Newsroom: Article

Emerging Market De(bt)velopments

There are positive signals that Fidel Castro’s brother Raúl, president of Cuba since Fidel’s retirement in February, has set economic and – to a lesser extent – political transition in motion. Cubans are now allowed to buy electronic equipment such as mobile phones and DVD players, farmers have been given their own land to stimulate food production and Cubans are now allowed to stay overnight in hotels (whereas before only foreign guests were welcome).

Current economic developments are bright. Commodity prices, including nickel (still a major export product for Cuba) have soared and exploration for oil is expected to lead to the extraction of a significant amount of crude oil annually in the near future. The US Geological Survey estimated that the North Cuba basin could contain as much as 4.6 billion barrels of oil, with a high-end potential of 9.3 billion barrels. Not only that, but close to one trillion cubic feet of natural gas. Tourism, another major foreign currency income for Cuba, has been picking up again after some disappointing recent years.

At the end of 2007, the Cuban government's total known foreign obligations was estimated at approximately $44bn, or about 86% of the island's GDP ($51bn). However, this figure includes old Soviet-era debt with an original face value of 20 billion transferable roubles, equivalent to $20bn (this is an estimate as there is no agreed exchange rate for transferable roubles). This will most likely be treated under a bilateral debt treatment with Russia. Also, a large part of this debt is performing debt, leaving about $8bn of non-performing debt, of which about half is owed to export credit agencies.

It seems that the current economic transition in Cuba combined with strong demand for commodities has sparked an upturn in trade between Cuba and other countries and is pressing these countries to arrange deals with Cuba concerning non-performing debt. Recently, for example, Mexico struck a deal with Cuba on restructuring a $400m debt.

These developments increase the likelihood that, following political transitions in both Cuba and the US, a successful debt-restructuring programme may be implemented including multilateral, bilateral (Paris Club) and private creditors. The levels of expected debt cancellations range between 50% and 90% (HIPC/Cologne treatment). However, we expect that it will still take years before such a programme will actually be executed.

With this wide range of expectancies of debt cancellations, and the current economic transitions and developments in Cuba, the volume of trading in the secondary market in Cuban distressed trade and bank debt has grown recently. Prices of defaulted Cuban trade debt continues to vary widely, based on quality of documentation, amount, date of default, currency and origin/identity of the original creditor.

We advise holders of Cuban debts to contact us for advice on any questions relating to distressed or defaulted Cuban debt.

A. Thiescheffer on thiescheffer@omnibridgeway.com
R. van Hulst on vanhulst@omnibridgeway.com
H. Rijkens on rijkens@omnibridgeway.com

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