This month, US President Donald Trump fulfilled a campaign promise by partially rolling back the two-year rapprochement with Cuba. The new US policies include harsher rules for US travellers and prohibit direct business dealings with military-run companies, compromising an estimated 60% of Cuba’s economy. However, despite the tough talk, Trump did not completely reverse the relaxation in relations fostered under the Obama administration. There are still exceptions for US airlines and cruise lines that received authorisations to open routes to the country. Embassies in Washington and Havana will also remain, as will measures that allow for increased telecommunications services. Furthermore, looser rules allowing exports of US agricultural goods and some other products, as well as an easing of shipping regulations, have not been rolled back. The new restrictions will not come into effect immediately. The US Office of Foreign Assets Control (OFAC) and the Department of Commerce need to issue regulations implementing the new policy, which could take some months. 

Impact on country risk

The tightening of the US policy comes at an inconvenient time for Cuba. The island is already in a bad place as its main ally, Venezuela, is suffering from a deep economic crisis. In the past year Venezuela sharply cut aid and trade, leading to a contraction of 0.9% of the Cuban economy in 2016. In addition, it led to a widening of the fiscal deficit to an estimated 6.2% of GDP. Also in 2017, sluggish growth of only 1% is forecast while the fiscal deficit is expected to expand to 8.3% of GDP. When the new US regulations are issued, economic growth and fiscal balance is likely to be further damaged since the easing of US sanctions under the Obama presidency saw a boom in US tourism to Cuba. Cuba’s small current-account surplus (projected at 1.1% of GDP in 2017) is likely to be negatively impacted too since tourism is a main source of current-account receipts. Furthermore, if the Venezuelan crisis worsens, Venezuela could end its oil subsidies to Cuba, hurting the Cuban economy even more. Cuba remains in category 7/7 for both short-term and medium-term risk classifications, owing to Cuba’s history of default on external debt, a poor payment record, imbalances caused by the dual exchange-rate system and the lack of reliable data.

Analyst: Jolyn Debuysscher, j.debuysscher@credendo.com