February 9th 2014
Cuba: sovereign risk
February 2014 CCC
Kate Parker (lead analyst); Robert Wood (analyst). Published 21 February
2014, 1530 GMT.
This sovereign rating is issued by The Economist Intelligence Unit
credit rating agency, registered in accordance with Regulation (EC) No
1060/2009 of 16 September 2009, on credit rating agencies, as amended,
and is issued pursuant to such regulation.
Credit risk score graph
The CCC rating and underlying score remain unchanged from The Economist
Intelligence Unit’s last ratings report in December 2013. We estimate
that the fiscal deficit came in at 1.2% of GDP in 2013—below the
government’s target as a result of poor and behind-schedule execution of
public projects. Although the deficit is anticipated to widen again in
2014, to 4.7% of GDP, as the authorities’ investment programme gets back
on track, it will be below levels recorded in recent years (it peaked at
6.7% of GDP in 2008). Following an agreement with Russia to write off
most of Cuba’s unpaid debt to the former Soviet Union (relating to a
moratorium on external debt in 1986), arrears now account for around 25%
of the public debt stock (previously this stood at 35%) and mostly
comprise arrears to the Paris Club. This is described as “immobilised”
debt by the Cuban authorities.
Far-reaching reforms of the food-rationing system and deep cuts to state
payrolls will increase fiscal flexibility in the medium term.
Although not part of our central forecast scenario, a rollback or
suspension of Venezuelan subsidies (prompted by an economic crisis in
that country) remains a major external risk and would require sharp
Even though only 30% of this year’s fiscal deficit will be monetised,
this still equates to an estimated US$1.2bn, which will complicate
monetary policy at a time when the government is seeking to tackle price
and currency distortions.
The deficit has traditionally been fully monetised, but the authorities
are expected to issue 20-year sovereign bonds (tradable only between
Cuban banks) in 2014 to finance 70% of the deficit. This will raise the
public debt/GDP ratio to over 40% of GDP, but will benefit the financial
sector and foster greater monetary policy independence. The ratio will
remain well below the 50.6% median for CCC-rated sovereigns—but risk is
high, owing to Cuba’s weak track record in terms of commitment to pay.
The reform process is proceeding gradually, with public-sector spending
cuts and the transferral of some state activities to the private sector
set to provide added protection against external shocks. Cuba will
remain dependent on nickel exports and subsidised imports of oil from
Venezuela in 2014. Nickel prices are not expected to register
significant gains, but equally a sharp fall is unlikely. Structural
improvements will support medium-term fiscal consolidation. The wage
bill will decline as the state payroll shrinks, although the transfer of
jobs to the private sector has so far proceeded cautiously as the
authorities attempt to keep unemployment steady.