Country Report Cuba November 2018

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Country Report

Cuba

Generated on November 17th 2018

Economist Intelligence Unit 20 Cabot Square London E14 4QW United Kingdom

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Symbols for tables "0 or 0.0" means nil or negligible;"n/a" means not available; "-" means not applicable Cuba 1

Cuba

Summary 2 Briefing sheet

Outlook for 2019-23 4 Political stability 4 Election watch 5 International relations 5 Policy trends 6 Fiscal policy 6 Monetary policy 6 International assumptions 7 Economic growth 7 Inflation 8 Exchange rates 8 External sector 9 Forecast summary

Data and charts 10 Annual data and forecast 11 Annual trends charts 12 Monthly trends charts 13 Comparative economic indicators

Summary 13 Basic data 15 Political structure

Recent analysis Politics 17 Forecast updates Economy 19 Forecast updates 20 Analysis

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 2

Briefing sheet Editor: Mark Keller Forecast Closing Date: November 8, 2018 Political and economic outlook A planned constitutional reform will limit the power of the new president, Miguel DíazCanel, who took office in April 2018. The reform will decentralise power from the executive, raising risks to political stability as different figures compete for authority. The revolutionary leader and former president, Raúl Castro (200818), will retain control as head of the ruling party and will remain an influential figure among the armed forces. The military will remain an important political and economic powerbroker. US-Cuba relations are likely to remain cool as long as Donald Trump remains the US president, although warmer relations are likely later in the forecast period. Ties with the EU will improve under a new bilateral co-operation accord. Moves towards economic liberalisation will be cautious. The government will entrench existing reforms rather than introduce major new ones. The non-state sector will expand, but The Economist Intelligence Unit expects the government to limit its pace of growth. Cuts in Venezuelan aid, lower exports and austerity measures will keep GDP growth low in the first half of the forecast period. It will pick up notably in 2021-23, helped by better access to financing, growth in tourism and progress on economic reforms. The authorities will unify the Cuban and convertible pesos in preparation for the eventual removal of the convertible peso from circulation. The process is unlikely to begin before 2021. We expect any transition to be gradual. Key indicators 2018a 2019b 2020b 2021b 2022b 2023b Real GDP growth (%) 0.9 0.8 0.4 3.5 3.8 3.9 Consumer price inflation (av; %)c 6.9 5.4 4.6 5.1 6.7 6.4 Government balance (% of GDP) -8.9 -6.7 -5.4 -4.2 -3.1 -2.4 Current-account balance (% of GDP) 1.0 1.7 1.6 0.2 -1.1 -1.8 Unemployment rate (%)d 2.8 3.1 3.4 3.7 3.9 4.0 Exchange rate CUC:US$ (av)e 1.00 1.00 1.00 1.00 1.00 1.00 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Economist Intelligence Unit estimate, based on official data. d The official definition of unemployment includes only those laid off from employment who are registered as seeking work. e Official rate.

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 3

Key changes since October 1st The national statistics office released data on 2017 growth, which came in above our estimate, at 1.8%. Recovery from Hurricane Irma drove the result, with higher government consumption on the demand side, and construction growth on the supply side. In the light of the new data, we have adjusted our forecasts for 2018-20 downwards, given the higher base of comparison and the fact that much of the benefit from reconstruction will have taken place in 2017; our forecasts are now in line with those of the government. The government also released current-account data for 2015 (although not a breakdown by component), which also came in below our estimates. We have adjusted our subsequent forecasts accordingly. The month ahead December TBD: Government to announce 2018 growth estimate: The minister of economy usually presents a growth estimate for the year at a December meeting of the council of ministers. The government forecasts that growth this year will come in at around 1%; we estimate growth of 0.9%. TBD: Constitutional reform responds to popular consultation: Public consultation on constitutional reform ended on November 15th. The commission will now respond to public input to draft a new version, before submitting the reform to a public referendum early next year. Major risks to our forecast Scenarios, Q3 2018 Probability Impact Intensity Economic crisis in Venezuela results in a sudden collapse of oil supply and High High 16 demand for Cuban service exports Weather-related shocks cause extensive damage to infrastructure High High 16 Eventual currency reform creates monetary instability Very High Moderate 15 An ageing population, net emigration and "brain drain" add to skilled-labour High Moderate 12 shortages Businesses suffer losses due to theft High Moderate 12 Note: Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential developments that might substantially change the business operating environment over the coming two years. Risk intensity is a product of probability and impact, on a 25-point scale. Source: The Economist Intelligence Unit.

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 4 Outlook for 2019-23 Political stability The political scene will be dominated by a transition to a new generation of leadership, coinciding with ongoing but cautious economic reform. Restraint in the reform process is evident in the proposed constitutional reform, introduced in late July. A period of public consultation on the constitutional reform will conclude in mid-November. Following this, the reform will be submitted for ratification by public referendum in early 2019. The Economist Intelligence Unit expects it to pass. Planned constitutional changes will have the effect of dividing power between many, varied stakeholders, rather than centralising it in the hands of a single, powerful leader, as has been the case since the 1959 revolution. The reform will decentralise power away from the presidential office by re-introducing the role of prime minister (which was eliminated in 1976). The prime minister, chosen by the president, will lead the cabinet in the day-to-day running of the country, while the role of president will be more ceremonial. This will limit the power of the new president, Miguel DíazCanel, who was chosen in April to replace his predecessor, the revolutionary leader Raúl Castro (200818). Mr Castro will remain influential as head of the ruling Partido Comunista de Cuba (PCC) and the Politburo, Cuba's highest decision-making body, until the next party congress in 2021. Mr Castro retains significant influence within the armed forces, an important political and economic powerbroker in Cuba. With more disparate sources of power, leaders may vie for authority, raising risks to stability. Despite the political changes, economic and social reforms are likely to be only gradual, given the government's wariness of the destabilising effects of liberalisation. Social protest could rise if economic reforms fail to generate more opportunities and better living standards, or if they create higher income inequality. The government will undertake token social liberalisation efforts: the new constitution is likely to legalise samesex marriage, and Mr DíazCanel has encouraged a more critical press. Nevertheless, the regime will maintain tight control over institutions; the security apparatus will prevent major unrest. Corruption is uncommon at senior levels but rife further down the public-sector ranks, fuelled by low incomes, consumer goods shortages and institutional weaknesses. Crime rates will remain low by regional standards.

Election watch Although there may be small changes to the political system following the constitutional reform, Cuba’s oneparty system will largely remain unchanged. National and provincial elections are held every five years and were last held in March 2018. Candidates are nominated through municipal councils (elected every twoandahalf years) and by members of official “mass organisations” (including labour unions, and organisations for students, women and farmers), although the final decision rests with the PCC's candidates commission. Candidates are not required to be PCC members, but most are. Although only one candidate is nominated for each seat in National Assembly elections, nominees must be approved by a majority of voters. The National Assembly chooses the president who, under the proposed constitutional reform, will be limited to two five- year terms; direct election of the president has not been proposed.

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 5 International relations Relations with the US have cooled significantly during the presidency of Donald Trump. US trade sanctions in place since 1960 (which can only be removed by the US Congress), and claims for compensation for expropriations (by US firms) and embargo-related damages (by Cuba), will continue to complicate the relationship. Given weak popular support for the embargo in the US, our baseline forecast assumes that ideological hostility between the two countries will slowly diminish, especially under a new Cuban leader, enabling a lifting of sanctions later in the forecast period. However, given the mutability of US policy under Mr Trump, risks to this forecast are high, and an end to sanctions may be delayed until the US president leaves office. Ties with the EU will improve following the formal reinstatement of relations in November 2017, and the EU will remain an important investment and lending partner. Dependence on Venezuela (for subsidised oil, in exchange for medical services) will diminish as Cuba diversifies sources, but a reduction in subsidised oil supplies, related to Venezuela's economic crisis, will damage Cuba's economy. Cuba is expanding investment and commercial ties with other nations, including China, Russia, Japan and Algeria.

Policy trends Policymaking is forged in line with "guidelines" issued at PCC congresses held every five years. The most recent guidelines, from the April 2016 congress, differ little from those unveiled at the 2011 congress, which introduced liberalising reforms to create more efficient markets and improve productivity, and which suffered from weak implementation. The policies have fostered the emergence of a non-state sector and a greater openness to foreign investment. More liberalising measures are possible at the next party congress in 2021 (when Mr Castro will step down as PCC chairman), but the transformation of Cuba's communist economy into one that is mixed will be gradual, and will not result in full-blown capitalism in the forecast period. We expect further contraction of the public sector, growth of private-sector activity and expansion of the tax base. There will be some price liberalisation later in the forecast period, but state intervention will continue in most areas. Risks to economic liberalisation are substantial, given the state's half-hearted commitment to independent enterprise, resistance from hardliners to reforms and Cuba’s lack of experience with financial and business regulation. Official unemployment was low in 2017, at 2.6% (latest available figure), underscoring caution in reducing the state payroll. The non-state sector appears to be absorbing workers dismissed by the state (almost a third of workers are employed in the private sector), but private-sector expansion will be slow. In the short term, non-state jobs will remain concentrated in restaurants, hotels and other tourism services, but will eventually expand into construction, business services and other sectors. Foreign investment will rise in line with government aims, but will fall short of the government's goal of US$2.5bn a year until later in the forecast period.

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 6 Fiscal policy Revenue and spending will fall as a share of GDP in 2019-23 as the public sector shrinks. From an estimated 8.9% of GDP in 2018, we forecast that the fiscal deficit will narrow somewhat, to 6.7% of GDP in 2019, as the country largely completes its recovery from Hurricane Irma, which struck in late 2017. The deficit will remain large, but will gradually narrow over the remainder of the forecast period, reaching 2.4% of GDP by 2023. The narrowing will be driven by fiscal consolidation, as well as tax increases targeting the private sector and foreign businesses. Up to 70% of the deficit is reportedly financed by bonds purchased by state-owned banks (drawing on savings by citizens and state-owned companies), with the remainder monetised. We expect Cuba to remain barred from membership in multilateral institutions such as the World Bank and Inter-American Development Bank as long as US sanctions remain in place, given US veto power in both institutions. However, lending from other multilateral institutions, such as the Development Bank of Latin America (CAF) and the Central American Bank for Economic Integration, remains possible, particularly for investment projects. We also expect some renewed bilateral lending from the EU following a debt rescheduling agreement with the Paris Club, particularly via "debt-for-equity" agreements whereby debt is cancelled in exchange for stakes in future investment projects by firms from creditor countries.

Monetary policy The large informal economy and different markets with divergent prices and exchange rates complicate monetary management. The authorities will seek to balance demand and supply of the two currencies, the convertible peso (CUC, set at CUC1:US$1) and the Cuban peso (CUP, officially CUP1:CUC1, but unofficially set at CUP24:CUC1), in preparation for elimination of the CUC. Although no official timeline has been revealed, the authorities have hinted that they will soon present a plan to unify the currencies. However, given the constitutional reform process, we now do not foresee a unification of the two currencies beginning until early 2021. Should the authorities withdraw the CUC earlier than we currently forecast, they would address price instability with heterodox measures, including controls on foreign exchange, prices, wages and credit. After the initial shock, authorities would shift towards indirect measures, using increasingly market-led financial institutions and instruments.

International assumptions 2018 2019 2020 2021 2022 2023 Economic growth (%) US GDP 2.9 2.2 1.3 1.7 2.0 1.9 OECD GDP 2.3 2.0 1.5 1.9 2.0 1.9 World GDP 3.0 2.7 2.5 2.7 2.8 2.7 World trade 4.0 3.7 3.0 4.0 3.7 3.9 Inflation indicators (% unless otherwise indicated) US CPI 2.6 2.4 1.6 1.8 1.7 1.8 OECD CPI 2.5 2.5 2.0 2.0 2.0 2.0 Manufactures (measured in US$) 6.3 3.6 3.0 2.4 3.6 2.9 Oil (Brent; US$/b) 75.2 76.8 70.8 74.8 77.4 76.1 Non-oil commodities (measured in US$) 2.4 -0.1 2.6 1.6 1.3 0.9 Financial variables US$ 3-month commercial paper rate (av; %) 2.1 2.9 2.5 2.6 2.9 3.2 Official exchange rate CUC:US$ (av) 1.00 1.00 1.00 1.00 1.00 1.00 Exchange rate US$:€ (av) 1.18 1.19 1.21 1.21 1.24 1.24

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 7 Economic growth The economy will remain under strain in the short term, owing to stilllow prices for Cuba’s commodity exports (mostly nickel and sugar), reduced aid and oil shipments from Venezuela, the re-imposition of commercial and tourism restrictions by the US, and continued limitations on access to foreign exchange (with the government prioritising repayment of external debt over import spending). Following the release of 2017 real GDP data, which showed a stronger than expected outturn of 1.8%, we have reduced our 2018 estimate for growth to 0.9%. Growth will slow to 0.8% in 2019 and 0.4% in 2020 as tourism grows at a more modest pace, reflecting a slowdown in arrivals from the US; continued hard currency shortages will also affect domestic economic activity. A forecast economic slowdown in the US in 2020 will dampen growth in remittance flows from Cuban workers there and reduce worldwide tourism growth (especially from Canada, Cuba's main source of tourists). GDP growth will accelerate from 2021, assuming a lifting of US sanctions that year, which will spur trade, tourism and investment. We forecast average annual real GDP growth of 3.7% in 2021-23. Our forecasts assume that economic reforms will slowly advance, access to international finance and trade will improve, and state sector rationalisation will generate efficiency gains. The complete and sudden elimination of subsidies from Venezuela is the biggest risk to Cuba's economic performance, but we expect that Cuba will further diversify trade and investment partners, and possibly accelerate economic reforms, in order to ease the eventual impact of the ending of Venezuelan subsidies. Private consumption will be supported by remittances and the transfer of activity from the state to the private sector. Gradual economic liberalisation will encourage private investment. Remittances will be the chief source of financing for small businesses. However, the banking system will expand, assuming a larger role in financing investment and, partly, consumption. Economic growth % 2018a 2019b 2020b 2021b 2022b 2023b GDP 0.9 0.8 0.4 3.5 3.8 3.9 Private consumption 1.1 0.9 0.5 4.9 5.3 5.2 Government consumption -1.8 -2.6 -0.9 4.4 2.6 3.9 Gross fixed investment 3.2 1.1 1.4 6.3 9.1 8.2 Exports of goods & services -4.6 -0.2 -2.0 6.6 5.3 4.2 Imports of goods & services -6.1 -4.5 -2.6 17.0 14.1 12.5 Domestic demand 0.7 0.1 0.3 5.0 5.3 5.4 Agriculture -5.0 1.1 2.8 3.8 4.5 3.7 Industry 0.5 0.2 0.2 4.7 5.1 4.4 Services 1.3 1.0 0.3 3.2 3.5 3.8 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts.

Inflation In the absence of official data, we estimate that inflation will reach 5.3% at end-2018, before slowing to 5% at end-2019 and 4.6% at end-2020, driven by lower domestic demand. Inflation will increase to an average of around 6% per year in 2021-23, assuming higher levels of domestic demand amid currency unification and the lifting of US sanctions. The effect of currency unification is difficult to forecast, as there are different price sets in various markets, with some basic goods substantially out of line with market values. The Banco Central de Cuba (the central bank) will use indirect instruments to curb inflation, while the Ministry of Finance will contain administered prices and wages. Concerns about the inflationary impact of currency unification and price liberalisation will prompt the authorities to implement the policy over a period of many years, but the effect should be partly cushioned by firmer competition and expanded output.

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 8 Exchange rates The CUP is used for salaries and locally produced goods, and the CUC is used in hard-currency retail outlets, for imports and by tourists. The CUC is fixed at CUC1:US$1. There are nine exchange rates between the two currencies, the two principal ones being the “official” rate of CUP1:CUC1 used in the state sector and an unofficial but legal rate of CUP24:CUC1 used for personal transactions and in the nonstate sector (the “Cadeca” rate). Some sectors of the economy (such as the Mariel Special Development Zone—a manufacturing and port complex—and agricultural sales to the tourism sector) use intermediate rates of CUP10:CUC1 or CUP11:CUC1. The system is distortionary, making it difficult to measure the economy’s size or calculate costs and prices. The authorities intend to unify the two currencies, and are preparing by building up international reserves. There is no timetable for unification, and we do not expect the process to be undertaken until early 2021, when a lifting of US sanctions will ease access to external finance. From 2021 we believe that there will be a gradual strengthening of the Cadeca exchange rate (although officially this will be a devaluation of the CUP1:CUC1:US$1 rate), settling around CUP15:CUC1, after which the CUC will be removed from circulation. If the process provokes extreme instability, it could be prolonged.

External sector The current-account surplus will increase from an estimated 1% of GDP in 2018, to 1.7% of GDP in 2019. This will be due to a narrower trade deficit as the sugar harvest recovers from its 2018 collapse, supporting export revenue, and as the import bill declines alongside reduced need to import construction materials following the recovery from Hurricane Irma. However, the current- account surplus will slowly dwindle over the remainder of the forecast period, before shifting into deficit in 2022. As a percentage of GDP the trade deficit will narrow in 2018-20, largely owing to compression of the import bill in the light of shortages of foreign currency, before expanding in 2021-23 amid a projected lifting of US sanctions. The deterioration of the current-account surplus will largely be due to a narrowing of the services surplus—despite rising tourism income—as a result of dwindling medical services sales to Venezuela. The primary income deficit will widen, driven by profit repatriation by foreign companies and debt interest payments, but it will be more than offset by a growing secondary income surplus, reflecting strong remittance inflows. The shift into current-account deficit will coincide with gradually increasing foreign investment and official lending, but even so, we project a decline in reserves cover. The authorities do not publish data on international reserves; we estimate an end-2018 level of US$11bn (10.7 months of import cover). Reserves coverage will decrease as currency unification gets under way, the cost of servicing rescheduled debt increases and import levels rise, but it will remain above six months.

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 9 Forecast summary Forecast summary (% unless otherwise indicated) 2018a 2019b 2020b 2021b 2022b 2023b Real GDP growth 0.9 0.8 0.4 3.5 3.8 3.9 Industrial production growth 0.5 0.2 0.2 4.7 5.1 4.4 Gross agricultural production growth -5.0 1.1 2.8 3.8 4.5 3.7 Unemployment rate (end-period) 2.8 3.1 3.4 3.7 3.9 4.0 Consumer price inflation (av) 6.9 5.4 4.6 5.1 6.7 6.4 Consumer price inflation (end-period) 5.3 5.0 4.6 5.5 7.1 6.3 General government balance (% of GDP) -8.9 -6.7 -5.4 -4.2 -3.1 -2.4 Exports of goods fob (US$ bn) 2.2 2.3 2.4 2.6 3.0 3.3 Imports of goods fob (US$ bn) 11.3 11.0 10.8 13.0 15.3 17.5 Current-account balance (US$ bn) 1.1 1.9 1.8 0.3 -1.6 -2.8 Current-account balance (% of GDP) 1.0 1.7 1.6 0.2 -1.1 -1.8 External debt (year-end; US$ bn) 29.8 29.5 29.2 29.9 30.6 30.7 CUC:US$ (av)c 1.00 1.00 1.00 1.00 1.00 1.00 CUC:US$ (end-period)c 1.00 1.00 1.00 1.00 1.00 1.00 CUP:CUCd 24.00 24.00 24.00 22.70 19.01 15.92 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Official rate. d Cadeca rate.

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 10 Data and charts Annual data and forecast

2014a 2015a 2016a 2017b 2018b 2019c 2020c GDP Nominal GDP (US$ m) 80,656 87,133 91,370 96,851a 104,889 110,925 116,206 Nominal GDP (CUC m) 80,656 87,133 91,370 96,851a 104,889 110,925 116,206 Real GDP growth (%) 1.0 4.4 0.5 1.8a 0.9 0.8 0.4 Expenditure on GDP (% real change) Private consumption 4.6 7.4 4.1 1.3a 1.1 0.9 0.5 Government consumption -1.0 0.0 -0.2 2.2a -1.8 -2.6 -0.9 Gross fixed investment -4.9 18.3 7.5 1.3a 3.2 1.1 1.4 Exports of goods & services -2.8 -0.1 -19.7 0.0a -4.6 -0.2 -2.0 Imports of goods & services -1.5 10.1 -10.6 -1.6a -6.1 -4.5 -2.6 Origin of GDP (% real change) Agriculture 2.2 2.5 5.8 -1.4a -5.0 1.1 2.8 Industry -2.9 8.8 -1.9 2.2a 0.5 0.2 0.2 Services 2.3 3.2 1.2 2.1a 1.3 1.0 0.3 Population and income Population (m) 11.4 11.5 11.5b 11.5 11.4 11.4 11.4 GDP per head (US$ at PPP) 11,707b 12,334b 12,517b 13,003 13,298 13,661 14,051 Recorded unemployment (av; %) 2.7 2.4 2.4 2.6a 2.8 3.1 3.4 Fiscal indicators (% of GDP) Public-sector revenue 58.8 57.4 56.5 57.4a 53.6 52.8 52.1 Public-sector expenditure 60.8 63.4 63.3 66.0a 62.5 59.5 57.5 Public-sector balance -2.0 -6.0 -6.8 -8.6a -8.9 -6.7 -5.4 Net public debt 38.5b 40.3b 42.7b 46.9 49.3 50.9 52.2 Prices and financial indicators CUC:US$ (official rate; end-period) 1.00 1.00 1.00 1.00 1.00 1.00 1.00 CUP:CUC (secondary rate) 24.00 24.00 24.00 24.00 24.00 24.00 24.00 Consumer prices (av; %) 5.3b 4.6b 4.5b 5.5 6.9 5.4 4.6 Stock of money M2 (% change) 21.1 9.3 13.1 3.9 4.4 3.3 2.6 Current account (US$ m) Trade balance -7,952 -8,173 -7,744b -8,492 -9,128 -8,604 -8,342 Goods: exports fob 5,149 3,572 2,535b 2,562 2,193 2,347 2,441 Goods: imports fob -13,101 -11,745 -10,279b -11,054 -11,321 -10,951 -10,783 Services balance 11,899 10,523 9,857b 9,567 9,040 8,820 8,444 Primary income balance -1,054b -1,350b -1,399b -1,242 -1,218 -1,191 -1,190 Secondary income balance 219b 436b 1,254b 1,788 2,371 2,894 2,901 Current-account balance 3,112 1,436 1,968b 1,622 1,065 1,918 1,814 External debt (US$ m) Debt stock 29,913b 30,327b 29,886b 30,055 29,841 29,457 29,230 Debt service paid 1,540b 1,826b 4,366b 1,817 2,003 1,954 2,038 Principal repayments 650b 964b 3,524b 954 1,139 1,082 1,148 Interest 890b 862b 842b 863 864 873 890 International reserves (US$ m) Total international reserves 11,103b 11,803b 12,003b 11,353 10,953 10,553 9,753 a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. Source: IMF, International Financial Statistics.

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 11 Annual trends charts

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 12 Monthly trends charts

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 13 Comparative economic indicators

Basic data Land area 110,000 sq km: mainland 105,000 sq km; Isle of Youth (Isla de la Juventud) 2,000 sq km; keys 3,000 sq km Population 11.2m (December 2015)

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 14 Climate Subtropical; average temperature 25°C, average relative humidity 81% Weather in Havana (altitude 24 metres) Hottest month, August, 2432°C (average monthly minimum); coldest months, January and February, 1827°C; driest months, January and February, 38 mm average rainfall; wettest month, September, 183 mm average rainfall Weights and measures Metric system; also old Spanish units. Sugar is often measured in Spanish tonnes (2,271 lbs), and there is a Cuban quintal of 101.4 lbs, made up of 4 arrobas. For area measurement, one Cuban caballería equals 13.4 ha or 33.16 acres Currency There are currently two domestic currencies: the Cuban peso (CUP), in which prices and wages are denominated within the domestic economy, and the convertible peso (CUC), used in “hard currency” retail outlets, and for imports and tourist expenditure. In both currencies, one peso is equal to 100 centavos. The official exchange rates, used in national income and fiscal accounting aggregates, are CUP1:CUC1 and CUC1:US$1. There are nine CUP:CUC exchange rates, the most common being the unofficial but legal rate (known as the "Cadeca" rate) of CUP24:CUC1, used mainly for personal transactions. The government plans to eliminate the CUC, but has not given a date for the change, or the proposed value of the Cuban peso. As part of the improvement in relations with the US, in March 2016 Cuba agreed to end a 10% commission charged for the exchange of US dollars within Cuba (although this has not yet come into force); there is no such charge for the conversion of other currencies into convertible pesos. Since 2002 euros have been accepted in some tourist resorts Time 4 hours behind GMT (5 hours behind GMT in November-March) Public holidays January 1st (Liberation Day) and 2nd (New Year's Day); March 30th (Good Friday); May 1st (Labour Day); July 25th-27th (Anniversary of the Revolution); October 10th (War of Independence); December 25th (Christmas Day); December 31st (New Year’s Eve)

Political structure Official name Republic of Cuba Form of government Centralised political system, with close identification between the Partido Comunista de Cuba (PCC) and the state Head of state The president, Miguel DíazCanel, took over from Raúl Castro on April 19th 2018. The executive The Council of Ministers is the highest executive body; its Executive Committee is composed of the president, the first vice-president and the vice-presidents of the Council of Ministers National legislature National Assembly of People’s Power; 612 members elected by direct ballot. The full Assembly meets twice a year, and extraordinary sessions can be called. National Assembly working commissions operate throughout the year Legal system A People’s Supreme Court oversees a system of regional tribunals; the Supreme Court is accountable to the National Assembly National elections

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 16 Provincial and national assembly elections were last held in March 2018. A new president was chosen by the National Assembly in April. National government The organs of the state and the PCC are closely entwined, and power devolves principally from the Executive Committee of the Council of Ministers Main political organisation The Partido Comunista de Cuba (PCC) is the only legal political party. Official “mass organisations” (including labour unions, and organisations for students, women and farmers) are a feature of the Cuban political system President of the National Assembly: Juan Esteban Lazo Hernández President of the councils of state & ministers: Miguel DíazCanel Bermúdez First vicepresident: Salvador Valdés Mesa Secretary of the Council of Ministers: Homero Acosta Álvarez Key ministers Agriculture: Gustavo Rodríguez Rollero Communications: Jorge Luis Perdomo Di-Lella Culture: Alpidio Alonso Grau Domestic trade: Betsy Díaz Velázquez Economy & planning: Alejandro Gil Fernández Education: Ena Elsa Velázquez Cobiella Energy & mines: Raúl García Barreiros Finance & prices: Lina Pedraza Rodríguez Foreign relations: Bruno Rodríguez Parrilla Foreign trade & investment: Rodrigo Malmierca Díaz Higher education: José Ramón Saborido Loidi Industry: Alfredo López Valdés Interior: Julio César Gandarilla Bermejo Justice: Oscar Silveira Martínez Labour & social security: Margarita González Fernández Public health: José Ángel Portal Miranda Revolutionary armed forces: Leopoldo Cintra Frías Science, technology & the environment: Elba Rosa Pérez Montoya Tourism: Manuel Marrero Cruz Transport: Adel Yzquierdo Rodríguez Central bank president Irma Martínez Castrillon

Generated on November 17th 2018 The following articles have been written in response to events occurring since our most recent forecast was released, and indicate how we expect these events to affect our next forecast. Politics Forecast updates DíazCanel visits allies in Russia and Asia November 13, 2018: International relations Event The president, Miguel DíazCanel, completed an 11day trip abroad in early November, during which he visited allies in Russia, North Korea, China, Vietnam and Laos. Analysis The trip was Mr DíazCanel's second trip abroad since taking office in April (his first was to the UN General Assembly in September). The trip comes as Cuba seeks to shore up support (either diplomatic or financial) from its former Cold War allies in order to decrease dependence on Venezuela as material support from that country decreases amid economic collapse. Mr DíazCanel met with the heads of state of the various countries in question. Russia, Cuba's former Cold War-era patron, has re-emerged as an important partner for Cuba in recent years, particularly in military matters in which the Russians are able to provide replacement parts for Soviet military and industrial equipment. During the visit, the Russian government committed to trade agreements totalling US$260m, and also to extend Cuba a US$50m loan to purchase military equipment (including replacement parts). Both China and Vietnam have emerged as important trading partners for Cuba. China has recently displaced Venezuela as Cuba's primary trading partner, with bilateral trade of US$2bn in 2017, and Vietnam has emerged as an important source of imports, with bilateral trade of US$224m in 2017. Although few concrete agreements were made in China (the two countries agreed to increase co- operation in trade, energy, agriculture and pharmaceuticals), in Vietnam Mr DíazCanel secured an important trade agreement that will seek to increase bilateral trade to US$500m by 2022. Both China and Vietnam also agreed to support Cuba in its ongoing economic liberalisation, a process that both countries have undertaken in recent years with great success. Visits to North Korea and Laos were more ideological than economic. In North Korea Mr Díaz Canel met with the North Korean president, Kim Jung-un, and the two vowed to maintain diplomatic relations of the highest level. The two also predictably denounced US sanctions (which affect both countries). In Laos, another ideological ally, Mr DíazCanel signed agreements to increase co-operation between the two countries' central banks and also to increase co- operation in sports. However, given the relative poverty of North Korea, Laos and Cuba, no significant trade or investment agreements were signed. Impact on the forecast The trip reinforces our view that Cuba will look to rekindle ties with former Cold War allies in the wake of Venezuela's economic collapse and reduced ability to provide aid.

Co-operation increases with Venezuela and ends with Brazil November 15, 2018: International relations Event Cuba has sent an additional 500 medical and other professionals to Venezuela this week, despite that country's deepening crisis. The government also announced that it would pull its staff from Brazil's Mais Médicos (more doctors) programme, following threats from the Brazilian president elect, Jair Bolsonaro, to cancel Cuba's participation in it. Analysis The additional 500 staff sent to Venezuela will join the almost 22,000 Cuban specialists already in Venezuela, which include medical staff, sports trainers, and military and intelligence officials. In exchange, Venezuela sends Cuba around 55,000 barrels of oil per day, and provides other cash assistance estimated to total around US$5bn a year. This makes the sale of professional services Cuba's number one export, exceeding even tourism. The sending of additional personnel to Venezuela is evidence of the Cuban government's commitment to supporting the Venezuelan government. Although payments to Cuba for the personnel have been delayed, they have not been withdrawn. It has also been reported that, given production shortfalls at home, Venezuela has bought oil on the global market to continue to meet its obligations to Cuba. Cuban military and intelligence officials form an important pillar of support for the Venezuelan president, Nicolás Maduro. Their backing has helped to keep him in power, despite a chaotic economic and political situation. While renewing its commitment to Venezuela, the Cuban government announced that it would withdraw its medical staff from Brazil, where around 8,300 Cuban medical professionals currently work, mostly in remote areas. Mr Bolsonaro had demanded that Cuban staff receive the full salary that Brazil pays the Cuban government for their services (US$3,500/month) and that Cuban staff should be able to bring their families. He also insisted that Cuban doctors take an exam to revalidate their medical licenses in Brazil, as other foreign doctors in the programme must do. Cuba opted to withdraw its staff instead, calling the demands "insulting". Mr Bolsonaro offered political asylum to Cuban doctors who wish to stay, and it is likely that many will accept the offer. The withdrawal from Mais Médicos will come with a significant economic cost for Cuba, given that income from Brazil comes to around US$400m (0.4% of estimated 2018 GDP) per year. Impact on the forecast We expect Cuba to continue to work to support the Venezuelan government, given its dependence on Venezuelan largesse. In the light of the withdrawal from Brazil, we will make downward adjustments to our current-account surplus forecast in 2019-20.

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 19 Economy Forecast updates Annual trade fair promotes investment opportunities November 8, 2018: External sector Event The Feria Internacional de La Habana (FIHAV 2018, an annual international trade fair) took place in Havana, the capital, from October 29th-November 2nd. The event attracted over 3,000 delegates from a reported 65 countries looking to do business with Cuba. Analysis The fair was the second to be held since the US administration of Donald Trump announced that it would renew restrictions on doing business with Cuba. Like FIHAV 2017, this year's fair was less well attended than it was in 2016, during the brief rapprochement initiated by former US president, Barack Obama (2009-17) in 2014-16, when firms were attracted by business opportunities and the promise of the imminent lifting of US sanctions. Also continuing a trend seen last year, the number of US firms participating in the conference was down sharply, from several dozen in 2016 and 16 in 2017 to just eight this year. Spain, Cuba's third-largest trading partner and the country with the most firms involved in joint ventures with the Cuban state, continued to be the biggest exhibitor. Companies from Russia and China also made a strong showing, although representatives from these countries said that the fair was more of a formality, as the Cuban government prefers to sign agreements with its allies at a state-to-state level, rather than dealing with private companies. The fair hosted 350 Cuban state enterprises, with 120 of these exhibiting goods and services for export. However, Cuba's fledgling private sector was nowhere to be seen: foreign firms are unable to invest in the island's private sector, and Cuban entrepreneurs are unable to import and export from foreign firms. Cuba's minister for trade and investment, Rodrigo Malmierca, said that foreign direct investment (FDI) in Cuba is growing but remains below the target of US$2.5bn a year. From October 2017 to this year, he said, foreign firms have promised US$1.5bn of future investment, although The Economist Intelligence Unit does not consider promises of investment in its annual estimates for FDI, given the cumbersome nature of investing in Cuba. Mr Malmierca also presented Cuba's 2018/19 Portfolio of Foreign Investment Opportunities, containing 525 projects for a total of US$11.6bn in FDI. Impact on the forecast We expect FDI into Cuba to continue to grow, although to consistently miss the government's US$2.5bn target, largely given the complicated nature of investing Cuba and the country's suboptimal business environment. Our forecast therefore remains unchanged.

Bolsonaro threatens to cancel medical co-operation with Cuba November 14, 2018: External sector Event The Brazilian president-elect, Jair Bolsonaro, has warned that he may break diplomatic relations with Cuba and abolish the Mais Médicos (more doctors) programme with the country. Analysis Under Mais Médicos, signed in 2013 by the government of Dilma Rousseff (201116), the Cuban government provides Brazil with 11,420 medical professionals to work in remote areas of Brazil not normally served by doctors. Brazil pays Cuba US$3,500/month per doctor, of which the Cuban government keeps around 75%, with the rest going to the doctor. The programme is therefore an important source of hard currency for the Cuban government, bringing in approximately US$400m a year. The sale of professional services (mainly doctors) is Cuba's main export, and generates more foreign earnings than tourism. Mr Bolsonaro has said that he would like the programme to continue, but has criticised the treatment of Cuban doctors in Brazil. He has said that the doctors must receive 100% of the money Brazil pays for them, and said that he believes that Cuban doctors should be able to bring their families with them when working in Brazil. Both conditions will be anathema to Cuba. The first would damage the profitability of the programme, and the second would increase the likelihood of medical professionals defecting to Brazil. However, a scenario in which Cuba compromises by making it easier for family members to visit, as well as increasing the wages of doctors in Brazil, is plausible. Such a scenario would allow Mr Bolsonaro to claim victory. Still, given Mr Bolsonaro's avowedly anti-communist views, the programme could also be cancelled outright. Mr Bolsonaro has been highly critical of Cuba's human rights record, and has also threatened to cancel diplomatic relations or other agreements signed by the governments led by the left-wing Partido dos Trabalhadores in 2003-16. The decision to cut relations would put Brazil more in alignment with the US than with other Latin American countries, the latter of which have supported a policy of engagement with the Cuban government. Impact on the forecast We currently consider it unlikely that Brazil would cut diplomatic relations with Cuba over the forecast period, but the Mais Médicos programme is likely to be subject to revision. Although outright cancellation would be an extreme move, the conditions of payment are likely to be revised. This would have a negative effect on Cuba's balance of payments, but we will await a final decision before making adjustments to our forecasts.

Analysis Caribbean continues to lag in Ease of Doing Business ranking November 13, 2018 The latest Ease of Doing Business report, published annually by the World Bank, shows Caribbean countries continuing to perform relatively poorly. The highest-ranked country in the region, Puerto Rico, placed at 64th with Jamaica, the second-highest, placing 75th. At the other end, Haiti placed among the ten worst countries in the world. Most Caribbean countries registered only middling gains in their scores from last year, and some countries—such as Suriname or Guyana—actually saw their scores decline. Within the Caribbean, Puerto Rico is the highest-ranked economy, although it is a significant number of places behind the US (which is in eighth place globally), of which is it a territory. Although Puerto Rico benefits from its association with the US through the US's legal system (giving it high scores for Getting Credit and Resolving Insolvency), it scored more poorly for Paying Taxes (where it ranks 162nd out of 190 countries in the world), and Registering Property (159th).

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 21 Jamaica is the largest independent country in the Caribbean to score reasonably well, ranked 75th in the world. However, this represents a five-place drop from last year's 2018 report, when it was ranked 70th. This year Jamaica scored particularly poorly in the Paying Taxes category (123rd), hindered by an onerous and bureaucratic process for registering and making tax payments. Jamaica also scored badly for Getting Electricity, ranked 115th in the world. Electricity supply is patchy across Jamaica, with many rural areas having limited access and frequent blackouts common even in main urban areas. Reliability of electricity supply is a key prerequisite for most businesses, and Jamaica's supply problems act as a deterrent to potential investors. St Lucia, the Dominican Republic, and Trinidad and Tobago also ranked relatively well overall, at 93rd, 102nd and 105th respectively. Despite being one of the largest economies in the region and attracting rising foreign direct investment, the Dominican Republic's score dropped three places this year, from 99th in the 2018 report. Its score for Enforcing Contracts is particularly low, at 149th, indicating that investors may face an uncertain investment environment, especially when it comes to judicial recourse. Trinidad and Tobago has also dropped three places in the rankings with low scores in several categories, such as Enforcing Contracts (174th), Paying Taxes (166th) and Registering Property (158th). As the economy is heavily dependent on its energy sector, maintaining foreign investment into the sector will be key to retaining high tax revenues from hydrocarbons production. Challenges from the Bahamas The Bahamas' ranking proved controversial: it was placed 118th in the 2019 report, up only one position from the previous year. Immediately after the World Bank's 2019 report was released, the chairman of the country's chamber of commerce, Michael Maura, released a statement claiming that World Bank officials had misrepresented the extent of changes to the rankings that should have been incorporated into the 2019 report. He claimed that World Bank officials had said that they would reduce the importing time metric used as a measurement in the Trading Across Borders category by nearly half, which could have had a positive impact on the country's overall ranking. However, in the event, the Bahamas' Trading Across Borders score came in at 161st, down from 157th in 2018, a ranking that Mr Maura claimed did not reflect improvements made to import procedures at the Nassau Container Port. Such complaints reflect the importance of the Ease of Doing Business index as a globally comparative tool for potential investors; Mr Maura warned that investors might not recognise improvements that have been made in recent years. Low scorers dominate in the ranking Haiti remained the lowest scorer in the Caribbean, ranked 182nd out of 190 countries, one place down from 2018. This reflects the economy's major structural weaknesses, including poor infrastructure, particularly in terms of utility provision and transport networks. In addition, bureaucratic processes are lengthy and often costly, particularly for foreign investors looking to set up a business. Reflecting these weaknesses, Haiti's worst score is for Starting a Business, scoring 189th. Ongoing political instability and the after-effects of several major natural disasters, most recently Hurricane Matthew in 2016, have hindered the efforts of successive governments to improve business processes and streamline procedures. The current president of Haiti, Jovenel Moïse, looks unlikely to shift this dynamic, with public protests having already derailed several of his efforts to introduce reforms that proved unpopular with the electorate. Barbados' score improved three places in the 2019 index, rising to 129th. This is surprising given the island's current economic turmoil, with a rising fiscal deficit and falling revenues leading the new government of Mia Mottley to trigger debt restructuring negotiations with creditors in mid- 2018. As a result, Barbados is now in selective default. Barbados' rising score in spite of these challenges reflects the efforts made by Ms Mottley and her predecessor, Freundel Stuart, to increase the country's investment attractiveness as a means of stemming outflow of funds and attracting more investment. Although this strategy has as yet had a limited impact on levels of real GDP growth, it has achieved some progress in terms of

Country Report November 2018 www.eiu.com © Economist Intelligence Unit Limited 2018 Cuba 22 streamlining bureaucracy and reducing red tape. One of the economy's best scores is for Resolving Insolvency (34th), reflecting a number of reforms. Nonetheless, the country's ranking remains well below the 116th place it achieved in 2016, indicating that the Mottley administration has some ground to make up. Other poor performers in the region include Guyana and Suriname, which both saw their overall scores decline. The decline in Guyana was due to the length of time required to register a business and register construction permits (which can take up to 208 days). This led Guyana's ranking to fall from 126th in 2018 to 134th in the 2019 report. Suriname's score suffered from the difficulty of Starting a Business (182nd in the world), Getting Credit (178th) and Enforcing Contracts (187th). However, its overall ranking remain unchanged at 165th. Outlook for the region poor without major reform The Caribbean economies generally remain clustered in the bottom half of the global rankings, despite positive performances by outliers such as Jamaica. This reflects their general ranking as middle-income countries, but the relatively static scores in 2019 indicate that reform of business processes is not currently a priority for most of the economies, which could undermine their attractiveness as investment destinations over the medium term. This will need to change in future if the countries are to remain dynamic and competitive in the global economy.