What Does France's COFACE Think About Cuba's Commercial Environment? "Business Default Risk- Extreme"

Bois-Colombes, France-based Compagnie Française d'Assurance pour le Commerce Extérieur (COFACE) was established in 1946. Privatized in 1994, COFACE is a wholly-owned subsidiary of Paris, France-based Natixis S.A., a subsidiary of Paris, France-based Groupe BPCE, the second-largest banking group in France. From COFACE:

February 2019
Cuba
Population- 11.5 million
GDP per capita- US$
Country risk assessment- E (Business Default Risk- Extreme)
Business Climate- E (Business Default Risk- Extreme)

Major macro-economic indicators
2016 2017 2018(e) 2019(f)
GDP growth (%) -0.9 1.6 0.0 1.0
Inflation (yearly average, %) 4.5 5.2 5.9 5.0
Budget balance (% GDP) -6.3 -8.6 -8.3 -7.8
Current account balance (% GDP) 0.9 0.6 0.7 0.6
Public debt (% GDP) 42.5 48.2 51.2 52.1
(e): Estimate. (f): Forecast.

STRENGTHS
Tourism and mining sectors (nickel, cobalt), agricultural potential (sugar, tobacco); Opening up to the individual and cooperative private sector of agriculture, trade, catering and construction (more than 200 trades); Qualified and inexpensive labour force; Quality medical and educational sectors; Relatively satisfactory social indicators; Low crime; fight against corruption; Dialogue and cooperation agreement with the European Union since the November 1, 2017, which has already led to FDI

WEAKNESSES
External vulnerabilities (climate, raw material prices, Venezuelan aid); Low productivity in the public sector and agriculture; Low investment and poor infrastructure; Cumbersome administrative process; still very recent trade regulations; State control over wholesale trade, credit, foreign trade, and foreign investment; Subsidies on commodities (those listed in libreta or ration book) weighing on public expenditure; Reduced access to external funding; Distance from the real conversion rate that maintains the dualism of the economy, the black market, the rationing economy and the informal sector; Lack of statistical transparency

Risk assessment

The bet of FDI to revive growth at half mast
The country’s already weak growth is likely to be impacted in 2019 by poor performance in the agricultural sector and lower growth in tourism from the United States. The former, heavily impacted by Hurricane Irma in September 2017, is struggling to recover, with particularly poor sugar harvests in 2018 (a 30% drop from the previous year). From a tourism perspective, the return of tensions with the United States, since Donald Trump came to power, will continue to weigh on the sector. The fallout from the hurricane will also continue to impact the activity. 2018 was a year of slower growth after the 2017 record (-24% for tourists from the United States in the first half of 2018) with the return of some American restrictions. The vitality of the cruise sector is not expected to reverse the trend in 2019. New President Miguel Diaz-Canel has relaunched reforms to attract foreign investment. New administrative simplification measures have been put in place, while foreign companies have been granted permission to operate the rail network. This decision fulfils a dual objective of modernising infrastructure and increasing the country's attractiveness for FDI. However, these efforts are unlikely to generate the targeted USD 2.5 billion per year needed to boost growth. To date, most foreign investment remains concentrated in the Port of Mariel's special economic zone (totalling USD 10.7 billion of investments), while foreign investors remain constrained by US sanctions. In terms of domestic demand, public consumption will likely be driven by investment in infrastructure, mainly around post-hurricane reconstruction. Private consumption will continue to be supported by expatriate remittances and tourism revenues. In addition, Venezuela's economic downturn will continue to impact exports of refined products (drop in crude oil supply at low prices). This decline, in addition to lower sugar exports, should lead to a negative contribution of net exports to growth.

Public and current accounts subject to external conditions
The currently weak public accounts are expected to continue to improve as a result of lower financing needs for post-hurricane reconstruction. The lowest deficit observed in 2018, thanks to an increase in revenue collected from private companies (11% of revenues), suggests that the deficit will be further reduced in 2019. However, the absence of Venezuelan aid will continue to weigh on the public accounts, and the expenditure structure (50% for social spending) will likely limit the extent of the reduction. As a result, public debt is expected to continue to increase, although data detailing its structure is lacking. Following an agreement with the Paris Club in 2015, Cuba obtained a waiver of interest arrears, a staggered payment of the principal of the original debt over 18 years and a grace period for the payment of new interest until 2020. However, access to external financing will remain constrained.

From a current account perspective, the trade balance will remain largely in deficit, due to high import dependence. Nevertheless, imports should decrease following the controls imposed by the government in response to the shortage of foreign exchange. Exports will continue to be impacted by the decline in oil revenues (drop in Venezuelan crude oil deliveries), as well as by the decline in sugar production in a context of low prices. The dynamism of nickel exports, with prices increasing, will likely only partially offset these two effects. The balance of services should remain positive thanks to tourism, as should the income balance, thanks to remittances from expatriates. The current account will therefore remain in surplus, despite a downward trend. Elsewhere, little progress has been made on the project to unify the two exchange rates: the convertible peso aligned on the US dollar (dedicated to tourists and remittances) and the domestic peso (CUP 24 per USD), in which wages and locally produced goods are denominated.

Renewal but little change
2018 was marked by a renewal of the Cuban political class, as Miguel Diaz-Canel succeeded Raoul Castro as president. The electoral cycle that framed the transition was marked by the absence of dissent. However, few changes are to be anticipated with the retention of Mr Castro as leader of the Cuban Communist Party until 2021, and a still significant influence of the army in various domains. The constitutional reform launched in spring 2018 will bring about very few transformations, limited to normalising past reforms, particularly in terms of the existence of a private sector under state control. This reform is expected to be ratified by referendum at the beginning of 2019. Relations with the United States will likely remain tense under the presidency of Donald Trump, pushing the island to seek other diplomatic partners to deal with the fall of its Venezuelan ally – such as Russia (rail investment projects under way).

LINK To Report: https://www.coface.com/Economic-Studies-and-Country-Risks/Cuba