28 Oct Cuba Libre, Sooner or Later
On Tuesday, the United Nations issued its 24th annual condemnation of the American embargo of Cuba. There was a silver lining. With the recent thawing of relations between Cuba and the United States, expectations are running high for political normalization between the two countries and the promising economic opportunities that should come with it. While much of this hope is warranted, so is caution. There is still a long way to go before investors and businesses can fully enter the markets of the Caribbean’s largest island.
Over the past year, diplomatic ties between the two countries have been restored, and some trade and travel restrictions eased. What happened? Might the oil downturn have played a role? In recent years, Venezuela has supported the Cuban regime by supplying subsidized oil in return for medical services. Cuba leases out 30,000 Cuban healthcare professionals to Venezuela, along with a variety of other service workers. In return, in addition to cash compensation, subsidized Venezuelan oil provides much of the island’s oil supply.
But oil demand has decelerated, in large part due to a global economic slowdown led by China at the same time that fracking has dramatically increased supply. This combination pushed oil prices lower, reducing the compensation Venezuela provided to Cuba. Might the loss of Cuba’s economic safety net have played a role in its desire to liberalize and negotiate with its neighbor to the north? I think so.
As the Cuban market opens, there will be many opportunities, and none is bigger, perhaps, than medical tourism. Cuba has one of the most concentrated supplies of doctors in the world, with 6.7 for every 1000 citizens. On this metric it is behind only Monaco and Qatar, according to the World Health Organization. But in Cuba, labor costs are extremely low: general practitioners make $44 dollars per month. Thousands of Canadians and Europeans already travel to Cuba every year for its affordable healthcare, but this may be a drop in the bucket compared to the opportunity.
Let’s not forget that a nonstop flight between Havana and Miami would take less than 30 minutes. And with almost four million senior citizens in Florida alone, conditions are ripe for a boom in outbound American patients heading to Cuba for medical care.
General tourism from global consumers is also starting to boom. While travel for Americans is still restricted, tourism from the United States rose by over 50% in the first half of this year. Total inbound international tourism to Cuba was up almost 20% last year. Not surprisingly, AirBnB recently entered Cuba and the island became the fastest growing new market launch in the company’s history.
Despite these areas of optimism, Cuba has a long way to go before its economy can boom. The US still imposes strong sanctions on the country, although public opinion has turned sharply against it. Cuban debt trades for pennies on the dollar. The country has significant infrastructure problems, including subpar roads, financial services, and information technology.
But Cuba is focused on addressing these needs. It ranks 135th in Internet penetration in the world, putting it between Syria and Swaziland. Only 25% of Cubans have any access, and those that do can only reach a small, censored subset of the web. But the country plans to get 50% of households connected to the internet over the next 5 years. It will also need to build out its infrastructure to support the swarms of inbound vacationers that might flock to the island. It currently has 62,000 hotel rooms—roughly the same as Phoenix — but already has plans to build 13,600 more by 2016. Cruises to the island have quintupled over the past three years, but its ports need to be upgraded to host the biggest ships. And indeed there are billion dollar plans to upgrade the island’s Port of Mariel and set up a special economic zone there, with much of the funding coming from Brazil.
More problematic concerns persist. The country does not have the solid rule of law needed to make investors confident. It’s not clear how contract disputes will be handled, or for that matter how basic regulations will be applied. Ultimately, it’s impossible to truly know today how far Cuban liberalization will go. While some property laws have been relaxed, most industrial activity in the country is still centrally controlled.
In today’s highly interconnected global economy, Cuba offers a rare opportunity for businesses and investor to enter semi-untouched markets. There’s plenty of hype and excitement, but let’s not lose track of reality. Risks abound, but rewards could be plentiful – for the patient and long-term oriented. Sooner or later, we’ll be toasting a free Cuba with a cuba libre.