The surprise announcement by President Barack Obama and Cuban President Raúl Castro of an agreement to pursue the normalization of relations has significant positive implications for Cuba’s risk profile. However, policy changes unveiled by Obama in mid-December 2014 do not include a near-term lifting of the trade embargo that has been in place for more than five decades, which will require congressional approval.

But the easing of restrictions on travel, financial flows, and some forms of trade will bring immediate benefits for an economy threatened by the deepening political and economic troubles in Venezuela, which has been a crucial source of financial support for the government in Havana for years.

The immediate beneficiary of Washington’s opening will be businesses operating in the tourism industry and related hospitality services. Although Obama’s proposals do not include a lifting of the ban on pleasure trips by U.S. citizens, the easing of restrictions on permitted activities by travelers visiting Cuba for educational, humanitarian, and professional purposes figures to create stronger demand for leisure-related opportunities that will encourage higher levels of investment, bolstering the expansion of private-sector jobs.

Likewise, the easing of restrictions on flows of remittances will boost the purchasing power of average Cubans, creating stronger demand for the expansion of retail establishments.

In The Spotlight

The reduced risk of serious near-term economic difficulties diminishes the danger of domestic political instability that might prompt backtracking on the program of economic liberalization initiated by Castro as part of a strategy for laying the foundation for a smooth transfer of political control to a younger generation of leaders within the ruling Communist Party of Cuba (PCC) in 2018.

The easing of commercial restrictions and the normalization of bilateral relations will produce little, if any, near-term improvement in the more general climate for investment, the key weaknesses of which include woefully inadequate infrastructure, weak legal protections (particularly with regard to intellectual property rights), and the lack of an institutional framework for the arbitration of disputes. However, the diplomatic thaw will encourage investors to take a closer look at Cuba, and also brightens the prospects for restructuring old debt and tapping new sources of credit.

In a bid to seize those opportunities, Havana has signaled that it will be more forthcoming with data on the state of government finances. In that vein, the release in late December of information about the current account balance and foreign-currency reserves, long treated by Cuban officials with great secrecy, is encouraging.

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The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.




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