Outlook for 2017-18

• Elections held on October 5th resulted in a ruling coalition led by the Partido MAN and a new prime minister, Hensley Koeiman. Political stability will remain fragile, particularly if intra-coalition unity falters.
• Progress on fiscal consolidation and tackling corruption will be gradual and subject to opposition pressure. 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.
• The economy stagnated in 2016 and will record only a modest expansion in 2017-18 of just 0.4% per year on average, with growth hindered by public spending cutbacks and weak consumer demand.
• A fragile economic recovery and deflationary pressures emanating from low oil prices will keep inflation at bay in 2017-18, when it will average just 2%.
• The current-account deficit will continue to narrow, but will remain large. Recovering tourism demand abroad will push up services receipts, while the merchandise trade deficit will narrow, owing to cheaper oil imports.

Review

• The Partido MAN narrowly won the October 5th general election, but with just 16.2% of the vote and four seats in the 21-seat legislature. It will govern as a coalition guaranteeing a small majority of 12 seats.
• GDP contracted again in the second quarter of 2016, by 0.2%. This follows a similar sized contraction in the first quarter. The Economist Intelligence Unit now expects the economy to record no growth in 2016.
• Five ships belonging to Petróleos de Venezuela (PDVSA, Venezuela's state oil company) were briefly seized due to lack of payment for using Curaçao's harbour facilities. They were released shortly afterwards.
• The current account recorded a deficit of Naf275m (US$153.6m) in the second quarter of 2016, bringing the first half deficit to Naf408.9m. This is slightly wider than the Naf375.6m level seen a year earlier.

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 (New Year's Day), 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), December 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 national election is due in late 2020

Government

A coalition of the Partido MAN (MAN), Pueblo Soberano (PS), Partido Antiá Restrukturá (PAR), and the Partido Nashonal di Pueblo (PNP) controls 12 of the 21 seats in the Staten

Main political organisations

MAN, four seats; Movementu Futuro Kòrsou (MFK, four seats); PAR, four seats; Korsou di Nos Tur (KdNT, three seats); PS, two seats; PNP, two seats; Un Kòrsou Hustu (UKH, one seat); Movementu Progresivo (MP, one seat)

Key ministers

Governor: Lucille George-Wout

Prime minister; general affairs; foreign relations: Hensley Koeiman

Administration, planning & services: Undefined (assigned to PS)

Economic development: Undefined (assigned to PAR)

Education, science, culture & sport: Elsa Rozendal (Proposed)

Finance: Kenneth Gijsbertha (Proposed)

Health, environment & nature: Undefined (assigned to PAR)

Justice: Undefined (assigned to PNP)

Social development, labour & welfare: Undefined (assigned to PS)

Traffic, transport & spatial planning: Undefined (assigned to PNP)

Central Bank president

Emsley Tromp

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Following the October 5th election and the swearing in of the new parliament on November 2nd, the political scene has moved towards the creation of the new government led by the new prime minister, Hensley Koeiman of the Partido MAN. The MAN won the election having gained the largest share of the vote (16.2%), but with only four out of 21 seats in the Staten (the legislature) it must set up a coalition government. Although the coalition has not been fully defined yet, it will likely include Pueblo Soberano (PS), which led the previous (caretaker) government, as well as the Partido Nashonal di Pueblo (PNP), and the Partido Antiá Restrukturá (PAR). This would give the coalition a total of 12 seats.

The political establishment has been rocked by major corruption allegations over the last year, most recently involving the president of the Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint Central Bank), Emsley Tromp. Earlier in the year, former prime minister Gerrit Schotte of the opposition Movementu Futuro Kòrsou (MFK) was convicted on bribery charges and sentenced to three years in jail and a five-year ban from public office. Despite this, Mr Schotte was allowed to run in the election and the MFK came close to winning, with 16% of the vote and four seats. It is unclear whether the conviction will be upheld; if he is allowed to remain in the legislature, he is likely to present a strong opposition to the coalition.

The main threat to political stability is that a member of the coalition would withdraw, which would effectively leave it without a majority. As such, the new government will require a strong mandate to avoid a continuation of the political volatility that has affected the island in recent years. It will also have to address weak growth and implement unpopular policies, such as changes to public pension entitlements and to the education and healthcare systems, along with tax reform; these could easily be derailed by special interest groups. The business environment will continue to be hampered by political and policy uncertainty, with further corruption scandals also possible.

Elections were originally scheduled for September 30th but were postponed to October 5th as a result of Hurricane Matthew. A total of 13 parties contested the 21 legislative seats, of which eight parties obtained at least one. The MAN, MFK and PAR were the only parties to obtain four seats, while the Korsou di Nos Tur (KdNT) secured three and is the second-largest opposition party. Since the dissolution of the Netherlands Antilles in 2010, no government in Curaçao has lasted the full length of its four-year term, which presents a considerable risk to political stability if the ruling coalition suffers internal frictions.

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 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 prevent PDVSA from continuing to operate the refinery. Recently, five PDVSA tankers were seized in Curaçao harbours due to lack of payments, but were later released.

The Economist intelligence Unit does not expect a radical policy shift under the new government. Under the auspices of the Netherlands-based Council for Financial Oversight, the island has made some important structural changes over the past two years that should see its fiscal position improve in the longer term. Among these are: an increase 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 a preference for generic drugs 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, slower progress has been made on implementing other policy recommendations, including some supported by the IMF, such as a move to introduce a value-added tax (VAT), as well as greater flexibility to the labour market. Long-term policy will be guided by the island's 2015-30 National Development Plan, which seeks to boost competitiveness, improve infrastruc-ture and diversify the economy further.

The opening up of state utilities to competition and private-sector investment will also advance only slowly, and the government will need to address the underperformance of state-owned companies. A policy of encouraging alternative, sustainable electricity generation and energy conservation in order to reduce dependence on imported fuel 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. The island will remain an attractive tourism destination, but it is heavily dependent on Venezuelan demand, which will be affected by that country's ongoing recession. 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. Ongoing infrastructure improvements-including a new hospital for the island, as well as a new arrivals hall for the airport-should also help to boost growth and employment. In addition, plans for an oil pipeline from Venezuela are under consideration.

Under the tutelage of the Kingdom Council of the Netherlands, the new government will continue its fiscal consolidation efforts. The island recorded a minuscule fiscal deficit of Naf1.6m (less than US$1m) in 2015; including loans and grants, there was a surplus of 2.9% of GDP. A financial supervision arrangement with the Dutch government will maintain pressure for fiscal reform, but in the meantime expenditure is being held down (a spending freeze has been in place since 2012). Tepid economic growth has seen only a minor increase in the tax take. Although the financial arrangement with the Netherlands is useful in lowering the deficit, the CBCS has criticised it for being too inflexible. Pressure to keep the island's numerous social funds well capitalised and to continue upgrading infrastructure will remain a constant challenge. The public debt/GDP ratio, which reached 44.2% of GDP at end-2015 (up from 38.6% of GDP at end-2014), has risen owing to the issuance of two bonds in 2015 (of Naf278.8m) for construction of a new hospital and for road infrastructure. However, relatively small fiscal deficits in future should prevent a significant rise in the debt stock.

A weak economy and subdued inflationary pressure will enable the CBCS to keep monetary policy loose. However, monetary transmission mechanisms are weak, and policy rate decisions have only a limited effect on economic performance. Despite a decision in 2011 by the Staten to dissolve the CBCS and establish a central bank solely for Curaçao, reform of the currency union and the creation of a central bank that is independent from Sint Maarten will remain medium-term goals; in view of more pressing issues, they are unlikely to be priorities for the new government. On the banking side, the IMF has urged both islands to strengthen financial supervision and transparency, as well as sharing crossborder tax information, given the island's status as a regional financial centre. This will help to address reputational concerns stemming from high levels of fraud, tax evasion and money-laundering.

After stagnating in 2016 we expect real GDP growth to return to positive territory in 2017-18, at 0.3% and 0.4% respectively. Curaçao's small, open economy will remain highly sensitive to shifts in commodity prices, and the ebb and flow of international tourism demand. According to official data, a three-year recession ended in 2015, with growth of 0.3%, although an IMF Article IV report published in August put it at a weaker 0.1%. However, the economy contracted by 0.2% in both the first and second quarters of 2016, and we are therefore now estimating zero growth this year. We then expect growth to accelerate modestly into the short term, driven by further improvements in services sector activity (particularly in non-tourism areas such as finance). This will drive new investment in services and construction growth in the medium term. However, a sharp recession in nearby Venezuela adds further headwinds to this vital sector (stay-over tourism fell by 8.2% in May and 5.7% in June, the last available reported figures).

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. Minimal growth in real wages will 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, the future of Curaçao's Isla oil refinery-leased to Venezuela's embattled PDVSA-remains in question, following an announcement in February that the lease would not be renewed in 2019. The refinery has also been suffering from ongoing labour unrest, which has resulted in strikes during September, in one case leading to blackouts in numerous parts of the island. Other risks to our forecast for a mild recovery would materialise if real GDP growth in the US or the euro zone were to fall below our current projections.

The government has pledged to pay more attention to addressing the concerns of business, in order to improve the investment climate and cut red tape. However, until clear progress is made, investor confidence and levels of private investment will remain subdued. Some initial steps to stimulate investment have made headway in recent years. Under the new government, we expect further efforts to me made on improving consultation between the public and private sectors 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 that the Staten will approve the deal. Progress in politically sensitive areas, such as tackling rigid labour laws, is, nevertheless, likely to remain slow and piecemeal. 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 competition 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 swinging into positive territory in March and April, annual inflation has again turned negative, with consumer prices falling by 1% in July (the steepest decline since end-2015), despite a rise of 0.6% in month-on-month terms. Price pressures will remain weak in the short term as lower fuel, transport and communications costs continue to offset food price increases, and we estimate that annual inflation will average just 0.1% in 2016 as a whole. Going forward, the extremely weak nature of the economic recovery will prevent a marked upturn in consumer demand in 2017-18 and, combined with still-modest international oil prices, this will result in average inflation of 1.8% and 2.1% respectively. Risks to this forecast stem from a possible sharp rebound in oil prices (which would quickly feed through to upward price pressures), but this is not our baseline 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, had 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 reached 15.3% of GDP in 2015 and we estimate that it narrowed to 13.8% of GDP in 2016. The trade deficit has improved as a 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. Continued modest growth in investment and in the economy as a whole will begin to push up demand for imported goods, but the trade deficit will still shrink as 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 partly offset by growth in the deficits on the income and current transfers accounts. Overall, these trends are expected to result in a modest narrowing of the current-account deficit. Inward direct investment is showing signs of an upturn in response to recovering tourism (the figure of US$245.4m in 2015 was the highest tally since 2008, although the US$64.7m received in the first half of 2016 is less than the year-earlier period), but a more significant increase will have to wait 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. International reserves for the currency union with Sint Maarten stood at US$1.4bn at end-September (up from US$1.3bn at end-2015), providing just over 13 months of import cover.