11 Sept 2015
Cuban Tourism Sector Set to Boom as US Sanctions Come to an End
After 53 years of US sanctions, Cuba is on course to regain its role as the undisputed playground of the Caribbean. This is set to inspire an inevitable rush of investments in the country's dilapidated leisure and communications infrastructure.
US smokers may well be cracking open the bubbly as their many years of restricted access to the world's finest cigars almost certainly seem to be over. This is but one small consequence of the end of the long – but often phoney – economic war between the US and Cuba.
The (re)opening of the US embassy in Havana on 14 August 2015 was the latest – albeit by far the most symbolic – development in the increasingly frantic negotiations and legal shenanigans taking place between high-level US and Cuban officials. Both sides are clearly keen to bring to a close this particular legacy of the Cold War. It's been 53 years since President Kennedy's administration imposed the Cuban Assets Control Regulations act, legalisation that led to a draconian trade embargo between the two countries.
Castro and his revolutionary Government seized almost US$10 billion of US assets when they 'inherited' the Cuban economy in the late 1950s. At the time, the country was vibrant and economically successful, ranking only behind Venezuela and Uruguay in a region that comprised more than 30 countries. Significantly – according to the Cuban-born US economist Carmelo Mesa-Lago – it was also fifth in the entire hemisphere, even when both the US and Canada were taken into account.
Leap forward more than half a century and the twin effects of decades of a command economy and the collapse of the Soviet Union (and with it, its enormous economic subsidies) has seen Cuba slip to number 22 in the region, according to the World Bank. It is possibly still falling, with GDP growth on the island having slipped to just 1.3% in 2014. Against such a backdrop, then, it is small wonder that the Cuban government – albeit begrudgingly – is willing to formally welcome back the Yankee dollar.
Staunch defenders of command economies will, no doubt, point to some of Cuba's undoubted successes. The country, for instance, does have the fourth highest literacy rate in the region. Despite this, the overwhelming majority of the impoverished islanders clearly welcome the lifting of the embargo and the prospect of earning a decent wage. In the meantime, though, the country's high literacy rate and its relatively advanced healthcare facilities mean that the export of Cuban healthcare and educational services, alone, could be worth some $6 billion per year.
Travelling around Cuba today, it is evident just how little investment there has been in the country's physical infrastructure for many years. The road network is, at best, decrepit and invariably pot-holed, save for one short stretch of motorway approaching Havana. Outside of the cities, disused single-track rail lines criss-cross the island, usually adjacent to shuttered factories. This, then, is a legacy of the glory days of cane sugar, thriving agricultural output, and a time when Bacardi was still Cuban.
Today, in the absence of any meaningful commercial sector, Cuba's three primary sources of revenue, all anchored around the oil subsidies provided by Venezuela, are remittances from Cubans living abroad (primarily in the US), earnings generated by Cubans working on contracts elsewhere in Central and South America (primarily healthcare workers and teachers), and tourism.
In 2013, Canadians accounted for around third of the three million-plus tourists to visit the country. The number of US tourists, unofficially numbering approximately 300,000 in 2014, is expected to rise significantly as travel arrangements for US citizens move towards being normalised.
The issue of US food exports has long been something of a grey area between the two countries. Back in 2008, such trade amounted to around $700 million, with many such US consumer foods destined for hotel dining rooms. The process should soon emerge from the shadows, with US financial institutions now allowed to conduct transactions between the two countries. In line with this, on 21 July this year, the Florida-based bank Stonegate became the first US financial institution to set up a corresponding account in Cuba.
Even before this, however, a huge wave of US dollars was already pouring into the island. According to the Miami-based Havana Consulting Group, more than $2.6 billion of cash remittances were repatriated to Cuba by Cuban Americans in 2012. This sum is certain to be dwarfed by the monies that will start pouring in once the barriers are down and the circa 1.8 million Cubans living in the US – two-thirds of whom live in Florida – are free to start bringing in cash directly, as well as having the liberty to invest it.
A number of Cuban Americans are already planning to invest in property and leisure initiatives in Cuba, either via relatives or, increasingly, courtesy of newly acquired Cuban brides. At present, the Cuban government has only designated a small number of sectors as approved for operation by the private sector – restaurants, property rentals and tourism services.
Inevitably, then, it is the opportunities represented by the looming surge in tourism that are most exciting for would-be entrepreneurs. By contrast, investment in infrastructure and other larger scale projects is seen as likely to get bogged down by civil servants, many of whom are reportedly petrified of the imminent wholesale changes on the way.
Getting an accurate figure as to wages in Cuba is also a challenge. The official figure varies between $30 and $80 a month, although many islanders seem to have two or more sources of income. Farmers, only recently entitled to keep and, indeed, grow more of their own produce, appear relatively prosperous.
By contrast, in the towns and cities, economic hardship seems to be the norm. Doctors do shifts as taxi drivers, soldiers supplement their rations as barmen and a large number of car and motorcycle owners are only too keen to provide opportunistic taxi services.
Currently, the key domestic economic sectors are sugar, petroleum, tobacco, cement, agricultural machinery and pharmaceuticals. This has seen exports principally destined for Canada (16%), China (15.2%) and Venezuela (14.2%), with Spain (the legacy colonial power) accounting for 7.5% of Cuba's exports. The same list of countries accounts for the majority of imports. Venezuela represents just over a third of the total value (oil, oil and more oil), with China and Spain at 12.3% and 9.4% respectively.
It is in the tourism sector, though, that the economic changes brought about by the end of the sanctions will be most immediately felt. In truth, the island is already struggling to cope with its current number of tourists. As and when the country is restored to its role as the true Caribbean playground, a truly transformational wave of investment will prove a huge boost for its hotel, internal travel, communications and leisure services sectors.
With some of the world's finest beaches, a diverse landscape stretching across the island's near 1,000 kilometre length and a raft of historic colonial cities, Cuba is likely to displace Mexico as the overseas party destination of choice for US youth. It will also inevitably attract European and Asian visitors, all keen to experience its unique brand of tropical nostalgia. This, after all, is the country that Christopher Columbus deemed: "so enchantingly beautiful that it surpasses all others in charm and beauty..."
Away from the beaches, in Havana, Cuba has potentially one of the world's future most-visited cities. The three million strong capital is steeped in colonial grandeur and bursting with a vibrant and earthy culture. Just as Barcelona moved up from almost nowhere 20 years ago to become Europe's third most visited city (after Paris and London), Havana may well achieve a similarly impressive feat in its own region.
All the above activity notwithstanding, the rush to invest in Cuba from larger corporates will be more measured than any moves by more entrepreneurial companies and individuals. It appears that Cuba's command economy and its extraordinarily risk-averse bureaucrats will take months – if not years – to come to grips with the seismic changes coming to the country. Even then, overseas investors may struggle to make money if their primary objective is the nine million-strong domestic market.
Once the restrictions are fully lifted, though, overseas investment, sooner or later, will result in Cuba once again proving a glittering and prosperous nation. Inevitably, it will be one increasingly framed by US values, with a society more socially divisive than its current incarnation.
For the majority of Cubans, though, no longer having to live on rations and being free to better themselves, the end of the embargo cannot come too soon. For investors, it may well be a case of move over Jamaica, Barbados and the Bahamas – Cuba will unquestionably become the jewel of the Caribbean and one of the world's leading tourist destinations.
Nick Jaspan, Special Correspondent, Havana