The battered Cuban economy suddenly received in September 2017 one of the strongest and most unexpected blows in the last 20 years. The images of the first days after Hurricane Irma struck the island brought to the minds of many Cubans the specter of the disastrous special period in peacetime of the 90s, which arose as a result of the fall of the Soviet Union and the socialist countries of Eastern Europe. The lack of electricity, drinking water and food, coupled with the collateral damage generated by the blow from Irma, created a real chaotic situation on the island, pushing the economy close to a recession, which does not seem to be ending anytime soon.
Irma generated a critical situation in the economy, which has been kept afloat at low growth rate levels due to remittances, tourism and the export of services. The atmospheric phenomenon strongly impacted the tourist infrastructure, energy generation, water supply, agriculture, the sugar industry and the housing sector, just to mention those that suffered the most damage. The losses run into many millions of dollars.
Repairing the damage will require investment of hundreds of millions of dollars that were not planned to be used for these purposes. This situation further aggravated the country's economic situation and will undoubtedly impose a delay on payment of obligations to Cuban foreign creditors and the usual suppliers of the country, many of whom have not consistent payments for the sale of their products.
To this should be added the fall of Venezuelan financial support by 4.3 billion dollars in 2016 compared to 2012, due to the decrease in revenues from the re-export of oil and the sale of medical services[i]. See Figure 1.
Figure 1. Revenues from oil re-exported by Cuba and income earned from services of hired personnel in Venezuela, 2012-2017P
Source: Havana Consulting Group from its own sources and reports from other sources, among which are the Cuban Ministry of Public Health, international press agencies, and the Cuban press.
Impact on the tourism sector
Cuba’s plans to reach a figure of 4.7 million tourists in 2017 saw a hard stop in September 2017. The by-now famous atmospheric phenomenon -- which will be remembered as one of the most powerful hurricanes seen in the Atlantic in the last 100 years -- attacked with force the north coast of the island, sweeping in its path, one by one, several of the most important tourist locations of the country.
At the time that Irma reached the island, the trend of the tourism business between Cuba and the United States had grown in the first half of the year compared to previous years, and had been stable in the months of July and August. The market at that time showed no signs of weakening while expecting the implementation of the measures that would be announced later in the year by the Trump Administration on travel to Cuba. See Figure 2.
Figure 2. Number of flights from the US to Cuba, January -September, 2014-2017
Source: Havana Consulting Group
Perhaps the most notable event in the two-month period before the hurricane had been the cancellations of some travelers on individual trips, especially in the Airbnb platform that supports the private sector. But travel agencies were already working on ways to recapture that demand, with the offer of new and attractive packages for group travel.
Almost overnight, a business that was generating a volume of revenue of 10 million dollars a day fell to less than one million a day, due to the impact of Hurricane Irma. The number of daily air flights from the U.S. fell from 41 to 10, which illustrates the scope of the impact.
In the first semester of 2017, U.S. tourism generated a volume of business estimated at 1.8 billion dollars (the profits generated by the 55,800 North American cruise passengers that traveled to the island in that period of time are not included). This figure is the sum of the volume of money spent by travelers in the organization of their trip and in their stay on the island, which we have grouped into 8 different items[i]. See Figure 3.
Figure 3. Travel expenses for travelers to Cuba from the US, first half of 2017
Source: Havana Consulting Group
The item with the highest value was lodging, which was estimated at 675 million dollars, for 36.9% of total revenue, followed by profits of the travel agencies with 463.2 million dollars for 25.3% of the total, "other daily expenses" estimated at 405.3 million dollars (22.2%) and air tickets with a value of 153.4 million dollars, for 8.4% of the total.
Of the total revenue generated by the travel of persons between the two countries, it is estimated that 33% goes to American companies, while 35% goes to Cuban government institutions and 32% to the Cuban private sector. See Figure 4.
Figure 4. Estimation of the distribution of revenues generated in the CUBA-USA tourist market, first quarter 2017
Source: Havana Consulting Group
Other countries that emit tourists to Cuba have also been affected due to damage to the infrastructure of the main tourist poles of the country. Around 70% of the hotel infrastructure suffered damage to different degrees, including direct impacts and collateral damage, particularly at hotels located on the north coast of the country, especially those in Cayo Coco, Cayo Guillermo, Cayo Santa María, Varadero and Havana. In some of these tourist poles, full recovery of facilities could take months.
The infrastructure of airports in the north of the country and the pedraplenes that connect the keys were severely damaged, which delays the arrival of aid and reconstruction work. The Santa Clara airport and the Jardines del Rey International airport in Cayo Coco were also damaged, the latter heavily.[i]
Jardines del Rey International Airport in Cayo Coco
Access to the keys north of Ciego de Ávila and Camagüey was disrupted, isolating them from the mainland and between them. The road that joins them and connects them with the mainland were heavily damaged; six of its 12 bridges were rendered impassable; the road joining Jaronú with Cayo Cruz in Camagüey has stretches of almost 100 meters torn by the force of the sea[i]. The road from Caibarién road to Cayo Santamaría was also severely damaged by giant waves at several points, which makes it impossible to pass through this route to the tourist pole of the northeast keys of Villa Clara.
Pedraplén Cayo Coco Pedraplén Cayo Santa María
Impact on the power generation network
The national energy system was seriously damaged by the onslaught of Hurricane Irma as it struck the northern coast of Cuba. Most of the Cuban thermoelectric power stations, with the exception of Renté in Santiago de Cuba and Carlos Manuel de Céspedes in Cienfuegos, are located on the north coast, the area most damaged by the path of the hurricane as it crossed the island. 74% of the energy generated by the national electricity system comes from these plants. See Map 1
Map 1. Cuba's electric power system and trajectory of Hurricane Irma, 2017
Source: Havana Consulting Group
Irma caused a crisis in the generation of energy. The recovery of the Cuban energy system will take a while, since the effects were both on the generation end, as well as on the energy transmission network. Cuban authorities reported the destruction of dozens of high voltage towers, more than 2,400 electricity posts and thousands of power lines that will take several weeks to recover. Most of the hotels and hospitals are meeting their energy needs using their own generators fueled by fuel oil and diesel. Irma left in the dark almost 80% of the national territory.
The technical director of the Electric Union - the company responsible for the generation of energy in the country - recognized that the interconnection of the national electricity grid was breached by hurricane Irma[i].
The Antonio Guiteras Thermoelectric Plant, located in the province of Matanzas, the largest in the country with a generation capacity of 330 Megawatts, was out of service due to the destruction of its pumping station.[ii]
Meanwhile, the so-called "distributed energy generation system", designed to support the obsolete thermoelectric power plants, has serious generation problems, since around 50% of the generating sets that compose it show problems related to over-use of their motors during the summer seeking to avoid blackouts and guaranteeing services to international tourism.
Impact on agriculture and the sugar industry
The damages to Cuban agriculture were significant and difficult to estimate. There have been severe impacts on livestock barns and other facilities, windmills, rice mills, crops of all kinds and small livestock.
Likewise, the coffee sector in the Manicaragua region was affected to an extent still to be quantified. In Camagüey, Ciego de Ávila, Sancti Spíritus and Villa Clara, thousands of hectares of bananas, corn, cassava, different types of citrus, fruits and other crops were lost, as well as around 3,500 hives that produce about 190 tons of honey per annum. Dozens of pig farms were also destroyed, as well as more than 100 poultry houses producing chickens and eggs, with a loss of more than 112,000 birds and 120,000 replacement chicks.[iii]
The tobacco industry, one of the most important export clusters of the country, was not exempt from the ravages of the monstrous meteor. It suffered great losses in the central region of the country, with more than 1,100 houses to cure tobacco and almost 2,000 nurseries affected.
In the western part of the country, considerable losses have been also reported. The rains and the force of the winds affected more than 1,400 hectares of plantain, corn and cassava in the province of Mayabeque.
At the same time, the hurricane inflicted severe damage to the infrastructure of warehouses for agricultural products in all those territories.
The sugar industry, another of the economic clusters of the country producing exportable products, was also impacted by Irma, reporting the affectation to varying degrees of more than 430,000 hectares of sugarcane throughout the country. About 40% of the infrastructure of the sugar mill network was damaged, as were also other facilities that support this industry.
Impact on housing infrastructure
One of the most severely damaged sectors was housing. Cuba has a very weak housing stock, with more than one million homes rated as being in poor and average condition. About 43% of these housing units are in the capital. The damage brought by Irma has notably worsened the country's housing stock, which is estimated to have a deficit of more than 1 million homes.
Thousands of houses were affected in the provinces of Holguín, Las Tunas, Camagüey, Ciego de Ávila, Sancti Spíritus, Villa Clara, Matanzas and Havana, mainly due to total or partial collapse and full loss of roofs. Preliminarily it has been estimated that there are more than 40,000 houses with severe damages in the provinces. In addition, more than 1,400 schools have been reported to have suffered damages of different magnitudes.[i]
Conclusions
Hurricane Irma has put Cuba at a truly extreme crossroads. The economy is currently in full recession as a result of the losses caused by Irma and the abrupt fall of Venezuelan financial support. The country's financial capacity to face this crisis is extremely weak, since the nation’s other exportable items are not expected to have growth that would compensate for the drastic loss of Venezuelan financial support. The damages caused by Irma, although they have not yet been quantified, will undoubtedly further reduce the export capacity of the affected export sectors.
The government has expressed that its recovery strategy will give priority to areas that produce substantial foreign revenue, such as tourism. Thus, it has prioritized that sector seeking to rebuild the damaged tourism infrastructure in order to have it ready for the next high demand tourist season that will begin in November 2017.
However, the recovery process will take a long time given the number of fronts that have been affected at the same time: energy system, water supply system, agriculture, sugar industry, tourist infrastructure, housing, and others. Rebuilding these sectors will require hundreds of millions of dollars that are not available.
Unfortunately, the population is going to be heavily affected, because the problems generated by Irma will not have a quick solution. This is especially ao in the housing sector, a sector that has endured critical problems for more than 20 years. Even in the medium term, there is no solution for the people whose homes were affected. For those who lost their homes, they have to start anew in a difficult environment. If they do not have relatives abroad to help them, their lives have already been turned upside down.
Cuba not only needs international help to get out of the crisis: it also needs an urgent change of strategic mentality on the part of the government as to how to manage the economy. The solution of how to resolve this tremendous crisis as quickly as possible is in the government’s own hands. Deep transformations of laws are required to open the economy to allow free enterprise so that capital flows into the island. The solution is not to punish the private sector: it is to implement modern policies that allow and make possible a profound structural change in the country's economy that would take full advantage of the human capital that the nation already has and at the same time be in the center of the process for the attraction of foreign capital and the development of its own wealth in a free enterprise market system.
If in the last seven years the timid and limited reforms implemented by the government have allowed an important segment of the population to achieve economic independence from the state and they have managed to create a successful business network that brings together thousands of private businesses, why not expand that formula to the rest of the sectors of the economy and allow free enterprise once and for all? In the end, those who would win are all Cubans: the country as a whole would win.
The economic aid of the Cuban exiles has been a key factor in the development of this nascent private sector, which has managed to create a market of goods and services estimated at between 2.5 and 3.8 billion dollars per year. The diaspora can play an important factor in the economic recovery of the country if the appropriate legal framework is created.
If China and Viet Nam took more than 350 million people out of poverty in less than 25 years, why couldn’t Cuba improve substantially the lives of 10 million people out in less than five years? There is no doubt that the conditions to do are present. What is missing is the political will to take the necessary steps. It does not make sense to incur 60 more years of centralized economy, mediocre strategies and poor economic performance to continue swimming against the current. The country needs change urgently.
Without a doubt, the aftermath of Irma is pushing the precarious Cuban economy to the limit. This is the moment to carry out change, otherwise the next years will be very difficult for the Cuban people.
References
[i] Alfonso, Pablo. “Irma deja en suspenso el boom turístico de Cuba”. Martí Noticias. Septiembre 2017.
[i] Gámez Torres, Nora; Whitefield, Mimi y Pentón Mario J. “Tras paso de Irma, cubanoamericanos intentan ayudar a sus familiares en Cuba: es complicado”. El Nuevo Herald. Septiembre 2017. http://www.elnuevoherald.com/noticias/mundo/america-latina/cuba-es/article173752711.html
[i] HCG Business Intelligence Unit. “Cuba: the "zombie" market that generates hundreds of millions of dollars”. August 2017. THCG Business Report, August, Nº4. THCG and Tech, LLC.
[i] HCG Business Intelligence Unit. “Crash of Venezuelan financial support creates a new scenario: crisis or opening?”. August 2017. THCG Business Report, August, Nº4. THCG and Tech, LLC
[i] Pentón, Mario. “Así se ve desde el espacio la devastación del huracán Irma en Cuba”. El Nuevo Herald. Septiembre 2017. http://www.elnuevoherald.com/noticias/mundo/america-latina/cuba-es/article172928141.html
[ii] Mendez Piña, Pablo Pascual. “'Revolución energética' vs. azote de Irma”. Diario de Cuba. Septiembre 2017. http://www.diariodecuba.com/cuba/1505411313_33978.html
[iii] Alfonso, Pablo. “Daños en la agricultura por Irma agravarán escasez de alimentos en Cuba “. Martí Noticias. Septiembre 2017. https://www.martinoticias.com/a/cuba-afectaciones-agricultura-agravaran-escasez-alimentos/152762.html
[i] EFE. “’Cero total’ eléctrico aleja normalidad en Cuba, turistas se impacientan por salir.” Septiembre 2017. https://www.martinoticias.com/a/cero-total-electrico-en-cuba-aleja-normalidad-turistas-se-impacientan-por-salir/152659.html
