Transcript of the Executive Directors of the Bank, held on Thursday, September 10, 1953

STRICTLY CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVEI.OPMENT SIXTIETH SPECIAL MEETING or EXECUTIVE DIRECTORS West Ballroom Shoreham Hotel Washington, D. c. Thursday, September 10, 1953 ii 11 !i II :, The meeting convened at 9:00 a.m., Mr. Eugene R. Black, I I: ll ij President, presiding. 11 Ji 'I i: ·1 11 ii p i Ii !! i ,, 11 ii !j 11 II 11 ,I 1: I Ii 1: 11 i 11 :I Ii I! STRICTLY CONFIDENTIAL la Item: Proposed Loan to Chile ••••• ·-. 0 •••• 25 I i " 11 11 ** ** ** I 11 11 II 11 I, j! :/ I: Ii II ,, ii q 11 11 II 11 1: i 11 I I I ,1 I I I  'I STRICTLY CONFIDENTIAL 24 STRICTLY CONFIDENTIAL 25 I would like next to turn to the loan to Chile. I would I I like to call on Mr. Sandolin. 11 (Discussion off the record.) Ii I' !I THE CHAIRMAN : Gentlemen, some of the directors have said 11 that they wish to leave by 10:00. I don't think we will be I 1: i finished by 10:00. We can cut the presentations very sharply, I I: but it is just up to you. I think we can finish by 10:15. What is your pleasure? I I; MR. MACHADO: I move we continue in session until we get i ,, 11 through with these two loans. Ii I' ! THE CHAIRMAN: Is that agreeable to the Board? If so, j I iI we will continue. Mr. Sandolin. I I' MR. SANDQLIN: Mr. Chairman, members of the Board: iI, \ In i view of the short time that we have, I will dismiss what I /, 11 had meant to say. Most of it, anyway, appears in the Presi- i' 11 dent's Report and in the other reports which you have before 1! !i you. j i: ,, 1: 11 However, I do want to say that this proposed project in II Chile for the construction of a newsprint plant and a chemica ij I, i pulp plant stands up beautifully from almost every point of 11 II view. It will contribute substantially to Chile's foreign fl ii i exchange position. It will be operated by a private company I I I I it ii STRICTLY CONFIDENTIAL 26 :l ;j which has considerable experience in the business, a company II 11 1! which has a fine record of earnings; it has a management whicb II is alert and very capable. j, .! ,, I; The proposed loan of 20 million dollars would cover the II 11 foreign exchange cost of the proJect. It would be for a term F ll I of 17 years, with a four-year period ot grace, which roughly J; approximates the period of construction. Amortization pay- If ments would be very low in the early years, in order to give l! the company an opportunity to iron out the production bugs : that are inevitable in the operation of new plants. The loan I I 1/ would be paid off in 1970. I The loan which is submitted to the Board for considera- I tion would also be guaranteed, or would be secured by a mort- 1/ I gage on the property included in the projects, as well as 11 certain other properties of the company, particularly the 'I timber plantations. 11 I. This proJect would be one of the first real developments i I' in developing Chile's forest industry, and the pulpwood re- 1! r serves, the main raw material, are substantially in excess of 11 1f anything that would be needed for the operation of these II plants. Practically all the other raw materials are readily/ 'I I, I available in Chile, the exceptions being bleaching powder I I and fu~l~::ef:~t:~ ~:::~ions, I will try to answer them. I .I II I might add that Fomento would be a co-borrower under 11 Ii 'I Ii II STRICTLY CONFIDENTIAL 27 the proposal and agreement. This is a requirement of Chilean legislation, so Fomento, let's say, would be a borrower in name only. THE CHAIRMAN: Are there any questions? {No response.) Thank you, Mr. Sandelin. Mr. Carlson. :,i I' Ii MR. CARLSON: I want to take Just a few minutes to high- Ii Ii !I light some of the creditworthiness aspects of the Chilean i :I economy. 11 ii ii The last three or four years, two outstanding develop- Ii ments have been taking place, firs~ internally; and second, II 11 externally. The internal problem that has been plaguing i i Chile for many decades, the rate of inflation, so accelerated j1 in 1950 that it became a political issue a year ago. The ad- I 1 ministration came into power on an anti-inflation platform, I · and they have now been undertaking the first concerted attemp, 11 ii , in Chile's history to attack the inflationary problem at its I' roots. The success of this stabilization program will depend I 1 i in part on economic factors, and in part on political factors1 I 1 \ On the economic side, Chile is undertaking to unify ex- j j change rates, to establish new and stricter monetary controls I over the commercial banking system, and also to do something l 1/ I',I about balancing its national budget. The last of these is 11 much more difficult than the first two, but they are taking 11 :I Ii !I STRICTLY CONFIDENTIAL 29 some steps in that direction. The political aspect for the success or the stabiliza- d i! tion program depends, in part., on the attitude of the Congress. i! I' 11 The program was put through on a grant of special powers., so 11 the Congress is not necessarily committed to support the Ii I I 11 program. The administration's present strength rests on a I I: coalition arrangement. I I ·1 I. And finally., the attitude of very strong labor unions in j I! I! Ii Chile may be decisive in deciding whether or not this stabili~ Ii I: I zation program will take hold. 11 tl 11 So much for the internal. For the external aspects, the 11 :I11 outstanding development has been the copper situation. As Ii you all know., copper prices shot up considerably at the out- 11 I break of the Korean war., and now are beginning to return to I 1: something like pre-Korean levels., say a price somewhere in thel !I 11 i' lower 20's. The copper situation is characterized by an in- 11 ![ I, crease in capacity., especially in the United States and coun- I !I i tries like Rhodesia. This increase in supply is going to come1 ji ,I J! with a declining., or., at best, constant demand, and as a 11 i result prices will continue to decline. Copper is critical II ii for Chile because it accounts for 70 percent of Chile's dolla Ii ll !I exchange. 'I II Another factor is other exports, which provide about 11 !i F a third of Chile's total exchange, iron., steel., agricultural i ii 11 H !I products., and a variety of manufactured products that Chile 11 jl l STRICTLY CONFIDENTIAL 29 has been exporting. By and large, the balance ot payments picture tor Chile looks tight for the next few years, and we may expect Chile to return more or less to where it was in 1949 or 1950.. This transition period will be a somewhat painful one, but the im- 11 Ii mediate impact is going to be cushioned by the rather cautiousi I II policy the Chilean administration has been following with re- JI spect to import licensing, and also the drawing they are re- 1/ I' II ceiving from the Fund will help. I. !I Por the longer-run adjustment, getting back to what might 11 11 be called normality after the Korean copper boom, adjustment I will be helped considerably by certain large exchange savings 1 projects that Chile is undertaking. Iron and steel now are II1 I! saving Chile approximately 10 to 15 billion over what it used ij to import. A petroleum refinery is being set up which will ,! save Chile another 10 or 11 million, and the present project, i Ii,1 the paper and pulp loan, will again save Chile another 7t to 11 8 million. 1! The external debt or Chile, debt service, is now running 11 II around 25 million. It will reach a peak around 1956 and 1957, Ii11 after which it drops on the average of about 10 million. The 11 11 present loan being considered does not add to the de~t service Ii 11 until 1958, which is after the peak period. ! I In general, I think we can conclude that without undue I strain Chile should be able to absorb this additional debt II I J STRICTLY CONFIDENTIAL 30 service, and will have enough exchange at least to maintain this external debt service for the next few years. !! II THE CHAIRMAN: Thank you, Mr. Carlson. i Ji Are there any questions? II MR. RASMINSKY: This question ls probably directed to II' if 'I the previous staff member. How does the cost ot producing I ) the newsprint, pulp, compare with the costs of other producer~? 1 I\ MR. SANDELIN : It comps res very ta vorab ly. In tact, I I I think it would perhaps match the most efficient producers in j J: 11 the world. ,I Ii'I MR. RASMINSKY: That is, power is available? 11 MR. SANDELIN: Power will be available because they are Ii II going to install two more generators to the power plant in the 11 I, area. Pulpwood is cheap, and Chile has a realistic attitude II 11 11 I' towards exchange rates now, so I think it will compete very l easily with the market. 11 THE CHAIRMAN: Are there any other questions? II 11 ·1 (No response.) I If there are no other questions and no discussion, may I 1 have a motion on this resolution. ·I ,, MR. MACHADO : I move that we approve this loan. '1 If Ii MR. SELEK: Second. liii THE CHAIRMAN: All in favor say aye. !I II (Chorus of ayes.) 11 Opposed, no. ,I ii i !j Ii STRICTLY CONFIDENTIAL 31 (No response.) I declare the loan approved.