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Cuba's credit rating downgraded; outlook stable
Published on April 30, 2014 Email To Friend    Print Version

NEW YORK, USA -- Ratings agency Moody's Investors Service has downgraded Cuba's credit rating to Caa2 (poor quality and very high credit risk) from Caa1. At Caa2, the outlook is stable, Moody’s said.

Moody's decision to downgrade Cuba's rating was driven by an assessment of the country's vulnerability to external and domestic shocks, relative to rating peers.

In terms of external shocks, Cuba relies heavily upon Venezuela (Caa1, negative outlook) for oil, which is imported with favorable financing terms through Petrocaribe. Given Venezuela's increasingly unsustainable macroeconomic imbalances and elevated risk of an economic and financial collapse, the future of this arrangement is uncertain, rendering Cuba vulnerable to a sharp adjustment in the cost of energy imports, which amounted to an estimated $6.5 billion (47% of total imports) in 2012.

In terms of domestic shocks, the main risk is an abrupt and disorderly political transition. While President Castro recently indicated that his current term will be his last and, at the same time, appointed a First Vice President of the Council of State of Cuba, there is considerable uncertainty around the future state of Cuba's political economy.

Moody's noted that, in recent days, the possibility has emerged that Cuba could revive Paris Club debt negotiations.

The stable outlook on the Caa2 rating reflects Moody's view that the future trajectory is equally likely to be affected by the country's credit weaknesses as by its credit strengths. Weaknesses include limited access to external financing, high dependence on imported goods, political transition risk, and lack of data transparency, while strengths include a dynamic and growing tourism sector, nickel-related mining activities, and the potential for future economic diversification.

There could be upward pressure on Cuba's rating if certainty emerges over the medium term political and economic prospects of the country, including expectations around economic reforms and enhanced data transparency.

There could be downward pressure on Cuba's rating if Venezuela's ability and/or willingness to provide economic support to Cuba is materially diminished, thereby increasing the country's oil import costs and leading to a material deterioration in the balance of payments position.

Economic summary:

GDP per capita (US$): 6,498 (2012 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 3% (2012 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.1% (2012 Actual)

Gen. Gov. Financial Balance/GDP: -3.6% (2012 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -1% (2012 Estimate) (also known as External Balance)

External debt/GDP: 21.5% (2012 Estimate)

Level of economic development: Very Low level of economic resilience

Default history: At least one default event (on bonds and/or loans) has been recorded since 1983.
 
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