Outlook for 2011-12

A two-seat majority will help the coalition government of the prime minister, Sarah Wescot-Williams, maintain political stability in the forecast period. The government will struggle to consolidate the fiscal accounts and continued weak economic growth will undermine its attempts at reform. The fiscal accounts are likely to remain in deficit throughout the outlook period. Any unpopular austerity measures will test the strength of the governing coalition. The government's accounts will remain under the supervision of the Dutch College Financieel Toezicht (CFT, the financial supervision council) in the forecast period. The Netherlands Antilles guilder will be replaced by the US dollar or the Dutch Caribbean guilder in 2012. Global weakening and attempts to tighten the fiscal policy stance will cause growth in St Maarten to slow again in 2011.

The political scene

The government's attempts to consolidate the fiscal accounts are proving problematic and have brought it into conflict with the civil service unions, with the administration deciding to pay in July an outstanding payment of cost of living adjustments dating back to 2006. The Dutch government, which has stated that it may intervene "if necessary", is monitoring the situation.

Economic policy

St Maarten has submitted another draft budget for 2011 to the CFT, which provides technical assistance to the authorities of St Maarten and Curaçao, after the previous draft was deemed to be based on unrealistic expectations. The authorities in St Maarten (and Curaçao) have continued to discuss the introduction of a new currency in 2012, including the possibility of adopting the US dollar as the monetary unit.

The domestic economy

Inflation for St Maarten decelerated to 0.8% in October 2010 (the latest available data), from 6% at the end of 2009. The easing of inflation is a result of weaker price pressures for clothing and footwear, health and education. The economy of the Netherlands Antilles Federation saw economic activity contract by 0.3% year on year in the second quarter of 2010, a deterioration compared to the first quarter, when output expanded by 0.8%.

Foreign trade and payments

The current-account deficit of the Federation widened further in the first nine months of 2010 owing to a sharp deterioration in the current transfers balance and a rise in the import bill.

Land area

34 sq km, St Maarten encompasses the southern half of the island of St Martin; the northern half of the island constitutes the French St Martin

Population

Total population: 30,594 (2001 census)

Main town

Philipsburg is the capital

Climate

Sub-tropical

Weather

Hottest month, September, 26-32°C; coldest months, January-March, 27°C (average daily minimum and maximum); driest month, June, 1 mm average rainfall; wettest months, July-August, 90-113 mm average rainfall

Language

Dutch and English (official languages); an English-based creole dialect is also spoken

Measures

Metric system

Currency

St Maarten (and Curaçao) share the Netherlands Antilles guilder (Naf) = 100 cents. The exchange rate has been fixed at Naf1.79:US$1 since 1971. The US dollar is in free circulation on both islands.

Time

4 hours behind GMT

Public holidays

January 1st, Carnival Monday (date varies), Good Friday and Easter Monday (dates vary), April 30th (Queen's Day), May 1st (Labour Day), Ascension Day (date varies), July 2nd, October 21st, December 15th, December, 24th, 25th and 26th, December 31st (half day)

Official name

Land Sint Maarten

Form of government

Parliamentary democracy with control over internal affairs, including aviation, customs, communications and immigration; the Netherlands is responsible for external affairs, such as citizenship, defence and foreign affairs

The executive

The Council of Ministers is responsible to the Staten (parliament)

Head of state

Queen Beatrix Wilhelmina Armgard van Oranje-Nassau of the Netherlands, represented by a governor, responsibility in the Netherlands lies with the Home Office

National legislature

The Staten has 15 members, elected by adult suffrage every four years under a system of proportional representation

Legal system

Courts of first instance on the island, appealing to a High Court of Justice operated jointly with Aruba, Curaçao, St Maarten and the BES Islands; in civil and criminal matters, the Dutch Supreme Court in the Netherlands will remain the highest legal authority

Elections

As part of the dissolution of the Netherlands Antilles federation elections for national governments took place in St Maarten on September 17th 2010; next national elections will take place in 2014

Government

A coalition of the United People's party (UP, 6 seats) and the Democratic Party (DP, 2 seats); the opposition National Alliance (NA) is the largest party, with seven seats

Main political organisations

United People's party (UP); Democratic Party (DP); National Alliance (NA)

Prime minister: Sarah Wescot-Williams

Deputy prime minister: Theo Heyliger

Key ministers

Economic affairs: Franklin Meyers

Education & culture: Rhoda Arrindell

Finance: Hiro Shigemoto

Health, social affairs & housing: Cornelius de Weever

Justice: Roland Duncan

Public works & housing: Theo Heyliger

Tourism: Franklin Meyers

Transport & telecommunications: Franklin Meyers

Central Bank president

Emsley Tromp

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On October 10th 2010 St Maarten became fully self-governing, except in matters of defence, foreign policy and judicial and financial affairs, which will remain the responsibility of the Dutch government. A coalition government between the newly-formed United People's party (UP, which holds six seats out of a total of 15 in the Staten-the legislature) and the Democratic Party (DP, which holds two seats) are set to govern until the next elections in 2014. Although its slim one-seat majority could hold the coalition hostage to minority interest groups, an independent deputy (formerly a member of the opposition National Alliance, or NA) supports the government and will help ensure political stability in the forecast period.

The new government has vowed to unify the country by means of extensive consultation with community councils and non-governmental organisations (NGOs). Its programme is expected to focus on social issues including a national health insurance system, which should be finalised by January 2012, and the provision of more affordable housing.

St Maarten will maintain close relations with the Netherlands, which will remain responsible for its foreign policy and defence. The government has also vowed to strengthen ties with St Martin, the northern French part of the island, and to build close relations with Aruba and Curaçao, the other two independent Caribbean islands within the Kingdom of the Netherlands. In December the prime minister, Sarah Wescot-Williams, participated in a meeting on regional co-operation and development with her counterparts from Aruba and Curaçao. Reflecting its growing integration into the region, St Maarten became a member of the Parlamento Latinoamericano (Parlatino, the Latin American Parliament) shortly following independence.

The authorities' statements about the new country's economic policy have been short on substance. The government's accounts are under the supervision of the Dutch College Financieel Toezicht (CFT, the financial supervision council), which provides technical assistance to the authorities in St Maarten and Curaçao. The CFT rejected the draft 2011 budget owing to over-optimistic GDP growth and revenue growth forecasts, and is currently considering a new draft budget. The government's budget problems present a serious concern, especially since debt relief provided to the Netherlands Antilles by the Dutch government as part of the independence package, as well as the continuance of aid flows from the Netherlands, should have provided some room to implement moderate fiscal spending measures in 2011. The CFT has also ordered an independent audit of the cost of the government's programme as Dutch debt forgiveness precludes St Maarten from building up new overseas debt. The government will struggle to consolidate the fiscal accounts and continued weak economic growth will undermine its attempts at reform. Any unpopular austerity measures will also test the strength of the governing coalition. The fiscal accounts are likely to remain in deficit throughout the outlook period.

The Netherlands Antilles guilder will remain pegged to the US dollar until a new shared currency is adopted in 2012. The Centrale Bank van Curaçao en Sint Maarten (the Central Bank) has made no decision about whether the two islands (which form a currency union) will adopt the US dollar (a stance favoured in St Maarten) or the Dutch Caribbean guilder, a new currency. The latter stance is favoured by Curaçao as the adoption of the US dollar would hurt the foreign exchange businesses of the commercial banks.

Despite a slight contraction in economic activity in the Netherlands Antilles (separate data for St Maarten are not expected until some time in 2011) in the second quarter of 2010, the federation's economy is likely to have staged a weak recovery in 2010. Nevertheless, some weakening in the US and the EU, as their policy stimuli wane, indicates that growth will remain very slow in St Maarten. Tourism is unlikely to stage a significant expansion owing to weak growth in source markets in North America and Europe; this will also continue to deter tourism investment. A return to US-dollar strength (the present currency, the Netherlands Antilles guilder, is fixed to the US dollar, as will be the new currency of Curaçao and St Maarten when it is issued) against the euro and Canadian dollar in 2011-12 will act to undermine tourism slightly. At the domestic level, attempts to tighten the fiscal policy stance, weak real wage growth and unemployment in the tourism sector will limit private consumption growth, undermining overall growth prospects.

The effect of a weak recovery will be felt in a widening of the trade deficit and a narrowing of the services surplus. This development will trigger calls for the island to improve its regional competitiveness. A fall in external financing inflows in 2011-12, as debt relief inflows tail off over the forecast period, will also hurt the current-account deficit.

The first government of St Maarten-the island became independent on October 10th 2010-is facing many fiscal challenges which have brought it into conflict with the unions. The coalition between the Democratic Party (DP) and the newly-formed United People's party (UP), which is still struggling to set a budget for 2011 (see Economic policy) had to announce a rise in the sales tax to increase tax revenue last December-the sales tax rise came into effect in February. According to the minister of finance, Hiro Shigemoto, this was necessary because the tasks and responsibilities of running the new country would cost 30% more than had been anticipated. He complained that the budget provided by the government of the Netherlands Antilles Federation had allocated insufficient funds for the required investment in the workforce, knowledge base and infrastructure, or for the operational costs of running the new country.

The government's attempts to consolidate the fiscal accounts have brought it into conflict with the civil service unions. The main issue is the outstanding payment of cost of living adjustments dating back to 2006. The Windward Islands Civil Servants Union/Private Sector Union and the Windward Islands Teachers Union demanded that the government honour the Federation pledge to pay the outstanding amount in full, while the new St Maarten government argued that it did not have the funds. Instead it offered to make a part-payment to be followed by the remainder at a later date. Following a number of offers tabled in January and February, all of which were met by union threats to strike unless the full amount was paid with immediate effect, an agreement was eventually reached to pay the workers the outstanding amount in July. However, a final settlement remains pending until the 2011 budget is agreed.

St Maarten's financial problems were the focus of attention in the Dutch legislature in December and again in February when representatives of a number of parties called on the Dutch minister for kingdom relations, Piet Hein Donner, to intervene to put the new country's finances in order. On the first occasion, Mr Donner replied that the new country must be given time to resolve its problems, but in February he stated that he would intervene "if necessary".

There are indications that the authorities are finding themselves stretched as they assume the tasks of enforcing law and order in the new country. In mid-January, the St Maarten police chief, Peter de Witte, requested that the Dutch government provide 20 police officers over a three-year period. He said that the St Maarten police force lacked expertise and the capacity to train new officers. Also in January, the minister of justice, Roland Duncan, announced an increase in the number of staff at the financial intelligence unit tasked with collecting information about money-laundering and the financing of terrorism. The increase came after the Dutch authorities raised concerns about the capacity of the agency.

St Maarten's financial situation came under the spotlight in late January following the rejection of the 2011 budget by the Dutch College Financieel Toezicht (CFT, the financial supervision council), which provides technical assistance to the authorities of St Maarten and Curaçao. The draft budget that was approved by the St Maarten legislature in December was described as unbalanced by the CFT, which instructed the authorities to cut the budget by a total NAf30m to NAf414m (US$213m). In rejecting the draft budget, the CFT stated that it did not accept the authorities' projection that GDP will grow by 2% in 2011-the CFT believes, as does the Centrale Bank van Curacao en Sint Maarten (the Central Bank) that growth will struggle to come in above 0.3% in 2011. The lower GDP projection undermines the budget's revenue projection. Moreover, fiscal revenue will also be lower than projected because the authorities had included in their budget calculations revenue from the higher turnover tax of 5% for the full 12 months of 2011, when in fact the tax was raised from 3% to 5% in February only.

An adapted budget was resubmitted on February 17th and is set to be assessed by the CFT. The redrafted budget has a larger deficit, totalling NAf61m-this includes NAf15m to cover a payment agreement with the civil servants' unions (see The political scene). In justifying the increased budget deficit, the minister of finance, Hiro Shigemoto, stated that NAf32m of the deficit would be one-off expenditure that would be covered by the government's cash reserves. He added that a further NAf14.4m would be met by implementing cost-cutting measures across the seven government ministries. Furthermore, he said that the authorities could not agree with the CFT's and the Central Bank's projected 0.3% GDP growth rate, but that they had revised their projection from 2% down to 1.3%.

In its assessment of the economic prospects for 2011 issued at the beginning of January, the Central Bank again advised St Maarten to strive to maintain the sound debt position it had been provided thanks to the Dutch debt relief programme. The assessment went on to highlight the pressures that the elected authorities will face in trying to balance the budget while at the same time making the necessary investments in human capital and physical infrastructure. The Central Bank advised that sound medium-term policy framework must involve a reform of the tax system and improvements in tax collection.

The authorities in St Maarten (and Curaçao) continue to discuss the introduction of a new currency in 2012, including the possibility of adopting the US dollar as the monetary unit. Currently, St Maarten and Curaçao use the Netherlands Antilles guilder (Naf), but if St Maarten were to dollarise its economy (it is seriously considering a switch), Curaçao would be likely to follow suit. The BES islands (Bonaire, St Eustatius and Saba; the three islands which formed part of the Federation of the Netherlands Antilles alongside St Maarten and Curaçao, and which-since the dissolution of the Federation in 2010-form part of the Netherlands) are already using the US dollar. Emsley Tromp, the president of the Central Bank, has spoken in favour of dollarisation, but representatives of Curaçao's commercial banks oppose the switch as they would stand to lose most of their revenue from foreign exchange operations.

Although no official separate economic data on St Maarten and Curaçao have yet been published, consumer price inflation for St Maarten has long been published separately. Twelve-month inflation decelerated to 0.8% in October 2010 (the latest available data) from 6% at the end of 2009 and 2.4% in June 2010. The easing of inflation is a result of weaker price pressures in the categories of clothing and footwear, health and education.

Apart from the inflation data, other macroeconomic data at the moment only exist for the Federation of the Netherlands Antilles. According to the Centrale Bank van Curaçao en Sint Maarten (the Central Bank), the economy of the Federation saw output decline slightly in the second quarter of 2010, with output contracting by 0.3% year on year. This follows growth of 0.8% in the first quarter. The contraction was mainly attributed to a negative contribution from the external sector as export activity fell and import demand increased. On the supply side, the hotel and restaurant sector registered a modest decline despite an increase in stay-over visitors in St Maarten and Bonaire. The wholesale and retail trade sector recorded a decline across the Federation as Curaçao's free-zone continued to fare badly given the sharp fall in the number of visitors from Venezuela-whose citizens tend to visit Curaçao for shopping tourism. However, provisional data for tourism in 2010 in St Maarten are positive as both the number of stay-over visitors and that of cruise passengers increased. In January 2011, the St Maarten Harbour Group of Companies announced that the number of cruise ship passengers arriving in St Maarten in 2010 had far surpassed expectations. The total number was expected to be just short of 1.5m, representing the highest level since 2005.

No official economic data for the external accounts of St Maarten and Curaçao exist as yet. Only data for the Federation of the Netherlands Antilles exist at the moment. The current-account deficit of the Federation widened during the first nine months of 2010 to almost US$900m, owing to a deterioration in the current transfers balance. A worsening of the trade deficit-owing to a combination of contracting merchandise export earnings and a rise in spending on oil imports-also contributed to a deterioration in the current-account. The current transfers surplus halved as the substantial inflows from the Dutch government for debt relief tailed off further in the third quarter of 2010. The services account was stable, underpinning a slight improvement in Netherlands Antilles tourism (especially in St Maarten, which expanded its cruise ship capacity) during the second and third quarters. These data will boost the authorities of the newly-independent St Maarten as they attempt to generate an economic recovery.

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Outlook for 2011-12

Although the countries of the Caribbean Community (Caricom) will continue to enjoy broad political stability in the outlook period, there is a risk of increased unrest as most countries struggle to return to positive economic growth following deep recessions and high unemployment in 2009-10. Earnings from the tourism sector, the region's main source of employment and foreign exchange, will recover modestly in the outlook period as economic growth in the US and UK slowly improves. However, as governments attempt to deal with continuing fiscal constraints amid rising levels of public debt, inequality and poverty levels will increase, reversing much of the progress made in the past decade. Nonetheless, the Economist Intelligence Unit does not expect rising discontent to threaten the region's long democratic tradition. Throughout the region, the illegal drug trade will continue to represent a threat to security and stability. The public finances will remain under pressure in most countries during the outlook period, owing to weak revenue collection. Extremely high levels of public debt will continue to threaten fiscal sustainability in an economic environment characterised by still-tight liquidity.

Recent developments

Caricom is facing some of its most serious financial challenges to date, raising concerns that the commitment of Caricom's 14 member states to regional integration could falter. The need for renewed cost-cutting comes at a time when the Secretariat is seeking a new leader following the resignation of the secretary-general, Edwin Carrington-who served in the post for nearly two decades-at the end of 2010. A deal that will substantially increase competition for Caribbean bananas in the EU was finalised on February 3rd when the European parliament approved an agreement-first reached in December 2009 between the EU and the US, Brazil, Colombia, Costa Rica, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Peru and Venezuela-which reduces import duties on bananas produced in Latin America by 35% over six years. Following an extremely challenging period for the region's key tourism sector in the wake of the global financial crisis-which resulted in sharp reduction in arrivals and spending from crucial markets such as the US and UK-there were continuing signs of a tepid recovery in most countries in the first nine months of 2010 (the latest period for which data are available).

Although the countries of the Caribbean Community (Caricom) will continue to enjoy broad political stability in the outlook period, there is a risk of increased unrest as most countries struggle to cope with still-weak economic growth and high rates of unemployment following deep recessions in 2009 and 2010. As governments continue to cope with severe fiscal constraints amid extremely high levels of public debt, inequality and poverty levels will rise, reversing much of the progress made in the past decade. That said, the Economist Intelligence Unit does not expect rising discontent to threaten the region's long democratic tradition, with most of the region's governments expected to serve out their full parliamentary terms and several others opting for early elections to consolidate their parliamentary positions. Nor do we expect difficult economic conditions to spark social unrest in the majority of the region. The region's two largest economies, Jamaica and Trinidad and Tobago, will continue to struggle with high levels of crime, despite government initiatives to combat drug-trafficking and gang activity; other countries-particularly those in the Organisation of Eastern Caribbean States (OECS)-will face continued increases in crime levels as a result of extremely high unemployment and widespread poverty.

Combating organised crime and drug-trafficking, which is dominated by large, international criminal organisations, will remain the main security challenge throughout the region, buoyed by increased funding from the US under the Caribbean Basin Security Initiative (CBSI). The proliferation of lower-level domestic gang activity will continue to boost the region's murder rates, which are already extremely high on a per-head basis. Although many governments will continue to develop new initiatives to combat crime, corruption of public officials and the undermining of laws and institutions will hinder their effectiveness. Drug seizures and arrests in Jamaica since the 2004 launch of Operation Kingfish, an anti-crime initiative with international support, have led to some displacement of trafficking to the eastern Caribbean, Central America and Mexico, as drug shipments are rerouted. There are concerns over an increased flow through Venezuela, which in recent years has become a major drug conduit, to Guyana, Suriname and the eastern Caribbean. New coastguard vessels and coastal radar systems acquired by Trinidad and Tobago and Barbados could begin to show results in control of the eastern Caribbean drug routes in the outlook period.

Despite recent progress on paper, in practice Caricom's region-wide integration efforts will remain stalled during the outlook period as countries opt for increasingly protectionist policies in the wake of the economic downturn. All Caricom member states, with the exception of Haiti and the Bahamas, have now formally joined the region's single market, although some barriers to trade remain in place. Progress on the implementation of a single economy will prove significantly more difficult: even in the years when economic growth was strong, governments were hesitant to cede control of monetary and exchange-rate policies. Any attempt to strengthen the powers of regional institutions would require constitutional amendments in most member states, which can be a slow process, even when most political forces are supportive of reform (which currently they are not). Furthermore, the need for fiscal austerity in most member countries will result in continuing financial hardship for the region's key institutions, particularly the Caricom Secretariat, which will slow progress even further. The search for the next secretary-general of Caricom will continue, but with few stellar candidates available to fill the post, the institution will continue to struggle to assert its relevance on a regional level.

The Economic Partnership Agreement (EPA, a reciprocal trade agreement compatible with the World Trade Organisation, or WTO) signed between the EU and the Cariforum (Caricom and the Dominican Republic) in mid-2008 will have little impact on trade flows in 2011-12, partly because barriers to imports will be dismantled at a slow pace and Caribbean businesses remain ill-prepared for major export initiatives. In addition, disputes between Caricom and the Dominican Republic over trade adjustment funds from the EU will remain contentious; economic and political interests in the region will continue to block the Dominican Republic's bid to join Caricom as a means of easing these disputes. Although some work is now under way, the prospect of a finalised free-trade agreement (FTA) with Canada to replace the Caricom-Canada Trade and Economic Co-operation Agreement (CaribCan, which will expire in 2011) remains low owing to resistance within the region to further trade agreements in the wake of the economic downturn. Other initiatives aimed at boosting trade flows will have little impetus-talks within the WTO and proposals for an FTA with the US will remain stalled. Regional governments and much of the private sector will continue to regard liberalisation as a threat to high-cost protected industries and to trade tax revenue, which is crucial to the beleaguered public finances in most countries. Caricom industries-other than bananas and sugar-have not benefited from existing bilateral trade pacts in force over the last 20 years, such as the Lomé and Cotonou conventions (with the EU), and the Caribbean Basin Initiative (CBI) with the US. A lack of economies of scale and structural reforms will continue to undermine the potential advantages available from trade accords, and trade negotiations will continue to be seen as a means of leveraging increased development assistance.

In most of the region the public finances will remain under pressure during the outlook period, following recessions in most countries in both 2009 and 2010, which severely depressed revenue collection. Public debt, which at end-2010 averaged over 90% of GDP, is expected to rise further in 2011; high public-debt levels in most Caricom countries will continue to pose a serious threat to fiscal stability in an economic environment characterised by tight liquidity. Rollover risk will remain heightened as investor risk appetite will remain lower than in the 2004-08 boom years. At the same time, current spending requirements will remain high. Governments will find it increasingly difficult to generate larger primary surpluses or boost GDP growth in order to maintain debt ratios at their current levels. Those countries that have not already done so will seek to introduce a value-added tax (VAT) to help offset falling revenue from trade taxes. In many countries in the region, however, resistance to expenditure cuts or tax rate increases will make fiscal improvements hard to achieve. In commodity-producing countries (Jamaica, Trinidad and Tobago, Suriname and Guyana), volatile global prices will further complicate the fiscal situation. A further source of fiscal pressure in some countries will come from subsidised fuel imports and consumption. We expect oil prices to remain high by historical standards during the outlook period, averaging US$90/barrel in 2011 (up 13% year on year) and US$82.25/b in 2012.

Following a sharp decline in 2009-and only a muted improvement in 2010-earnings from the tourism sector, the region's main source of employment and foreign exchange, will remain weak in the outlook period as demand remains modest (owing to still-high unemployment levels in source markets) and prices are cut to attract visitors. This will continue to weigh on domestic employment, tax revenue and foreign-exchange earnings. Tourist arrivals are expected to benefit in 2011 only from a statistical rebound, with a more meaningful recovery remaining elusive until 2012 at the earliest. Fuel prices will remain high, with negative implications for both airline and cruise travel costs, further constricting fragile tourism demand. Many investments in the tourism sector have been put on hold and there are few signs of renewed investor appetite owing to continued financing constraints, further reducing employment opportunities.

Although we expect some recovery-owing to an improvement in global financing availability compared with a year ago-investment in mining and energy will remain below pre-2009 levels during the outlook period as a result of continuing instability of commodity prices. Historically high gold prices in 2011 will continue to benefit gold producers such as Suriname and Guyana. The prospects for further large-scale investment in bauxite and onshore and offshore exploration for oil and gas in Suriname are less certain. Oil and gas exploration in Guyana, Barbados, Jamaica and Belize could also be negatively affected by weak investor confidence, despite a strong recovery in global oil prices. Similarly, additional large-scale investment in alumina in Jamaica, which would be of significant economic benefit, is likely to be postponed. Trinidad and Tobago will continue its push to become a centre for high value-added chemicals and metals processing, owing to its natural-gas production and capacity for generating electricity at a comparatively low cost.

Caribbean farmers will struggle to survive in an increasingly challenging global market during the outlook period, as they are faced with reductions to the EU sugar price and increasing competition from South and Central American-based banana producers. The future of the region's sugar industry will continue to face uncertainty, with EU price guarantees likely to be phased out in the near term. To lessen the economic impact of cuts in the guaranteed price, the EU is providing adjustment assistance. The Caribbean banana industry will also face steeper competition in the wake of a loss of preferences following a decision in early 2011 by the EU-the region's main banana export market-to cut import duties on bananas produced in Latin America by 35% over six years, thus eroding the Caribbean's historic advantage (bananas from the Caribbean currently enjoy quota- and duty-free access to the EU, whereas Latin American producers pay a duty of EUR176-US$224-per tonne; this is set to fall to EUR114 per tonne by 2017). Although Caribbean bananas will continue to enjoy quota-and duty-free access to the EU market, without some additional form of protection the industry is unlikely to survive.

The outlook for the Caribbean's financial services sector remains weak, despite some recovery in the global financial sector. Although most domestic and regional sectors have continued to perform strongly, serious problems emerged in 2009 in Trinidad and Tobago and Antigua-Barbuda. Although these were largely isolated incidents, they have weighed heavily on already shaky international confidence in the region's financial sector. There is the potential for further instability: some Trinidad and Tobago-based institutions with significant assets in the most heavily indebted Caribbean countries are likely to suffer in the current economic environment. The continuing need for OECD countries to close money-laundering and tax loopholes will place limits on growth prospects for some Caribbean financial centres.

Caricom is facing some of its most serious financial challenges to date, raising concerns that the commitment of Caricom's 14 member states to regional integration could falter. The global financial crisis hit Caricom member states particularly hard and many, facing fiscal crises at home, are not making their contributions as agreed. Jamaica has reportedly had to cut its payments to regional organisations under fiscal austerity measures agreed with the IMF in early 2010. At the 27th meeting of the Community Council, held in Guyana on January 17th, the approval of the 2011 budget was deferred and the Caricom Secretariat was asked to undertake further cost-cutting measures and present a smaller budget for approval. Caricom's budget has been frozen at US$18m for the last three fiscal years as it has attempted to contain costs, but the financial challenges facing the regional grouping continue to be described by the Secretariat as "severe". Although it was reported in the regional press that job cuts are looming, this was denied by the Secretariat, which directly employs around 200 staff, in a statement in early February. It appears more likely that the contracts of some employees who are past the Secretariat's official retirement age of 60 (of which there are significant numbers) may not be renewed or staff may be asked to take pay reductions in an attempt to maintain current staffing levels. Similar to the recently-retired secretary-general, Edwin Carrington-who served in his post for 18 years and resigned in 2010 at the age of 72-there are many staff members who have passed retirement age but have not been required to resign their posts. Although the political power of this demographic within the institution cannot be underestimated, it will grow increasingly harder to justify the renewal of their contracts as financial pressures continue to rise and cuts are made in other areas. Caricom is also likely to cut back on its large travel budget by relying more on videoconferencing and less on regional meetings where participants need to be flown in from as many as 14 countries.

The need for renewed cost-cutting comes at a time when the Secretariat is seeking a new leader following the resignation of Mr Carrington at the end of 2010. The selection process has also come under intense public criticism, mainly owing to its lack of transparency. A ten-member search committee-assigned to manage the succession process and chaired by Barbados's minister of foreign affairs, Maxine McLean-in February determined that none of the five candidates put forward by the governments of Belize, Dominica, Saint Lucia, St Vincent and the Grenadines and Suriname "met the required appointment criteria". However, critics argue that it is unclear what those appointment criteria actually are, with no public advertisement for the post, no job description, no information about the composition of the search committee nor any official report on how the search has been conducted so far. Lolita Applewhaite, a Barbadian, will continue to act as secretary-general pending the selection and appointment of a new secretary-general at some point in 2011.

A deal which will substantially increase competition for Caribbean bananas in the EU has been finalised. On February 3rd a majority in the European parliament approved the agreement—first reached in December 2009 between the EU and the US, Brazil, Colombia, Costa Rica, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Peru and Venezuela—which reduces import duties on bananas produced in Latin America by 35% over six years, potentially boosting the competitiveness of large producers in the region over smaller growers in the Caribbean (and those in Africa and the Pacific). Under the deal, the EU will gradually cut import tariffs on Latin American-produced bananas in eight stages, from €176/tonne currently to €114 by 2017. In return, the US and Latin American side will drop the actions brought against the EU before the WTO for infringing the rules of international trade. Bananas from the Caribbean, as well as from other African and Pacific producers, will continue to enter the EU market, the world's largest market for the fruit, duty free under a special agreement for ten former European colonies in Africa, the Caribbean and the Pacific (ACP). Once approved by the WTO later in 2011, the deal will mark a victory for the world's largest banana producers in a trade dispute, labelled the "banana wars", which has lasted nearly 20 years. Despite the ruling—which is considered a major blow to Caribbean producers—the EU may decide to boost its compensation aid to those countries most affected by the increase in competition. In the Caribbean, these would include Belize, Dominica, the Dominican Republic, Jamaica, Saint Lucia, St Vincent and the Grenadines and Suriname. The EU is already providing €200m (US$254m) in aid to ACP banana producers in the 2010-14 period. No indication was given of the amount by which this figure would be increased beyond 2014. Although bananas are an important export for the Caribbean, nearly three-quarters of all bananas consumed in Europe currently come from Latin America. According to data from the European Commission, the EU imported nearly 4.8m tonnes of bananas in 2008 worth a total of €2.9bn (US$3.7bn).

Following an extremely challenging period for the region's key tourism sector in the wake of the global financial crisis—which resulted in sharp reduction in arrivals and spending from crucial markets such as the US and UK—there were continuing signs of a tepid recovery in most countries in the first nine months of 2010. However, according to the most recent country-specific data from the Caribbean Tourism Organisation (CTO; which covers varying time periods and is not yet available for all countries), performance continued to be mixed and varied widely from country to country. Furthermore, although most countries posted year-on-year increases in tourist arrival figures, this performance reflects very weak bases of comparison and in most cases arrivals remained below pre-2009 levels. Tourism earnings data are also not readily available for most countries, complicating any analysis of sector recovery (lower hotel and airfare prices have attracted increased numbers of tourists in many markets, but earnings are thought to have remained weak as a result of these incentives).

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According to available data, stopover arrivals remained lower in Grenada, Montserrat, St Vincent and the Grenadines and Trinidad and Tobago. With the exception of Trinidad and Tobago, the larger Caricom countries fared relatively well, with stopover arrivals to the Bahamas (up 6.4% year on year in the first seven months of 2010), Barbados (up 7.3% year on year in January-October) and Jamaica (up by 4.2% year on year in the first eight months of 2010) posting some of the strongest increases in the English-speaking Caribbean. The increase in arrivals to Jamaica was attributed mainly to continued sharp discounting by airlines, hotels and tour operators (which will have a marked negative impact on the sector's profits), as well as higher arrivals from Canada, which rose by nearly 8% year on year during the period following an intensive marketing campaign. US arrivals rose strongly in all markets except Bermuda (down 3% in the first nine months of the year), Grenada (down 11% year on year in January-July) and Montserrat (down over 20% in January to March), but this was mainly owing to a low base of comparison; overall, US arrivals remained below pre-2009 levels in most countries. Nonetheless, US arrival figures posted strong recoveries in Anguilla (up 17%), Barbados (15.5%), Curaçao (40%) and Saint Lucia (38%). The return of US tourists is an encouraging sign for the region's tourism sector, which relies on the US as its main tourism market.

Following a year of strong growth in cruise passenger arrivals in 2009—mainly on account of deep price reductions—data for 2010 show a marked reversal in several markets. Arrivals fell by over 7% year on year in Jamaica (January-August), by over 17% in Curaçao (January-September), and by 14% in Trinidad and Tobago (a very small cruise market). Sharp declines were also observed in several countries in the OECS (arrivals to St Vincent and the Grenadines fell by nearly 31% in January-August, to Antigua-Barbuda by over 25%, and Grenada by 7.2%). The number of arrivals in Saint Lucia stagnated. Dominica posted year-on-year growth of 3.5% in cruise passenger arrivals in January-October. The Bahamas (the most visited cruise destination in the Caribbean), Belize and Bermuda have all posted strong year-on-year increases in cruise arrivals, mainly reflecting changes to cruise ship routes during the period and continuing deep discounts on cruise packages from the key US market.

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The outlook for a recovery in tourism sector earnings remains precarious in 2011 despite our expectation that arrivals numbers will rise markedly in year-on-year terms in some key markets. With traditionally higher-spending UK arrivals set to remain weak—and worsened by the implementation of the UK Air Passenger Duty (APD), which will result in higher airline ticket prices to the Caribbean—US and Canadian arrivals will rise, but will not boost overall tourism sector revenue strongly enough to spur a meaningful recovery in the short term. Any significant improvement in arrivals figures in 2011 will be owing primarily to continuing base effects and further discounting by hotel and airline operators.