Cuba seeks financial breathing space

To reduce the vulnerability of its economy, the Cuban government aims, in addition to negotiating the debt with several countries, to diversify a foreign trade still too concentrated in terms of supply and of partners.

After being a single-product and single-exporting economy for a few centuries, dependence now tends toward the export of medical services.

The government of Raúl Castro has explicitly set out to reorganise its foreign trade and financial relations to avoid repeating two difficult-to-forget ordeals in Cuba. With a difference of barely three decades, the country suffered deep economic crises because of a similar cause: the sudden loss of practically a single trade and financial partner.

In the early 1960s, in a few months ties were cut short with the United States, which had a monopoly over Cuba’s trade and finances. Relations waned and became an open political conflict after Washington’s withdrawal of its purchases of the Caribbean neighbour’s sugar quota in reprisal for the socialist tone of the Cuban Revolution.

The same thing happened in 1990 with the disappearance of the Soviet Union. Despite prior industrialisation and agricultural development efforts, the Caribbean nation maintained at that time a basically single-product and single-exporting economy. Without the USSR, Cuba suddenly lost its sugar buyer – as well as of nickel and other exports – and its oil supplier.

Some of the economy’s characteristics have varied since then. From a mainly raw material producer it has evolved into an economy of services. But it still maintains a concentration of alternatives and markets. Tourism and the export of professional services contribute around three fourths of the country’s foreign incomes; just the medical services, with 8.2 billion dollars previewed for this year, contributed more than half of all the Cuban incomes in hard currency.

Meanwhile, Venezuela and China concentrate around 53 percent of its foreign trade.

This dependence is worrying the authorities, as they have stated on many occasions. The economic programme approved in 2011 under the name of Economic and Social Policy Guidelines prioritises the diversification of exports and markets.The renegotiation of Cuba’s debt with Russia is an important success in the policy of the Raúl Castro government to gain foreign financial credibility.

Jorge Mario Sánchez Egozcue, a researcher with the Centre for the Study of the Cuban Economy (CEEC), observes other structural traits in Cuban foreign trade. From a strong dependence on intergovernmental agreements or special exchange mechanisms, to “a chronic propensity toward the importing over-reaction,” which it blames on rigidities, domestic insufficiencies, and employment, price and efficiency distortions.

The domestic economy maintains a well-known dependence on imported inputs. The most negative expression is that the import of goods has a more accentuated tendency to grow than the gross domestic product (GDP).

Those traits lead to another of the Cuban economy’s old evils: “an untenable tendency toward accumulating a trade debt,” said Sánchez Egozcue during a recent CEEC international seminar. As proof of this, he cited a data that he defined as structural inertia: for every 1 percent of the GDP growth, the debt grew almost 2 percent from 2008 to 2012.

 The “chronic tendency toward a disproportionate debt accumulation,” this economist commented, generates a situation of vulnerability in the Cuban economy aggravated in recent years.

According to the Cuban Statistical Yearbook of 2013, the country’s active foreign debt had risen continuously to 13.575 billion dollars at the close of 2010 (the last report by the Central Bank), from 8.908 billion in 2007. In just three years, the liabilities understood as active debt increased 65 percent – derived only from banking and commercial transactions and credits, not taking into account the debts frozen years ago or before 1990.

An observation by Sánchez Egozcue confirms the deterioration of the debts during that period. In proportion to the GDP, the total foreign debt stood at an average of 41 percent in the decade of 2000, but starting 2007 “one can see an acute acceleration” to reach 49 percent in 2009. Parallel to this, he explains, the coefficient of imports in relation to the GDP went from 16 percent to 23 percent in 2006. “The response could only be to assume an in-depth restructuration,” he concludes.

After reprogramming in 2000 its debts with Germany and Japan, in order to recover those markets, Cuba’s policy of negotiations had come to a standstill. But in view of the worsening situation, the country resumed manoeuvres with successive successful results: in 2010 Havana was able to restructure a debt of almost six billion dollars with China, in 2012 Japan wrote off 80 percent of a Cuban debt of some 1.4 billion dollars and in 2013 Mexico accepted writing off 70 percent of the debt and Cuba only had to pay 146 million dollars in more than 10 years.Moody’s credit risk rating agency this year downgraded to Caa2 Cuba’s high risk assessment.

Undoubtedly, the greatest victory, in political as well as financial terms, was achieved by Cuba with the agreement signed last year with Russia. Moscow exempted it from paying 90 percent of a debt the island had been dragging since the times of the Soviet Union, estimated at more than 35 billion dollars, the biggest of the unpaid debts.

The Raúl Castro government also oriented a policy of austerity and financial discipline to gain international credibility. Though it included a policy to restrict spending in imports, controversial in the eyes of economists who fear negative consequences for economic growth, it has achieved some of the proposed objectives.

Moody’s international risk management analysis agency improved the high risk rating of the Cuban debt. In 2011 it rated it at Caa1 and in April this year it downgraded it to Caa2, an encouraging data for Havana at a time when the country’s risk is threatening to go up due to the U.S. government’s merciless attitude against third country banks that assume Cuba’s financial transactions. (2014)

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