Outlook for 2017-18

• After elections on April 28th Curaçao is now governed by a ruling coalition led by the Partido Antiá Restrukturá (PAR) and a new prime minister, Eugene Rhuggenaath. He has a slightly stronger mandate than his predecessor.
• 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.
• GDP is estimated to have contracted by 0.1% in 2016 and will recover only modestly in 2017-18, growing by just 0.4% per year on average. Growth will be hindered by public spending cuts 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 narrow slightly as a share of GDP, but will remain large. Recovering tourism demand will push up services receipts, while the trade deficit will narrow.

Review

• The PAR managed a narrow win in the recent elections, securing 23.3% of the votes and six (out of 21) seats in the legislature.
• After nearly two weeks of negotiations, a ruling coalition was established under the leadership of the PAR and also including the Partido MAN (MAN) and the Partido Inovashon Nashonal (PIN), brining the total seats to 12.
• Real GDP was flat in the third quarter of 2016, resulting in an annual average contraction of 0.1%. The island's growth outlook will continue to largely depend on tourism and a reactivation of domestic consumption.
• The current account deficit widened to US$566 in 2016, equivalent to 18% of GDP. This was partly due to a fall in goods exports that offset a decline in imports.
• Tourism remained weak in the third quarter of 2016, with stay over visitors falling by 7.2% year on year. Cruise arrivals fell by an even steeper 35.5%

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 scheduled for 2021

Government

A coalition of the Partido Antiá Restrukturá (PAR), Partido MAN (MAN), and Partido Inovashon Nashonal (PIN) control 12 of the 21 seats in the Staten.

Main political organisations

PAR, six seats; MAN, five seats; Movementu Futuro Kòrsou (MFK, five seats); Korsou di Nos Tur (KdNT, two seats); PIN, one seat; Partido Soberano (PS, one seat); Movementu Progresivo (MP, one seat)

Key ministers

Governor: Lucille George-Wout

Prime minister; general affairs; foreign relations: Eugene Rhuggenaath (PAR)

Administration, planning & services: Armin Konket (MAN)

Economic development: Steven Martina (MAN)

Education, science, culture & sport: Marilyn Alcalá-Wallé (PAR)

Finance: Kenneth Gijsbertha (MAN)

Health, environment & nature: Suzy Camelia-Römer (PIN)

Justice: Quincy Girigorie (PAR)

Social development, labour & welfare: Hensley Koeiman (MAN)

Traffic, transport & spatial planning: Zita Jesus-Leito (PAR)

Central Bank president

Emsley Tromp

Download the numbers in Excel

Download the numbers in Excel

Download the numbers in Excel

Elections were held on April 28th following the dissolution of the previous government led by Hensley Koeiman of the Partido MAN (MAN), which governed for just over half a year. The Partido Antiá Restrukturá (PAR) won the largest share of the vote, at 23.3% of the total, which was enough to give it six seats out of 21 in the Staten (the legislature). Mr Koeiman's MAN came second, securing five seats, an identical tally to that of the Movementu Futuro Kòrsou (MFK), led by a former prime minister, Gerrit Schotte (2010-12). Following nearly two weeks of negotiations, a coalition between the PAR, MAN and Partido Inovashon Nashonal (PIN) was announced on May 10th with the PAR's Eugene Rhuggenaath as prime minister, but it will have a slim majority of just 12 seats-just one more than the minimum needed. A fragmented political environment will provide little guarantee of stability going forward, and although the new coalition has a stronger mandate than its predecessor (which collapsed when a party holding just two seats withdrew), the government is at risk of instability should frictions emerge between the PAR and MAN.

The new 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. Early in 2016 Mr Schotte, of the opposition 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 2016 election and the MFK came close to winning, with 16% of the vote and four seats in the Staten. It did even better in 2017, with 19.9% of the vote and an extra seat. It is still unclear whether the conviction will be upheld but, in the meantime, Mr Schotte will be the strongest voice among the opposition to the new coalition.

Challenges facing the new government include the need 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 held on April 28th. The 21 legislative seats were contested by 11 parties, of which only seven obtained at least one seat (down from eight in the last government). This highlights the high degree of political fragmentation on the island. The PAR, MAN and MFK were the only parties to obtain a substantial amount of seats (at least five), while Korsou di Nos Tur secured two. Since the dissolution of the Netherlands Antilles in 2010, no government in Curaçao has lasted the full length of its four-year term, and there is a considerable chance that the new ruling coalition will suffer from internal frictions, presenting risks to political stability.

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. In late 2016 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 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 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 remain 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.

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 (the last full year available); 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 the 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.

The economy contracted by 0.2% in both the first and second quarters of 2016, and was flat in the third. We therefore estimate a contraction of 0.1% in 2016 as a whole, after which real GDP growth is forecast 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. Rising unemployment over the past year (to 13.3%) also highlights 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.

Successive governments have 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 invest-ment have made headway in recent years. We expect further efforts to be made by the new 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 a deflationary trend in May-September 2016, consumer prices began to rebound, rising by 0.6% in November (the latest available data). Price pressures will remain weak in the short term as relatively low 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 sharper 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 widened to an estimated 18% of GDP in 2016 and we expect only modest narrowing in the short run. The trade deficit decreased in 2016 as a result of a decline in trade-related oil refinery activities (which have large import components) and weak demand for consumer imports. 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 slightly as a share of GDP as oil import costs remain contained. We expect a 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 to an average of 17.6% of GDP in 2017-18. Inward foreign direct investment (FDI) has been more stable in response to recovering tourism (the FDI figure of US$146.4m in 2015 was the highest tally since 2008, although this slipped slightly to US$133.1m in 2016), but more significant inflows 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.