Fiscal Deficit To Narrow In 2014 On Lower Public Investment Spending

BMI View: We believe that slightly stronger growth and conservative spending plans for 2014 will see the Cuban government's fiscal deficit narrow this year, to 3.2% of GDP, compared to 3.4% in 2013. We forecast the deficit to tick up to around 4.0% of GDP over the coming years, slightly higher than years past, as policymakers make greater use of international capital markets.

We forecast that Cuba's fiscal deficit will narrow slightly in 2014, to 3.2% of GDP, compared to 3.4% in 2013, thanks to an improvement in the outlook for real GDP growth, as well as the government's decision to significantly pare back capital spending. Despite the improvement, we expect that the budgetary shortfall will hover around 4.0% of GDP over the next several years, wider than the 3.4% average seen over the past five years, as the government has taken steps to gradually make greater use of international capital markets, suggesting greater deficit spending than in years past ( see 'Notwithstanding Additional Reforms, Business Climate Remains Poor', April 2).

Cuba's total revenues came in at CUP44.8bn in 2013, a 7.1% decline from the previous year. The relatively poor performance was likely due to headwinds which affected the economy at large. According to Cuba's Oficina Nacional de Estadística e Información (ONEI), real GDP growth in 2013 was just 2.6%, down from 3.0% in 2012. Perhaps more importantly, retail sales grew by only 4.5% in 2013 in nominal terms, and with overall economic inflation (measured using the headline GDP deflator, since a detailed breakdown has not yet been made available) coming in at 4.7%, this may actually constitute a decline in real terms. Nearly half of Cuba's tax revenues come from sales tax, so this would have had a significant negative effect on government receipts. We expect stronger GDP growth in 2014 (we are forecasting headline real GDP expansion of 2.9%), with tax receipts to pick up in tandem.

Largely Dependent On Sales Tax For Revenues
Cuba - Sources Of Tax Revenue, % Of Total

BMI View: We believe that slightly stronger growth and conservative spending plans for 2014 will see the Cuban government's fiscal deficit narrow this year, to 3.2% of GDP, compared to 3.4% in 2013. We forecast the deficit to tick up to around 4.0% of GDP over the coming years, slightly higher than years past, as policymakers make greater use of international capital markets.

We forecast that Cuba's fiscal deficit will narrow slightly in 2014, to 3.2% of GDP, compared to 3.4% in 2013, thanks to an improvement in the outlook for real GDP growth, as well as the government's decision to significantly pare back capital spending. Despite the improvement, we expect that the budgetary shortfall will hover around 4.0% of GDP over the next several years, wider than the 3.4% average seen over the past five years, as the government has taken steps to gradually make greater use of international capital markets, suggesting greater deficit spending than in years past ( see 'Notwithstanding Additional Reforms, Business Climate Remains Poor', April 2).

Cuba's total revenues came in at CUP44.8bn in 2013, a 7.1% decline from the previous year. The relatively poor performance was likely due to headwinds which affected the economy at large. According to Cuba's Oficina Nacional de Estadística e Información (ONEI), real GDP growth in 2013 was just 2.6%, down from 3.0% in 2012. Perhaps more importantly, retail sales grew by only 4.5% in 2013 in nominal terms, and with overall economic inflation (measured using the headline GDP deflator, since a detailed breakdown has not yet been made available) coming in at 4.7%, this may actually constitute a decline in real terms. Nearly half of Cuba's tax revenues come from sales tax, so this would have had a significant negative effect on government receipts. We expect stronger GDP growth in 2014 (we are forecasting headline real GDP expansion of 2.9%), with tax receipts to pick up in tandem.

Largely Dependent On Sales Tax For Revenues
Cuba - Sources Of Tax Revenue, % Of Total

Despite its difficulties in generating revenues in 2013, the Cuban government successfully reined in spending to keep the budget deficit under control, and total expenditures fell by 5.6% in 2013. Looking ahead, we expect that the government's plan to slash capital spending will similarly support an improvement in the fiscal balance. According to the ONEI, budgeted capital expenditures amount to just CUP2.5bn in 2014, a massive reduction compared to the CUP4.1bn allocated in 2013. Actual capital spending outlays often exceed the budgeted amount (total capital spending in 2013 came to CUP5.4bn), however it appears likely that it will very low by historical standards. We believe that the government is depending heavily on greater private sector investment and bilateral partnerships, particularly among regional powerhouses like Brazil and Mexico, to help fund infrastructural upgrades, allowing Cuba to foot a smaller portion of the bill ( see 'Despite Progress On Foreign Investment, Domestic Business Environment To Lag Behind', January 30). Over the longer term, we expect Cuba's return to international capital markets will see both increased state spending on infrastructural projects and a wider fiscal deficit .

Capital Expenditures To Contract Sharply In 2014
Cuba - Capital Expenditures, Budgeted And Actual, CUPbn

Lower capital expenditures will help support a rebound in current expenditures, which contracted by 8.5% in 2013 and which we believe will grow by 7.5% in 2014. The communist government takes a very active role in the economy, and government consumption amounts to 38.5% of total GDP. We expect that most of the government's current expenditures will go towards the provision of services: education, health, social assistance, and social security combine for two-thirds of total current spending in the 2014 budget. However, administrative and security expenditures are on the rise, having nearly doubled since 2010, and accounting for 23.1% of total current spending in 2013.

Public Administration And Security Spending On The Rise
Cuba - Current Expenditures Breakdown, % Of Total

The ONEI no longer provides a breakdown of administration and security expenditure, so it is difficult to ascertain whether the change is due to growth in the government bureaucracy, an uptick in defence spending, or a combination of both. There are some indications that security expenditures are on the rise, as the government resumes some programmes which were put on hold in early in the 2000s. For example, a major spy base used for intelligence gathering of US communications in Lourdes, just south of Havana, is being modernised and reopened with the support of the Russian government, according to numerous various major news outlets, although Russian officials have denied their country's involvement.

Economic Activity (Cuba 2009-2018)
Country Indicator 2009 2010 2011e 2012e 2013e 2014f 2015f 2016f 2017f 2018f
Cuba Nominal GDP, USDbn 67.3 72.8 71.5 73.5 77.4 20.3 8.5 5.6 4.3 4.0
Cuba Real GDP growth, % y-o-y 1.4 2.4 2.8 3.0 2.6 2.9 2.9 2.5 2.5 3.1
Cuba GDP per capita, USD 5,958 6,456 6,341 6,521 6,870 1,805 759 497 379 352
Cuba Population, mn 11.3 11.3 11.3 11.3 11.3 11.3 11.2 11.2 11.2 11.2
Cuba Unemployment, % of labour force, eop 1.7 2.5 3.2 3.0 3.0 3.0 3.0 3.0 3.0 3.0
National Sources/BMI

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Related sectors of this article: Economy, Economic Activity, Fiscal Policy
Geography: Cuba
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