Issuing economic prophecies is risky due to the number of unpredictable variables involved. But, as we glimpse the first lights of this incipient 2025, a currency storm is on the horizon that threatens to further upend this floating shell that we continue to call Cuba, if only out of habit. And yes, in just days the dollar has lost more than 10% of its value. Those waters seem calm, but this is only the short-lived, electric and tense calm that precedes the impending storm.
A Descending Dollar
The December Effect: for idiosyncratic reasons, business in Cuba slows in December; investment stops, and even emigration ebbs until the new year, reducing the demand for dollars, while on the supply side there is an increase due to the spike in remittances received due to the holidays. Less demand and more supply put downward pressure on the price of the dollar.
The Castroism Effect: Historically, whenever the Government makes major economic announcements, the result is greater uncertainty. Cubans wait to see "what will happen," and consumption and investment stall. This effect is much more visible since few agents - SMEs - account for such market power that their decisions define the value of currencies.
That the dollar has never risen immediately after a Castroist economic announcement shows that, since 2021, forced by circumstances, a tiny part of the Cuban nation's beleaguered entrepreneurs was partially unshackled, all Castroism has done is to hound that sector, preventing it from prospering.
Resolution 56 - the nationalization of wholesale trade - and the new currency invention have exacerbated the "Castroism effect."
Resolution 56 forces thousands of MSMEs to abandon the wholesale sector, such that, at least for now, they demand fewer dollars and concentrate on liquidating inventories and goods in transit within the 120 days that the Government granted them before closing.
Meanwhile, the diffuse and superficial announcement that a floating legal rate would be adopted has put a damper on the illegal foreign exchange market, with agents waiting to decide where to operate, in CADECA or on the street.
Conclusions Regarding the Falling Dollar
Neither the foundations of the national economy, nor any external shock - the "Trump effect" is still slight - explain the abrupt drop of the dollar that we have witnessed, such that it may be concluded that it was precipitated by a combination of the December and Castro effects, catalyzed and maximized by the speculation that is unleashed in any market when a trend varies.
Without economic foundations supporting the depreciation of the dollar, it will evaporate when the December effect chronologically ends, the Castro Effect subsides, and uncertainty decreases. The exchange market will then be expected to recover a bullish imbalance, given the chronic shortage of foreign currency on the Island.
The Coming Rebound
Private MSMEs: Although thousands of these companies are being driven from the wholesale business, unmet demand for goods persists in the population, such that distribution chains will eventually be adjusted and private retailers will be resupplied through 'mules' or state wholesalers. In any case, they will need dollars, probably more than before given the foreseeable increase in the price of products due to the State's inefficient interference in the distribution chains.
A demand for extra dollars will appear when many of the thousands expelled from the wholesale business manage to liquidate their stock. Then, tired of trying in Cuba, some will need dollars to emigrate, while others will need them to repatriate the money to the country from which they made their investments.
Emigration: Not even the Government expects economic improvement by 2025; the 1% growth announced, even if achieved, is insufficient. The worsening living conditions will be an increased stimulus to emigrate, for which foreign currency is needed.
Floating State Rate: Although it is unknown how it will work, it is clear that the Central Bank does not have reserves to stabilize the value of its currency and, in addition, the authorities have already assured that they will buy more dollars - to distribute among state companies - than they will sell, which will leave fewer dollars on the street to meet private demand. Reduced supply and equal or increased demand will make the illegal dollar more expensive, forcing the government to buy increasingly expensive dollars. The rate will not be floating, but rather increasing.
Conclusions About the Rebound
Private demand for foreign currency will not decrease as long as families depend on imports to survive. And, on the supply side, the government seems to be gutting the market by buying more dollars than it will sell, so the rebound could be traumatic.
The Impact of the Foreign Currency Market on the National Economy
Although the MSMEs connected to the Government are partially financed through the new currency allocation mechanism announced by Prime Minister Manuel Marrero, the aggregate demand for dollars is expected to continue to be higher than the supply - and we still do not know the effect of Trump on emigration or remittances - such that the trend will be a progressively more expensive dollar.
This increase could be contained, as it has been until now, by keeping the monetary base frozen at the current minimums, which result in the shortage of cash from which the population suffers. However, the Central Bank will need money to buy dollars, and it is very likely that it will have to expand the monetary base by printing or increasing bank liabilities to get it, since cash is held by individuals who refuse to put it in Castroist banks.
A novelty that we will likely see in the short term will be that, for the first time, they allow legal entities, SMEs, to acquire dollars through bank entries to replenish themselves at the new state wholesalers. But how long will it be before these state wholesalers suffer the same fate as MLC stores, which were decapitalized under inept state administration?
For now the Government has managed to contain the escalation of prices by reducing the purchasing power of Cubans and making it difficult for them to access cash (that is, transforming inflation into misery, as without money there is no demand), but adopting a floating exchange rate could rekindle the inflationary flame if the State, as everything seems to indicate, has to issue money to buy dollars. Marrero recognizes the existence of partial dollarization, but when will they recognize the existence of a total disaster?