Cuba economy: Officials grow more worried

Cuba economy: Officials grow more worried
August 3rd 2009
FROM THE ECONOMIST INTELLIGENCE UNIT

Cuba's government announced on July 31st that it had lowered its
forecast for GDP growth in 2009 by nearly a full percentage point, from
2.5% to 1.7%. This follows an earlier reduction in May from 6%. The
Cuban economy is clearly struggling under the weight of the global
economic crisis, and the government has given this priority over any
potential political reforms. The Economist Intelligence Unit expects
growth this year to be no more than 1%.

The slowdown is particularly dramatic when seen in the light of Cuba's
robust economic performance of recent years. GDP growth averaged 10.2%
in 2005-07, and decelerated to 4.3% in 2008. The downturn is largely a
result of a squeeze on external finance arising from high food import
prices, falling nickel prices and hurricane losses.

Further, government austerity measures are restricting private
consumption, both directly as a result of reduced demand and also
indirectly as a result of delays to the introduction of promised
workers' incentives payments. Inflows of financing and income from
services will weaken against the backdrop of a deteriorating external
economic climate, reducing finance for planned investment. In the
absence of major reforms, monetary imbalances, price distortions and
restrictions on private enterprise will also continue to curtail the
dynamism of domestic industry.

There has been some positive news in recent months. Nickel prices have
risen (from below US$9,700 per tonne in March to around US$15,000/tonne
in June), and tourist arrivals in June rose by 7.3% year on year,
bringing growth in arrivals in the first half of the year to 2.7%. Most
of the growth has come from firm demand for Canadian package holidays,
an increase in Cuban-American visitors following the change in US law in
February and some diversion of package holidays from Mexican to Cuban
resorts as a result of the outbreak of swine flu in Mexico. However,
tourism earnings declined in this period at a double-digit rate, as
competition forced down prices and tourists spent less money in Cuba.

Limited investment continues

Fiscal retrenchment by the government has cut into current spending as
well as investment. However, some major publicly funded projects are
continuing. In his July 26th national speech, President Raúl Castro
confirmed that work on water supply infrastructure and reconstruction of
buildings and infrastructure in the wake of hurricanes in late 2008
would not stop.

Other projects are dependent on flows of external financial support. In
the oil sector, the postponement of plans by a consortium of foreign
companies to drill a new exploratory well in Cuba's deep-water territory
in the Gulf of Mexico may be related to financing issues, although the
fall in the oil price could have contributed. After drilling the first
well in 2004, which found oil, but not in commercial quantities, the
consortium, led by Repsol (Spain) and including StatoilHydro (Norway)
and ONGC Videsh (India) is reported to have experienced difficulties in
procuring a drilling platform, which may be linked to the fact that US
law prevents companies working in Cuba from using equipment containing
more than 10% US technology.

There are possibilities of future foreign financing from the Petróleo
Brasileiro (Petrobras, the Brazilian state oil company), following its
completion of seismic tests in an exploration bloc in coastal waters on
Cuba's northern coast (with a decision due by May 2010) and Petróleos de
Venezuela (PDVSA, the Venezuelan state oil company), which plans to
start exploration in 2010. A first tranche of US$110m in financing from
Brazil has been confirmed for the first phase of a port development
project at Mariel, on the northern coast 50 km west of Havana due to get
underway in the near future. The total cost of the first phase, expected
to take up to five years, is estimated at US$600m, and the whole project
is projected to cost US$2bn.

Political fallout

The poor state of the economy has carried with it political
repercussions. On July 31st the government also announced that it would
postpone indefinitely the long-awaited Communist Party congress, which
was to have taken place this year. There has not been a congress since
1997, and the upcoming one was expected to put Raúl Castro's mark on the
party and on future policies. Raúl succeeded his brother, Fidel, more
than 18 months ago, although the latter remains the titular head of the
Communist Party.

Rather than plan for the party congress, top government
officials—members of the Central Committee of the party—will focus on
the economy during this period of downturn. Their concerns in this area
will clearly take priority over any potential political reforms into the
near term.

ViewsWire (3 August 2009)
http://viewswire.eiu.com/index.asp?layout=VWArticleVW3&article_id=1724727357&region_id=&country_id=1780000178&refm=vwCtry&page_title=Latest+analysis&rf=0