New York, December 10, 2015 -- Moody's Investors Service has today affirmed Cuba's Caa2 foreign
currency issuer rating and changed the outlook to positive from stable.
The key drivers of today's rating action are the following:
1) Dependence on Venezuela has lessened since 2014, and despite
pressure on Cuba's external finances from lower economic and financial
support from its main trade partner, risks remain manageable.
2) Continued reform momentum and increased rapprochement with the United
States have supported favorable macroeconomic performance and raise the
likelihood that US economic sanctions might be eased further.
The positive outlook on Cuba's Caa2 rating reflects Moody's
expectation that measures to diversify trade and financial links will
contribute to favorable macroeconomic trends and will coincide with continued
easing of economic sanctions by the US. The positive outlook also
anticipates that the Cuban authorities will maintain the current reform
momentum following the Communist Party Congress in April 2016, while
managing challenges stemming from weaker external finances.
Cuba's long-term local currency country risk ceilings and
the foreign currency bond ceiling remain unchanged at Caa2. The
foreign currency bank deposit ceilings is also unchanged at Caa3.
The short-term foreign currency bond and deposit ceilings remain
at NP (Not Prime). These ceilings reflect a range of undiversifiable
risks to which issuers in any jurisdiction are exposed, including
economic, legal and political risks. These ceilings act as
a cap on ratings that can be assigned to the foreign and local-currency
obligations of entities domiciled in the country.
RATIONALE FOR THE OUTLOOK CHANGE
-- FIRST DRIVER: DEPENDENCE ON VENEZUELA HAS LESSENED,
AND DESPITE PRESSURE ON EXTERNAL FINANCES FROM LOWER ECONOMIC AND FINANCIAL
SUPPORT FROM ITS MAIN TRADE PARTNER, RISKS REMAIN MANAGEABLE --
The principal driver of Moody's decision to change the outlook to positive
from stable is that lower Venezuelan support has fostered diversification
and, despite some external liquidity pressures, the risks
remain manageable. 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. As a result of lower support from its main
trade partner and top provider of financial assistance, Cuba's
economic growth slowed significantly to 1% from 2.7%
in 2013. However, measures to diversify trade and financial
links seem to have been successful and have coincided with a gradual easing
of economic sanctions by the US. Although they have not fully offset
the loss of Venezuelan support, the outlook for stronger inflows
remains favorable over the medium term.
Increased tourism activity has improved the economic outlook for the country,
but tourism earnings have not fully offset the decrease in Venezuelan
financial inflows which has hurt the balance of payments. Since
2009, the government has substantially curtailed imports and cut
state payrolls and subsidies in order to maintain an external current
account surplus. Despite these challenges, Moody's
believes that external liquidity pressures remain manageable as the authorities
have adopted measures to ensure balance of payments sustainability since
the 2008-09 liquidity crunch and the crisis that followed the dissolution
of the Soviet Union. The country's dependence on Venezuela
will diminish further as Cuba diversifies its trade and financial relations
over the next two-to-three years.
As barriers to investment and financing constraints continue to ease,
supported by continued US rapprochement, the authorities will have
much greater scope to access finance and ease the current tight external
liquidity conditions. Moody's expects an increase in capital
inflows is forthcoming. Both government policy and the changing
relationship with the US will encourage more inward FDI, as well
as official lending, following the restructuring of commercial and
bilateral debt in recent years.
-- SECOND DRIVER: CONTINUED REFORM MOMENTUM AND INCREASED
RAPPROCHEMENT WITH THE US HAVE SUPPORTED FAVORABLE MACROECONOMIC PERFORMANCE
AND RAISE LIKELIHOOD ECONOMIC SANCTIONS MIGHT BE WEAKENED FURTHER --
The second driver of the outlook change is Moody's expectation that
the cautious reform momentum will be maintained as the US is likely to
continue easing sanctions. The easing of US trade and travel restrictions
came at a crucial time for Cuba, helping to offset the accelerating
loss of Venezuelan economic assistance. Rapprochement between the
US and Cuba has helped increase overall tourism flows by nearly 16%
so far this year. This prompted Moody's to revise up its
real GDP growth forecast for Cuba to 3.5% (from 2.3%)
in 2015 and 3.0% (from 2.9%) in 2016,
while the government expects the economy will expand by 4% this
year.
The authorities' expectation of a strong rebound in economic activity
this year may reflect the anticipated effect of thawing U.S.
sanctions. Increasing permissible US participation in the Cuban
economy is likely to have a multiplier effect on economic activity,
as it could "crowd in" investment by non-US investors
in anticipation of increased visitor arrivals to the Caribbean nation.
Moreover, the last Communist Party Congress, held in April
2011, focused on the introduction of economic reforms designed to
create more efficient markets and drive productivity growth. Moody's
believes that the next meeting (to be held in April 2016) is likely to
continue this process by expanding private-sector activity,
reducing price controls, reforming the tax system, and potentially
addressing the issue of the dual currency system.
The public sector payroll has already decreased strongly, media
sources suggest that by 2016 there will be one million fewer state employees
than in 2009, and further reductions could come after the next Communist
Party Congress. 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.
Despite a lack of data availability and transparency that Moody's
continues to highlight as an important rating constraint, official
and publicly available data remain adequate to maintain a rating on the
Cuban sovereign.
WHAT COULD MOVE THE RATING UP/DOWN
There could be upward pressure on Cuba's rating if there is a further
easing of US economic sanctions that has a material impact on Cuba's
economic prospects and reform momentum is maintained. More clarity
over the political transition at the end of President Raul Castro's
current term would ease concerns over political and social instability.
Enhanced data timeliness and transparency would also be credit positive.
Conversely, the positive outlook on Cuba's rating would be
changed back to stable if there is no further progress in US rapprochement
and reform momentum is lost. Evidence of increased stress on Cuba's
external finances would also lead to a stabilization of the outlook.
GDP per capita (PPP basis, US$): Unavailable (also
known as Per Capita Income)
Real GDP growth (% change): 1% (2014 Actual) (also
known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.1%
(2014 Actual)
Gen. Gov. Financial Balance/GDP: -2.6%
(2014 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 3.9% (2014 Estimate)
(also known as External Balance)
External debt/GDP: 14.6 (2014 Estimate)
Level of economic development: Very Low level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 09 December 2015, 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 materially increased.
The issuer has become less susceptible to event risks. 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 fiscal or financial strength,
including its debt profile, has not materially changed. The
systemic risk in which the issuer operates has materially decreased.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2013. Please see the Credit Policy 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 rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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 rating action on the support provider and in relation to each particular
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 rating action, and
whose ratings may change as a result of this 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
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Anne Van Praagh
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's changes Cuba's outlook to positive from stable; Caa2 rating affirmed
