After stagnating in 2016 we expect real GDP growth to return to positive territory, reaching 0.3% in 2017 and 0.4% in 2018. 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 the level at a weaker 0.1%. However, the economy contracted by 0.2% in both the first and second quarters of 2016, and we therefore estimate zero growth this year. Although no new GDP data has been released since our previous report, rising unemployment over the past year (to 13.3%) has highlighted the still-weak state of the economy.

We expect growth to accelerate modestly in 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 will add further headwinds to this vital sector (stopover tourism fell by 8.2% year on year in May 2016 and by 5.7% the following month, the last available reported figures). The government was also recently involved in an agreement with AirBnb (US; an online short-term property rental marketplace) to promote its visibility abroad, as well as a financial bailout of the local airline, Insel, which highlights the strategic importance attached to the tourism industry.

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. There are ongoing talks on whether operations could be transferred to a Chinese firm, Guangdong Zhenrong Energy, which has recently been awarded a US$5.5bn contract to upgrade the refinery. 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. We expect further efforts to be made by the next government to improve consultation between the public and private sectors on policy initiatives. 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.