Moody's Cuts Cuba Rating on Risk from Venezuela Turmoil

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Moody's cut Cuba's credit rating Wednesday by one notch, citing its vulnerability to a shock increase in fuel costs arising from turmoil in supplier Venezuela.

Moody's also cited the risk of a rocky political transition in the Caribbean island in the wake of the Castro regime as it cut the rating to Caa2 from Caa1, well into "speculative" territory for debt.

"Cuba relies heavily upon Venezuela for oil, which is imported with favorable financing terms through Petrocaribe," the credit rating firm said.

"Given Venezuela's increasingly unsustainable macroeconomic imbalances and elevated risk of an economic and financial collapse, the future of this arrangement is uncertain, rendering Cuba vulnerable to a sharp adjustment in the cost of energy imports."

It noted that energy imports cost the country $6.5 billion in 2012, nearly half of its total import bill.

Moody's also warned of "an abrupt and disorderly political transition," with revolutionary strongman Fidel Castro now 87 and his brother Raul Castro, Cuba's president, 82.

"While President Castro recently indicated that his current term will be his last and, at the same time, appointed a first vice president of the Council of State of Cuba, there is considerable uncertainty around the future state of Cuba's political economy."

While Cuba is deeply restricted in its ability to tap international capital markets, Moody's noted that Havana might be weighing reopening negotiations with the "Paris Club" of bondholders to resolve claims on long-defaulted debt.

Cuba has made tentative steps to open up its long-isolated economy, including passing a new law late last month to ease the way for foreign investment.

But the economy still suffers under tight communist rule and a five-decade-old embargo maintained by the United States.

The government of close ally Venezuela has long given Havana a sweetheart deal on oil imports.

But with Venezuela's own economy sinking under mismanagement and political turmoil, and its own import bill soaring, Moody's suggests Caracas could be forced to change its stance towards Cuba to stabilize its own finances.

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