Update Country Report Curaçao 25 Jun 2019

Event

In mid-June the Netherlands Financial Supervision Board for Curaçao and Sint Maarten (CFT) met with various authorities from the government of Curaçao and voiced concern about the island's fiscal health.

Analysis

Citing the risk of a widening deficit this year, the message from the CFT was balanced but firm: although progress has been made by the government to raise revenue, expenditure-cutting efforts have been insufficient and must be ramped up. In the absence of more prudential financial management, the public debt/GDP ratio has risen, to 50%. To reverse this trend, the CFT impelled the government to implement measures to reduce social spending, in particular, with rising healthcare costs weighing on state finances.

This year's budget must be approved by the CFT to ensure that it is in line with a fiscal agreement made with the Netherlands at the time of the dissolution of the Netherland Antilles in 2010. If the CFT does not accept the government's proposed budget, then the Netherlands can make a legally binding instruction to Curaçao to bring its budget in line with the agreement-a controversial move that risks a popular backlash in Curaçao.

Curaçao's government has argued that given the economy's ongoing struggle to recover from three consecutive years of negative growth, the Dutch government should relax its oversight and allow the island to run a wider budget deficit. The economic decline has been driven by the crisis in nearby Venezuela, which has depressed output at Curaçao's Isla oil refinery and led to a sharp drop-off in Venezuelan tourism, previously a mainstay of the economy. Echoing the government's argument, the IMF has also warned that tighter fiscal policy would likely derail an economic recovery.

The Netherlands persistence that public finances are put in order sends a strong message to Curaçao's government, with The Hague unwilling to reach a situation where it might need to bail Curaçao out. To avoid even further Dutch involvement in its financial management, the government of Curaçao may freeze public-sector salaries and lay off public-sector employees.

Impact on the forecast

Our forecasts are unchanged. We do not expect the government to fully follow Dutch recommendations, with the fiscal balance remaining in deficit. However, we expect some measures to be implemented in line with the CFT's advice. The fiscal balance will endure pressure from problems at the Isla oil refinery; the worsening of conditions at the refinery would lead to a wider fiscal deficit than envisaged in 2019.