EMTA SPECIAL SEMINAR: CUBA – THE NEW FRONTIER?
Tuesday, December 8, 2015
360 Madison Avenue, 17th floor
(on 45th St. between Madison and 5th Aves.)
New York City
This EMTA Special Seminar will provide analysis and commentary by a panel of experts on the prospects and challenges of doing business in Cuba. Specific topics will include:
A. What is the macro
situation in Cuba?
B. What is the present state of international capital markets transactions in Cuba?
C. What important impediments exist in the US and Cuba to US citizens and entities doing other business with Cuban citizens or entities?
D. With reference to precedents in the
political-economic evolution of Eastern Europe, Nicaragua and other countries,
what is the likely path of transformation of the US-Cuba relationship?
11:45 a.m. Registration
12:00 noon - 1:00 p.m. Market Panel Discussion
Fernando Alvarez de la Viesca (TPCG Group) - Moderator
Rupert Clifford (Oxford Portfolio Advisors)
Sudeep Singh (Redux)
Augusto de la Torre (World Bank)
1:00 p.m. - 2:00 p.m. Legal Panel Discussion
Danforth Newcomb (Shearman & Sterling) - Moderator
Julissa Reynoso (Chadbourne & Parke LLP)
Jason Poblete (Poblete Tamargo LLP)
James D. Whisenand (Whisenand & Turner P.A.)
Lunch will be provided
Additional support provided by Capital Markets Financial Services, Inc.
Registration fee for EMTA Members US$95 / US$695 for non-members.
First EMTA Cuba Panels
EMTA hosted its first market and legal Cuba Panels “Cuba - The New Frontier?” on December 8, 2015 at its NYC offices. TPCG Group sponsored the event, with additional support from Capital Markets Financial Services, Inc. Topics addressed included: the present state of international capital markets transactions in Cuba; important impediments in the US and Cuba to US citizens and entities doing other business with Cuban citizens or entities; the outlook for (i) foreign investment in and (ii) international capital markets transactions with Cuba if existing US government restrictions on the foregoing are removed; the macro situation in Cuba; and, with reference to precedents in the political-economic evolution of Eastern Europe, Nicaragua and other countries, the likely path of transformation of the US-Cuba relationship.
Fernando Alvarez de la Viesca (TPCG Group) moderated the market panel, with the following panelists: Rupert Clifford (Oxford Portfolio Advisors), Sudeep Singh (Redux) and Augusto De la Torre (World Bank).
In response to de la Viesca’s question on what is the macro situation in Cuba, De la Torre stated that there is an interesting tension -- the macroeconomic balances seem to be right, but the economy is struggling to grow, despite the process of normalization of relations with the U.S. One big reason for the lack of vigor in economic growth is the great inefficiency in resource allocation caused by the dual exchange rate system. In this connection, he referred to his paper, “Exchange Rate Unification: The Cuban Case”, which can be found by Clicking Here, one of the docs under After the adverse shock that Cuba suffered with fall of the Iron Curtain, which led to 3-digit inflation and a hard time of painful adjustment, Cuba made the decision in the mid-1990’s to move gradually towards a more market-based economy and open up its tourism sector. This “perestroika” was suspended in 2003 when Cuba started to receive aid from Venezuela. With cheap oil, the energy and construction sectors expanded, while external conditions improved visibly, including due to Venezuela’s commitment to purchase Cuba’s medical services. Cuba’s positive economic situation lasted until 2008 when it became unsustainable. This led to a new wave of reform began, macro balances were brought into order, the external deficit was reduced to zero and payments were restored and normalized, but growth remained weak, with the economy growing only by 2-3%. This context helps us understand why Cuba has been trying to accelerate its market opening process. Agriculture, light manufacturing, medical and other services were some of the sectors initially targeted for commercial opening. However, the market for labor has remained distorted, as most labor has to be hired through state employment agencies. And, until the distorted exchange rate regime is fixed, Cuba can’t develop the crucial market for inputs, including access to imported inputs. Moreover, exchange rate system reform requires a simultaneous fiscal reform because there are large taxes and subsidies implicit in the dual exchange rate regime.
In response to de la Viesca’s question on what is the present state of international capital markets transactions in Cuba (kinds and volume of transactions, as well as counterparties), Clifford posited that Cuban was guarded in discussing its outstanding sovereign and corporate indebtedness figures, but there were bilateral and syndicated credits outstanding in addition to Paris and London Club debt, with differing levels of trading on all of those credits. The debt to GDP numbers are unknown, and no one knows what their money is really worth. It was clearly in Cuba’s interest to deal with its creditors and, while one doesn’t know what the level of PDI forgiveness will be, there will likely be many individual deals being negotiated. Economic impediments remain: (i) lack of Cuban private capital formation, (ii) undeveloped private sector markets and (iii) foreign exchange capital and employment controls. However, there was a considerable amount of ambition and entrepreneurship to normalize relations.
Singh recounted how in 2006 $4 billion of working capital was extended to Cuba by European banks and hedge funds, but that after the 2008 financial crisis the ability to lend more was limited. With rates at 12-15% and the introduction of Basel III, the perfect storm in trade finance was waged as banks couldn’t lend more money or they’d be subject to considerable fines. With this huge barrier to entry and an economy that was dependent on tourism, Cuba became stagnant. Singh believes that the Cuban economy is currently in transition and will likely take off, but market access right now remains difficult. He thinks the leadership is well-prepared, there’s a big opportunity for medical equipment and architecture growth (and repatriation of its doctors) and the focus should be on reducing the cost of their imports. However, banks are reluctant to enter into new arrangements that may be unwound by a US political candidate that may win the White House and not be as forward-thinking as Obama about US-Cuban relations. When the monetary system is unified, there will be huge winners and losers in the process, people out of jobs, etc. He also stated that, while the genesis of the embargo relates to the seizure of US assets, there may be some movement on the claims issue soon. He suggests that US investors approach OFAC to address the current prohibitions.
Danforth Newcomb (Shearman & Sterling) moderated the legal panel, with the following panelists: Julissa Reynoso (Chadbourne & Parke LLP), Jason Poblete (Poblete Tamargo LLP) and James D. Whisenand (Whisenand & Turner P.A.).
In response to Newcomb’s question on what is the most important issue blocking normalization of economic relations with Cuba, Reynoso stated it was the Helms-Burton Act and all its attendant complications. With Obama’s loosening of the Act’s implementing regulations, there was significant progress in terms of movement of people – Cuban and non-Cuban Americans, and contact between Cubans and others in commercial, financial and other contexts. However, there remain significant barriers for normalization of business activities, with the real and potential threat of sanctions (which have already been imposed) looming. In her view, the formalization of commercial and financial activities was still in its preliminary stages (as a Cuban government afraid of change and entrenched with a huge bureaucracy was still a big impediment). However, if a Democrat were to be elected, she predicted that the Act would be repealed. On the expropriated property claims of US citizens issue, she stated that the Cuban authorities acknowledge the challenge, and she hopes they will be practical and reasonable in resolving it.
In response to Newcomb’s question on when Congress would lift the Cuban embargo, Poblete replied that the embargo “was not going anywhere” and that this was not an important policy topic or “political chit” for Congress (which already had a risk aversion) to take on. He stated that the lack of good information was a big part of the problem, as was the fact that Cuba was a small, not important, market and that the claims issue, which was manageable, had to be resolved (and it was a “thread passing through each transaction” and in Cuba’s hands to resolve it if it wanted to attract investors and be taken seriously) before there was any contemplation of lifting the embargo. The compliance risk was intense (with some of the regulations not even being consistent) and Cuba had to demonstrate some movement first, given all the legal problems. “Access to the US market was a privilege, not a right”, and it was within Cuba’s control as to when the Act would be repealed. After Russia, China and Venezuela aided the country, it was now looking for another “sugar daddy”.
Whisenand disagreed, claiming that the Act restricts commercial activities, but other things remain at play. Other than tourism and multilateral agency support, the Act didn’t even need to be repealed, was just an “enabling law”, not an impediment to growth, and not a “be all and end all”. He posited that there was no political will in Congress to fight Obama “who had done most of the heavy-lifting” and still had 14 months to green-light the lifting of the embargo. And, many of the holders of property claims may have passed away (although the Cuban nationals issue remained a domestic one even if they now live outside of Cuba since their property was taken while they were still nationals). In connection with the reference to precedents in the political-economic evolution of Eastern Europe, Nicaragua and other countries, and the likely path of transformation of the US-Cuba relationship, he stated that the analogy to Eastern Europe was not apt since there were transition governments in that locale. Unfortunately, “it takes too long for US businesses to make any money [in Cuba]”. The State Department was the biggest impediment, leading more of the change in policy with its sanctions, while OFAC was less restrictive.
In response to Newcomb’s question on whether the Act licensed trading in Cuban debt, Whisenand did not think the Act impeded it since it related more to the Cuban government than the private sector; Poblete posited that, when the Act was drafted, it granted unprecedented authority to the President to ease sanctions to help the Cuban people, but not its government, and that the Trading with the Enemy Act impeded such trading (one needs the US government’s permission and OFAC license to trade claims and enter into other secondary market trades); and Reynoso claimed that the President had more discretion than one may imagine in terms of creating more flexibility through regulations. Poblete concluded that it was a myth that the US has been strengthening its Cuban sanctions; in fact, they have been eased.
Newcomb agreed that the Act would easily be repealed in the next Administration, be it a Democrat or Republican at the helm, that the Act had many loopholes and was not as big an impediment as people surmised, and that it was a symbol, a political issue (with Russian and Iranian sanctions paling in difficulty to the Cuban situation).
Whisenand’s PowerPoint can be accessed by Clicking Here.
Links to relevant documents can be accessed by Clicking Here.