We expect the economy to contract by 0.6% in 2020, continuing a multi-year recession, followed by a return to positive growth of just 0.2% in 2021. Our 2020 forecast assumes that a slight pick-up in investment (notably in construction) and tourism will be outweighed by further poor performance by the manufacturing sector, which contracted by 14.9% in 2018, reflecting the Isla oil refinery's ongoing woes. The problems at Isla also inflate the import bill as oil products need to be imported (rather than sourced from the refinery). Limited activity at Isla will continue in mid-2020, assuming that a final takeover agreement with Swiss-based Klesch Group is agreed, but the need to tighten fiscal policy will preclude a return to positive growth. Minimal growth in real wages and high levels of unemployment, which reached 21.2% in April 2019, will constrain private consumption demand. Moreover, tougher global financial regulation acts as a brake on offshore services and company formation.

Although we expect the tourism sector to outperform other sectors, a deter-ioration of the external environment, owing the novel coronavirus (Covid-19) outbreak, will curtail its growth and that of the broader economy. Although no cases have yet been reported in Curaçao, tourism to the island (particularly from the Asia-Pacific region) may decline as the virus spreads. Tourists are likely to be concerned about contracting the virus at airports and during flights, as well as through potential contact with carriers from different countries once they reach their destination. Cruise travel is likely to be particularly affected, given the rapid spread of the coronavirus on the Diamond Princess cruise vessel, which was quarantined off Japan in February.

Curaçao's small, open economy will be hit by a dip in tourism demand, dampening the external sector's prospects. Considering the poor prospects of domestic demand of picking up this year amid fiscal consolidation efforts and a dire labour market situation, the economy's short-term growth prospects will remain dim.

Moreover, downside risks continue to loom. Notably, if talks to have the Klesch Group take over the island's 335,000-barrel/day oil refinery falter, domestic demand will worsen as the refinery idles. Although our baseline scenario assumes that the coronavirus outbreak is largely contained by end-June, the prolongation of the virus's impact on the global economy could materialise if the outbreak is not contained. Should this scenario occur (to which we attach a 25% probability), real GDP growth is highly likely to remain in negative territory in 2021.