Last weekend Barack Obama sat down with Raul Castro at the Summit of the Americas in Panama, marking the first in-person meeting between US and Cuban heads of state in over 50 years. This historic encounter, coupled with the removal of Cuba from the US list of nations that sponsor terrorism, signals continued progress in the thawing of US-Cuban relations and, for many multinational corporations, that Cuba could be open for investment within the next few years.
While tangible progress on US-Cuban relations has certainly been made, it is critical that regional executives manage expectations around both the timeline and near-term potential of Latin America’s final frontier market. Here are a few considerations that any multinational weighing investment in Cuba should bear in mind:
- Success in Cuba will require substantial patience: Despite the recent steps toward restoration of diplomatic relations with the US, Cuba still faces many hurdles to a normalization of economic relations with its northern neighbor. Repeal of the Helms-Burton Act will require approval of the US Congress, and despite the Obama administration’s support for reducing sanctions, political opposition to such a move remains, making the timeline for a complete opening of the market unclear.
- Cuba’s growth trajectory depends on further reform: While the Cuban government has implemented several economic reforms since 2007, they have failed to generate the growth that was promised. Further reforms will be necessary — in particular the unification of the country’s dual exchange rate regime — for Cuba to develop as an export platform or significant consumer market.
- Estimates of market potential warrant skepticism: Data in Cuba is unreliable, with many economists estimating that the government’s national accounts overstate economic growth by over 30 percent. Meanwhile, the country’s dual exchange rate regime dramatically exaggerates purchasing power, making it difficult for companies to accurately estimate market size.
- The risk-reward calculus of being a first mover is less favorable in Cuba: Many foreign multinationals who are exempt from the trade embargo have made investments in Cuba over the past two decades in an effort to gain an early toe-hold in the market. However, over 60 percent of the foreign ventures established in Cuba since 1991 have folded. This is in large part due to the outsized and capricious role the government continues to play in the economy.
Despite the challenges that the Cuban market presents, it is also a market with significant potential for companies in certain industries. As such, we encourage all FSG clients to read our latest report on how to best prepare for an opening of the Cuban market, so that they can better understand the risks and rewards associated with doing business in Latin America’s most intriguing market.