Thawing Cuban Relations and Investing Potential
Steady Investor News
Is Cuban rum the smoothest in the world? Arguably ‘Yes’. However, in the last 88 years it has been almost impossible for an American to visit Cuba and try some of that rum (ideally on one of the 250 fun-filled Cuban beaches). But, that all could change soon.
Following Fidel Castro’s rise to power, political tensions between the Cuban and U.S. governments (communist and capitalist, respectively) rose to the level of nuclear crisis resulting in political hostility and a trade embargo lasting more than half a century – up until 2015 when President Obama took steps to normalize diplomatic and trade relations with Cuba.
Any deal with Cuba is a political minefield and we won’t weigh in on the pros and cons in that context. However, we will take a look at how normalized relations with Cuba could affect economic growth and trade for both countries.
Cuba’s Economy
Shambled Economy: The $128.5 billion Cuban economy is mostly state-controlled and has yet to recover from the 2008-09 financial crisis. According to the Cuban government, the economy has been growing at around 2% since 2009, but most economists believe it’s actually near zero.
Communication Breakthroughs: Cuba has one of the most underdeveloped telecom infrastructures in the world and is one of the world's least connected countries. Only 23% have state-restricted internet access (which can hardly be called internet access) and just 5% have unfettered access to global internet connections. Additionally, only 10% use mobile phones.
Aging Population: Cuba has a total population of nearly 11.1 million that is aging. Around 18% of the island’s population is above age 60 and this percentage is expected to rise to 30% by 2030. As this shift occurs, Cuba will be faced with having fewer working-age citizens supporting more non-workers placing greater stress on their economy.
Key Revenue Driver: Cuba has the third highest number of physicians per capita, behind only Monaco and Qatar. Export of health care services, in the form of sending physicians, nurses, and healthcare technicians to countries like Venezuela and Brazil, is the economy’s principal source of revenue. Around 40,000 Cuban medical professionals visit Venezuela every year providing services for which nearly $5.5 billion a year is paid.
Per Capita Income: With a 99.8% literacy rate, Cuba has a well-educated workforce. However, around 73% are employed by the state. With 40% of the workforce falling in the middle class bracket, the aggregated gross per capita national income is around $5,539. Interestingly, however, the take home salary for most Cubans is around $20 a month.
Potential Benefits from Thawed Relations
For Cuba, one of the immediate benefits of renewed relations with the U.S. will likely be increased remittance flows. The most recent figures put annual cash remittances to Cuba at approximately $5.1 billion, a level greater than the four fastest growing sectors of the Cuban economy combined. With a deal, permitted remittance levels from the U.S. would potentially be raised fourfold, from $2,000 to $8,000 per year. This differential has more power than meets the eye as remittances do not cost the Cuban government or its broader economy anything to produce (unlike substantial costs that go into processing sugar, manufacturing drugs, and importing food). This scenario would help increase spending power in Cuba, which is expected to grow at a compound annual rate of 4.6% through this decade.
In December, direct postal service resumed and baseball teams began reciprocal visits. Additionally, Rihanna has partied there with Paris Hilton, American television shows have filmed in Cuba, Air BnB and Netflix are operating and credit cards are accepted. For global companies seeking a foothold anywhere they can, more money in the pockets of Cubans means more fuel for expansion. Take Coca-Cola for instance - with an open Cuba, Coke could soon be legally sold in every country in the world except one: North Korea.
The past twelve months have seen more changes in Cuba than, arguably, over the previous twelve years.
U.S. Sectors Poised to Benefit
With the U.S. government working toward restoring full diplomatic relations with Cuba, the agriculture and telecommunications export sectors seem to have the most upside along with farmers in the Southeastern U.S. (whose proximity to Cuba make their poultry, fish, wheat, rice, and corn exports to Cuba especially competitive).
Bottom Line for Investors
A deal with Cuba stands to create thousands of new U.S. jobs while saving the government huge amounts in federal enforcement costs. Previously, the government used resources from 10 different agencies to enforce various provisions of the embargo and has devoted millions of dollars and thousands of man hours. According to the U.S. Treasury Department, every year over 70% of the department’s inspection hours were devoted to sniffing out smuggled Cuban goods, even though the agency administers more than 20 other trade bans.
An open Cuban economy, coupled with its well-trained workforce, could make it the next ideal international investment destination. Presently, it attracts around $500 million of fixed direct investment, just 1% of its GDP. But, with a lifted embargo investment could soar and bring GDP along with it.
And, while we're taking a close look at what thawing relations with Cuba specifically means for investors, we're always looking hard at U.S. economic data as well. If you want to come up to speed on what we're seeing for investing perspective, download our just-released Economic Outlook Report (April '16 edition).
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