Political and economic outlook

• The coalition government led by the prime minister, Eugene Rhuggenaath of the Partido Antiá Restruktur, will face challenges governing, with a slim majority in the legislature and a prolonged crisis in Venezuela that threatens to engender political instability.
• 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 supervision to Curaçao and help it to maintain a balanced budget. A high level of public debt to GDP of around 50% will continue to add an element of fiscal risk.
• After contractions in GDP in 2017 and 2018, The Economist Intelligence Unit forecasts a gradual expansion in 2019-20 (averaging 0.3% per year), driven by rising tourism. Weak manufacturing and ongoing fiscal constraint will prevent a stronger recovery.
• Inflation will dip slightly lower in 2019-20 than in 2018, owing to softer oil prices (in 2019 and 2020) but higher food prices (in 2020) will keep consumer prices from falling below 2%. Inflation will average 2.3% during the forecast period.
• The current-account deficit will narrow gradually as a share of GDP, but will remain large, at over 13% in 2020. Recovering tourism earnings will boost the services surplus, while the trade deficit will narrow as demand for construction material falls.

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Key changes since March 18th

• The government received an exemption from US sanctions on the Venezuelan state oil company, PDVSA, which operates an oil refinery on the island. This waiver will not boost economic growth, but it prevents the scenario of a further major economic decline.
• Relief from US sanctions follows a visit by US congressional representatives, the first such visit since 1997. As relations with Venezuela deteriorate we expect economic and diplomatic ties with the US to grow.

The quarter ahead

• TBC-New Isla refinery operator: The government continues to seek a new strategic partner to take over the lease and operation of the refinery that is currently leased by PDVSA. A new operator will support revenue growth and overall economic growth prospects, as PDVSA's waning production has weighed on the refinery's operations.
• TBC-Data releases for 2018: We expect official data for 2018 to be released in the next quarter. We currently estimate that the economy contracted by 2% in 2018, but this figure, as well as our forecast, would be subject to change in the event of a different end-year result.

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 (2019)

January 1st (New Year's Day), March 4th (Carnival), April 19th (Good Friday), April 22nd (Easter Monday), April 27th (King's birthday), May 1st (Labour Day), May 30th (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: Kenneth Gijsbertha (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 (executive director)

José Jardim (executive director)

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The political situation will be volatile during 2019-20. The coalition government-which consists of the main Partido Antiá Restrukturá (PAR) and two minority partners, the Partido MAN (MAN) and the Partido Inovashon Nashonal-has only a very slim parliamentary majority, holding 12 seats in the 21-seat parliament. The Economist Intelligence Unit's central forecast is that the coalition will serve out the remainder of its term in office, which runs until 2021, but there is a high risk of an early election. The government, led by the prime minister, the PAR's Eugene Rhuggenaath, has a stronger mandate than its predecessor (which collapsed when a party holding just two seats withdrew). Nevertheless, the ruling coalition faces a fragmented political environment. In particular, differences between the PAR and MAN over the island's role in a prolonged Venezuelan crisis may be aggravated, raising the risk of political instability.

The government will find it difficult to avoid the political volatility that has affected the island in recent years. The political establishment was rocked by major corruption allegations, including accusations of financial malpractice levelled at 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 initially replaced by two acting directors in November 2017. Moreover, a former prime minister (2010-12) and founder of the largest opposition party, the pro-independence Movementu Futuro Korsou (MFK, five seats), Gerrit Schotte, continues to exert a level of political influence as leader of the MFK. This is despite being convicted of bribery charges and sentenced to three years in jail and a five-year ban from public office in 2016.

On top of political fragmentation, stability will suffer from rising migration inflows from Venezuela. In early 2019 there were an estimated 15,000 undocumented Venezuelans (equivalent to nearly 10% of the island's population) which will burden the already-strained public finances and heighten the risk of social tension. In addition, the government's efforts to address weak growth and a feeble fiscal stance may engender social unrest. Changes to public pension entitlements, and the education and healthcare systems could, along with tax reform, easily be derailed by special-interest groups. These factors will contribute to overall political instability and complicate governance.

Since the dissolution of the Netherlands Antilles in 2010, no government has served a full four-year term, and there is a considerable risk that the current ruling coalition will be undone by internal tension. The next elections are not due until 2021; although it is not our central forecast scenario, 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 over the island's relationship with the Netherlands 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 self-governing (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 of 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 governments of Curaçao and Aruba are likely to join the Sint Maarten Constitutional Court within the forecast period, a development that would bolster regional co-operation. Moreover, we expect Curaçao and Sint Maarten to become associate members of the Caribbean Community (Caricom) during 2019-20.

The predominance of the Venezuelan crisis will strain relations with Venezuela, while prompting closer ties with the US. Amid a concerted international effort to oust the Venezuelan regime, the government has secured a sanctions waiver for the island's Isla oil refinery (operated by Venezuela's state-owned oil company, PDVSA) and agreed to act as a hub for US and Dutch humanitarian aid on its way to Venezuela (in the event that the distressed country allows it).

We do not expect a radical policy shift over the course of 2019-20. 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, helped the island to reverse deficits accumulated during the Schotte administration's term.

Nevertheless, slower progress has been made on implementing other policy recommendations, 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 infrastructure and diversify the economy further.

The opening up of state utilities to competition and private-sector investment will 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.

The island will remain an attractive tourism destination; we expect progress in attracting visitors from the US and Europe, following the decline in Venezuelan arrivals stemming from that country's economic collapse. 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. Although the IMF estimates that the country posted a fiscal deficit of 3.5% of GDP in 2017 (which was the result of large increases in expenditure, primarily contributions to SVB, the social security bank), a rise in tax revenue is estimated to have narrowed the deficit to 0.5% of GDP in 2018. We expect the government to maintain small deficits in 2019-20, even as the government achieves a primary fiscal surplus in the same period through continued fiscal adjustment efforts.

A financial supervision arrangement with the Dutch government will sustain support for fiscal reform, but in the meantime expenditure will be held down (a spending freeze has been in place since 2012). On January 21st Curaçao's central bank issued US$38.6m in domestic bonds. The funds raised by this new bond issue will help to finance the island's budget over the medium term, but low revenue is set to dampen economic activity in 2019. Weak growth in 2019-20 will discourage tax increases. Although the relationship with the Netherlands will remain 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 burden is fairly heavy, at around 50% of GDP. The authorities are aiming to reduce this ratio to 40% in the medium term; in the absence of larger fiscal surpluses, this may be difficult, but we still expect a modest decline in the public debt burden in 2019-20.

A weak economy combined with slightly rising inflationary pressure will enable the CBCS to keep monetary policy relatively loose, despite an increase in the pledging rate (the main policy rate) of 50 basis points, to 2.5%, in 2019. 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.

After three consecutive years of contraction, during which real GDP contracted by a combined 4.7%, we project only a very marginal recovery in 2019-20. We are projecting annual average GDP growth of just 0.3% in 2019-20. This mainly reflects expectations of a pick-up in investment (particularly in construction) and tourism activity, which will offset a continued poor performance by the manufacturing sector (reflecting the Isla refinery's ongoing woes). A stronger recovery will be precluded by the government's need to tighten fiscal policy during the forecast period.

Minimal growth in real wages and high levels of unemployment 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.

Our forecasts are subject to downside risk: Curaçao's small, open economy will remain highly sensitive to shifts in commodity prices, and the ebb and flow of international tourism demand. If the external backdrop deteriorates, real GDP could easily slip back into negative territory in 2019-20.

After averaging an estimated 2.6% in 2018, inflation will remain stable, falling to 2.4% in 2019 amid a softer oil prices. Our 2020 inflation forecast is more muted; we expect inflation to further moderate, reaching 2.2%, as subdued growth will prevent a more marked upturn in prices. Although oil prices are forecast to fall in 2020, food prices are set to rise, which will prevent a more pronounced deceleration of inflation. Risks to our forecasts stem from the potential of higher oil prices (which would quickly feed through to upward price pressures) and the price of soft-commodity staples. With much of Curaçao's consumer basket composed of imports, the country will remain vulnerable to global price trends.

We expect the 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 real effective exchange rate has depreciated substantially since 2011, owing to the impact of hyperinflation in Venezuela, Curaçao's third-largest trading partner.

We estimate that the current-account deficit narrowed slightly in 2018, shrinking by 1.9 percentage points from 2017 to reach an estimated 20% of GDP. We are forecasting a continued decline in the size of the deficit in 2019-20, owing largely to a recovery in services earnings on the back of an increase in arrivals and higher-paying tourists. 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 13.4% of GDP by 2020. 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 four and a half months of import cover.

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