Economy

The Next 50 Years

In the wake of Fidel Castro's death and with his brother's resignation now forthcoming, what investment opportunities might arise in Cuba in the short run?

After ousting the Batista dictatorship in the late 1950s, Fidel Castro went on to control the country for nearly five decades, exerting direct control over the state apparatus. Reforms and the gradual softening of policy began following the delegation of power to Raúl, when a number of legislative changes were made. These included the granting of permission to civilians to engage in licensed self-employment—called cuentapropistas in Spanish—a move which represented a considerable change in government treatment of the private sector. Elsewhere, restrictions were placed on the tenures of government representatives, setting ten years as the upper limit. Raúl Castro himself will have to leave office by February 2018. And perhaps most importantly, relations with the US began showing signs of improvement over the past two years, particularly after the president met Barack Obama in Panama City for the Seventh Summit of the Americas in 2015.

These developments have been paralleled by the introduction of incentives to make Cuba more appealing to international funds and companies. Now in place, this new law will supersede the pre-existing law brought in to encourage FDI in 1995, following the crises created by the disintegration of the Eastern Bloc. The more recent crisis caused by Venezuela’s cessation of subsidized oil exports to Cuba has accelerated the moderating of the country’s foreign policy.

Among other benefits, new regulations offer more generous tax cuts and increased security for investments, an important consideration given that Castro famously nationalized private businesses during the revolution. They also establish three main vehicles of investment, namely joint ventures with Cuban partners, commercial contracts with Cuban authorities, and 100% foreign-owned companies.

The former model allows for tax exemptions on net profits for up to eight years after the JV’s establishment, and this can be extended by the Council of Ministers. After that period, companies will pay a 15% tax on net profits, although this tariff could increase to up to 50% if the firms are involved in the exploitation of natural resources. However, foreign investors are not able to associate with cuentapropistas and must hire their staff through a local firm, which will also negotiate working conditions.

The regulation also prioritizes investment in 11 main sectors: agriculture, the food industry, pharmaceuticals, biotechnology, energy, iron and steel, infrastructure, sugar, mining, logging, and tourism. Ever since inflows of FDI began in earnest in the 1990s, the tourism sector has been the industry responsible for the largest amount of investment.

In the first half of 2016, Cuba received _x005F _x005F over two million tourists, and is on track to surpass the record figure of 3.5 million tourists from 2015. More American tourists are expected to land in Havana in the coming years if relations with the US continue to improve. However, Donald Trump’s electoral victory could signal a change in the US’s diplomatic stance toward Cuba.

While future foreign relations remain uncertain, the Cuban regime continues to move along the path of reform, and recently presented its portfolio for foreign investment which comprises almost 400 projects worth over USD9.5 billion. Cuba expects to attract around USD2 billion a year in FDI as a direct result of legislation introduced in 2014. According to an interview in Granma, the state’s official newspaper, Deborah Rivas, General Director of Foreign Investment at the Ministry of Foreign Trade and Foreign Investment of Cuba, stated that there are _x005F _x005F nearly 200 foreign companies operating in Cuba. As of March 2016, she continued, over 30 firms have invested in the country thanks to the 2014 law.

The government has also created the Special Economic Development Zone of Mariel, a free trade zone just 45km away from Havana equipped with a port and storage facilities. Cuba already established two similar zones in the 1990s, but with Mariel the country plans to make the most of its strategic location in the Caribbean to become a logistic hub for the transportation of goods to the US. Unfortunately for Cuba, the success of these plans largely depends on how the new Washington administration acts in the year to come.

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