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Risky Business: Investing in Cuba Is More Than Just a Financial Gamble

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"It's hard to argue against weeding out corruption. Sometimes, in the process, you break a couple of eggs."

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But Jones explains that symbols don't necessarily represent true change.

"It worked well for some -- the oligarchs, the mafia," he says. "In terms of building a base for fundamental, long-term change, I think the jury is still out. Cuba sees what happened in Russia and is saying, 'We don't want that.' Corruption is a disease that strikes even the most sophisticated countries, including ours -- look at Enron."

Jones says those doing business in Cuba need to be aware of what has occurred in recent months, though how the corruption crackdown will affect future investment can be a matter of perspective.

"As far as the arrests are concerned, you can spin that negatively or positively," he says. "It's hard to argue against weeding out corruption. Sometimes, in the process, you break a couple of eggs."

Hal Klepak, a Canadian military historian and author of two recent books on the Cuban military and Raul Castro, sees the crackdown as a bullish sign.

"In a country where small-scale but widespread corruption is the rule, if the government is to be seen to be serious about rooting out the scourge, it must show it is doing so at the very top and doing so in a dramatic way," Klepak told Reuters after Amado Fakhre's arrest last year.

"I do not see it as bad at all for foreign business in Cuba, probably just the opposite in the mid- to long-term," he explained. "But there is also little doubt that it does make many jittery when the problem is such a generalized one."

At the same time, there is a case to be made for not providing a crucial source of hard currency to a regime described by the 2012 Human Rights Watch World Report as "the only country in Latin America that represses virtually all forms of political dissent."

"The government increasingly relied on arbitrary arrests and short-term detentions to restrict the basic rights of its critics," the report says, "including the right to assemble and move about freely. Cuba's government also pressured dissidents to choose between exile and continued repression or even imprisonment, leading scores to leave the country with their families during 2011."

Further, Cuba hasn't done much to burnish its FICO score over the years. It has been called a "debt-market pariah," in an exclusive club that briefly welcomed Argentina in 2001 as it defaulted and devalued its currency and admitted Pakistan as a member in 1998, when it was isolated internationally for conducting nuclear tests. Cuba is the veritable chairman of the board, having served continuously since 1999.

From Moody's:

Cuba's Caa1 sovereign ratings reflect a debt moratorium, in place for more than 20 years, which has led to the accumulation of principal and interest arrears. Cuba's ratings incorporate very low economic strength largely on account of the small size of its economy and low GDP per-capita.

Very weak institutional strength reflecting governance problems are factored into Cuba's ratings, along with considerations related to limited availability of information and a lack of transparency.

In addition to weak government financial strength, Cuba's ratings incorporate: (i) the economy's extreme dependence on imported goods, (ii) restricted access to external financing, and (iii ) ongoing political uncertainties.

Which means, in so many words, "good luck."

No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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