Cuba s Next Revolution: Emerging From Decades Of Isolation

Webinar Cuba s Next Revolution: Emerging From Decades Of Isolation January 22 2015 Jake Grant, ICT Analyst Katherine Weber, Head Of Americas Country Risk Jessica Peters, Pharmaceuticals & Healthcare Analyst Michelle Berman, Head Of Freight & Shipping Gregan Anderson, Americas Country Risk Analyst

Introduction Overview Country Risk: Assessing The New Status Quo Telecoms: Slow Progress On The Cards Pharma: Growing Foreign Appeal Energy: Diversification A Growing Focus Shipping: Opportunities Abound Q&A

Big Changes On The US Side What has happened: Diplomatic relations restored Travel expanded Financial services facilitated Certain US export activities streamlined Remittance limits increased 90 80 70 60 50 Public Opinion Supportive Poll: Do you support or oppose the US ending the embargo with Cuba? 79 57 67 What has NOT happened: Complete normalisation of relations Authorisation of free recreational tourism Significant reversal on Cuban imports 40 40 30 31 20 20 10 0 Democrats Republicans Independents Support Oppose Source: ABC News, December 23, 2014

Macroeconomic Challenges Abound Cuba faces a number of serious economic challenges Ageing population Reputation for arbitrary enforcement of laws Limited experience with private enterprise Widening trade deficit Shortage of hard currency Massive distortions in the market due to dual exchange rates Severe dependence on Venezuela for hydrocarbons and dollar availability 50 40 30 20 10 0-10 Source: World Bank, UN, BMI 400,000 350,000 300,000 250,000 200,000 150,000 100,000 Median age (LHS) Population growth rate (RHS) Cuba Caribbean average Latin America average Total tourist arrivals, 2002 Total tourist arrivals, 2008 Total tourist arrivals, 2014 2.5 2.0 1.5 1.0 0.5 0.0-0.5 Acute need for new sources of foreign exchange 50,000 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: ONEI Top chart: Median age and population growth rate. Bottom chart: Tourist arrivals.

Cuba Moving Forward, But Slowly Cuban government has taken steps towards greater global engagement CELAC summit Bilateral cooperation on major infrastructure projects Plans to unify currency But business environment still poor by regional standards Significant regulatory uncertainty Lack of clarity regarding Castro succession Cuban Business Environment Two-Step Recent Steps Forward Recent Steps Back Travel restrictions greatly reduced Currency unification announced List of sectors allowed by government in private enterprises expanded Proposed Special Development Zone for foreign investors Further steps to engage foreign businesses from Mexico, Spain, Brazil, as well as major European & Asian countries Chart source: BMI Table Source: BMI, Local press. 30 25 20 15 10 5 0 Uptick in crackdowns on democracy advocates Ban on the resale of imports Tightened restrictions on types of economic activity allowed under private sector licenses Increase in customs duty to deter small-scale importers Ongoing complaints of inconsistent application of laws, intimidation, widespread uncertainty A Large Gap To Close Cuba - Convertible & National Peso Exchange Rates National Peso, CUP/US$ Convertible Peso, CUC/US$

Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114e Q214e Q314e Q414e 3000 2500 2000 1500 1000 500 What Does US Relaxation Mean? Current Situation One of the most underpenetrated countries. Weak infrastructure. State-owned monopoly controls sector. Policy has held back development. Mobile coverage at 85.3% (2013). Need for low-cost handsets, network equipment, tariff plans and internet familiarity to drive uptake. 0 Mobile Subscribers ( 000) &Penetration (%) 25 20 15 10 5 0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 Fixed Mobile Broadband Telecoms Penetration Rates (2014) Cuba Dominican Republic Puerto Rico Jamaica Bahamas Haiti US companies can legally sell consumer and communications tech to Cubans (mobile phones, TVs, PCs, software, etc). New communications links between US-Cuba to improve quality satellites, submarine cables. Setup of mobile and fixed broadband network infrastructure on the island. T-Mobile US interested. 2014=BMI estimate. Source: BMI, ONE

Momentum Building Before Obama Jan-2013: ALBA-1 connects Cuba to global internet via Venezuela. May-2013: Jamaica branch of ALBA-1 goes live. Jun-2013: ETECSA announces plans to launch residential ADSL service in September 2014. Jan-2014: ETECSA states plans to launch mobile internet access and email, abolish minimum top-ups and balances paid by international families/friends. Mar-2014: Cuba launches mobile e-mail. May-2014: ETECSA deploying new cell sites to relieve network congestion caused by mobile email introduction. Jun/Jul-2014: ETECSA will offer telephony/internet services to cooperatives. 2008: Sale of PCs, mobile handsets permitted Cuba-Venezuela Submarine Cable Dec-2014: ETECSA to offer public Wi-Fi starting January 2015. Source: Dyn Research

A Cuban Information Revolution? Telecoms Liberalisation/Privatisation/Opening Up will be Cuba-led Cuba is able to do business with the rest of the world. Policy has kept it isolated, not US embargo. Telecoms is a strategic sector ETECSA + secret police tap phone lines, censor Internet and persecute blog writers. Intranet vs. Internet. SOE monopoly. Minority stake at best. BMI Cuba Telecoms Forecasts ( 000) 4,500 US companies would need to compete with other international players, eg. Huawei/ZTE. 4,000 3,500 Signs of liberalisation would court interest from the US and other global companies: potentially CWC, Telefónica, Digicel, CNT, etc. No significant developments over the next few years, without a change at the top. 3,000 2,500 2,000 1,500 1,000 500-2012 2013 2014e 2015f 2016f 2017f 2018f 2019f Mobile Internet Broadband Fixed Source: CEPEL Source: BMI

Pharmaceutical Regulatory Regime National Formulary Commission (CNF) Cuba currently has little respect for pharmaceutical intellectual property rights. National Clinical Trials Centre (CENCEC) Intellectual Property (OCPI) National Pre- Clinical Studies Commission National Drug Quality Centre (CECMED) Cuba will have to strengthen patent respect in order to expand market growth. Finlay Institute of Cuba has partnered with French biopharmaceutical company Abivax to commercialise vaccines, advancing their willingness to work with foreign companies.

Growing Foreign Appeal Medical Tourism Since 2000 Cuba has increased its prioritization of medical tourism as a profit earning sector for the country, undercutting Mexico and the UK. Innovation Cuba's innovations in biotechnology (anticancer vaccines and Heberprot-P) will make increased trade relations a positive step for market development. Pharmaceutical Intelligence Lifting the embargo will allow the US and Cuba to better share data, monitor outbreaks of infectious diseases, develop coherent responses and ensure a more robust science relationship with great mutual benefit.

Pharmaceutical Trade Cuba runs a pharmaceutical trade surplus. Since September 2014, Cuba has conducted trade meetings with Japan, Spain, Iran, India and Russia. Russia has demonstrated an interest in importing Cuban pharmaceuticals. Cuba s innovations in biotechnology and low-cost generic medicines will attract investors and support exports. 700 600 500 400 300 200 100 0 Cuba: Pharmaceutical Trade 2014 2015 2016 2017 2018 2019 Cuba's Pharmaceutical Exports (USDmn) Cuba's Pharmaceutical Imports (USDmn) Source: UN Comtrade Database, DESA/UNSD, BMI.

Energy Independence In Focus Shift towards expanding onshore proven reserves and boosting funding for alternative energy projects will move towards energy independence. Wind At Cuba s Back Growing mining and industrial sectors will require increasing electricity generation. Cuban government plans to increase electricity generation from renewables to 24.0% by 2030, from 4.3% at present. US will create approval process for export and re-export of items for environmental protection, including items that increase energy efficiency. Chart: Wind speed and current wind farm locations Cuba. Source: Solar and Wind Energy Resource Assessment, UNDP, Global Environment Facility, US Department of Energy Renewable Energy Laboratory.

Factors Converging To Benefit Cuba External Factors Panama Canal Expansion Thawing of relations with the US Growth in trade with Latin America + Internal Factors Development of Port of Mariel, which is able to handle postpanamax ships Construction of a Free Trade Zone (Mariel Special Development Zone) Expanding trade with Asia 2014 new foreign investment = laws open Cuba up to greater investment Result Cuba well positioned to increase trade and develop as a regional transhipment hub.

New Puerto de Mariel well positioned to play a role in US- Cuba trade and develop as a transhipment point for goods into and out of the US. Puerto de Mariel is 246 nautical miles from Miami. US Trade Potential Well Positioned The Competition 2013 Container Throughput (TEU) 1,800,000.00 1,600,000.00 1,400,000.00 1,200,000.00 1,000,000.00 Port is one of the most modern in Latin America, keeping pace with the demands of the global container shipping sector, offering deepwater and brand new handling equipment. 800,000.00 600,000.00 400,000.00 200,000.00 - Port of Kingston (Jamaica) Port of Freeport (Bahamas) Port of Caucedo (Dominican Republic) Container terminal is operated by global port operator PSA International, which brings with it investment and terminal operating expertise. Considerable competition from existing Caribbean transhipment hubs, specifically the Bahamas. Source: CEPEL Source: BMI

Looking To Asia Expansion of the Panama Canal (due for completion in 2016), will open up new trade routes between Asia and the Caribbean. Asia Pacific is Cuba s third largest trade partner and trade growth between the two has been rapid. In 2000 Asia Pacific accounted for 7.8% of Cuba s total trade, by 2013 this reached 14.2% of the total. Chinese car manufacturer Geely is interested in starting an assembly plant in the Mariel Special Development Zone, other Asian firms to follow. 2000 Cuba Total Trade Breakdown Asia-Pacific, % of Cuba Total Trade Africa, % of Cuba Total Trade Middle East, % of Cuba Total Trade Latin America, % of Cuba Total Trade Developed States, % of Cuba Total Trade Other, % of Cuba Total Trade 2013 Cuba Total Trade Breakdown Asia-Pacific, % of Cuba Total Trade Africa, % of Cuba Total Trade Middle East, % of Cuba Total Trade Latin America, % of Cuba Total Trade Developed States, % of Cuba Total Trade Other, % of Cuba Total Trade Source: IMF DOTS

Q&A