection
program that will improve the recovery rate of the
Emeraude field. He probably will show continued
interest in having US oil companies develop what
Brazzaville believes are sizable untapped reserves.
Finally, we believe that Sassou will step up efforts
to acquire debt relief and increased concessional
assistance from France, the United States, and
other Western donors.
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17 February 1984
Even if the West meets all of Sassou's expectations,
he will still look to Moscow for military aid.
Moreover, Sassou remembers Moscow's role in the
assassination of one of his predecessors, and he
probably believes that the Soviet Union would not
refrain from encouraging coup plotting by leftist
and other disgruntled elements if he swings too
close to the West.
25X1
25X1
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