2016: The cards are already on the table

Annual Review.

The drop in oil prices affected Venezuela and by extension maintains on tenterhooks that country’s commercial ties with Cuba.

Cuba’s economic evolution during 2016 contributes clues about its possible performance in the new year and keys to understand the courses the process of transformations could take.


What will happen in the Cuban economy in 2017? How can its possible evolution be anticipated? The experts don’t rule out a National Plan that projects a Gross Domestic Product (GDP) of 2 percent. But an analysis of the road taken by the economy in 2016 contributes visible signs in these first months of 2017 and indicates that the road ahead is difficult.


The government goal is challenging, in economic and even political terms. The proposal for the GDP growth in 2017 is similar to the one Cuba planned and was unable to meet in the recently concluded year. Instead of advancing a few percentage points, the economy decreased 0.9 percent in 2016.


For the first time since the crisis of the so-called Special Period – 1990s -, the economy closed a year with decrease. The data unleashed ominous forecasts. A calm look shows that the scenario is not the same as that of more than 20 years ago, in the interior of the country or in its external context.


In a much citedessay of the magazine Foreign Affairs, British academician Emily Morris, an expert from the Inter-American Development Bank (IDB), said that Havana is facing a challenge, not a crisis. Morris alludes to structural transformations projected by the economic reform, known in Cuba as the Updating of the Economic and Social Model.


In any case, the obstacles and financial limitations that in 2016 constrained the country continue. Economy and Planning Minister Ricardo Cabrisas ratified last December in the National Assembly of People’s Power the persistent tense situation in the availability of hard currency and other restrictions which he described as “strong.”


President Raúl Castro was more categorical when he commented to the deputies the perspectives for 2017. “I must warn that financial tensions and challenges persist that could even get worse in certain circumstances.” The president made a similar warning in this National Assembly meeting a year ago, but now he let in a ray of hope. “However, we forecast that the Cuban economy will retake the upward trend and the GDP will register a moderate increase of around two percent.”


Which are the economy’s problems? Which are the opportunities?


Cuban foreign trade’s vicissitudes


In 2016 the Cuban accounts in hard currency were severely contracteddue to economic problems of a key foreign partner, Venezuela, which joined other ups and downs of foreign trade and the losses traditionally caused by the U.S. economic blockade on Cuba. The favourable airs in other activities were unable to compensate for the lows, but theywerean encouraging sign. The start-up of 2017 confirms some of them and others.


Due to a strong drop in the oil prices on the world market and internal political conflicts, the Venezuelan economy decreased 9.7 percent last year, according to estimates of the Economic Commission for Latin America and the Caribbean (ECLAC). The financial lows of that country inevitably affected its exchange with Cuba in highly sensitive areas like the supply of fuel.


PDVSA’s deliveries witnessed a reduction that Cuba barely partially mitigated through purchases from other countries – 515,000 barrels of crude from Algeria, according to Reuters. Neither has the national oil production compensated for these problems. The exhaustion of a group of wells has reduced extraction to less than 3.7 million tons of oil and equivalent gas, from the four million it achieved years before.


Faced by such financial difficulties, the government was forced to cut the energy plan. In July it reported a reduction of 4.4 percent in the previewed fuel for the year (from 8,221,600 tons to 7,862,070) and from six percent in electricity spending (from 15,310 gigawatt hours to 14,523). The adjustment was centred in social and budgeted areas to not affect the enterprises with an impact on the economy. It also decided to protect the residential sector, which did not see the return of the power cuts of the 1990s.


The activity that contributes the most incomes to the economy, the export of medical services, has in Venezuela one of its principal destinations. It experienced an inevitable reduction, while there is an indexation mechanism with the sending of oil agreed between both countries.


According to estimates of the Economist Intelligence Unit (EIU), in 2016 the export of services – professional workforce and tourism – contributed to Cuba 11.1 percent fewer incomes than in 2015. This represents losses worth 1.17 billion dollars for the country, this study adds.Since it was a year in which the leisure industry experienced an increase, then the low can be estimated fundamentally in terms of the medical services.


The danger of political and above all economic distancing with other countries, like Brazil, hangs like the Sword of Damocles over this Cuban commercial alternative.


Drop in prices and exports


The losses in the export of goods affected the country’s foreign trade balance because of the drop in prices on the international market, combined at times with Cuban production lows.


Nickel was the first in the portfolio of export products to be affected. In 2016 its price decreased 14 percent on the world market. In response to this, the Cuban industry of Moa bet on reducing costs instead of increasing production, reduced to 56,000 tons this year, after having reached 74,000 tons a decade ago.

A combination of low prices on the world market and the reduction of production cut the dollars contributed by nickel to the Cuban economy.

Sugar, on the contrary, had a healthier international price, at least this year. It averaged 18.20 cents per pound on the market, according to the World Bank, from the 13 cents in 2015. But sugar production did not follow suit. Due to problems with the climate like drought and untimely rains, the 2015-2016 harvest was below 1.6 million tons of sugar out of a 1.9 million plan that expected to equal the previous harvest.


Oil by-products, inserted for some time in the Cuban export portfolio, have seen their incomes decrease because of the cited depreciation of hydrocarbons.


Under higher financial limitations than usual, in the middle of the year the government had to cut down on the plan for the import of goods by 3.3 percent. Some analysts fear that the final reduction was higher. In 2015 it had already decreased by 10.4 percent. Two continuous years of contraction in that indicator can be negative for an economy.


Costs of the blockade


During the last months of his second term in office, President Barack Obama speeded up the steps to improve relations between Cuba and the United States. His visit to Havana was one of the most marked events in 2016.


However, if at some point the White House promises and directives provided optimistic expectations, the foreign finances did not find a real respite. The economic and financial blockade continued punishing Cuba with sanctions and other costs.

The Cuban tourist industry added half a million visitors in 2016 after a similar leap the previous year.


The Presidential Directive issued by Obama put into force a package of measures to make flexible personal purchases by U.S. citizens visiting Cuba. The door that opened joint medical research between both countries and the development of other links, even commercial ones, with biotechnology and the medical-pharmaceutical industry, one of the Cuban sectors with the biggest development perspectives, as confirmed by the interest it awakens among U.S. and European entities, could have a greater impact.


In terms of investments, however, this fifth package of measures by the Obama government does not contribute changes: the restrictions continue in place. Cuban government sources expressed doubts until they see more than the letter of these regulations. They take into account the obstacles that continue preventing its companies from operating with dollars in third countries, despite the fact that Washington officially authorised the use of that currency by Cuba.


On December 14, exactly one month after Obama presented his directive, the Office of Foreign Assets Control (OFAC) of the Department of the Treasury imposed a fine of almost six million dollars on the National Oilwell Varco Company for having commercial links with Cuba. In January of this year the list of sanctioned entities included the non-profit organization Alliance for a Responsible Cuba Policy and the Canadian Toronto Dominion Bank.


According to the Cuban government’s report presented to the General Assembly of the United Nations, the costs of the blockade amount to 4.68 billion dollars in the annual period of 2015 to 2016. The Resolution that condemned that policy this year was almost unanimously approved by the UN General Assembly. For the first time no country voted against: the United States and Israel abstained this time, as a sign of the understanding Washington is seeking with Havana.


Characterised for the ambiguity of his speeches, the new U.S. president, Donald Trump, still hasn’t broken the veil of uncertainty about the policy he will maintain toward its southern neighbour. Since Cuba is not an international priority for the United States, Trump could delay in showing his cards. Obama did the same. Meanwhile, through the gaps already opened in the wall, the comings and goings of airline companies and congress people representing the business sector continue, the latter more interested in normal commercial and financial relations than in the extension of a policy of hostility whose benefits they are unable to see.


Between Matthew and the drought


With a well-known destructive power, in October Hurricane Matthew crossed the island’s easternmost corner. The damages, preliminarily estimated in 1.481 billion pesos, were concentrated in the municipalities of Baracoa, Maisí, Imías and San Antonio del Sur, in the province of Guantánamo. In addition to the ruined road, electric, communications and aqueducts infrastructure, and the damages to some 40,000 homes, the region lost extensive areas of its principal crops: coconut, cacao and coffee.

Hurricane Matthew caused severe economic damages in Cuba’s easternmost region.


Matthew did not leave major water accumulations in Cuba, as a way of compensating for the severe destruction of its gusts; the damages of another disaster, drought, could now be greater.


The average rainfall in the country during 2015 and 2016 has been one of the five lowest in the last 30 years, the National Institute of Hydraulic Resources (INRH) recently reported. In January 2017, 80 percent of the 168 municipalities were in some category of hydrologic drought. “Due to climate change, mainly in the Caribbean region, there is increasingly less rain,” reported José Antonio Hernández, director of the INRH Rational Use of Water.

Drought reduced fundamental agricultural productions in the Cuban diet, like rice.

The country’s water reserves were gradually reduced, but in a sustained way, during the year. In February 2017, it barely had 45 percent of its total reservoir capacity.


The lack of water caused a reduction of the harvests, like that of rice in 2016. For the same reason the sugarcane and potato crops declined. Together with the lack of strong investments, agricultural and livestock productions have not been able to take off with force.


The government even took advantage of the low prices of basic food stuffs on the world market to increase by 111.6 million dollars the import of food productsthat have not been produced in Cuba. These purchases amounted to a total of 1.668 billion dollars, a figure still 14 percent below the original plan and way below the annual invoice of more than two billion dollars the country has assumed in previous years.

At the 7th Congress of the Communist Party of Cuba Rául Castro reiterated the socialist profile of the economy, but defended economic transformations like the opening to foreign investments and small and middle private enterprises.


Problems and opportunities for 2017


Of all these problems, which are the ones that will continue in 2017? Almost all of them, including drought. When assessing in December the foreign financial restrictions and the limitations in the supply of fuel faced by the country last year, Economy Minister Ricardo Cabrisas estimated that Cuba finds itself “in a stage that will not be able to be reversed in the short term.”

Economy Minister Ricardo Cabrisas admitted that in 2017 the obstacles and financial restrictions that damaged the economy last year will continue.


The tensions do not point to declining in the economy of Cuba’s principal foreign trade partner, Venezuela, while the Cuban government previews a 4.3 percent decrease in national oil and gas production, equivalent to 3,538,200 tons. Even so, the 2017 plan projects a 4.2 percent growth in electric power generation with respect to the estimate of 2016.


Among the stormy clouds that persist, the opportunities on which the government founds its forecasts for the increase in the GDP are also still in place. This projection is supported by renowned economists due to their critical views,


One of them, José Luis Rodríguez, former minister of economy and planning, does not believe that “now we will return to the toughest days of the Special Period.” Although he lists a string of difficulties, Rodríguez is of the opinion that “the presented growth goal of two percent is tense, but not impossible to attain if the challenges of the current Cuban economy are faced adequately.”


The economy’s driving force?

In the final months of his term in office, Barack Obama speeded up some decisions to improve his country’s relations with Cuba, but he was unable to eliminate the blockade.

With a sustained expansion for two years, tourism is again emerging as the most dynamic sector of the economy. For the second consecutive year it registered a leap of more than half a million in the number of foreign visitors: from 3.5 million in 2015 to more than four million in 2016. In 2015 they increased 17.4 percent and on the following 14 percent, according to the Tourism Ministry (MINTUR).


Incomes also maintained a tendency to increase. In the first semester they grew 15 percent, according to the National Bureau of Statistics and Information (ONEI); and MINTUR sources report close to three billion dollars in the year.


Judging by the January take-off – with a 15 percent increase that month -, the expectation of growing in 2017 is again strongly founded. The MINTUR is proposing another record of 4.2 million, a forecast of a five percent hike, which is rather cautious.


Like in the 1990s, the leisure industry is again gaining the title of the economy’s driving force: it attracts attention, commerce and investments. The construction pace is speeding up in Cuba in the hotel sphere and non-hotel installations. According to MINTUR, the hotel system reached 66,547 rooms in 2016 after it added that year 2,316 accommodations. In 2017 the country previews finishing 4,019 new rooms and adding 20,000 before 2020. The private sector, which has established closer business deals with state enterprises and joint venture, is adding several thousand rooms.


That ministry’s general director of development and investments, José Reinaldo Daniel Alonso, reported that the development is centred in Havana, Varadero, Trinidad, Holguín and the group of cays to the north of the Cuban archipelago.


The airports also form part of the investors’ priorities. The government signed agreements with two French companies, Bouygues and Paris Airports, to expand and manage, respectively, Havana’s José Martí International Airport, among others. Record numbers of passengers seen to and even threats of collapse in the airport installations speak favourably of the perspectives of that sector and the need for investors.


Arrival of U.S. citizens


The flow of travellers has gained intensity after the regular flights of eight U.S airlines were received in the final months of the year authorization to land in Havana. Jet Blue, Delta, American Airlines, United, South West, Alaska, Spirit and Frontier have been authorized routes to 10 Cuban cities.

Several of the most important U.S. airlines were given the green light to land in Havana with regular flights.

According to ONEI, U.S. citizens climbed to the third issuing market of travellers to Cuba in 2016 (after Canada and the Cuban community abroad), after ranking in seventh place in 2014. The point of take-offwas marked with start of official talks between Washington and Havana.


Although the blockade laws ban them from doing tourism in Cuba, 284,937 U.S. citizens travelled in 2016 (73 percent growth). They travel with licenses.


That country’s airlines and flights link Cuba to the United States and to other tourist issuing markets and regional destinations of the leisure industry. They are the spearhead of a business sector endeavouring to renew relations with Havana. But they are also a symbol of something that is happening in the Cuban economy since it undertook the path toward the normalisation of relations between both countries.


Behind the U.S. airline companies, airlines from other countries in Europe, Latin America and Asia have entered the Cuban market, with the commercial benefit this implies for a sector, tourism, with potential to assume the leadership of the economy. The same is happening in other spheres of Cuban foreign relations.


The affluence of government delegations and of businesspeople maintained in 2016 the intensity acquired starting December 17, 2014, when public talks took off between Havana and Washington. France and Holland, two of Cuba’s main partners in Europe, and Russia and China are some of the most active countries.


Foreign Investments


Juan Triana is another renowned economist who believes it is possible that the GDP will grow two percent this year, despite that “a part of the conditions and characteristics of the national economy that caused that decline (-0.9 percent in 2016) has not substantially changed.”


But Triana sees opportunities that are not taken advantage of more efficiently or in a faster way. In his opinion, “the socialist state entrepreneurial system did not achieve the necessary dynamism and the initiated transformations have not sufficiently matured to provide better results.”

The Mariel Special Development Zone is the spearhead in the strategy to promote foreign investments, but the benefits are still not being seen.

One of the opportunities badly taken advantage of, but on which many hopes are pinned, are foreign direct investments (FDI). The government, through Cabrisas, its economy minister, has admitted that “foreign investment continues being very low in its participation with respect to total investment.” It only represents 6.5 percent of the plan, Cabrisas reported.


Ever since Parliament approved in March 2014 Law 118, which governs that activity, up to the last Havana International Trade Fair in November 2016, the authorities had only approved 83 projects with foreign capital, for a total of 1.3 billion dollars. Judging by this figure and other estimates, in 2016 the country executed foreign investments for less the 500 million dollars, very far from the two or 2.5 billion Cuba needs annually, according to the consensus of the government and experts, to achieve a GDP growth of between five and six percent.


President Raúl Castro has repeatedly criticised “the obsolete mentality full of prejudices against foreign investment.” He said this in December before the MPs and in April in the 6th Congress of the Communist Party of Cuba (PCC), a meeting that defined cardinal policies and transformations of the economic model.


The programmatic documents approved at that congress confirmed a space for industrial and services cooperatives and explicitly gave the green light to small and medium private enterprises. Triana, however, sees that “we are unable to integrate all the economic agents in a single force directed at the purpose of development, economic growth and wellbeing,” referring to those non-state structures.


Sparking off factors


As the intense traffic of business and government delegations to Cuba in 2015 and 2016 confirmed, the curiosity and interest of Europeans, Latin Americans and Asians regarding this country’s economy has grown. The reaction was set off by similar exploratory visits by its business rival of the world’s first economy. The expectations of turning back the blockade, which has freely sanctioned until now third country companies and banks, has also had an influence.


Another encouraging factor is the strategy followed by the Cuban government to organise its foreign finances, with the declared aim of gaining international credibility. In 2016 it was able to restructure its debts in the mid and long term with Japan to give continuity to the agreement of renegotiating its foreign debt with the Paris Club.


Cuba is seeking to add to the foreign investments and the incomes for the export of goods and services access to credits with less onerous interest rates.


For some years now, remittances have been another option to inject hard currency into the economy. Although there are no specific figures, some researchers estimate an increase in 2016 of more than two billion dollars. A considerable part of that amount is absorbed by the private sector as working capital.


Changes at stake

The currency unification continues among the structural reforms that the government still hasn’t been able to implement, despite being programmed in the Economic and Social Policy Guidelines.


The year 2016 did not bring with it many new measures, or laws, One of those with the greatest impact, Resolution 6 of the Labour Ministry, actually arrived to improve the payment for results of the work in enterprises, which two years before had established another, Resolution 17 of this ministry.


The official reports indicate that the majority of the principal actions of the process of Updating of the Economic and Social Model have already been presented, conceived or are being undertaken The last Congress of the PCC added new programmatic documents of the changes: the Conceptualization of the economic and social model, the bases of a Long-Term Plan and a renovation of the Economic and Social Policy Guidelines.


When evaluating in April the march of the process, then economy minister and head of the Standing Committee for the Implementation and Development of those reforms, Marino Murillo, reported to the 7th Congress of the PCC that out of the 313 guidelines approved five years before, only 21 percent has been totally complied with. Seventy-seven percent is in the stage of implementation. And two percent has not been initiated.


But basic structural transformations are pending, like the currency unification, a new law of enterprises and a deeper and more far-reaching reform of the prices system than the adjustments recently tested in some markets. The economy and society are also waiting for a better pace in the application of the already approved policies. The delay in these steps leads to hindrances, conflicts and daily controversies.


The country’s political leadership affirms that it has shown almost all its cards. What remains now is that they play them. (2017)

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