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CUBA is excluded from key multilateral financialinstitutions such as the IMF / World Bank. In 1986, allservicing on bank and bilateral debt with Westerngovernments was suspended.
The US embargo has been most damaging to Cuba in terms of restricting its access to finance both privately and at a state level.
At the end of 2004 Cuba's total debt was US$ 13.8 billion, comprising US$ 8 billion of 'inactive' debt built up after Cuba defaulted on its debts in 1986 and US$ 5.8 billion of 'active' debt built up after 1989. The EIU suggests (Oct 2006) that this may increase to US$ 15.2bn as by the end of 2006.
The president of the Cuban Central Bank, Francisco Soberón, has won many plaudits for his stewardship. In recent years the Central Bank has accumulated more control and influence over the rest of the economy (see box right). Increasingly, the financial system is being used to drive economic decision making and allocation decisions.
In early 2006 Banco Central issued a EUR 400m bond which, while largely subscribed by Cuban banks, also had 15% foreign bank participation. This is reflective of a general attempt by Cuban policy-makers to restructure Cuba's outstanding debt, focusing on converting short term debt into medium-long termdebt and trying to reduce rates paid through securitizing obligations where possible.
Beginning in the mid 1990's a number of international financial institutions established operations within Cuba either through joint ventures with local Cuban institutions, through the establishment of a representation office or simply on a deal by deal basis. Cuba also maintains significant export guarantees and credits with, most significantly, China, Iran,Venezuela and Brazil.
The US Treasury department has taken a number of measures targeting financial institutions doing business with Cuba, most notably fining UBS in 2004. More recently there has been some nervousness from Scotiabank which terminated its Cuban clients in Jamaica out of concern for US repercussions.
Trade finance is especially important in Cuba given that many foreign suppliers prefer not to provide credit in a market where they typically do not understand credit issues.
There was some interest in Cuban sovereign national debt in 2005-6. A London-based specialist brokerage house, Exotix, visited Cuba in 2005-6 reviewing opportunities. Cuban sovereign debt, including unpaid coupons, trades at only 6% of its combined par value and PDI. With the strengthening of the Cuban economy, this may be cheap. Investors have seen very strong returns (including PDI) in other distressed markets, such as Iraq (20%) and Serbia (33%).
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FOREIGN PARTICIPANTS IN CUBA
The most important financial institutions operating in Cuba with part or full foreign participation include Netherlands Caribbean Bank N.V., Caribbean Finance Investments Ltd (CariFin), Republic Bank of Trinidad, Corporación Financiera Habana S.A. (CFH) and Financiera Iberoamericana S.A.
Other overseas financial institutions which have representation offices in Cuba include Banco Industrial de Venezuela, National Bank of Canada, Banco Bilbao Vizcaya Argentaria, Banco Sabadell, Société Générale, Fransabank, Caja de Madrid, BNP Paribas and Caja del Mediterráneo.
Yields on Cuban short-term debt are typically higher than on long-term transactions and relatively high in absolute terms. The difference in rates is explained primarily by the collateral with project finance deals.
Given that many of the foreign participants in the trade finance market have experienced low default rates the returns obtained reflect the underlying perception of risk as well as the limited number of market participants.
The particular nature of the Cuban political, economic and financial landscape impact upon the real risks faced by foreign financial institutions. Some of the key factors are detailed below:
FACTORS THAT REDUCE RISK:
Low risk of corporate malfeasance due to multifarious restrictions which restrict corporate actions (such as establishing a company and the purchase or sale of assets) aswell as strict rules on the operation of bank accounts and an overall environment of strict enforcement for white collar crimes and misdemeanors which are discovered.
The reluctance to let companies go bankrupt means that Cuban state-owned companies will be given breathing space and assistance to restructure their operations in the event of serious problems.
Low level of financial engineering or use of complex financial products [such as derivatives].
FACTORS THAT INCREASE RISK:
The 'aportes' (akin to a compulsory dividend) system means that even the most profitable companies may face financial difficulties if their results are below budget.
Providers of capital to Cuban entities worry that in the event of a severe external shock the system may lack the necessary shock absorbers or political will to ensure repaymentobligations are met.
RISK NEUTRAL
Any subsidiary of the Cuban state can ultimately be consolidated upwards as part of Cuba Inc. While this means any non re-payment damages the overall credit reputation of Cuba Inc it also highlights the difficulty / possible illusion inherent in cherry picking and then ring-fencing good credit risks. |
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Recent Central Bank Regulation
During 2003-5 various measures increased the control of the Cuban Central Bank over other government institutions and state-owned enterprises in Cuba. In particular:
Resolution 65, July 2003: required Cuban entities to obtain Central bank authorisation for any hard currency purchases (above US$ 5,000)
Resolution 80, Nov 2004: the US dollar ceased to be legal tender for transactions within Cuba, being replaced with the Cuban Convertible Peso (CUC)
Resolution 92 Dec 2004: a single consolidated hard-currency account was established at the Central Bank which all Cuban entities are required to use
Decree 15, April 9, 2005: the Cuban Convertible Peso (CUC) was revalued by approximately 8% to CUC1:US$1.08 (buy) and CUC 1: US$1.04 (sell), marking a shift from a fixed exchange rate to an adjustable peg
Various: the decentralisation in the financial system which saw many new financial entities emerge in the mid-1990s was largely reversed in 2001-2004 with virtually all of the non-banking financial institutions re-centralized into the banking system. New credit procedures introduced in 2006 have also removed some of the leverage that creditors could exert and are considered to aid debtors through some procedural changes.
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