The Republic of Cuba is the largest country in the Caribbean with a population of 11.5 million. The market rate for the Cuban peso has completed almost a full circle over the last 20 years after collapsing in value in the early to mid 1990's to clawing most of its exchange losses back to its current valuation reflecting the economic events in Cuba during this time. After the collapse of the Soviet Union in 1989-90, Cuba lost in excess of 6 billion USD a year in subsidies. Unlike the Soviet Union, Cuba has stayed with for the most part with a failed economic ideology of a state command control economy. Cuba under communism has the state setting production quotas and prices, not allowing Cuban businesses to react freely to market forces. State central planning is a discredited economic system of the 20th century. The state also takes an active role by essentially managing all foreign trade.
POLITICS: for the most part, the United States trade and travel embargo that was implemented in 1960 is still in place. On October 18, 2000, the U.S. congress eased trade sanctions against Cuba specifically with food & medicine as long as Cuba pays in cash. In 2004, the United States reversed policy again and decided to clamp down with further sanctions. Fundamental changes are slowly taking hold in Cuba including freedom of religion, the beginnings of a class structure with rich and poor. For further details on Cuba’s political framework, please contact us here at BankINTRO.com.
ECONOMY: centrally planned economy although minimal private enterprise is now taking hold. Cuba currently produces basically very little of value, everything is imported, and tourism and remittances from the United States form the basis of the Cuban economy. Cuba is a state controlled socialist economy where the state has a firm hand in the affairs of the citizens and foreign trade. The government does provide for Universal Health care and education to all Cubans. From 1989-1993, the Cuban economy entered a depression contracting by 35 percent whereby industrial production fell 75 percent as Soviet subsidies ceased to exist as the Soviet Union imploded. Today, the average 2009 Cuban standard of living remains below the 1989 level. Although modest reforms have been implemented, the state remains firmly in control of an estimated 90 percent of the economy.
Economic reforms and an economic overhaul were implemented in 1994 in order to expand industries such as tourism in order to replace the lost annual Soviet subsidies. Improved Cuban sugar crops after years of poor harvests and a massive influx of tourists from around the world particularly from Europe and Canada resulted in the Cuban economy recording annual growth of 3.5 percent from 1994-2000. Another industry of importance to Cuba includes cigars although it was greatly damaged from hurricane Lili in early October 2002. Years of energy shortages impacted production within Cuban industry. Future foreign exchange earnings for Cuba may exist in its nickel / cobalt production, expansion of the coffee industry, rum, rice production to replace sugar crops and the potential to exploit oil exploration.
Oil production is a bright spot particularly in the offshore oil fields on the northwest part of the country in waters harboring Florida. Cuba’s leases are currently being developed, some in joint venture production sharing agreements including a Canadian resource company and Cuba’s state oil monopoly. An estimated 20 billion barrels of oil in shared agreement with the United States may exist in waters off the coast of southern Florida.
Tourism is one of the few bright lights for Cuba since its reincarnation in the mid 1990’s with now upwards of 2 million visitors per year. Tourism accounts for 50 percent of Cuba's foreign exchange although the global recession has slowed the industry. Increased tourist activity has resulted in a construction boom in areas; new restaurants and traffic are now common. Havana now has a new 100 million USD airport, over 60 major airlines fly to Cuba. During the late 1990’s, tourism has taken over the sugar industry as Cuba's largest foreign exchange earner with many resorts now accepting euro’s (EUR) for payment. Tourism employs over 100,000 directly.
Remittances are pegged at around 1 billion USD annually, mostly from Cuban Americans sending money home to relatives living in Cuba. The sugar industry which has been Cuba's historical lifeline income earner for centuries has been forced to restructure due to inefficiencies. One positive development taking place is an upswing in commodity prices, particularly nickel which will benefit Cuba's mining industry.
Economic Statistics
GDP as measured by purchasing power parity came in at 111 billion USD (2009) with corresponding GDP per capita estimated at 9,700 USD equivalents. Market GDP stood at 56.5 billion USD. GDP growth rates include year 2009 at 1.4 percent, 2008 at 4.3 percent, 2007 at 7.3 percent. Inflation quotes include year 2009 at 4.3 percent, year 2008 at 4.2 percent, year 2006 at 5 percent, year 2001 at only 0.5 percent and year 1997-2001 at negative 0.5 percent (deflation). Cuba’s fiscal deficit at 3.4 billion USD (2009). Current account deficit measured at 1.18 billion USD (2009), year 2008 shortfall at 2.6 billion. Net oil importer at 100,000 bpd (2007). Official unemployment rate is at 1.6 percent. The government employs 90 percent of the workforce. Major industry segments include tourism, petroleum, sugar, tobacco, construction, agricultural, pharmaceuticals.
POSITIVE: electricity and natural gas supply demand ratios are now balanced, decline in energy power shortages, health tourism value at upwards of 50 million USD per year CONCERN: illegal migration to the U.S. using dangerous homemade rafts, alleged human rights violations in order to show favorable statistics including infant mortality rates, very low communication penetration rates for both fixed and mobile, crime, corruption, reliability of government statistics, no private land ownership, large black market economy - entrepreneurs are going underground.
BANKING SYSTEM: Central Bank of Cuba created in 1997. Total foreign exchange reserves position at 3.5 billion USD equivalents (2009). There are no ATM’s, credit cards are accepted.
REGIONAL and GLOBAL ANALYSIS: United States, Caribbean, Venezuela, China
The United States has in place a freedom & democracy plan ready to be implemented after a post Castro era ends. The plan involves humanitarian aid and increased energy. Cuba is moving closer to the European Union with trade agreements. Both Canadian and European multinationals seek to establish themselves in Cuba in areas of mining, rum, cigars, etc. Venezuela has provided oil support to Cuba reported to be as high as 100,000 barrels of oil per day discounted as much as 40 percent in price. In return, thousands of Cuban medical personnel are in Venezuela helping to train professionals to establish a sound medical system within Venezuela. Total Venezuela Cuba trade is worth 7 billion USD per year (2007). Cuba is not a member of CARICOM and has isolated itself from the rest of the Caribbean countries in terms of trade. In fact, major trading partners now include surprisingly the United States, China, Canada, Netherlands, Russia, Spain and France. China is providing assistance in areas of transportation, electronics and communication.
KNOWLEDGE: Free Market Forces
located only 90 miles south of Florida, the nature of its geography right next door to the wealthiest and largest economy on the globe will benefit Cuba significantly. Tourism, nightlife and Cuba again will be the Las Vegas of the Caribbean. The power of free markets will win and BI.C believes President Castro realizes this phenomenon as he is balancing market liberalization and political control. Similar to other Caribbean countries, Cuba in due course will modernize and have to take a serious look at banking & financial services as a source of national revenue once democracy takes hold and laws are updated. In order to make change a positive outcome in Cuba, in BankINTRO.com’s view, the United States should drop all trade and travel embargos and let the market works it magic, the market will force political change quicker than trying to starve the people and keeping them powerless.
CURRENCY: two parallel currencies: ISO symbol 'CUP', Cuban peso, domestic peso, nicknamed the ‘National’ peso. The other official currency in use is the convertible peso ‘CUC’, Cuban peso, international peso, nicknamed ‘dollar’ peso.
At time of review on May 17, 2010, the official exchange rate is 1 CUP to 1 US-dollar ('USD') although the market rate is fluctuating around 22 to 26 CUP to 1 USD. Both currencies currently in use in Cuba are fixed by the government. The CUP is used by to pay citizens wages, they use the CUP to buy goods & local services. The black market trading range since 1998 for the Cuban peso is in a trading range of 20 to 28 CUP to 1 USD. Cuba also operates the convertible peso (CUC) with an official exchange rate of 1 USD to 0.93 CUC. The convertible currency is used mostly by tourists and for payment of luxury goods. Those Cuban’s able to get their hands on convertible currency can live quite well, it is well known that taxi drivers are some of Cuba’s highest paid earners due to them receiving tips in hard currency.
The official exchange rate between the two domestic currencies is 25 CUP (domestic) to 1 CUC (convertible). Coinage denominated in US currency is no longer accepted within Cuba. Both Cuban currencies have no value outside of Cuba. The authorities charge a 10 percent surcharge when converting USD to CUC. There is no surcharge for other hard currencies.
CURRENCY HISTORY: the peso came into circulation in year 1857, year 1881 pegged to the USD, year 1960 the USD peg replaced with the Soviet ruble, year 1991 – peso collapsed when the Soviet Union disintegrated, year 1993 – USD given legal tender status, year 1994 – convertible peso introduced at par to the USD, year 2004 – USD removed as legal tender as Cuba responds to United States sanctions.
Historically, the black market rate for the Cuban peso 'CUP' for domestic use peaked at a low 120 CUP to 1 USD in 1994, year 1995 at 35 CUP. During 1989-90 near the end of the Soviet Union, the CUP was at a trading level of approximately 7 CUP to the USD. Steady appreciation of CUP versus the USD from the 1994 low as the Cuban government has implemented policies to shrink the money supply, lower subsidies to unprofitable enterprises. Recent quotes have the CUP trading closer to 25 to the USD.
CURRENCY FORECAST: If President R. Castro can maintain control of the dual currency, he can further keep his power; the U.S. trade embargo actually helps his regime stay afloat. The dual regime is under threat from the massive underground black market economy estimated upwards of 40 percent of Cuba’s total GDP. Cuban’s who have access to the convertible peso are much better off financially. The dual currency regime is actually creating a class divide.
The dual currencies in use are strictly political. The country has been held back 60 years in economic advancement. Currency valuation remains speculative based primarily on domestic political events. An eventual movement towards private ownership will one day see a real estate bonanza in Cuba and a long term multiyear bull market in the Cuban peso.
Potential for Cuba is enormous as the country will be a much different place in 20 to 30 years from its current state of affairs as foreign investment will take presence in a significant way. Cuba's geography and proximity to the United States with U.S. free market forces coupled with the eventual removal of President Castro and his regime from power will ultimately see the demise of the Cuban peso itself as outright US-dollarization may inevitably take hold.
The Cuban currency regime is a speculation on a change in a political direction in a post Castro era. UPDATED: May 17, 2010
