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President Obama’s historic visit will boost Cuba GDP, but trade risks - Media comment

By CreditMan Monday, March 21, 2016

Daniela Ordonez, Economist, Euler Hermes, said:

“President Obama’s historic visit to Cuba is helping to create a new economic landscape which in turn will give a tangible boost to the Cuban economy. If US sanctions are completely lifted, real GDP could accelerate to 5-6% growth a year during 2016-2020, compared with an average of 2% in the last five years.

“Growth would be driven mostly by investment, which we anticipate to grow by 15-20%. Consumption should also accelerate but to a lesser extent, as the internal market will continue to be highly state-managed and ration based.

“The easing of the embargo and opening up the US market to Cuban products would greatly sustain exports. We expect them to gain momentum gradually in coming years as investment generates additional production capacity in export-oriented sectors. The U.S. will be the main winner, with USD1bn export gains expected per year, becoming Cuba’s main trade partner as of 2018.

“However, trading with Cuba will remain risky in the short-term. Notably, three major risks will remain high for the foreseeable future: currency and financing risks, political and business climate risks, and credit risk.

“The Cuban exchange rate system is complex, featuring two coexisting official currencies (the CUP and the CUC) with different fixed exchange rates. In the long-run unification is unavoidable with the opening of the economy, but might lead to drastic economic adjustments, with high economic and social costs along the way. In addition, financing the real economy, especially access to credit for companies will remain limited in the short-run as the interbank payment system and distribution channels need to be re-established.

“The possibility of political and social tensions or fully-fledged protectionism cannot be ruled out. Foreign investment will remain tightly controlled by the state, with most foreign ventures requiring majority Cuban ownership while large government holding companies will continue to dominate the market.

“In the short-run, non-payment risks by Cuban companies will remain high. Euler Hermes rates Cuba D4 – its lowest possible rating - when it comes to getting paid on time.”