Is Cuba ready to repay its foreign debt?

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For the past several years, Cuba has been negotiating debt payment and forgiveness deals with its global creditors. In December 2015, for example, Cuba signed an agreement with 14 Paris Club member countries to forgive $8.5 billion of its $11.1 billion in outstanding debt. The remaining $2.6 billion was structured to be paid over 18 years, and the first payment of about $40 million was made in October 2016. The deal also allowed Paris Club members to establish bilateral restructuring agreements with Cuba to set money aside for development projects.

Besides government-to-government debt, the Cuba also spent four years successfully restructuring its commercial debt with creditors from Japan, Mexico, China, and Uruguay. The result was forgiveness of 81.6 percent of the $42 billion face value of that debt, leaving the country with outstanding obligations of about $9.5 billion.

It is important to note that these agreements didn’t include debt with private creditors, which in 2010 was estimated at $11.3 billion for Venezuela and $350 million for Brazil. The Brazilian debt also does not include nearly $700 million that Brazil lent for infrastructure work in the Mariel Special Economic Development Zone.

The restructuring deals were intended to send signals that Cuba is committed to paying its debts, which could pave the way for work with international financial institutions. Now, Cuba faces the challenge of fulfilling its payment commitments—an uphill battle considering the country is facing economic recession.

The Cuban GDP fell 0.9 percent in 2016 despite increases in tourism revenues (12.3 percent) and remittances (2.7 percent). Although some government officials say upcoming economic reforms will boost the country’s GDP, most experts agree the economic situation will worsen in 2017.

The main factor triggering this recession was a drop in Venezuela’s oil supply and plummeting global oil prices. In 2013, the price of crude oil on the world market averaged $108.60 per barrel. By 2016 it fell to $42.62 per barrel—causing Cuba an income loss of about $4.18 billion that year. Decreased nickel and sugar exports also worsened the economic situation, as did a drop in the production of domestic crude oil and gas––which forced Cuba to buy from countries besides Venezuela, and at world market prices without subsidies.

Cuba’s deposits in international banks (international reserves) have also fallen in recent years. Since the Cuban government does not issue official information on the reserves held by the Central Bank, it is difficult to know its true value. However, information published by the Bank for International Settlements in Basel makes it possible to estimate the value of Cuba’s international reserves.

The value of these reserves fell sharply from about $4.1 billion in December 2011, to about $2.7 billion in December 2012, to about $2.2 billion in September 2013—a nearly 48 percent drop over the entire period.

Cuba’s international reserves fell partly because they were used to repay debts with some of its most important creditors. They were also used to purchase food, which was necessary given a rise in global food prices and the country’s failure to boost domestic production.

The combination of these challenges will make it difficult for Cuba to fulfill its debt commitments. The most practical strategy for Cuba is to open its economy to the free market, release its productive forces, and deepen the opening with the U.S. regardless of how the Trump administration steers policy towards the island.

 

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