Cuba: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
Acceleration of GDP growth in 2011 thanks to reforms
After slowing in 2009, the economy failed to recover in 2010. Restrictive fiscal policy and the extent of "disguised" unemployment (resulting in a bloated public sector) held economic growth in check. But the resumption of investment projects halted during the crisis - particularly in refining and port infrastructure - drove the economy. Agriculture moreover escaped relatively unscathed from the vagaries of weather.
Growth is expected to accelerate in 2011. Increases in consumption and investment will make it possible to offset reductions in public spending. Tourism is also likely to accelerate. Road and rail investment projects initiated in 2010 are expected to continue. Economic performance will be largely subject to implementation of reforms announced by Raul Castro late 2010, including the redeployment of 500,000 "surpluses workers" (10% of the working population) from the public sector and the liberalization of legislation on setting up companies. Economic activity could thus accelerate and productivity increase thanks to a greater leeway given to private initiative (with licenses consequently granted for nearly 200 new business enterprises) and to the influx of foreign direct investment. But despite a glimmer of change, the authorities made it abundantly clear that preservation of a socialist system remained an overriding and non-negotiable condition. And Cuba's lack of infrastructure and limited institutional capacity continue to handicap economic development.
Balanced external accounts thanks to tourism and restrictions on imports
The current account balance has been kept artificially in balance by a policy of restricting imports for purposes of both replenishing foreign-exchange reserves and fostering substitution of domestic production for imports. Imports mainly comprise oil products (originating in Venezuela), capital goods, and food products, with nickel and farm products the main exports. The trade deficit is expected to deteriorate this year. But tourism earnings and private transfers will suffice to keep the current account in balance despite profit repatriation by mining companies. Despite foreign debt within the average of countries in the region, debt service is still substantial (25% of foreign exchange earnings) and it will likely grow further in coming years.
In the wake of the downsizing and streamlining of the public sector, public spending contracted in 2010 and will likely decline further this year. The deficit was cut in half between 2008 and 2010. But the fiscal system continues to be hobbled by major shortcomings. The informal economy represents a high proportion of production, which is not subject to tax. The public debt represents one third of GDP and is expected to decline only slightly in the medium term.
High expectations for the Cuban Communist Party Congress early this year
Since 2008, Raul Castro has officially succeeded his brother as head of State. He has undertaken since then structural economic reforms intended to benefit the private sector. The Cuban Communist Party Congress in April this year is expected to officialize a new series of reforms. No upheavals in the political regime are expected in coming years.
The absence of diplomatic relations with the United States and the embargo it has imposed continue to be the defining characteristics of Cuba's foreign policy, signs of rapprochement since the election of Barack Obama notwithstanding.
Strengths
- Important mineral (nickel, cobalt), agricultural (sugar, tobacco), and fishing (rock lobster) resources plus potential oil reserves for which prospecting is under way
- Developed tourist sector - major source of foreign currency
- Fairly well educated population, allowing Cuba to export services
- More satisfactory social indicators than other countries in the area
- Discovery of oil fields in 2008, preferential agreement with Venezuela on the importing of oil
Weaknesses
- Vulnerable to natural disasters and external shocks
- Very limited access to external funding, because of huge arrears in external debt repayments
- Distortions intensified by de-dollarization at end 2004, and creation of two currencies
- Infrastructure deficiencies and governance weaknesses
- Uncertainty surrounding the Castro regime and the future development of external relations, including US trade embargo