Savings, foreign currency market and cryptoassets in Cuba

A Caribe (State) chain store in Cuba

Very few Cubans have enough savings to capitalize them in Cuban currency, either in CUP pesos or MLC (magnetic USD).

By Miguel Alejandro Hayes Martínez (El Toque)

HAVANA TIMES – The structure of citizens’ consumption of goods and services changed after World War II. These changes were quickly reflected in economic theory. This is seen in the permanent income hypothesis.

According to this theory, consumption is explained by two sources: personal income and loans or advances. In other words, a person lives off his hard work and the debts he incurs (on his current work and an advance on future work).

This is not the case for people whose personal income covers their needs. The sectors whose income allows them to satisfy certain levels of consumption and which have a “little remainder” have savings. Meanwhile, public policy tries to capture these savings, as a source of investment, according to the old economic maxim: savings = investment (there are also people who use loans to invest, and they are also subject to public policy interest, but I’ll just focus on savings in this article).

Citizens who have savings have several options when it comes to investing their money. The classic option is to deposit these savings in the bank, and after a period of time they will earn interest, or these savings can be given as a direct investment, by buying shares in a company (the right to take a share of the future profits of a company) on the financial market.

The financial market is the place where savings go in exchange for future profits, on the one hand, but on the other hand, it also involves the promise of profits in exchange for financing. Depending on which offers more income, depositing money in a bank or buying stocks, which means taking a bet, a decision is made (this may include advice from money managers, financial advisors, etc. ).

Inflation is a variable also present in the financial market, and it must be taken into account because the money of today will be worth less tomorrow (but I will not discuss this variable here).

A new market has recently appeared, which represents potential profits for those who have savings, just like the financial market. This is the cryptoactive market.

The Cuban financial market

In Cuba, loans are not systematically granted to consumers, by banks or businesses. As a result, loans or advances are not a significant factor in consumption, historically speaking, and Cuban citizens have fewer tools than other societies to cover their expenses.

Add to that the fact that the minimum wage in Cuba is not enough. One could say that salaries below 4000 pesos (the peso is 25 x 1 USD officially but not available in banks and on the street the rate is 100 pesos for $1.00) are not enough to live a decent life , in general. Public sector wages are therefore not the variable covering all consumption. Most government employees are in this situation.

However, about a million workers work independently, there are remittances, jostling… In addition, several generations cohabit in the average Cuban household, which explains the more complex structure of consumption, instead of the theory of the permanent income hypothesis in its pure sense.

Given the above, a partial conclusion is that Cubans who have no salary, plus a hustle, plus remittances, with a little left over, have no savings to decide where better to invest. this. The majority are trapped in the frantic race for survival: household savings are very low.

But in Cuba, there are also people who have money. A minority have enough to think about how to add value to it. This minority could decide to place their savings in the bank (while waiting for an interest rate to capitalize their deposit, read here: profit) or to turn to the financial market.

Although Cuban banks offer interest rates, citizens who have money do not go to the bank to keep it safe or, rather, they do not deposit a large sum of money in the bank.

They also don’t go somewhere to buy shares (or rights to the company’s profits) so that others have funding, because that doesn’t exist here. This activity between private actors has not been legalized in Cuba, nor is there a private business structure ready for it; Moreover, this type of market operation does not take place between private players and public players. There is simply no traditional and official financial market in Cuba.

Likewise, very few Cubans have enough savings to capitalize them (and they want to) in Cuban currency, whether in CUP pesos or MLC (which only exists on magnetic cards). There are no funding opportunities. In other words, the few wealthy people in Cuba (who can save money to spend on something other than consumer goods) have their savings in foreign currencies, outside the country if possible (where banks offer interest rates), in works of art, in other valuable assets such as property, but never in CUP or MLC. It is always better to save your money in a currency that has international support and stability, than in a currency that does not. I don’t need to explain why the Cuban currency is weak and undervalued.

Well, even if savings are considered a classic source of financing investments, for savings to act as such, they must find investments in the local economy that are much more attractive than in a foreign economy, which begins with the currency in which this savings first takes shape. Therefore, for an economy to capture savings in the form of investments, it needs a strong and reliable currency. This is not the case for the Cuban currency. There are no funding sources.

On the demand side, there is no regular and stable framework where a group of financial organizations can come together and grant the right to share in the profits, in exchange for funding. There is no funding request.

Without supply and without demand, there is no financial market, in effect (regardless of isolated, illegal and secondary operations from a statistical point of view).

Another partial conclusion that we can draw is that, in the Cuban case, whether there is inflation or not, the traditional relationship that the economy forges between savings and investment has no way of forming with the source and magnitude of Cuban income, just as if there were no way to open up a landscape for a financial market; this correlation therefore implies a zero economic connection in a systemic way.

Consequently, the behavior and future of savings are indifferent to the exchange rate offered by the bank, or “financial market”, whether there is inflation or not.

Cryptoasset market

Despite a non-existent financial market in Cuba, the cryptoasset market is gaining ground.

The volatility, uncertainty and lack of culture of Cuban citizens in this regard to face this landscape means that larger economies continue to be spared in the aforementioned manner, rather than in the new cryptoasset market.

We must remember that it continues to be a trading space like the stock market, which is not exactly suited for direct participation by anyone spared. As a result, Cuba’s crypto-asset market does not respond to the conventional dynamic it has in other regions: take a chance and hope your money adds value.

Instead, this market in Cuba serves a need and is pretty much a necessary outcome: it helps remittances enter the country, as well as other funds from abroad. Today, having cryptoassets is one of the few options to bring foreign currencies into the country online. As a result, Cubans or their family members abroad buy crypto-assets and then resell them in MLC in Cuba and receive payment in this currency.

So, unlike the normal crypto-asset market, it only appeared to bring money into Cuba so that it could be spent on consumer goods. It is a market where the fundamental nature is to simply reproduce one of its parts, and not to capitalize on it. We have to remember that no one (except reselling companies, which aren’t the majority) wants to have thousands of dollars in MLC, they just want it in small amounts as they go by.

On the other hand, there are people in Cuba who, unlike those who do it to obtain MLC by selling consumer goods, only buy cryptoassets to then resell them at a higher price (the only reason for buying a cryptoasset is the hope that it will be worth more in the future); like people do when they buy foreign currencies in bulk and then sell them for more. This group seeks to make a profit. They use the need to bring MLC into Cuba to buy cryptoassets, then their return to them is higher when their price increases. They discovered a way to profit from their buy/sell.

This is another peculiarity of the Cuban crypto-asset market. While those who intervene, to buy and sell, in other places, hope to increase their yields; in Cuba, only one party seeks to satisfy a need without any profit, while another group seeks a profit.

Rather than being a cryptoasset market, it’s usury with cryptoassets.

The reality is that this market represents an immediate solution, but its structural price creates a bubble; it is therefore not a systemic solution, it is not viable for the majority of Cubans and it will only last for the duration of the bubble.

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