Update Country Report Curaçao 08 Jan 2020

The Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint central bank) has released its final 2019 GDP growth estimates for both countries. The central bank estimated that Curaçao's GDP had contracted by 1.9% (mirroring our estimate), while Sint Maarten's economy had expanded by 5.5% (stronger than our estimate of 3%). The CBCS noted that Curaçao's decline was driven by public-expenditure reductions and rising inflation. Meanwhile, Sint Maarten's economy had benefited from post-hurricane reconstruction spending. In line with the central bank's outlook for 2020, we expect this economic divergence to continue; Curaçao's economy will contract for a fifth consecutive year and Sint Maarten's recovery will continue into 2020.

Following the dissolution of the Netherlands Antilles and the start of domestic self-rule in 2010, the two Caribbean nations' economic performance has been lacklustre at best. Although their growth stories share some similarities, recent economic performances of the two countries are distinct. Curaçao's economy, which has contracted during seven of its ten years of independence, continues to struggle because of the economic crisis in Venezuela. In contrast, Sint Maarten's economy, which was battered by Hurricane Irma in 2017 (damages exceeded 250% of GDP), is beginning to recover.

Curaçao cannot shake recession in 2019

The CBCS noted that a decline in both domestic and net foreign demand drove the economic contraction in Curaçao last year. According to the central bank, private consumption fell particularly sharply on the back of rising inflation (estimated at 2.8% by end-2019, up from 2.6% in 2018) and a worsening labour market. Furthermore, the economic crisis in nearby Venezuela (one of the country's main trading partners) continues to impact the island through a sharp decline in tourism and trade, in addition to the reduction of investment in, and activity at, the Isla oil refinery, which is operated by the Venezuelan state-owned oil firm, Petróleos de Venezuela (PDVSA). At the same time, as private-sector activity dwindles, the government has implemented spending cuts and reduced public employment under the auspices of the Dutch government, further weighing on consumer spending potential.

In terms of GDP by sector, the transport, manufacturing, construction and retail sectors all declined in 2019, leading to the overall contraction. There was some positive growth in the hotels and restaurants sector, indicating a mild recovery in the tourism industry. In addition, the financial intermediation sector posted growth, reflecting the government's efforts to establish the island as a financial hub.

Sint Maarten finds its footing

The CBCS data were more positive with regards to Sint Maarten, with growth in private and public spending driving increased domestic demand. Ongoing post-hurricane reconstruction projects, in particular, contributed to higher spending than usual, stimulating growth in the construction and manufacturing sectors. At the same time, external demand remained firm, contributing to a recovery in tourism.

However, the central bank noted that Sint Maarten's fiscal position still poses concerns, with the budget remaining in deficit, albeit reduced from 2018 as a result of rising revenue. As such, the government continues to require liquidity support from the Netherlands, as well as dispensation from the Dutch government to continue running a deficit. This is in contrast to Curaçao, where the government's spending cuts and the introduction of new taxes means that the island should have balanced its budget in 2019.

The year ahead

For 2020, we are less pessimistic about Curaçao's GDP growth prospects than the CBCS, which forecasts a decline of 2.3%. Instead, we are currently forecasting an economic contraction of 0.3%. This reflects ongoing weak private consumption, exacerbated by rising inflationary pressures as a result of the introduction of the new general spending tax in late 2019.

Subject to various downside risks, the key determinant of our 2020 economic growth forecast for Curaçao will be the future of the Isla oil refinery. Although the PDVSA lease has been extended to end-2020, it is unclear whether activity will resume at Isla and, if so, whether this will be sufficient to provide economic support. Our forecasts assume limited activity at the refinery in 2020. A positive conclusion to current discussions with the Klesch Group, an industrial commodities conglomerate, would help to support our economic forecasts. However, any benefit would not be felt until Klesch began operating Isla in 2021. Conversely, should the negotiations fall through-or if PDVSA fails to resume activity in 2020-this would pose downside risks to our 2020 GDP growth forecast. The CBCS estimates that such a scenario could lead to Curaçao's economy contracting by 5.2% in 2020.

For Sint Maarten, we are likely to revise up our real GDP growth forecast in 2020 (currently 2.5%), considering a higher base effect after growth in 2019 was stronger than expected. However, slow progress on reconstruction projects-in part stemming from a lack of capacity-will continue to weigh on the economic recovery. This may be exacerbated by political risks associated with the snap election on January 9th, with the newly elected legislators likely to spend several weeks negotiating a new governing coalition, potentially delaying the approval of reconstruction initiatives and long-discussed tax reforms. Nevertheless, our economic outlook for Sint Maarten will remain more optimistic than for Curaçao.