Country Report Cuba September 2009

Outlook for 2009-10

• The focus for the president, Raul Castro, will be on responding to the economic slowdown and managing Cuba's shifting relations with the US.
• The initiation of talks between Cuba and the US marks an important step, but many obstacles remain on the path towards normalisation of bilateral relations. The Economist Intelligence Unit expects progress to be slow.
• In the context of weaker economic growth, the government will keep tight control of fiscal expenditure and import spending to contain the public-sector and external deficits.
• Growth in the first half of 2009 supports our central forecast that GDP will be less hard hit by the global recession than many other Latin American economies. Growth is forecast to accelerate from 1% in 2009 to 3.6% in 2010.
• Price distortions will delay the start of the convergence of the dual exchange rate. A rebound in 2010 should help create the conditions necessary for revaluation of the unofficial rate to begin in early 2011.
• The current-account deficit is expected to narrow from 4.7% of GDP in 2008 to an average 2.8% in 2009-10, reflecting import compression. The capital-account surplus will fail to cover it, resulting in a draw-down of reserves.

Monthly review

• Raul Castro has quelled speculation that the postponement of the communist party Congress (originally due in 2009) might result in its eventual cancellation by signalling a new round of public consultations.
• Prospects for closer US relations have been boosted by the US Treasury Department's publication of new rules to comply with the president's executive order to lift restrictions on Cuban Americans' travel and remittances.
• Reports have suggested that energy rationing has succeeded in avoiding power cuts. Concerns about possible food shortages arising from a lack of foreign exchange have also eased.
• Mr Castro has acknowledged that economic difficulties have forced payments delays, but he claims that import cuts and improved financial procedures have reduced risks for lenders extending credit to firms trading with Cuba.
• Prices for many basic goods sold in convertible pesos (CUC), have been cut by up to 20%. No explanation was provided, but the move could be designed to narrow the differential between prices in Cuba and the US.
• GDP growth slowed to 0.8% in the first half of the year, prompting a further downward revision to the official growth forecast for 2009, to 1.7%.