Update Country Report Curaçao 13 Mar 2019

Event

According to the Central Bank of Curaçao and Sint Maarten (CBCS), the economy contracted by 1.7% year on year in the third quarter of 2018.

Analysis

The decline was led by the manufacturing (down by 8%) and construction (2%) sectors, with the manufacturing sector suffering from a drop in output at the Isla oil refinery. According to the CBCS, lower production at Isla was caused by limited supplies of crude oil from Venezuela's state-owned oil firm, PDVSA, which currently operates the refinery. In addition, disruptions to steam delivery from the Curaçao Refinery Utilities plant also weighed on the sector. In the construction sector, the completion of large projects, including a new hospital and road maintenance, reduced activity.

In contrast, the hotel and restaurant sector posted positive growth in the third quarter, growing by 10% year on year, owing to growth in both cruise and stop-over tourism. An increase in the number of seats on US flights to Curaçao led to a 28% jump in North American stop-over visitors, compared with a contraction of 2% during the same period in 2017, contributing to a 14% rise in the overall number of stop-over visitors. This indicates that the tourism sector is beginning to recover from a protracted period of decline, which was driven by a drop in tourism from Venezuela, owing to that country's economic and political crisis.

On the demand side, the CBSC noted weak results for private consumption and fixed investment. Private consumption, which fell by 0.4% year on year, was dampened by higher oil import costs, which pushed up inflation (to 3.1% in the third quarter). Private and public investment declined owing to the winding down of major construction projects.

Although we expect seasonal factors to have contributed to growth in tourism in the final quarter of 2018, external factors present risks to our forecast of a recovery in 2019. Most notably, the situation in Venezuela continues to be unstable. Further reductions in oil imports from Venezuela will intensify the woes facing the Isla refinery and weigh on manufacturing. Simultaneously, the post-hurricane recovery of other Caribbean countries will introduce more competition for tourism, undermining Curaçao's own revival.

Impact on the forecast

Our forecast remains unchanged. Although the Venezuelan crisis presents some downside risks to our expectation of a modest acceleration in 2019, we maintain this forecast on the basis of a good performance by the tourism and financial services sectors.