Curaçao's small, open economy will remain highly sensitive to shifts in commodity prices, and the ebb and flow of international tourism demand. According to official data, a three-year recession ended in 2015, with growth of 0.3%, although an IMF Article IV report published in August put it at a weaker 0.1%. However, the economy contracted in the first quarter of 2016, by 0.2%, which suggests that growth will continue to underperform. We expect growth to accelerate modestly in the short term, driven by further improvements in services sector activity (particularly in non-tourism areas such as finance). This will drive new investment in services and construction growth in the medium term. However, a sharp recession in nearby Venezuela, along with the impact of the Zika epidemic on tourism, adds further headwinds to this vital sector (stay-over tourism fell by 8.2% in May and 5.7% in June). Despite the first-quarter dip, we expect real GDP growth to remain positive, albeit weak, in 2016 and 2017, at 0.2% and 0.4% respectively.

A stronger recovery will be prevented by the government's need to maintain strict fiscal discipline during the forecast period, which will continue to stifle the ability of the public sector to provide a lift to economic growth. Minimal growth in real wages will constrain private consumption demand. Growth will be further hampered by tougher international financial regulation, which is acting as a brake on offshore services and company formation. Furthermore, the future of Curaçao's Isla oil refinery-leased to Venezuela's embattled PDVSA-remains in question, following an announcement in February that the lease would not be renewed in 2019. The refinery has also been suffering from ongoing labour unrest, which has resulted in strikes during September, in one case leading to blackouts in numerous parts of the island. Other risks to our forecast for a mild recovery would materialise if real GDP growth in the US or the euro zone falls below our current projections.

The government has pledged to pay more attention to addressing the concerns of business, in order to improve the investment climate and cut red tape. However, until clear progress is made, investor confidence and levels of private investment will remain subdued. Some initial steps to stimulate investment have made headway in recent years. A framework agreement between the private sector and the government provides for closer consultation on policy initiatives. The participation of all the governing parties in the signing of the agreement will better align the reform agenda with business goals and will improve the chances that the Staten will approve the deal. Progress in politically sensitive areas, such as tackling rigid labour laws, is, nevertheless, likely to remain slow and piecemeal. Several industries in Curaçao operate as virtual monopolies, with some companies suspected of abusing their dominant positions, particularly in the telecommunications, utilities, construction and pharmaceuticals sectors. The creation of a competition watchdog to oversee the opening of some sectors to new investors has the potential to improve efficiency and lower costs across the economy. However, implementation will be slow, and will be hampered by resistance to reforms from established interests that have the capacity to wield considerable political influence.