Cuba’s Hoisted Flag Flaps
Havana and Washington reopened their embassies in solemn ceremonies attended by veterans of the decades ago break in diplomatic relations, as US banking and telecom firms received permission to service the island. Under looser rules 80,000 Americans not of Cuban descent visited through July, helping to support estimated 4 percent GDP growth. Agricultural exporters continue to press for the removal of industry and broad trade sanctions to boost last year’s $300 million in exports, but have come to realize they must also extend credit as officials repay old debt to Mexico, Russia and Japan. Secondary trading of outstanding Cuban obligations has picked up but the market remains illiquid and is hobbled by the bar on US participation. As a proxy investors have bought the closed-end Herzfeld Caribbean Fund, where the equity portfolio has begun to target technology in light of the Castro government’s commitment to broadband in half of homes by end-decade. The next Communist party congress early in 2016 is expected to unveil additional small-scale private sector reforms and could introduce a formal timetable for currency unification. European and Latin American companies with existing ties have revealed modest expansion plans as they continue to contend with overweening state partnership demands and domestic political and economic swings. Spanish banks and firms enjoying a 3 percent GDP recovery doubt that any major or insurgent party will win convincingly in upcoming elections, as local currency earnings in the region are hammered by slumping commodities and domestic demand and capital outflows.
In nearby Central America in contrast bond sentiment soured with massive anti-corruption protests calling for executive branch purges in Guatemala and Honduras. The former holds presidential elections the first week of September after the bribery arrests of the Vice President, central bank head and social security system administrator following a UN panel investigation. The outgoing incumbent Perez Molina could not field a party successor under scandal and the front-runner has been tainted by the monetary authority’s alleged misbehavior. Before the poll growth and inflation were both 3 percent with mining and financial services up double-digits, as the fiscal deficit rose to around 2.5 percent of GDP to be financed by domestic borrowing. Remittances were up almost 10 percent on US construction rebound, as lower oil import costs reduced the trade gap.
Honduran President Hernandez is a year into his term and the Supreme Court recently ruled that he could seek a consecutive mandate, as the National Party in power was implicated in a big health service fraud. He agreed to “dialogue” with demonstrators but refused to resign or convene an independent inquiry. The IMF program of budget restraint may now be complicated by the standoff as higher sales taxes push inflation to 5 percent. The building sector has weakened but remittances jumped 15 percent in the latest quarter to shrink the current account deficit to 6.5 percent of output. The booming dollar has lifted consumer spending power at a time both countries may have to wait for a new Obama administration anti-poverty initiative to gain traction pending a truce between leaders and increasingly vocal civil action flag bearers.
