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US-CUBA TRADE ASSOCIATION Doing Business in Cuba Citrus Club, Orlando, Florida April 13, 2006. OVERVIEW OF CUBAN BUSINESS ENVIRONMENT Prepared by: Paolo Spadoni Stetson University. Cuban Economy: Introduction. Deep economic recession in early 1990s Fall of former Soviet Union

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US-CUBA TRADE ASSOCIATIONDoing Business in CubaCitrus Club, Orlando, Florida April 13, 2006



Prepared by: Paolo Spadoni

Stetson University

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Cuban Economy: Introduction

  • Deep economic recession in early 1990s

    • Fall of former Soviet Union

    • Beginning of “Special period in time of peace”

    • Intensification of US sanctions (Torricelli, Helms-Burton)

  • Economic reforms

    • International tourism, foreign investment

    • Legalization of US dollars (remittances)

    • Self-employment, agricultural cooperatives, free farmers markets

  • Slow but constant economic recovery since mid-1990s

    • Reforms: good results

    • Re-centralization of the economy (search for efficiency)

    • Closer relations with Venezuela and China (and US food sales)

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Cuba’s GDP Growth (1989-2005)

  • Sources: CEPAL; EIU; Cuban Government.

  • 1990-93: GDP contracted by 40.1%

  • Positive performance since then, but growth rate has fluctuated substantially

  • Record GDP growth of 11.8% in 2005 with “sustainable social” formula

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Cuba’s New GDP Formula

  • “Sustainable social” GDP

    • Recognizes value added of subsidized social services (healthcare, education, sports) provided by Cuban state to its population and to citizens from other countries, mainly from Venezuela.

  • Cuba’s arguments

    • Traditional GDP formula designed for market economies

    • Assigns no added value to subsidized social services

    • Uses cost calculations that do not reflect “true purchasing power” of Cuban population

    • Wages are low, but citizens pay no rent, free healthcare and education, subsidized utility services and basic products

  • New formula: key issues

    • What added value is assigned to Cuba’s vast social safety net?

    • Profitability in a market system?

    • What countries are used as a reference?

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Cuban Economy: Current Situation

  • Good economic performance in 2005

    • Main reason: unprecedented earnings from exports of medical and educational services, particularly to Venezuela

    • Exports of G&S from $5.9 billion in 2004 to $8.7 billion in 2005

    • Other reasons: higher revenues from tourism and nickel exports

  • But economy negatively affected by:

    • Severe energy crisis and continuing drought

    • Two major hurricanes in 2005 causing losses of about $2 billion

    • Strengthening of US sanctions

  • Future economic challenges

    • “Energy revolution” (small electricity generation plants)

    • Housing program (construction)

    • Improvement of transportation sector

    • Fight against “corruption and illegalities”

    • Reducing income inequalities

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International Tourism in Cuba: 1993-2005

  • Source: Anuario Estadistico de Cuba; Cuban Ministry of Tourism. *Author’s calculations

  • 2005: tourist arrivals 2.3 million (+12%), revenues almost $2.6 billion (+10%)

  • Gross revenues per tourist in 2005 about 23% below 1995 level

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Cuba: Main Export Products, 2000-2005 ($U.S. million)

  • Sources: Oficina Nacional de Estadísticas; EIU. *Preliminary estimates

  • Export performance

    • Growing nickel revenues mainly result of higher international prices

    • But injection of financing and technology by foreign partners (China

      and Canada) expected to lift production

    • Decline of revenues from sugar exports, growth of tobacco exports

    • Pharmaceuticals and biotech exports estimated at $300 million in 2005

  • Imports

    • Fuel (Venezuela), foodstuffs (US), machinery/equipment, chemicals

  • Cuba’s main trading partners

    • Venezuela, China (US fourth largest import partner in 2004)

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Foreign Investment in Cuba

  • Cuba’s opening to foreign investment in early 1990s (handful of hotel and

  • oil exploration joint ventures)

  • After 1993, number of international economic associations (AECEs)

  • increased and expanded to different sectors of the Cuban economy

  • Since 1998, preference for AECEs that involve higher amounts of capital

  • and loan financing

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Active International Economic Associations (1993-2005)

  • Source: Cuban Ministry of Foreign Investment (MINVEC)

  • Number of AECEs dropped from 403 in 2002 to 258 in 2005 (-36%)

  • Cuban authorities: country has been concentrating on businesses with results

  • Number of JVs more suitable to Cuba’s current needs

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Authorized and Dissolved Associations by Year of Dissolution (1988-2005)

  • Source: Author’s calculations from MINVEC data.

  • About half of dissolutions occurred in last 3 years (and less authorizations)

  • 60 AECEs in process of dissolution at the end of 2005

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Foreign Direct Investment in Cuba in $U.S. million (1993-2004)

Sources: Cuban Central Bank, May 2002; EIU. *1994 data are cumulative to that year.

  • Cuban experts: committed FDI is more than $6 billion (about half delivered)

  • AECEs by sectors and country

  • Leading sectors: basic industry, tourism, construction

  • Leading countries: Spain, Italy, Canada

  • In terms of capital invested

  • Leading sectors: telecommunications, mining, and tourism

  • Leading countries: Canada, Italy, Spain

  • FDI priorities

  • Mining, energy, oil, sugar derivatives, biotechnology, tourism

  • Tourism

  • 49 hotels under management contracts with 10 foreign companies in 2005

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Cuba’s Business Climate (1993-2004)

  • Complaints by European investors (June 2002)

    • Excessive utility costs due to the state monopoly on services

    • Bureaucratic hurdles, payment delays

    • Expensive dollar payments to Cuban workers recruited by state-entity

  • Cuba’s stance

    • Rules of the game always clear (FDI complementary)

    • Efficiency through re-centralization, more revenues to the state

    • Increased ability of Cuban government to respect payment obligations

  • Recent developments

    • Focus on large investment projects

    • Decline in number of cooperative production agreements

    • Free Trade Zones development halted in 2003

    • Major FDI operations in oil and mining

    • Virtually all new FDI projects are with China and Venezuela

    • But still opportunities for investors from other countries

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AECEs Operating Abroad by Geographical Area (1993-2004)(percentage as of June 30, 2003)

Source: Centro de Promocion de Inversiones (CPI), September 2003.

  • Cuba’s investments abroad increasingly important

  • Major biotech and pharmaceuticals projects in East Asia (China, Malaysia,

  • India), Middle East (Iran), and Africa (Namibia and several other countries)

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Main Indicators of AECEs, 1993-2005 (1993-2004)

  • Source: Cuban Ministry of Foreign Investment

  • Main indicators of AECEs have shown constant progress

  • 2005: Increase in total sales, exports, domestic sales (even with fewer JVs)

  • FDI fostered competitiveness of Cuban production, import substitution

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Foreign investment: Big Players in Cuba (1993-2004)

  • A limited number of joint ventures with foreign partners have a large economic impact

  • 5 joint ventures account for vast majority of export revenues of AECEs

    • Corporacion Habanos S.A. (tobacco, Altadis)

    • Havana Club International S.A. (rum, Pernod Ricard)

    • Compañia Azucarera Internacional S.A. (sugar, unknown)

    • ETECSA (telecommunications, Telecom Italia)

    • Sherritt International (nickel)

  • Increasing dissolutions: little negative effect as long as big players continue to invest in Cuba

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Exports of AECEs, 1995-2005 (1993-2004)(as percentage of Cuba’s total exports of goods and services)

  • Sources: Author’s estimates from MINVEC and CEPAL data.

  • Important presence of FDI in oil, mining, and energy production

  • Foreign participation has substantial influence over the production and

  • marketing for five largest export sectors (sugar, nickel, tobacco, rum, fishing)

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Conclusion (1993-2004)

  • Cuban economy is improving

    • Increased foreign exchange earnings (first current account surplus)

    • New revenues from export of medical services (Venezuela)

    • Tourism, nickel exports on the rise, soft credits from China

  • Translating growth into tangible benefits for population

    • State investments in energy, housing, transportation, consumer products

    • More food imports,raising wages and pensions

    • Reducing gap between those with/without access to hard currency

  • Business environment

    • Cuba’s closer relations with Venezuela and China

    • Re-centralization of the economy

    • More controls, but also more efficiency?

    • Preference for large investment projects (with results)

    • Strong presence of FDI in Cuba’s most successful industries

    • Brightest investment opportunities in basic industry and tourism