Emerging Markets, Frontier Markets

What Should Investors Expect From Cuba’s Economy? — An Interview With Robert Abad


Ahead of U.S. President Barack Obama’s historic trip to Cuba — which will be the first visit by a sitting U.S. president in 88 years — there are several major companies that are scrambling to negotiate deals to operate in the small island economy. Such names as AT&T, Starwood Hotels, and Marriot have already expressed interest in doing business in Cuba. Other companies that have expressed interested include Delta, American Airlines, and United Airlines; whom are still restricted from flying direct flights to Havana from the U.S. by the trade embargo.

The Obama administration announced on Tuesday that it was easing restrictions on travel to allow “people to people” educational trips and also allowing Cuban nationals to get jobs in the U.S. or to open U.S. bank accounts. The move by the administration are some of the most significant regulatory changes that have been made on the way toward normalization that Obama and Cuban President Raúl Castro announced in December 2014.

Obama’s visit will be an opportunity for diplomacy and improving economic ties which could spur U.S. Legislators to speed up further easing on restrictions with Cuba.

To get a better idea of what investors should expect, Robert Abad, a graduate of Columbia’s School of International and Public Affairs (SIPA) who runs EM+BRACE, a boutique emerging markets advisory firm, shared his insight during a recent interview with Nathaniel Parish Flannery at Forbes:

Nathaniel Parish Flannery: What does President Obama’s visit mean for Cuba-U.S. relations?

Robert Abad: President Obama’s visit to Cuba should have little immediate effect on resolving politically and emotionally charged issues such as the U.S. embargo, human rights and migration, but the visit may end up playing an important role in persuading ideologues, especially in Cuba, that pragmatism is the better approach towards U.S.-Cuba relations.

Thus far, the Obama administration has announced measures to deepen U.S.-Cuba rapprochement: the removal of Cuba from the U.S. Terrorism Sponsor list, the re-opening of the U.S. Embassy in Havana, the agreement-in-principle that allows a resumption of U.S. flights to Cuba, and the easing of certain provisions of the U.S. embargo allowing greater flexibility on remittances, travel and U.S. business involvement. All of these measures represent important sources of relief for Cuba at a time when the country can no longer obtain critical financial assistance from Venezuela which is suffering from its own political disarray and the sharp collapse in crude oil prices.

Despite these high-profile gestures, the Cuban government has yet to show any desire to compromise on the political reforms advocated by the U.S., which include but are not limited to: holding free and fair elections, granting freedom of the press, extending political freedoms and establishing labor unions. But the pressure on Cuban officials to act is rising.

On one hand, it would be naïve to expect that after 15 months into a diplomatic re-launch, Cuba would abruptly paper over a 50-plus year history of rancor and change colors overnight. On the other hand, Cuba is in an increasingly untenable economic position with demographic and social investment trends projected to add more downward pressure on state finances. Without bold action in reforming the economy and securing significant amounts of fresh financing, the Cuban government puts its own political credibility and viability at risk.

With this in mind, President Obama’s visit or “capitalism charm offensive” may very well be timely in subtly pressuring Cuba to consider placing political survival and financial security one notch above ideology.

Parish Flannery: Culturally, there seems to be a lot of interest in Cuba but what do warming relations mean for investors? Will a lot of business opportunities open up in Cuba?

Abad: Investors should bear in mind that despite the euphoria over improved U.S.-Cuba relations, Cuba itself has yet to take any major steps towards what will ultimately be a very long and complicated journey. This means being careful in not getting caught up in investment-related euphoria and hyperbole.

For instance, traditional development or emerging market (EM) narratives suggesting that Cuba is a country in “take off” stage or that it’s destined to follow in the successful footsteps of its ex-Soviet sibling, Vietnam, are simply misguided. Cuba does not have the economic, financial and political underpinnings from which to build on and grow.

Policymakers in Cuba have yet to adopt a socially acceptable approach to unwinding the massive structural distortions that were built up over the decades. This task will not be easy, quick or costless. Countries that have tried to adjust too slowly or too abruptly have triggered side effects such as runaway inflation, financial sector collapse and social fragmentation, resulting in wholesale losses for early stage investors.

At a more micro-level, investors should manage any outsized expectations around the lifting of the U.S. embargo and what it might mean for business opportunities in Cuba. If changes were to come to fruition in 2017, Cuba would still need to maintain its restrictive foreign business policies in place, as there’s currently little absorptive capacity in the country to handle large waves of people and capital from abroad.

Parish Flannery: What are the biggest potential areas for growth in Cuba and what factors are holding back Cuba’s economy and potentially limiting investment?

Abad: Whether you survey Cuba from above, as you fly into its international airport, or walk through the dilapidated areas of Havana, Cuba’s domestic economic potential is plainly evident. But it goes beyond the usual emphasis on commercial and residential real estate development. Less glamorous areas such as water and sewage treatment and waste management represent major investment opportunities as urban reconstruction and planning eventually takes hold across the country.

Energy infrastructure, specifically in the realm of renewable energy and natural gas, offers myriad investment opportunities, but the field is already getting crowded with China and Russia-financed projects. Similarly, communications and tourism and hospitality will experience a boost as a result of easing U.S. embargo provisions, but these areas are also crowded as European companies have already made strong inroads over the years.

One growth area that shouldn’t be underestimated and under-appreciated is education. During my time in Cuba last year, I had the good fortune of engaging a number of people in conversation – artists, cab drivers, hotel staff, street musicians, and a family that offered me shelter from an afternoon thunderstorm. A common thread in those talks was the importance of education and the arts, especially in the lives of Cuba’s youth, and their role in sustaining development and progress. Joint ventures with universities and professional organizations globally to bring technical know-how, research, and creative programs to Cuba will be critical for fostering entrepreneurship, small and medium sized private businesses, and professional services.

Cuba’s high literacy rate, its globally recognized network of medical professionals and its proximity to the U.S. also translate into major growth potential in areas such as health or medical tourism, medical services and equipment, pharmaceuticals, and hospital partnerships. Neighboring Costa Rica offers insight on how these sectors have served to broaden and diversify their economy over time.

There’s no question that Cuba holds untapped investment and growth potential, but policymakers, unfortunately, have been a key obstacle to progress. There is budding hope on this front as the Communist Party is currently experiencing a generational power shift at a critical point in the country’s history. Fidel and Raul Castro are both over 80 years of age; the latter already announced that he will step down in 2018. As the party looks to rejuvenate its aging leadership pool, it’s possible we may see newer, more reformist players who are willing to take Cuba to the next stage of evolution.

Robert O. Abad is the founder of EM+BRACE, a global advisory and mentorship initiative that came to life in 2015 – a concept over 5 years in the making – with the intent of supporting, developing and inspiring the next generation of emerging market professionals and trailblazers.

A student of the world, Robert travels extensively. He has engaged a broad spectrum of clients, industry consultants and media outlets globally. His professional experience spans 25 years in emerging markets investment research and portfolio management, risk management, product management, start-up business development, and career training and mentorship at organizations such as Western Asset Management, Citigroup, Fiduciary Trust International, Global Emerging Market Advisors, L.P., the United Nations Development Programme, and Merrill Lynch & Co.

Robert holds a Master’s degree in International Affairs from Columbia University (SIPA) and an MBA in Finance from Columbia Business School. He has a Bachelor of Science degree in Marketing from New York University’s Stern School of Business. Robert is an Adjunct Professor of Finance and sits on the Board of Advisors at Claremont University’s Peter F. Drucker and Masatoshi Ito Graduate School of Management. He is also on the Board of Trustees at Sequoyah School in Pasadena, California.


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