Political and economic outlook

• The ruling coalition led by the prime minister, Eugene Rhuggenaath of the Partido Antiá Restrukturá, faces significant challenges ahead of what is set to be a contentious election (due in April 2021).
• Even after the election takes place, The Economist Intelligence Unit expects the fractious political environment to hinder progress on fiscal consolidation and efforts to tackle corruption after the coronavirus (Covid-19) pandemic.
• 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.
• Real GDP will recover by 10.2% in 2021 owing to an investment support package from the Netherlands, after falling by an estimated 27.5% in 2020. Growth will moderate to 7.4% in 2022, but real GDP will not return to pre-pandemic levels within the forecast period.
• After sliding to an average of 2.2% in 2020, annual inflation will average 3% in the 2021-22 forecast period as oil prices and domestic demand recover. Monetary tightening will begin in the second half of 2021.
• Following its peak of an estimated 28.9% of GDP in 2020, the current-account deficit will narrow over the forecast period, averaging 19.2% of GDP in 2021-22, as export earnings from the tourism sector recover in line with a gradual abatement of the pandemic.

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Key changes since September 7th

• We have revised our real GDP forecast for 2021, to 10.2% (from 6.3% previously) in the light of a long-term investment and financial support package offered by the Netherlands under a recent agreement singed with the country.
• The latest tranche of fiscal support, worth Naf181, (US$100m) will help to ease some fiscal pressures in the near term, by providing the government with additional funds to carry out economic recovery programmes.

The quarter ahead

• TBC-GDP (Q2 2020): The Centrale Bank van Curaçao en Sint Maarten (the joint central bank) reported that real GDP fell by 6.9% year on year in the first quarter. We expect the negative trend to have intensified in the second quarter as the pandemic gained a global foothold and led to a total shutdown of tourism-the country's main source of income.

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); February 24th (Carnival); April 10th (Good Friday); April 13th (Easter Monday); April 27th (King's birthday); May 1st (Labour Day); May 21st (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 10 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 : Ivan (Steven) Martina (MAN)

Education, science, culture & sport: Eugene Rhuggenaath [interim]

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

Richard Doornbosch

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The coalition government, which is led by the Partido Antiá Restrukturá (PAR) and includes two minority partners-the Partido MAN (MAN) and the Partido Inovashon Nashonal (PIN)-will contest the general election in April 2021; The Economist Intelligence Unit forecasts the PAR to be re-elected for a third term. After the election, the PAR will continue to face an uphill battle in navigating Curaçao through the coronavirus (Covid-19) pandemic, which has dramatically affected the small, tourism-dependent economy. Political stability will be subject to risks throughout the 2021-22 forecast period, largely in the form of differences with the opposition relating to the Dutch government's influence over Curaçao's internal affairs and economic policy-especially regarding fiscal support during the pandemic; these differences will remain regardless of the outcome of the 2021 elections and will hamper governability. Conditions of Dutch-led oversight and governance structures have proven extremely contentious in Curaçao (talks to adjust the conditions are ongoing), and it appears that the opposition is exploiting this tension by claiming that fresh polls would give the newly elected government a stronger mandate in future negotiations with the Netherlands. We do not expect the prospective government to have a significantly stronger mandate than the present government to negotiate with the Dutch, given the few options that the country has other than relying on the Dutch government for fiscal support.

The domestic atmosphere is susceptible to bouts of protests and strikes; the government is under pressure after adopting stringent austerity measures, a condition for receiving financial assistance from the Netherlands that led to social unrest in late June 2020. Given that the government will have to rely on additional funding from the Netherlands to strengthen an economy that has been crippled by the shutdown of tourism, stringent austerity measures are on the table, and the domestic environment will be a hotbed for civil unrest and strikes that will further undermine the economic recovery.

The government managed to get the National Ordinance Exceptional Situation (known as the Emergency Act) passed in parliament on December 3rd 2020, with 11 votes in favour to 9 votes against. The law gives the government the power to declare a state of emergency in order to contain a rapid spread of the virus, which carries with it the executive ability to impose restrictions on certain civil liberties. As a concession to the opposition, which argued that the legislation grants the executive undue power, a last-minute amendment stipulates that parliament must meet within 48 hours of a state of emergency being declared to vote on how long it should last. We do not expect the executive to use the law as a means of delaying elections, but imposing a state of emergency and restricting civil liberties does carry the risk of inciting some social unrest.

The next election is the general election, which is scheduled to be held in April 2021. Although our baseline assumption is for a PAR victory, this view is subject to major risks, including a collapse of the current coalition owing to internal tensions, particularly given its lack of a majority in the Staten (the legislature) and a high degree of political fragmentation regarding the island's relationship with the Netherlands. While details regarding the frontrunners of the race are not yet clear, we expect the candidate with the view of strengthening the executive's mandate during negotiations with the Netherlands to emerge as most popular. In the 2017 election the 21 parliamentary seats were contested by 11 parties, of which only seven secured representations. The PAR, MAN and Movementu Futuro Kòrsou (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 Curaçao'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 2021-22 forecast period.

The government will also seek to develop ties elsewhere. 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 a major objective in terms of Curaçao's international relations, especially as the political and economic crisis in Venezuela (historically a major commercial partner) endures.

The government's near-term policy focus will continue to be containing the spread and the economic fallout from the pandemic. We expect the public health impact of the crisis to be limited, owing to the government's early announcement of containment measures. Although Curaçao has reopened tourism, the ensuing surge in Covid-19 cases in September-November prompted the government to reimpose some domestic restrictions, while choosing to keep tourism open. The new restrictions include a ban on bars, cafes and restaurants from serving alcohol in a bid to deter socialising; drinking alcohol in public places is also prohibited. Indoor dining at restaurants is suspended and the current 9 pm to 4:30 am night curfew has been extended until December 21st. The authorities are working in close collaboration with the Curaçao Tourist Board to guarantee a safe reopening of hotels.

In terms of economic policies, Curaçao's ability to undertake recovery measures was boosted by an agreement with the Netherlands in early November to establish the Caribbean Entity for Reform and Development. The agreement will provide long-term financial support and oversight to Curaçao, including a third fiscal support package of Naf181m (US$100m or 4.4% of estimated 2020 GDP), as well as a long-term investment package. Although the exact amount under the investment support package is yet to be finalised, it will include EUR30m for educational facilities, EUR25.3m to support law enforcement and EUR20m to improve the investment climate.

The government also plans to modernise the iGaming industry. As part of the conditions of its aforementioned agreement with the Netherlands, the government is required to modernise the sector by mandating industry players to pay taxes to the national Treasury, as well as tightening government monitoring of the industry through sound licensing, law enforcement, and (potentially) the creation of an independent regulator. These reforms are likely to prove detrimental to the government's plan of reviving tourism in a bid to boost activity, as the iGaming industry is an integral part of Curaçao's tourism.

Fiscal policy will be countercyclical in the near term in response to the Covid-19 pandemic, but the depth of the economic shock means that Curaçao has little recourse but to seek additional funding from the Netherlands. Curaçao's fiscal position has been slightly strengthened by the recent agreement with the Netherlands, under which Curaçao received its third tranche of liquidity support from the Dutch to the tune of Naf181m (4.4% of estimated 2020 GDP), which will help Curaçao to meet its expected spending requirements at the start of 2021.

The first two tranches of fiscal support from the Netherlands totalled EUR460m. These included payroll subsidies for private-sector employees of up to 80% of wages (depending on the revenue loss to the company); income support of Naf1,335 (US$754) per month for self-employed people; support of Naf1,000 (US$557) per person per month for workers rendered unemployed since mid-March; credit support for small and medium-sized enterprises (SMEs); and compensation for the Social Security Bank's premium losses.

Curaçao will rely on additional support from the Dutch during much of the forecast period, but these will come at the cost fiscal tightening on the government's part. For example, the government introduced a range of measures to cut state expenditure in response to a sharp drop in revenue caused by the shutdown of the tourism industry (% of total revenue) during the ongoing pandemic. Many of these measures were requested by the Netherlands as conditions for the provision of new financial assistance to Curaçao to mitigate the impact of the economic slump, including a 25% cut in benefits for members of parliament and a 12.5% pay cut for civil servants that was introduced on July 1st 2020. The latter fuelled major protests in late June and the civil services union has pledged to continue protesting against the wage cut. Reining in fiscal spending in the medium term will prove difficult at a time when economic recovery is a major policy priority, but we expect the government led by the president, Eugene Rhuggenaath, to ultimately comply with Dutch requirements, which in turn carries the risk of triggering strikes and protests in 2021-25.

We expect the monetary stance of the Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint central bank) to remain accommodative at least for the first half of 2021, in order to create a conducive environment for economic recovery. The official interest rate was lowered to 3% in the second half of 2020, from 4.5% in the first half, and will be slow to bounce back to the pre-pandemic level. However, monetary transmission mechanisms are weak and interest-rate decisions by the central bank have only a limited effect on economic performance. Other monetary policy instruments include reserve requirements, which were raised in February 2020 from 18% to 19%. We expect the reserve requirements in 2021 to be relaxed slightly to boost credit creation during a post-coronavirus recovery stage. Monetary tightening will be gradual and will not take place before the second half of 2021.

Reform of the currency union and the splitting of Curaçao and Sint Maarten's shared central bank will still be medium- to long-term goals, but will largely remain on hold in the short term, as more immediate concerns such as the post-pandemic economic recovery remain a priority. Addressing reputational concerns stemming from high levels of fraud, tax evasion and money laundering will remain a priority for the CBCS. However, leadership instability will undermine its efforts and hinder the monetary union as it carries out its long-term plans.

The economy of Curaçao will recover partly in 2021, at the rate of 10.2% growth, after plummeting by an estimated 27.5% in 2020. Economic recovery in 2021 will break the chain of multiyear recessions that the island has been subject to since 2016, and will be the result of base effects and some resumption in tourism and related sectors. Once tourism activities normalises (which is expected in 2022), GDP growth will moderate to 7.4%.

Tourism came to a standstill during the health crisis and will be slow to recover, dragging output down as sentiment towards travel and tourism will remain pessimistic until the crisis passes or a vaccine is developed and rolled out. Although economic data for the second quarter is not yet available, the CBCS reported that, in the first quarter of 2020, real GDP dropped by 9.6% year on year, signalling a much more drastic downturn in the second and third quarters.

The first-quarter economic downturn was driven by a lack of new private construction projects; several important projects reached completion in 2019. In terms of gross value added, all sector contributed to negative performance of GDP. We expect the factors causing the first-quarter decline to have intensified upon the outbreak of the Covid-19 pandemic and to have affected overall output levels much more drastically.

The pandemic will also bear down on Curaçao's already poor manufacturing sector performance, which contracted by 17.1% (in nominal terms) in 2019, reflecting the Isla oil refinery's ongoing woes. The halt in economic activity will compound the problems faced by Isla during 2020. A request in July from the Rhuggenaath government to Klesch Group (based in Switzerland) to finalise the takeover was met with silence, and negotiations subsequently ended. As the search for a new operator continues, the creation of jobs for those left unemployed owing to the non-operation of the refinery will be delayed, weighing on the scope and pace of economic recovery.

Labour market conditions will be hit hard by the economic fallout from the pandemic. We expect real wages, which were already growing only marginally in 2018, to decline. We also anticipate that the unemployment rate, which stood at 17.4% in April 2019, will spike in 2020 amid lay-offs and furloughs owing to business closures during and after the pandemic. This will have a detrimental effect on private consumption demand. With the global tourism sector grinding to a halt, Curaçao's small and open economy will be hit hard by dampening external sector prospects, despite the reopening of its tourism sector. Given the poor outlook for a pick-up in domestic demand this year (notwithstanding fiscal measures) and a dire labour market situation, the economy's short-term growth prospects will remain negative. Some cushion will come from the recent agreement with the Netherlands, which aims to provide long-term investment package, to boost the investment climate in the country.

After slowing to an estimated annual average of 2.2% in 2020, owing to a decline in domestic demand and a forecast dip in average oil prices this year amid the coronavirus pandemic, inflation will accelerate to an average of 3% in 2021-22 as demand recovers, fuelling a 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.

The currency union with Sint Maarten and the island's limited exposure to international financial markets will protect against strong depreciative pressures and exchange-rate volatility in 2021-2022. 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, but Sint Maarten has a preference for adopting the US dollar, which Curaçao opposes. We expect the union to remain intact during the 2021-22 forecast period at least, with the Netherlands Antilles guilder pegged to the US dollar at Naf1.79:US$1.

The structurally large current-account deficit will narrow over the 2021-22 forecast period, to an average 19.2% of GDP, after peaking at an estimated 23.8% of GDP in 2020. The estimated widening of the deficit in 2020 is mainly owing to a sharp downturn in the tourism sector. This will be partly offset by a decline in the import bill as domestic demand for imports falls and oil prices drop amid the coronavirus pandemic.

Oil prices will rise in 2021, lifting the import bill and partly offsetting moderate export growth. Overall, the current-account deficit will narrow to 20.8% of GDP in 2021. In June international reserves for the currency union with Sint Maarten stood at Naf2.7bn (US$1.5bn), providing 4.7 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 Dutch government, minimising the risk of a balance-of-payments crisis.

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