Political and economic outlook

• Curaçao is a tiny, open island economy and a constituent country of the Kingdom of the Netherlands that is heavily dependent on tourism, with the Netherlands being the key source of tourists to the country and an important trade partner.
• The Economist Intelligence Unit expects the Partido Antiá Restrukturá (PAR)-which leads the ruling coalition-to suffer defeat at the March 19th general election, owing to public discontent with the government's handling of the coronavirus (Covid-19) pandemic.
• The fractious political environment will hinder progress on fiscal consolidation and efforts to tackle corruption after the coronavirus pandemic. The Kingdom Council of the Netherlands will continue to provide fiscal supervision.
• Real GDP will recover by 5.5% in 2021 owing to an investment support package from the Netherlands, after falling by an estimated 21% in 2020. Growth will rise to 11.5% in 2022, but real GDP will not return to pre-pandemic levels within the forecast period.
• The current-account deficit will narrow over the 2021-22 forecast period, driven by a resumption in tourist inflows. It will remain large nonetheless as domestic demand recovery, coupled with rising oil prices, will raise the import bill.
• Reform of the currency union and the splitting of Curaçao and Sint Maarten's shared central bank will be a long-term agenda, but will largely remain on hold in the short term, amid more immediate concerns such as economic recovery from the pandemic.

Download the numbers in Excel

Key changes since December 9th

• In view of the positive developments in the rollout of Covid-19 vaccines , we now believe Curaçao to reach herd immunity by late 2021, which will help to boost GDP growth in the latter half of the forecast period above what we previously expected.

The quarter ahead

• March 19th-General election: We expect the opposition Movementu Futuro Kòrsou (MFK) to steal some seats from the PAR, eroding the latter's largest single party status in the legislature. The MFK is the best-positioned party to win the general election but it will have to enter into a coalition agreement in order to form government.
• TBC-GDP (Q3 2020): The Centrale Bank van Curaçao en Sint Maarten (the joint central bank) reported that real GDP fell by 30.3% year on year in the second quarter. We expect the negative trend to have continued into the third quarter owing to a total shutdown of tourism-the country's main source of income-caused by the pandemic.

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 15th (Carnival); April 2nd (Good Friday); April 5th (Easter Monday); April 27th (King's birthday); May 1st (Labour Day); May 13th (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 March 19th 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

Download the numbers in Excel

Download the numbers in Excel

Download the numbers in Excel

The Partido Antiá Restrukturá (PAR) and its two coalition partners-the Partido MAN (MAN) and the Partido Inovashon Nashonal (PIN)-are preparing to contest the general election on March 19th. The Economist Intelligence Unit expects the next government to be formed by a coalition between the Movementu Futuro Kòrsou (MFK)-the main opposition party currently-and either the MAN (which has been trying to distance itself from the PAR amid public discontent with the latter) or some of the smaller parties that are vying for single seats.

The next government will 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 cross-party differences 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 and the opposition claimed 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 authorities, 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 next government will most likely continue to face pressure to adopt stringent austerity measures if it is to receive additional financial assistance from the Netherlands. The current government's decision to adopt austere measures led to social unrest in late June 2020. Given that the government will have to rely on additional funding from the Netherlands-in the absence of other viable options-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 coronavirus, 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. Most recently, the government declared a state of emergency on March 8th to curb the spread of a new UK variant of the coronavirus, which is expected to last 90 days. 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.

General elections will be held on March 19th; 15 parties will compete for 21 parliamentary seats. With six seats, the PAR is currently the largest single party in parliament. However, the party and its leader, current prime minister Eugene Rhuggenaath, have seen their popularity fade over the past year, owing to the government's handling of the pandemic and decision to adopt austerity measures that sparked some unrest. The PAR's main coalition partner, the MAN (which has five seats) is seeking to distance itself from the former in the meantime in order to avoid getting punished at the polls.

We view the MFK as best positioned to secure the largest share of votes at the upcoming polls, although its unlikely to form a government on its own and will have to rely on the MAN or the smaller parties. The MFK (which also has five seats) is aiming to capitalise on popular dissatisfaction with the Rhuggenaath administration by running on a platform of policies that prioritise national interests. As such, the MFK is likely to gain some seats at the expense of the PAR, and this-combined with MAN's attempts at distancing itself from the PAR-erodes the PAR's chances of clinging to power. However, given that elections are often closely fought, our current forecast of an MFK victory is subject to major risks, including the rollout of Covid-19 vaccines that is likely to boost voter support for the PAR.

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, as 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 next government's near-term policy focus will continue to be containing the spread and the economic fallout from the coronavirus pandemic. In this regard, the government has set an ambitious timeline for Covid-19 vaccinations and aims to vaccinate all adults by the end of June. Curaçao received its first shipment of Covid-19 vaccines from the Netherlands in mid-February and the Dutch government will continue to be the main provider of vaccines to the island. Healthcare workers and people aged over 60 years will be prioritised, with all those over 18 years due to be vaccinated in a second phase. In the pilot week, 3,371 doses were administered, which was more than the 2,000 doses planned. The ambitious vaccine schedule is designed to ensure that the country is fully vaccinated before the start of the hurricane season, which lasts from June to November, and could affect vaccine supplies and the rollout of the programme. If successful, the island would be well positioned for the start of the tourism season (in November). For now, we expect the vaccine rollout to continue progressing at the current pace, although supply-side bottlenecks and global competition pose risks to a timely rollout. On balance, we expect herd immunity to be achieved in 2021.

In terms of economic policies, Curaçao's ability to undertake recovery measures was boosted by an agreement with the Netherlands in early November 2020 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 ongoing pandemic has increased the need for expansionary fiscal policy and the next government will have little recourse other than relying on Dutch financing to fund economic recovery efforts as domestic sources of revenue generation will remain inadequate in the near term. This will come with the condition of adopting austerity measures in other areas of spending that are not of emergency nature. Although the MFK has criticised the PAR for conceding to Dutch-imposed conditions, they themselves will have little option upon forming government (which is our baseline forecast) other than to rely on Dutch assistance. On a positive note, the government's fiscal position will improve in 2021 given the recent agreement with the Netherlands signed in early November 2020, 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 the island to meet its expected spending requirements in 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 continue to rely on additional support from the Dutch during much of the forecast period or at least until the economy is back on track and domestic sources of revenue have recuperated. Dutch assistance will come at the cost fiscal tightening on the government's part, especially on non-emergency spending. The national debt will also rise as a result; the IMF forecasts that national debt will exceed 100% of GDP in 2021 (up from 55% of GDP in 2019). Reining in non-emergency expenditure such as on remuneration, hiring and appraisals will prove difficult bearing in mind the implications on political stability, which in turn will pose risks to fiscal adjustment.

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 in 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. The pledging rate was lowered in March 2020 to 1% (from 2.5%) and has remained at that level ever since; we do not expect the pledging rate to be raised before the second half of 2021. 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 5.5% growth, after plummeting by an estimated 21% 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 accelerate substantially to 11.5%.

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 a vaccine is rolled out globally. The worst of the pandemic was felt in the second quarter of 2020 when mobility restrictions and cross-border controls were the most stringent, thereby completely shuttering tourism. In fact, the CBCS reported that in the second quarter of 2020, real GDP fell by an unprecedented 30.3% year on year. On the demand side, all components fell but the most pronounced decline was registered in private consumption, on the back of a pandemic-induced lockdown and stress in the labour market caused by a shutdown in activity across sectors and compression of external demand. Public consumption fell owing to lower disbursements on goods and services. Border controls affected trade flows, with a decline in global demand causing exports to fall at a faster pace than imports. Although we expect some sequential gains in economic activity as tourism was gradually reopened, all demand-side components are likely to have remained significantly depressed in subsequent quarters.

The pandemic is estimated to have battered 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. Some positive news came in January this year when the government announced a new preferred bidder, the Curaçao Oil Refinery Complex (a privately held company) to take over the operating lease of the refinery, after negotiations with Klesch Group (based in Switzerland) failed to come through. If an agreement is reached, refinery revenue could resume towards the end of 2021, lifting economic growth in 2021-22.

After slowing to 2.2% by the end of 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 2.9% in 2021-22 as demand recovers and oil prices rise. 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 2021-22. 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 17% of GDP, after peaking at an estimated 20.5% of GDP in 2020. The estimated widening of the deficit in 2020 is mainly a result of 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 18.7% of GDP in 2021, driven by a widening of the services surplus. In February international reserves for the currency union with Sint Maarten stood at Naf2.9bn (US$1.6bn). 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-payment crisis.

Download the numbers in Excel