http://havanajournal.com/business/entry/export-development-canadas-economic-and-political-review-of-cuba/

HavanaJournal.com: Cuba Business

Export Development Canada’s economic and political review of Cuba

Posted November 22, 2011 by publisher in Cuba Business.
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Excerpts from the Cuba update (pdf) from Canada’s Export Development Canada agency that offers financing, insurance and risk management solutions that assists Canadian exporters and investors expand their international business.

The “capitalist” influence of foreign investment has been grudgingly regarded as a necessary evil to keep the regime alive economically. Raul is pragmatic and is changing this attitude, accepting that private sector involvement could increase accountability, productivity and efficiency. Economic difficulties in the past three years mean that Cuba is not only changing its domestic system, but is back to courting foreign countries for credit and capital. Many have been reluctant to oblige given a 2009 freeze on bank accounts and the government’s severe and worsening lack of funds. Raul’s latest decisions to open up to private sector/self-employment opportunities for Cubans, and a rumored reversal of the freeze on bank accounts, would be expected to pique investor interest going forward.

The rules for doing business in Cuba continue to be opaque and arbitrary. Cuban bureaucracy is notoriously slow and energy shortages hold back development. Cuba’s Central Bank passed a series of decrees between 2003 and 2005 to centralize the economy and eliminate the use of U.S. currency. Increased Central Bank control over imports and the use of convertible currencies was also affected through these changes, and exchange controls were tightened again in 2009. The Central Bank has de facto control over the provision of payment for most import transactions.

EDC economics growth outlook calls for a modest expansion in GDP, in line with the tentative nature of the global economic recovery. In terms of structural economic reforms EDC economics anticipate gradual changes as manifested by the relative increase in small private enterprises and co-operatives, and recent announcements by the government which have called for a reduction in the public workforce by 1.3 mn over the next three years. This cutback is intended to be balanced by an increase in private business licenses approvals as a measure destined to support investment led growth.

China has become Cuba’s top creditor and will enjoy the benefits of increased investment in the medium-long term. Economic reform is planned to provide the government with an increase in income tax, sales and social security taxes. This is expected to increase self-employment related taxes by 400% to USD35mn in 2011. Improvement in the trade balance has permitted the clearing of some ST arrears, though data availability on this issue is limited.

Cuban government access to medium- and long-term credit is very limited. Moody’s rates the Government of Cuba Caa1 and the government has been in default on medium to long-term foreign currency debt for many years.

Outlook: Overall Cuba’s economic prospects remain constrained by deep structural challenges, limited access to credit and economic sanctions imposed by the US. The outlook for tourism, nickel, and the country in general, is improving. Should the economic reforms play out and FDI flows continue, the growth prospects will benefit positively. The medium term outlook would
be revised to the upside if US-Cuban relations were to see a significant improvement. However, such a development is not expected over the forecast horizon.

Risks to the Outlook

Positive: Discovery of a major oil find; Significant easing of US sanctions

Negative: Tougher US sanctions; Pulling of credit support from China or Venezuela

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