Cuban Economy: Between Government Change and the Trump Effect
Cuban Economy: Between Government Change and the Trump Effect
The new government that will rule the Cuban fates from April this year will face the enormous challenge of continuing with the reforms to ensure the economy growth, in an increasingly complex context, marked by the freezing of relations with Washington, the deep crisis of the main trading partner, Venezuela, the slow takeoff of foreign direct investment and the need to re-launch the private work.
In 2017, Cuban economy grew by 1.6%, below the year’s initial expectations, but at least the depressive trend of 2016 stopped, when the GDP fell by 0.9%. According to the information offered by the Minister of Economy, Ricardo Cabrisas, the sectors that contributed the most income in the last twelve months were construction, tourism, transportation and agriculture. Among the reasons given by the Government to justify the slight growth were the acute drought and the considerable damages, valued at over 13 billion pesos, caused by Hurricane Irma, which affected 12 provinces of the country, along with the continuity of the United States embargo.
Another element with a lot of weight in the analysis of the Cuban economic development has been the renegotiation and payment of the enormous debt accumulated by Havana. According to José Luis Rodríguez, former Minister of Economy, Cuba has disbursed about 23 billion dollars in recent years to meet the creditors. "Logically, those billions of dollars dedicated to pay the debt and what the US blockade costs us, could not be used to invest in the economy, or to increase consumption. However, the payments that have been made and those that continue to be made are those that have allowed a gradual process to increase direct foreign investment and, in general, a growth in the country's productive investments", Rodríguez said.
WHAT FACTORS CAN INFLUENCE CUBAN ECONOMY IN 2018?
For this year, Cabrisas predicted economic growth of 2%, thanks to the boost of tourism, trade and construction. This estimate exceeds that of the Economic Commission for Latin America and the Caribbean (ECLAC), which predicted a 1% rise for the country.
Cuba plans to import food for a value of $ 1.738 billion, $ 66 million more than 2017. The consumption of equivalent fuels (crude oil and gas) would increase by 4.9%, which includes the generation of electricity, which would grow 6.1%. The Cuban State will continue to ensure basic services, as well as health and education, free of charge.
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According to the renowned economist, Juan Triana, PhD., there are several factors that can influence Cuban economy in 2018. One of the most important would be the country’s main export products prices behavior, among them the byproducts of oil, sugar and nickel. Another element to considerate will be the amount that can be obtained by the export of professional services (especially doctors). Here it’s essential to assess that this sector will depend on how the political and economic situation in Venezuela evolves, since that country is the main receiver of health workers. The behavior of other commercial partners in Havana, such as China and Canada (the main issuer of tourists) will also be key in the development of Cuban GDP.
Cuban President Raul Castro has assured that the monetary unification will be an essential step to support the reforms that his government has promoted. "Cuba today has official exchange rates that are overvalued, both for the Cuban peso in relation to the US dollar and for the Cuban convertible peso (CUC) in relation to the dollar. They both generate negative incentives to export, productivity and efficiency and therefore they often lead to poor or inefficient allocation of resources", Triana explained.
Can Cuba receive more direct foreign investment in 2018? According to Rodrigo Malmierca Díaz, Minister of Foreign Trade and Foreign Investment (Mincex, by its Spanish acronym), in 2017 Cuba managed to attract foreign capital exceeding two billion dollars and the business portfolio for this year proposes 456 projects, for a value estimated investment of 10 billion 700 million dollars, recognized Deborah Rivas, Mincex representative. Currently, 80 investment projects with foreign participation are under negotiation that could take place in 2018, Rivas explained. Of these, 15 are very close to reaching an agreement. These projects would generate new works in sectors such as renewable energy, industry, construction and mining.
One of the main bets of Havana, after the approval of the foreign investment law in 2014, was the Mariel Special Development Zone. There, according to Cubadebate, the Government has invested an average of 300 million dollars per year to develop modern infrastructures that are attractive to foreign investors. So far, 33 projects have been approved in the Zone and investments have already been obtained that exceed $ 1.189 billion.
Why the attracted investment has not been superior? For the expert-in-economic-issues journalist, Ariel Terrero, "Among the obstacles, the economic embargo of the United States to Cuba threatens to almost be eternal, judging by the setback that President Donald Trump is sending to the relations’ normalization between both countries. To ignore the costs of the embargo would be naïve, if not hypocritical, as the former Ecuadorian president and economist Rafael Correa once said (...) Equal or more attention deserves other internal obstacles that delay the procedures of any investment. Despite legal provisions to reduce negotiation periods, bureaucratic entanglements persist, which are intertwined with deformations of national banking and financial environment, such as the harmful monetary and exchange duality; they can delay the efforts and demotivate not only foreign businessmen. Cuban companies often lack knowledge, training and sufficient motivation to get involved in matters that may involve more responsibility than immediate benefit for the business organization and its employees".
THE "TRUMP EFFECT"
It seemed that the progress made between Cuba and the United States after December 17, 2014, would be irreversible; however, the Trump Administration has adopted a series of measures that have had a strong backlash in the ties between the two governments. Despite the return of Cold War rhetoric to political discourse, at least five sectors remain where there are strong economic interests for the two countries: sending remittances, telecommunications services, travel, agricultural products sales and indirect investments.
A report by the pollster Bendixen & Amandi International and the consultancy THCG, quoted by analyst José Luis Perelló, considered that remittances to Cuba, mainly from the United States, where the largest number of Cuban emigrants live, range from 1.5 to 2 billion dollars every year, not including goods and telephone recharges from abroad.
Another point of contact is in travel. In 2017, Cuba received almost 4.7 million international visitors, an increase of 16.2% compared to the previous year. To achieve this record number several factors were combined, among them the increase in the arrival of cruises and direct flights from different cities in the United States. Three of the largest cruise companies in the world, Carnival Corporation, Royal Caribbean and Norwegian Cruises Lines, said they will make about 286 berths in Cuban ports until 2019, which would represent the arrival of more than 455 thousand passengers to the Caribbean country. As a trend, Cubans living in the United States use the airway; meanwhile, Americans prefer cruise travel programs. When the re-establishment of direct flights was announced, there was a frenzy of airline offers. After some time in the market, some decided to retire, but the strongest continue betting on the destination Cuba. American Airlines executes 35.4% of the total flights, followed by JetBlue.
The trade of agricultural products has been, for decades, one of the greatest points of contact. It’s no coincidence that the lobby of companies in this sector has done so much force in Washington to lighten sanctions against Cuba. "The United States became one of the largest food suppliers to Cuba after the authorization of this type of trade with the Island through the agreement known as TSRA. In these 16 years the annual sales of agricultural products reached an amount of little more than 5.250 billion dollars. Hoewever, as of 2008 they fell significantly due to the liquidity problems Cuba faces and the need to buy products from foreign entities that grant credit and other facilities, since the US rules require cash payments and complex banking transactions through third countries", Perelló explained in his article.
The greater openness to private work or cuenta propia was one of the main steps in the reforms promoted by Raúl Castro since 2010. According to data offered by the Ministry of Labor and Social Security, at the end of the first quarter of 2017, 567 982 people practiced private work in Cuba, which represented 12% of the total of those employed in the country. However, in August of that same year, the Government announced new measures for this sector, among which appeared the non-granting of new licenses for a group of activities until a new regulation was presented, which sought to "correct deficiencies". This update of the regulation has not yet been made public. In addition, according to Marino Murillo, who is responsible for the reforms implementation (Guidelines), the Government does not contemplate so far the approval of new non-agricultural cooperatives beyond the 429 constituted, which operate on an experimental basis.
"In the case of the private sector, the expectation was not met that its status as small and micro enterprises would be recognized and there is no information that the new regulations to be announced take this aspect into account, which is not merely formal. Neither does it seem to be on the agenda for this sector the expansion of "employments" to more qualified jobs", Triana analyzed.
To achieve the goal of growing 2% in 2018, President Castro assured in his most recent intervention before the Parliament that it was necessary "to guarantee the efficient use of available financial and material resources, to elevate export revenues, and to increase national production, especially food, without renouncing the development programs that are underway to generate income and new sources of employment". Can this growth be achieved? The new president of Cuba, who will take office in April, will have to answer that question at the end of the year.
Text by Manuel Alfonso Zaldívar. PanamericanWorld. Havana