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Rating Action:

Moody's downgrades Cuba's ratings to Ca from Caa2; maintains stable outlook

18 Nov 2021

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 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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
Client Service: 1 212 553 1653

No Related Data.
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