Cuba's Last Gamble? - Debt defaults

As Cuba's economy weakens further and its foreign debt soars, U.S. industries increase the push for trade and the extension of credit to the island.

After years of steady -- if slow -- recovery from its collapse in the early 1990s, Cuba's economy is now stalled amid a fall in tourism, a post-Sept. 11 drop in remittances, hurricane damages and low export prices.

Last year, Cuba devalued its currency by 18 percent, defaulted on some $500 million in loans and reportedly closed 12,000 hotel rooms. Last month it restricted the ability of some foreign investors to pocket their profits.

Some observers say Cuba's recent purchase from American farmers of about $73 million in food products may be a last-ditch effort to persuade Washington to lift the 40-year-old trade embargo, including a ban on trade credits.

''It's a Hail Mary pass, bottom of the ninth, the end of the fourth quarter,'' said one U.S. businessman who monitors the Cuban economy. ``To take $70 million and buy from us when other countries are going unpaid, they are betting the proverbial farm on the U.S. agricultural lobby in Congress.''

Although President Fidel Castro successfully steered Cuba through the brutal crisis sparked by the loss of Soviet subsidies in 1991, the current stall comes at a time when he no longer seems at the top of his game.

The 76-year-old Castro has appeared to repeatedly lose his train of thought during recent speeches, and he fainted during a public appearance June 23, later blaming the incident on the strong summer sun.

Cuba's minister of economics and planning, José Luís Rodríguez, reported in December that the economy grew a respectable 3 percent in 2001, compared with 5.5 percent in 2000.

But independent economists doubt him. ''When you take their own figures for key sectors in 2001, they are below the 2000 figures and do not back up this optimistic version,'' said FIU economics professor Antonio Jorge.

Castro put the damage from Hurricane Michelle in November at 1.8 billion pesos -- which is the equivalent of anywhere from $72 million to $1.8 billion, depending on whether the damages can be repaired using Cuban pesos, such as damages to Cubans' homes, or require U.S. dollars, such as imported goods for tourist hotels.

Income from tourism and tourism-related activities dropped from $1.96 billion in 2000 to $1.8 billion in 2001, Cuba's National Statistics Office reported last week. Tourism Minister Ibrahim Ferradaz has said that Cuba received the same 1.7 million visitors in 2001 as in 2000, and that tourist-days in January were down 26.7 percent compared to January of 2001.

Foreign companies running hotels in Cuba reported recently that their once-lax government partners were no longer paying out profits unless the hotels achieved the exact profit margins required by their contracts, according to the U.S.-Cuba Trade and Economic Council, a New York group that monitors the island's economy.

Managers of two foreign hotel chains in Cuba contacted by The Herald said they could not comment on the USCTEC report because of fears that Cuban officials could retaliate against them for airing the island's economic problems.

USCTEC also published excerpts from a Ferradaz letter to Cuban hotel officials telling them that government investments in tourism has been cut ''to the indispensable minimum'' and urging them to ''demand'' that their foreign partners, who usually handle foreign bookings, come up with more visitors.

''Tourism is in trouble in Cuba as all over the world but with an aggravating factor: tourism is the Cuban economy's steam engine, so the situation is bleak,'' Omar Everleny, a respected Cuban economist, wrote in a Nov. 22 report for the Havana-based Center for the Study of the Cuban Economy.

He reported that about 12,000 of Cuba's 36,000 hotel rooms had been shuttered and 20 of its 225 hotels had closed all or some of their floors at one time during the year.

Cuba's tourism industry boomed in the '90s -- growing 12 to 18 percent a year -- but had slowed even before Sept. 11 amid complaints of bad service and lack of options beyond Havana and a half-dozen beach resorts.

Sept. 11 proved a double whammy for Cuba when it sent the U.S. economy into a recession, leading many Cubans in the United States to trim their visits to the island and their remittances to relatives there.

Monthly remittances fell by about 30 percent from September to December, according to USCTEC President John Kavulich. Annual remittances have been estimated at anywhere from $375 million to $1 billion.

Sales in stores that sell imported goods for U.S. dollars -- usually money sent by Cubans abroad to relatives on the island -- dropped from $800 million to between $550 million and $600 million during 2001, Everleny wrote.

''Sept. 11 exacerbated the problems for the entire year, but 2001 was still not going to be a good year before Sept. 11,'' said Kavulich.

The drop in tourism and remittances in turn pushed government exchange houses to devalue the peso in September, from 4.7 U.S. cents to 3.7 cents, its lowest value since the mid-1990s.

Cuba's main exports -- nickel, sugar and its famed cigars -- also suffered from low prices or flat demand throughout the year, and the 2000-2001 sugar harvest hit only 3.5 million tons, compared to six million to eight million tons in the 1980s.

The downturn led Cuba to fall behind on repaying an estimated $500 million in debt to private banks and firms in France, Spain, Japan, Canada, Chile and Venezuela even before Sept. 11, USCTEC's weekly newsletter reported, and to several more after the attacks.

The Ministry of Foreign Trade in February asked several of its largest private creditors, mostly foreign banks and trading firms, to renegotiate $1 billion in commercial debt, USCTEC reported. Cuba's foreign debt stands at $10.9 billion, plus $24 billion owed to the former Soviet Union.

The French government also reported earlier this month that Cuba was behind on repaying government trade credits issued in 1999, 2000 and 2001, but did not reveal the amount of the arrears.

Vice President Carlos Lage told an audience in Germany last week that the Cuban economy would begin to recover this year, with tourism and remittances turning up as post-Sept. 11 travel security concerns ease.

But experts said that a long-term recovery is unlikely unless Cuba changes its cumbersome communist economy. ''Centrally planned systems are extraordinarily rigid, not only extraordinarily inefficient, and cannot react in time to outside changes,'' said Jorge.

The downturn has raised some hopes that Castro will relax economic controls as he did during the early 1990s crisis, when he legalized the holding of U.S. dollars, self-employment and private restaurants.

Cuba-watchers were intrigued by the return to Havana in late 2000 of Carlos Aldana, a top advocate of reforms fired and sent into provincial exile in 1992. Aldana, 60, now works for a joint venture in Havana, signaling his political rehabilitation.

But Castro so far has shown no signs of favoring new reforms, especially at a time when the Bush administration has announced a thorough review of U.S. policies on Cuba with a view to tightening them.

''When Cuba has found its ability to earn foreign exchange to be in crisis, the government has responded in ways that have included expansion of commercial and economic opportunities,'' Kavulich said.

''But given the Bush administration's rhetoric and actions, the Cubans may not want to make changes that could make them be perceived as bowing to U.S. pressures,'' he added.

"...it [Cuba] restricted the ability of some foreign investors to pocket their profits."

"Foreign companies running hotels in Cuba reported recently that their once-lax government partners were no longer paying out profits unless the hotels achieved the exact profit margins required by their contracts."

"But Castro so far has shown no signs of favoring new reforms..."
________________________________________

Abysmal credit ratings, huge defaults on foreign debt, crazy and arbitrary fiscal, monetary and commercial policy. Do you begin to see why any sort of investment in Castro's Cuba is foolhardy? Without civil liberties and true private property ownership, free enterprise is impossible. And without free enterprise, Cuba's economy will always have to be propped up by things like foreign subsidy and government drug trafficking. But civil liberties are what Castro and company understandably fear the most, whether it is extended to foreign investors or to Cubans themselves. Such a government cannot be "worked with" or "cajoled" by encouraging with trade the very conditions that Castro will not permit.

"...Much of what you saw can be said of other countries where we do not have trade sanctions in place -- Saudi Arabia and China come immediately to mend. No civil liberties in either, Saudi Arabia has a huge debt with which they're struggling."

Yes, you're right. Gross violations of human rights occur in both China and Saudi Arabia. They are institutionalized and routine. However, both of them differ from Cuba in two major respects (and there are others) -- 1) seizure of the property of legitimate foreign investors, and 2) an economy that has been run aground for 40 years by loony pie-in-the-sky marxism. At least economically, China has shown a willingness to adapt to the realities of the marketplace, and despite their continuing outrageous human rights abuses, the property and commercial interests of foreign investment are respected. Even the Taiwanese have been re-locating to the mainland in surprisingly large numbers to run businesses there. And there is reason to be confident that China will continue to provide a stable business environment for these people -- that is, until they've built up their military capability enough to attack us.

The Sauds have also been responsible in their business dealings with us. American property is safe there, and despite their indebtedness, their assets can more than cover it. The same cannot be said of Cuba, which, under Castro, has had an unbroken record of lies, thievery, and spectacularly poor economic management. In another post, you cited figures for hotel occupancy and other aspects of the Cuban tourism industry. But seen in perspective, ie. in comparison to figures for previous years in the past decade, those figures you gave only demonstrate that the health of that sector is declining significantly. With Castro or any of his likely Marxist successors at the helm, this country is a very poor risk for investment of any kind. The "different approach" you suggest is, IMO, unworkable and inadvisable. No American business demands that Saudi Arabia or China pay up front in cash. No, it's only Cuba. And for good reason.

Until and unless Castro, his lieutenants and his cadres are permanently taken out, I can see no hope at all for Cubans.

Paul Greenberg: Fidel and friends**** The problem is that, like any other economy that's been run into the ground by some Communist caudillo, F. Castro and brutal company are a little short of cash just now and always. Cuba is already some $11 billion in debt, it defaulted on its international loans years ago, and so it can't get any more money from the World Bank. Or any other lending agency that has this thing about being repaid. In short, Fidel's is a typical Communist economy, that is, bankrupt -- and not just morally. That's where American banks and credit and you, the American taxpayer, come in. Because all the loans and grants that Cuba's sordid little dictatorship would need to buy our rice and shore up its own power would have to be backed some way by the U.S. government. That's the dirty little secret none of those pushing for an end to this embargo emphasize. They see trade with Cuba as still another farm subsidy.****

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.