Cuban currency

Cuba’s Financial Road to Economic Transformation

Despite President Obama’s recent initiative to normalize bilateral relations, US Congress remains a major obstacle to Cuba’s decades long political and economic estrangement. The Helms-Burton Act in particular requires outstanding claims against Cuba to be resolved before sanctions are lifted – and also limits executive authority to fully lift sanctions until Cuba’s government is democratically elected or is at least in transition.

While Cuba’s sovereign debt is owed to many countries, claims and awards (totaling more than $6 billion) pertain to the bilateral relationship between the US and Cuba. This includes nationalized US property claims and awards from three terrorism cases. In fact, blocked Cuban real estate properties located in the US today total $270 million. In order to sustain Obama’s momentum with Cuba, the Helms-Burton Act will likely need amending by Congress.

Resolving Cuba’s external sovereign debt recently gained renewed enthusiasm with a meeting of “Paris Club” creditor nations for the first time since negotiations collapsed in 2000. Paris Club President Bruno Bezard estimated Cuba’s sovereign debt to be $15-16 billion, with France being the largest of the 17 sovereign nation creditors. A deal would likely reduce Cuba’s overall indebtedness and allow Cuba to potentially re-enter the international debt markets. However, without resolution of US sanctions, Cuba’s perceived credit standing and marketability would suffer.

Ex-Cuban central bank official Pavel Vidal, who is now a professor at Universidad Javeriana Cali in Colombia, estimates Cuba’s total foreign debt to be between $25-30 billion. Of this amount, approximately $15 billion represents sovereign debt presently under negotiation with the Paris Club.

In April, Cuba’s commercial creditors formed a “London Club” to negotiate Cuba’s debt held by the private sector. As a result, there has been a revival of Cuba’s publicly traded debt among private investors. According to Nicholas Berry, chairman of Stancroft Trust, Cuba’s debt has recently been trading at 25 cents on the dollar, having risen substantially in the last year.

Cuba’s ambition to resolve its claims and re-enter the debt markets is buttressed by at least one thing in demand today: growth potential.   With a GDP of $128 billion (ppp), Cuba’s economy is larger than that of Guatemala despite being miniaturized by the yoke of communism. Private sector reforms implemented since 2010 have introduced some dynamism into the economy, and since 2007 the US is Cuba’s forth-largest trading partner despite the trade embargo that prohibits most exports outside of agriculture and medicine. At approximately $5,000, Cuba’s official per capital GDP is one-tenth the level of the US. Other sources suggest the average Cuban earns about $50 a month. In any case, there is plenty of room for growth in income as Cubans become exposed to foreign capital and technology.

With accurate economic statistics about Cuba hard to find, looking back just prior to the revolution of 1959 offers some insight into Cuba’s future potential. “Contrary to the myth spread by the revolution,” wrote Alfred Cuzan, a professor of political science at the University of West Florida, “Cuba’s wealth before 1959 was not the purview of a privileged few. . . . Cuban society was as much of a middle-class society as Argentina and Chile.” In 1958, Cuba had a higher per-capita income than much of Europe.

To cure Cuba’s squandered past, long term foreign investment must make up for a severe lack of domestic savings. In the past, Cuba has rejected relationships with the International Monetary Fund and the World Bank. Changing this policy would unlock billion of dollars in long-term infrastructure finance on favorable terms. One banker, Richard Rubin of Project Finance Advisors LLC, says, “I’ve been getting more calls and seeing Cuba interest heat up in recent months but it remains to be seen what lending programs will be the first to launch in Cuba.” Assuming normalized relations with the US, the Overseas Private Investment Corporation (OPIC) would likely enter the picture as another long-term infrastructure lender to key sectors.

Havana capital

Cigars, rum, agriculture and traditional (and medical) tourism offer potential for billions of dollars of private investment. Yet another area that is often overlooked in Cuba is natural resources and oil. The island has significant reserves of nickel and cobalt – top five in the world for nickel by some estimates.   Proved oil reserves are estimated at 124 million barrels. The U.S. Geological Survey estimates that offshore reserves in the North Cuba Basin could contain an additional five billion barrels of undiscovered technically recoverable crude oil. Add to this Cuba’s inviting people, pristine beaches, mountain villages, majestic architecture and relative safety and you can see how combining infrastructure finance, entrepreneurialism and a tropical climate could lead to a hurricane of opportunity.

Finally, changes underway in the world of venture finance are likely to impact the way Cuba attracts investment in ways never experienced before in a developing country. In the last few years, micro-VC investment has become an integral part of the startup ecosystem around the world.  In fact, Startup Cuba is one such organization working on the ground in Cuba to promote the renewal of private enterprise.

Access to long-term infrastructure finance combined with the micro-VC investing approach could accelerate Cuba’s economic transformation much faster than that experienced by Russia and China and produce even higher financial returns.

Cuba’s Financial Road to Economic Transformation was last modified: November 16th, 2015 by Simons Chase