Investment Frontier’s Case for Cuba
Investment Frontier made a visit to Cuba this past week. We figured that it was important to evaluate the country’s potential prior to the changes from the US-Cuba thaw taking effect. We came back very optimistic for the country’s future.
Cuba gained independence from Spain in 1898, but the country was actually handed over to the US for 4 years, until 1902, when Cuba became independent from the US. However, this independence was more formal than absolute, as the US continued to control the Cuban economy right until the Revolution in 1959. Prior to the Revolution, Cuba had a very successful, albeit unequal economy. On Socioeconomic measures, the country was comparable to Spain or Portugal and was in fact wealthier than states like Mississippi and South Carolina. The Revolution was largely successful in equalizing the economy, but it was done at the expense of growth, in a very similar manner to what we have seen in Brazil over the last five years.
The United Fruit Company (now known as Chiquita) was allowed carte blanche control of much of Cuba, growing sugar cane and bananas in a similarly ruthless manner to what was done in Guatemala, Nicaragua, and Colombia. They segregated communities based on race and all of the management was Americans relocated to Cuba. Indentured servitude was the norm, and it was an experience that formed General Batista’s thoughts about the US. The US by way of the United Fruit Company controlled every aspect of Batista’s life, growing up as the son of a Sugar Cane worker on a United Fruit Company plantation. Batista never questioned Cuba’s relationship with the US, and took it as a given. Batista was paid by the Mob and corporates in the US to keep the gates open, but his unfailing support for US interests in Cuba fomented resentment which eventually led to Revolution.
Cuba today is a dichotomy. Cuba has a higher literacy rate and a higher life expectancy than the US. Every Cuban has access to electricity and universal healthcare of a high standard is available across the country. At the same time, the economy is crippled by being centrally planned, internet penetration is amongst the lowest in the world, and selection and choice for Cubans is severely restricted. What has been made clear to us, is Cuba is far from the failure that the Soviet Union was, or what we perceive North Korea to be. Cuba could have continued in its path with a US embargo in place for a long, long time. We think the US recognized this, and decided to change tact; far too late, but at least they did.
Today, under Raul Castro the government has made numerous small concessions to introduce capitalism into the economy. The most notable change being the gradual shift and push to private business and specifically encouraging small-scale entrepreneurs. The system known as Palidares has enabled 22% of Cubans to be working as part of the private sector, and the goal is to shift this up to 40% over time. This shift has reintroduced inequality, but has also brought about a drive and passion in Cubans that has long been dormant.
Check out the factbox below for some basic information on Cuba.
On the surface, Cuba reminds us of many EM/FM countries that are significantly worse off than Cuba. Places like India, Bangladesh, Laos and Cambodia. Then you factor in excellent quality highways, free healthcare, good quality education, and minimal income inequality and you are left confused. We think Cuba is very well-positioned to grow quickly. The core infrastructure of electricity and highways is in excellent condition. Yes, the railways have largely been non-operational other than one line running from east to west, but the bones are there to quickly re-open the web of railway lines that once covered Cuba. Cuba’s increasingly close relationship with China has paid dividends in terms of access to quality goods (most air conditioners, televisions, and appliances are Chinese-made), and it has also paid in terms of counsel on how to transition from a centrally-planned economy to a more capitalist-oriented economy. The current make-up of Cuba’s exports is shown below.
We had the displeasure of driving a Chinese-made Geely across the country; certainly Chinese vehicles are a ways away from competing on a global stage, but they are far better than the 1950s American-made cars that populate the island. We were taken aback by the driving discipline in Cuba, easily on par with North America in terms of consideration and the following of rules. Cuban society in general, is far more orderly than any other place we have visited in the Caribbean. This we believe, is Cuba’s greatest strength. A strong and inexpensive labour pool that is highly qualified, organized, and orderly coupled with excellent infrastructure.
The Havana Stock Exchange has been defunct since the Revolution (stock certificates can still be purchased), but we believe that with the opening of the country to the US, a new one could be in the works fairly shortly. With capital restrictions between the US and Cuba being removed, small-scale privatization of state-owned companies is probable.
Currently, land can be leased by the government to private individuals. Cubans have been able to buy or sell their homes for a few years now, and are entitled to have up to 2 homes (private residence and a vacation home). However, it is not unheard of to have an individual use another person’s allotment in Cuba’s shadow economy to own multiple properties. Foreigners however are more hard-pressed, and the number of properties available for foreign investment is limited which makes the prices comparable to more developed markets. The thoughts of Cuba on foreign purchases of real estate is well explained in this article.
So today, you cannot invest in equities and real estate is difficult and challenging. Fixed income is a long ways away. You can do business in Cuba, under a dizzying array of restrictions, but ensure that you receive wise counsel. So there are very few ways of participating in Cuba’s rise. One of the more interesting areas of potential investment in Cuba is the art market. We will have a piece coming out shortly that will look out art investment in Frontier Markets, keep an eye out for that. Relating to Cuba, we would say that it’s one of the best opportunities for art investment that we have come across.
The one group of people we must make a strong recommendation that you ignore, is Cuban Americans. Cuban Americans have an extremely biased view that is irrational and emotional. As an example, you can read this piece. There are numerous falsities in the article, but one that is readily apparent is that Cuba has defaulted on its debt. It has not, Russia forgave the debt in return for concessions related to oil exploration, in fact the link the article provides says just as much.
Nothing actionable from this post, but we do think it’s important that investors pay attention to Cuba. It is one of the most promising opportunities in the Americas, and it is a country with a lot of potential for growth. If you have any questions or comments, please let us know.