New York, November 18, 2021 -- Moody's Investors Service ("Moody's") has today
downgraded the government of Cuba's long-term local and foreign-currency
issuer ratings to Ca from Caa2. The outlook remains stable.
The downgrade of Cuba's ratings to Ca reflects (i) reduced hard-currency
inflows because of the pandemic and economic sanctions that further limit
the government's external debt-service capacity; and
(ii) the currency unification process that will remove a key distortion
in the economy, but points to a weaker assessment of Cuba's
overall credit profile.
The stable outlook on the rating reflects Moody's view that upside and
downside risks to Cuba's credit profile remain balanced. Risks
to the upside are constrained by current economic sanctions imposed by
the US and internal economic distortions, which limit growth prospects.
Downside risks reflect external liquidity challenges, which along
with financial sanctions, curb the likelihood that the Cuban government
would be able to access additional external funding. As a result,
Moody's expects Cuba's credit profile to remain very weak
and in line with a Ca rating.
Cuba's local and foreign-currency country ceilings have been
lowered to Ca from Caa2. The alignment between the local-currency
ceiling and the sovereign rating reflects very high government presence
in the economy, weak predictability of institutions and high political
and external vulnerability risks. The alignment between the foreign-currency
ceiling and the local-currency ceiling incorporates Cuba's
limited policy effectiveness, constraints on external indebtedness
and a closed capital account.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE TO Ca FROM Caa2
REDUCED HARD-CURRENCY INFLOWS BECAUSE OF THE PANDEMIC AND ECONOMIC
SANCTIONS FURTHER LIMIT THE GOVERNMENT'S EXTERNAL DEBT-SERVICE
CAPACITY
Cuba's hard-currency inflows, particularly those related
to tourism, were severely hindered by the pandemic and adversely
affected by hardened constraints imposed by the Government of the United
States on remittance flows to the island.
In 2020, the Cuban economy contracted by 10.9%,
following a 0.2% contraction in 2019. It was severely
impacted by the travel restrictions and quarantines that were implemented
both domestically and internationally by governments of key tourism source
markets to contain the spread of the coronavirus. The number of
visitors to Cuba had already fallen by 9.3% in 2019 as a
result of the US revoking educational and export authorizations in June
of that year. In 2020, visitor numbers dropped by another
74.6% compared to 2019, and through September 2021
they were equivalent to only 17% of 2020's full-year
figure. A major decline in tourism has significantly reduced foreign-currency
inflows to the country. Although Cuba fully reopened its borders
to tourism on 15 November 2021, Moody's expects hard-currency
inflows to recover only gradually because Cuba will face strong competition
from other tourism destinations in the Caribbean and due to strict limitations
imposed on travelers by the US government.
Meanwhile, although there is no official data on remittances,
these flows also play an important role in bringing hard currency to the
island. US sanctions that restricted the flow of remittances in
2019 and 2020 were maintained through 2021. Along with the multi-year
decline in financial support from Venezuela, as well as the adjustment
to the new exchange rate regime, Cuba experienced a significant
tightening of external financial conditions in 2020 and 2021, which
has resulted in more limited availability of hard currency to import basic
goods and medicines and to service external liabilities.
The sharp deterioration of economic conditions in 2020-21 --
including a limited ability to import basic goods and medicines and accelerated
inflation -- contributed to an increase in social discontent.
The government's severe crackdown on protests will likely prolong
economic and financial sanctions that were imposed in recent years,
further constraining financial flows to the island.
Cuba's limited external debt-service capacity was confirmed
by the announcement made in June 2021 by the Paris Club, a group
of official creditors,[1] which amended the 2015 restructuring
agreement reached with Cuba. Although the new terms have not been
fully disclosed, the Paris Club indicated that the revised agreement
would include a deferral of payments, after anecdotal evidence pointed
to Cuba missing payments in 2020. Overall, Moody's
considers that Cuba's limited debt-service capacity is consistent
with a credit risk profile that is associated with a Ca rating.
CURRENCY UNIFICATION PROCESS WILL REMOVE A KEY DISTORTION IN THE ECONOMY,
BUT POINTS TO A WEAKER ASSESSMENT OF CUBA'S OVERALL CREDIT PROFILE
In 2021, Cuba began unifying its multiple exchange rates,
targeting an ultimate rate of CUP24 per USD. This will help reduce
a major economic distortion that contributed to an overestimation of Cuba's
GDP. However, Moody's expects the devaluation of the
CUP to lead to a material deterioration in Cuba's key economic and
fiscal metrics.
Moody's assessment of economic strength will weaken given the smaller
scale of the economy and lower wealth levels. Moody's estimates
nominal GDP could decrease to around $15-$20 billion
in 2021 from $107 billion in 2020, and income levels will
be pushed lower as well. Overall, changes in these metrics
point to lower resilience to shocks, which, combined with
Cuba's weak economic performance, the impact distortions caused
on labor flexibility, and negative demographic dynamics, denote
weaker economic strength.
Similarly, fiscal strength will weaken as the debt stock relative
to GDP will increase significantly given the large share of foreign-currency-denominated
debt. Because of the currency devaluation, external government
debt will be equivalent to three times GDP, pointing to a heavy
debt burden.
Overall, these developments confirm the underlying weaknesses of
Cuba's credit profile, which is reflected in the Ca rating.
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 to remain subdued in the coming years because
of a gradual recovery in tourism flows. The continuation of economic
sanctions will continue to weigh on investment prospects, while
existing economic distortions will hinder domestic demand.
Downside risks reflect external liquidity challenges, along with
the effect of financial sanctions, which curb the government's
ability to access external funding. Given these elements,
Moody's expects Cuba's credit profile to remain very weak
and in line with a Ca rating.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Cuba's ESG Credit Impact Score is highly negative (CIS-4),
reflecting moderate exposure to environmental risks, high exposure
to social risks and a very weak governance profile. Opaque policymaking,
and very low data and information transparency weigh heavily on Cuba's
credit profile.
Cuba's exposure to environmental risks is moderately negative (E-3
issuer profile score). The country is exposed to hurricanes that
have the potential to cause flooding, loss of crops and life,
and damage to infrastructure, in particular vital hotel infrastructure
on which the country depends to generate foreign exchange from tourism.
Exposure to social risks is highly negative (S-4 issuer profile
score). An aging population will weigh on growth potential and
raise government expenditure. Government repression of basic social
freedoms and deteriorating economic conditions, as well as an aging
ruling class, could spark social and political unrest, particularly
as the power is very slowly transitioning away from historical leaders.
The influence of governance on Cuba's credit profile is very highly
negative (G-5 issuer profile). The policymaking process
is opaque, resulting in very limited policy predictability and a
lack of transparency that also weakens data quality. Policy effectiveness
is low, as reflected by the severe distortions in Cuba's economy,
policymakers' unwillingness to address social risks in favor of
maintaining a tight grip on power, and their inability to increase
climate resilience by investing in better infrastructure.
GDP per capita (PPP basis, US$): [not available]
(also known as Per Capita Income)
Real GDP growth (% change): -10.9% (2020
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 18.5%
(2020 Actual)
Gen. Gov. Financial Balance/GDP: -17.7%
(2020 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 0.8% (2020 Actual) (also
known as External Balance)
External debt/GDP: 21.4% (2020 Actual)
Economic resiliency: caa1
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 15 November 2021, 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 decreased.
The issuer's fiscal or financial strength, including its debt profile,
has materially decreased. The issuer has become more susceptible
to event risks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's would change the stable outlook on Cuba's Ca ratings to
positive in the event of an easing of US economic sanctions or a renewed
push toward domestic economic reforms that significantly improve Cuba's
economic prospects. A significant increase in hard-currency
inflows that reduces Cuba's external vulnerability would also have
positive rating implication.
Evidence of increased stress on Cuba's external finances, deteriorating
economic prospects because of external shocks, and reform reversals
that jeopardize progress achieved on economic liberalization would exert
downward pressure on the country's rating.
The principal methodology used in these ratings was Sovereign Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
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same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
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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
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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
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affected the rating. For further information please see the ratings
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For any affected securities or rated entities receiving direct credit
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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.
The ratings have been disclosed to the rated entity or its designated
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the UK and is endorsed
by Moody's Investors Service Limited, One Canada Square,
Canary Wharf, London E14 5FA under the law applicable to credit
rating agencies in the UK. Further information on the UK endorsement
status and on the Moody's office that issued the credit rating is
available on www.moodys.com.
REFERENCES/CITATIONS
[1] Paris Club: Agreement on the debt between Cuba and the
group of creditors of Cuba, June 10, 2021
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.
Renzo Merino
Vice President - Senior Analyst
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
Alejandro Olivo
MD-Sovereign/Sub Sovereign
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
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