Two weeks after Juan Guaidó declared himself interim president of Venezuela, the Cuban government has given no sign of diminishing its support for the Nicolás Maduro regime. Havana’s bet on Maduro is risky because many other countries are increasingly supporting Guaidó, but it has a good reason for sticking with him: If his regime collapses, the island could plunge into a new economic crisis, top Cuban economists told el Nuevo Herald.

“If Maduro falls, I don’t know how they can get out of that,” said Carmelo Mesa Lago, the leading expert on the Cuban economy. Mesa Lago believes the Cuban government is already embellishing its economic figures to hide an ongoing crisis, and that the loss of Venezuelan subsidies could only make things worse.

“The crisis in the ‘90s was much worse because there was more dependency on the Soviet Union, but the blow will be tremendous,” he added. Cuba plunged into a withering crisis after the crumbling Soviet Union stopped its massive subsidies to the island.

If Venezuelan subsidies are halted, the experts say the island might suddenly lose 10 to 12 percent of its GDP, basing their estimates .

Sign Up and Save

Get six months of free digital access to the Miami Herald

#ReadLocal

Venezuela was Cuba’s largest trade partner in 2017, the last year for which figures are available. Bilateral trade hit more than $2.2 billion during the year, nearly 12 percent of the island’s GDP.

“If Venezuela totally collapses, the impact on Cuba would be clearly significant because the majority of the fuels that Cuba receives come from there. But more important are the conditions under which it is received, at prices different from the world market,” said Omar Everleny Pérez, former professor at the University of Havana’s Center for the Study of the Cuban Economy.

Under an agreement signed by the late leaders Fidel Castro and Hugo Chávez, Cuba receives Venezuelan oil at subsidized prices and pays with medical services and medicines. The Chávez government also spent $1.2 billion updating a refinery in the city of Cienfuegos so it could process Venezuelan oil and re-export some of the products.

At the peak of the arrangement, Cuba received 100,000 barrels of crude per day. But that figure dropped by more than half in recent years because Venezuelan oil production plummeted under Maduro.

From 2012 to 2017, Cuban imports from Venezuela — largely crude — dropped by $4.5 billion, while exports — mostly medical services — fell by $1.5 billion, according to Cuban economist Pavel Vidal, a professor at the Universidad Javeriana in Colombia..

Those drops indicate that a possible shock from an end to Venezuelan assistance would not be as harsh as the blow the Cuban economy took when the Soviet Union collapsed. Castro decreed an emergency known as the Special Period at the time, as the Cuban economy shrank by 35 percent. But unlike the 1990s, the Cuban economy now receives more foreign investments as well as revenue from tourism and remittances from Cubans abroad. More than half a million people now work in the private sector.

The impact would be significant nevertheless, the experts agree.

“The dependence [on Venezuela] has been decreasing, although it remains high and leaves Cuba in a vulnerable situation,” Vidal said.

Special Report – The Cannabis Industry’s Biggest Day Yet!

A can’t miss report for anyone investing or thinking about investing in the cannabis industry was just released.

Federal Regulations are on the verge of change, see what that means for the industry and which 5 stocks in particular stand to profit immensely!

Don’t miss out on the timely information in this Free Report!

In the short term, Cuba would have to buy crude oil at market prices or seek favorable agreements with countries like Russia, Algeria or Mexico.

, but analysts believe that was paid for by Venezuela’s state-owned oil company, known as PDVSA. Russian officials have made it clear they want a secure source of financing for future shipments.

Everleny said Cuba might find a new oil supplier in Mexico’s new leftist President Andrés Manuel López Obrador.

“The outlook is complicated, and there are few options if Venezuela is hit with a major political crisis,” said Everleny. “Cuba could study what Mexico could offer it, based on what Cuba could offer Mexico, because the country is critically low on hard currency and its only option is to earn revenues through Cuban exports.”

Neither Russia nor Mexico appear ready to offer the massive subsidies that Venezuela once provided.

The economists interviewed also warned that the strategies used so far by the Cuban government to compensate for the reduction in Venezuelan subsidies — cutting imports and betting on the growth of tourism and the private sector — will not be enough if Venezuela suddenly stops all its subsidies.

The private sector shrank last year due to tight new regulations, the island did not reach its 5 million-tourist goal, and tourism revenue fell, especially from U.S. visitors who now arrive mostly on cruise ships. At year’s end, the Cuban government also lost the income from medical personnel working in Brazil.

What’s more, sugar prices are low, food production is stagnant, and there are tensions with the U.S. government, which has threatened to add sanctions on Havana for its continuing support of Maduro.

Before the Venezuelan political crisis exploded in January, when Guaidó declared himself interim president, the Cuban government was already talking about the need for austerity on the island. Cuban ruler Miguel Díaz-Canel told the National Assembly late last year that the island had to make better use of its domestic resources and act “without formalities” to grow “all forms of income.” He also called for increased foreign investments, but did not explain how that could be achieved.

Mesa Lago warned that the loss of Venezuelan support could also affect Cuba’s foreign debt payments, renegotiated by former ruler Raúl Castro with the Paris Club and Russia. Imports would also fall because of the shortage of hard currency, which would lead to a drop in domestic production as well as consumption. The shortages of food and medicines, already rampant, would become even sharper, he added.

“The economy has suffered for years from the stagnation/recession of the GDP. Exports don’t grow, and there’s already a history of too many debts and defaults. The budget deficit is already at a record level, and imports have already been cut to the minimum,” said Vidal. “What’s more worrying is that some families still depend on government salaries and pensions that cannot withstand another reduction, even if it’s less than in the 1990s,” he added.

“It would be a situation difficult to handle, economically and socially.”

<p

Related stories from Miami Herald

February 08, 2019 03:47 PM

February 04, 2019 06:25 PM

Receive News & Ratings Via Email - Enter your email address below to receive a concise daily summary of the latest news and analysts' ratings with MarketBeat.com's FREE daily email newsletter.