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    February 9th 2014

    Sovereign risk
    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.

    Current assessment

    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.

    Positive factors

    Far-reaching reforms of the food-rationing system and deep cuts to state
    payrolls will increase fiscal flexibility in the medium term.

    Negative factors

    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
    fiscal tightening.
    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.

    Rating outlook

    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.

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