Understanding Cuba's Capital Flows

UNDERSTANDING CUBA’S CAPITAL FLOWS<1> Luis R. Luis Cuba has modest access to international capital markets.  This in addition to an inactive membership in international financial organizations means capital flows to the island are limited to trade finance and investment from a few partners.  Official Cuban data on capital movements is inexistent, even as the national statistical agency ONEI periodically releases foreign trade data.  This note estimates capital account transactions for 2009-2015, working from the bottom up by distilling investor and project data as well as from analysis of Cuban trade and debt statistics. CUBA:  CAPITAL ACCOUNT($ million) 2009201020112012201320142015Direct Investment282348406371438319129    European Union0262569132137na     Mariel049195195195490    PDVSA,  Subsea cable1731757728283636    Moa JV, Sherritt Oil1109810878839894Loans (net)9261058341-1384-99-111321Development Finance1181338588101262 naIdentified Capital Account13261539832-925440470450Current Account Balance-16214911437238216392672naOverall Balance116430302269145720793142naErrors & Omissions (- outflow)275-1915-3562-2820-2556-2768na     MemorandumInternational Assets at BIS4288540341102747227026442052 na – not available Sources -  See Note on Sources below The table shows the components of the capital account: direct investment, loans and development finance.  Direct investment estimates are obtained from official statistics for the European Union and from corporate reports from Sherritt International, PDVSA and Odebrecht, the main contractor for the expansion of the port of Mariel. The numbers show that direct investment between 2009 and 2014 averaged $360 million per year or about 0.5% GDP.  The direct investment estimates in the table are understated by the lack of data from investors from China, Japan and some Latin American countries.  Judging from the investment position in Cuba of European companies, the annual shortfall is probably under $50 million.  To be sure the direct investment estimates comprise the largest investment projects in the country, the port of Mariel, the expansion of the Cienfuegos refinery, the undersea fiber optic cable to Venezuela, the expansion and maintenance of the Moa joint-venture and petroleum development projects. Loans for 2009-2012 are derived from ONEI statistics on Cuban external debt. They are not adjusted for exchange rate fluctuation which, for example, make the 2012 net loan outflow up to 10% more negative than the actual dollar flows.  Loans for 2013-2015 are obtained from the assumption that new loans are tied to trade finance from China which provides new 180-day loans on incremental exports to Cuba and from BIS data on foreign bank claims on Cuban borrowers. Development finance comprises concessional net financing by official and multilateral agencies.  The figures are Official Development Assistance of the OECD for operations by its member states.  There is possibly some overlap with loan data from ONEI but it is not feasible to disentangle this from the available databases. The capital account numbers for 2015 are incomplete. Information from the European Union and OECD is lacking. The table shows Cuba has registered a surplus on capital account for every year during 2009-2015 except 2012 when the government recorded sizable repayment of debt in arrears to suppliers.  The capital account when added to the surplus recorded on the current account yields an appreciable overall positive position in the balance of payments. The overall balance can be compared to the assets of Cuban banks, including the central bank, at banks in over 45 countries and territories that report to the Bank for International Settlements.  Cuban assets at the BIS are a proxy for its international reserves.  They have been decreasing during 2010-2015 while the overall balance of payments is in surplus.  The difference between the overall surplus and Cuban asset changes at BIS banks are entered as Errors and Omissions in the table and averaged $2.7 billion per year in 2010-2014. The Errors and Omissions means that Cuba is accumulating net international assets outside of the BIS area.  This could be international reserves or other assets held by Cuban banks, government entities or state enterprises.  It would also include Net Errors and Omissions in the current account of the balance of payments. It is not possible to pinpoint the sources of the Errors and Omissions.  Its size and consistent sign (outflow of capital) may mean that a systematic factor is present.  Cuba’s evident tight international liquidity suggests that a large accumulation of official liquid assets is not taking place.  Nonetheless it is reasonable that Cuba is building up some assets in Chinese banks and perhaps others such as Russia which do not report to the BIS.  These assets would be part of international reserves and can be used in the financing of trade transactions.  It is also possible that Cuba provides finance or donates a significant portion of its services exports to countries in Latin America or elsewhere. NOTE ON SOURCES Direct Investment Data from the European Union is derived from ec.europa.eu/eurostat database. Data for Spain is from Ministerio de Economia y Competitividad, ICEX Sherritt International Corporation, Annual Reports, 2010-2015 PDVSA, Informe Annual de Gestion, 2010 – 2015 Odebrecht-Infraestructura – Latinoamerica, Concluye la revitalizacion de Puerto Mariel, en Cuba. Odebrecht.com, 27/01/2014. PDVSA invita a empresarios Venezolanos a invertir en Cuba. Reuters. 24/10/2012. Refinery depreciation and undersea cable installation estimated from standard depreciation and cost rates. Loans Oficina Nacional de Estadisticas e Informacion, Sector Externo Bank for International Settlements, Quarterly Reviews, 2012-2015 and June 2016. Development Finance Organization for Economic Cooperation and Development, Official Development Assistance. Current Account Oficina Nacional de Estadisticas e Informacion, Sector Externo Oficina Nacional de Estadisticas e Informacion, Panorama Economico y Social, Cuba 2015. Estimates on investment income and transfers, 2012-2014, from Ernesto Hernandez Cata,”An Update on Cuba’s Balance of Payments”, ASCEBLOG, October 24 2015. Financial Assets Bank for International Settlements, Quarterly Reviews, 2009-2015 and June 2016. <1> Comments by Ernesto Hernandez-Cata were very helpful in the preparation of this article.