Thursday, November 01, 2018

Globalizing Cuban Investment--Accessing Equity and Investment Markets in the Era of Transition

Recently there have been (what for Cuban reporting amounts to) a sustained interest in projections of Cuban sovereign economic power in international private markets. Three recent articles by Marc Frank, Sara Marsh and Nelson Acosta  for Reuters nicely captures the "mood" in the business "talking sphere."  

In the first, Mr, Frank reports on the somewhat remarkable entry of the Cuban state into equities markets, if only indirectly.  He reports that CEIBA Investments, a Guernsey Company, was said to have raised a modest sum, about $39 million, on the first day of trading on the London Stock Exchange (Cuba fund first to be listed on London exchange). It was indicated that those finds would be used for further investment in Cuban state owned enterprises in the tourism sector.  CEIBA announced that " through the Initial Issue of 30,000,000 new shares at a price of 100 pence per share, capitalizing CEIBA at approximately £137 million ($177.6 million)" (Cuba fund first to be listed on London exchange). CEIBA0's investment manager is Aberdeen Asset Investments, a company that prides itself on giving "clients access to investment opportunities across the broadest range of sources." (here). 

In the second, Sara Marsh and Marc Frank reports on the release of data by Cuban officials recounting a rise in the hoped for dollar amounts of investment deals inked by the Cuban state (Cuban international business conclave bucks Trump and slump).  The story spoke to what appears to be a greater willingness for key states (Panama, Germany) and businesses, including U.S. business, to attend and perhaps engage successfully in the high profile Cuban international trade fair.  The trade fair, of course, is critical to meet investment targets on the key sectors identified for  development in the 20'30 Economic Plan. And, as always, the trade fair tool place under the enormous shadow of the United States: "Cuban President Miguel Diaz-Canel. . .  cut the ribbon and toured the grounds, tweeting: The fair “ratifies international interest in trading with Cuba despite the (U.S.) blockade.”" (Cuban international business conclave bucks Trump and slump)..

In the third article, Nelson Acosta and Marc Frank reported on the size, scope and trajectory of inbound foreign investment in Cuba, but again during the course of the annual international trade event. Again, the touchstone was the United States and its hostility to Cuban economic development, with the report of additional targeted sanctions against Cuban officials and entities. But the report also reminded readers of something that has changed little since the start of Cuba's "reform and opening up period" in 2011: "While $5.5 billion in deals may have been signed since 2014, the government has said only around $500 million has actually been invested annually, including foreign government credits and donations. Diplomats and business officials report that many projects are hard pressed to obtain financing and the Communist-run country's bureaucracy also slows deals from getting off the ground" (Cuba says investor interest up despite U.S. hostility). 

The three reports plus additional brief comments follow. The three reports ought to be taken with the usual grain of salt.  No sooner had this cheery picture been painted than Marc Frank reported, for Reuters, that "Cuba’s economic growth will come in at around 1 percent this year, compared with the 2 percent previously forecast, due to a fall in exports and tourism revenue" (Cuba lowers economic growth forecast as trade continues to drop; "Cuba’s budget deficit reached 8 billion pesos last year, nearly 9 percent of its GDP, Vidal said. “This helps stimulate growth, but by accumulating a financial bubble in the form of public bonds in the hands of state banks,” he said. “It can’t go on forever.”").

Some brief comments:

1.Cuba appears to have retained a measure of discipline in its efforts to cultivate foreign inbound investment.  They remain quite cautious and directed, especially with respect to foreign investment from the so-called capitalist zone.  To that end the 2030 Economic Plan may well have served some use, at least as a general guideline for investment strategic decision making. It is far too early to tell, though,. It is also interesting to note that the trade fairs and other events are not aimed at the socialist camp or other traditional allies, with respect to which other rules likely apply.

2. Cuba has not overcome its own internal transaction costs and inefficiencies in drawing foreign capital.  These remain the same and are well known.  Among the better known ones: (1) a burdensome bureaucratic process that is rife with contradiction as negotiations occur on multiple levels with multiple officials each exercising administrative discretion in ways that may not be consist--or timely; (2) the rejection of market devices make negotiating terms somewhat more difficult, especially for joint ventures; (3) the State monopoly on labor may pose problems of both quality control and increasingly human rights related concerns for private sector foreign firms;  (4) the "yield" on memoranda of understanding appears to be low and not growing significantly; (5) the legal situation in Cuba remains somewhat fluid though perhaps getting better; (6)  there are specific sector controls that tends to limit the sorts of investments that are viable in Cuba; and (7) the Cuban internal market remains effectively off limits. 

3. The projection of Cuban sovereign economic activity into foreign equity markets is to some extent remarkable and ought to be considered more carefully.  It is on the one hand quite conservative.  But at the same time, with so much unpaid Cuban sovereign debt outstanding--and some large portion of that in the U.K, it may only be a matter of time before these transactions may catch the attention of sovereign creditors, and the more clever ones among than might be tempted to help themselves to some of the funds flowing out to Cuba.That is made easier by Cuba's insistence on conflating its state and economic activities. 

4. Cuba may have strategic geopolitical value (even with respect to the placement of economic activity),but it may not present the best value for investment in the region except in a few limited sectors (tourism certainly, Pharma perhaps, infrastructure unlikely in the absence of certain foreign financing). 

5.  Most remarkable was the absence of the Chinese, Russians, and the Belt and Road Initiative in these reports.  One would have expected that China's Asian Infrastructure and Investment Bank would play a more prominent role in Cuba's high priority infrastructure projects (at least with respect to fiance).  Yet their absence is telling--unless of course that absence suggests secrecy. And indeed, outside of Pharma and tourism, investors ought to be wary without more knowledge of the role of Chinese and Russian investment intentions. Indeed, Cuba has signaled since 2017, that it would like to serve as a node in China's Belt and Road initiative (see here).  And, indeed, on the eve of the trade show, China hosted a Belt and Road Initiative exhibition in Cuba, though the scope of the exhibition appears to suggest the small role for Cuba in the Initiative as of this date (see here).

6. Investment in Cuba remains modest. Even best case scenarios suggest that it will be some time before Cuba can reliably count on external funding to aid in its economic planning.  As well there is little her to suggest the "other shoe" of Cuba's economic initiatives--its own outbound foreign investment.  Like the North Koreans, Cuba relies heavily on the exportation of tabor-for-hire for both the projection of political objectives and the realization of income.

7.  Lastly, it is curious ot see the net effects of the Affair of the Sonic Weapons Attack.At least at this level of investment there appears to be little net effect on trade.  But trade remains relatively low.  Perhaps this is in part the allusion of Cuban officials to the United State sin their official pronouncements during the course of events. And Cuban efforts at classical agit prop at the U.N. (here) played little role as well. As far as we know that is.  But it may be too easily to tell as the next round of targeted sanctions may well disrupt the trajectory of investment.

8. Cuba's bilateral trading regimes require more careful study. There has been some recent work on Cuba's approach to bilateral trade that may prove useful as a means of opening up investment (e.g., Rafael Velazquez Perez).  But the fundamental stumbling block remains: as long as Cuba seeks foreign trade only to fuel its own ability to raise capital, and is only willing to use its national territory as a place for manufacture o¡r assembly of goods destined elsewhere, it will remain substantially cut off from effective engagement in trade and investment.  But since the Cuban Communist Party 7th Congress, it seems clear that this is a trade off that the state and Party may be willing to make.


October 22, 2018, 02:21:00 PM EDT By Reuters

By Marc Frank

HAVANA, Oct 22 (Reuters) - CEIBA Investments, a fund that owns stakes in hotels and commercial property across Cuba, said on Monday it raised $39 million on its first day of trading on the London Stock Exchange and will use the money to expand its business on the island.

CEIBA, launched in 2001, has investments in office buildings and four hotels across the capital city Havana and the beach resort of Varadero. Proceeds from the IPO are earmarked to upgrade and expand existing properties as well as build a new 400-room hotel in the central town of Trinidad.

The investment fund, listed on the Specialist Fund Segment of the LSE, was the first focused on the Communist-run Caribbean island to be listed on the exchange, the exchange said.

Aberdeen Asset Investments recently became the investment manager of the company, and Aberdeen Standard Investments is managing the firm, with CEIBA CEO Sebastiaan Berger its portfolio manager.

This is Aberdeen Standard's first experience of managing investment in Cuba, a country seen by investors as having huge potential but still subject to crippling U.S. sanctions.

"It has been 22 years that I have been involved with foreign direct investment in Cuba," Berger told Reuters. "Of all transactions and achievements I believe this one has been the most difficult one to accomplish and at the same time the one that will likely have the greatest positive impact on Cuba's economic future," he added.

Tourism is a vital industry and a main source of foreign revenues for Cuba, whose economy is suffering after decades of sanctions from Washington, dwindling support from crisis-hit ally Venezuela and declining revenues from goods exports.

Investors in Cuba's tourism industry had high hopes for the sector when then-U.S. President Barack Obama restored diplomatic relations in 2015 after more than five decades of hostilities.

His successor, Donald Trump, however, has been dialing back the changes. His introduction of new travel restrictions has sucked some air out of Cuba's tourism boom, but a number of foreign businesses such as Spain'sMelia Hotels and China'sJin Jiang are pursuing new investments.


HAVANA (Reuters) - Cuba’s foreign trade and investment minister opened the country’s international trade fair on Monday waxing defiant in the face of an increasingly aggressive Trump administration and precipitous decline in trade.

The annual event, at sprawling fairgrounds on the outskirts of Havana, draws hundreds of businesses and government delegations from around the world, including many U.S. allies.

The fair, which includes an investment forum, is designed both as Cuba’s main business venue and a show of international support in the face of U.S. sanctions.

Panama’s president will visit the fair on Tuesday, Germany will open a trade office, Spain has the most companies in attendance and Russia is expected to sign a number of deals.

Cuban President Miguel Diaz-Canel, who replaced Raul Castro in April, cut the ribbon and toured the grounds, tweeting: The fair “ratifies international interest in trading with Cuba despite the (U.S.) blockade.”

This year’s fair comes as the Communist-run country faces a severe cash shortage and stagnation. Efforts to attract more foreign investment to overcome the crisis have fallen short.

Direct foreign investment entering the country has averaged in the hundreds of millions of dollars over the last few years, according to the government, compared with the annual $2.5 billion it is seeking.

Combined exports and imports fell around 25 percent from 2013 through 2017, with imports dropping to $11.3 billion from $15.6 billion, according to the government.

The government announced in July that a disastrous sugar harvest and drop in tourism would force further cuts in imports through the end of the year.

Trade and Investment Minister Rodrigo Malmierca blamed everything from U.S. sanctions and climate change to “the resurgence of nationalism and protectionism” for the country’s economic woes.

He did not mention the crisis gripping ally Venezuela or the resulting decline in Venezuelan subsidized oil and cash for medical care.

The Caribbean island is struggling to pay foreign providers on time and seeking longer payment terms. Malmierca thanked economic partners “who are standing by us in these circumstances” and promised to “honor our obligations,” as he has for the last three years.

Malmierca also welcomed the dozen or so participating U.S. companies, saying they understood “the mutual advantage of working with Cuban businesses.”

U.S.-Cuban relations have deteriorated sharply since Donald Trump became president, with a return to Cold War characterizations of Cuba and a tightening of trade and travel restrictions eased by predecessor Barack Obama.


HAVANA, Oct 31 (Reuters) - Cuba's foreign trade and investment minister said on Wednesday the country had signed nearly 200 investment projects worth $5.5 billion since it slashed taxes and made other adjustments to its investment law in 2014.

Cuba began a major effort to attract foreign investment as socialist ally Venezuelas economy went into crisis and has ratcheted it up as export revenues decline and the Trump administration backtracks on a detente begun under then-U.S. President Barack Obama.

"Foreign investment in Cuba is growing despite the recent strengthening of the U.S. economic, trade and financial blockade, though it is below what we want, the minister, Rodrigo Malmierca, said at an investment forum in Havana.

Even as the forum unfolded, debate on an annual resolution condemning U.S. sanctions got underway at the U.N. General Assembly in New York and the Trump administration said that on Thursday it would announce new sanctions aimed at Cuba's military and security services.

Malmierca said 40 new projects were signed over the last year valued at $1.5 billion.

Many agreements are in the tourism sector and are often simple management and marketing accords. Others are in manufacturing, oil exploration and to a lesser extent areas such as pharmaceuticals, agriculture and logistics.

Cuba says it wants a minimum $2.5 billion per year in direct foreign investment to dig its way out of years of crisis and stagnation.

While $5.5 billion in deals may have been signed since 2014, the government has said only around $500 million has actually been invested annually, including foreign government credits and donations.

Diplomats and business officials report that many projects are hard pressed to obtain financing and the Communist-run country's bureaucracy also slows deals from getting off the ground.

For example, since 2014 five golf resorts valued at close to $2.5 billion were signed with British, Chinese and Spanish investors, but ground has yet to be broken on any of them, according to foreign business officials and diplomats with knowledge of the projects.

Malmierca said the country was working to overcome numerous obstacles for investors, such as lengthy delays for project approval, lack of experience among Cuban negotiators and Cuba's dual monetary system with fixed exchange rates.

Under then-leader Fidel Castro, foreign investment was first nationalized, then, after the fall of former benefactor the Soviet Union it was viewed as an unfortunate necessity. Today it is lauded as an integral part of the countrys development strategy.

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