Political and economic outlook

• The ruling coalition led by the prime minister, Eugene Rhuggenaath of the Partido Antiá Restrukturá, faces a challenging political landscape; it has a slim legislative majority and is likely to increasingly face pushback from opposition parties ahead of April 2021 elections.
• The Economist Intelligence Unit expects the fractious political environment to hinder progress on fiscal consolidation and efforts to tackle corruption, indicating progress on these fronts will be disjointed and incremental.
• The Kingdom Council of the Netherlands will continue to provide fiscal supervision to Curaçao and help the government to rein in fiscal imbalances. Despite Dutch support, a high public debt/GDP ratio (of over 50%) will continue to add an element of fiscal risk.
• The persistence of weak private domestic consumption, restricted public spending and enduring manufacturing woes will result in a modest contraction in 2020, prolonging a recession that began in 2016, before the economy recovers slightly in 2021.
• Annual inflation-fuelled by the introduction of a new general consumption tax in April-will edge higher to 3.7% in 2020, despite softer oil prices. Inflation will moderate slightly in 2021, but will remain high as oil prices recover.
• The current-account deficit will narrow, but will remain large at more than 20% of GDP in 2020-21. Recovering tourism earnings will boost the services surplus, while the trade deficit as a share of GDP will narrow slightly, as demand for construction materials falls.

Download the numbers in Excel

Key changes since December 6th

• Assuming that the coronavirus (Covid-19) outbreak undermines growth in the tourism sector (which we expected to be a key driver of growth in 2020), we have revised down our 2020 GDP forecast to a contraction of 0.6% (from a contraction of 0.3% previously).

The quarter ahead

• TBC-New Isla refinery operator: Switzerland-based Klesch Group has reached an agreement to take over operations at the 335,000-barrel/day oil refinery, but the deal has yet to be finalised. Klesch has indicated that it could manage operations by April, but talks with previous bidders have hit hitches, suggesting that negotiations could be prolonged.
• TBC-Real GDP data (2019): We expect the release of official data related to year-end 2019 performance to be slow and delayed. However, taking into account official estimates released by the government, our sombre assessment of the economy is likely to be confirmed by the official data; we retain our GDP growth forecast of a 2% contraction.

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); 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 April 2021

Government

A coalition of the Partido Antiá Restrukturá (PAR), Partido MAN (MAN) and Partido Inovashon Nashonal (PIN) controls 12 of the 21 seats in the Staten

Main political organisations

PAR, six seats; MAN, five seats; Movementu Futuro Kòrsou (MFK), five seats; Kòrsou di Nos Tur (KdNT), two seats; PIN, one seat; Pueblo Soberano (PS), one seat; Movementu Progresivo (MP), one seat

Key ministers

Governor: Lucille George-Wout

Prime minister & foreign relations: Eugene Rhuggenaath (PAR)

Administration, planning & services: Armin Konket (MAN)

Economic development: Giselle McWilliam (MAN)

Education, science, culture & sport: [vacant]

Finance: Kenneth Gijsbertha (MAN)

Health, environment & nature: Suzy Camelia-Römer (PIN)

Justice: Quincy Girigorie (PAR)

Social development, labour & welfare: Hensley Koeiman (MAN)

Traffic, transport & urban planning: Zita Jesus-Leito (PAR)

Central bank president

[vacant]

Download the numbers in Excel

Download the numbers in Excel

Download the numbers in Excel

The coalition government-led by the Partido Antiá Restrukturá (PAR) and including two minority partners, the Partido MAN (MAN) and the Partido Inovashon Nashonal-will find it difficult to overcome the political volatility of recent years. In particular, differences with the opposition over the influence of the Dutch government on internal affairs and economic policy will hamper governability and political stability. Against a fractious political backdrop, the coalition's narrow majority will also preclude consensus on policies, given that the alliance only controls 12 of the 21 seats in the Staten (parliament). Although the prime minister, Eugene Rhuggenaath of the PAR, enjoys a stronger position than the previous coalition that collapsed in 2017, divisions over the country's policy direction and its fragmented political landscape will undermine political stability and engender periodic flare-ups.

Corruption scandals and their consequences will also continue to aggravate the political landscape. In recent years the political establishment has been rocked by corruption allegations, including accusations of financial malpractice against the former president of the Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint central bank), Emsley Tromp. In addition, Gerrit Schotte, Curaçao's first prime minister (2010-12) and founder of the main opposition party, the pro-independence Movementu Futuro Kòrsou (MFK, which has five parliamentary seats), was convicted on bribery charges in 2016 and given a three-year jail term and a five-year ban from public office. Mr Schotte continues to exert significant political influence as MFK leader.

As the economic crisis persists in Venezuela, immigration from that country will continue to pose a risk to stability. Refugees International, a US-based non-profit organisation, estimates that there are more than 10,000 undocumented Venezuelans in Curaçao (equivalent to about 7% of its population). The influx of Venezuelans may also strain the public finances and undermine the government's efforts to bolster its feeble fiscal position, heightening the risk of political tensions surrounding government spending. A lack of consensus on the treatment of Venezuelans on the island will be a source of political friction. Governability may also be complicated by special interest groups, which could derail proposed changes to public pension entitlements, as well as reform of the education and healthcare systems.

The Economist Intelligence Unit's central forecast is that the coalition will serve out the remainder of its term in office, ahead of elections in April 2021. Nevertheless, there is a high risk of an early poll. Since the dissolution of the Netherlands Antilles in 2010, no government in Curaçao has served a full four-year term, and there is a considerable risk that the current coalition will be undone by internal tension. Its slim majority in the Staten and a high degree of political fragmentation regarding the island's relationship with the Netherlands contribute to this risk. In the 2017 elections the 21 parliamentary seats were contested by 11 parties, of which only seven secured representation. The PAR, MAN and MFK were the only parties to obtain more than two seats.

Although the Dutch government retains responsibility for defence and foreign policy, the domestic government, which is struggling to deal with Curacao's economic malaise, will increasingly seek to foster external relationships that advance growth. Increased regional integration is part of this strategy, and we expect Curaçao to become an associate member of the Caribbean Community (Caricom) in the 2020-21 forecast period. The government will also seek to develop ties else-where. In October the prime minister met with China's ambassador to the Netherlands, Xu Hong, to strengthen ties in tourism, energy and the financial sector. Diversifying tourism markets (and the economy more broadly) will be key objectives in terms of Curaçao's international relations, especially as the political and economic crisis in Venezuela (historically a major commercial partner) endures.

In an effort to boost the economy, the government increasingly will seek to build its commercial and diplomatic ties with the US, one of its largest tourism markets. In 2019 the government received members of the US Congress for the first time since 1997, secured a US sanctions waiver for its oil refinery, and agreed to act as a hub for US and Dutch humanitarian aid en route to Venezuela (in the event that Venezuela agrees to receive it). Considering the large influx of Venezuelan migrants, the government will continue to request security and financial assistance from the Dutch government. The Dutch government will provide some support, but bilateral relations will come under stress, given the Dutch government's stringent budgetary oversight.

The Curaçaoan government's efforts to implement structural reforms in 2020-21 will be met with limited success. Under the auspices of the Netherlands Financial Supervision Board for Curaçao and Sint Maarten, the island has made structural changes in recent years that should improve its fiscal position in the long term, including a rise 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 (to ease the public wage bill)-other reform efforts have focused on healthcare, such as implementation of a basic medical insurance scheme and a preference for generic drugs to reduce costs.

Nevertheless, the implementation of other policy recommendations from the Dutch government and the IMF-including the introduction of a value-added tax (VAT) and greater labour market flexibility-has been slow and will continue to drag. The government's weak position and disinclination to shore up the public finances, in part owing to the poor state of the economy, will preclude any drastic fiscal tightening measures.

At the same time, the impetus to advance structural reforms will be overshadowed by actions to solve more commanding issues, such as finalising a new operator agreement for the Isla oil refinery and bringing about economic growth in the short-term (in part through a concerted effort to boost tourism arrivals). As a result, significant progress on long-term policy objectives-guided by the 2015-30 National Development Plan that seeks to boost competitiveness, improve infrastructure and further diversify the economy-is unlikely to be achieved in the forecast period.

Under pressure from the Kingdom Council of the Netherlands, the government will intensify its fiscal consolidation efforts. However, in view of anaemic economic growth, we expect continued (albeit small) overall fiscal deficits as a percentage of GDP in 2020-21, despite spending restraint and the implement-ation of revenue-raising measures (including the introduction of a 15% general consumption tax in April). On the upside, we expect that continued adjustment efforts mean that the government is likely to achieve primary fiscal surpluses during this period.

Dutch oversight will temper government spending in the short term, as the government must eliminate its budget deficit in line with the Kingdom Act on Financial Supervision, which stipulates that the country must balance its budget. Revenue-raising measures have had some success, but poor progress in reducing current expenditure prompted the Dutch government to impose binding restrictions in 2019. The Netherlands will soften the blow by pairing the instruction with an agreement to support the Curaçaoan government's Growth Strategy, which aims to improve financial management and engender sustain-able development. In November 2019, however, with the economy continuing to struggle, Mr Rhuggenaath requested additional financing assistance to support economic modernisation efforts. Although the Dutch government appears willing to meet the Curaçaoan government's request (given the poor state of the economy), the disbursal of loans has not materialised as the Financial Supervision Board still needs to assess the loan application. As of March 4th, the board has expressed concerns that spending is still not in line with the island's small economy, suggesting that further oversight to reduce spending is likely.

Despite Dutch support, the government will struggle to keep the island's many social funds well capitalised, while continuing to upgrade infrastructure. The public debt burden is fairly heavy, exceeding 50% of GDP. Officials aim to reduce this to 40% in the medium term, but it will be difficult in the absence of larger fiscal surpluses. Nevertheless, we continue to expect Dutch-led budgetary tutelage gradually to pare back the debt burden over the long term.

The central bank will continue to promote exchange-rate stability in relation to the US dollar, its primary mandate. In the short term, the CBCS will seek to build up gross official reserves, which have declined from the equivalent of more than five months of import cover in 2017 to four months in January 2020. To achieve this, the CBCS will hold tenders of certificates of deposits (CDs) to local banks every two weeks (since beginning in August 2019), which will also help to absorb excess liquidity in the banking system. The pledging rate (the main policy rate) has remained at 2.5% (only mildly positive in real terms) since the start of 2019. However, monetary transmission mechanisms are weak and interest-rate decisions by the central bank have only a limited effect on economic performance.

Addressing reputational concerns stemming from high levels of fraud, tax evasion and money-laundering will remain CBCS priorities. However, leadership instability will undermine its efforts and hinder long-term planning for monetary union.

The central bank is currently without a head following the resignation of the previous president, Bob Traa, who stepped down having served only six months in the role in late 2019. The CBCS had previously been without a permanent president since October 2017, when the then incumbent, Mr Tromp, was dismissed over alleged tax evasion. Mr Traa's departure is likely to slow implementation of IMF recommendations to strengthen financial supervision and transparency, as well as to share tax information (Curaçao and Sint Maarten are important regional financial centres). Reform of the currency union and the splitting up of the islands' shared central bank will remain medium- to long-term goals, but will largely be on hold in the short term.

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.

After averaging an estimated 2.6% in 2019, annual inflation will pick up in 2020 and average 3.7%, in part owing to indirect tax measures (a general spending tax is to be introduced in April), which will push up consumer prices. Oil prices are forecast to dip in 2020 (partly owing to the impact of the coronavirus on demand), but will trend upwards in 2021. Even so, our 2021 inflation forecast is for a further slight moderation, partly owing to base effects. We expect inflation that year to average 3.5%, as the subdued state of the economy will preclude a more marked rise in prices.

Risks to our forecasts stem from the potential for higher oil prices and further tax measures to shore up the public finances. 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. 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, but Sint Maarten has a preference for adoption of the US dollar, which Curaçao opposes. The 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 appreciated gradually since 2011, owing to hyperinflation in Venezuela (which until recently was Curaçao's third-largest trading partner) and the appreciation of the US dollar.

The current-account deficit will narrow in 2020-21, but will stay above 20% of GDP. This assumes a recovery in services earnings on the back of a rise in tourist arrivals (and in higher-paying tourists). Continued modest growth in investment will boost demand for imported goods, but the trade deficit, although structurally wide (historically above 30% of GDP), will narrow slightly in 2020 as a share of GDP, given weak import demand and softer oil prices.

In 2021 oil prices will rise, swelling the import bill and offsetting moderate export growth. These trends will narrow the current-account deficit from an estimated 26.3% of GDP in 2019 to 20.1% of GDP in 2021. In January 2020 international reserves for the currency union with Sint Maarten provided four months of import cover, down from more than five months in 2017. However, Curaçao will maintain good access to bilateral and multilateral loans, owing to its relationship with the Netherlands government, minimising the risk of a balance-of-payments crisis.

Download the numbers in Excel