The development of the Index in 2014 suggests the worst moments of the year for the economy in terms of foreign exchange constraints are over, but for now, the CSETI does not offer yet a clear signal that the GDP will accelerate enough in the second half to reach the official goal of 1.4% for the year. The most probable forecast for GDP growth this year is 0.8%
Beginning in September 2014, the Cuba Standard Economic Trend Report includes its own economic activity index, taking the monthly pulse of the Cuban economy. The objective is enabling the nowcasting of the island’s economic situation, using an independent measure, thereby filling the information deficit and the lack of clear signals about the state of the economy in the course of the year.
The new Index makes it unnecessary to wait until partial GDP growth information is announced twice yearly, in the sessions of the National Assembly, or to depend on the reports and yearbooks the National Information and Statistics Institute (ONEI) publishes with much delay on its website.
The Cuba Standard Economic Trend Index allows the anticipation of Cuban GDP growth statistics and offers an up-to-date signal to investors (and other interested organizations) about the state of the Cuban economy.
Around the globe, a large number of countries count on this type of indexes that anticipate the official release of quarterly GDP figures. They are usually built by universities, research centers, consulting firms, central banks and private financial institutions. In all cases, the variables that make up the index are based on data by the statistics office of the respective country, on manufacturing, employment, consumption, personal income, confidence indexes, among others. In the case of Cuba, this would be impossible, due to the insufficient and lagging information released by ONEI.
From ONEI, the Cuba Standard Economic Trend Index only takes monthly Visitor Arrival statistics to gauge the export of tourism services. The remainder of ONEI reports, on agriculture, manufacturing, farmers market sales, and on investments, have delays of more than six months, and the historical series are incomplete, which is why they can not be used in the index.
To get around this problem, we are basing ourselves on the following strategy. On the one hand, we have a number of studies that demonstrate the validity for Cuba of the focus on economic growth constrained by the balance of payments. In other words, the Cuban GDP trend has a proven high correlation with variables of the balance of payments: Exports, imports, terms of trade, and external financing.
On the other hand, although Cuba doesn’t publish monthly information on trade, the main trade partners do report monthly data on exports and imports with Cuba. So we are using data from trade partners as a mirror of Cuban export and import statistics. Also available are up-to-date statistics on international commodity prices, allowing us to make estimates of the terms of trade. In addition, it is feasible to count on some proxy variables to estimate real external financing. This way, we complete the four categories of series we need. Additionally, we incorporate a fifth category that approximates Cuba’s dependency on Venezuela — the monthly trade exchange between the two countries. So, the theoretical and empirical framework of the balance-of-payments constrained growth, plus the mirror information of Cuba’s foreign trade, as well as other international data, allowed us to make use of the first ever economic activity index that has been estimated forthe Cuban economy.
In total, the Cuba Standard Economic Trend Index counts with 28 variables taken on a monthly base from January 1998 to the present. It includes information on real exports and imports of the 10 leading trade partners, it retrieves data on nickel, sugar, oil and food prices, and it approximates real external financial flows, as well as the dependency on Venezuela.
The Kalman Filter econometric technique used in the index allows estimating a common component of the evolution of the 28 variables. The method makes it possible to separate the idiosyncratic (particular) movement of each series from the common component of allseries. This signal contained in the combination of the 28 variables draws together the state of the economy every month, making up the Cuba Standard Economic Trend Index.
FIRST ESTIMATES OF CUBA STANDARD ECONOMIC TREND INDEX
The graph shows the estimates of Cuba Standard Economic Trend Index (CSETI) from January 2008 through September 2014. Values above zero indicate favorable conditions in the balance of payments for GDP growth. In contrast, CSETI values below zero indicate unfavorable conditions for GDP growth, corresponding to balance of-payment constraints (or foreign exchange constraints). The latter, for example, applies to the year 2009, when the country went through a financial crisis that forced the government to stop foreign-debt payments and freeze bank deposits. The CSETI shows that the effects in the balance of payments of that financial crisis hit bottom in October 2009, with an Index value of -0.62. This coincided with a slowdown of GDP growth from 4% in 2008 to 1.4% in 2009, the worst year for the GDP since Raúl Castro took the presidency.
Since then, the CSETI reflects the gradual improvement of conditions in the external sector. However, in August 2013, the Index drops drastically to negative territory. That deterioration of foreign exchange constraint reflected by the CSETI explains the slowdown of GDP growth from 3% in 2012 to 2.7% in 2013, and it also explains the slowdown predicted for this year, given that the Index has remained below zero. Of the five categories included in the Index, the only one that shows improvement in 2014 are the terms of trade, due mainly to a 35% rise in the nickel price, and a 4% rise in the sugar price since the end of 2013. The remainder of the categories (real exports, real imports, real external financing, and the proxy variable of exchange with
Venezuela) show a contraction or deceleration year-to-date. In the first three quarters of 2014, the CSETI registered average values of -0.19, -0.17 and -0.13. The third-quarter figure is helped by an Index projection for September of – 0.03 (in the “neutral” range of balance of payments). The development of the Index in 2014 suggests the worst moments of the year for the economy in terms of foreign exchange constraints are over. The data suggest we may have hit a bottom in which the economy remained during the three quarters. However, there is not sufficient evidence yet to talk about a recovery.
Only if this tendency towards values close to or above zero continues would there likely be GDP growth in the second half higher than the 0.6% of the first half. But for now, the CSETI does not offer yet a clear signal that the GDP will accelerate enough in the second half to reach the official goal of 1.4% for the year. Considering the data through September in the CSETI, the most probable forecast for GDP growth this year is 0.8%.