Update Country Report Curaçao 16 Jul 2019

Event

On July 12th the Netherlands issued a formal budget instruction to Curaçao, requiring it to bring its budget within the limits imposed by the Kingdom Financial Supervision Law. In response, the Curaçao government has stated that it will appeal against the Netherlands' move.

Analysis

Concerns that the Dutch government would impose legally binding budget restrictions have been realised. First mooted in June, when it warned that Curaçao's budget had exceeded the agreed limit for a third consecutive year, the Kingdom Council of the Netherlands has instructed the Curaçao government substantially to reduce its projected fiscal deficit for this year. Details of the measures mandated by the instruction are scarce, but under existing legislation the Netherlands can impose adjustments to the government's budget. The instruction implies a sharp cut to expenditure, as the Dutch government has previously highlighted Curaçao's poor progress on reducing current expenditure.

The Curaçao government had sought to prevent the formal budget instruction by deferring discussions from June, giving it time to put together a deficit reduction proposal, including economic growth strategies. However, despite commending Curaçao for its efforts to raise revenue, the Netherlands deemed the proposal insufficient.

The Dutch authorities made it clear that they accept there are mitigating circumstances behind Curaçao's budget woes, such as a decline in revenue owing to a slowdown in tourist arrivals from Venezuela and an interruption of operations at the Venezuelan-operated Isla oil refinery. The Netherlands has therefore softened the blow of the budget instruction by pairing it with an agreement to support the government's Growth Strategy programme, which aims to improve financial management and engender sustainable development, emphasising the co-operative nature of the relationship. Full details of the programme have not yet been released, but it may well include some form of funding from the Dutch government for economic and social investments, which would to some extent compensate for the imposed budget austerity.

Impact on the forecast

We do not expect the Dutch government to revoke its instruction. It had already delayed its decision in order to allow the Curaçao administration an opportunity to avert the measures. Furthermore, it has agreed to co-operate through a growth agreement. Our economic forecasts are therefore unchanged. We have already factored in Dutch-led budgetary tutelage into our baseline forecast of a narrowing fiscal deficit and a moderately declining public debt burden, the latter of which came in at just over 51% of GDP in 2018.