Identifier
Created
Classification
Origin
09HAVANA33
2009-01-15 16:24:00
CONFIDENTIAL
US Interests Section Havana
Cable title:  

INTERPRETING CUBA'S 2008 ECONOMIC PERFORMANCE

Tags:  ECON PGOV PINR PREL CU 
pdf how-to read a cable
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R 151624Z JAN 09
FM USINT HAVANA
TO RUEHC/SECSTATE WASHDC 4037
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCOWCV/CCGDSEVEN MIAMI FL
RUEAIIA/CIA WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUCOGCA/COMNAVBASE GUANTANAMO BAY CU
RHMFISS/HQ USSOUTHCOM MIAMI FL
RHMFISS/JOINT STAFF WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
C O N F I D E N T I A L HAVANA 000033 

SIPDIS

DEPT FOR WHA/CCA

E.O. 12958: DECL: 01/13/2019
TAGS: ECON PGOV PINR PREL CU
SUBJECT: INTERPRETING CUBA'S 2008 ECONOMIC PERFORMANCE

REF: A. HAVANA 969

B. HAVANA 752

Classified By: COM Jonathan Farrar for reasons 1.4 (b) and (d)

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SUMMARY
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C O N F I D E N T I A L HAVANA 000033

SIPDIS

DEPT FOR WHA/CCA

E.O. 12958: DECL: 01/13/2019
TAGS: ECON PGOV PINR PREL CU
SUBJECT: INTERPRETING CUBA'S 2008 ECONOMIC PERFORMANCE

REF: A. HAVANA 969

B. HAVANA 752

Classified By: COM Jonathan Farrar for reasons 1.4 (b) and (d)

--------------
SUMMARY
--------------


1. (SBU) On January 7, the Cuban Office of National
Statistics published a Panorama of Economic and Social
Indicators for 2008 providing some detail behind the data
reported to the National Assembly (ref A) by Raul Castro
and his economic team December 26-27. While the
availability of statistics in Cuba has noticeably improved
over the past two years, interpreting their true
significance remains a challenge. GDP, as uniquely
measured in Cuba, grew by a disappointing 4.3 percent led
by service exports, transportation, and tourism. In
addition to three hurricanes, Cuba experienced a perfect
storm in its current account with the price of its key
imports (food and fuels) rising and the price of its key
exports (nickel and, to a much lesser extent, sugar)
falling. As a result, the trade deficit in goods increased
by over USD 4 billion or 68 percent from 2007. For the
same reasons, the fiscal deficit also took a hit, climbing
31 percent in 2008 to 6.7 percent of GDP (septel). Raul's
theoretical solutions of reducing some subsidies (most
likely the ration card) and raising wages are much more
likely to improve the Cuban economy, if one day
implemented, than his more specific and immediate
prescriptions of limiting travel and perks for government
officials. End Summary

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HOW CUBAN GDP GROWS
--------------


2. (SBU) At Fidel Castro's urging, the Government of Cuba
(GOC) started using an unconventional method for
calculating GDP in 2003. Rather than calculating the
domestic value of government services provided for free
(healthcare, education, etc.),the GOC values these
services at prices that would have been charged in an
unspecified market economy. Furthermore, some GOC official
statistics (e.g. GDP and the state budget) combine Cuba's
two currencies, the Cuban non-convertible peso (CUP) and
Cuban convertible peso (CUC),at the official exchange rate
of 1 to 1 rather than the unofficial but formally traded

exchange rate of 24 to 1. Thus, the absolute value for GDP
reported in official statistics is meaningless and should
not be compared with other countries. However, changes in
GDP year to year remain meaningful under the assumption
that the GOC has not made any additional, unreported
changes in methodology.


3. (SBU) Raul Castro and his economic team reported 4.3
percent real GDP growth in 2008, well below the 8 percent
originally projected, the 7.3 percent reported for 2007,
and the 12.1 percent reported for 2006. The reasons cited
for the disappointing growth include the U.S. embargo, the
devastating hurricane season, higher prices for fuels and
food imports, and lower prices for key exports (nickel).
These excuses are only partially valid. It's hard to
imagine that the GOC'S projection of 8 percent growth for
2008 did not already take into account the likelihood that
U.S. sanctions would continue throughout the year. While
the three hurricanes in August and September significantly
impacted economic activity in the second half of the year,
the GOC had already warned that GDP growth for the first
half of 2008 was slower than expected at 6 percent.


4. (U) The GOC attributed more than 85 percent of Cuba's
4.3 percent GDP growth in 2008 to just four sectors:
public health and social assistance (41 percent);
transport, storage, and communications (16.2 percent);
import duties (15.2 percent); and hotels and restaurants
(13.9 percent). It is likely that the public health and
social assistance sector includes inflated domestic
spending figures using the GOC's unique methodology plus
income earned (in cash and goods) from exporting medical
services, primarily to Venezuela. The GOC focused
government spending on improving transportation of goods
and people with highly publicized purchases from China,
Russia, Vietnam, and Iran.


5. (SBU) In a more conventional breakdown, Economy and
Planning Minister Jose Luis Rodriguez reported on December
27 that personal consumption represents 49 percent of GDP
(down from 53 percent in 2007),social (government)
consumption represents 29 percent (up from 28 percent),
investment represents 14 percent (same as 2007),and net
exports represent 8 percent (up from 5 percent). The
increase in net exports as a percentage of GDP is
surprising considering the deficit in the trade of goods
grew by 68 percent to nearly USD 11 billion. As a result,
we can assume that the surplus in the trade of services
grew even faster, although the GOC offers very little
transparency into this figure which likely includes exports
of medical services (doctors, nurses),tourism, and other
consultancies.


6. (U) Planning and Economy Minister Rodriguez estimates
2009 GDP growth of 6 percent, but, unlike previous years,
provided no detail into how Cuba will achieve it.

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MORE TRADE AND TOURISM
--------------


7. (SBU) Cuba has a relatively open economy in the sense
that it is heavily dependent on the external market, in
particular trade, tourism, and remittances. Total trade in
goods increased 33 percent in 2008, dominated by a 44
percent increase in imports. Cuba reportedly spent USD 907
million more on food and USD 1.336 million more on fuels,
representing half of the USD 4.3 billion increase in the
trade deficit. (NOTE: Through November, imports from the
United States were already 50 percent higher than 2007.
U.S. exporters value the sales at USD 660 million, but the
cost to Cuba is closer to USD 800 million. END NOTE) Cuba
also increased purchases of machinery and equipment, most
likely related to the transport, construction, and
communications sector post-hurricanes.


8. (C) According to official statistics, exports somehow
managed to increase by 2.1 percent even though the average
price of Cuba's most important export, nickel, dropped 41
percent and the tonnage produced dropped 7.4 percent.
According to Economy and Planning Minister Rodriguez, the
average price of nickel, which represented 58 percent of
all export revenue in 2007, dropped from USD 37,216 per ton
to USD 21,837 as of November 2008. The price continued to
drop into 2009 and currently floats between USD 11,000 and
12,000 per ton. Cuba produced 70,400 tons of nickel in
2008, down from 76,000 in 2007. The lower production was
likely due to damage and delays caused by three major
hurricanes. The GOC estimates that revenue from nickel
exports was USD 250 million less than forecast for 2008.
Regardless of the forecast, we estimate that nickel revenue
was more than USD 1 billion less in 2008 than the record
revenue earned in 2007. More than half of the nickel
production is through a joint venture with Sherritt
International of Canada.


9. (C) Nevertheless, the official press reported on
January 5 that the nickel industry "gained economic
leadership" over the tourism industry with USD 552 million
in profit. The GOC has not reported its profit from
tourism, but did report that the number of visitors in 2008
climbed by 9.3 percent and the corresponding revenue
increased by 13.5 percent to USD 2.5 billion. A closer
look at the data published shows that Canadian visitors
continue to dominate the Cuban tourism industry. Through
November, visitors from Canada represented one-third of all
visitors in 2008 and over 75 percent of the increase in
visitors. Visitors from Russia rose by 40 percent and from
Poland by 100 percent, but their impact is significantly
smaller than Canada and Western Europe. Visitors from all
Western European countries were actually down in 2008.
Return rates to Cuba are relatively low, and we understand
that travel agencies are pushing hard for foreigners to
visit Cuba now before the GOC or USG implements
significant reforms.

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INFLATION AND UNEMPLOYMENT
--------------


10. (SBU) GOC official statistics reported a December to
December increase in the consumer price index of only 0.8
percent. This extremely low rate is notable not only
because it is significantly lower than the 2007 rate of 2.8
percent and the 2006 rate of 5.7 percent, but also because
2008 saw the first increase in gas prices since 2005 (ref
B). On September 8, regular gas prices rose by 69 percent
and diesel by 87 percent. The GOC, holding true to their
promise, revised gas prices again three months later, this
time down by an average of 25 percent. Nevertheless,
prices remain between 25 and 40 percent higher than before
September, which trickles into all facets of the economy.
In addition to higher fuel prices, the money supply grew by
9.4 percent, average wages grew by 1.5 percent (from CUP
408 per month to CUP 414, or about three more dollars per
year),and prices for a variety of everyday purchases like
soap, beer, and transportation went up. The reported 3.4
percent increase in the average consumer price index for
2008 and 2.6 percent higher GDP deflator used to calculate
real GDP are more realistic inflation indicators, but most
likely still on the low side.


11. (SBU) The official unemployment rate fell to a new
historic low of 1.6 percent, or 79,600 people. The
economically active population of 5 million men and women
represents 69 percent of the population age 15 to 59. The
remaining 31 percent, or 2.2 million people, are
categorized as not actively looking for work but many of
whom work in the informal economy. The agricultural
sector employees nearly 20 percent of the workforce, and
together with construction (18 percent),education (15
percent),and the very broad public health/social
assistance/sport/tourism sector (13 percent) employs
two-thirds of all active Cubans.

--------------
FISCAL DEFICIT
--------------


12. (SBU) Similar to GDP, Cuban budget calculations mix
both currencies and are therefore better analyzed in terms
of changes than in absolute terms. Although revenues were
5.6 percent higher than budgeted (and 14.4 percent higher
than 2007),the GOC outspent their budget by 9 percent
(15.7 percent higher than 2007). Almost all of the higher
spending went to food subsidies, fuel subsidies, and
spending on housing and construction material
post-hurricanes. Overall, the fiscal deficit grew by 63
percent to 6.7 percent of GDP. The 2009 budget plans to cut
the fiscal deficit to 5.6 percent of GDP. As part of the
budget, the GOC projects that subsidies will decrease
slightly with lower international food and fuel prices.

--------------
RAUL'S SOLUTIONS AND COMMENTS
--------------


13. (C) As noted in Ref A, Raul Castro offered few
concrete remedies in response to Cuba's disappointing
economic performance in 2008. In fact, he predicted an
even more difficult environment in 2009 as a result of the
world financial crisis. He said, "next year will be one of
great uncertainty in the world economy and we should be
prepared to take up that serious challenge which has been
affecting us considerably." He discussed in general terms
the need to adjust foreign currency spending to levels
equivalent to foreign currency revenues by continued import
substitution and increasing tourism and healthcare
services. He also admonished "most people" for not
properly valuing the services they receive for free as part
of their compensation, but rather focusing on their monetary
salary. He appeared to reference removing some of these
subsidies and adjusting salaries accordingly. Castro
exempted healthcare, education, and social
security/assistance, which only leaves the ration card
(food basket) and transportation as likely targets. In
this same context he seemed to redefine socialism by
stating that Cuba should "apply the socialist principle of
everyone being compensated according to their work."


14. (C) Once again, Raul Castro has done well to identify
some of Cuba's biggest economic problems, but any real
solutions remain elusive or off target. His only concrete
measures discussed in his National Assembly speech were
cutting official travel by 50 percent and eliminating perks
to government employees. He indicated that a proposal to
establish a General Comptroller office will be discussed at
the next National Assembly. Regarding any more substantial
reforms, Castro promised that "these issues (subsidies and
salaries) are very closely linked to the structural and
conceptual transformation that shall be submitted to
discussion to and approval by the Sixth (Communist) Party
Congress." The much delayed Party Congress is scheduled
for sometime in late 2009.
FARRAR