Outlook for 2015-16

• The prime minister, Ivar Asjes of the Pueblo Soberano (PS), leads a coalition government with a weak, one-seat majority. Risks to political stability will grow in the run-up to an election in 2016, which may be brought forward.
• Progress on fiscal consolidation and tackling corruption will be hampered by the government's slim majority. Tougher counter-narcotics action in Central America poses a risk to Curaçao's security from diverted drug flows.
• The Kingdom Council of the Netherlands will continue to provide fiscal supervision to Curaçao. Progress towards achieving a balanced budget will continue in 2015-16.
• Economic growth will gain traction in 2015, following a lengthy recession since 2009. However, growth will be weak, hindered by retrenchment in public spending and tax increases that will blunt consumer demand.
• A fragile economic recovery and deflationary pressures emanating from lower average oil prices will keep inflation at bay in 2015, with forecast average inflation of 1% and a year-end rate of 1.3%.
• The current-account deficit will continue to narrow in 2015. Recovering tourism demand will push up services receipts, while the merchandise trade deficit will narrow owing to cheaper oil imports.

Review

• The coalition government has announced plans to adopt a code of conduct for civil servants as part of an internal integrity process, but the reform is unlikely to pass, given the coalition's small legislative majority.
• Headline consumer price inflation stood at 1.4% in April, up from 1.3% in March but below the end-2014 rate of 1.6%, according to the Central Bureau of Statistics.
• Chinese investors visited Curaçao in mid-May to explore the possibility of providing much-needed capital to modernise the Isla oil refinery, which is currently leased by Venezuela.

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, March 3rd (Carnival), Good Friday, Easter Monday, April 26th (King's birthday), May 1st (Labour Day), May 29th, (Ascension Day), July 2nd (Flag Day), October 10th (Curaçao Day), December 25th and 26th, December 31st (half 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

As part of the dissolution of the Netherlands Antilles federation, the election of a national government took place for the first time in August 2010. The first government's term was cut short when the ruling coalition split, and an early general election was held in October 2012. A new government was elected to a four-year term but took office only in June 2013, owing to difficulty in forming a majority coalition government. The next election is due in 2016

Government

A coalition of the Pueblo Soberano, the Partido pa Adelanto i Inovashon Soshal, the Partido Nashonal di Pueblo and an independent member, Glenn Sulvaran (previously affiliated to the Partido Antiá Restrukturá), has a one-seat majority in the Staten

Main political organisations

Pueblo Soberano (PS, five seats); Movementu Futuro Kòrsou (MFK, five seats); Partido pa Adelanto i Inovashon Soshal (PAIS, four seats); Partido Antiá Restrukturá (PAR, three seats); Movimentu Antiyas Nobo (MAN, two seats); Partido Nashonal di Pueblo (PNP, one seat); Frente Obrero Liberashon 30 di Mei (FOL)

Key ministers

Governor: Lucille George-Wout

Prime minister: Ivar Asjes

Economic development: Stanley Palm

Education, science, culture & sport: Irene Dick

Finance: José Jardim

Government policy, planning & services: Etienne van der Horst

Health, environment & nature: Denzil (Ben) Whiteman

Justice: Nelson Navarro

Plenipotentiary minister: Marvelyne Wiels

Social development, labour & welfare: Ruthmilda Larmonie-Cecilia

Traffic, transport & urban planning: Earl Balborda

Central Bank president

Emsley Tromp

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The prime minister, Ivar Asjes of the Pueblo Soberano (PS), leads a coalition government and a nine-member cabinet. The coalition holds only a one-seat majority in the Staten (the legislature), which was achieved only after months of political manoeuvring following the October 2012 election. As a result, Mr Asjes faces an uphill struggle to maintain coalition unity and momentum for reforms in 2015. He survived calls for his resignation in August 2014 following the defeat in the legislature of a government proposal for an anti-terrorism and sanctions bill, but pressure for his resignation could easily build again. Adherence by the government to a reform agenda including unpopular changes to public pension entitlements, the education and healthcare systems and tax reform could easily be derailed by special-interest groups, and the coalition's ability to govern effectively will diminish as the 2016 general election approaches. There is a risk that Mr Asjes will be unable to complete his term, in the event that the coalition collapses. The business environment will also continue to be hampered by political and policy uncertainty.

The fragile coalition between the PS (with five seats), Partido pa Adelanto i Inovashon Soshal (PAIS, four seats) and Partido Nashonal di Pueblo (PNP, one seat) is viable only because one of the four legislators elected for the opposition Partido Antiá Restrukturá (PAR) defected and joined the government as an independent. The Economist Intelligence Unit therefore expects a turbulent and fragmented political scene to remain a major impediment to consensual policymaking, keeping risks to political stability high until the next election is held. Risks also emanate from ongoing legal action concerning allegations of corruption and misuse of public funds. This affects the opposition Movementu Futuro Kòrsou (MFK) party in particular, owing to an investigation into its former leader, Gerrit Schotte, the previous prime minister (2010-12).

The last general election was held in October 2012, precipitated by Mr Schotte's sudden resignation in August of that year. Six parties won representation in the legislature: the PS and the MFK secured the largest shares of the vote, winning five seats each, while the PAIS and the PAR each won four seats (with one PAR candidate later defecting), the Movimentu Antiyas Nobo took two seats and the PNP received one seat. The next general election is due to be held in late 2016, but, given the fragility of the coalition and its single-seat majority, there is a high risk that the government will fail to complete its term and that an early election will ensue.

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. Mr Asjes and his party are strong proponents 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, but relations could become strained if the PS's view becomes more broadly accepted within the governing coalition. The island's foreign policy will continue to be directed towards achieving a larger role for Curaçao in regional affairs, including developing close social and cultural ties with other former colonies of the Netherlands and the implementation of a co-operation agreement signed with Sint Maarten in early 2014. The administration will also try to maintain good relations with Venezuela, whose state-owned oil company, Petróleos de Venezuela (PDVSA), has leased the island's Isla refinery until 2019. However, relations would be strained were economic and political events in Venezuela to result in PDVSA's being unable to continue.

Recent fiscal consolidation efforts to erase an US$85.5m deficit generated under Mr Schotte's administration (2010-12) and compensate for a fall in tax revenue during the recession made progress in 2014, resulting in a modest officially estimated surplus in the year. Weak economic growth and a commitment to reducing accrued fiscal deficits will limit the adoption of expansionary fiscal policies, but some public investment will see progress in the remainder of 2015. Fiscal consolidation and the imposition of a cap on debt levels will prevent a build-up of overseas debt. The coalition government is expected to advance tax reforms to increase revenue, but its slender parliamentary majority means that progress will be subject to setbacks. Other proposed policy initiatives include the raising of the retirement age from 60 to 65, and the introduction of efficiency improvements and cost savings to reduce the public healthcare bill. Reform of the education system and welfare provision will also receive attention to ensure long-term fiscal stability. However, these measures are unpopular, and resistance to them will continue to test the governing coalition's commitment to reform. The opening of state utilities to competition and private-sector investment will also advance only slowly. A policy of encouraging alternative, sustainable electricity generation and energy conservation in order to reduce dependence on imported fuel oil 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 and the adoption of energy-saving measures unless further fiscal concessions were offered.

Under the tutelage of the Kingdom Council of the Netherlands, the government is continuing its fiscal consolidation efforts. A financial supervision arrangement with the Dutch government will maintain pressure for fiscal reform and limit the risk that populist policies will be adopted in advance of the 2016 elections. Expenditure is being held down (a spending freeze has been in place since 2012), but low tax revenue due to the continued weakness of the economy will prevent the swift repayment of accrued fiscal deficits. Given only minimal economic growth, further reforms will be needed to increase revenue and reduce expenditure in order if the deficit is to be prevented from widening. However, the private sector will resist new tax measures, arguing that these would hinder competitiveness and hold back economic recovery.

The weakened economy and subdued inflationary pressure will enable the Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint Central Bank) to keep monetary policy very loose. However, monetary transmission mechanisms are weak, and policy-rate decisions have only a limited effect on economic performance. A gradual, very mild tightening cycle is expected to get under way later in 2015, assuming that credit demand grows and that the Federal Reserve (the US central bank) begins to tighten policy in the second half of the year.

Despite a decision in June 2011 by the Staten to dissolve the CBCS and establish a central bank solely for Curaçao, work to advance the plan has stalled. We expect the two countries' joint currency, the Netherlands Antilles guilder, to survive in the short term, as policy priorities have shifted to more urgent issues, such as controlling the fiscal deficit and avoiding exchange-rate uncertainty. Reform of the currency union and the creation of a central bank that is independent from Sint Maarten will remain medium-term goals, but these are unlikely to advance during the lifespan of the current government.

Curaçao's small, open economy will remain highly sensitive to shifts in commodity prices and the ebb and flow of international tourism demand. Following an estimated slight contraction in real GDP in 2014 of 0.4%, marking the sixth consecutive year of recession, economic growth will begin a weak recovery in 2015. This will be driven mainly by improving services sector activity, owing to an upturn in stop-over tourism demand-tourist arrivals jumped by 13% year on year in the first quarter. This will drive new investment in services and construction growth in 2015 and beyond. A return to more positive external conditions will also support an end to recession, although real GDP growth is forecast to be barely positive this year, at 0.2%.

A stronger recovery will be prevented by the government's need to maintain strict fiscal discipline, which will continue to stifle the ability of the public sector to provide a lift to economic growth. Tax increases and minimal real wage growth will also 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, despite recent overtures from Chinese investors, the future of Curaçao's Isla oil refinery remains in question, and any interruption of the facility's activities would represent a major setback for economic growth. Talks with Venezuela over new investment to modernise the refinery have been stalled since 2013. Other risks to our forecast for a mild recovery would materialise if real GDP growth in the US (forecast at 2.4% in 2015 and 2.5% in 2016) were to falter or if weakness in the euro zone were to mount.

The government has pledged to pay more attention to addressing the concerns of business, so as to improve the investment climate and cut red tape. However, until clear progress is made, investor confidence and levels of private invest-ment will remain subdued. Some initial steps to stimulate private investment made headway in 2014. A framework agreement between the private sector and the government provides for closer consultation on policy initiatives. The participation of all the governing parties in the signing of the agreement will better align the reform agenda with business goals and will improve the chances of the deal's approval by the legislature. Progress in politically sensitive areas, such as tackling rigid labour laws, is nevertheless likely to remain slow and piecemeal. The drafting and approval of antitrust legislation (in the form of a competition act) is expected to conclude later in 2015. 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 com-petition 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.

After a marked upswing in inflationary pressures in mid-2014, consumer price inflation has weakened gradually since, reaching 1.4% in April 2015. Price pressures will remain contained in 2015 as lower average fuel, transport and communications costs continue to offset food price increases. Fiscal restraints and tax rises will also continue to dampen both public spending and growth in private consumption demand in the remainder of 2015. The extremely weak nature of the economic recovery will prevent a marked upturn in consumer demand, and, combined with lower average international oil prices, this will result in a year-end inflation rate of 1.3%. Risks to this forecast stem from a possible sharp rebound in oil prices (which would quickly feed through to upward price pressures) and the risk of a sudden hiatus in Venezuelan tourism demand, but this does not form part of our central forecast 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, 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 narrowed in the first nine months of 2014, and we estimate the full-year deficit at the equivalent of 30.9% of GDP, down from 37.1% in 2013. The improvement has been driven by an upturn in services receipts, largely owing to a recovery in tourism demand, and by a fall in the merchandise trade deficit. The latter trend is the result of a decline in trade-related oil refinery activities, and also of weak demand for consumer imports, which is outstripping a decline in export earnings. We expect these trends to continue in 2015. An end to the recession and modest investment growth will begin to push up demand for imported goods, but the trade deficit will still shrink as average oil import costs stay below their 2014 levels. We expect a further widening of the surplus on the services account as tourism growth continues to recover, but this will be partially offset by growth in the deficits on the income and current transfers accounts. The overall impact of these trends is expected to result in a modest further decline in the current-account deficit, to 26.3% of GDP, in 2015. Inward direct investment is showing signs of an upturn in response to recovering tourism, but inflows will remain subdued 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.