Moody’s: Cuba’s removal from state-sponsored terror list is credit positive

imagesNew York, June 09, 2015 — The recent removal of Cuba from the list of countries that the US considers to be sponsors of terrorism is credit positive for the sovereign, says Moody’s Investors Service. Moody’s rates Cuba Caa2 with a stable outlook.

Although largely symbolic, removal from the list could reduce the stigma for non for non-US financial organizations of providing financial flows and international banking services to Cuba if regulations are eased further. It also increases the likelihood that Cuba could receive funds from international organizations, such as Corporacion Andina de Fomento (CAF), among others, says Moody’s in the report “Removal from List of States that Sponsor Terrorism Is Credit Positive.”

Removal from the terrorism list follows the December 2014 announcement of normalization of relations between the two countries, a process that has spurred a growth in tourism.

Tourism contributes to the country’s flow of foreign exchange. Cuba also has a need for higher-end accommodations, and demand for them combined with better access to financing could lead to significant infrastructure building, says Moody’s. Increased financing to enhance the island’s tourism infrastructure by private sources would significantly boost economic activity in Cuba.

Moody’s expects Cuba and the United Sates now to look to reopen embassies in their two capitals. As the process of normalization continues, it will likely further boost the already substantial increase in US visitors to the island, which began with the softening of travel restrictions in January 2015.

Whatever the growth in tourism, Cuba will continue to face significant macroeconomic challenges and Moody’s expects the pace of economic reform to be sluggish.

Moody’s points to Cuba’s duel currency system, with the Cuban convertible peso (CUC) that is tied to the dollar and also the Cuban peso (CUP), as a major source of inefficiencies and pricing distortions.

“The dual currency that distorts relative prices is Cuba’s single most important macroeconomic challenge,” says Moody’s Vice President — Senior Analyst Jaime Reusche.

“An increase in the value of the resulting unified peso relative to CUP would increase Cubans’ spending power, but stoke inflation and lead to widespread shortages. Conversely, a fall in the value of the CUC would be resisted by those with savings in the harder currency,” says Moody’s Reusche.

In 2013 Cuba announced that it would be eliminating the duel system, but has yet to release a timetable for phasing it out.

This entry was posted in Exchanges. Bookmark the permalink.