Country Risk Rating

E
The highest-risk political and economic situation and the most difficult business environment. Corporate default is likely. - Source: Coface

Business Climate Rating

E
The highest possible risk in terms of business climate. Due to a lack of available financial information and an unpredictable legal system, doing business in this country is extremely difficult.

Strengths

  • Tourism and mining sectors (nickel, cobalt), and agricultural potential (sugar, tobacco)
  • Opening up to the individual and cooperative private sector of agriculture, commerce, catering and construction
  • Skilled and inexpensive workforce
  • Quality medical and educational sectors
  • Relatively satisfactory social indicators
  • Low crime and the fight against corruption
  • Dialogue and cooperation agreement with the European Union
  • WEAKNESSES

  • External vulnerabilities (climate, commodities)
  • Low productivity in the public sector and in agriculture
  • Weak investment and infrastructure
  • Very cumbersome administrative process and still very recent trade regulations
  • State control over wholesale trade, credit, and foreign trade, and investment
  • Commodity subsidies weighing on public spending
  • Reduced access to external funding
  • Conversion rate is moving away from the reality, which maintains the dualism of the economy, the black market, the rationing economy, and the informal sector

Weaknesses

  • External vulnerabilities (climate, commodities)
  • Low productivity in the public sector and in agriculture
  • Weak investment and infrastructure
  • Very cumbersome administrative process and still very recent trade regulations
  • State control over wholesale trade, credit, and foreign trade, and investment
  • Commodity subsidies weighing on public spending
  • Reduced access to external funding
  • Conversion rate is moving away from the reality, which maintains the dualism of the economy, the black market, the rationing economy, and the informal sector

Current Trends

The change of president in the United States, a breath of fresh air for the Cuban economy?

The Cuban economy will begin 2021 on the brink of suffocation, subject to the combined weight of U.S. sanctions, national lockdown measures to stop the spread of the pandemic, and the fall in global tourism. Donald Trump's term in office was synonymous with hardening for all sectors. The restriction for U.S. cruise ships to stop at the island, the new measures to block Venezuelan oil shipments to the island, and the application of Title 3 of the Helms-Burton Act, which authorizes the prosecution of entities benefiting from assets expropriated in Cuba since 1 January 1959, were the first hard blows to the Cuban economy. The extension of sanctions to the FINCIMEX agency, which manages the remittances of expatriates sent through Western Union from the United States, in November 2020, should make it much more difficult to send foreign currency to the country, further complicating the island's dollar supply. With Joe Biden's victory, some easing of tensions could take place, going back to the policy advocated under Barack Obama's presidency, favoring tourism and investment, and re-authorizing foreign currency remittances. However, the Cuban dossier is not expected to be the priority of the new U.S. administration in 2021 and a real lifting of the embargo remains unlikely, as Republicans are largely opposed to it. In this context, the recovery in 2021 will be weak, mainly driven by external demand for medical and pharmaceutical goods and services, and for a nickel. Public demand, which weighs heavily on the Cuban economy, is expected to be constrained by the lack of financing, while access to international markets and multilateral donors is still impossible for the country. The investment will remain low given the global context, pending a real lifting of sanctions by the United States. Household demand (56% of GDP in 2018) will suffer from the new obstacles to the sending of remittances by expatriates, and from the rise in the unemployment rate among the self-employed, particularly in the tourism sector. The tourism sector is expected to remain in recovery while activity remains sluggish in Europe and the United States, the main sources of tourist flow in the country. The manufacturing sector, with the exception of high-tech products in pharmaceuticals or biotechnology, will remain well below its potential, affected by the lack of foreign currency that is constraining imports, despite the recent measures taken by the government in July 2020 to authorize new types of foreign currency exchange. The agricultural sector will be supported by the production of sugar and tobacco but will remain largely exposed to climatic conditions and the problems of fertilizer imports.

Public accounts deteriorated by the crisis and U.S. sanctions

While public spending has had to be increased to finance the fight against the health crisis, the Cuban government has also had to spend more on oil supplies, while U.S. sanctions have made it very difficult to supply Venezuelan oil, forcing it to buy at market prices. Simultaneously, tourism revenues have collapsed. This led the government to request a moratorium on its debt from Paris Club countries in June 2020. A one-year moratorium was granted as opposed to the two years initially requested. Discussions are expected to resume in spring 2021. Uncertainty persists as to China's behavior with regard to Cuban debt. The monetization of the deficit should therefore continue.

Regarding the external accounts, the deficit of the balance of goods should increase with the recovery of internal activity and a possible relaxation of the latest measures on expatriate remittances by the new administration, which would facilitate access to the dollar on the island. However, exports should resume with a certain dynamism, driven by the rise in the price of nickel and sugar production. Pharmaceutical and biotechnological products will remain the island’s key exports. The same will be true for medical services, the two sectors representing 48% of export revenues. This will compensate for the collapse of the tourism sector, which will remain weak, leaving the current account in a slight surplus. The surplus could be larger if the Biden administration lifts restrictions on remittances. In the event of a long-announced reform to unify the two currencies, the strong devaluation of the single currency could improve the competitiveness of the island's exports but would increase the bill for the consumption of imported goods, at the risk of increasing shortages.

Little danger to power

After the implementation of the constitutional reform in 2019, centered on a decentralization effort for economic planning, as well as the creation of the post of the prime minister to divide power at the executive level, little movement has taken place on the island from a political point of view. The government seems to have the capacity to nip in the bud any spirit of dissent that might arise in the context of the economic crisis. From an international point of view, a decrease in tensions with the United States under the Biden administration is expected.

Source:

Coface (02/2021)
Cuba