International Financial Scene
World Economic Developments
CONFIDENTIAL
ii
1 Most projections point to a slowdown in OECD activity next year after the
unexpected strength experienced since the crash, partly in response to the recent
retightening of monetary policy and partly attributable to a more restrictive fiscal
stance in Japan and Germany. Nevertheless growth should remain close to trend.
2 Market pressure, particularly intense since the US Presidential elections, is
testing the willingness of the US authorities to accede to higher US interest rates
(Chart 1) and/or dollar depreciation (the complexities of the twin deficit problem
are being compounded by concerns over the future of the troubled savings and loan
sector). A further rise in rates and depreciation does, however, seem probable.
Recent commodity price movements (Chart 2) are giving conflicting signals: whereas
metal prices have strengthened again (partly because of supply disruptions) having
fallen back from peaks in the late spring, prices of other industrial materials are
below their level at the end of last year. Oil prices have recovered somewhat
following the latest OPEC accord but the $18 pb target looks a distant prospect.
Food prices, while down from their drought-affected peak in July, remain well above
mid 1987 lows although the recovery has not been shared by tropical beverages
important to the export revenue of a number of heavily indebted läcs.
3 Overall, these trends probably add up to a more difficult environment for
servicing ldc debt in the year ahead.
IMF/IBRD
4 While repeating many of the familiar homilies, the Interim Committee communique
also revealed increasing official acceptance that debt reduction will have a place
in the work-out of middle income debt. While re-affirming the primacy of new money
in financing packages, official creditors agreed that the menu approach be broadened
to include "voluntary market-based techniques which increase financial flows and
which reduce the stock of debt without transferring risk from private lenders".
While such techniques would encompass self-financed buybacks such as the Chile and
Mexican schemes, and buybacks financed by new private sector credits, the place of
new official loans (or guarantees) is not clear. On a strict interpretation,
official loans for buybacks would lead to a higher official share in the remaining
debt. Nevertheless, the reduction in the debt could be sufficiently great that the
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