Cuba: Economic growth surprises on the upside

January 12, 2018

Latin News

At the end of each year, the economy and planning minister – currently Ricardo Cabrisas, who has held the post since July 2016 – presents a report to the National Assembly outlining the country’s economic performance over the course of the year. The report typically contains estimates for full-year economic performance, including GDP growth, which due to the highly planned nature of the economy tend to be fairly accurate, changing little when the final statistics are published.

Expectations for the end of December report were not particularly rosy, owing to the significant damage inflicted by Hurricane Irma last September and the scaling back of oil shipments from Venezuela. Many commentators expected the economy minister to confirm what many had feared – that GDP had contracted for a second consecutive year in 2017, following a near-1% drop in 2016. However, the final outturn appears to have been much more positive: although GDP growth missed the government’s 2% target, at 1.6% it was a reasonable performance in the light of the difficult external backdrop. President Raúl Castro summed up this sentiment, stating that “this outcome is not sufficient to feel satisfied, but we must congratulate ourselves for achieving it, despite the adverse conditions”.

Tourism drives overall growth

According to the economy minister, growth was fuelled by a good performance across several sectors, including tourism, construction and transport. A detailed breakdown of the statistics was not provided, but the authorities have previously alluded to the likelihood that tourism grew much more dynamically than the other sectors. Tourist arrivals rose from 4m to a record 4.7m in 2017, implying growth of 17.5%. This came on the back of an exceptionally strong 2016, when arrivals rose by 13%. The 700,000 increase in tourist arrivals registered in 2017 was partly explained by a sharp rise in US tourists, which rose by around 334,550 to nearly 620,000. This came despite the reintroduction of some travel restrictions by US President Donald Trump in June 2017 that essentially make independent travel to Cuba more difficult for American tourists.

Construction and transport are likely to have registered more moderate growth than the tourism sector, but still contributed to the comparatively firm GDP result. Few details were provided about the projects driving growth in each sector, but there was some new investment in tourist facilities across the island last year, as well as some new investment in the Mariel Special Economic Development Zone, which are likely to have lifted construction. Efforts to improve the country’s transport infrastructure, in a bid to develop the tourism offering, are likely to explain growth in the transport sector, even if overall quality provision remains poor. Meanwhile, the agricultural sector was affected by Irma, particularly poultry farming but also fruit and vegetable production as well as sugar cane, but this was offset by a better performance earlier in the year, with the sector contributing to overall GDP growth.

2% growth target for 2018 may be optimistic

The government is targeting a further acceleration in the pace of growth in 2018, to 2%, thanks to continued growth in both tourism and investment. The authorities believe that tourist arrivals could reach the 5m mark this year, while further investment could help tackle long-running deficiencies in the country’s infrastructure (partly explained by US economic sanctions, which hamper imports of raw materials).

However, several structural factors may hamper a pick-up in GDP growth. A further increase in tourist arrivals may be difficult: while President Trump’s mid-2017 reintroduction of travel restrictions did not affect outbound tourism in the months following the announcement, since many of these travel plans were already booked, it will begin to have an effect from early 2018, as US tourists are discouraged from travelling to Cuba. The US is now the second-largest source market, behind Canada, so a drop-off in the number of US tourists visiting the island could dampen activity in the sector. It is unclear whether other large source markets (Canada and Europe) could compensate for a potential decline, particularly given that tourist arrivals from these countries are already at historically-high levels.

Prospects for a pick-up in investment are also uncertain. An expansion of publically-funded investment will be difficult, given that the government is trying to shrink the size of the public sector. Detailed statistics on the size of the budget deficit for 2017 are unavailable, but it is highly likely that reconstruction spending after Irma hit in September will have lifted the already-sizeable deficit. Fiscal consolidation in 2018 will therefore place pressure on government spending. Yet President Trump’s rollback of many of the liberalising trade and investment measures introduced by his predecessor, Barack Obama, will discourage foreign investors who had previously been considering investing in the island.

Venezuela remains a major risk factor

The government will hope that the expansion of domestic private investment, in the form of small businesses, will take up the slack and help to drive overall GDP growth in 2018. However, these small businesses continue to struggle as a result of limited access to credit (reflecting an underdeveloped banking system) and severe difficulties in sourcing goods and services, particularly imported parts. The government is also tightening legislation that regulates private businesses, making it more difficult for Cubans to secure licenses to operate in the still-emerging private sector.

The issue of Venezuela also remains a significant risk factor for Cuba. Although lower oil imports from Venezuela did not prevent the Cuban economy from growing in 2017, there is a possibility that this aid may be suspended altogether in 2018, if the economic crisis in that country deepens further. This would force Cuba to pay market price for its oil imports, which would exact a further strain on the public finances, particularly given the country’s relatively few sources of foreign exchange. The Cuban government continues to work to diversify trade and investment partners, so a complete withdrawal of assistance by Venezuela would have less of an impact than the cut-off of Russian aid after the dissolution of the Soviet Union. However, a complete suspension in aid from Venezuela during 2018 would almost-certainly put the government’s 2% GDP growth target out of reach and may even push the economy into recession.

Contributor Biography

Latin American Newsletters (LatinNews) was founded in London in 1967 to provide expert political, economic, and security analysis on Latin America and the Caribbean. For nearly 50 years, it has been acknowledged as the foremost authority on the region.

Tags: cuba, economics, economy, growth, investors, macroeconomy, political risk
Posted in LatAm, Macro Economics, Macro Economics