For a brief moment, Cuba appeared poised to return to international capital markets. It was late in the Obama era, months after the historic US-Cuba rapprochement. And Raul Castro vowed to clear the debt the country had defaulted on decades earlier, a first step toward re-entering the world of global finance and securing the funding needed to revive a moribund economy.
Six years after it restored diplomatic relations with the United States, Cuba’s efforts at making peace with creditors have been derailed, and the island is as isolated as ever. The market for its old commercial loans is all but dead, and when they do trade it’s for just 10 cents on the dollar. That’s down about 70 percent from when optimism peaked in 2016.
The dour mood took hold as foreign support dried up over the past few years when the economy of former patron Venezuela fell apart. The relationship with the United States went cold under President Donald Trump, and Joe Biden has signalled a reconciliation isn’t a priority amid efforts to staunch the pandemic and push through his infrastructure spending plan. A sharp drop in tourism sparked by Covid-19 robbed the nation of foreign currency, exacerbating the pain caused by a decline in exports, which have fallen by a third since 2014.
With hardly enough cash to pay for food imports now as Raúl Castro gives up his last vestiges of power – bringing an end to six decades of Castro family rule – Cuba can’t make good on the debt repayment deals that had been hailed as a sign of its return to the international stage just a few years earlier.
“The combination of Cuba reducing the pace of reforms, the impact of the Venezuela situation and the US sanctions is all being reflected in a balance of payment crisis,” said Pavel Vidal, a former Cuban Central Bank analyst who now teaches at the Pontificia Universidad Javeriana in Cali, Colombia. “That’s forced them to stop servicing foreign debt.”
It’s a letdown for investors who had been encouraged when Raúl took over from his brother Fidel in 2011 and made progress at settling old debts from the government and state-owned companies, some of which dated to the 1970s. His government reached a deal with 14 members of the Paris Club of wealthy governments in 2015 under which US$8.5 billion was forgiven, leaving US$2.6 billion in arrears. Cuba was given 18 years to pay off the debt. Russia, its Cold War-era benefactor, had already forgiven 90 percent of its debt.
There was a pickup in trading of the old commercial loans, with prices as high as 36 cents on the dollar in 2016 as investors saw a chance to profit from the Caribbean island’s return to the world stage. The financial world got another encouraging sign in late 2017 when Raúl Castro pledged Cuba’s “willingness to fulfill its commitments” to creditors.
A group of investment firms known as the London Club holding about US$1.4 billion of defaulted private debt reached out, offering the government a settlement.
But by that time, the Trump administration was trying to squeeze Cuba and discourage any efforts at normalising relations. Nothing came of the London Club’s overture. Investors eventually brought a claim to a London court, where the case is ongoing.
Cuba owed US$17.8 billion in foreign debt as of 2017, according to the most recently published government statistics, though the total has almost surely risen since then. Even if it could start to service the debt, the country faces other obstacles, including US sanctions and questions over how to compensate for land and businesses it expropriated during the revolution. US politics may be another obstacle to friendlier relations with avowed communists, with the Biden administration looking to swat down suggestions it leans far left.
The Cuban Foreign Ministry didn’t respond to a request seeking comment. The Paris Club declined to comment.
US policy under Biden will be governed by “support for democracy and human rights,” White House Press Secretary Jen Psaki said April 16. “A Cuba policy shift or additional steps is currently not among the president’s top foreign policy priorities.”
So there’s no doubt the prospect of Cuba selling an overseas bond remains a long way away. Exports last year fell to their lowest level in 15 years, leaving the country with little hard currency to pay for imports of basic necessities. The economy shrank 11 percent last year, among the worst contractions in Latin America.
There’s some hope, though, that Cuba’s dire straits could provide the motivation for its new political leaders to bolster their efforts to clear up the defaulted debt issue and attract foreign capital. Miguel Díaz-Canel, who has been at the forefront of pushing for economic reforms after taking over as president from Raúl Castro in 2018, was named the new leader of the all-powerful Communist Party on Monday, cementing his influence.
Díaz-Canel has a track record of overseeing reforms, having helmed the painful process of unifying a decades-old dual currency system, which he said would allow the country “to go ahead with the transformations that we need to update our economic and social model.”
And there’s a chance that Cuba could see economic benefits from developing a Covid-19 vaccine. Health agencies are conducting Phase III trials with two candidates, with plans to inoculate nearly two million adults by the end of May. If the vaccines are successful, the island could reopen to tourism and potentially export the shots.
“The situation right now could be the tipping point that will lead to more reforms,” said Vidal, the former Cuban central bank analyst. “They have to put their finances in order so they can attract international investment, because that’s what’s needed.”
For now, though, the landscape for investors remains bleak. Cuba missed its agreed-upon payments to the members of the Paris Club in 2019. Last year, as Cuba’s economic slide worsened during the pandemic, the two sides agreed to suspend payments for the year.
There aren’t currently any negotiations between the parties, according to a person who has been involved in the talks and asked not to be identified citing private information.
“Both sides know that the Cubans can’t pay anything,” said John Kavulich, the president of the US-Cuba Trade and Economic Council, a New York-based researcher focused on the countries’ relationship.
by Ezra Fieser, Bloomberg