Economic Analysis - Headwinds Set To Batter External Accounts - OCT 2017


BMI View : Falling oil shipments from Venezuela and a deterioration in relations with the US will see Cuba's external accounts deteriorate in the coming years. Shortages of hard currency will strain the island's ability to import needed goods moving forward.

We maintain our view that Cuba's good trade deficit will widen in the years ahead, as the country is forced to import more oil at market prices given the end of assistance from Venezuela ( see ' Goods & Services Trade Balances Heading In Different Directions ' , March 27). While a report from Economy Minister Ricardo Cabrisas showed that total imports actually fell in H117, as the country focus on reducing its oil usage amid a shortage of hard currency, we do not think this is sustainable in the long-run.

Additionally, we expect that the rollback in relations between the US and Cuba announced by US President Donald Trump will weigh on services exports moving forward. While the Cuban tourism market will continue to grow, given the US' relatively small share of arrivals, growth rates will likely be lower than we had previously anticipated. While we do not forecast a current account balance for Cuba due to a lack of up-to-date data, the most recent print, from 2015, showed a deficit of nearly 10.0% of GDP. Moving forward we expect both the goods and services trade balances to deteriorate, likely keeping the deficit wide.

Collapse In Venezuela To Serious Blow To Cuban Economy

Venezuela has drastically reduced its shipments of heavily subsidised oil to Cuba amid its ongoing political and economic crisis ( see 'Political Crib Sheet: Peaceful Resolution Increasingly Unlikely', July 6). According to documents leaked from Venezuelan national oil company PdVSA, shipments of oil to Cuba declined 13.0% y-o-y in H117, and were down more than 40.0% in 2016 from the year before. As a result of this decline, Cuba has been forced to drastically cut back on its usage of oil and electricity, such as by reducing the number of hours worked by government agencies. In addition, the end of oil imports from Venezuela has undermined Cuba's lucrative oil re-exports, which has historically been a major source of hard currency.

End Of Venezuela Support Comes Amid Rising Fuel Prices
Brent - USD/barrel (bbl), ave.
e/f = BMI estimate/forecast. Source: BMI

Falling oil re-exports - as well as weak prices for Cuba's exports of nickel and sugar - have created a shortage of hard currency, in turn limiting Cuba's ability to import needed goods. Cabrisas stated that as much as 85.0% of imports into Cuba were financed through commercial credits, though in H117 this fell below 50.0% as many suppliers refused to issue more debt. While the government does not provide full details, Cabrisas stated that imports in 2017 would likely be USD1.5bn less than the government had planned.

As we expect that the current Venezuelan government is unlikely to remain in power beyond 2018 ( see 'Assessing Political Outcomes: Regime Change Remains Most Likely Scenario', July 14), in the years ahead Cuba will need to meet its oil needs at market prices. While rationing will help reduce the island's fuel needs, we do not believe that Cuba can cut usage sufficiently to offset the loss of support from Venezuela. Given the shortage of hard currency in the country, particularly if US tourism declines as we expect ( see below), an increase in oil imports will strain the government's ability to cover the island's needs.

US Rollback To Weigh On Tourism Sector

While we remain generally positive on the Cuban tourism sector, which will support services exports in the years ahead, the partial rollback on relations between the US and Cuba will act as a headwind to growth in the sector. On June 16 President Trump announced restrictions on travel to the island, and banned transactions with the sprawling Cuban military conglomerate GAESA ( see 'Rollback To Undermine Cuban Economy', June 16). Though the US represents a relatively small portion of visitors to the island, growth in trips by Americans has fuelled growth in the broader tourism sector - which reached 13.5% y-o-y in 2016 - since the relaxation of relations between the countries in late 2014. As a result, growth in services exports from Cuba will slow in the years ahead.

US Accounts For Relatively Small Share Of Tourists
Cuba - Tourist Arrivals, By Country
Source: ONE, BMI
Macroeconomic Forecasts (Cuba 2013-2019)
Indicator 2013e 2014e 2015e 2016e 2017f 2018f 2019f
National Sources/BMI
Population, mn 11.4 11.4 11.5 11.5 11.5 11.5 11.5
Nominal GDP, USDbn 77.1 80.7 87.1 89.5 93.2 14.9 8.4
GDP per capita, USD 6,760 7,050 7,602 7,801 8,116 1,296 732
Real GDP growth, % y-o-y 2.7 1.0 4.4 -0.9 1.0 0.7 1.4
Consumer price inflation, % y-o-y, ave 3.0 3.0 3.0 3.0 3.0 3.0 3.0
Exchange rate CUP/USD, ave 1.00 1.00 1.00 1.00 1.00 6.50 12.00
Exchange rate CUP/USD, eop 1.00 1.00 1.00 1.00 1.00 12.00 12.00
Budget balance, CUPbn -2.6 -1.7 -4.4 -7.2 -11.3 -11.0 -10.6
Budget balance, % of GDP -3.4 -2.1 -5.1 -8.0 -12.1 -11.3 -10.5
Current account balance, USDbn 0.6 2.4 3.2 3.3 3.4 0.5 0.3
Current account balance, % of GDP 0.8 3.0 3.7 3.7 3.6 3.6 3.5