Outlook for 2016-17
Review
Land area
444 sq km; Curaçao lies in the southern Caribbean Sea, to the north-west of Venezuela and 68 km east of Aruba, outside the hurricane belt
Population
Total population: 150,563 (2011 census)
Main town
Willemstad, the capital
Climate
Subtropical
Weather
Hottest month, September, 25-33°C; coldest months, January-February, 21-31°C (average daily minimum and maximum); driest months, March-April, 16-19 mm average rainfall; wettest months, October-December, 83-99 mm average rainfall
Language
Dutch and Papiamento (official); Spanish and English are also spoken
Measures
Metric system
Currency
Curaçao and Sint Maarten 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 (New Year's Day), February 8th (Carnival), March 25th (Good Friday), March 28th (Easter Monday), April 27th (King's birthday), May 1st (Labour Day), May 5th, (Ascension Day), May 15th (Whit Sunday), July 2nd (Flag Day), October 10th (Curaçao Day), December 25th (Christmas Day), December 26th (Boxing Day)
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 policy
The executive
The Council of Ministers is responsible to the Staten (parliament)
Head of state
King Willem-Alexander of the Netherlands, represented by a governor; responsibility in the Netherlands lies with the Home Office
National legislature
The Staten has 21 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 between Aruba, Curaçao, Sint Maarten and the "BES islands" (Bonaire, Sint Eustatius and Saba); in civil and criminal matters, the Dutch Supreme Court in the Netherlands will remain the highest legal authority
Elections
The next national election is due on September 30th 2016
Government
A coalition of the Pueblo Soberano (PS), the Partido pa Adelanto i Inovashon Soshal (PAIS), the Partido Nashonal di Pueblo (PNP) and an independent member, Glenn Sulvaran (previously affiliated to the Partido Antiá Restrukturá-PAR), controls 12 of the 21 seats in the Staten
Main political organisations
PS, five seats; Movementu Futuro Kòrsou (MFK, five seats); PAIS, four seats; PAR, three seats; Movimentu Antiyas Nobo (MAN, two seats); PNP, one seat; Frente Obrero Liberashon 30 di Mei (FOL)
Key ministers
Governor: Lucille George-Wout
Prime minister: Bernard Whiteman
Administration, planning & services: Etienne van der Horst
Economic development: Eugene Rhuggenaath
Education, science, culture & sport: Irene Dick
Finance: José Jardim
Health, environment & nature: Siegfried Victorina
Justice: Nelson Navarro
Social development, labour & welfare: Ruthmilda Larmonie-Cecilia
Traffic, transport & spatial planning: Suzanne Camelia-Romer
Central Bank president
Emsley Tromp
2011a | 2012a | 2013a | 2014a | 2015a | |
GDP (US$ m) | 3,038.7 | 3,131.1 | 3,147.6 | 3,158.4 | 3,151.9 |
Real GDP growth (%) | 0.6 | -0.1 | -0.8 | -1.1 | 0.3 |
Consumer price inflation (av; %) | 2.3 | 3.2 | 1.3 | 1.6 | -0.5 |
Population (‘000) | 150.6 | 151.4 | 152.8 | 154.8 | 157.0 |
Exports fob (US$ m) | 930.1 | 948.4 | 701.2 | 699.3 | 476.8 |
Imports fob (US$ m) | -2,131.6 | -2,254.3 | -1,906.2 | -1,818.7 | -1,512.5 |
Current-account balance (US$ m) | -829.7 | -875.4 | -662.5 | -376.0 | -481.1 |
Gross reserves excl gold (US$ m) | 2,308.9 | 2,031.2 | 1,982.9 | 2,442.8 | 2,470.6 |
Exchange rate (Naf:US$) | 1.79 | 1.79 | 1.79 | 1.79 | 1.79 |
a Actual. |
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Origins of gross domestic product 2015 | % of total | Components of gross domestic product 2009 | % of total |
Agriculture, fishing & mining | 0.4 | Private consumption | 69.2 |
Manufacturing | 11.8 | Government consumption | 16.5 |
Utilities | 2.0 | Fixed investment | 37.8 |
Construction | 5.9 | Exports of goods & services | 60.7 |
Commerce | 10.6 | Imports of goods & services | 84.0 |
Hotels & restaurants | 5.2 | ||
Transport & communications | 11.5 | ||
Financial intermediation | 12.4 | ||
Other sectors | 40.2 | ||
Main destinations of exports 2015 | % of total | Main origins of imports 2015 | % of total |
Caribbean | 24.4 | US | 33.1 |
US | 5.3 | Venezuela | 21.5 |
Venezuela | 5.2 | Netherlands | 13.1 |
Aruba | 4.5 | Asia | 10.9 |
Netherlands | 3.9 | Caribbean | 6.2 |
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2014 | 2015 | 2016 | ||||||
3 Qtr | 4 Qtr | 1 Qtr | 2 Qtr | 3 Qtr | 4 Qtr | 1 Qtr | 2 Qtr | |
Output | ||||||||
Real GDP (% change, year on year) | 0.1 | 0.0 | -0.2 | 0.4 | 0.3 | n/a | n/a | n/a |
Prices | ||||||||
Consumer prices (% change, year on year) | 2.7 | 1.9 | 0.2 | -0.6 | -0.2 | -1.3 | n/a | n/a |
Financial indicators | ||||||||
Exchange rate Naf:US$ (av) | 1.79 | 1.79 | 1.79 | 1.79 | 1.79 | 1.79 | 1.79 | 1.79 |
Exchange rate Naf:US$ (end-period) | 1.79 | 1.79 | 1.79 | 1.79 | 1.79 | 1.79 | 1.79 | 1.79 |
Deposit rate (av; %) | 1.2 | 1.2 | 1.2 | 1.2 | 1.3 | 1.2 | 1.2 | 1.2 |
Lending rate (av; %) | 7.6 | 6.8 | 6.5 | 7.2 | 7.3 | 6.9 | 6.5 | 6.3 |
Treasury-bill rate (av; %) | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 |
Government bond yield rate (av; %) | 0.3 | 0.1 | 0.0 | 0.1 | 0.1 | 0.0 | -0.3 | -0.5 |
M1 (end-period; Naf m) | 3,611.8 | 3,644.4 | 3,727.9 | 3,674.5 | 3,619.9 | 3,608.9 | 3,819.1 | 3,840.5 |
M1 (% change, year on year) | 12.1 | 5.6 | 5.6 | 1.2 | 0.2 | -1.0 | 2.4 | 4.5 |
M2 (end-period; Naf m) | 7,757.3 | 7,785.9 | 7,913.2 | 7,940.3 | 7,923.6 | 7,973.1 | 8,195.8 | 8,182.4 |
M2 (% change, year on year) | 5.8 | 4.0 | 3.8 | 3.1 | 2.1 | 2.4 | 3.6 | 3.0 |
Sectoral trends in tourism | ||||||||
Stay-over visitors (‘000) | 115.1 | 128.5 | 122.1 | 100.4 | 116.7 | 130.8 | 127.5 | 97.1 |
Cruise tourism (‘000) | 95.6 | 178.9 | 188.8 | 86.7 | 79.7 | 155.9 | 188.0 | 81.9 |
Foreign trade and payments (Naf m) | ||||||||
Goods: exports fob | 305.5 | 357.0 | 229.6 | 202.1 | 177.9 | 249.0 | 161.5 | n/a |
Goods: imports fob | 858.7 | 828.5 | 647.7 | 697.8 | 669.4 | 692.5 | 567.4 | n/a |
Merchandise trade balance fob-fob | -553.2 | -471.5 | -418.1 | -495.7 | -491.5 | -443.5 | -405.9 | n/a |
Services balance | 363.3 | 320.6 | 351.6 | 220.2 | 229.2 | 276.7 | 305.9 | n/a |
Income balance | -15.9 | -15.7 | 6.7 | 10.8 | -18.8 | 3.0 | -9.4 | n/a |
Net transfer payments | -46.3 | -28.4 | -26.7 | -19.3 | -25.3 | -15.3 | -18.3 | n/a |
Workers' remittances | 20.5 | 23.3 | 23.5 | 24.2 | 25.6 | 27.2 | 19.3 | n/a |
Current-account balance | -252.1 | -195.1 | -86.5 | -284.0 | -306.4 | -179.1 | -127.8 | n/a |
Sources: IMF, International Financial Statistics; Centrale Bank van Curaçao en Sint Maarten. |
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The political scene is focused on the imminent general election, to be held on September 30th. The election will be the first since the collapse of the Ivar Asjes administration (2013-15) in August 2015 and its replacement by a caretaker government led by Bernard Whiteman of the Pueblo Soberano (PS). The current coalition government holds 12 of the 21 seats in the Staten (the legislature), putting it in a stronger position than the Asjes administration, which had only a one-seat majority. The political establishment has been rocked by major corruption allegations over the last year, most recently involving the president of the Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint Central Bank), Emsley Tromp. Earlier in the year, former prime minister Gerrit Schotte of the opposition Movementu Futuro Kòrsou (MFK) was convicted on bribery charges and sentenced to three years in jail and a five-year ban from public office. An appeal is ongoing and Mr Schotte has continued to present himself as a candidate for the forthcoming election; a recent opinion poll put his support as high as 27%. However, The Economist Intelligence Unit expects the PS to retain control of the legislature.
The new government will require a strong mandate to avoid a continuation of the political volatility that has affected the island in recent years. It will also have to address weak growth and implement unpopular policies, such as changes to public pension entitlements and to the education and healthcare systems, along with tax reform; these could easily be derailed by special interest groups. The business environment will continue to be hampered by political and policy uncertainty, with further corruption scandals also possible.
The last general election was held in October 2012, precipitated by Mr Schotte's sudden resignation in August of that year. Six parties won representation in the legislature: the PS and the MFK secured the largest shares of the vote, winning five seats each. The Partido pa Adelanto i Inovashon Soshal and the Partido Antiá Restrukturá (PAR) each won four seats (with one PAR candidate later defecting), the Movimentu Antiyas Nobo took two seats, and the Partido Nashonal di Pueblo one seat. The next general election is set for September 30th, with Mr Whiteman seeking re-election. His main rivals will be Mr Asjes, who is now leading a new party known as the Speransa pa un Miho Kòrsou, as well as the MFK's Mr Schotte (assuming that his appeal against his jail sentence is not rejected).
Curaçao has been a self-governing nation (except in matters of defence and judicial policy) since October 2010. The Kingdom of the Netherlands remains responsible for defence, but there is a risk that this will strain the relationship between the two nations. The PS is a strong proponent of full independence for Curaçao. The Kingdom Council of the Netherlands (the Netherlands ministerial executive, which includes former Dutch colonies) will continue to provide technical support and fiscal oversight, but relations could become strained if the PS's view becomes more broadly accepted within the governing coalition. The island's foreign policy will continue to be directed towards achieving a larger role for Curaçao in regional affairs, including developing social and cultural ties with other former colonies of the Netherlands and the implementation of a co-operation agreement signed with Sint Maarten in 2014. The administration will also try to maintain good relations with Venezuela, whose state-owned oil company, Petróleos de Venezuela (PDVSA), has leased the island's Isla refinery until 2019. However, relations would be strained were economic and political events in Venezuela to prevent PDVSA from continuing to operate the refinery.
Under the auspices of the Netherlands-based Council for Financial Oversight, the island has made some important structural changes over the past two years that should see its fiscal position improve into the longer term. Among these is an increase in the retirement age from 60 to 65; an additional sales tax of 9% on luxury goods; a more progressive property tax; and a reduction in the number of public servants in order to ease the public-sector wage bill. Additional reform efforts have been focused on healthcare, such as the implementation of a basic medical insurance scheme and a preference for generic drugs in order to reduce the medicine bill. These measures, combined with a spending freeze, have helped the island to reverse the deficits that were accumulated during the Schotte administration. Nevertheless, slower progress has been made on implementing other policy recommendations, including some supported by the IMF, such as a move to introduce a value-added tax (VAT), as well as greater flexibility to the labour market. Long-term policy will be guided by the island's 2015-30 National Development Plan, which seeks to boost competitiveness, improve infrastructure and diversify the economy further.
The opening up of state utilities to competition and private-sector investment will also advance only slowly, and the government will need to address the underperformance of state-owned companies. A policy of encouraging alternative, sustainable electricity generation and energy conservation in order to reduce dependence on imported fuel is making progress, but will be hindered if the weakness of international oil prices proves sustained, as this would undermine the competitiveness of alternative energy sources. The island will remain an attractive tourism destination, but it is heavily dependent on Venezuelan demand, which will be affected by that country's ongoing recession (year-on-year stopover visitors from Venezuela fell by 6.3% in 2015). On the positive side, Curaçao has a more diversified economy than the rest of the Dutch-speaking Caribbean, which means that it is less vulnerable to a slump in tourism or any other single sector. Ongoing infrastructure improvements-including a new hospital for the island, as well as a new arrivals hall for the airport-should also help to boost growth and employment. In addition, plans for an oil pipeline from Venezuela are under consideration.
Under the tutelage of the Kingdom Council of the Netherlands, the government is continuing its fiscal consolidation efforts. The island recorded a minuscule current deficit of Naf1.6m (less than US$1m) in 2015; including loans and grants, there was a surplus of 2.9% of GDP. A financial supervision arrangement with the Dutch government will maintain pressure for fiscal reform, but in the meantime expenditure is being held down (a spending freeze has been in place since 2012). Tepid economic growth has seen only a minor increase in the tax take. Although the financial arrangement with the Netherlands is useful in lowering the deficit, the CBCS has criticised it for being too inflexible. Pressure to keep the island's numerous social funds well capitalised and to continue upgrading infrastructure will remain a constant challenge. The public debt/GDP ratio, which reached 44.2% of GDP at end-2015 (up from 38.6% of GDP at end-2014), has risen owing to the issuance of two bonds in 2015 (of Naf278.8m) for construction of a new hospital and for road infrastructure. However, relatively small fiscal deficits in future should prevent a significant rise in the debt stock.
A weak economy and subdued inflationary pressure will enable the CBCS to keep monetary policy very loose. However, monetary transmission mechanisms are weak, and policy rate decisions have only a limited effect on economic performance. Despite a decision in 2011 by the Staten to dissolve the CBCS and establish a central bank solely for Curaçao, reform of the currency union and the creation of a central bank that is independent from Sint Maarten will remain medium-term goals; in view of more pressing issues, they are unlikely to be priorities for the government that takes office after the end-September election. On the banking side, the IMF has urged both islands to strengthen financial supervision and transparency, as well as sharing crossborder tax information, given the island's status as a regional financial centre. This will help to address reputational concerns stemming from high levels of fraud, tax evasion and money-laundering.
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.
After swinging into positive territory in March and April, inflation has again turned negative, with consumer prices falling by 1% in July (the steepest decline since end-2015). This has resulted in average deflation so far this year of 0.2%. Price pressures will remain weak during 2016 as lower fuel, transport and communications costs continue to offset food price increases. Base-year effects will also be stronger in the second half of the year, making a return to positive territory likely in the fourth quarter. Overall, however, the extremely weak nature of the economic recovery will prevent a marked upturn in consumer demand in 2016-17 and, combined with still modest international oil prices, this will result in average inflation of just 1% in 2016-17. Risks to this forecast stem from a possible sharp rebound in oil prices (which would quickly feed through to upward price pressures), but this does not form part of our baseline scenario.
We expect Curaçao's government to retain the Netherlands Antilles guilder, as efforts to introduce a new currency, the Caribbean guilder, have stalled. Sint Maarten and Curaçao, which formed a currency union in 2010, had intended to adopt the new currency jointly. However, Sint Maarten has a preference for adoption of the US dollar, which Curaçao opposes. This stalemate means that the currency union will remain intact in the short term at least, and that the Netherlands Antilles guilder will remain pegged to the US dollar at Naf1.79:US$1.
The current-account deficit narrowed in the final quarter of 2015 but reached 15% of GDP for the year as a whole, up from 11.9% of GDP in 2014. This deterioration stems primarily from a narrowing of the services surplus (mostly on account of non-tourism services), whereas the trade deficit actually improved. The latter trend is the result of a decline in trade-related oil refinery activities (which have large import components), and also of weak demand for consumer imports, which is outstripping a decline in export earnings. Continued modest growth in investment and in the economy as a whole will begin to push up demand for imported goods, but the trade deficit will still shrink as oil import costs remain contained. We expect a further widening of the surplus on the services account as tourism growth continues to recover, but this will be partly offset by growth in the deficits on the income and current transfers accounts. Overall, these trends are expected to result in a modest narrowing of the current-account deficit. Inward direct investment is showing signs of an upturn in response to recovering tourism (the US$245.4m in 2015 was the highest tally since 2008), but a more significant increase will have to wait until government reform efforts improve competitiveness. Curaçao has access to bilateral and multilateral loans, and we expect this to remain the case, minimising the risk of a balance-of-payments crisis. International reserves for the currency union with Sint Maarten stood at US$2.6bn at end-August (up from US$2.5bn at end-2015), providing more than four months of import cover.