New Prospects for Spanish Businesses in Cuba

Julio Cerviño Fernández

Spain is Cuba’s third most important trading partner, after Venezuela and China, with an annual trade turnover of approximately 1 billion Euros.  More than 250 Spanish firms operate in the Cuban market, with many of them having operated there for more than 20 years.

Spanish companies are the largest foreign investors in a broad range of sectors, such as tourism, financial services, water supply and other related services.  Undoubtedly, Spanish businesses have played an important role since Cuba opened its doors to foreign investors in the decade of the 1990s.

Spanish hospitality chains were pioneers in the development of the Cuban tourism sector, with the first investment being in the hotel Sol Palmeras (Meliá Group) in Varadero in 1989. Other firms  and institutions in the financial sector, agroindustry and services followed suit.  Thus, in recent bilateral meetings, Cuban government officials conveyed to their Spanish counterparts “their decision to compensate Spanish firms that continued to trade with Cuba during the difficult years despite the sanctions imposed by U.S. embargo on the island”. 

The interest of Spanish firms in doing business with Cuba remains a constant, although there have been ebbs and flows associated with legal changes implemented by the Cuban government and by the economic crisis experienced by Spain in the last 7 years.  Now that Spain has overcome its economic crisis and there are new prospects for doing business with Cuba, it stands to reason that Spanish firms will once again seek to enhance investment and commercial ties with the island.

Destination of Spanish investments

A recent study by the IE Business School about Spanish investments in Latin America concluded that in 2015, the Latin American region would again be important for Spanish firms investing abroad .  In a survey of a repre
sentative sample of large and mediumsize Spanish companies, 74% of respondents indicated that they intended to increase their investments in Latin America in 2015 and beyond, while 6% indicated that they intended to reduce such investments, and 22% expected no change. It is important to note in Figure 1, and in contrast to similar studies for previous years, that Cuba is one of the countries where Spanish investment is expected to increase in the next few years, principally as a result of new business opportunities in the island arising from the thaw in diplomatic relations between Havana and Washington. At present, Cuba is Spain’s fifth largest export market in Latin America . In 2015, Spain’s exports to the island were 598 million dollars, 40% higher than a year earlier.

The interest of Spanish firms in doing business in Cuba is present not only among large companies from the tourism, energy and infrastructure sectors, but also among many Spanish SMEs (small and medium size companies), who are planning to raise their profile in the island through trade and the establishment of offices or subsidiaries in the island. Undoubtedly, this positive outlook is also a function of the improved economic situation at home, and the perception that the economic crisis that started in 2008 was finally overcome. Spain recorded a 3.2% rate of economic growth in 2015, the highest growth rate not only in the Euro zone but also among advanced countries (IMF, 2015). According to the IMF, Spain's projected growth rate of 2.5% in 2016 trailed only that of the United States (projected growth rate of 2.6%) within advanced countries. 

Cuba as a trading partner and location for Spanish investments

The Spanish government is fostering the expansion of economic and commercial relations between Spain and Cuba in order to take advantage of new opportunities that might arise from a period of political and economic changes in Cuba. The objective is to support and promote the already significant presence of Spanish firms in the island through a government-togovernment framework that boosts bilateral economic relations.  Along this line, several important agreements have been concluded recently. One of the agreements, ratified at the end of  2015, deals with the restructuring of Cuba's short-term debt with Spain . The short-term debt, which amounts to 201.5 million euros, arose from export credit insurance guaranteed by the Spanish government through the Spanish Export Credit Insurance Company (Compañía Española de Seguros de Crédito a la Exportación, CESCE).

The agreement reached with the Cuban government condones in full the late unpaid interest and part of the principal; payments of the remaining debt are rescheduled for a period of 10 years with a grace period of three years on amortization of the principal. Part of the debt forgiveness has been implemented directly and another part through a Debt Conversion Program which creates a Counterpart Fund in Cuban pesos to finance projects prioritized by the Cuban government and agreed by both parties. The parties have also discussed Cuba's overall debt with CESCE (which amounts to 2,300 million euros, according to CESCE statistics). 

The most important action for Spanish exporters would be the reinstatement of the government insured line of credit for exports to Cuba was closed in 2000 because of the large debt run up by Cuba.

To support direct investment in Cuba, the Spanish Development Financing Corporation (Compañía Española
de Financiación del Desarrollo, COFIDES) of the Ministry of Economy announced in the summer of 2015 the creation of a public financing line for projects of Spanish corporations in Cuba with an initial funding of 40 million euros through 2017 . This financing facility consists of two separate lines: a Cuba-General line intended to finance projects located in any province of the nation, and the CubaZona Especial de Desarrollo Mariel (ZEDM) line. The first line is intended to support investments by Spanish companies in any region of the country; the minimum amount to be financed is 75,000 euros and the maximum 30 million euros per investment, with a four year of grace period for productive investments. The second line, Cuba-Zona Especial de Desarrollo Mariel, finances investments from 75,000 to 2 million euros, within three years and six months grace period for any implementation.

The second line, Cuba-Zona Especial de Desarrollo Mariel, finances investments from 75,000 to 2 million euros, within three years and six months grace period for any implementation.

Spanish companies have had significant roles in agroindustry and tourism sectors since Cuba opened its economy to foreign investment, and we can expect that they will continue to do so in the future

Investment opportunities in Cuba

According to COFIDES, Spanish companies are interested in investing in  various sectors of the Cuban economy.  The main sectors of interest align with those proposed by Cuba's Ministry of Foreign Trade and Foreign Investment (Ministerio del Comercio Exterior y la Inversión Extranjera, MINCEX) in a document published at the end of 2015 titled “Oportunidades para la Inversión extranjera”, which listed 25 projects within the ZEDM and 326 other potential investment projects outside of the ZEDM (see Table 1) .

A careful analysis of the document confirms that Cuban authorities are prepared to open up the economy to foreign investment and significantly flexibilize legal and bureaucratic restrictions. This decision combines two motives: the will to continue to move forward with the economic opening that started a few years ago, and the need to address bottle necks and limitations that affect productive sectors of the Cuban economy. Beyond the investment projects proposed by the Cuban government, the prospects for growth of the Cuban economy are interesting to foreign investors.

Cuba had a real GDP growth rate of 1.3% in 2014 and of 4% in 2015; imports grew by 13% in 2015 (ICEX, 2015) . The growth of the tourism sector is evident, fueled by a significant increase in tourism from the U.S. The contribution of foreign investment is key for Cuba, as are also the growth of reserves and income from tourism, boosted by measures taken by the U.S. Administration since December 2014. The investment projects proposed by MINCEX are dominated by the oil, agroindustry and tourism sectors (79% of the total). Spanish companies have had significant roles in two of these sectors -- agroindustry and tourism -since Cuba opened its economy to foreign investment, and we can expect that they will continue to do so in the future.

As noted above, Spanish hospitality chains were the pioneers in the development of Cuban tourism and at present are the leaders in managing rooms in 4- and 5-star hotel properties, with more 70 hotels operated by the chains Meliá, Barceló, Iberostar, Ruc, Hotusa and NH . The tourism boom experienced by the island as a result of strong growth in tourists from the U.S. has made it very clear that Cuba needs to expand significantly the number of hotels in the principal urban locations as well as in sun and sand locations. 

Most of the Spanish hospitality companies have already expressed their interest in expanding their presence in the island. Growing internal demand combined with demand from tourism is putting pressure on the agroindustry sector to increase production of foodstuffs and beverages. Cuba currently imports 70% of its food items, valued at some 2,000 million dollas in 2014 alone. Spanish companies are world leaders in the food industry and some of them -- for example, Campofrío, Cárnicas Serrano (Industria Hispano-cubana Bravo), Hotelsa, Froxá, Freixenet, Pescanova, Joan Sardá, and Bodegas Torrés -- already are experienced in the Cuban market.

Other sectors of interest in the medium and long term for Spanish investors, in addition to tourism and agroindustry, are services sectors in which Spain has already demonstrated its "know how" in other Latin American countries, such as supply and/or management of electricity, water, airports, telecommunications, treatment of urban refuse, and renewable energy. Also human capital-intensive services that would utilize highly qualified Cuban human resources, such as subcontracting of electronic data services, joint research on biotechnology, and cultural and musical production. 

It should also be noted that among the principal global infrastructure construction and management companies are an important group of Spanish companies (such as Ferrovial, OHL, FCC, ACS, Sacyr, Agroman) with experience in large infrastructure projects. Other Spanish companies like Acciona, Iberdrola and Gamesa are among the global leaders in photovoltaic and eolic energy projects.

Evidence of Spanish interest in investing in Cuba Cuba is again in vogue among Spanish companies and investors. 

The interest on the part of Spanish companies to be part of Cuba's new economic and commercial scenario was clearly demonstrated by the participation of more than 150 Spanish companies  in the recent Havana International Fair (Feria Internacional de La Habana, FIHAV) held in November 2015 . Spain was the country with the highest number of businesses represented at  the Fair. Over 80 companies from different economic sectors -such as industry, industrial equipment, construction materials, food, and services related to logistics, consulting, and tourism- exhibited their products and services within Spain's pavilion.  An additional 36 companies, principally in the industrial sector, exhibited their offerings in the pavilion of the Basque Autonomous Government and 40 others exhibited in other pavilions.

Other important Spanish businesses are in the area of franchising, with several Spanish chains seeking to enter the Cuban market. Within this growing interest in the Cuban market, even airline company Iberia, which discontinued flights to Cuba in 2013, restarted frequent direct flights to La Habana in the summer of 2015 . Undoubtedly, Cuba is again in vogue among Spanish companies and investors.  he improvement in the Cuban economy, the growth of the internal market and productive investment, and the increasing availability of financial credit constitute the ingredients for the growth of Spanish trade and investment in the largest of the Antillean islands.




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This article is courtesy of THCG BUSINESS REPORT

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