Cuba's External Debt Problem: Daunting Yet Surmountable

ascecuba

By Luis R. Luis

Cuba has been in default of the bulk of its external financial obligations for over 50 years without negotiations towards a comprehensive restructuring.  Even the facts of the case are difficult to ascertain.  According to the most current official Cuban information published by Oficina Nacional de Estadisticas, the external debt stood at $12.3 billion at the end of 2009.  But according to the Club of  Paris of 19 major creditor governments (including Russia and Brazil but excluding China) the claims on Cuba by this group alone at the end of 2011 were $30.5 billion.[i]  Adding claims by private and other official creditors yields total external obligations of $43.1 billion. However, this number does not include capitalized interest due private and some official creditors.  In addition, the estimate does not include debt to Venezuela arising from the bilateral agreement between the two countries through which Cuba receives crude oil and derivates.  There is no precise information on this potential debt, although in recent years reported Cuban exports of health and other services to Venezuela exceed the value of its oil imports.

CUBA: EXTERNAL DEBT BY CREDITOR - US$BILLIONS
	actual	projected
	end 2011	end 2014
BIS banks	1.7	1.2
Paris Club/a	30.5	10.4
Other Official Debt/b	2.0	2.6
Suppliers/c	4.6	5.0
Defaulted Bonds and loans/d	4.3	4.3
Total	43.1	23.5
debt ratios  (on 2011 GDP and trade data)
Debt as % of GDP	62.5	34.0
Debt as % of Exports + Tourism	504	275
Debt as % of Convertible Exports + Tourism	839	458
Debt as % of Exports of Goods and Services	262	143
Sources: BIS, Quarterly Review ( June 2012 and September 2013), Paris Club (Annual Reports
2011 and 2012), Oficina Nacional de Estadisticas, Exotix and author's  estimates.
a/ official debt to major creditors except Brazil, China and Venezuela
b/ Brazil, China and other official debt not in Paris Club estimated from project data
c/ estimate based on data from ONE for end 2009
d/ defaulted bonds and commercial loans carried at face value
and includes $1.25 billion from London Club

The table shows external claims on Cuba.  The bulk of this data is reported by creditors, either official or private, or estimated from project finance figures.  Only the debt to suppliers is derived from the Cuban government.  A sizable part of the discrepancy with Cuban statistics stems from the long-standing rejection by Cuba of principal and interest owed to the former Soviet Union and claimed by Russia.  Nonetheless the Club of Paris this year revised upwards by $4.6 billion its claims to $35.1 billion as of the end of 2012, of which some 40% are new claims by Russia of principal and past due interest.[ii] Subsequently Russia announced a preliminary agreement for the writing off and refinancing of $32 billion of Soviet era debt.[iii] The actual agreement was signed in October 2013 and reportedly will write-off 90% of the debt with $3.2 billion to be repaid over 10 years.[iv]  Some of this will be offset by new credits from Russia for the leasing of airplanes and purchases of other equipment.  Implementation is expected to take place by the end of 2014 as the Russian Duma needs to grant approval.

There have been other important recent debt negotiations.  In 2012 an agreement was completed to write-off a substantial amount of Japanese commercial debt and rescheduling the reminder for 30 years.  It is not known if this agreement involved official debt, while there has been no confirmation from the Paris Club.  In September 2013 Mexico announced a restructuring of official claims on Cuba.[v]  Mexico is writing off 70% of a $487 million debt owed BANCOMEXT, the Mexican foreign trade bank.  The table incorporates these restructuring agreements into a forecast for the debt at the end of 2014.

Lacking comprehensive negotiations Cuba is making progress on restructuring important components of its foreign obligations.  On a practical level these agreements can open the door to some bilateral trade and project finance, though they are insufficient to propel Cuba towards access to international financial markets.  For this, restoration of relations with international financial institutions, crucially the IMF and World Bank, are needed followed by agrements with the Paris Club and later, a settlement with bondholders and other long-ago defaulted private creditors. These agreement are required for Cuba to achieve a comprehensive restructuring of its debt and gain market perception of creditworthiness.

How burdensome is Cuba’s external debt?  To help answer this question I have calculated debt ratios shown on the table. These ratios relate the debt to the capacity to service it.  Complementary ratios showing the burden of debt servicing are not calculated as there is scant public data regarding Cuba’s principal repayment schedules, interest rates and bond and loan covenants directing the treatment of past due interest and principal.

The ratio of debt to GDP at the end of 2001 was 62.5%, nearly matching the 61.2% average  of transition economies in Eastern Europe and the Middle East.[vi]  This ratio is surely understated by the accounting of Cuban national accounts at a notional value of CUP 1 =  US$1.  A more realistic exchange rate means a substantially higher value for this indicator.  Following the restructuring operations with Russia and Mexico, the debt to GDP ratio will be lowered to around 34% by end 2014.  For the sake of argument, assuming the Cuban peso is overvalued by 40%, the ratio would be 57%.

A problem, however, is that the Cuban economy is relatively closed to international trade and nearly completely closed to international financial and capital markets.  So that even if the debt is not very large relative to the size of the economy, it would still require a great effort to achieve the capacity to service the debt without great stress on its external accounts, and on consumption and investment.

Looking at the debt in an alternative way,  the ratio of projected 2014 debt to exports of goods and services at 143% would place Cuba among a number of countries with investment grade credit ratings.  Nonetheless, a majority of current account receipts are part of barter trade with Venezuela and other countries such as Brazil, China and Russia which provide a small amount of free cash flow.  Another measure, the ratio of debt to convertible exports and tourism receipts which are paid in cash, places the ratio at over 450%, an unsustainable level that implies a high probability of default.

These numbers depict a situation where debt levels even after some restructuring are still daunting, and where the solution lies in opening up the economy to trade and investment as well as a decisive push to engage in a wider set of external financial negotiations.  These will require a contribution by Cuba to make partial restitution payments on defaulted obligations.  All of this will be arduous as political considerations in Cuba and abroad stand in the way of progress. 

---

[i] Club of Paris, Annual Report, 2011.

[ii] Ibid, Annual Report, 2012.

[iii] Pravda, February 22, 2013

[iv]  “Deal on Forgiving $32 billion Cuban Debt to USSR Signed”, The Moscow Times, 11 December 2013, Issue 5274.

[v] “Mexico Says it will waive most of $487 million debt owed to Cuba”, Reuters, November 1, 2013.

[vi] Luis, L. R., “Cuba: External Debt and Finance in the Context of Limited Reforms,” Association for the Study of the Cuban Economy, Annual Proceedings, 2013, forthcoming.