TNAG-1640-FCO40-2287-Economic-situation-in-Hong-Kong-1987 — Page 60

CONFIDENTIAL

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6 Syndicated loans continue to be the prime borrowing instrument for developing

Cou ies. Since the beginning of June, 80% of their borrowings ($1.1 bn) have

taken this form. Chinese borrowers accounted for three quarters of the total with

two sizeable loans ($200 mn and $340 mn) and several smaller loans. Only two

borrowings were announced in this period for East Bloc countries, both syndicated

loans. One raised $34 mn for Vneshtorgbank of the USSR; the other, for the first

joint venture in Poland (Lim Joint Venture Co, involving the Polish airline as the

major partner, with Marriott hotels and the largest Austrian construction company),

the first euroloan to a Polish borrower since rescheduling, raised the equivalent of $93.6 mn in Austrian schillings. The cost of this new borrowing has not been

disclosed, but is believed to be below that of the rescheduled loans. Repayments

are to come from hard currency earnings from the project the joint venture was set

up to undertake. Market access, however, continues generally to be very difficult

for convalescent debtors: Venezuela's soundings about a return to the markets

appear to have been rebuffed. On the other hand, Colombia has obtained preliminary

agreement from the banks for a syndicated loan of around $1 bn.

7 At the other end of the debt spectrum, Peru and Zambia remain in confrontation

with creditors. President Garcia of Peru has criticised his own administration for

excessive laxity in applying the 10% debt service limit last year, and has promised

increased rigour in its enforcement from now on. But Cote d'Ivoire, which had earlier declared a payments moratorium in the face of sharply falling commodity

prices, has now reportedly reached agreement on draft letter of intent for a new

SBA, following a visit from the Fund MD. In Ecuador (which has suspended all

payments to the banks) negotiations with the banks are expected to begin after the

completion of the rebuilding of the oil pipeline around the end of August.

8 The general world economic environment continues to be mixed. In the major

seven economies in aggregate GNP in Q1 was 2.7% higher than a year earlier, and

early data for Q2 suggest continued modest growth. Although forecasts for growth for the year as a whole and for 1988 remain at around 2 1/2% to 2 3/4% per annum,

discussions at recent international meetings (such as the OECD WP3) have been

slightly less pessimistic than earlier in the year about prospects for the world

economy. Meanwhile, interest rates are little changed over the last six weeks,

with six-month eurodollar rates remaining slightly above 7%. The US dollar has

been relatively stable in effective terms since the Louvre agreement, and is around

4 1/2% below its level of the end of last year.

9 The OPEC ministerial meeting in June brought agreement on quotas to maintain an

oil price of $18 pb. This accord seems so far to be holding, with some oil prices

rising above $20 pb, their highest levels in dollars since the end of 1985 (in SDRS

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