Regional Business Outlook

Region: Infrastructure a key concern at corporate summit

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The Summit of the Americas (SOA) held in Panama City on 10-11 April will go down in history as a major political landmark, symbolised by the handshake between Presidents Barack Obama of the US and Raúl Castro of Cuba. But it wasn’t all politics: ahead of the SOA, Panama also hosted the second Chief Executive Officer Summit of the Americas (known as II CEO). Some 700 top business executives, including Facebook’s Mark Zuckerberg, América Móvil’s Carlos Slim, Construtora Odebrecht’s Marcello Odebrecht and the CEOs of Boeing, AES Corporation, Coca-Cola and Copa Holdings, among others, were in attendance.

II CEO was a chance for an impressive list of chief executives to give their corporate takes on some of the problems and potential solutions facing Latin America. It was also a chance for the heads of state to engage with them. Panama’s President Juan Carlos Varela spoke of the contribution companies could make to his government’s goal of achieving “prosperity with equity”: he stressed the positive role of private sector investment, and the way it can help increase living standards. In his speech to the CEOs, President Obama made a call for old antagonisms between Left and Right, and between the public and private sectors, to be set aside in favour of “practical solutions”. He sought to balance recognition of the wealth-creating effects of free enterprise with the acknowledgement that markets can and sometimes do fail and therefore need a degree of regulation. Inspired by a visit to the Panama Canal, Obama said he had learnt that its successful operation as a key link in world trade depends on adequate rainfall and water levels: hence global warming and action on climate change must be part of the public-private dialogue.

Various themes came up in the discussion, with a number of CEOs putting questions during one session to four heads of state: Varela, Obama, Brazil’s Dilma Rousseff and Mexico’s Enrique Peña Nieto. Obama and Rousseff stressed the importance of regional infrastructure integration. The Brazilian president described the infrastructure issue as one of the biggest challenges her government faced, and suggested there was potential for multilateral collaboration to address it. Brazil is already involved in collaborative gas pipeline and electricity transmission projects with its neighbours, she noted, emphasising that investment was needed not only for energy, ports and highways, but also for social infrastructure, like housing and education.

The Americas Business Dialogue (ADB), a private sector group coordinated with the help of the Inter-American Development Bank (IDB), produced a set of 30 specific recommendations for the heads of state to consider. These were grouped into four main clusters. The first aimed to “improve infrastructure and strengthen trade”; the second to “facilitate financial resources to spur growth and development”; the third to “stimulate innovation and entrepreneurship and develop our human capital” and the fourth to “maximise the potential of the region’s energy and natural resources”. By their nature, long lists of detailed recommendations can make rather dry reading, but there was a clear attempt to streamline and boost the impact of a number of existing public-private processes.

For example, under the second cluster – the use of financial resources to boost growth and development – the detailed recommendation was that governments should “take steps to deepen and harmonise capital markets and integrate markets that lack scale, by facilitating investments by public entities, which constitute some of the largest investors; issuing bonds with a wide variety of maturities that others can use as references to price their securities; and aligning listing requirements, credit ratings, and professional licensing requirements with internationally accepted standards to create a simple and transparent framework for issuing securities.” This recommendation could be interpreted as supporting initiatives like the Mercado Integrado Latino Americano (MILA), a multi-country stock exchange incorporating the bourses of Chile, Peru, Colombia and Mexico. The MILA does get a specific mention further on in the document, when the IDB is cited as calculating growth in its first phase (before Mexico joined) at 27%, to reach a market cap of US$727bn, thus making it the second largest market in Latin America.

The ADB’s recommendations, coupled with a set of briefing papers prepared by the IDB, are particularly good at quantifying economic development problems and illustrating the potential gains to be had by addressing them. IDB calculations indicate that if Latin America could double its current levels of infrastructure investment, “potential real annual GDP growth could increase by as much as 2 percentage points”. Also cited was data from the Economic Commission for Latin America and the Caribbean (ECLAC), which indicated that average regional investment in 2012 in the four key infrastructure categories (transport, energy, telecoms, and water and sanitation), was 3.5% of GDP. ECLAC estimated that a higher and sustained investment level equivalent to 5.2% of regional GDP, or US$170bn, would be required “to respond to business and consumer needs between 2006 and 2020”. And to get up to the infrastructure investment rates of the more successful Asian economies, the rate would need to rise even further, to around 7.9% of regional GDP, or some US$260bn.

The ADB also makes the point that it is not just about finding the money. Infrastructure projects must be professionally designed, evaluated, and executed. It says that while Brazil, Mexico, Colombia, Peru and Chile have attracted substantial investment in road and rail concessions, they still face challenges, which include “lack of independence, technical expertise, and coordination among regulatory agencies; poorly designed contracts that lead to constant renegotiations; and national policies that may prevent foreign companies from competing in badly needed services such as cabotage or air cargo”.

The recommendations also mention the need to integrate Latin American economies more closely into global value chains (GVCs). Modern and robust logistics, and easier of cross border movements, are considered key conditions to allow companies to compete efficiently in GVCs. But the main global GVCs are located in the EU, South Asia, and North America – not in Latin America or the Caribbean. The IDB says that the typical regional economy has “fewer backward and forward production linkages than the typical country in Asia or Europe. The share of exports linked to a “multi-country production process” is 13 percentage points lower in Latin America and the Caribbean than it is in Europe.

Innovation and entrepreneurship featured high on the list of CEO concerns. Both are seen as critically important to lift productivity levels, but the region is said to lag far behind in the kind of STEM (science, technology, engineering and mathematics) skills that are deemed “most likely to contribute to innovative entrepreneurship”. Other worrying indicators are that start-ups face higher barriers to market entry in Latin America. Banks provide 15-30% of start-up financing in the US, 7% in Brazil, and close to 0% in Chile and Mexico. Average research and development spending in the OECD countries is over 2% of GDP, but under 1% in Latin America and the Caribbean. More encouragingly perhaps, the documents presented by the IDB show that something is stirring in this area. According to InfoDev, a World Bank donor fund designed to support entrepreneurship and business incubators, there are about 3,600 companies with 16,000 employees taking part in incubated businesses as part of a continent-wide network of business incubation organisations. The comparable number in the US is 27,000 start-up companies. According to US research, US$1 of public investment in incubators can generate US$30 in future tax revenues. If a similar relationship holds for Latin America, start-ups could begin to play a significant role in supporting growth and diversification.

Region: Latin lessons to be learnt from South Korea?

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The Inter-American Development Bank (IDB) has suggested that Latin America could learn some useful economic lessons from South Korea. Or is it too late?

According to Federico Basañes, head of the IDB’s department of knowledge and learning, “South Korea has one of the most impactful development stories of recent times”. He points out that between 1961 and 1993 the proportion of its population living below the poverty line in the country dropped from 48.3% to 7.6%. Many Latin American governments would love to have a comparably impressive record on poverty reduction. Whichever way you look at it, South Korea does seem like a fast car overtaking everyone else on the highway to development. As recently as 1980, 15 countries in Latin America and the Caribbean had GDP per capita levels that were higher than in South Korea. Today, none of them do (the closest is Trinidad & Tobago, where per capita GDP is 88% of South Korea’s). Presenting its annual report in Busan in South Korea in April, the IDB organised a workshop to look at the lessons that can be learnt.

According to Basañes, among the things that South Korea got right were the “relentless” promotion of exports and the efficient allocation of human capital and resources to the sectors of the economy where it had the highest productivity. It also had solid institutions and a public sector that recruited “the best and brightest” into the civil service. But it did get some things wrong, he says: it over-invested in heavy engineering and chemicals, and developed a belief that the government would not let the big conglomerates fail, all of which contributed to the economic crisis of the late 1990s. Nevertheless, the country has bounced back strongly. Basañes describes modern South Korea as “an industrial and knowledge powerhouse”, adding that “its experiences in education, vocational training, trade promotion, smart cities, use of smart grids and other technologies to increase productivity have provided valuable lessons for Latin America and the Caribbean.”

But Mauricio Moreira, an IDB consultant, says the “South Korean model” cannot be mechanically transported to Latin America. Speaking to Spanish news agency Efe, he pointed out that “various parts of the model can work for us, but others not… the world is different, domestic conditions are different, economists have been arguing about this for 30 years and it still isn’t settled”. According to Moreira, after an initial experiment in protectionism, by the 1970s South Korea had realized a foreign trade opening could become an engine for development. Latin America didn’t come to that realisation until the 1990s, and by that time it was a late convert, because it had to compete with exporting giants like China and India.

Education could be another transferable part of the “model”, Moreira says. “It is impressive. The priority that the South Koreans gave to education at the start of their industrialization process is fantastic. It is now part of the culture. The importance they give to teachers, and to universities, it is difficult to find anything comparable in Latin America”. In his view, during their protectionist phase, Latin American countries had things the wrong way round. There was no emphasis on education and training, because industries were protected. The result was that the region ended up with lots of uncompetitive industries, which lacked staff with the right skills.

Moreira feels that Latin America did miss the bus. With the possible exception of Mexico, he believes the continent can’t go for a manufacturing and export-led growth model, simply because South Korea showed the way and was eagerly followed by the likes of China and India. There are too many doing the same thing; that market is now just too competitive. Mexico is an exception, because its close proximity to the US allows it to be very competitive and to become closely integrated into the US value production chain. For the rest of the continent, Moreira says, “We have to take advantage of the resources that we have, and diversify from that starting point. We have to add value to mining and agricultural production. Many regional governments are still a little bit obsessed with manufacturing as the only option, and it isn’t. We have to think of other alternatives”.

Trade opportunities

The IDB used the Busan meeting as a vehicle to promote new South Korea–Latin American trade opportunities. Business representatives from both sides were invited to investigate trade in technology, transport, energy and environmental services. The IDB says that since 1990 trade between South Korea and Latin America and the Caribbean (LAC) has grown at an average annual rate of 17% to reach US$54bn in 2014. LAC countries have exported mineral and agricultural commodities to South Korea, while importing manufactured and hi-tech products.

The IDB notes, however, that LAC exports to South Korea are more diversified than to other Asian markets. South Korea has also become an important source of foreign direct investment (FDI) in LAC countries, particularly in the manufacturing sector. There are free trade agreements (FTAs) between South Korean and Chile, Peru and Colombia. During the summit, the South Korean government announce that it would provide US$1bn of policy financing to Latin America, including setting up a US$500m Economic Development Cooperation Fund (EDCF). The Fund will provide loans to infrastructure development projects in Latin America. “Connecting Seoul’s prowess in information technology and manufacturing with Latin America’s abundant mineral and energy resources will benefit all sides”, said the South Korean finance minister, Choi Kyung-hwan.

Corporate Radar

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Ecopetrol to divest ISA stake

Colombia’s state-owned oil company, Ecopetrol, has been authorised by the government to sell its 5.32% stake in the also majority state-owned electricity transmission company, ISA. The decision came in early April; shortly after former finance minister Juan Carlos Echeverry as Ecopetrol’s new chief executive, replacing Juan Gutiérrez Pemberthy. The oil company said that the proceeds of the share sale would be used to help finance Ecopetrol’s investment programme. Separately, Ecopetrol also said it had received finance ministry approval to issue bonds on international capital markets worth up to US$3.2bn. In 2014, Ecopetrol posted net profits of COP7.8bn (US$3.0bn), down by 41% on the year earlier, a fall that the company attributed to the slump in international oil prices. Earlier, there were reports that Ecopetrol was considering taking over direct operation of the Rubiales oil field, currently operated by the Canada-listed oil company Pacific Rubiales. Under the existing licence, which expires in mid-2016, Ecopetrol has the rights to 60% of the field’s output, with Pacific Rubiales holding 40%. While the two companies were reported to be in talks over post-2016 arrangements, Colombian press reports said Ecopetrol was considering taking 100% control of the field, which produces around 160,000 bpd, or one sixth of the country’s total production.

Carlos Slim spins off Telesites

Shareholders in América Movil (AMX), the Mexico-based telecoms giant controlled by Carlos Slim, voted in April to spin off a new company called Telesites, which will manage a total of 10,800 mobile telephony transmission towers around the country. Telesites will be listed on the Mexican stock exchange. According to the newspaper El Financiero, the new company will have 43.2% of the radio transmitter tower market in the country, followed by American Tower with 34.2% and Mexico Tower Partners with 4.8%, with the remainder divided up among smaller players. AMX highlighted forecasts according to which Mexico needs to multiply the number of transmission towers in operation four-fold, suggesting the new company will be well positioned for strong growth. Mexican analysts say that although AMX has been ruled to be “predominant” in the local telecoms market by the regulator, Instituto Federal de Telecomunicaciones (IFT), and therefore must divest part of its operation; the spin-off of Telesites is a separate matter. Jesús Romo, of analysts Telconomía, said that Telesites was being spun off to allow AMX to focus on other parts of its business, more than for regulatory reasons. Nonetheless he expected the IFT to consider Telesites to be “predominant” in the transmission towers market, just as its parent AMX had been deemed to be before. The new company would be subject to the same ‘asymmetric measures’ – basically the obligation to grant access to its transmission network to other players at rates fixed by the regulator. AMX still needs to carry out other divestments to reduce its market dominance; in July 2014, the company said that it would present a plan to do this by 30 June 2015 at the latest.

Shell’s BG takeover has implications for Brazil

The 7 April announcement that Royal Dutch Shell was in advanced talks to takeover BG Group is believed to have implications for oil and gas operations in Brazil. Globally, Shell (which has a market valuation of US$202bn), by acquiring BG (with a market cap of US$46bn) is seeking to extend its lead in gas production and get closer in revenue terms to the world’s biggest private sector oil company, the US-based Exxon-Mobil. The takeover, if approved, will be the first since the collapse in oil prices last year, and, in the eyes of some analysts, a sign of a new wave of market consolidation. Shell chief executive Ben van Beurden made it clear that one of the attractions of the deal was BG’s Brazilian assets. He described Brazil as “probably the most exciting area in the world for the oil industry”, adding, “We are already in Brazil and we are happy there, but we want more. A significant part of this deal was gaining a stronger presence in Brazil’s deep water”. BG has drilling rights to the Iara, Saphinoá, Lapa and Lula (formerly Tupi) oil blocks. The Shell CEO recognised that to develop Brazil’s pre-salt offshore deposits the company needs to work in partnership with the state-owned Petrobras, currently mired in corruption allegations and enquiries. “The headlines about Petrobras are not pretty, but we are talking about something long term here” he commented.

Brazil’s OAS seeks bankruptcy protection

One of Brazil’s major construction companies caught up in the Petrobras corruption scandal, Grupo OAS, filed for bankruptcy protection for nine of its subsidiaries on 31 March. The company has debts of BRL8bn (US$2.48bn) and has not been able to borrow or raise capital because of the impact of its involvement in the Petrobras scandal. It has also been hit by the flatlining Brazilian economy, public sector austerity and a weak domestic currency. The OAS move to seek bankruptcy protection followed similar action by two of its competitors, Alumini Engenharia and Galvão Enghenheria. The three companies are alleged to have been part of a cartel of over 20 large groups that paid bribes to Petrobras executives in exchange for contracts. Several top OAS managers were arrested last year as part of the investigation into the cartel. The decision to file for bankruptcy was taken after negotiations with the company’s main creditors. Sources said the outlines of a rescue plan had been agreed, involving a debtor-in-possession (DIP) loan to tide the company over, followed by the sale of shareholding stakes in subsidiaries including infrastructure operator Invepar, a shipbuilder, two football stadiums, a waste management company, an oil and gas sector supplier, and a defence contractor.

General Electric upbeat over the region

Despite “turbulence” and a poor performance this year in two of its key markets, Brazil and Venezuela, US company General Electric said it expected to achieve a 1% growth rate for its Latin American division in 2015. Speaking at the summit of CEOs held in Panama in April just before the Summit of the Americas organised by Organisation of American States (OAS), Reinaldo García, head of GE’s Latin American division, told the Reuters news agency that the company had boosted its profits in Latin America by 7% in 2014, and over the last four years had almost doubled the size of its regional business. This year it was expecting 1% growth in Brazil, which would be a good result in a “difficult year” for the economy. In Venezuela, where GE is involved in power generation and the oil and gas sector, it was expecting revenue to remain flat or fall a little. But García remained upbeat about prospects for the business. “The continent has 600m people with a growing middle class, and with big infrastructure challenges” he said, adding, “We love this continent”.

Ford announces US$2.5bn Mexico investment

Ford Motor said in April that it would invest a total of US$2.5bn to build a new engine factory in Chihuahua and a transmission plant in Guanajuato, creating an estimated 3,800 new jobs. This was the latest in string of new investments announced for the country’s booming automotive sector. It followed an earlier announcement of a US$1bn plant investment by Toyota, designed to build 200,000 Corolla compact cars for North American markets.

In March, Volkswagen said it would invest US$1bn to expand its production plant in Puebla state. Welcoming Ford’s new investment at a ceremony in Mexico City, President Enrique Peña Nieto noted that Mexico has moved up from eighth to seventh largest car producer in the world, and is the fourth-largest car exporter.

The Mexican authorities say cumulative foreign investment in the sector has now reached over US$22.6bn. Ford’s new investment will be to build 1.5 litre and 1.6 litre four-cylinder engines, mainly assembled up to now in the UK and China, and used to power Ford Fusion and Escape models. It confirms the strong growth of the automotive sector in the country, with a range of companies attracted by Mexico’s multiple free trade agreements, competitive wage levels and proximity to US consumers.

The announcement was not well received by the main US industry labour union, the United Auto Workers (UAW). In a statement it said “The announcement by Ford to invest US$2.5bn in Mexico is disappointing, but not any more disappointing than GM’s decision to invest US$5bn in Mexico or similar investments like FCA Chrysler, Nissan, Mazda, Honda, and now both Toyota and Kia, which have announced investments in Mexico.” Industry analysts, however, note that not all the traffic has been one-way. GM recently said it was spending US$185m to move Cadillac SRX production out of Arizpe in Mexico and back into the US.

Grupo Radio Centro gets cold feet

The Mexican media conglomerate Grupo Radio Centro will not, after all, operate a national digital free-to-air TV service. Mexico’s telecoms and broadcasting regulator, Instituto Federal de Telecomunicaciones (IFT), had selected Grupo Radio Centro as one of two successful bidders for national licences, offered in a bid to help break up the existing duopoly of Televisa, the dominant network and TV Azteca, the number two. Having paid an initial MXN415mn (US$26.9m) deposit, Grupo Radio Centro has been due to pay the remaining balance of its bid, which including the deposit came to MXN3.06bn (US$200m) on 10 April. But as the deadline approached it became evident that the conglomerate was scrambling to seek out partners to help it raise the money. On the day itself, no payment was made, meaning Grupo Radio Centro was deemed to have forfeited the licence – and lost its deposit. The other successful bidder, Cadena 3, which offered a lower MXN1.8bn, is still on track to launch next year. IFT said it would consider what to do next in a forthcoming meeting. Referring to the now unallocated licence, the IFT president Gabriel Contreras said, “There is interest from regional operators and we will analyse every possibility”.

Southern Copper expects big growth

Peru-based mining group Southern Copper said in a report filed with the Lima stock exchange that it expects to almost double its annual copper production to 1.15m tonnes by 2017, as projects in Peru and Mexico come to fruition. The company said that its expected growth would make it the world’s third largest copper producer by 2017. Grupo México controls Southern Copper. In 2014 it produced 676,600 tonnes of copper. In early April this year, it successfully issued US$2bn worth of 30-year bonds, designed to help fund its expansion plans and possible “strategic acquisitions”.

Its current projects include expanding the Buenavista mine in Mexico, where US$3.4bn in investment is earmarked to boost production from 180,000 tonnes per year (tpy) now to 512,000 tpy. It also highlighted its US$1.4bn Tía María project in Peru, which is scheduled to produce 120,000 tpy by 2017. The Tía María mine is facing opposition from local communities, who fear that farms will suffer contamination. On 22 April, one person died as a result of clashes between police and protestors demanding that the project be cancelled. Southern Copper is still awaiting a mining permit from the government, which delayed the project after a first wave of protests in 2011. President Ollanta Humala has defended the project, saying that Southern Copper should be “given a chance”. The mining company is also focusing on expanding its existing mine at Toquepala, where it plans to invest US$1.2bn to double the capacity of its concentrator.

Cuba: SSOT delisting boosts sentiment

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On 14 April, President Barack Obama notified the US Congress of his intention to remove Cuba from the State Department’s list of state sponsors of terrorism (SSOT).

The government of Cuba welcomed the news that the country is to be removed from the SSOT list (also comprising Syria, Sudan and Iran), as an important step towards the restoration of normal diplomatic relations between the US and Cuba. In theory, the US congress has 45 days to respond. In practice, President Obama could veto any objections. While the de-listing will facilitate banking and financial relations between the two countries (including allowing the Cuban interests section in Washington and the Cuban Mission to the United Nations in New York renewed access to banking services), and certainly spur the nascent US interest in doing business with Cuba, the considerable legal and technical hurdles to doing so under the congressionally-codified embargo remain firmly intact, without much hope of removal any time soon.

Implications

In a report outlining the main implications of Cuba’s SSOT de-listing, a multinational law firm, Hogan Lovells, identified the following: (Cuba’s) eligibility for a wider range of (US) exports of dual-use items (for example software, communications technology and other items with potential military use); eligibility for US foreign assistance and humanitarian aid; elimination of Private Right Action (meaning that the statutory authorisation for individual US citizens to pursue private claims against Cuba in US courts would be eliminated, thereby facilitating trade without the potential fear of asset seizures); the elimination of a rule requiring publically-traded companies to disclose to the US Securities and Exchange Commission (SEC) their dealings with Cuba; and finally, the elimination of State divestment laws (some US states have laws or policies prohibiting investments in companies doing business with blacklisted countries).

Meanwhile, the mainstream media continues to highlight how a number of leading US companies in the broadly defined technology, media and telecommunications (TMT) sector are looking to expand into Cuba. In February, for instance, the online movie provider Netflix said that it would extend its service to Cuba, as a part of a longer term plan to expand its geographical footprint from around 50 countries to 200 over the next two years. At the VII Summit of the Americas, Mark Zuckerberg, the founder and Chief Executive Officer of Facebook, said that it was looking to expand its internet.org initiative, which brings Wi-Fi services to countries and areas that are lacking in Internet access, to Cuba. Internet.org is already active in the region in Colombia, Guatemala and Panama. Apple has indicated that it may provide some of its products to Cuba. Other reports indicate that Amazon may be looking to provide its clients with the opportunity to ship to Cuba.

Online commerce in Cuba is and will remain hampered by the lack of Internet access. According to the International Telecommunications Union (ITU), Internet penetration in 2013 was 25.7%. Although the state-owned telecommunications company Etecsa reduced the cost of an hour of Internet use from the equivalent of US$5 to US$2.50 for a two month period to mid-April, that lower price is still way too expensive for most Cubans. Alternatively, Cubans may pay Etecsa the equivalent of US$10 per month for 20 hours of Internet access, US$15 for 50 hours or 220 hours for US$60. The charges must be paid in convertible pesos (CUC), which are fixed at (near) parity to the US dollar. In a country with over 11m people, there are only 155 public access points where connection to broadband Internet is possible.

Less attention has been paid to the logistics of online payments to Technology, Media and Telecoms (TMT) companies by Cubans buying goods and/or services. Credit cards and debit cards, typically used by customers in other countries, are not yet available. In theory, TMT companies could sell vouchers for national pesos (CUP) or (more likely) CUC – the two currencies in Cuba’s dual currency system, which then could be redeemed by customers online. In practice, though, no details have been made public.

Details of how TMT companies might be paid likely will remain scant until the Cuban authorities resolve a much more fundamental problem. As we have regularly noted in our reviews of the Cuban economy, neither the CUC nor the CUP adequately perform the basic functions of money. Neither really serves as a unit of account, a means of payment or a store of value. Unless and until the current dual currency system is replaced with a new system that is clearly sustainable (such as a properly constructed new currency peg to the US dollar, for instance), e-commerce is very unlikely to flourish in Cuba.

This is not to say that recent weeks have not seen significant and positive announcements involving foreign companies. In late March, for example, Canadian company Sherritt International said that it should benefit from a reduction in tax rates applied by the Cuban authorities to its local operations. The new foreign investment rule cuts the tax rate on oil & gas operations from 30% to 22.5%. The equivalent reductions for power generation and mining, two other areas in which Sherritt International has significant interests in Cuba, are from 30% to 15% and from 45% to 22.5% respectively. The halving in the tax on mining comes at a time that there is the potential for a substantial increase in volumes of nickel production. Nickel prices have been boosted in the recent past by a global shortage. In part because of the mothballing of plants, output of nickel from Cuba’s mines in the last year or so has been about half of the normal level of the last decade.

Press reports in early March indicated that Brazilian construction group Odebrecht is starting work on a US$200m project to modernise and expand Havana’s José Marti International Airport. This is Odebrecht’s third major infrastructure project in Cuba. Three quarters of the funding will come from Brazil’s state-owned development bank, Banco Nacional de Desenvolvimento Econômico e Social (BNDES), which will disburse the money directly to the Cuban government through a bilateral export credit facility set up in 2014.

The projects being operated by Sherritt International and Odebrecht have a number of features in common. First, the government of Cuba (and/or its various agencies) is the main client. Sherritt International and Odebrecht are providing physical infrastructure that the country badly needs. Both companies have ample access to the funding that they need from global capital markets (and, in Odebrecht’s case, indirectly from the government of Brazil). In short, the absence of payments systems and the shortcomings of the dual currency system do not affect the activities of either on a daily basis in the way that they would hamper the normal operations of TMT companies seeking to engage with large numbers of Cuban consumers.

Taking a one-year view, a number of trends are foreseeable. The US and Cuban governments will move further towards a normalisation of relations, focused initially on re-establishing embassies. These improving diplomatic relations will provide a favourable backdrop for multinational construction and mining companies. High profile consumer businesses from the US (and large TMT companies in particular) will continue to make clear their desire to extend their geographical footprints to Cuba. In practice, however, little will happen until the Cuban authorities have undertaken wholesale currency reform.

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