Update Country Report Curaçao 08 Apr 2019

Event

The government has announced that it is sending representatives overseas to meet with potential operators for the distressed Isla oil refinery. Authorities anticipate that a non-binding proposal from a prospective bidder will be accepted by July.

Analysis

The situation at Isla has been deteriorating for several years, in connection with waning production and mismanagement at PDVSA, Venezeula's state oil firm, which holds the Isla lease. The refinery faces the prospect of closing altogether in 2019 if no new operator can be found. The lease held by PDVSA expires at the end of the year, and efforts to find a new operator hit a snag earlier this year when the top bidder withdrew. Furthermore, economic sanctions placed on Venezuela in early 2019 have severely impacted Isla's activity. Venezuelan oil shipments have dwindled for fear that they might be seized by the country's creditors, or transferred to self-appointed interim president, Juan Guaidó. Most recently, a shipment of oil on the Icaro tanker was unable to be delivered following the imposition of sanctions; the cargo has now been unloaded in Curaçao but will be held in storage until its ownership is resolved.

The refinery is now experiencing severe financial problems. In March employees were warned that the company will only be able to pay salaries until July, at which point Isla would have to close and workers would be laid off. The refinery is trying to reduce costs by cutting contractor payments, but there is a limit to the financial relief that this will provide when there is no income.

Should the refinery close, this will pose several problems for Curaçao's government, the first being the immediate requirement to provide social benefits for the estimated 2,000 workers employed directly and indirectly. In addition, the refinery is one of Curaçao's main sources of income; no income from Isla at all in 2019 will place severe pressure on state finances. The refinery is also a significant source of the island's manufacturing output, which has already been in decline owing to reduced output at the refinery during 2018.

Impact on the forecast

Given the worsening situation at Isla, we may revise down our current GDP estimate for 2019, which assumes growth of 0.4% on the basis of a recovery in tourism activity. The refinery's closure represents a substantial downside risk to our forecast and could potentially exacerbate public finances to the extent that the Netherlands will need to provide financial assistance.