Political and economic outlook

• The administration of the prime minister, Eugene Rhuggenaath of the Partido Antiá Restrukturá, will face a challenging time governing, given its slim majority of just one seat in the legislature.
• Progress on fiscal consolidation and tackling corruption will be gradual and subject to opposition. Tougher counter-narcotics action in Central America poses a risk to security as a result of diverted illegal drug flows through Curaçao.
• 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 that GDP contracted by 1.5% in 2017, owing to a slowdown in growth of tourism revenue and domestic demand. Public spending cuts and weak demand will keep growth below 1% annually in 2018-19.
• Inflation will be slightly higher in 2018-19 than in recent years, owing to a pick-up in oil prices. Inflation will average around 2.4% 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 March 22nd

• We have revised our GDP growth forecast for 2018, from 0.3% to 0.2%, owing to uncert-ainty over the future of the Isla oil refinery on the island. A court ruling has permitted its seizure by ConocoPhillips (US) from the Venezuelan state oil firm, PDVSA.

The quarter ahead

• TBC - Isla refinery dispute resolution: We expect the government's successful negotiations with ConocoPhillips, to secure the salvation of the Isla refinery. Production will, however, suffer during the quarter.
• TBC - Tourism receipts continue to grow: Early signs suggest that 2018 will see a recovery in tourism receipts, despite stagnant arrivals numbers, owing to the partnerships with European and Middle Eastern airlines that bring higher-paying tourists.

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: 160,337 (January 2017, official estimate)

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 12th (Carnival), March 30th (Good Friday), April 2nd (Easter Monday), April 27th (King's birthday), May 1st (Labour Day), May 10th (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 director)

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The coalition government consisting of the majority partner, the Partido Antiá Restrukturá (PAR), and two minority partners, the Partido MAN (MAN) and the Partido Inovashon Nashonal, took office in May 2017, with Eugene Rhuggenaath of the PAR becoming prime minister. The government has a very slim parliamentary majority, holding 12 seats in a 21-seat parliament. A fragmented political environment will provide little guarantee of stability, and although the 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 friction emerge between the PAR and MAN.

The 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 in the past two years, 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. Despite having been convicted of bribery charges and sentenced to three years in jail and a five-year ban from public office in 2016, the former prime minister, Gerrit Schotte (2010-12), of the Movementu Futuro Korsou (MFK), was allowed to run in the 2016 and 2017 elections. The party won 16% of the vote in 2016 and 19.9% of the vote in 2017, and gained a seat in the parliament. Mr Schotte's trial will be held in August. It is unclear whether his conviction will be upheld, but, in the meantime, he will be the strongest voice among the opposition.

On top of political fragmentation, stability will suffer from rising immigrant inflows from Venezuela, which will burden strained government coffers and invite social tension. In April the Dutch government donated US$124,000 to set up detention centres and process Venezuelan refugee asylum requests. Moreover, the government will struggle in its effort to address weak growth and implement unpopular policies. Changes to public pension entitlements, the education and healthcare systems could, along with tax reform, easily be derailed by special-interest groups. The business environ-ment will continue to be hampered by political and policy uncertainty, with further corruption scandals also possible.

Since the dissolution of the Netherlands Antilles in 2010, no government has lasted the full length of its four-year term, and there is a considerable chance that the current ruling coalition will suffer from internal friction, presenting risks to political stability. The next elections are not due until 2021, but there is a high risk of early elections before that date, owing to the coalition's slim majority in the Staten (the parliament) of just one legislator. A high degree of political fragmentation on the island will contribute to this risk; in the 2017 elections the 21 legislative seats were contested by 11 parties, of which only seven obtained at least one seat. The PAR, MAN and MFK were the only parties to obtain a substantial amount of seats (at least five each).

Curaçao has been a self-governing nation (except in matters of defence and judicial policy) since October 2010. The Netherlands remains responsible for defence, which will strain the relationship between the two countries in the short term, as Curaçao has increased demands for security assistance owing to concerns about the large inflow undocumented Venezuelan migrants. The Kingdom Council of the Netherlands (the Netherlands ministerial executive, whose responsibilities include 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 Netherlands colonies. 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 Economist Intelligence Unit expects Curaçao and Sint Maarten to become associate members of the Caribbean Community (Caricom) by 2019, following their application for accession in February.

The government will try to maintain links with Venezuela, traditionally its primary trade partner. Although relations between the two countries have rapidly deteriorated, travel permits were restored in April 2018. Venezuela's state-owned oil company, PDVSA, has a lease on the island's Isla oil refinery until 2019. However, the economic collapse in Venezuela has caused underinvestment in the refinery, which operates at half capacity. Following a May 2018 court ruling that allows ConocoPhillips, a US company, to seize PDVSA's assets in repayment for a longstanding arbitration over the latter's nationalisation of the oil industry, the Curaçao government will negotiate (we believe successfully) to ensure that the refinery remains in operation.

We do not expect a radical policy shift under the current government. Under the auspices of the Netherlands Financial Supervision Board for Curaçao and Sint Maarten, the island has made some important structural changes in 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 accumulated during the Schotte administration's term. 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 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 alterna-tive, sustainable electricity generation and energy conservation in order to reduce dependence on imported fuel is making progress. The island will remain an attractive tourism destination; we expect progress in attracting visitors from the US and Europe, following the decline in Venezuelan demand due to that country's ongoing financial crisis. Curaçao has a more diversified economy than the rest of the Dutch-speaking Caribbean, which means that it is less vulnerable to slumps in tourism or other individual sectors. Ongoing infrastructure improvements should also help to boost growth and employment.

Under the tutelage of the Kingdom Council of the Netherlands, the government will intensify its fiscal consolidation efforts, as fiscal deficits continue to grow. At the end of the third quarter of 2017 the government posted a cumulative budget deficit of more than Naf 100m (US$56m), or around 1% of GDP. This was the result of large increases in expenditures, primarily contributions to the social security bank, SVB. However, this does not include further commitments of around Naf 50m that the government incurred towards the end of the quarter, which we estimate will have yielded a full-year deficit of around 2% of GDP. However, under a mechanism of financial support from the Dutch government, Curaçao received more than Naf$50m in 2017; once this is accounted for, we expect that the fiscal deficit will have been reduced to a final level of 1% of GDP for the year. With the economy recovering in 2018, a rise in tax revenue will bring the fiscal balance back to a small surplus.

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 prevent further fiscal deterioration. Although the financial arrangement with the Netherlands is useful in reining in 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 (mainly composed of domestic debt), reaching an estimated level of around 50% of GDP by end-2017. However, the return to a fiscal surplus in 2018 should stabilise the debt/GDP ratio.

A weak economy and still-low 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 an independent central bank will remain medium-term goals. On the banking side, the IMF has urged both Sint Maarten and Curaçao to strengthen financial supervision and transparency, as well as to share 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.

Following the release of discouraging data for January-September 2017, in our March report we adjusted our 2017 real GDP growth estimate to a contraction of 1.5% (we previously estimated decline of 0.3%), owing to a larger than anticipated fall in both private and public demand, which increased exports and private investment were unable to offset. Declining tourism earnings and deteriorating terms of trade are set to persist into 2018. Moreover, the ruling by a Curaçao court in May 2018 that allows ConocoPhillips, a US oil firm, to seize local assets belonging to the Venezuelan state-owned oil company, PDVSA, including the Isla oil refinery, has increased the risk to economic output in 2018. The Isla refinery represents (directly and indirectly) around 10% of the island's annual GDP. A complete halt of production, even for a small period of time, would be costly and would permanently threaten the refinery's operability (as at end-April, half of the refinery's boilers are not running).

Although our baseline scenario envisages a solution to the refinery's operational problems, manufacturing output will suffer from delays. As a result, we expect only a slight recovery in GDP growth in 2018, to just 0.2%, before a pick-up to a still-weak 0.9% in 2019. The economy would suffer even more severely if a solution to the refinery's problems was not reached, with adverse impacts affecting both the diversity of the economy and overall growth. Other risks to our forecast for a mild recovery would materialise if US or euro zone GDP growth were to fall below our current projections. Public spending on reconstruction following a destructive hurricane season in September 2017 will be supported by aid from the Dutch government and the EU. At the end of March the government received US$17m in EU funds for reconstruction projects, which will support investment growth following the completion of the construction of a large pier in 2017 and a hospital by the end of 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 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 activity (particularly in non-tourism areas, such as finance). This will drive new investment in services and construction growth in the medium term. A sharp recession in Venezuela caused overall stopover tourist arrivals to decline by 10% year on year in 2017; we expect a recovery in 2018-19 as arrivals from other countries increase. Indeed, first-quarter 2018 data indicate a reversal of the decline in tourism numbers, with stopover tourism rising by 1% year-on-year and cruise arrivals jumping by a remarkable 64% year on year. The government recently came to an agreement with Airbnb, a US-based online short-term property rental marketplace, to promote its visibility abroad, and was involved in a financial bailout of the local airline, Insel, highlighting 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.

Consumer prices will rise modestly in 2018-19, continuing a trend of higher food and international oil prices that began in 2017. However, economic weakness will prevent a marked upturn in demand-side pressures and a fixed exchange rate will dampen tradeables prices, resulting in average inflation of 2.4% in 2018 and 2.3% in 2019.

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, with the Netherlands Antilles guilder pegged to the US dollar at Naf1.79:US$1.

The current-account deficit, estimated at 17.6% of GDP in 2017, is forecast to narrow in 2018-19, owing largely to a recovery in services earnings on the back of an increase in arrivals and higher-paying tourists-in January-February tourism receipts rose by 2% year-on-year. 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 narrow slightly as a share of GDP as oil import costs remain contained. Overall, these trends will narrow the current-account deficit to 12.8% of GDP by 2019.

Inward foreign direct investment (FDI), which had stabilised in response to recovering tourism (the FDI figure in 2015 of US$146.4m was the highest since 2008), has slipped more recently, to US$133.1m in 2016; we expect this trend to reverse in 2018 on the back of post-hurricane reconstruction works. However, more significant inflows will not be forth-coming until government reform efforts improve competitiveness.

Curaçao will maintain access to bilateral and multilateral loans, minimising the risk of a balance-of-payments crisis. International reserves for the currency union with Sint Maarten stood at around US$1.3bn at the end of March, providing around five months of import cover.

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