President Raúl Castro’s successor will be appointed in 2018, marking the first time in almost 60 years that Cuba’s president will not be from the Castro family. The incoming president, likely to be Vice-President Miguel Díaz-Canel, will inherit a challenging foreign policy environment, as US President Donald Trump rolls back engagement with Cuba. This may also weigh on the economy, as revenues from US tourism decline.
Cuba’s National Assembly will choose President Raúl Castro’s successor in 2018, with the handover of power expected to occur in April 2018. The successor is likely to be Vice President Miguel Díaz-Canel, marking a transition away from the country’s revolutionary guard and the Castro family. Díaz-Canel will lack the revolutionary legitimacy of his predecessor and may struggle to maintain party unity and reform progress.
Moreover, Castro will remain head of the Partido Comunista de Cuba and this may limit the new president’s influence on policy formation. However, the handover of power is likely to be peaceful and will not elevate security risks for foreign investors in Cuba.
The incoming president will face a more challenging foreign policy environment. In the US, the Trump administration has worked to roll back the Obamaera rapprochement with Cuba. In November 2017, Trump prohibited Americans from conducting business with 180 Cuban entities and firms. Despite this, a violent interstate conflict between the two countries is unlikely in the medium-term outlook. Close relations with Venezuela are also likely to come under pressure in 2018, as regime change in the country becomes increasingly likely.
Any replacement government in Venezuela is unlikely to maintain close links with communist Cuba, increasing the country’s isolation from the international community.
If appointed president, Díaz-Canel will inherit an economic reform agenda, which aims to grow the private sector, reduce the size of the state and unify the dual exchange rate. If implemented such reforms have the potential to return Cuba’s economy to growth, following an estimated contraction of 0.3% in 2017. However, doubts have been raised over Díaz-Canel’s commitment to reforms. In
a leaked August 2017 video, the vice president reportedly criticised support for the private sector and reengagement with the US, suggesting that he will not adopt a more moderate policy position than Castro.
The economy is likely to face a number of headwinds in 2017, regardless of reform progress. President Trump’s decision to restrict American travel to Cuba from November 2017 may lead to a decline in the numbers of American tourists visiting Cuba. This will likely have a knock-on effect on investment in Cuba’s tourism sector. For example, as of 15 November 2017, 4 US airlines had announced that they plan to end flights to Cuba. Damage caused by Hurricane Irma in August- September 2017 will also weigh on the economy. A quarter of the country’s 4- and 5-star hotels were damaged in the hurricane, along with 40% of sugar mills. This will have a significant impact on export earnings, with sugar accounting for 16% of total exports in 2016. As a result, hard currency will remain scarce in 2018.
The business environment in Cuba will remain challenging following the leadership transition. Reforms to boost the private sector, if implemented by Díaz-Canel, will occur only slowly, meaning that foreign investors will face elevated risks for the foreseeable future. Cuba does not have an independent judiciary, making the enforcement of contracts challenging. Non-payment risks are also elevated in government contracts.
In November 2017, Spain’s Minister of Commerce stated that the Cuban government owed around USD 46.5 million to Spanish firms operating in the country, leading Spain’s export-credit agency, CESCE, to temporarily close down its Cuban credit line. Similarly, the government can cancel or modify contracts at will, and compensation is not guaranteed. There is also an elevated risk of expropriation, despite domestic laws which theoretically protect foreign owned assets from seizure. However, most foreign companies operating in Cuba maintain good relations with the government, and this offers a degree of protection from contract alterations and expropriation.
* There is limited appetite for these risks due to sanctions and country risks. New enquiries will be sensitive to capacity constraints; pricing will be dependent on deal specifics.
** There are a very limited number of markets that support deals due to US sanctions and on-going economic difficulties.
In this month's Risk Outlook, we also provide a detailed forward looking assessment of developments within the security, trading and investment environments for Colombia, Brazil, Mexico and Venezuela all of which have been the subject of recent enquiries from JLT's client base.
The monthly Risk Outlook is supported by JLT’s proprietary country risk rating tool, World Risk Review (WRR) which provides risk ratings across nine insurable perils for 197 countries. The country risk ratings are generated by a proprietary, algorithm-based modelling system incorporating over 200 international sources of data.
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For further information, please contact Eleanor Smith, Political Risk Analyst on +44 (0)121 626 7837 or email email@example.com