Cuba – Economy in a Vise

Now in the second year of his presidency, Miguel Díaz-Canel is enduring a baptism by fire as he attempts to usher in a new era in Cuba’s political history, following nearly six decades of continuous rule by the Castro dynasty. The economy is being squeezed from two directions, as Cuba’s benefactors in Caracas are struggling to survive a political crisis and the collapse of the Venezuelan economy, and the US restores the restrictions on trade, investment, travel, and financial flows that were eased under former President Barack Obama.

Significantly, the US has begun to enforce the 1996 Helms-Burton Act, which permits the owners of assets seized during the 1959 Cuban revolution to file lawsuits in US courts against third parties that do business with any enterprise or agency making use of confiscated property. If strictly enforced, virtually any foreign investor in Cuba would potentially be at risk of being sued under the Helms-Burton provisions.

The negative effects are already evident. On the tourism front, Cuban authorities are projecting an 8.5% year-on-year decline in foreign visitors in 2019. Likewise, support from the Venezuelan government has decreased sharply.

Addressing the National Assembly in July, Díaz-Canel aped the time-tested strategy of his mentors, and placed the blame for the current troubles squarely on the US, while announcing a raft of measures aimed at simultaneously soothing discontent and tightening the government’s control over the economy. In late July, the Finances and Prices Ministry issued Resolution 302, which rolled back some of the market freedoms extended to the “non-state sector,” in effect imposing a price freeze on all goods and services sold by private businesses, at both the wholesale and retail level.

The government is also trying to find new benefactors. Three decades after the collapse of the Soviet Union, Havana is once again looking to Moscow, hoping to exploit renewed tensions between Russia and the west to its advantage. China is investing in Cuba, but shows no indication that it is looking to sink large quantities of funds into risky ventures. Russia, in contrast, is already investing more than $1 billion in a railroad network, and Díaz-Canel will be looking to increase that total when Prime Minister Dimitry Medvedev visits Havana in October to commemorate the 500th anniversary of the city’s founding.

In July, President Díaz-Canel reported that the economy grew by 2.2% in 2018, an upward revision of the 1% estimate announced late last year. Even more suspect is the forecast for 2019, which remains 1.5%, despite widespread evidence of a slowdown that has fueled speculation that the economy is actually in recession. At best, any positive real GDP growth will be minimal.

Since 1979, The PRS Group Inc., has been a global leader in quant-based political and country risk ratings and forecasts. This commentary represents a sneak peek from our upcoming political risk reports. For more information please contact us at (315) 431-0511 and sales@prsgroup.com, or explore a subscription to PRS Online and/or ICRG Online today to receive political risk updates.

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