Update Country Report Curaçao 20 Aug 2019

Event

The Centrale Bank van Curaçao en St Maarten (CBCS, the joint Curaçao and Sint Maarten central bank) has begun to tighten its monetary policy in response to a gradual decline in gross official reserves.

Analysis

The move was announced in early August as Curaçao and Sint Maarten seek to improve their fiscal positions under guidance from the Dutch government. As part of its monetary tightening strategy, the CBCS will hold biweekly tenders of certificates of deposits (CDs) to local banks, starting in the second half of August. These CDs will be offered in Netherlands Antilles guilders (Naf) and US dollars. The bank hopes that offering US dollar-denominated CDs will encourage local banks to hold US dollars with the CBCS, boosting its reserves, while Naf-denominated CDs are intended to reduce excess liquidity in the banking system. However, the bank will hold its interest rate at 2.5%.

The CBCS noted that a series of economic shocks have weighed on foreign-currency inflows at the same time as rising outflows, leading to a steady reduction in official reserves. These economic shocks include the 2017 hurricane that caused major damage to Sint Maarten, the knock-on effect of Venezuela's economic crisis on Curaçao, and rising import costs and the end of debt relief from the Netherlands in 2018. As a result, gross official reserves have declined from more than five months of import coverage in 2017 to 3.7 months as of August 2019.

The CBCS did not specify how long it will continue to tender CDs; this policy is likely to continue until it has restored its reserves to what it deems an acceptable level. According to the central bank, the policy is part of a broader initiative to improve the fiscal situations of the two islands, with their governments being guided by the Netherlands to implement sound economic policies through revenue-raising measures that will help to reduce their fiscal deficits.

We expect that tighter monetary policy will help to stem the ongoing decline in foreign reserves and mop up excess liquidity in the banking system. This should also help to relieve inflationary pressures, which have been exacerbated by rising import costs since 2018.

Impact on the forecast

Our economic forecasts are unchanged; we do not envisage a material impact from the central bank's policy tweaks and the exchange rate will remain at Naf1.79:US$1.