Update Country Report Curaçao 09 Feb 2018

Event

In late January Curaçao's government submitted an economic policy proposal to the Netherlands Financial Supervision Board for Curaçao and Sint Maarten (CFT). This economic plan aims to improve revenue and achieve a budget surplus in 2018.

Analysis

According to the CFT, Curaçao had a budget deficit of NAf116m (US$64.9m) in the 2017 fiscal year, which contravenes the terms of the Kingdom Act on Financial Supervision (RFT, by its Dutch acronym), implemented in relation to Curaçao and Sint Maarten by the Netherlands upon the dissolution of the Netherlands Antilles. As a result, the government has had to prepare a series of special economic measures in order to reduce the deficit in 2018 and return to compliance with the RFT. The island is running a budget deficit in part because of a fall in tourist arrivals in 2017, led by a sharp decline in arrivals from nearby Venezuela. In addition, the publicly run postal service is experiencing financial problems, while uncertainty over the future of the Isla oil refinery could prove a medium-term drag on economic growth.

The economic package includes measures, proposed by the CFT, to focus on increasing tax revenue through a crackdown on tax evasion. In addition, the government has proposed removing the provision of free education for all citizens and providing it only to low-income families. The latter proposal is only at an exploratory stage but is likely to prove unpopular, given an environment of rising inflation and higher unemployment. Unemployment rose to 14.1% by the end of 2017, and reached 18.8% for 25- to 34-year-olds. Inflation reached 1.6% at end-2017, and is set to increase further in the first quarter of 2018 following a 25% increase in the price of cooking gas. The severing of trade and transit relations between Curaçao and Venezuela has also pushed up import costs for fruit and vegetables, which are now being sourced primarily from Colombia and the Dominican Republic.

Impact on the forecast

For now we expect that the new measures will achieve the objective of eliminating the fiscal deficit and complying with CFT regulations. However, we expect ongoing contagion from Venezuela to damage GDP growth prospects in 2018, and we are likely to revise down slightly our forecast for Curacao's GDP growth, from the current level of 0.7%. This increases the risk that fiscal revenue growth will underperform, potentially undermining the goal of achieving fiscal balance.