Political and economic outlook

• After elections in April, Curaçao is now governed by a coalition led by the Partido Antiá Restrukturá and a new prime minister, Eugene Rhuggenaath, whose mandate is slightly stronger than that of 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 through Curaço.
• The Kingdom Council of the Netherlands will continue to provide fiscal super-vision to Curaçao and help it to maintain a balanced budget. A public debt/GDP ratio of over 40% will continue to add an element of fiscal risk.
• The Economist Intelligence Unit estimates GDP to decline by 0.3% in 2017, owing to reduced tourism revenue. We forecast modest growth averaging 0.7% of GDP in 2018-19; higher growth will be hindered by public spending cuts and weak consumer demand.
• Inflation will be slightly higher in 2018-19 than in recent years, owing to a pick-up in low oil prices. Inflation will average just above 2% in 2018-19.
• The current-account deficit will narrow slightly as a share of GDP, but will remain large. Recovering tourism earnings will boost services receipts, while the trade deficit will narrow.

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Key changes since September 19th

• We have revised our real GDP growth estimate for 2017, to a contraction of 0.3% of GDP down from growth of 0.2% of GDP, based on latest data that show a contraction of 0.9% of GDP in the first quarter due to a rise in imports, which offset export growth.
• We are more sanguine on fiscal consolidation following improvements in both tax and non-tax revenue collection over the first quarter of 2017.
• We expect the current account to narrow more rapidly in 2018-19 than previously thought, owing to a rise in global oil prices, which will help to narrow the trade deficit, and auspicious prospects for tourism, which will help to grow the primary income surplus.

The quarter ahead

• January 2018 - Tourism performance report, third quarter 2017: We expect the report to show a continued decline in stayover arrivals, from 10% year on year in the January-June period to 12% year on year in the January-September period. However, we also expect a rise in cruise arrivals, which over time will temper the decline in overall visitors.
• TBC first quarter 2018 - Quarterly bulletin, second quarter of 2017: In the second-quarter bulletin, compiled by the Centrale Bank van Curaçao en Sint Maarten (the central bank), we expect to see the decline in the import bill to stabilise as oil prices rise, while export earnings will pick up on the back of a slow recovery in tourism.
• TBC - Dutch authorities to visit: During the first quarter of 2018 we expect the Dutch authorities to visit Curaçao and Sint Maarten to review the reconstruction progress. We expect concrete announcements regarding grants and investment, as well as a review of Curaçao's fiscal consolidation efforts.

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); Partido Inovashon Nashonal (PIN, one seat); Pueblo 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

Leila Matroos-Lasten (acting co-director)

José Jardim (acting co-director)

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A new coalition government consisting of the Partido Antiá Restrukturá (PAR), the Movementu Antia Nobo (MAN) and the Partido Inovashon Nashonal (PIN) was announced on May 10th, with Eugene Rhuggenaath of the PAR becoming prime minister, following elections on April 28th. The PAR won the largest share of the vote, with 23.3% of the total, which was enough to give it six seats out of 21 in the Staten (the legislature). MAN, the party of the former prime minister, Hensley Koeiman (2016-17), came joint 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). The government will have a slim majority of 12 seats-just one more than the minimum needed. A fragmented political environment will provide little guarantee of stability, 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 now-suspended president of the Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint central bank), Emsley Tromp, who was replaced by two acting directors in November 2017. 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. MFK did even better in April 2017, when it got 19.9% of the vote and gained another seat. It is 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). 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 friction, presenting risks to political stability. The next elections are due in 2021, but there is a high risk of early elections before that date due to the coalition's very slim majority of one legislator.

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 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. The government will focus on implementing a co-operation agreement signed with Sint Maarten in 2014, which was bolstered in August 2017 through a deal on healthcare co-operation with Sint Maarten and Aruba. The administration will also try to maintain good relations with Venezuela; the country's state-owned oil company, PDVSA, has a lease on 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 (so far in 2017 the Venezuelan government has increased orders from the Isla refinery). An increase in illegal immigration from Venezuela, owing to food shortages there, has raised the risk of the Dutch government applying diplomatic pressure on Venezuela.

The Economist intelligence Unit does not expect a radical policy shift under the new government. Under the auspices of the College Financieel Toezicht, the Netherlands' public-sector financial supervision council, the island has made some important structural changes over recent years that should see its fiscal position improve in the long term. These include 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 deficits that were accumulated during the Schotte administration. Nevertheless, 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 infra-structure 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. However, this 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 financial crisis. 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 intensify its fiscal consolidation efforts, as fiscal deficits continue to grow. The island recorded a fiscal deficit of Naf254.3m (US$142m) in 2016, but, including loans and grants, this grew to a surplus of 2.9% of GDP. Under the same mechanism, the government posted a final fiscal surplus of Naf51m (US$29m) in the first quarter 2017, which corresponds to 3.7% 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). Low economic growth in 2018-19 will discourage tax increases. However, aid from the Dutch government following the destructive hurricane season of 2017 will help to stabilise the fiscal deterioration. 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 has continued to rise, reaching 46.3% of GDP by end-March 2017. 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 to share crossborder tax information, given the islands' status as regional financial centres. This will help to address reputational concerns stemming from high levels of fraud, tax evasion and money laundering.

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.

Consumer prices will rise modestly in 2018-19, owing to higher food and fuel prices. However, economic weakness will prevent a marked upturn in consumer demand in and, combined with still-modest international oil prices, this will result in average inflation of 1.9% in 2018 and 2.5% in 2019. Prices have risen steadily in 2017 owing to elevated food and fuel costs. Price pressures will stabilise in the medium term as fuel, transport and communications costs return to normal, but food price increases will support modest inflation.

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, estimated at 15.8% of GDP in 2017, is forecast to narrow in 2018, owing to a rise in oil prices and an increase in cruise tourism. 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 the surplus on the services account to rise as tourism recovers in 2018-19. Overall, these trends are expected to result in a modest narrowing of the current-account deficit to an average of 12.4% of GDP in 2018-19. Inward foreign direct investment (FDI), which had stabilised in recent years in response to recovering tourism (the FDI figure in 2015 of US$146.4m was the highest tally since 2008) has begun to slip slightly, dropping to US$133.1m in 2016. 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$1.4bn as at November 16th 2017 (down from US$1.5bn at end-2016), providing just under than five months of import cover.

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