Cuba: Time to restart the markets

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Jan Dehn, head of Research at Ashmore discusses why Christmas comes to Cuba, as the country finally escapes its tragic status as a museum piece from the Cold War.


The US government has begun the process of normalising relations with Cuba. One of the last legacies of the Cold War thereby finally looks set to dissipate. During the Cold War, the Russian-sponsored Warsaw Pact and Western powers led by the United States were locked in an ideologically motivated dispute over control of Emerging Markets (EM).

The result was a plethora of dictatorships across the Emerging world, whose misrule so impeded development that a lasting impression was created that EM are a bunch of fragile and unstable countries.

Cuba was one of the highest profile hotspots of the Cold War, which enabled the country to sell itself as a potent symbol of the alleged abuse by the United States of its power the world over, particularly for its own and other left-wing governments that in turn used this perception to justify their own authoritarian misrule. Cuba, welcome to the 21st Century! Time to restart the currency, bond and stock markets!


The government took another important step forward towards restoring fiscal prudence by announcing that the long-term interest rate at which BNDES, a massive state lending institution, finances will be increased by 50bps to 5.5% from 1st January 2015.

The Treasury of Brazil, which provides the bulk of financing to BNDES, raises funds at the SELIC policy rate of 11.75%, while BNDES lends at the so-called TJLP plus a spread, thus in most cases providing an enormous implicit subsidy for the economy, which crowds out private sector lending and shows up in the public finances as higher public debt.

Further narrowing of the gap between the SELIC and the TJLP is likely next year, in our view. Despite slow growth and a much weaker currency, Brazil continues to run larger current account deficits due to quasi-fiscal imbalances of the type described above.


The National Bureau of Statistics has revised the 2013 GDP up by 3.4%, mainly due to increases in the services sector.

Further increases are likely as GDP in more distant years are revised when China adopts fully recognised international practices for measuring GDP. GDP numbers in EM tend to be systematically understated, because they are calculated based on censi that quickly become obsolete due to the rapid structural evolution of most EM economies.

The lower the per capita GDP the larger the typical revisions. Meanwhile, fresh data from the property market shows that property prices are still slowing albeit at a progressively slower rate. The fastest rate of contraction was observed in July 2014. On current trends, China’s property prices look set to return to positive growth rates within the next 6 months. The flash PMI for December fell to 49.5.

Russia-Ukraine situation

Public statements last week suggested that several senior government officials were now looking for opportunities to stabilise or even de-escalate tensions with Russia.

French President Francois Hollande, Austrian Chancellor Werner Faymann, Italian Prime Minister Matteo Renzi, Swedish Foreign Minister Margot Wallstroem and Danish Foreign Minister Martin Lidegaard all took public positions against applying further pressures on Russia or went as far as suggesting a reduction in sanctions.

The economic incentives for a peace deal have recently increased for most parties involved in the Russia-Ukraine situation, while the political incentives for further escalation have deteriorated.

This means that odds of a deal have improved, though it remains to be seen if the political talent – or lack thereof – in Europe, the US, Russia and Ukraine are sufficient to prevent this opportunity from going begging. An exchange of prisoners took place in Eastern Ukraine, but fighting is also continuing.


After a week of exceptionally volatile currencies and a decision by the central bank to raise interest rates by 650bps to support the RUB the Duma authorised a RUB 1trn capital injection into Russia’s banks. The government will issue sovereign bonds that will be exchanged for subordinated bonds issued at yields of 12%-13%.

The Russian government has one of the lowest debt to GDP ratios in the world, which means that further support is both possible and likely should the stresses in the Russian market continue, in our view.

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