After contracting by 0.3% in 2017 on the back of still declining tourism earnings and deteriorating terms of trade, real GDP growth is forecast to return to positive territory in 2018, gaining by 0.7% in 2018 and 0.6% in 2019. Public spending on reconstruction following a destructive hurricane season in September 2017 will benefit from aid from the Dutch government. 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 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-overall stopover tourism declined by 12% year on year in the January-September 2017 period, compared with the same period in 2016. The government was also recently become involved in an agreement with AirBnb, a US-based 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 tighten fiscal policy during the forecast period. 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 been suffering from ongoing labour unrest and sustained a fire in May that temporarily reduced its operational capacity by half. 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.