LDC FOREIGN PRIVATE BORROWING: RECENT TRENDS AND ISSUES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83B00851R000200070002-6
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 21
• Document Creation Date: December 20, 2016
• Document Release Date: March 23, 2007
• Sequence Number: 2
• Publication Date: September 1, 1982
• Content Type: REPORT

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Directorate of Confidential
LDC Foreign Private
Borrowing: Recent Trends
and Issues
Confidential
GI 82-10182
September 1982
Copy 4 14
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Directorate of
Intelligence
LDC Foreign Private
Borrowing: Recent Trends
and Issues
Issues Branch, OGI,I
This paper was prepared by Economics
Division Office of Global Issues, wrt contributions
from Economics Division, Office of
Global Issues. Comments and queries are welcome
and may be directed to the Chief, Third World
Confidential
GI 82-10182
September 1982
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Overview
Information available
as of 30 July 1982
was used in this report.
LDC Foreign Private
Borrowing: Recent Trends
and Issues
Less developed countries borrowed heavily again in 1981 as they continued
to be hit hard by low export commodity prices, high interest rates, and the
cumulative effects of global recession. Aggregate medium- and long-term
debt to foreign private banks rose by $46 billion, roughly the same increase
as in 1980. Almost half of the new debt came from US banks. We do not
expect major changes in this pattern of borrowing over the next year or
two, because the forces underlying LDC borrowing needs are unlikely to
abate and banks seem willing to continue to provide credit, albeit at
substantially higher cost.
The mounting financial problems of the LDCs have heightened bankers'
concerns, but their response thus far has been to increase lending fees to
diffuse the potential loss from bad loans:
? More borrowing took place in the highly publicized Eurocurrency
markets rather than the less expensive bilateral transactions that charac-
terized lending in 1980.
Banks insisted on greater returns to cover their perception-probably
heightened by the tenuous East European financial situation-of in-
creased risk of lending to LDCs.
? More loans were written based on the US prime rate instead of the
London interbank offer rate (LIBOR). Borrowers, especially in Latin
America, apparently prefer to use the prime rate because they can attract
participation by regional US banks.
Banks have suffered relatively small losses on their international lending
while reaping substantial profits, and they are willing to lend to an
increasing number of LDCs. Mexico, Brazil, Argentina, and Venezuela
accounted for about half of new lending in 1981, and we expect them to ab-
sorb an even greater share in 1982. Besides such traditional clients, banks
also are boosting lending to cash-short OPEC countries and to such
politically or economically questionable borrowers as Bangladesh, Uganda,
and Angola. Although loans to the latter group are small, we believe they
indicate a willingness by banks to deal with riskier countries to diversify
their foreign loan portfolios and maintain high profits.
Rising debt burdens combined with a continuing slump in export earnings
have led to an increase in the number of LDCs unable to service their
debts. At the end of 1981, 28 LDCs were in arrears on their payments,
with half receiving some form of debt relief during the year. The list of
Confidential
GI 82-10182
September 1982
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those in arrears now includes such normally sound LDCs as Costa Rica in
addition to such perennial problem countries as Sudan, Ghana, Zaire, and
Bolivia. So far, the amount of debt rescheduled is small-less than 10
percent of total debt outstanding-and has had little evident impact on the
international financial system.
Bankers are worried, however, that one or more large borrowers, particu-
larly in Latin America, where US banks have two-thirds of their LDC
exposure, will be unable to service their debt:
? Mexico's international finances have become increasingly precarious in
recent weeks. Foreign lenders hope to avoid rescheduling because of the
massive amount of its debt and have been encouraging Mexico to seek
help from the IMF.
? We believe Argentina will need some form of debt relief and may have to
reschedule payments this year, largely as a result of the drop in foreign
exchange reserves and export earnings that took place during the
Falklands crisis.
? In contrast, Brazil has stabilized its debt position. Although its $80
billion debt is large, bankers are evidently encouraged by its diversified
economy, close monitoring of private-sector borrowing, and proven record
of effectively implementing austerity measures.
The unanswerable long-term question is how much longer LDCs can
sustain the cycle of new foreign private borrowing to finance large current
account deficits exacerbated by high interest payments on existing debt.
Most observers believe that even if the industrial economies turn around
soon and interest rates moderate, the 1980s will be a decade of unusually
slow economic progress for most LDCs. It will thus be extremely difficult
for living standards to rise as rapidly as they did during the halcyon growth
spurts of the 1960s and 1970s. Both the social instability that could arise
from austerity programs and inappropriate expansionary policies pose risks
to international lenders. Thus, in our judgment, bankers will be watching
carefully how countries such as Mexico, Argentina, Chile, the Philippines,
Morocco, and Peru restructure their economies to cope with the reality of
having to make do with less.
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I
Borrowing on the Euromarkets 1
3. Selected LDC Eurocurrency Loan Terms: Weighted
Average Spreads
4. Selected LDC Eurocurrency Loan Terms: Weighted
Average Maturities
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Figure 1
LDC Volume of Private Borrowinga
a Including medium- and long-term Eurocurrency
credits and foreign and international bonds. The
data were compiled from a variety of sources,
including Euromoney, the World Bank, commercial
bank data, newspapers, and periodicals.
587488 9-82
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LDC Foreign Private
Borrowing: Recent Trends
and Issues
Total Private Borrowing
Net borrowing by less developed countries ' from
foreign private banks-which consists of drawdowns
of both new and existing credit lines of all maturi-
ties-continued to rise in 1981 and first-half 1982.
According to data from the Bank for International
Settlements, bank claims on LDCs rose by $46 billion
in 1981, to $321 billion, after an increase of $49
billion in 1980. US bank claims on LDCs increased by
Table 1
Selected LDCs:
US Bank Exposure,a Ranked by Size
$20 billion in 1981 to $118 billion (table 1), with all Brazil 16.2 19.0 18.9
major borrowers, and particularly Mexico, increasing Venezuela 9.1 9.6 9.3
their debt. Net bond borrowing increased by $3 billion Argentina 7.9 9.3 9.3
in 1981, up from an increase of $2 billion in 1980. South Korea 7.1 9.4 8.5
We estimate that gross medium- and long-term pri-
vate borrowing was about $75 billion in 1981, com-
pared with about $65 billion in 1980.1 The Eurocur-
rency market and bond markets accounted for about
$65 billion, up sharply from the 1980 figure of $42
billion (figure 1 and table 2). Most of the increase was
accounted for by the non-OPEC LDCs, but the
OPEC LDCs also obtained more funds than in 1980.
The remaining $10 billion in gross borrowing is
attributable to unpublicized Eurocurrency and bilat-
eral bank credits. In addition to medium- and long-
term commitments, we estimate that the level of
short-term credits increased by about $10-15 billion;
these credits include bank loans of less than one-year
of maturity and bilateral trade credits from both
banks and private firms.
' For this paper, the LDCs comprise some 115 independent nations
in Africa, Asia, Latin America, and the Middle East, along with
colonies and territories. Israel, Turkey, South Africa, Communist
countries, and the European countries are not included
I For this paper, gross LDC borrowing, except when state
otherwise, represents bank commitments to LDCs of more than
one-year of maturity and bonds. These commitments tend to be
highly variable on a year-to-year basis and are not closely correlat-
ed with drawdowns over the short run. Reasons for this include a
lack of information on short-term credits and drawdowns of
existing credits and a tendency of LDCs to line u new credit lines
in anticipation of future financing problems
Philippines 5.1 6.0 5.8
Chile 3.7 5.8 5.6
Taiwan
Indonesia
Ecuador
Colombia
Other LDCs
4.2 5.1 5.1
1.8 2.5 2.7
2.1 2.2 2.3
2.6 2.6 2.2
22.9 25.3 25.6
a The source of these data is the Federal Reserve Bulletin. The data
include claims of US offices and foreign branches of US-owned
banks and of US subsidiaries of foreign-owned banks. The data do
not include US agencies and branches of foreign banks and foreign
subsidiaries of US banks.
b Yearend data.
Borrowing on the Euromarkets
Loan Volume in 1981. The Eurocurrency market was
the most popular source of funds; total LDC credits
rose from $40.6 billion in 1980 to $61.4 billion last
year.
factors contributed to this increase:
? The world recession led to depressed demand for
LDC exports and greater LDC borrowing.
? Higher interest rates on existing loans generated
additional borrowing to meet debt service
obligations.
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Table 2
LDCs: 1981-82 Euromarket Borrowing a
30,183
7,685
293
435
1,145
72
1,217
489
200
689
372
0
372
260
0
260
250
0
250
0
0
0
Nigeria
3,027
0
3,027
533
0
533
Saudi Arabia
1,460
0
1,460
825
0
825
United Arab Emirates
152
0
152
178
0
178
Venezuela
6,196
241
6,437
4,423
0
4,423
Non-OPEC LDCs
47,733
2,891
50,624
20,601
1,897
22,498
Angola
80
0
80
7
0
7
1,104
0
Bahrain
112
0
112
53
0
Bangladesh
47
0
47
50
0
Barbados
98
0
98
0
0
0
2,921
37
0
37
0
0
0
11
0
11
0
0
0
2,334
30
2,364
433
0
433
405
50
Egypt
355
0
355
221
30
251
Ethiopia
20
0
20
0
0
0
Fiji
0
0
0
25
0
25
297
427
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Bonds
Total
Jordan
79
0
79
Kenya
115
0
115
Lebanon
70
0
70
Bonds Total
0 7
0 3
0
Mauritania
98
0
98
12
0
12
Mauritius
0
0
0
40
0
40
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? LDCs chose to obtain new loans rather than draw
down their existing credit lines as they did in 1980,
when the number and volume of new credits actual-
ly declined.
? There were fewer nonpublicized medium-term loans
in 1981 than in 1980, when LDCs frequently resort-
ed to this type of loan rather than publicize less
favorable terms.
? The softening of world oil prices led to greater
financing needs for many oil-exporting LDCs, most
notably Mexico and Nigeria.
banks have con-
ducted more detailed credit risk analyses for LDCs
over the past 18 months. Deteriorating economic
conditions in many LDCs-such as Bolivia, Morocco,
and the Philippines-prompted banks to limit the
growth of or even reduce their exposure to those
countries. Other LDCs, however-including India,
Malaysia, and Thailand-were aided by relatively
strong economies and a lack of prior bank exposure.
O
The cost to LDCs of borrowing increased substantial-
ly in both nominal and real terms during 1981. The
London interbank offer rate (LIBOR), which is the
base rate for most Eurocurrency loans, rose from a
1980 average of 14.0 percent to 16.8 percent in 1981
(figure 2). Real interest rates also rose because of
reduced inflation in the developed countries, particu-
larly the United States. Moreover, average loan terms
stiffened somewhat. According to our calculations,
the average maturity on LDC loans remained at
about seven years, but the average spread rose from
0.90 percentage point above LIBOR in 1980 to 0.95
percentage point in 1981' (tables 3 and 4). Each
percentage point change in the spread reflects about
$2.0 billion in interest charges to LDCs. The average
spread for non-OPEC LDCs rose during 1981 for the
second straight year, while the OPEC LDC spread
continued a downward trend started in 1976.
The hidden component of borrowing costs-front-end
management or participation fees-grew during 1981
as LDCs attempted to shield themselves from adverse
publicity about their rising credit risk.
I
some LDCs, such as Nigeria and
Venezuela, preferred to keep the publicized spreads
lower and pay higher fees. These front-end fees can be
as much as 3 to 4 percentage points.
A new factor raising LDC borrowing costs is the
growing use of Eurocurrency credits based on the US
prime rate rather than on LIBOR. Publicized loan
data show that about $1.7 billion in new LDC credits
were priced over US prime in 1981 as opposed to only
$0.1 billion in 1980; many other credits carried an
option of US prime or LIBOR. Most of the borrowers
using US prime were Latin American countries.
According to financial publications, borrowers prefer
the US prime because they can publicize a lower
spread to their countrymen and can also attract
participation by regional US banks. Bankers are
willing to grant the lower spread because the US
prime has recently been 1 to 2 percentage points
higher than LIBOR.
Besides the surge in Eurocurrency lending, LDC bond
issues rose sharply in 1981 following a two-year
decline in volume. LDC bonds totaled $3.2 billion last
year, more than double the 1980 figure; the number
of LDCs issuing bonds, however, fell from 17 in 1980
to 12 in 1981. According to institutional and banking
publications, most LDCs were unwilling to enter the
bond market because of high interest rates, and
potential purchasers found LDC paper relatively un-
attractive. Mexico was by far the largest LDC bond
issuer with two-thirds of the 1981 total. Argentina,
Brazil, India, South Korea, and Venezuela floated
most of the remainder.
Distribution of Lending. After a year of little change,
the non-OPEC LDCs increased their share of total
LDC borrowing substantially in 1981, from 72 per-
cent to 78 percent (table 5). The primary reason
behind the shift was the rise in Mexico's share from
14.4 percent to 23.5 percent, more than twice that of
Brazil, which had the next highest share.
25
25
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Figure 2
Interest Rates: Yearly Averages
~I-i 1-i I 1 1
1973 74 75 76 77 78 79 80 81 82
1St half
587489 9-82
Seven countries continued to dominate LDC borrow-
ing, accounting for nearly two-thirds of the total:
? Mexico, the largest LDC borrower, boosted its
borrowing sharply because of high import costs,
depressed oil export revenues, and a large develop-
ment program.
? Brazil's share declined largely because of greater
use of private placements (about which we have
little data) rather than publicized syndications.
? Venezuela is the largest OPEC borrower, but its
share fell in 1981 as Caracas cut back borrowing to
consolidate its debt position.
? Argentina's share remained relatively stable, in view
of its improved payments situation last year.
? South Korea overcame the problems associated with
negative real GNP growth and change in leadership
in 1980 to boost its borrowing share in 1981.
? Hong Kong continued to expand its borrowing by
virtue of its strong credit rating.
? The Philippines' share declined although its 1981
volume increased over the 1980 total. Borrowing
restrictions imposed by an IMF agreement and
increasing lender apprehension led to the slower
growth in Philippine credits.
Several lesser LDC borrowers substantially increased
their share of total borrowing last year. According to
banking industry publications, the explanations vary
widely. Nigeria more than doubled its share in order
to support large-scale development programs. Chile's
share jumped as it took advantage of its improved
economic situation in first-half 1981. India continued
to be a favorite of lenders, largely because of low
previous exposure, and attracted funds for energy-
related projects. Some of the more creditworthy
LDCs-Colombia, Taiwan, and Thailand-saw their
borrowing shares drop in 1981 largely because they
did not want to pay the higher interest rates.
Eight LDCs-Angola, Bangladesh, Libya, Macau,
Marshall Islands, Seychelles, Solomon Islands, and
Uganda-obtained Eurocurrency loans for the first
time in 1981. We believe this is evidence of the
willingness of banks to diversify their lending to
countries with little or no prior exposure, even though
these countries may be considered slightly worse
credit risks. As a result, a total of 73 LDCs obtained
Eurocurrency credits and bonds in 1981, an all-time
record (table 6). The previous high was 63 LDCs in
both 1978 and 1979.
Developments in 1982. Lending patterns this year
have not changed substantially from those of 1981.
LDCs raised more than $30 billion in Eurocur-
rency credits and bonds in first-half 1982, which is
only slightly behind last year's pace. Mexico, Venezu-
ela, Brazil, and South Korea are again the largest
borrowers. Some countries, such as Malaysia and
Taiwan, have taken advantage of their strong credit
ratings to boost their borrowing. Several Latin Ameri-
can countries, however, have experienced difficulty in
25
25
25X
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Table 3
Selected LDC Eurocurrency Loan Terms
Weighted Average Spreads a
Total LDCs
1.26
1.07
1.18
1.68
1.70
1.52
1.16
0.87
0.90
0.95
1.03
Non-OPEC LDCs
1.32
1.18
1.13
1.72
1.78
1.68
1.22
0.86
0.93
1.00
1.12
Argentina
1.75
1.35
1.52
2.00
1.89
1.75
1.11
0.78
0.68
0.85
1.07
Brazil
1.12
0.87
1.12
1.78
1.96
2.02
1.51
0.92
1.44
2.09
2.13
Chile
2.47
2.10
1.38
0.89
1.00
0.92
1.00
Colombia
1.38
0.75
1.75
1.65
1.50
1.08
0.87
0.83
0.71
0.60
Hong Kong
0.88
1.58
1.17
1.68
1.67
1.50
1.00
0.76
1.13
0.48
1.30
India
1.00
1.06
0.57
0.53
0.53
0.51
Malaysia
0.88
1.25
1.54
1.43
1.07
0.81
0.70
0.47
0.31
0.27
Mexico
1.25
0.65
0.80
1.53
1.59
1.61
1.08
0.78
0.63
0.74
1.08
Morocco
1.63
1.61
1.35
0.98
0.96
1.04
1.06
1.06
Panama
1.65
1.38
1.17
1.75
1.73
1.75
1.56
0.88
1.25
1.26
1.26
Peru
1.60
1.69
1.17
1.82
2.25
1.40
1.31
1.07
0.72
Philippines
2.00
2.00
1.40
2.09
1.75
1.70
1.09
0.92
0.81
0.90
0.83
South Korea
1.37
1.16
1.42
1.97
1.82
1.71
0.98
0.67
0.82
0.65
0.57
Sri Lanka
0.94
0.83
0.69
0.59
Algeria
1.50
0.99
1.53
1.61
1.63
1.33
1.13
0.86
0.56
0.56
Ecuador
1.50
1.75
1.65
1.41
1.10
0.94
0.74
0.71
0.66
Gabon
1.88
1.80
1.67
1.94
1.97
1.95
2.25
1.81
1.50
Indonesia
1.67
1.69
1.89
1.70
1.21
0.71
0.77
0.54
0.39
Kuwait
1.71
1.79
1.04
1.50
1.55
1.53
1.13
a Spreads are weighted by the amount and maturity of the loans.
b Data are for first-half 1982.
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Table 4
Selected LDC Eurocurrency Loan Terms
Weighted Average Maturities a
Non-OPEC LDCs
Argentina
Brazil
Colombia 8 11 10 7 7 7 10 10 10 9 10
Hong Kong 7 8 10 6 7 7 10 9 7 12 3
India 7 7 5 8 9 10
Ivory Coast
Malaysia
Mexico
Morocco
5 6 5 8 10 11 9 8
5 7 7 8 8 10 10 8
5 5 6 8 8 6 8 5
7 5 7 8 10 8 7 5
a Maturities are weighted by the amount of the loans.
b Data are for first-half 1982.
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Table 5
LDCs: Share of Private Borowing a
Total LDCs
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Non-OPEC LDCs
66.6
63.0
89.2
71.9
74.8
70.6
67.1
72.4
72.0
78.3
74.5
Argentina
6.2
1.1
6.2
0.4
5.4
6.9
3.8
5.9
6.0
5.9
3.7
Brazil
18.8
11.5
21.1
18.8
19.7
16.1
13.3
14.8
14.9
11.1
9.7
Hong Kong
0.3
2.6
1.7
5.0
2.7
1.7
2.2
2.4
4.3
5.8
2.4
India
0.2
0.2
0.2
0.1
0.3
1.8
1.0
Malaysia
2.6
0.2
1.8
3.7
1.2
0.7
2.7
0.7
2.5
2.6
3.1
Mexico
15.1
17.6
19.8
21.2
15.9
17.4
17.4
21.8
14.4
23.5
27.0
Morocco
2.0
2.5
3.1
1.7
1.1
1.1
1.4
1.3
Peru
3.9
8.2
4.7
3.8
1.9
0.8
1.2
0.9
1.3
1.7
Philippines
2.9
1.9
11.3
1.9
7.1
3.6
5.0
4.2
3.3
2.3
3.3
South Korea
2.6
0.6
4.1
2.8
7.0
5.5
7.4
6.3
5.1
6.3
7.3
Taiwan
0.1
2.9
1.2
1.4
2.4
0.7
1.6
1.4
0.7
1.8
Thailand
0.1
0.5
1.0
1.0
1.5
2.1
1.4
1.0
Other non-OPEC
11.8
16.2
15.4
9.6
7.9
9.7
8.9
7.2
11.2
9.0
8.5
OPEC LDCs
33.4
37.0
10.8
28.1
25.2
29.4
32.9
27.6
28.0
21.7
25.5
Algeria
8.0
17.9
0.8
4.7
4.5
3.2
8.4
4.6
1.0
0.8
1.0
Indonesia
3.6
2.5
4.8
14.2
6.5
0.4
3.7
1.7
3.1
1.9
2.3
Iran
10.3
9.7
1.5
2.1
5.2
7.8
3.3
Nigeria
0.3
3.7
3.7
1.9
4.7
1.8
a Private borrowing includes medium- and long-term Eurocurrency
credits and foreign and international bonds.
b Data are for first-half 1982.
obtaining new credits: Argentina as a result of the Spreads for individual LDCs varied. Asian LDCs, for
Falklands crisis, and Chile, Ecuador, and Peru be- example, generally improved their spreads because of
cause of economic difficulties brought on by depressed relatively strong economies, while terms for Latin
export revenues. American countries tightened as a result of poor
economic performance and rising debt levels. Terms
Loan terms have generally stiffened from 1981 levels. on loans to African LDCs stiffened slightly; although
The average spread rose above 1.0 percentage point- most of these countries did not have access to the
largely because of a jump in the non-OPEC average capital markets because of weak economies. LIBOR
spread-and the average maturity fell to six years.
25
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Table 6
Publicized LDC Appearances in the
Euromarkets a
Year
Non-OPEC OPEC LDCs
LDCs
Total LDCs
1972
20
7
27
1973
34
8
42
1974
29
7
36
1975
32
8
40
1976
33
9
42
1977
45
10
55
1978
51
12
63
1979
54
9
63
1980
48
9
57
1981
64
9
73
1982 b
38
9
47
a LDCs that have obtained a Eurocurrency loan or issued a foreign
or international bond.
b Data are for first-half 1982.
dropped to about 15 percent for the first four months
of 1982, easing some of the debt-servicing burden for
LDCs.
The OPEC LDCs increased their share of total LDC
borrowing to more than 25 percent in first-half 1982,
which reflects their growing financing requirements in
light of the soft oil market. A total of 47 LDCs have
borrowed thus far in 1982, none of them new entrants.
Outlook for 1982-83
Volume of'Borrowing. We estimate that LDC borrow-
ing requirements will increase over the next 18
months at a slower rate than in previous years. Most
analysts expect the aggregate non-OPEC LDC cur-
rent account deficit to level off in 1983, which should
ease the group's financing burden. The rising deficits
of several OPEC countries, however, will cause them
to enter the Euromarkets in search of funds. More-
over, high interest rates on existing loans will force
many LDCs to borrow additional funds to meet debt
repayment obligations. With official sources of lend-
ing-including the IMF-not planning to increase
Table 7
Selected LDCs: Changes in Credit Ratings a
Improving terms (1982 spread at least 0.1 percentage point less than
1981 spread)
Algeria
Colombia
Indonesia
Peru
Sri Lanka
Stable terms (1982 spread less than 0.1 percentage point different
from 1981 spread)
Bangladesh
Malaysia
Taiwan
Brazil
Morocco
Thailand
Chile
Nigeria
Trinidad and Tobago
Ecuador
Panama
Venezuela
India
Philippines
Ivory Coast
South Korea
Stiffening terms (1982 spread at least 0.1 percentage point greater
than 1981 spread)
Argentina Papua New Guinea
Congo Paraguay
Hong Kong Uruguay
Jamaica Zambia
Mexico
a Changes are determined according to the LDC's weighted average
spread for 1982 as opposed to 1981.
substantially their financial flows, we foresee that
LDCs will have to continue their heavy reliance on
private banks.
At this stage, we expect the increase in net LDC
borrowing from private banks to be the same in both
1982 and 1983 as in 1981-about $45 billion. Gross
medium- and long-term borrowing will probably be
$75-80 billion each year, slightly higher than last
year, with most of the total again accounted for by the
Euromarkets. Financial publications state that the
bond markets should improve for LDCs as interest
rates begin to fall, although the disappearance. of the
OPEC surplus will take away some potential sources
of support for LDC bond issues. 25
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Problem Areas. Despite Mexico's serious financial
problems, we do not think that borrowing by individ-
ual LDCs in the remainder of 1982 will produce any
major surprises. Nonetheless, we see several develop-
ments that could have an adverse impact on LDC
borrowing:
? As lenders conduct more stringent credit risk anal-
yses, countries such as Mexico and Venezuela will
probably meet increased market resistance. As a
result they will be forced to adjust their economic
policies or else pay substantially higher rates.
? With a decline in the number of least risky LDCs-
those that are creditworthy and have small out-
standing loan balances-and an increase in the
number of riskier LDCs, the average spread for the
non-OPEC LDCs will probably remain above 1.0
percentage point.
? An emerging bank policy of "regionalization"
whereby all countries in a region are adversely
affected by the problems of one or a few (such as by
Poland in Eastern Europe and Argentina in South
America) could slow the flow of new lending to
LDCs regardless of their individual credit risk.
Financial difficulties will probably continue to afflict
LDCs with external payments arrears, and more of
them will probably seek debt relief. At the end of
1981, 28 LDCs were in arrears and half of them
obtained debt relief last year (table 8). None of the 28,
however, has a debt large enough to cause major
problems for the international financial community.
I Ithe major concern to
private banks is the possibility of a debt rescheduling
by Mexico or Argentina. Mexico's economic troubles,
which have recentl become more evident, could lead
to a reschedulin .
Primarily because of the drop in both export revenues
and foreign exchange reserves during the Falklands
crisis, we believe Argentina will need some sort of
debt relief and may have to reschedule before the end
of 1982, which will make lenders even more cautious
Table 8
LDCs With Payments Arrears, 1981
Central African Republic a
23
Chad
17
Congo
442
754
463
El Salvador
215
The Gambia
27
Ghana
245
Guinea a
110
11
120
Haiti
41
Jamaica a
494
Liberia a
246
Madagascar a
317
Mali
69
Mauritania
92
Nicaragua a
501
374
60
880
258
50
1,119
about new loans to South America. The other large
LDC debtor, Brazil, has stabilized its debt position;
creditors are more optimistic and see little or no
prospect of debt rescheduling for the next year or two.
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Appendix
Key LDC Borrowers
Mexico. Mexico, the largest LDC borrower, raised
some $15.2 billion on the Euromarkets in 1981 and
$8.2 billion in first-half 1982. As a result of its
deteriorating payments situation and massive borrow-
ing needs, Mexico has been forced to accept less
favorable terms in the past year. The average spread
rose from 0.63 percentage point above LIBOR in
1980 to 0.74 in 1981 and 1.08 thus far in 1982. Most
of the increase is attributable to the declining credit-
worthiness of the private sector-particularly Grupo
Alfa-but recently gov-
ernment borrowers have met growing lender resist-
ance. Bankers are especially wary of Mexico's current
parlous economic troubles, but they are hopeful that
the government will take the necessary steps to slow
down and better control the economy. If not, we
believe that Mexico will have to restructure or even
reschedule a portion of its debt before the end of this
year.
Argentina. the Falk- 25
lands crisis has drastically altered bankers' assess-
ments of Argentina, but they have resisted the urge to
shut off lending entirely because they are unwilling to
push Argentina into a formal default and are optimis-
tic about the country's economic potential. Most
banks have not extended new medium-term credits to
Argentina, but they have rolled over existing short-
term credits. US bank exposure to Argentina has not
changed in the past six months. Spreads on Argentine
loans have increased since 1980, and we expect they
will continue to do so. We believe it is unlikely,
however, that Argentina will obtain any new medium-
rm syndicated loans during the remainder of 1982.
nearly double to 1.5 percentage points above LIBOR
this year, which could cost Mexico as much as an
additional $200 million to meet its 1982 gross borrow-
ing requirement of more than $20 billion.
Brazil. Brazil continues to borrow heavily although its
credit standing has improved in the past yea
Terms remain stea y, wit
Brazil paying between TO and 2.5 percentage points
above LIBOR for eight-year loans. Self-imposed aus-
terity measures last year have taken hold and have
satisfied Brazil's creditors.
Venezuela. The largest OPEC borrower, Venezuela,
obtained $6.4 billion in 1981 and $4.4 billion in first-
half 1982. Now, however, Venezuela has run into
some difficulties filling its borrowing needs. Although
depressed oil export revenues and a massive buildup of
short-term debt have boosted Venezuela's financing
requirements to nearly $10 billion,
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some bankers have shied away from new
lending because of Caracas's support for Argentina in
the Falklands conflict. 25
South Korea. South Korea's borrowing has rebounded
after the change in leadership and decline in GNP in
1980, with a total of $4.1 billion in 1981 and $2.2
billion thus far in 1982. Credit terms have improved:
the average spread was 0.65 percentage point above
LIBOR in 1981, down from 0.82 the previous year.
We believe that the 1982 spread will be about the
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The large Korean
borrowers, both public andprivate continue to ac-
count for most of the new credits.
ontinue to have little trouble obtain-
Nigeria. Nigeria's emergence as a major borrower,
$3.0 billion in 1981, has been slowed thus far in 1982
even though its borrowing needs are greater. I
Nigeria's credit standing as
Hong Kong and Indonesia. Hong Kong and Indone- deteriorated along with its economy-mainly because
sia-two of the better LDC credit risks of declining oil export revenues, high import bills, and
ing new funds. Hong Kong borrowed $3.7 billion in
1981 with an average spread of 0.48 percentage point
above LIBOR and a 12-year average maturity. Most
of the loans are for projects, and some extend even
beyond the 1997 expiration date of the New Territo-
ries' lease from China. We expect Hong Kong to
continue to be a major borrower on the Euromarkets,
totaling some $4-5 billion in 1982. Indonesia took
advantage of its low bank exposure relative to other
Asian LDCs to obtain an average spread of 0.54 in
1981 and 0.39 in the first part of 1982 despite a
decrease in oil export revenues. The loans were target-
ed primarily for projects and trade financing. Indone-
sia's exposure to US banks has risen by about 50
percent during the past 18 months.
Chile. Chile borrowed nearly $2.4 billion in 1981,
most of it in the first half of the year. US banks, in
particular, have been very active lenders to Chile.
Lower commodity prices, especially copper, combined
with the severe recession and financial difficulties
have soured lenders' attitudes toward Chile in the past
six to eight months, which will make it more difficult
for Chile to meet its 1982 borrowing requirement of
about $6 billion.
The Philippines. The Philippines encountered grow-
ing banker resistance in 1981 because of high expo-
sure to many banks, depressed commodity exports,
the instability of several major companies, and a
growing debt burden.
Philippine loan
terms tightened in 198 1 but ease in the first part of
1982. We expect the Philippines to borrow on the
order of $4-5 billion this year.
administrative chaos in Lagos. Spreads on loans to
Nigeria have remained below 1.0 percentage point,
but only because the government pays hefty front-end
fees-as high as 3.5 percentage points. Most of the
lending is for projects, but some is diverted to bal-
ance-of-payments financing.
$2 billion we
expect spreads to remain aroun percen age point.
Malaysia and Taiwan. These two LDCs continue to
rank among the better credit risks because of strong
economies and relatively low exposure to foreign
banks. Malaysia has the lowest average spread among
all LDCs-0.31 percentage point above LIBOR in
1981-and has taken advantage of that to borrow
heavily at favorable rates to build up reserves and
promote development projects. Even with the expect-
ed increase in Malaysian borrowing this year to about
Taiwan is being viewed
more cautiously because o increased Western ties
with China and the resultant emergence of China as a
borrower. Lenders are wary of political pressure by
China but are still anxious to participate in the
lucrative trade finance activity in Taiwan. US bank
exposure to Taiwan remained at about $5 billion
through first-quarter 1982.
Thailand and India. Both Thailand and India have
used their lack of previous lending to their advantage,
borrowing at spreads of around 0.5 percentage point
above LIBOR. In both cases project lending is the
main priority. political
uncertainties in Thailand and the rising level of
external debt in India (now at about $20 billion)
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suggest that these LDCs' good credit standing may be
only temporary. Thailand obtained $0.9 billion in
1981, while India borrowed $1.1 billion; we expect
both countries to increase their totals slightly this
year.
Peru. Peru borrowed more than $800 million in 1981,
but a worsening in
the balance of payments in the past year-brought on
by depressed commodity export revenues-has dam-
aged the country's credit standing. Despite a recent
IMF agreement, Peru may have some trouble borrow-
ing the $2-3 billion it needs this year. US bank
exposure to Peru has increased at a slower pace over
the past year.
Colombia. I Colombia
remains the most creditworthy South American coun-
try even though large current account deficits have
increased its borrowing requirements. Total borrow-
ing by Colombia-mostly project related-was $1.0
billion in 1981, and we believe it will reach $1.5
billion this year. The growth of US bank exposure to
Colombia has slowed over the past year; we expect
banks to remain cautious during the rest of 1982.
Ecuador. Ecuador
has felt the squeeze of lower oil revenues, but it still is
obtaining funds at favorable rates, around 0.7 per-
centage point over LIBOR in 1981-82. US banks have
continued to lend to Ecuador, with total exposure at
$2.3 billion in first-quarter 1982. We believe that
Ecuador's current political uncertainties and rising
external debt will make lenders more cautious, and
Quito may experience a tougher time lining up new
credits in second-half 1982.
Panama. I Panama is 25
the strongest Central American republic, largely be-
cause of its growing importance as an offshore bank-
ing center, its steady canal revenues, and the US
military presence. Panama borrowed more than $0.6
billion last year, and we expect that the country
should top that total in 1982. US banks have been
lured by increased use of US-prime-based credits.
economic difficulties in Morocco-brought
on by ig oil imports, depressed phosphate prices,
poor agricultural performance, and an ongoing con-
flict in the Western Sahara-have brought on a
decline in the country's creditworthiness and a stiffen-
ing of terms. After borrowing more than $0.9 billion
last year, Morocco may be hard pressed to match that
figure in 1982. Saudi Arabia borrowed nearly $1.5
billion in 1981, and we think it will obtain an amount
close to that this year.
Saudi Arabian firms have used their country's good
credit rating to borrow heavily for infrastructure and
industrial development projects.
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