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  HOME | Cuba

Moody’s Reaffirms Cuba’s Credit Rating but Changes Outlook to Positive

HAVANA – Moody’s Investors Service on Thursday kept Cuba’s credit rating unchanged but improved the outlook from “stable” to “positive,” citing a lessening of dependence on oil-rich Venezuela and increased rapprochement with the United States.

Although Cuba was once again assigned a speculative-grade foreign currency issuer rating of Caa2, Moody’s said in a rating action that the recent reduction in financial support from leftist-led Venezuela, whose economy has been battered by the recent steep drop in global crude prices, had been a positive development for the Communist-ruled island because it “fostered diversification.”

The New York-based agency noted that in 2014 “Venezuela greatly reduced trade and investment flows to Cuba as economic stress stemming from lower oil prices and social tensions led to increased liquidity pressures for the oil exporting nation.”

That reduction in support caused Cuban gross domestic product growth to slow to 1 percent last year from 2.7 percent the year before, but it also forced Cuba to take steps to “diversify trade and financial links (that) seem to have been successful.”

Furthermore, the ratings agency said that while a nearly 16 percent increase in tourist arrivals this year had “not fully offset the decrease in Venezuelan financial inflows ... external liquidity pressures remain manageable as the authorities have adopted measures to ensure balance of payments sustainability.”

Moody’s said a second driver of its decision to raise the outlook for Cuba’s foreign currency issuer rating was “continued reform momentum and increased rapprochement with the United States.”

The restoration of full diplomatic relations with the United States and the boost that development has given tourism in Cuba prompted Moody’s to upwardly revise its forecasts for Cuba’s real gross domestic product growth to 3.5 percent this year and 3 percent in 2016.

The Cuban government, for its part, is projecting 4 percent growth in 2015, a forecast that “may reflect the anticipated effect of thawing U.S. sanctions” by the Obama administration.

“Increasing permissible U.S. participation in the Cuban economy is likely to have a multiplier effect on economic activity, as it could ‘crowd in’ investment by non-U.S. investors in anticipation of increased visitor arrivals to the Caribbean nation,” Moody’s said.

A full lifting of the United States’ 53-year-old economic embargo on the island, however, would require congressional approval.

Moody’s also hailed structural reforms carried out in recent years by President Raul Castro, noting that “the public sector payroll has already decreased strongly,” with media sources suggesting “that by 2016 there will be 1 million fewer state employees than in 2009.”

More reductions could come after the next Communist Party Congress in 2016, Moody’s said, adding that “this is in line with the government’s strategy to continue expanding the private sector, as these workers are likely to be absorbed initially into the tourist sector and then other sectors as investment comes into the country.”

That 2016 meeting also could lead to an expansion in private-sector activity, a reduction in price controls, reform of the tax system and potential measures to address the issue of the dual-currency system, the ratings agency said.


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