US-CUBA TRADE ASSOCIATION Doing Business in Cuba Citrus Club, Orlando, Florida April 13, 2006

1
US-CUBA TRADE ASSOCIATIONDoing Business in
CubaCitrus Club, Orlando, Florida April 13,
2006
OVERVIEW OF CUBAN BUSINESS ENVIRONMENT Prepare
d by Paolo Spadoni Stetson University
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Cuban Economy Introduction

• Deep economic recession in early 1990s
• Fall of former Soviet Union
• Beginning of Special period in time of peace
• Intensification of US sanctions (Torricelli,
  Helms-Burton)
• Economic reforms
• International tourism, foreign investment
• Legalization of US dollars (remittances)
• Self-employment, agricultural cooperatives, free
  farmers markets
• Slow but constant economic recovery since
  mid-1990s
• Reforms good results
• Re-centralization of the economy (search for
  efficiency)
• Closer relations with Venezuela and China (and US
  food sales)

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Cubas GDP Growth (1989-2005)

• Sources CEPAL EIU Cuban
  Government.
• 1990-93 GDP contracted by 40.1
• Positive performance since then, but growth rate
  has fluctuated substantially
• Record GDP growth of 11.8 in 2005 with
  sustainable social formula

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Cubas New GDP Formula

• Sustainable social GDP
• Recognizes value added of subsidized social
  services (healthcare, education, sports) provided
  by Cuban state to its population and to citizens
  from other countries, mainly from Venezuela.
• Cubas arguments
• Traditional GDP formula designed for market
  economies
• Assigns no added value to subsidized social
  services
• Uses cost calculations that do not reflect true
  purchasing power of Cuban population
• Wages are low, but citizens pay no rent, free
  healthcare and education, subsidized utility
  services and basic products
• New formula key issues
• What added value is assigned to Cubas vast
  social safety net?
• Profitability in a market system?
• What countries are used as a reference?

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Cuban Economy Current Situation

• Good economic performance in 2005
• Main reason unprecedented earnings from exports
  of medical and educational services, particularly
  to Venezuela
• Exports of GS from 5.9 billion in 2004 to 8.7
  billion in 2005
• Other reasons higher revenues from tourism and
  nickel exports
• But economy negatively affected by
• Severe energy crisis and continuing drought
• Two major hurricanes in 2005 causing losses of
  about 2 billion
• Strengthening of US sanctions
• Future economic challenges
• Energy revolution (small electricity generation
  plants)
• Housing program (construction)
• Improvement of transportation sector
• Fight against corruption and illegalities
• Reducing income inequalities

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International Tourism in Cuba 1993-2005

• Source Anuario Estadistico de Cuba
  Cuban Ministry of Tourism. Authors
  calculations
• 2005 tourist arrivals 2.3 million (12),
  revenues almost 2.6 billion (10)
• Gross revenues per tourist in 2005 about 23
  below 1995 level

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Cuba Main Export Products, 2000-2005 (U.S.
million)

• Sources Oficina Nacional de Estadísticas EIU.
  Preliminary estimates
• Export performance
• Growing nickel revenues mainly result of higher
  international prices
• But injection of financing and technology by
  foreign partners (China
• and Canada) expected to lift production
• Decline of revenues from sugar exports, growth
  of tobacco exports
• Pharmaceuticals and biotech exports estimated at
  300 million in 2005
• Imports
• Fuel (Venezuela), foodstuffs (US),
  machinery/equipment, chemicals
• Cubas main trading partners
• Venezuela, China (US fourth largest import
  partner in 2004)

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Foreign Investment in Cuba

• Cubas opening to foreign investment in early
  1990s (handful of hotel and
• oil exploration joint ventures)
• After 1993, number of international economic
  associations (AECEs)
• increased and expanded to different sectors of
  the Cuban economy
• Since 1998, preference for AECEs that involve
  higher amounts of capital
• and loan financing

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Active International Economic Associations
(1993-2005)

• Source Cuban Ministry of
  Foreign Investment (MINVEC)
• Number of AECEs dropped from 403 in 2002 to 258
  in 2005 (-36)
• Cuban authorities country has been
  concentrating on businesses with results
• Number of JVs more suitable to Cubas current
  needs

10
Authorized and Dissolved Associations by Year of
Dissolution (1988-2005)

• Source Authors calculations from
  MINVEC data.
• About half of dissolutions occurred in last 3
  years (and less authorizations)
• 60 AECEs in process of dissolution at the end of
  2005

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Foreign Direct Investment in Cuba in U.S.
million (1993-2004)
Sources Cuban Central Bank, May 2002 EIU.
1994 data are cumulative to that year.

• Cuban experts committed FDI is more than 6
  billion (about half delivered)
• AECEs by sectors and country
• Leading sectors basic industry, tourism,
  construction
• Leading countries Spain, Italy, Canada
• In terms of capital invested
• Leading sectors telecommunications, mining, and
  tourism
• Leading countries Canada, Italy, Spain
• FDI priorities
• Mining, energy, oil, sugar derivatives,
  biotechnology, tourism
• Tourism
• 49 hotels under management contracts with 10
  foreign companies in 2005

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Cubas Business Climate

• Complaints by European investors (June 2002)
• Excessive utility costs due to the state
  monopoly on services
• Bureaucratic hurdles, payment delays
• Expensive dollar payments to Cuban workers
  recruited by state-entity
• Cubas stance
• Rules of the game always clear (FDI
  complementary)
• Efficiency through re-centralization, more
  revenues to the state
• Increased ability of Cuban government to respect
  payment obligations
• Recent developments
• Focus on large investment projects
• Decline in number of cooperative production
  agreements
• Free Trade Zones development halted in 2003
• Major FDI operations in oil and mining
• Virtually all new FDI projects are with China
  and Venezuela
• But still opportunities for investors from other
  countries

13
AECEs Operating Abroad by Geographical Area
(percentage as of June 30, 2003)
Source Centro de Promocion de Inversiones
(CPI), September 2003.

• Cubas investments abroad increasingly important
• Major biotech and pharmaceuticals projects in
  East Asia (China, Malaysia,
• India), Middle East (Iran), and Africa
  (Namibia and several other countries)

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Main Indicators of AECEs, 1993-2005

• Source Cuban Ministry of Foreign
  Investment
• Main indicators of AECEs have shown constant
  progress
• 2005 Increase in total sales, exports, domestic
  sales (even with fewer JVs)
• FDI fostered competitiveness of Cuban
  production, import substitution

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Foreign investment Big Players in Cuba

• A limited number of joint ventures with foreign
  partners have a large economic impact
• 5 joint ventures account for vast majority of
  export revenues of AECEs
• Corporacion Habanos S.A. (tobacco, Altadis)
• Havana Club International S.A. (rum, Pernod
  Ricard)
• Compañia Azucarera Internacional S.A. (sugar,
  unknown)
• ETECSA (telecommunications, Telecom Italia)
• Sherritt International (nickel)
• Increasing dissolutions little negative effect
  as long as big players continue to invest in Cuba

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Exports of AECEs, 1995-2005(as percentage of
Cubas total exports of goods and services)

• Sources Authors estimates
  from MINVEC and CEPAL data.
• Important presence of FDI in oil, mining, and
  energy production
• Foreign participation has substantial influence
  over the production and
• marketing for five largest export sectors
  (sugar, nickel, tobacco, rum, fishing)

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Conclusion

• Cuban economy is improving
• Increased foreign exchange earnings (first
  current account surplus)
• New revenues from export of medical services
  (Venezuela)
• Tourism, nickel exports on the rise, soft
  credits from China
• Translating growth into tangible benefits for
  population
• State investments in energy, housing,
  transportation, consumer products
• More food imports, raising wages and pensions
• Reducing gap between those with/without access
  to hard currency
• Business environment
• Cubas closer relations with Venezuela and China
• Re-centralization of the economy
• More controls, but also more efficiency?
• Preference for large investment projects (with
  results)
• Strong presence of FDI in Cubas most successful
  industries
• Brightest investment opportunities in basic
  industry and tourism