NATIONAL INTELLIGENCE DAILY FOR 29 SEPTEMBER 1989

Created: 9/29/1989

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China: Regime Bracedctober

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Tunisia: President Faces Growing exposition

Notea USSR: Gorbachev Oversees Ukranv Leadership

eficit Reduction Faces

Ecuador: Dispute WiUi Qj|

Peru: Urging Regional Antidrug

Yngoslavia: Economic Reforms Likely To Provoke

Iraa: Reducing Foreign Labor

Philippines: Debating How To Lay'Marcos to

iBdonesia: Socharto Moves To Scotch Succession

China:f'roni'n Measures To Collect

In

Special Analyses iraa: Roots of Growing Activism Agaiast

Brailt Fears of Financial Panic Kcsurfaang l*

Regime Bracedctober Anniversary

Chinese Government Is implementing stringent security precautions lo forestall demonstrations or rioUnce at cert monies SnndayOth anniversary of tne founding of the Peoples Kea.tUic. aJBLa*

Over thc past week miliiary units have conspicuously con< u'l urn-itcs in the streets of beijmgajj'tJj'ftlfJJhsjj^^

iy authoritieseal off the city

time since Aa_ have restricted.ctober.

'"troops are palrolfiw-gMhc areas around

und for thc first

suspected of

involvement in last spring's demonstrationale being ordered to participate in official festivities in Tiananmen Square. Foreign attendance will be sparse: only Cuba and Eastfrom the KasternBIoc have sent official

^stssssWajWcstcrnparticii ilion will be limited iobsssy* rrprcirrrrSniin^BSBBB^Ifci i '

preparations are evidence of thc regime's nervousness about possible demonstrations of popular resentment, and it is signal) ng that it will deal firmly with any attempts to embarrass it. By coercing students to take pan in the festivities, the authorities presumably hope to head offany student-initiated acts and make it appear that students in particular now support thc governmcni. There continue to be reports of isolated bombing and sniping incidents againsi troops, and il is possible some dissidents pt thc^celebrations with i

Faces Growing Opposition

Tunitio) 's deteriorating economy is eroding popular tuppori for President Ben All's government; tome of that support is likely to go to the Islamic-j

Bel Ah lacked Prime Minillcr Baccouche Wednesday ina ruling-party loyalist because of Baccouche'l increasinglyto the government's IMF-supported economicAccording to pressa growing faction of government officialslhat strict adherence lo lhe reformhigher prices on subsidized foods and the sale ofraise inflation and unemployment.averted sector-wide strikes this summer when labor

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Defense fears opposition to Ben Ali's programs willuniversity studer"*

Sporadic demonstrations, encouraged in partare likely this fall. Ben Ali may be forced to slowof reform to head off labor and popular unrest, but he isjeopardize Tunisia's standing with international creditorsdrastically from the IMF-supported program.Presidentoft approach irj_oidejJp co-opt

USSR: Gorbachev Oiersccs Ukraine Lcadeaflilp Shift

krainian pony Central Committee plenum in Kiev yesterday. General Secretary Gorbachev thanked Vladimir Shcherbitskiy upon his rctircmcni as republic pany leader and spoke at thc plenum's discussion of successors. Gorbachev said Shcherbitskiy had requested retirement last March. Republic second secretary Ivashko. one or two candidates put on lhe ballot, was elected Ukrainian party first secretary,reak with tradition, thc Ukrainian Central Committee allowed Soviet journalists to attend the plenum-j

Ibe Openness of the proceeding :ind ihr democratic formalities al the plenum, lhc smooth transfer of the Ukrainian party leadership from Shcherbitskiy to Ivashko clearly was carefully prepared. Ivashkoigh political profile in the weeks before Shchcrbilskiy's retirement, taking moderate political positions thai avoided serious offense cither to the Ukrainian part) establishment or to the republic Popular Front thai had called for Shchcrbilskiy's removal. As ai Ihc Leningrad plenum in July, Gorbachev's participation put his stamp of approval on the outcome. Ivashko nevertheless will hiivc difficulty in Ihc months ahead in satisfying the expanding demands of religious and nationalist Ukrainian mo^mcnls while kecpine them within bounds acccplablc

to

USSR Deficil Reduction Faces Uncertainty

peech to thc Supreme Soviet this week. Finance Minister Pavlov hasudget0 that would reduce Moscow's massive budget deficit toillion rubles,ercent of GNP Allhough thc budget calls for major cuts in expenditures on investment and defense, it relics mostly on an assumption of increased revenues io achieve thc deficil reduction. Pavlov indicated, moreover, that thc remaining deficit would be financedess inflationarysellingillion rubles worth of long-term bondsercent intcrcsi rate to banks, enterprises, and'VsjfV V>

Comment Thc measures Moscow is taking to control the deficit could help the leadership deal wiih its most pressingassive monetary overhang that is creating havoc in consumer market! Reducing thc deficil. however, depends almost entirely on revenue increases thai will be difficult to achieve; no source is specified for almostillion rubles of Ihc budgeted revenue increase. Moreover, some of thc cuts and measures for raising revenues are likely to be hotly debated in the Supreme Soviet. One legislator already has suggested that ihc plan and budget for ncal year have itntr rh.nef nf being approved in their current forin.

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ECUADOR: Dispute With Oil Workers

President Borja hasational slate or emergency and ordered troops to take control of Ecuador's Tcxaeo-man aged oil facilities and pipeline from striking workers. Thc strike, just before Sunday's scheduled assumption of management of thc pipeline by Ihe stntc oil company, has temporarily halted shipments of oil. which producesercent of the country's export revenues. Workers arc demanding upillion in severance pay from Texaco because ihe siatc oil company will not honor Ihcir contract. Although Texaco and Quito agree that compensation is due. they disagree over who should pay. Texaco isecent court ruling in the government's ravoratsasflssVi

union's far-left leaders probably want to play on nationalist sentiment by seeking payment from the US company, widely seen a's having greater resources than thc government. labor Minister Verduga justified the government's refusal to pay thc compensation by charging that Texaco had provoked the dispute to prolong its control of the pipeline. The confrontation, the thirdS-owned company this year, is likely to discourage sorely needed foreign investment and disturb foreign creditors The government nonetheless probably sees thc dispute as an opportunity to press Texacoower its demands for1 ii ionali/ation ihat is pending. ftsVHaaV

PF.RU: Urging Regional Antidrug Stance

is pressing Bolivia and Colombia to join itegional response. to ihc US counicrnareoins initiative ajjffjBHss^aVaaasaVVaaaaaaaV

the Peruvian Foreign Ministry says Presidents Barcn of Colombia and Paz Zamora of Bolivia have agreedtrategy-planning minisummit wiih President Garcia in Peru onctober before meeting with US officials. Garcia and Paz have publicly calledubstantial crop-subsntulion program and are emphasizing Ihe need to include West European countries in the antidrug plan.

_ [Garcia hopes thc drug issue will help him realize hil longstanding ambition to spearhead regional solutions to Latin America's problems. He probably believes that Colombian and

ay be an attempt Tol bowing to USP'cssure to ^specially if the traffickers

Markovic willontroversial market-oriented economic reform package for approval by the Federal Assembly today. Althoueh acknowledging thc likelihood of increased social unrest, hc reportedly believes his package is Yugoslavia's only hope for economic recovery and is confident of full approval.-The package reportedly lacks thc lough price and inicrcst-ratcControls demanded by Markovic's critics, and trade union and republic leaders have warned of general strikes and unrest jf the government fails toore concerted effort to halt indatidn. now runningercent. Markovic has denied.reports that hc will step down leu fSBSjajfBj,

iThc reforms, even if not watered down, will fail toquickly enough to satisfy workers, whileopulation already hard pressed. Moreover,recently by confrontations between Slovenia andover constitutional issues will hamperscheduled visit to the US in mid-October and hisPresident Bush may strengthen his hand, but inflationcontinue unabated and hc stands an evenf**infbefore his term ends in '

Reducing Foreign labor Force

Baghdad, which claimed Wednesday to be preparing to demobilize five divisions by mid-October, is trying to reduce the number of foreign workers in Iraq in order to prepare for Ignic-scale dcmobilizaljon and to conserve hard currency, reports that isexl month Iraq will sharply reduce the amountsoreign woAers can convert to hard currency and remit. Earlier this year. Baghdad banned Egyptians from operating produce sunds and

>om converting Ihcir earningsP* ,more Egyptians arc leaving lhan entering Iraq daily.ive divisions to befedroops,in r> percent of Iraq's currcni forces, aaaaflaf

WasaMHv Although previously announced demobiSzalions have resulted only in the shifting of uniis to Border Guard orecurity duties. Iraq probably wants to free some of the jobs ofillion foreign workers Tor soldiers. Baghdad also wants lo save hard currency for development projects and imports: annual remittances will bo halved to about SI billion even if most workers remain. Many Egyptians probably will stay in Iraq because of poor opportunities at home. Baghdad's actions* are likely to increase friction wiih members of lhe Arab Cooperation'Council, whjjh seek opportunities in Iibq for its workets (VtaTflMVaaapaB'faaaaaVfeV/

PHILIPPINES: Debating Ho- To Lay Marcos to Rest

death of Ferdinand Marcos yesterday in Honolulu, where he and his wife have lived in exileas reopened debate over whether the former President should be buried in tbc Philippines. President Aquino has expressed sympathy toamily bul has publicly rejjerated her earlier decision not to. return edi

V"BBBBsT^ppfJi Marcos's death it likely lo provoke tome short-lived anttgovernmenl and anti-US demonstrations, but his supporters probably are incapable of any serious thrcat.to.lhe Aquino administration. Although Aquino may eventually allow Maicos's burial in the Philippines, she will almost certainly seek US assistance to bar Mrs. Marcos's return: Mrs. Marcos and former Marcos associates are still under US indictment on charges of racketeering.

INDONESIA: Soehartoo Scotch Succosiea Talk

President Sochano has put the military on notice that he wig be the one tp determine when anduccessor is chosen.aBMaVaWsBtif recently said he will com; down hard on any generals attempting lo remove him unconstitutionally. Armed Forces Commander Sutrisno has publicly reiterated the military's baektngofihc President, and Defense Minister Murdani hasarning to siudcnt activists previously tolerated by ihc military. Officials have renewed warnings to lhc press not to wriic on politically (OAlKivfi issues, including ihe presidential succession.

gestures of support by military leaders may mean they have decidedhelve for now an increasingly public confrontation over thc succession with Soeharto. whose term expireslthough Soeharto remains in charge, the military is his power base, and behind-the-scenes succession maneuvering is likely to persist. He has not indicated whether he wtll seek another term M mt. J

CHINA: Employing Draconian Measure* To Collect Revenues

rowing budgci deficil. Beijing has launched an all-oui drive io increase revenues by forcing slate workers, joint-venlure employees, and soldiersuy more governmenteijing is insisting thai workers employed in joint ventures wiih foreign firms convert as much asta third of iheir "jffs into governmentd ihc VHHHaWlVHPPhc and frjs^onTffa^ci ar?bcin? forcedpend nearly half iheir satarics.*VaBBW

s scrambling io finance ils deficit, which ii likely v io reach an alllimchigh of more than SIO billion this year, without printing money and aggravating already serious inflation. Forced bond sales will further cloud China's business climalc for foreign investors by squeezing lhe profi: margins of joint ventures to lhe extent lhat employers have to increase wages to attract workers: These sales will also hurt worker productivity by furtherestive labor force. Thc mandatory bond purchase is lowering morale in the military byong-awaited pay raise awarded earlier this year and by keeping thc living standa.njs^of .soldicis below those of their civilian counterparts. y

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Press reports say Japan sending technical aid mission toirstuggests agreement near in dispute over petrochemicalventure, broader assistance program in Ihe

USSR's Gorbachev reportedly quashed attempt to raise Ugachev corruption investigation Monday at Supremeiberals trying lo reverse prosecutors' whitewash, focus attention on continuing legislative investigation. aagajja* VjJ

session of Palish Communist party's Central Committee plenum put off to Tuesday amid stormy debate on party's future

. party chief Rakowski warns disunity endangering party's existence effoi ts Io stem factionalism probably futile. 4aMsV'*J

Greece has announced electionharges filed against Papandrcou complete conservative-Communist coalition's ant (corruptiononservatives favored to win. but Socialist-Communist> >

Violence increasing as constituent assembly election nears in5 injured as supporters of leadingSWAPO. South African-backed Democratic Turnhalle Alliance clashed thistill on irack1 November.

Press rcpon says Misktio Indian eaile leader Brooklyn Rivera returned lo Nicaragua yesterdayeturn arranged by former President Carter . government statements suggest Managua will restrict Rivera'x electoral activities aaaasaVr

Special Analysis

of Crowing Activism Against Israel

Iran is frying toreater role in supporting lioiesn Arab 'iraggle against Israel- Respondingalestinians seeking to develop ties to radical Palestinian groups and to foster cooperation between them aad Lebanon's Shia militias. Tehran clearly aims to preserve or expand ils influence in Lebanon and the region, as well as to maintain its strategic relationship with Damascus. The competing interim and rivalries of the Lebanese^ and Palestinian groapt. however, will hinder IranianlajMH*

An important step was taken in mid-July this year when key radical Palestinians and Lebanese Shia leaders met with Iranian officials in Tehran for ihe first time. Although the Ihree panicsoint statemeni calling for Israel's destruction through armed struggle. Tehran made no commitment to provide financial suppon sought by thc

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Iran's actions almost certainly arc driven in pan by tactical considerations. Coordination of thc various Lebanescand Palestinian groups helpss battle against Lebanon's General Awn. who is widely perceived by Muslims as being supported by Israel and Iraq, ran also hopes that focusing on Awn and Israelen the Lebanese Muslims from disputes amonRthemsclves lna thereby help protect us primary client, Hizballah. flflPl V?

Strategic calculations also figure in Iran's anti-Israel policy. Tehran probabl. seesbanon and Israel an opportunity to gainh Arab elements opposedolitical settlement wiih Israel ihus recouping prestigehe war against Iraq. Thc Iranians no doubt consider thisay to make gains with radical Lebanese groups and to move the more moderate Amal toward confrontation with Israel. Public Iranian statements havC portrayed resistance to Israeleligious ratherational cause. President Rafsanjani may alto sec ami-Israel operation, as an acceptable way to revalidate his rcvolui.onarycrcdeniials aad attract support from hardline domesticaJJJf;

Prospects

unification of Ihc Lebanese and hardlini

to be ephemeral. MMaaMaitaaVMflsV-

flhe Amal-Hizballah reconciliation is not progressing

Israeli retaliation, has never been

en.hOWic about armed struggle with lsr*a.oMilion

win be even more difficult to sustain. Nonetheless, thereanger

of increased attacks on Israeli positions in southern Lebanon as

cl.ncrentor Iranian aid. Thc danger probably will increase

it the nnmcdjaicxgnfrontaiion with Lebamir Christian forces recedes asqaBganaBBBBjajM*

Arab radicals will coniinuc to turn to Iran for support at least as long as the Arab consensusolitical settlement wiih Israel.inimum. Iran willource of political and limited financial support to hardline Arab elements committed to armedh Israel More worn so me is the prospect that, in return for improving hr mnrr^ capabdmesof radical Pales.in.an group, such as* inc LP'Oc. Iran might use these groups to conduct icrrorisi attacks against us perceived enemies, including Western ones.

Special Analysis

Fears of Financial Panic Rcsurfaclnt

the piesideal'let election in fJovembee approaches, the Sarney government again faces the threat of hyperinflation, lit policy af relying on high real interest rates lo control inflation and to ensure therearket for itslean through Marchew presidenl isat risk as Investors grow increasingly Jittery. Some have already moved out of government-issued securities, doubtful of Brasilia's utility lo meat ballooning service payments; hyperinflation would quickly result if investors abandon the securities am masse. Even if President Sarney massages to stateinancial panic, his successor will not be spared and will need lo address Ihe Internal debt issue mmediately b)ainful economic restructuring.

Governmcni red ink has made Brazil's internal debt soar in recent

yean.rasilia has had little access to foreign borrowing

lo finance its operalions and has relied on printing money and selling

bonds,icious cycle: as domestic dcbi increases, inflation

rises and so do the interest payments on the securities ihai are posted

and compounded daily, rising interest payments in turn further

aggravate the federal deficit and result in the issuance of more

securities Last year, servicing the domestic debt cost more lhan

ercent of gross domestic product. Inflation this year is projected

toercent, and. as lbc government offers higher real rates

Caughtolicy Bind

Growing domestic debt and ever-expanding interest payments huvc robbed the government of the use of traditional monetary and fiscalarge chunk of Brasilia's expenses are now nondiscretionary interest payments. Lacking the poliiical will to raise taxes and trim lhe federal payroll, thc Sarney government has turned to monetary policy as its main weapon to control Inflation. Relatively high real interest rates soak up excess liquidity and keep investors in thc go vcrnrncnisccu lilies market bui at thc cost of adding to thc budget

Courtlng Flnanclil Panic

Real returns on die order ofoear have allowed the government successfully to market its'sccuritics, but particularly asiuic investors reportedly arc limiting their porchases of government

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on thehe servicing burden will take more thanercent ofGDP.lgiiF-

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Size and Scope of Domestic Debt

Brazil's internalpaper Ihe government issues to the public io finance ils budgetsoared from the equivalent ofercent of gross domestic product2 to aboutercent last year and will probably surpassercent by thc end of this year.ew olher countries have similarly large debts, they do noi have Ihe high nominal interest rates that inflation has induced in Brazil, where the burden to service internal debt hashoppingercent ofwhat Mexico pays andimes the payments on external debt.

Commercial banks, brokerage firms, cash-rich companies, and wealthy individuals are the primary holders of the securities, which are indexed to inflation. Most of the debtaturityays, but someercent of the estimated SBO billion nowhanges hands daily on the private-sector overnight market.

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rirunci.il murk els have been nervous in lhc nasi weekfirst temporarily tried to lower inierest rales, thenthem along with the official projections for inflation, making(or inveslots to predict their real rate of return. of securities are beginning 10

' * TJuestion the govcinmorn's ability to meet ballooning service payments

A flight from government tecunties would trigger hyperinflaiion. If investors opt out of bonds, they will try to turn to dollars and gold. Becauseillion in government securities far exceeds these assets, investors would next look lo real estate and consumer and

capital goods. Thc rapid increase in demand would outstrip supply.

sending prices soanng. Brasilia would be forced to print moneyuld no longer sell bonds.

By ignoring the root of ihe internal debt problem, the Sarncy government hasundamentally unstable financial system. Dight from government bonds could occur very Quickly because the volume of securities traded on tbe overnight market is huge. Moreillion of securities are scheduled for redemption between now and ihe inauguration in March. Inflationary pressures are building quickly,apid upward spiral in prices might make investors jittery about holding erurado-denom mated assets, regardless of the return Bran ha offers.

iiciiicuoous internal

,mmcdia,c drastic spending cuts Without

ultimately be forced lo take Ihe AVgSc so tut on of hyperinflation, whichestructuring of imcrnal isrupHon to production and socialIgilbilS

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