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Rating Action:

Moody's affirms Cuba's Caa2 ratings, maintains stable outlook

13 Sep 2019

New York, September 13, 2019 -- Moody's Investors Service, ("Moody's") has today affirmed the Government of Cuba's long-term foreign-currency and local-currency issuer ratings at Caa2. The outlook remains stable.

The affirmation of Cuba's Caa2 ratings balances the following key rating drivers:

1) Cuba's low economic strength will continue to be hindered by unfavorable near-term growth prospects as a result of a tightening of US travel restrictions, compounded by the continued loss of economic support from Venezuela

2) Despite ongoing challenges, the sovereign's credit metrics will remain broadly stable and in line with peer medians

The stable outlook on the rating reflects Moody's view that upside and downside risks to Cuba's credit profile remain balanced. The stable outlook takes into account the stalled process of rapprochement with the US as well as Moody's expectation that the tightened travel authorizations and sanctions on Cuba's military officials and public enterprises adopted over the past three years will curtail the flow of American visitors to Cuba and strongly diminish the impetus for foreign investment into the country. Although US policy toward Cuba may change marginally, we do not expect that these actions will materially alter underlining credit conditions in Cuba over the next 12-18 months.

Cuba's long-term and short-term foreign-currency bond and deposit ceilings remain unchanged at Caa2/NP and Caa3/NP, respectively. The local currency bond and deposit ceilings remain unchanged at Caa2.

RATINGS RATIONALE

RATIONALE FOR THE AFFIRMATION OF THE Caa2 RATINGS

FIRST DRIVER: CUBA'S LOW ECONOMIC STRENGTH WILL CONTINUE TO BE HINDERED BY UNFAVORABLE NEAR-TERM GROWTH PROSPECTS AS A RESULT OF A TIGHTENING OF US TRAVEL RESTRICTIONS, COMPOUNDED BY THE CONTINUED LOSS OF ECONOMIC SUPPORT FROM VENEZUELA

Cuba's low economic strength reflects moderate economic growth in recent years and less favorable medium-term growth prospects, as well as the economy's limited scale, diversification and productivity. Over the past decade the government has sought to liberalize the economy, foster a private sector, and move away from its centrally-planned system. Nevertheless, progress has been slow, with rollbacks and partial implementation of announced reforms a regular occurrence. According to official data, Cuba's real GDP grew 2.2% in 2018, up from 1.8% in 2017. The uptick is primarily explained by growth in investment, the result of reconstruction efforts following Hurricane Matthew in October 2016, and Hurricane Irma in October 2017.

Moody's expects that the construction sector will drag economic growth in 2019 owing to the culmination of reconstruction activity and the high base of comparison relative to 2018. More importantly, effective 5 June 2019, the US revoked the standing authorization for so-called educational "people-to-people" group travel to Cuba by US persons when conducted under the auspices of an organization subject to US jurisdiction. This was a very popular mode of travel to Cuba by US visitors. It also revoked export authorizations that had allowed private and corporate aircraft, cruise ships, sailboats, fishing boats, and other similar aircraft and vessels that are subject to US jurisdiction to go to Cuba.

A final damper on growth is the continued worsening of the economic situation in Venezuela, which served as an economic patron to Cuba in the past two decades by providing subsidized goods, and acquiring the services of Cuban professionals (in particular, healthcare). As the Venezuelan economy has deteriorated, this patronage has dwindled and imposed severe hardships in Cuba with the government announcing the rationing of basic goods and foodstuffs in May 2019.

The tightening of US travel restrictions came after the busiest part of the travel season, which will likely spare Cuba some of the economic losses in 2019, but will still negatively affect visitor arrivals in the second half of the year. Overall Moody's believes that growth will slow significantly to 0.5% in 2019 and that it will slow further in 2020, remaining broadly flat at 0.1% as the full force of US sanctions if felt throughout the entire year. Moody's expects a normalization of GDP growth to 1% in 2021 and for activity to remain close to 1.5% thereafter.

SECOND DRIVER: DESPITE ONGOING CHALLENGES, THE SOVEREIGN'S CREDIT METRICS WILL REMAIN BROADLY STABLE AND IN LINE WITH PEER MEDIANS

Cuba's low economic strength, very low institutional strength, moderate fiscal strength and very high susceptibility to event risk are traits common among 'Caa'-rated sovereigns that struggle with structural limitations that hinder economic and fiscal performance.

Despite the challenging economic environment, the sovereign's credit metrics remain aligned with those of similarly-rated peers. Cuba's real GDP growth averaged 2.0% in 2014-18, while the 'Caa' catergory median for the same period was 1.9%. Fiscal deficits in Cuba have been larger than for peers as they have averaged 6.6% of GDP in 2014-18 mainly as a result of the wider deficits in the last two years driven by hurricane-related spending, while the median for 'Caa'-rated sovereigns was 5.4% of GDP.

Nevertheless, Moody's estimates that Cuba's 2018 public debt ratio at 24.2% of GDP remains lower than the general government peer median of 63.9%. This is partly a reflection of the lack of official domestic debt data, and Moody's believes that the fiscal deficit is financed through intra-public sector lending, mainly by public banks and the central bank. External finances are likely to remain broadly stable, despite anecdotal evidence of payment arrears with suppliers, via the tightening of import controls in order to maintain low current account surpluses.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

In Moody's assessment, Cuba's credit profile is exposed to environmental risks from the effects of climate shocks in the form of hurricanes. The country is exposed to hurricanes that have the potential to cause flooding, loss of crops and life, and damages to infrastructure, in particular vital hotel infrastructure on which the country depends to generate foreign exchange. These considerations have been incorporated into the analysis of the country's economic strength and its susceptibility to event risk. Environmental factors represent a longstanding element of Cuba's credit profile, as recently illustrated by successive impacts from Hurricanes Matthew in 2016 and Irma in 2017.

Social considerations are not material to Cuba's credit profile. While an ageing population will weigh on growth potential and raise government expenditure, Cuba's challenges in economic and fiscal strength are driven by a range of long-standing factors, explained above.

Governance considerations are a key challenge to Cuba's credit profile and have been primarily incorporated into the "Very Low" assessment of the sovereign's institutional strength factor. The policymaking process is opaque, resulting in very limited policy predictability and a lack of transparency that also negatively affects data quality.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook on the rating reflects Moody's view that upside and downside risks to Cuba's credit profile remain balanced. Moody's expects economic performance will remain subdued and that the sovereign will marginally reduce its fiscal imbalance, and maintain broad stability in external finances despite some balance of pressures that have led to arrears with suppliers.

The stable outlook also takes into account the stalled process of rapprochement with the US as well as Moody's expectation that the tightened travel authorizations and sanctions on Cuba's military officials and public enterprises adopted over the past three years will curtail the flow of American visitors to Cuba and strongly diminish the impetus for foreign investment into the country. Although US policy toward Cuba my change marginally, we do not expect that these actions will materially alter underlining credit conditions in Cuba over the next 12-18 months.

WHAT COULD CHANGE THE RATING UP

The stable outlook on the Caa2 rating would be changed positive in the event of a further easing of US economic sanctions or a renewed push on domestic reforms that have a material impact on Cuba's economic prospects. Enhanced data timeliness and transparency would also be credit positive.

WHAT COULD CHANGE THE RATING DOWN

Evidence of increased stress on Cuba's external finances, along with deteriorating economic prospects due to external shocks and reform reversal that jeopardizes the small amount of progress achieved on economic liberalization, would put downward pressure on the credit profile.

GDP per capita (PPP basis, US$): [not available] (also known as Per Capita Income)

Real GDP growth (% change): 2.2% (2018 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.4% (2018 Actual)

Gen. Gov. Financial Balance/GDP: -8.1% (2018 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 1.9% (2018 Estimate) (also known as External Balance)

External debt/GDP: 24.2% (2018 Estimate)

Level of economic development: Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.

On 11 September 2019, a rating committee was called to discuss the rating of the Cuba, Government of. The main points raised during the discussion were: The issuer's economic fundamentals, including its economic strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed. Other views raised included: The issuer's institutional strength/ framework, have not materially changed. The issuer's governance and/or management, have not materially changed. The issuer's susceptibility to event risks has not materially changed.

The principal methodology used in these ratings was Sovereign Bond Ratings published in November 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The weighting of all rating factors is described in the methodology used in this credit rating action, if applicable.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jaime Reusche
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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