Cuba Coping With Venezuela Quagmire

Cuba is avoiding severe economic damage from the economic turmoil in its close ally Venezuela.  Officials report an increase in annualized real GDP of 4.7% in the first half of 2015 after meager expansion of 1.3% in the previous year.<1>  The expansion is broadly based across productive sectors particularly industry,  agriculture and commerce.  This at a time when the grossly mismanaged Venezuelan economy is in a deep contraction propelled by its inability to cushion the impact of a crash in oil prices. How is Cuba managing to withstand the economic collapse hitting its closest trading partner?  The most important element is that Venezuela, in spite of economic and financial necessity,  continues to supply Cuba with some 98,000 barrels per day of crude accounting for the bulk of Cuba’s energy needs.  This in turn is paid by the bartering of services of Cuban doctors and professionals in Venezuela.  So in terms of oil shipments the relationship between the two countries has not changed.  However because of the barter arrangement, the dollar value of Cuban services exported to Venezuela is quite likely diminished in proportion to the roughly 40% fall in the price of Venezuelan petroleum crude so far in 2015.  This would mean that Cuba conceptually could gain by shifting its exports of medical services from Venezuela to countries with better ability to pay. Whether or not Venezuela incurs financial debt to Cuba for services is not known given the opaque nature of transactions between the two countries. The financial crunch affecting Venezuela is also having  an impact on joint  oil company (CUPET and PDVSA) projects on the island such as the expansion and upgrading of refineries in Matanzas and Santiago de Cuba.  These were in fact the most important foreign investment projects underway in Cuba in the last two years and are currently suspended.  Cuba is in the middle of a promotional campaign to attract foreign direct investment which in 2014 was below 1% of GDP. The Cuban economy is highly dependent on imports for production inputs and on external demand for its services.  There are no official current account data for years after 2011.  The balance on trade and services is reported to be on surplus in 2014 but at 53% of the level in 2013.  A surplus of $1.3 billion is forecast by the government for 2015, a reduction from the previous year.  These trade numbers are obscured by the reporting of barter transactions with Venezuela on an accrual basis which do not correspond to actual financial results.   There is no registered cash payment for Cuban services rendered to Venezuela and a few other countries such as Ecuador and Nicaragua. There is marked improvement on external trade in other fronts.  Foodstuff imports in 2015 have become far more affordable.  An index of Cuban food import prices calculated by the author fell 18% in the first eight months of 2015 versus 2013 representing savings of around $400 million on an annualized basis and more than offsetting lower prices of  nickel, the island’s most important merchandise export. Importantly, a surge this year in overall tourism and of remittances and visits by US citizens will boost hard currency receipts.  Though we had estimated the 2015 impact of changes in these latter items at around 0.5% of GDP, it may be larger<2>.  This is because the multiplier impact of incremental remittances and US visitor expenditures on GDP measured in Cuban pesos is likely to be larger than 1.0.  These flows finance expenditures with a sizable domestic component such as for lodging, transportation and other services.  Furthermore these are de facto valued in Cuban pesos in the national accounts at an implicit rate of $1 = CUP24. The Cuban economic plan for 2015 calls for an expansion of state investment of some 6% and a public sector deficit of 4.1% of GDP as against 2.3% in 2014.<3>  The financing of this is unclear given the constricted nature of Cuba’s financial and banking system and reduced access to long term external finance.  Persistence of operating deficits in many state firms suggests also that a kind of “crowding out” effect takes place.  Unless enterprise reform improves state firm efficiency government investment runs into a constraint in the absence of direct financing from the central bank.  Cautious monetary management indicates that the latter is not substantial.  In any case the budget suggests a moderately expansive fiscal stance is in place.  This would be consistent with some improvement in external liquidity. Cuba does not publish a complete balance of payments nor international reserves.  On the basis of data from the Bank for International Settlements there was a modest improvement in Cuba’s external liquidity position in the first half of 2015 as shown by Cuban banks’ net assets in international banks.  It is hard to make much of this, but nonetheless it is a positive signal for the economy. <1> “Marino Murillo: Crecio la Economia Cubana 4.7% en el Primer Semestre”, Cubadebate, 15 de julio de 2015. <2> Luis R. Luis, “Economic Impact of New Cuba Measures”, ASCE Cuba blog, December 24, 2014. <3> “Aprueba la Asamblea Nacional Plan de la Economia para 2015,” 14ymedio, Diciembre 20, 2014. See also “Dictamen de la Comision de Asuntos Economicos sobre el informe de Liquidacion del Presupesto del Estado del ano 2014.” Cubadebate, 15 julio 2015.