Deficit widening, Cuba to emit 20-year bonds

More control over monetary policy: Banco Central de Cuba

CUBA STANDARD — Cuba will emit 20-year sovereign bonds to cover its widening budget shortfall next year, Finance Minister Lina Pedraza told the National Assembly Saturday.

The 2.5-percent, 20-year bonds will be negotiable instruments that can be transferred from one Cuban bank to another, when necessary, Pedraza said, without providing any more details.

The debt instruments will be traded among Cuban banks only, according to a former Central Bank economist.

“This is a key step in granting autonomy to monetary policy in relation to fiscal policy,” said Pavel Vidal, who now teaches at Universidad Javeriana in Calí, Colombia. “I think this is a very positive step to strengthen monetary policy, which is, in turn, key for the process of eliminating the dual currency system.”

This fall, Cuba began the gradual elimination of the convertible peso, also known as CUC, to eventually remain with the Cuban Peso (CUP) only. Observers believe the complex process of devaluing the CUC and boosting the CUP may take at least three years.

The bond announcement comes as the Council of Ministers forecasted a feeble 2.2 percent GDP growth rate for 2014; growth in 2013 was only 2.7 percent, almost one percentage point below predictions. The slow growth is not only a disappointment for Cuba’s economic reformers and an indication that the changes may take more time to gain traction, but it also puts pressure on Cuba’s slim foreign-currency reserves.

The Cuban central bank does not reveal its hard-currency reserves, saying it would make it vulnerable to U.S. attacks.

The revenues from the bond issue will cover up to 70 percent of the deficit — forecasted at 4.7 percent of GDP in 2014 — and the debt generated by it, Pedraza said, according to Prensa Latina. The remainder will be covered with new money printed by the Central Bank.

A bond issue will help control inflation more efficiently, Pedraza told the parliament.

“As only 30 percent of the fiscal deficit will be monetized, the Central Bank gains more control over monetary supply and inflation,” Vidal said. “With monetization, money printing depends on the fiscal budget, and not on the instruments and decisions of monetary policy.”

Foreign observers in Havana describe the move as a conventional strategy among tightly regulated economies to fund budget deficits. Even so, the fact that the government laid out the financing of the deficit is noteworthy.

Even if they were allowed to participate, international banks will keep their hands off the Cuban bonds, suggests a foreign businessman in Havana who spoke on background. Another cash crunch is likely ahead, as the budget deficit widens, and as long-time ally Venezuela is under pressure to reduce its commitments.

“No private institution would have any interest whatsoever,” he said about the bonds. “Cuba is entering into a very tough period with severe liquidity issues, and a real risk of what happens if Venezuelan support is cut further.”

The country “has been successful in renegotiating various sovereign debt deals, with Russia, France, Netherlands and others,” he added. “But I don’t see how this translates into new money, which is not part of a bilateral political deal.”

The Cuban government’s access to fresh hard currency is very limited.

Since a default on foreign debt in 1986, and throughout the Special Period, Cuba has had to rely on government loans under bilateral agreements and high-interest bank loans for access to hard currency. Due to U.S. resistance, the country is excluded from multilateral institutions such as the Interamerican Development Bank, IMF and World Bank and their lending mechanisms.

Foreign banks were only marginally involved in Cuba’s effort to regain footing in international bond markets in 2006.

Seven years ago, the Cuban Central Bank dipped its toes in the Eurobond market on the London Stock Exchange with two batches of short-term issues. This was followed by eight additional series of bonds in 2007 and 2008.

The results were mixed.

In 2007, the Banco Central de Cuba (BCC) repaid holders of the first two series of one-year bonds — a €400 million, 7-percent bond, and a €500 million, 8-percent bond. The BCC then issued two series of two-year bonds in 2007 for a total of €200 million, three series of two-to-four-year bonds in June 2008 for a total of €215 million, and another three series of two-to-four-year bonds in November 2008 for €215 million. Then, in 2009 a cash crunch forced the BCC to roll over the two €200 million bonds issued in 2007, according to Reuters, extending repayment by one year.

The 2006 bonds did not generate a lot of international exposure. Only 15 percent of the two bond issues were bought by international banks, many of them institutions with a previous lending record with Cuba; the other buyers were Cuban state banks.

The BCC’s were the first Cuban bond issues in decades. In 1986, the nation stopped serving its foreign debt entirely; part of this debt has been rescheduled and is being served, but some $8 billion, according to the prospectus of the 2008 bonds, remained unserved five years ago. Since the default, Cuba accumulated a spotty service record on the government and high-interest bank loans it obtained since the 1990s; after the 2008-09 cash crunch, the country renegotiated many of its loans.

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