The state-owned, military-run hotel group Gaviota's hotel capacity expansion announcement, amid stricter US travel restrictions and damage inflicted by Hurricane Irma last year, underlines Cuba's commitment to increase foreign participation in the economy.

• State-owned, military-run hotel group Gaviota announced it will expand its hotel capacity in Cuba by nearly 10% to 33,200 rooms.
• The announcement was made despite US tourist arrivals having decreased due to stricter US restrictions and the damage inflicted by Hurricane Irma last year.
• The hotel expansion will be undertaken through joint ventures with French and Spanish investors, indicating new president Miguel Díaz-Canel's support for increased foreign participation in the economy, but democratic political opening unlikely.

Cuba's military-run hotel group Gaviota announced on 13 July that it will expand its capacity by 2,750 rooms in 2018 to reach a total of 33,200 rooms distributed across 93 hotels nationwide. Cuba holds 69,041 rooms in four- or five-star hotels, mainly in coastal areas. Half of these are run by Gaviota. The announcement is one of the first relating to hotel infrastructure since new president Miguel Díaz-Canel was sworn in on 19 April 2018. It signals the Communist government's continued interest in opening of the tourist sector to foreign private capital. Tourism is Cuba's main source of hard-currency revenue, after the export of professional services.

Gaviota will participate in French group Accor's Paseo del Prado Hotel (250 rooms) on Havana's Malecón and the Spanish-owned Iberostar Hotel Packard (321 rooms) in the capital's historic and heritage locality of Old Havana close to Kempinski's Gran Hotel Manzana Kempinski La Habana. The Gran Hotel, Regis Hotel, El Palacio de Cueto, and Marques de Monte Hermoso Hotel are also to be adapted and reopened in Havana as hotels in the one-year outlook while other smaller hotels in Miramar and Vedado neighborhoods are to be inaugurated in 2021. No details have been released over which private sector hotels chains will participate in these upgrades and expansion work. Other hotels considered for upgrade and reopening outside Havana are the Ocean Arenas Blancas (546 rooms) on Cayo Cruz island north of the Camagüey province and the Iberostar Holguin (546 rooms).

Cuba has forecast a record number of 5 million tourists in 2018 versus 4.7 million in 2017 and 4.4 million in 2016. Most tourist arrivals come from Canada and the European Union but Argentina, Brazil, China, Mexico, and Russia are increasingly prominent. Such diversification is critical as US measures imposed in November 2017 toughen travel restrictions for US visitors. The sanctions also prevent US companies from conducting business transactions with Cuban state-run companies run by the military, intelligence, and security forces.

The sanctions are a significant setback for Cuba's tourist sector, given that US traveler numbers had grown the fastest in 2017, expanding 191% over 2016 to 1,173,428 (of which 619,523 where US nationals and 453,905 Cuban residents in the US). US nationals cannot travel freely to Cuba but enforcement of US restrictions had become lax under President Barack Obama (2009-17). Under President Donald Trump all travel by US nationals and residents to Cuba has to be sponsored by a US-based organization - justifying how the trip will benefit US-Cuba relations and having a US representative of that organization traveling with them.

Trump administration's blacklisting of Gaviota implies that no US corporations or individuals are allowed to do business with the hotel group or invest in any expansion of Cuba's tourist infrastructure. The sanctions specifically stipulate that it is against US law to provide economic support to military-run Gaviota or any other company run by the Cuban security services. The measures are not retroactive, meaning that US companies that signed development contracts with a Cuban counterparty before June 2017 would not be affected. These particularly benefits Starwood Hotels & Resorts Worldwide, which inaugurated a "Four Points" Sheraton hotel on 28 June 2016 operated by joint ventures with Gaviota.

Outlook and implications
Cuba's tourism sector will continue to drive external revenues in the near term but at a slower pace than in 2017. Gaviota's announcement underlines that Cuba is increasingly likely to turn to the foreign private sector to maintain, upgrade, and expand its tourist infrastructure in efforts to improve the business environment and mitigate the negative effects of US restrictions on investment and travel. French and Spanish investors are most likely to replace US companies, which the Cuban government had hoped to attract during rapprochement efforts towards the Obama administration. These investors face face high compliance and regulatory risks as they are exposed to the extra-territorial effects of the US embargo on Cuba. This includes the risk of potential fines if they have business interests or a direct presence in the United States or conduct transactions through the US financial system or in US dollars.

Cuba's tourism industry has been growing rapidly, driven by US tourists, especially after former president Obama conducted efforts since December 2014 to ease sanctions (now reverted by Trump). As of June 2018, the Cuban authorities reported that 2 million tourists visited the island within 2018 but IHS Markit assesses that Cuba is likely to fall short of its 5-million target for this year. US travelers are likely to face US government travel restrictions. IHS Markit on-the-ground sources report that tourist arrivals have already decreased as a result. They are also being hurt by the slow recovery of Cuban tourism infrastructure following Hurricane Irma, which caused extensive damage to the island in September 2017. Curtailment of subsidized supplies of Venezuelans oil, and reduced Venezuelan demand for the export of professional services including medical doctors and intelligence and defense operatives also have hurt Cuba's economy, weakening its main source of external revenues and slowing its reconstruction efforts. Venezuela is sending just 35,000 barrels as a result of sharply lower oil prices and reduced production (down from 100,000 barrels).

Overall, Cuba's hotel room expansion is to contribute moderately in 2019 to assist the tourist sector recover from this year's decline. In turn this should benefit the food, hospitality and retail sectors, including family-run restaurants knows as 'paladares'. A highly positive but unlikely indicator of progress for the sector would be if waivers were granted by the US Treasury and Department of Commerce for US hotel chains to conduct improvements and further investments within Cuba. Díaz-Canel is not sending any sign of democratic political reform in the upcoming constitutional reform hence the easing or lifting of the US embargo on Cuba is highly unlikely. Similarly, an equally unexpected announcement from Gaviota indicating a change in its control away from the military and intelligence services would facilitate additional foreign investments into the tourist sector.

Posted 27 July 2018 by Diego Moya-Ocampos, LLB, Principal Analyst, Country Risk Americas, IHS Markit