Created: 12/17/1987

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International Financial Situation Report (u)


Issue 71


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International Financial Situation Report IT1umber 1M1


The )oint communique issued by th* presidents of eight Latin American countries following their summit meeting In Mexicoovembernified position on debt, but cHd not Indicate any radical Joint debt actions would be taken. More noteworthy, than th* communique Itself werehe-sc*nes debates that led to the |oint declaration. Peru, Brazil, and Argentina reportedly pushed for radical debt Initiatives, Including limitations on Interest payments. In other developments!

o Many International banks are girdinguspension of payments on Argentina's foreign debt, which they believe Is Inevitable and could occur as early as this month, accordingeliable source. He0 million loan from international bejuos will bring Argentine reserves to aboutillion and shouldoratorium this month. To avert radical debt actionowav*r, Buenos Aires will require at6 billion In yet-to-be-ncgotlated new money coupled with quiescence from Ihe IMP. Meanwhile, President Alfonsin's economic team appears to be losing control over the economy and has discussed resigning en masse in January or February.

o Brazil's mj billion bridge loan to7 Interest obligations was signed onecember and the5 billion tranche will be made In three disbuntem*nts within th* next month. Negotiations beganecember on the term sheetebt rescheduling and now money package but, so far, little progress has been mado. The Brazilian delegation returned to the bargaining table with essentially the same proposals It brought when negotiations began oneptember, which the banks rejected as unrealistic and vague. Thetmosober* will likely become even more contentious in JanuaryIsdoes not resume scheduled Interest payments.

o The Mexican Government announced onecember new economic; measures designed to fight record inflation over the longer term and lower tha bloated federal budget deficit, while Increasing workers' wages to help counter rapidly rising consumer prices. The move apparently stops short of th* strong medicine needed to significantly reduce inflation, but some slowing is likely. Nonetheless, the austere nature of many of tha new measures mayolitical liability for the government during the runup to next summer's presidential election. fS MP NC 0C>





The Latin American Summit Meeting

The Joint communique Issued by the presidents of eight Latin Americantheir summit meeting in Acapulcoovember included aon debt, but did not suggest any radical Joint debtccording; totrie presidents essentially appealed for more creditor cooperation toustsolution to the Latin American debt problem and proposedfor achieving that objective. More noteworthy than the communiquethe behind-the-scenes debates that led to the Joint declaration. According toreliable source and US Embassy reporting, the debt talks were difficultPew, Brain, and Argentina reportedly pushed for radical debtlimitation on interest payments. By contrast, Colombiaoint declaration thatardline debt position because,Inflict on their ownoTabla negotiating

post ions with hanks. Generally reliable sources and US Embassy reoortlr* indicateeffectively played tha rota of moderator and influenced the phraiTng of7heon, which confined the most radical measures-such as ceilings on Interestof debt through secondary market discount, or linking dent servicingmarket acews-to "proposals" and emphasized that all such steos were subjectwith creditors.P NC



nal banks are girdinguspension of payments on Argentina's loreign oartt, which they believe is Inevitable and could occur as early as this month, accordingeliable source. Weid0 million loan from international banks will brine; Argentine reserves toillion and shouldoratorium this month. To avert radical debt actionowever, Buenos Aires wiu require Mt6 billion In yel-to-be-negotlatcd new money coupled with qmescance from the IMF. Both commercial brinks and the Fund, however, are becoming mcreasingly disillusioned with the slow pace of economic reform and are iD-dlspoaed to Increase lending to Buenos Aires.F NC OC)

l *eonomle team appears to be losing control over1ax packageorrgress-rsave failed to regain theArgentine public Treasury Secretary Brodei-sohn admitted that the team has,haI IUgoals are those that the IMF has"Mad that hereduce government

en,ralttoillion australesF)merely accelerate inflation, whichercent during theonthsS NF NC OCJ

tontf'SS t0 'lemconomic decline, the resigning en masse In January or February.

Tto replace Economy Minister

ntlhtn,both men would

concentrate on sellingconomic policies lo theapuio- or Troecoll-



noforn ncwtract prop in orcon

led teem might be tempted to announce radical debt actionew economic clan simultaneously, In the hopeoratorium would deflect domestic criticism from the austerity measures.F NC OC)

5 billion bridge loan to7 Interest obligations was signed onecember and the5 billion tranche will be mado In three disbursements within the next month. The remaining S3 billion will be disbursed In June provided:

o erm sheetebt rescheduling and new money package is negotiated with the Dank Advisory Committee by

o critical mass"ercent of the moreanks with loans to Brazil-sign onto the agreement by

o The agreement becomes effective byS NP NC)

Negotiations beganecember for *he term sheet but, so for, little progress has been made, actrordlngenerally reliable source. The Brazilian delegation returned to th* bargaining table with essentially the same proposals it brought when negotiations began oneptember, which the banks rejected as unrealistic and vague. Although Brasilia agreed to seek an IMF program. It Is not expected to begin negotiations with the Fund before next year, and It refuses to link economic performance targets to commercial bank disbursements. Moreover, it Insists on an interest capitalization scheme and new money equivalent to about half of Its Interest obligations. With less than one month before theanuary deadline nnd Ihe two sides far apart on the most basic Issues, the deadline will likelv be pushed back. The negotiating atmosphere will likely become even more contentious in Januarv If-as Is Ukelv-Brasllla does not resume scheduled interest payments. Bankers contend that Brasilia promised during negotiations for the bridge loan to resume payments, but Finance Minister Bresser has said Brasilia win onjy do so whenssured of receiving the concessions It is seeking from bonks. We expect the moratorium to drag on wellS NF NC)

Meanwhile, the economy continues Its downward aUde. Consumer demand remains weak despite recent large wage Increases, and Investment Is expected to drop to onlyercent of QDP this year. Economic growth will fall to 2fromercent per yearnd well belowercent needed annually to employ new entrants to the labor force. Inflation In November was nearlyercent and Is expected to exceedercent this month to7ecordpercent. Th* Finance Ministry hasiscal package, but President Samey already has overruled certain tax hikes and Congress bj likely to oppose major tax increases. Moreover, Samey has consistently failed to implement promised spending cuts, personally authorising billions of dollars for pet projects.iscal program may be announced soon,residential election almost certain next year, It la unlikely that Brasilia will follow through with any plan lo reduce the public sector's borrowing requirements, which will exceedercent of GDPs inflation continues to spiral, Brasilia probably will resort to another price freeze early next year.F)


The Mexican Government announced onecembereconomic measures designed to fight record inflation over the longer term and lower the bloated federal budget deficit, while increasing workers' wages to help counter rapldlv rlslmr consumer



prices. The program includes cuts in government programmable expenditures, lower Import tariffs to foster competition, and .oereased prices on government-supplied goods. The government also negotiated wlin the private sector to grant Labor an Immediateercent wage increase and anotherettnt Increaseccording to the us Embassy, Mexican officialsInflation to soar much higher this month and next but belleva they can almost halve this year's expected annual rata ofercent byhe Dank of Mexico devalued the controlledaccounts for ubout two-thirds ofercent to bring it in line with the free market rate.F)

The move by Mexico City apparently stops short of the strong medicine needed to significantly reduce Inflation, butslowing Is likely. The provision tncreaslne: workers' wages waa welcomed by organised labor and averted the general strike planned forecernber. Nonetheless, the austere nature of many of the new measures mayolitical liability for the government during the runup to next summer's Dresidenrial election. (CNF)

Other Latin American Countrloa

The Government of Peru devalued its currency onecember while Panamanian banks ara again suffering aerlous liquidity problems.F NC OC)


Peru devalued the official exchange rateercent against the dollar Monday in an effort to stem foreign exchange losses, but rising inflationtagnant economy continue to undermine Presidentagging popularity. Lima had devalued the official rate byercent in late October but, according to th* us Embassy, this failed toaileek reserve loss that continued Into November. Onlyercent of Lima's Inhabitants approved of Garcla's overall performanceoll conducted in November.F)

The devaluation, whloh should boost exports and slow both Imports and capital flight, will case pressures on Peru's reserves. Higher Import costs, however, will add toercent inflation, fueling greater labor discontent. The stagnating economy, which is plagued by lagging private Investment and rapidly growing government borrowing, la likely toajor problem for Garcia.F)


A senior government banking official stated In early December that, following six weeks of slow improvement, Panamanian banks are again suffering serious llquklltv problems causedeavy seasonal withdrawal ofhe official stated that ill Panamanian-owned banks-Including th* National Bank ofIn rxecarleja financial positions and soma fear that the failure of even one bank couldanle large enough to topple the country's banking structure, accordingenerally reliable source. Meanwhile, the government estimates that Its budget deflelt-whlch5 million from January0 million7ercent of GDP, according to us Embassy reporting. The fiscal deficit is expected to worsen next year, with tha National Bank of Panama estimating it could grow0 million If the government decides to resume debt payments. In an attempt to finance and reduce this deficit, Panama probably will ask its commercial creditors0 million in new money and Is0 percent acrcss-the-board spending reduction, including salary cutsiring freeze, nccaus* foreign banks are unlikely



to grant new financing, Panama mav be forced to enact politically unpopular spending cuts and continue to default on debt payment* to governments and banks next year.F NC OC)

USSR/Eastern Europe

Soviet international gold sales have risen and Soviet Foreign Trade Bank officials reportedly believe the rapid growth of Soviet hard currency Indebtedness over the past two years is drawinglose. In Eastern Europe, recent criticism of Belgrade's antl-Inflatlon program has Increased the chance that the regime's economic program will be in disarray when talks with Western creditors open early next year, and Belgrade announced It will seek an agreement with the IMF.F)

Soviet Union

The Soviet Union has recentlyeavy seller in the International gold market, prompted by higher gold prices and the need to finance major grain purchases, according to various sources. According to special intelligence, Soviet spot bullion activity rose by almostercent between September and October, with sales5 million. The USSR, along with other International gold producers, took advantage of higher getd prices resulting from the Increases In gold demand that followed the global stock market crash, accordingenerally reliable source. Ir. addition, the USSR plans to increase gold sales during the rest7 and the first quarter of next year to help finance major grain purchases, according to another generally reliable source. Soviet gold sales are likely toons this year. Although this would be one-fourth lew than ihe volume sold lastoldof higherapproach last year's level ofillion. Another senior Soviet banking official reportedly stated that yneshtorgbankhe Soviet Foreign Trade Bank, would sock to become an official international gold depositoryhe Soviets are also holding discussionrench brokerage firm and an Italian bank to set up bullion trading relations, according to special intelligence.F NC PR OC)

Meanwhile,US Embassy source reports that VTB officials believe the rapid growth of Soviet nard currency indebtedness over the past two yearslose. The source also reported thaturrent chairman, who has been In the positionill retire at the end of the year and be replacedoreign Economic Commission official. Finally, he stated VTB has yet to receive its borrowing Instructionsrompting confusion and uncertainty among bank officials.F)


Criticism of the government's anti-inflation program at the Yugoslav Communist Party plenum last week increased the chance that the regime's economic program will be In disarray when talks with Western creditors open early next year. Although the plenum apparently gave the Mlkullc program pro forma backing, the discussions aired considerable opposition to wage and other state economic controls.esult, worker demands for wage hikes will Jeopardize the anti-inflation effort. Party jctions In support of workers that undercut Mikulicz program increase theabout even-that his government will fall In the next six months. Meanwhile. Belgrade recently announced its intention to seek an agreement with the IMF, but failed to specify what type ofextended, or another type ofwill attempt to negotiate with the Fund.F)




In Ami, the Philippine Government will not take radical actions if the remaining seven creditor banks fail to sign the commercial bank accord byecember, Indonesia's foreign exchange reserves have droppedillion to no more thanillion as of mid Ootober, and Japan will lower Interest rates on loans made under theillion ASEAN-Japan Development Fund.P NC OC)


The Philippine Government does not Intend to take radical action if the remaining seven ofreditor banks fail to signillion commercial debt accord byecember, according to Manila press reports. Finance Minister Jayme reportedlyroposal by Economic Planning Secretary Monsod to place interest payments In escrow to exert pressure on the intransigent banks. According to the US Embessv,onfident that the agreement will ba wrapped up In time and Intimated that members of Manila's Bank Advisory Committee may opt to buv out the recalcitrant banks' relatively smaD exposures to complete the accord. Budget Secretary GuUlermo. however, did not ruleecond extension of the deadline. Failure to finalize the accord byecember or failure lo reach agreement on an extension of the deadline wouldey clause backdating lower Interest ratesanuaryosting the countryillion in additional Interest payments,P>


iIndonMlan Cenler forStudiesrivate firm, estimates'cos, rising International Interest rates, and the depreciation of the US dollar against the Japanese yen will push Indonesia's foreign debt toillionompared withillion today, according to an untested source with access. Its study Indicates that unless export revenues double during the next few years, an unlikely event In our view, given Jakarta's slow movement in reforming the economy and stimulating exports, the shara of export earnings required by interest payments and principal repayments wlU remain above the dangerous* high

fercent.esult, the CPS says that Jakarta will be forced to seek ahort-

devaluation. Meanwhile, Indonesian officials from the Ministry of Finance (MOF) and Bank Indonesia are concerned about the depletion of Indonesia's foreign exchange reserves, which reportedly droppedillion to no more thanillion as of mid October accordingenerally reliable source. Although reserves are adequate to cover about six months of Imports, Jakarta probably will soon reenter the syndicated loan market. For example, an untested source reports MOP officials recentlyapanese bonk0 million loan.F NC OC)


Prime Minister Takeshita announced at tho ASEAN summit meeting that Tokyo will

Jc underllUon ASEAN-Japan Development Fund

ccording lo the US Embassy, Japan's Ministry of Finance bowed under extreme pressure and agreed to lowerercentage point the Interest rates on loans from the

L2XIM)to reduce tneI" ADJF loans.esult of these concess ons, Tokyo expects to come under Intense pressure from both Internal and external forces toeneral rat* reduction for all official developmentccording to Ihe US Embassy. China and South Korea reportedly already





contacted th* Ministry of Foreign Affairs seeking rata reductions on their OECF and JLXIM loans. Although Tokyo probably will claim that the AJDFnique loan program, It probably will be forced, at minimum, to offer the same low rates on all the loans it extends under theillion capital recycling program.P NC)

Africa/Middle East

In Africa, Nigeria signed2 billion commercial bank refinancing package and and Zambian officials have met with the World Bank and IMF to discuss Its economic recovery program. The IMF nnd Worldare displeased with Egypt's delay In completing the first IMP review byovember.P)


Lagos2 billion commercial bank refinancing package onovember, endingonths of negotiations. Under the terms of the agreement, Lagos will0 million new money facility comprised of en eight-year loan carrying an Interest rate5 percentage points above LIBORour-year grace period. Tie reschedulingillion in medium-term loans1 billion in trade credlts-and carries the same Interest rate aa Ihe money facility. In addition, Ijmjos is finalising arrangements4 January meetir^ in London with Its promissory note holders, according to the US Embassy. Lagos proposed oneptember new payment terms and Interest rate capitalization on thet billion In reconciled promissory notes. Although Logos has rejected8 billion In claimsotal estimated atillion, It has hinted that it might allow direct negotiations on tome unreconciled claims, but would not delay theecember deadline for comDletinir all work on Its promissory notes.T)

c*lro International lending institutions disagree on the progress of Egypt's

economic adjustment under the IMF standby arrangement. According to the US Embassy, the Egyptian Government claims that It Is In compliance with aevcral elements of tu economic program-such as unifying commercial bank exchange rates, reducing subsidies, and lowering the budget deficit. The IMF and World Bank, however, ara displeased with Cairo's delay In completing the first review byovember. Th* IMF also believes that Cairo is stalling by not completing other key aspeC- of Its economicneludlrtg devaluing the official exchange rate and raisingir-st rates and then permitting these rates to respond to market forces. In addition, the World Bank la considering canceling the Bettor programs, which are not being fully utUized, and Instead combining themtructural adjustment loan. In our view, Cairo risks losing the confidence of International institutions and th* subsequent loss of financial resources if It does notreater effort to meet adjustment deadlines and achieve Its program's objectives for sustainable economic growth. Meanwhile,ecember, Egypt signed It* Paris Club bilateral agreement.with West Germany and will receive0 million In excort credits from Bonn.F)


ecovery package has been tha subject of poliev discussions with the World Bank and IMF. Negotiations focused on several of the program's kev pollcv SLSL^'ft Interest rates, th* exchange rate, money supply growth, and the' budget deficit. According to the US Embassy, the Institutions expect President Kaunda to announce the abolishment of most existing price controls-except for essential consumer


*joforn nooontract imtopln orcon

adjustment of Interest rotes, and the devaluation of the kwacha In his January budget speech. Kaunda is also expected to discuss8 goals for the economy, Including expenditure controls and revenue increases to lower the budget deficitercent of GDP, and steps to limit Inflation toercent as well as flexibility in making debt service payments, currently limited toercent of net export earnings. Tbe ceilingajor obstacle toormal agreement with the IMP. The World Bankorking level mission in early January to continue negotiations. Despite this progress, however, these institutions fear that the plan could fall apart if it falls to quickly achieve support of the party or general public. Success of the plan also depends on Government of Zambia elimination of lis arrears to theillion is due inthe raising of net external financing of0 million above debt service obligation0 million. The resumption of debt service payments wouldajor shift in Zambia's relations with creditors and review project assistance. World Bank officals are hopeful it would further be sufficient toaris Club scheduling.P)






The IlfTs enhanced structural adjustment facility (SAF) probably will not be operational by year-end, as previously planned several issues remain unresolved including burden-sharing among creditors, protection of the lender In the event LDCs do not repay SAP loans, and who should substdixe Interest rates on theccording to special Intelligence, the IMF hoped to have7 billion In new loan commitments to the SAP from member countries beforeace Tiber.P NC)


Colombia'sillion loan has been fullyxpect loon will bo signed bv end December.P NC OC)

Costa Rlean Central Bank President Llzano stated that the foreign exchange target for its IMP arrangement will not be met becausehortfall in capital Inflows and increase, in Imports San Jose has yet to reach agreement with commercial banks tutommitment to have accord In place byC NP>

New legislation has been proposed for Ronduran debt-equityayment is to be made In long-term, non-guaranteed government bonds tm'<-ad of localroposal unacceptable to foreign Investors andongress failed to vote on legislationecember recess.F NC PR OC)

Venezuela disappointed by slow investor response to Its debt-equity swap program that was approved lasttudying ways to ease foreign exchange controls and restrictions on profit repatriation.P)

Africa/Middle East

Tha December OAO debt summit concluded by calling on the International community to grant addition debtants creditors to convert put official loans to grants, suspend debt service payments forears, reduce real Interest rates, and accept partial repayment with domesticoreign creditors unlikely to fully accept these proposals.P)

ecember Paris meeting of the World Bank and major creditor governments2 billion In qulek disbursing financingfrican countries undertaking adjustmentue consideration will be given to tha social aspects of economic adjustment, especially the Impact of policy measures on the do or andneed to maintain socialome creditors will provide their coflnancing as grants, while others will use highly concessional terms.F)

Turkey reduced the interest rata It charges Iraq on outstanding loansercentage point above LIBOR to tha LIBORajor concession for Baghdad because Iraqercentage points above LIBOR on its intern.tional loans.P NC OC)

Kenya and the IMF completed negotiations0 million standby arrangement and structural adjustmentackage reportedly includes devaluation, austerity, monetary and credit expansion limits, and saetora!espite disbursements, IMP expects little long-term improvement in the economy.F)



Malawi concluded negotiations with IMF for Itillion standby arrangement In earlylio working on structural adjustmentommercial arrears have been reduced, payments arc -ow current through tho end ofC NP)

Paris Clubillion of Senegal's official debts In mid Novemberall principal and Interest on maturitiesbetween7av -eceivod lengthenedfearsix year(Cl *

Africa0 million payment io the IMP In late November,of2ith payment,ovember foreignfrllmcntjjfi

eserve Bank Governor De Rock said that Pretoria was relieved to have paid loan off.F)

Syrian foreign exchange holdings remain extremelventral Bank and Commercial Bank of Syria both have little liquid fundsamascus forced to rely on Arab aid and liberal financing from Arab banks and development funds to properve levels.F)

Zaire Is likely to miss theecember fiscal deficit target established In the7 IMF standbyinshasaillion deficit, double that ofespite missed target, the Fund Is expected loission In February to complete formal review, update policy framework paper for structural adjustment facility, and conduct annual Article IV consultations.F NC OC)


Romanian President Ceausescu fired Finance Minister BpSc over high interest rata payments to Worldas since backed off threat to suspend World Bank debtrobably reviewing debt payment strategy in wake of Brasovo sign of change in rapid debt repayment policy.F)


The World Bank reversed Bank policy on loans to China, according to special intelligence win refrain from financing projects that -cold increase Chinas capacity to produceecision prompted by political pressures from Japan, US, anduropean countries.F)

Buoyed by its increasing current account surplus, South Korea for the first time

illion loan to

illion loan to Indonesia, and plans to Increase loans nextooes to improve diplomatic relations and facilitate access to LDC markets.F)

Malaysiaoan prepaymentillion to commercialommodity price Increases boosted Its foreign exchange reserves to overillion, making bnfl prepayment possible, according to untestedespite signs of recovery, economy still extremely vulnerable to external shocks. IS NF NC)



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