Outlook for 2016-17

• The government of the prime minister, Bernard Whiteman, will serve out its term, but no significant policy initiatives are expected to advance before the October 2016 election, and political stability will remain fragile.
• Progress on fiscal consolidation and tackling corruption will be hampered by the government's slim majority. Tougher counter-narcotics action in Central America poses a risk to Curaçao's security from diverted drug flows.
• The Kingdom Council of the Netherlands will continue to provide fiscal supervision to Curaçao, and help it to maintain a balanced budget. A high public debt/GDP ratio of over 40% adds an element of fiscal risk.
• After years of recession, the economy will post positive growth in 2016-17, but the expansion will be weak at just 0.5% on average, hindered by retrenchment in public spending and weak consumer demand.
• A fragile economic recovery and deflationary pressures emanating from lower average oil prices will keep inflation at bay in 2016-17, with forecast average annual inflation of 2%.
• The current-account deficit will continue to narrow. Recovering tourism demand abroad will push up services receipts, while the merchandise trade deficit will narrow owing to cheaper oil imports.

Review

• Curaçao's next parliamentary election-only the second since the 2010 dissolution of the Netherlands Antilles-is likely take place in October, the latest possible point at which it can be held.
• Real GDP expanded by 0.3% in the third quarter of 2015, resulting in an average of 0.2% for the first three quarters. Growth was led primarily by restaurants and hotels, as well as utilities.
• The economy continued to experience deflation, with consumer prices declining by 1.1% year on year in October. In the January-October period, consumer prices fell by 0.3%.
• Total stopover tourist visitors increased by 3.8% year on year during January-October of 2015. However, those from the key Venezuelan market declined by 4.9% on account of a deepening recession in that country.

Land area

444 sq km; Curaçao lies in the southern Caribbean Sea, to the north-west of Venezuela and 68 km east of Aruba, outside the hurricane belt

Population

Total population: 150,563 (2011 census)

Main town

Willemstad, the capital

Climate

Subtropical

Weather

Hottest month, September, 25-33°C; coldest months, January-February, 21-31°C (average daily minimum and maximum); driest months, March-April, 16-19 mm average rainfall; wettest months, October-December, 83-99 mm average rainfall

Language

Dutch and Papiamento (official); Spanish and English are also spoken

Measures

Metric system

Currency

Curaçao and Sint Maarten share the Netherlands Antilles guilder (Naf)=100 cents. The exchange rate has been fixed at Naf1.79:US$1 since 1971. The US dollar is in free circulation on both islands

Time

4 hours behind GMT

Public holidays

January 1st, February 8th (Carnival), March 25th (Good Friday), March 28th (Easter Monday), April 27th (King's birthday), May 1st (Labour Day), May 5th, (Ascension Day), May 15th (Whit Sunday), July 2nd (Flag Day), October 10th (Curaçao Day), December 25th (Christmas day) and 26th (Boxing day)

Form of government

Parliamentary democracy with control over internal affairs, including aviation, customs, communications and immigration; the Netherlands is responsible for external affairs, such as citizenship, defence and foreign policy

The executive

The Council of Ministers is responsible to the Staten (parliament)

Head of state

King Willem-Alexander of the Netherlands, represented by a governor; responsibility in the Netherlands lies with the Home Office

National legislature

The Staten has 21 members, elected by adult suffrage every four years under a system of proportional representation

Legal system

Courts of first instance on the island, appealing to a High Court of Justice operated jointly between Aruba, Curaçao, Sint Maarten and the "BES islands" (Bonaire, Sint Eustatius and Saba); in civil and criminal matters, the Dutch Supreme Court in the Netherlands will remain the highest legal authority

Elections

The next election is due in 2016

Government

A coalition of the Pueblo Soberano (PS), the Partido pa Adelanto i Inovashon Soshal (PAIS), the Partido Nashonal di Pueblo (PNP) and an independent member, Glenn Sulvaran (previously affiliated to the Partido Antiá Restrukturá-PAR), controls 12 of the 21 seats in the Staten.

Main political organisations

PS, five seats; Movementu Futuro Kòrsou (MFK, five seats); PAIS, four seats; PAR, three seats; Movimentu Antiyas Nobo (MAN, two seats); PNP, one seat; Frente Obrero Liberashon 30 di Mei (FOL)

Key ministers

Governor: Lucille George-Wout

Prime minister: Bernard Whiteman

Economic development: Eugene Rhuggenaath

Education, science, culture & sport: Irene Dick

Finance: José Jardim

Administration, planning & services: Etienne van der Horst

Health, environment & nature: Siegfried Victorina

Justice: Nelson Navarro

Social development, labour & welfare: Ruthmilda Larmonie-Cecilia

Traffic, transport & spatial planning: Suzanne Camelia-Romer

Central Bank president

Emsley Tromp

Download the numbers in Excel

Download the numbers in Excel

Download the numbers in Excel

Following the collapse of the Ivar Asjes administration (2013-15) in August 2015, attempts to sustain a new multi-party governing coalition have suffered numerous reverses. An interim government under Bernard Whiteman of the Pueblo Soberano (PS) survived just one month, and has had to be reformed following defections. This new caretaker government, which is still led by Mr Whiteman, will carry the country through to an election that is due by October this year at the latest. The current coalition government holds 12 of the 21 seats in the Staten (the legislature), putting it in a stronger position than the Asjes administration, which had only a 1-seat majority.

Adherence by the government to a reform agenda including unpopular changes to public pension entitlements and to the education and healthcare systems, along with tax reform, could easily be derailed by special interest groups. Furthermore, the coalition's ability to govern effectively will diminish as the general election approaches. The business environment will continue to be hampered by political and policy uncertainty. Risks also emanate from ongoing legal action concerning allegations of corruption and misuse of public funds. This affects the opposition Movementu Futuro Kòrsou (MFK) party in particular, owing to an investigation into its former leader, Gerrit Schotte, who served as prime minister in 2010-12.

The last general election was held in October 2012, precipitated by Mr Schotte's sudden resignation in August of that year. Six parties won representation in the legislature: the PS and the MFK secured the largest shares of the vote, winning five seats each. The Partido pa Adelanto i Inovashon Soshal (PAIS) and the Partido Antiá Restrukturá (PAR) each won four seats (with one PAR candidate later defecting), the Movimentu Antiyas Nobo took two seats, and the Partido Nashonal di Pueblo (PNP) received one seat. The next general election is due to be held in October 2016, and it is likely that Mr Whiteman will work to prevent an early election, thereby maximising his time as prime minister. Both Mr Asjes, now leading a new party known as the Speransa pa un Miho Kòrsou (SMK), and Mr Schotte are expected to contest the next elections.

Curaçao has been a self-governing nation (except in matters of defence and judicial policy) since October 2010. The Kingdom of the Netherlands remains responsible for defence, but there is a risk that this will strain the relationship between the two nations. The PS is a strong proponent of full independence for Curaçao. The Kingdom Council of the Netherlands (the Netherlands ministerial executive, which includes former Dutch colonies) will continue to provide technical support and fiscal oversight, but relations could become strained if the PS's view becomes more broadly accepted within the governing coalition. The island's foreign policy will continue to be directed towards achieving a larger role for Curaçao in regional affairs, including developing close social and cultural ties with other former colonies of the Netherlands and the implementation of a co-operation agreement signed with Sint Maarten in 2014. The administration will also try to maintain good relations with Venezuela, whose state-owned oil company, Petróleos de Venezuela (PDVSA), has leased the island's Isla refinery until 2019. However, relations would be strained were economic and political events in Venezuela to result in PDVSA being unable to continue to operate the refinery.

Under the auspices of the Netherlands-based Council for Financial Oversight (CFT), the island has made some important structural changes over the past two years that should see its fiscal position improve into the longer term. Among these is an increase rise in the retirement age from 60 to 65, an additional sales tax of 9% on luxury goods, a more progressive property tax, and a reduction in the number of public servants in order to ease the public-sector wage bill. Additional reform efforts have been focused on healthcare, such as the implementation of a basic medical insurance scheme and preference for generics in order to reduce the medicine bill. These measures, combined with a spending freeze, have helped the island to reverse the deficits that were accumulated during the Schotte administration. Nevertheless, resistance by the private sector and labour unions to further tax rises is high, and Curaçao suffers from other fiscal vulnerabilities, including the need to keep social spending high, particularly on healthcare, given the island's rapidly deteriorating demographics compared with the rest of the Dutch-speaking Caribbean. Despite these challenges, the short time left before the next election means that major reforms are unlikely to be implemented until after a new government is sworn in.

The opening of state utilities to competition and private-sector investment will also advance only slowly, and the government will also need to address the issue of underperforming state-owned companies. A policy of encouraging alternative, sustainable electricity generation and energy conservation in order to reduce dependence on imported fuel oil is making progress, but will be hindered if the weakness of international oil prices proves sustained, as this would undermine the competitiveness of alternative energy sources and the adoption of energy-saving measures, unless further fiscal concessions were offered. The island will remain an attractive tourism destination, but depends heavily on Venezuelan demand, which will be affected by that country's ongoing recession (stopover visitors from Venezuela were down by 4.9% in January-October). On the positive side, Curaçao has a more diversified economy than the rest of the Dutch-speaking Caribbean, which means that it is less vulnerable to a slump in tourism or any other single sector.

Under the tutelage of the Kingdom Council of the Netherlands, the government is continuing its fiscal consolidation efforts, and The Economist Intelligence Unit estimates that it recorded a modest surplus in 2015. A financial supervision arrangement with the Dutch government will maintain pressure for fiscal reform and limit the risk that populist policies will be adopted in advance of the election this year. Expenditure is being held down (a spending freeze has been in place since 2012), but the weak economy will prevent a sharper increase in tax intake. Pressure to keep the island's numerous social funds well capitalised will remain a constant challenge. The public debt/GDP ratio, at an estimated 42% of GDP at end-2015, is higher than the 40% recommended for a small economy, and has risen owing to the issuance of two bonds in 2015 for construction of a new hospital and for road infrastructure. Nevertheless, the persistence of small fiscal surpluses should prevent the debt stock from rising further.

A weak economy and subdued inflationary pressure will enable the Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint Central Bank) to keep monetary policy very loose. However, monetary transmission mechanisms are weak, and policy rate decisions have only a limited effect on economic performance. As a result, we now do not expect any movement in the policy rate, given the persistence of global headwinds and the island's own tepid recovery in 2015. Ongoing deflation should also enable the CBCS to keep monetary policy exceptionally loose.

Despite a decision in 2011 by the Staten to dissolve the CBCS and establish a central bank solely for Curaçao, work to advance the plan has stalled. We expect the two countries' joint currency, the Netherlands Antilles guilder, to survive in the short term, as policy priorities have shifted to more urgent issues, such as controlling the fiscal deficit and avoiding exchange-rate uncertainty. Reform of the currency union and the creation of a central bank that is independent from Sint Maarten will remain medium-term goals, but these are unlikely to advance during the lifespan of the current government.

Curaçao's small, open economy will remain highly sensitive to shifts in commodity prices, and the ebb and flow of international tourism demand. We estimate that a six-year recession ended in 2015, with growth of 0.2% (growth reached 0.3% in the third quarter). We expect growth to accelerate modestly in the short term, driven by further improvements in services sector activity (particularly non-tourism). This will drive new investment in services and construction growth in the medium term. However, the sharp recession in neighbouring Venezuela, along with the impact of the Zika epidemic on tourism, add further headwinds. Overall, real GDP growth is forecast to remain positive, although weak, in 2016 and 2017, at 0.4% and 0.5% respectively.

A stronger recovery will be prevented by the government's need to maintain strict fiscal discipline during the forecast period, which will continue to stifle the ability of the public sector to provide a lift to economic growth. Tax increases and minimal real wage growth will also constrain private consumption demand. Growth will be further hampered by tougher international financial regulation, which is acting as a brake on offshore services and company formation. Furthermore, despite recent overtures from Chinese investors, the future of Curaçao's Isla oil refinery remains in question, and any interruption of the facility's activities would represent a major setback for economic growth. Talks with Venezuela over new investment to modernise the refinery have been stalled since 2013 and will be complicated by that country's economic crisis. Other risks to our forecast for a mild recovery would materialise if real GDP growth in the US (estimated to average 2.2% in 2016-17) were to falter or if weakness in the euro zone were to mount.

The government has pledged to pay more attention to addressing the concerns of business, so as to improve the investment climate and cut red tape. However, until clear progress is made, investor confidence and levels of private invest-ment will remain subdued. Some initial steps to stimulate private investment have made headway in recent years. A framework agreement between the private sector and the government provides for closer consultation on policy initiatives. The participation of all the governing parties in the signing of the agreement will better align the reform agenda with business goals and will improve the chances of the deal's approval by the legislature. Progress in politically sensitive areas, such as tackling rigid labour laws, is, nevertheless, likely to remain slow and piecemeal. The drafting and approval of anti-trust legislation (in the form of a competition act) is expected to conclude by end-2015. Several industries in Curaçao operate as virtual monopolies, with some companies suspected of abusing their dominant positions, particularly in the telecommunications, utilities, construction and pharmaceuticals sectors. The creation of a com-petition watchdog to oversee the opening of some sectors to new investors has the potential to improve efficiency and lower costs across the economy. However, implementation will be slow, and will be hampered by resistance to reforms from established interests that have the capacity to wield considerable political influence.

After a marked upswing in inflationary pressures in mid-2014, consumer price inflation has become negative, with 1.1% deflation year on year in October 2015 (the latest available figure) and a negative 0.3% average for January-October. We estimate that price pressures will remain contained in 2016 as lower average fuel, transport and communications costs continued to offset food price increases. Base-year effects will also push annual inflation back into positive territory this year. However, the extremely weak nature of the economic recovery will prevent a marked upturn in consumer demand in 2016-17 and, combined with still-modest international oil prices, this will result in average inflation rates of around 2%. Risks to this forecast stem from a possible sharp rebound in oil prices (which would quickly feed through to upward price pressures) and the risk of a sudden hiatus in Venezuelan tourism demand, but this does not form part of our central forecast scenario.

We expect Curaçao's government to retain the Netherlands Antilles guilder, as efforts to introduce a new currency, the Caribbean guilder, have stalled. Sint Maarten and Curaçao, which formed a currency union in 2010, intended to adopt the new currency jointly. However, Sint Maarten has a preference for adoption of the US dollar, which Curaçao opposes. This stalemate means that the currency union will remain intact in the short term at least, and that the Netherlands Antilles guilder will remain pegged to the US dollar at Naf1.79:US$1.

The current-account deficit widened in the third quarter of 2015, and we now expect it to have reached 17.9% of GDP for the year as a whole, down from 20.4% of GDP in 2014. This deterioration owes primarily to a narrowing of the services surplus (mostly on account of non-tourism services), whereas the trade deficit actually improved. The latter trend is the result of a decline in trade-related oil refinery activities (which have large import components), and also of weak demand for consumer imports, which is outstripping a decline in export earnings. We expect these trends to continue in 2016 and 2017 as GDP growth remains lacklustre. An end to the recession and modest investment growth will begin to push up demand for imported goods, but the trade deficit will still shrink as average oil import costs remain contained. We expect a further widening of the surplus on the services account as tourism growth continues to recover, but this will be partially offset by growth in the deficits on the income and current transfers accounts. The overall impact of these trends is expected to result in a modest further decline in the current-account deficit. Inward direct investment is showing signs of an upturn in response to recovering tourism, but inflows will remain subdued until government reform efforts improve competitiveness. Curaçao has access to bilateral and multilateral loans, and we expect this to remain the case, minimising the risk of a balance-of-payments crisis.