Outlook for 2017-18

• Elections held on October 5th 2016 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 security in the form of 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 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

• Mr Koeiman, dissolved parliament following the withdrawal of the Partido Soberano from the ruling coalition. A coalition of 11 opposition MPs is currently acting as the new majority.
• New elections will be held on April 28th, just a few months after the previous scheduled elections on October 5th. Since Curaçao achieved self-government in 2010, no administration has lasted its full term.
• The prime minister of Sint Maarten, William Marlin, has renewed his call for the country to appoint its own attorney-general, superseding its current shared arrangement with Curaçao.
• Unemployment in rose to 13.3% in 2016, according to the latest Labour Force Survey conducted by the Central Bureau of Statistics, highlighting the weak state of the economy.

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 27th (Carnival), April 14th (Good Friday), April 17th (Easter Monday), April 27th (King's birthday), May 1st (Labour Day), May 25th, (Ascension Day), 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 on April 28th 2017

Government

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

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: Ruthmilda Larmonie Cecilia (PS)

Economic development: Eugene Rhuggenaath (PAR)

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

Finance: Kenneth Gijsbertha (MAN)

Health, environment & nature: Zita Jesus-Leito (PAR)

Justice: Ornelio Martina (PNP)

Social development, labour & welfare: Jaime Cordoba (PS)

Traffic, transport & spatial planning: Suzy Camelia-Romer (PNP)

Central Bank president

Emsley Tromp

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The political scene is in turmoil following the quick dissolution of the government by the prime minister, Hensley Koeiman of the Partido MAN, barely a few months after the last general election, held on October 5th. This risk was highlighted by The Economist Intelligence Unit in our previous report. The dissolution of the government was triggered by the withdrawal of the two members of Pueblo Soberano (PS) from the ruling coalition, stripping it of its majority in the Staten (the legislature). New elections are scheduled for April 28th. A fragmented political environment will provide little guarantee of stability going forward. Following the October elections, the Partido MAN held just four seats out of 21, which means that any successive government will consist of a loose coalition, and will run the risk of losing a majority if any of the parties withdraws-as has repeatedly occurred throughout the past decade.

The next government will find it difficult to avoid a continuation of the political volatility that has affected the island in recent years. The political establishment has been rocked by major corruption allegations over the past 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 2016, a former prime minister, Gerrit Schotte (2010-12) 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 in the Staten. It is unclear whether the conviction will be upheld; if he is allowed to remain in the legislature, Mr Schotte is likely to remain a strong candidate in the upcoming April election, given that his party led the opposition to the now dissolved coalition government led by Mr Koeiman.

The upcoming government 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.

New elections will be held on April 28th. A total of 13 parties contested the 21 legislative seats in the previous election, of which eight parties obtained at least one each. This highlights the high degree of political fragmentation on the island. The MAN, MFK and the Partido Antiá Restrukturá were the only parties to obtain four seats, while Korsou di Nos Tur secured three. Since the dissolution of the Netherlands Antilles in 2010, no government in Curaçao has lasted the full length of its four-year term, presenting 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. 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, PDVSA, has leased the island's Isla refinery until 2019. 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 owing to lack of payments, but were later released.

The Economist intelligence Unit does not expect a radical policy shift under the next 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 long 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. Never-theless, slower progress has been made on implementing other policy recom-mendations, including some supported by the IMF, such as a move to introduce value-added tax (VAT), as well as bringing 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 and 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), rose on the back of 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, 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.

Following another dip into deflation in May-September 2016, consumer prices have rebounded, rising by 0.6% in November (the latest available data). Price pressures will remain weak in the short term as lower fuel, transport and communications costs continue to offset food price increases. 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 came in at an estimated 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 weak demand for consumer imports, the latter of which is outstripping a decline in export earnings. Continued modest growth in investment and the economy as a whole will begin to push up demand for imported goods, but the trade deficit will continue to 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 in 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$1.5bn at end-2016 (up from US$1.3bn at end-2015), providing just over 13 months of import cover.