Update Country Report Curaçao 20 Mar 2018

Event

The Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint central bank) released its third quarter 2017 report in mid-March, in which it revised downwards its GDP estimates for both countries. The bank now believes that the Curaçao economy contracted by 1.4% year on year in in the third quarter of 2017, with negative implications for real GDP growth prospects for both 2017 as a whole and 2018.

Analysis

The CBCS notes that Curaçao's year-on-year economic decline in this quarter was driven by a fall in domestic demand, corresponding to a drop in public and private spending. Public spending declined on the back of pressure on government revenue, which caused a decline in public investment. Private spending also dropped because of rising inflation, which reduced consumer purchasing power. Inflation rose to 1.1% in the third quarter of 2017, up from -0.6% in the same period in 2016, while the annual inflation rate reached 1.3%.

The central bank's sectoral analysis showed that the main sectors of decline were manufacturing, transport, communication, hotels and financial intermediation. A contraction of 3.8% year on year in the manufacturing sector was linked to lower production at the Isla oil refinery, one of the country's main sources of manufacturing income, which we expect to continue underperforming in 2018. Airport-related activity fell owing to reduced passenger and commercial traffic, caused in large part by flight cancellations by the national career, InselAir, following financial struggles.

The hotels and restaurants sector suffered from a 14.9% year-on-year fall in stopover tourism. This was most pronounced in falling arrivals from nearby Venezuela, where economic turmoil in that country deterred outbound tourism. However, Curaçao's other major source markets-the US, Caribbean and Netherlands-also posted declines in tourism. This overall decline was slightly offset by an increase in cruise tourism, benefitting from the opening of a second mega cruise pier for large cruise ships and the diversion of many cruise itineraries to Curaçao following the devastation caused by Hurricanes Irma and Maria elsewhere in the Caribbean in September 2017.

Impact on the forecast

Given that tourist arrivals continued to decline in the fourth quarter and confusion lingers over the future operator of the Isla oil refinery, we expect economic activity to remain subdued into 2018. We have revised our forecast for real GDP growth in 2018 down in our March report, from 0.7% to 0.3%.