Cuba to Issue Bonds to Finance Budget Deficit
HAVANA TIMES — Cuba will begin to issue sovereign bonds to pay for the debt generated by the budget deficit, said Finance Minister Lina Pedraza on Saturday.
The nation will finance up to 70 percent of the deficit, which in 2014 is expected to reach 4.7 percent of the Gross National Product (GNP), Pedraza told the National Assembly, reported Prensa Latina.
The remaining debt will be covered with the issuance of fresh currency by the Central Bank, she said, thus controlling inflation “more efficiently.” The deficit is expected to grow faster than the GNP, she pointed out. This year, the GNP grew less than expected, by 2.7 percent instead of the hoped-for 3.6 percent.
The bonds will bear an annual interest of 2.5 percent a year and will expire in 20 years. Pedraza did not say when they will be issued.
A sovereign bond is defined by Investopedia as “a debt security issued by a national government within a given country and denominated in a foreign currency. The foreign currency used will most likely be a hard currency, and may represent significantly more risk to the bondholder.”
“The government of a country with an unstable economy will tend to denominate its bonds in the currency of a country with a stable economy,” Investopedia explains. “Because of default risk, sovereign bonds tend to be offered at a discount. Brady bonds, which are issued by governments in developing countries, are a popular example of sovereign debt securities.”
The GNP is expected to rise about 2.2 percent next year, a growth restrained by the declining price of sugar and nickel, two important Cuban export products, and the rising prices of food on the world market, said Adel Yzquierdo, Minister of the Economy.
Cuba spent more than 1.7 billion dollars in food imports in 2013, a heavy burden on the nation’s finances. Yzquierdo blamed an insufficient production of milk, rice and beans for the added expenditure in imports.
The national budget for 2014, approved Saturday by the Assembly, assigns 54 percent of the funds to social expenditures, such as education, health care and social security.
Also on Saturday, Vice President Marino Murillo Jorge told the National Assembly that monetary unification will make the Cuban peso (CUP) the only currency in Cuba. The convertible peso (CUC) will be phased out.
At present, the CUP is traded at 25 per 1 dollar, the CUC at 1 per 1 dollar.
Murillo did not give a timetable for the phase-out and did not say what the rate of exchange might be.
Who would buy these bonds? Given Cuba’s track record, the risk of default is practically 100%.
The Spanish, the Russians. the Vietnamese and the Venezuelans have tried to no avail to find refinable crude. Cuba does not possess the know-how nor the capital to extract the oil themselves so they would have to lease out the drilling rights to a foreign company. Under the US embargo, that foreign company would not be able to sell that oil or any other oil they sell directly
to the US. This restriction severely limits their pool of qualified partners. The Chinese, of course, are always looking for cheap oil. If the deals the Chinese have struck with Venezuela and throughout Latin America are any indication, the Cubans
would not get rich from the sale of their oil to China. Most of China’s deals are through lowering the interest on existing loans. It is unclear if found Cuban oil could replace the Venezuelan subsidy Cuba currently receives. If so, Venezuela would then actually have to pay for the 40,000+ Cuban doctors, nurses, engineers, technicians, etc. currently working in Venezuela. Venezuela is having financial problems of their own and likely unable to pay cash for Cuban services. Finally, if past is preview, when Cuba had access to hundreds of millions of Soviet rubles per year, they were not known for their fiscal prudence and well-managed economy. On the contrary, a few extra shekels in Cuban pockets because of oil revenues would likely lead to repeating the international misadventures of the past and these days, given CIA drones and NSA spying, that could be risky. Anyway, the truth is they already found the oil and decided it was too expensive to extract. It is a low quality crude embedded in rock that would also be expensive to refine. Like the 10 million ton sugar harvest, the super cow, the biotech boon and the moringa plant, oil is the next Castro flight of fancy that has come to nothing.
They would be better off with a loan shark. This takes the high-risk junk bond to a whole new level!
What would happen Moses if Cuba found all that lost oil
Thanks
Lawrence
I do not see it happen. The risk is very high and as a result the interest rate in the bonds have to reflect such a risk. The country will have to pay at least 12 to 15%. There is terrible history of payments to foreigners by the Cuban government.
Cuban debt instruments?!!! Hahahaha! I can’t imagine what the discount on these bonds will be but Cuba’s wetnurse Venezuela pays about 14.5% on their long-term debt. By comparison, for debt with the same due date, US treasuries trade at about 3.0% and Venezuela has the world’s largest known oil reserves. Cuba has NOTHING. Well, that’s not exactly true. Cuba is famous throughout the financial markets for the Castros ease at not paying their bills. Cuba bonds? I would not be surprised to see rates of over 20%. They would be better off with a loan shark. This takes the high-risk junk bond to a whole new level!