Update Country Report Curaçao 21 Sep 2020

Event

The Dutch undersecretary for kingdom relations, Raymond Knops, warned on September 9th that the terms set for new financing to Curaçao were non-negotiable. Curaçao's worsening fiscal situation means that the government will now need to decide whether to agree to the Netherlands' terms in order to gain much-needed financing.

Analysis

The Netherlands has been negotiating with Curaçao, Sint Maarten and Aruba for several months now over additional financing to support the Caribbean economies through the economic downturn caused by the coronavirus (Covid-19) pandemic. The Netherlands has set requirements-including austerity measures and governance mechanisms-that Curaçao has so far rejected. Although the government of the prime minister, Eugene Rhuggenaath, is preparing a counter-proposal, Mr Knops's statement suggests that there is limited room for manoeuvre.

Most controversially, the Netherlands' offer includes a requirement to create a Caribbean Reform Entity, which would oversee the disbursement of Dutch funds. Although Curaçao has argued that this infringes its sovereignty, the Dutch government noted that the Caribbean Reform Entity would merely oversee funds from the Netherlands and would not affect Curaçao's budget and parliamentary powers.

Curaçao has made some strides towards complying with austerity requirements, for example by announcing a 12.5% public-sector pay cut in June. Parliamentary salaries were cut by 25% earlier in 2020, but an announcement in early September that they had been raised again reflects a sense of indifference against the backdrop of the ongoing financial negotiations.

The liquidity support from the Netherlands is becoming increasingly crucial as the economic downturn drags on. In the draft 2021 budget, the government expects a fiscal deficit of Naf681.3m (US$480.6m, or 13.7% of forecast 2021 GDP). Under the terms of the Financial Supervision Act, Curaçao is not permitted to run a deficit unless granted a deviation by the Council of Ministers for the Kingdom on the grounds of economic emergency.

Impact on the forecast

The Netherlands may use the threat of the budget being rejected to put additional pressure on Curaçao to accede to its demands. The delay in securing additional financing will further weigh on the government's ability to provide stimulus measures, exacerbating the impact of the current economic downturn.