Political Risk Analysis - Rollback To Undermine Cuban Economy - AUG 2017

BMI View : US President Donald Trump ' s decision to rollback the detente in US-Cuba relations begun under President Barack Obama will be a si gnificant blow to Cuba's economy . We expect that the move will have little impact on Cuba ' s internal politics, where the Communist Party will maintain its hold on the levers of power.

US President Donald Trump has announced a rollback of the normalisation of relations between the US and Cuba begun under President Barack Obama in December 2014. While our view has been that pressure from the US business community would convince the Trump administration to maintain the detente between the two countries ( see ' Normalisation Of US-Cuba Relations Will Regress, Not Reverse ' , November 15 2016), we acknowledged the risk that Trump would adopt the hard-line policies supported by the Republican Party in recent decades ( see ' Gradual Normalisation Ahead: Scenarios For US-Cuba Relations ' , March 13). Below, we highlight the most important policy changes announced by President Trump, and give our initial thoughts on their implications for Cuba moving forward.

Policies Aimed At Cutting Off Flow Of Funds To Cuban Government

The new policies will substantially tighten travel restrictions for US tourists visiting Cuba, and ban American businesses from making deals with the Cuban military. As the Cuban military conglomerate, Grupo de Administracion Empresarial SA (GAESA), is involved in most sectors of the economy, this will severely undermine the scope for investment in Cuba by US businesses. The changes will not, however, apply to the air and sea travel industries, allowing flights and cruise ships to continue to service the island. In addition, the Trump administration will not break off diplomatic relations with Cuba, and will not reinstate the 'wet foot, dry foot' policy that was repealed under Obama ( see 'Trump Will Not Reverse New Immigration Policy ' , January 17).

Rollback A Heavy Blow To Cuba's Economy

Given the far-reaching impact that these policy changes will have on the Cuban economy, we will be re-assessing our macroeconomic forecasts for Cuba in the weeks ahead. However, below we outline our initial thoughts in this development:

  • Cutting off US tourism to Cuba is a significant blow to the island's economy. We have held a constructive view on Cuba's economy despite a sharp decline in support from Venezuela ( see 'Petrocaribe Will Not Be Revived ' , April 28), based on the assumption that robust US tourism would continue in the quarters ahead ( see ' Growth To Bounce Back In 2017 & 2018 ' , April 27). However, under the new US policies we expect inflows of tourists will fall substantially in the months ahead, undercutting Cuba's primary source of hard currency. Combined with headwinds from Venezuela's crisis, we expect that these moves will see Cuba's economy remain in contraction in the next two years. These dynamics will push Cuba to pursue new international partnerships in the years ahead ( see ' Network Of International Ties Will Deepen ' , October 17 2016). For example, the regime has already deepened its ties with Russia, importing oil Russian oil for the first time since the Cold War and welcoming investment into domestic infrastructure ( see ' Russia To Invest In Modernising Railways ' , June 7).

US Arrivals Have Fuelled Tourism Boom
Cuba - Tourist Arrivals
Source: ONE, BMI
  • We do not believe this rollback will have a significant impact on Cuba ' s internal politics. Cuba's Communist system has withstood hostile US relations since the Castros seized power in 1959, and we expect the Partido Comunista de Cuba (PCC) to maintain its tight grip on Cuban society moving forward. The economic shock created by the rollback of US relations will, however, likely push back the timeline for economic liberalisation ( see ' Reforms To Underpin Steady Economic Growth ' , April 18), as the regime will likely see such reforms as too potentially destabilising amid falling economic activity.

  • The US embargo will remain in place. While our core view has long been that the Republican-dominated US Congress will not lift the embargo on Cuba, we have previously suggested that Raul Castro's scheduled resignation in February 2018, shifting public opinion and a pro-engagement stance from the Trump administration could spur Congress to repeal the embargo ( see ' Gradual Normalisation Ahead: Scenarios For US-Cuba Relations ' , March 13). However, with Trump's decision to side with the anti-Cuba hardliners within the Republican Party, we see little chance that the embargo ends until after the next president takes office, in 2021 at the earliest.

  • Future presidents are likely to re-engage with Cuba. Trump's decision to rollback the detente with Cuba came despite substantial opposition from within Congress, the US business community and the general public. Polling has shown a steady shift in public opinion on US-Cuba relations, with solid majorities now favouring the removal of travel restrictions on US citizens and the US embargo. Polls of Cuban-Americans in Miami have shown a similar shift, particularly among the young. As a result, we think it is highly likely that a future president - most likely from the Democratic Party - will capitalise on this change in sentiment by re-opening Cuba to tourism and investment.