Savings, Foreign Currency Market & Cryptoactives in Cuba

February 25, 2022

Very few people in Cuba have enough savings to capitalize on them in Cuban currency, whether that’s in CUP pesos or the MLC (magnetic USD).

By Miguel Alejandro Hayes Martinez (El Toque)

HAVANA TIMES – The structure of citizens’ consumption of goods and services changed after World War II. These changes were soon reflected in economic theory. This can be seen in the permanent income hypothesis.

According to this theory, consumption is explained by two sources: personal income and loans or advances. In other words, a person lives off their hard work and the debts they incur (on their present work and an advance on future work).

This isn’t the case for people whose personal incomes cover their needs. Sectors with incomes that allow them to satisfy certain levels of consumption and have a “little left over”, have savings. Meanwhile, public policy tries to capture these savings, as a source of investment, according to the old economic maxim: savings = investment (there are also people who use loans to invest, and they are also the subject of interest of public policy, but I’ll just be focusing on savings in this article).

Citizens with savings have several options when it comes to investing their money. The classic option is to deposit these savings in the bank, and after a while, they will generate interest, or these savings can be given as a direct investment, buying stocks in a company (the right to take a share of a company’s future profits) in the financial market.

The financial market is where savings go in exchange for profits in the future, on the one hand, but on the other, it also implies the promise of profits in exchange for financing. Depending on what offers greater proceeds, depositing money in a bank or buying stock, which means taking a gamble, a decision is made (this can include the counsel of fund managers, financial advisers, etc.).

Inflation is a variable that is also present in the financial market, and it needs to be taken into account because today’s money will be worth less tomorrow (but I won’t talk about this variable here).

A new market has recently appeared, which represents potential profits for those who have savings, just like the financial market does. This is the cryptoactive market.

Cuba’s financial market

In Cuba, loans aren’t systematically granted for consumption, by banks or businesses. As a result, loans or advances aren’t a significant factor in consumption, historically speaking, and Cuban citizens have less tools than other societies to cover their expenses.

Add to this the fact that the minimum wage in Cuba is not enough. We might say that wages under 4000 pesos (the peso is 25 x 1 USD officially but not available at banks and on the street the rate is 100 pesos for $1.00) aren’t enough to live a decent life, in general. Therefore, public-sector wages aren’t the variable that cover all of consumption. Most government workers are in this predicament.

However, approximately a million workers are working independently, there are remittances, side-hustles… Plus, there are several generations co-living in the average Cuban household, which explains the more complex structure of consumption, instead of the permanent income hypothesis theory in its pure sense.

Bearing the above in mind, a partial conclusion is that the Cubans who don’t have a salary, plus a side-hustle, plus remittances, with a little something left-over, don’t have any savings to decide where to better invest it. The majority are trapped in the rat-race for survival: household savings are very little.

But in Cuba, there are also people with money. A minority has enough to think about how to add value to it. This minority might be deciding whether to put their savings in the bank (waiting for an interest rate to capitalize their deposit, read here: profit) or whether to turn to the financial market.

Although, despite Cuban banks offering interest rates, citizens with money don’t go to the bank to keep it safe or, rather, they don’t deposit a large sum of money in the bank.

Nor do they go somewhere to buy stocks (or rights to company profits) so others have funding, because this doesn’t exist here. This activity between private actors hasn’t been legalized in Cuba, nor is there a private business structure ready for this; plus, these kinds of market operations aren’t carried out between private and public-sector actors. There just isn’t a traditional and official financial market in Cuba.

Likewise, very few people in Cuba have enough savings to capitalize on them (and they want to) in Cuban currency, whether that’s in CUP pesos or the MLC (which only exists on magnetic cards). There aren’t any funding opportunities. In other words, the few rich people in Cuba (who can save money to spend it on something other than consumer goods) have their savings in foreign currency, outside the country where possible (where banks do offer interest rates), in art pieces, in other valuable assets such as property, but never in CUP or MLC. It’s always better to save your money in a currency with international backing and stability, than in a currency that doesn’t. I don’t need to explain why Cuban currency is weak and under-valued.

Well, even though savings are considered a classical source of funding for investments, for savings to act as such, they need to find investments in the local economy a lot more attractive than in a foreign economy, which begins with the currency these savings first take shape. Therefore, for an economy to capture savings in the shape of investments, it needs a strong and reliable currency. This isn’t the case for Cuban currency. There are no sources of funding.

When it comes to demand, there isn’t a regular, stable framework where a group of financial bodies can come together and grant the right to participate in profits, in exchange for financing. There is no demand for financing.

Without supply and demand, there is no financial market, as a matter of fact (regardless of isolated, illegal and secondary operations from a statistical point of view).

Another partial conclusion we can draw is that, in the Cuban case, regardless of whether there is inflation or not, the traditional relationship that the economy forges between savings and investment has no way of being formed with the source and magnitude of Cuban incomes, just like there is no way a landscape can be paved for a financial market; so this correlation implies zero economic connection in a systemic way.

As a result, the behavior and fate of savings is indifferent to the exchange rate offered by the bank, or “financial market”, regardless of whether there’s inflation or not.

Cryptoactive market

Despite a financial market not existing in Cuba, the cryptoactive market is gaining ground.

This market’s volatility, uncertainty, and absence of Cuban citizens’ culture in this regard to deal with this landscape, mean that greater savings continue to be saved in the aforementioned ways, instead of in the new cryptoactive market.

We have to remember that it continues to be a commercial space like the stock market, which isn’t exactly fit for the direct participation of anyone with savings. As a result, Cuba’s cryptoactive market doesn’t respond to the conventional dynamic it has in other regions: trying your luck hoping your money adds value.

Instead, this market in Cuba responds to a necessity and is pretty much a necessary way out: it helps remittances enter the country, as well as other funds from abroad. Today, having cryptoactives is one of the few options to get foreign currency into the country online. As a result, Cubans or family members abroad buy cryptoactives to then sell them in MLC in Cuba and receive payment in this currency.

So, unlike the normal cryptoactive market, it has emerged just to get money into Cuba so it can be spent on consumer goods. It’s a market where the basic nature is to simply reproduce one of its parts, and not to capitalize on it. We have to remember that noone (except for reselling businesses, which aren’t the majority) wants to have thousands of dollars in MLC, they just want it in small sums as they consume.

On the other hand, there are people in Cuba who, unlike those who do it to get MLC from selling consumer goods, only buy cryptoactives to then sell them for a higher price (the only reason to buy a cryptoactive is the hope that it will be worth more in the future); like people do when they buy foreign currency in bulk to then resell it for more money. This group is looking to make a profit. They are using the need to get MLC into Cuba to buy cryptoactives and then their return on them is higher when these go up in price. They have discovered a way of making a profit out of buying/selling them.

This is another peculiarity of the Cuban cryptoactive market. While those who intervene, to buy and sell, in other places, hope to increase their returns; in Cuba, only one party seeks to satisfy a need without any profits, while another group is looking for a profit.

Rather than being a cryptoactive market, it’s usury with cryptoactives.

The reality is that this market represents an immediate solution, but its structural price is creating a bubble; thus, it isn’t a systemic solution, it isn’t viable for the majority of Cubans and it will only last as long as the bubble does.