825.51/10–346
Memorandum by Mr. Alexander Schnee of the Division of North and West Coast Affairs99
Subject: Ability of Chile to Service Additional $40,000,000 Foreign Debt—Report of NAC Staff Committee Working Group.
A Working Group of the NAC in Document No. 101 dated September 21, 1946, has found that Chile should be able to service an additional $40,000,000 foreign debt if that country’s economy undergoes a balanced development and if foreign markets for her major products are maintained. In the event of a major world depression, the prospects for Chilean loan repayment are deemed to be extremely unfavorable.
While recognizing that nitrate exports will after a few years fall to 40 per cent less than average pre-war shipments, the report nevertheless contains the conclusion that Chile will probably have a favorable balance of payments in the future, barring a world depression, and that this balance of payments will enable Chile to service a foreign debt increased by the $40,000,000 loan presently under discussion. The annual service and amortization charges on the Chilean Public Debt, including the $40,000,000 of contemplated credits, will amount to approximately $12.5 million. This is 6 per cent of estimated Chilean exports during the mid-period of loan repayment and compares with a debt service export ratio of 5 per cent for Brazil.
I believe this report contains at least two major assumptions which can be challenged.
- (1)
- The report estimates that until 1970 the world demand for copper will be sufficiently large to permit Chile to export annually most of its capacity production of 440,000 tons. Granting the report is correct in assuming that world demand will reach these proportions, the report does not demonstrate that this will be an effective demand, i.e., that prospective consumers will be able to undertake the reconstruction and economic expansion and development upon which the demand is predicated.
- (2)
- Another item included in the report as support for the thesis that Chile will have a favorable balance of payments in the forthcoming years is based upon the assumption that the Government will be able to restrict imports to a level roughly comparable to that which prevailed in the 1927–1929 period and again in the 1936–1939 period. No allowance has been made for the possible need to replenish loan [Page 598] inventories and catch up on deferred maintenance, although the report notes the Chilean claim that they have a net backlog of imports totaling approximately $180,000,000 caused by inability to import capital and consumers’ goods during the war. Considering the inflationary condition prevailing in Chile today, it would appear necessary that our calculations take into account the possibility that the Chilean Government may find it necessary to liberalize imports in order to make available to the public in the next few years a larger amount of consumers’ goods in order that the inflationary influence may be checked.
Prerequisites of the Loan—The attached report1 suggests the following prerequisities for the loan:
- (1)
- The reaching of an agreed settlement between the Chilean Government and the American bond holders.
- (2)
- Assurances from the Chilean Government on the following points
connected with commercial and exchange control policies and
practices:
- A.
- Approval of the general principles contained in proposals for expansion of world trade and employment.
- B.
- A clear and definite series of rules governing exchange and import procedure.
- C.
- Discontinuance of Fomento’s practices tending toward import monopolies where the products involved are destined for resale to private enterprises in Chile.