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 main source of tourists to the country and an important trade partner.
• The incoming coalition government, led by Gilmar Pisas, will be responsible for steering the Curaçaoan economy recovery. The coalition's majority in parliament will help the smooth passage of the government's agenda items.
• The Kingdom Council of the Netherlands will continue to provide fiscal supervision, although disagreements with the incoming government over certain financing conditions will disrupt the flow of Dutch financing, aggravating fiscal pressures.
• Real GDP will recover by 6.5% in 2021 owing to an investment support package from the Netherlands, after contracting 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, lifts 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 objective, but will largely remain on hold in the short term, amid more immediate concerns such as economic recovery from the pandemic.
• Curaçao's rapid vaccination rate compared with the larger Caribbean islands will make it more attractive to tourists during the Northern Hemisphere summer season.

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Key changes since March 8th

• Fiscal pressures on the incoming government will rise, owing to the coalition's opposition to receiving oversight from the Caribbean body for Reform and Development-a condition for receiving the third tranche of Dutch financing.
• The Economist Intelligence Unit have revised our real GDP forecast for 2021 to 6.5% (from 5.5% previously), owing to an easing of restrictions with the drop in Covid-19 cases and a rapid vaccination drive.

The quarter ahead

• June-New government: The Movementu Futuro Kòrsou (MFK) and the Partido Nashonal di Pueblo (PNP) formed a coalition agreement in late April but are yet to form a government, as the cabinet selection and screening process is still ongoing. We now expect the new government to be sworn in in June.
• TBC-GDP (Q4 2020): The Centrale Bank van Curaçao en Sint Maarten (the joint central bank) reported that real GDP fell by 20.4% year on year in the third quarter. We expect the negative trend to have continued into the fourth 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 last national election was held on March 19th 2021

Government

A coalition of the Movementu Futuro Kòrsou (MFK) and the Partido Nashonal di Pueblo (PNP) will take office in June. The coalition controls 13 out 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 next government will be formed by a coalition between the Movementu Futuro Kòrsou (MFK) and the Partido Nashonal di Pueblo (PNP). Both parties signed a coalition agreement in late April, but at the time of writing they had not yet taken office. The government formation process seems to have been delayed by a drawn-out selection and screening of cabinet ministers. The Economist Intelligence Unit expects the MFK-PNP government to be sworn in in June.

The incoming government will be tasked with navigating Curaçao through economic recovery from 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 hamper governability during the forecast period. Conditions of Dutch-led oversight and governance structures have proven extremely contentious in Curaçao. Although the MFK had claimed prior to the March general election that a fresh poll would give the newly elected government a stronger mandate in future negotiations with the Netherlands, we do not expect the prospective MFK-PNP government to have significantly stronger capacity than the outgoing government-formed by a coalition between the Partido Alternativa Real (PAR) and the Partido MAN (MAN), and led by the prime minister, Eugene Rhuggenaath-to negotiate with the Dutch authorities, given the few options that the country has other than to rely on the Dutch government for fiscal support.

The incoming government has a stronger legislative position than its predecessor, with 13 out of the 21 seats in the parliament, compared with 11 seats held by the outgoing PAR and MAN. This will allow it to advance its policy agenda with relative ease. However, given that the next government will have to rely on additional funding from the Netherlands-in the absence of other viable options-to strengthen an economy crippled by the shutdown of tourism, stringent austerity measures will remain on the table. The domestic environment will be a hotbed for civil unrest and strikes (as seen in June 2020, when the current government similarly adopted austere measures), which will further undermine the economic recovery.

A general election was held on March 19th, at which the MFK emerged as the largest single party in parliament, in line with our expectations, with nine out of the 21 seats. The MFK seemingly capitalised on popular dissatisfaction with the Rhuggenaath administration by running on a platform of policies that prioritised national interests. Its decision to form a coalition with the PNP (which obtained four seats) gives it the simple legislative majority needed to push its reform agenda. Meanwhile the PAR (which holds four seats) and the MAN (which holds only two seats) will struggle to find their footing and will pose little obstruction to the incoming government's mandate.

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 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 incoming government's near-term policy focus will be the same as its predecessor's: to contain the spread and the economic fallout from the coronavirus pandemic. In this regard, the outgoing government has set an ambitious target of vaccinating all adults by the end of June, which the new government will follow through on. 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. At the time of writing about 54% of the population had received at least one dose and 44% had been fully vaccinated. The ambitious schedule is designed to ensure that the country is fully immunised before the start of the hurricane season, which lasts from June to November, and could affect supplies and the rollout of the programme. If successful, the island would be well positioned for the start of the tourism season in November. We expect the vaccine rollout to continue at the current pace, although risks include supply-side bottlenecks and global competition. On balance, we expect herd immunity to be achieved in late 2021.

Items on the new government's policy agenda include boosting production and exports by diversifying the economy, improving public-sector efficiency and tax collection, strengthening and expanding tourism, restarting operations at the Isla refinery and the Bullen Bay Oil Terminal, increasing alternative energy generation, developing a second port at Vaersenbaai Noord, and improved co-operation with the other Dutch Caribbean islands. However, Curaçao's ability to undertake recovery measures will depend on the level of Dutch financing that it manages to secure.

The Rhuggenaath government and the Netherlands reached an agreement in early November 2020 to establish the Caribbean Entity for Reform and Development (COHO), which would provide long-term financial support and oversight to the island. In exchange for setting up the new body, the Dutch government will provide a third fiscal support package of Naf181m (US$100m, or 4.4% of estimated 2020 GDP), as well as a long-term investment package. The process of establishing the body has, however, been disrupted by the incoming government's opposition to receiving oversight from the COHO and its stated preference for IMF oversight. We expect the incoming government's stance on COHO to delay the arrival of the third fiscal support package, which would in turn delay economic recovery measures.

The ongoing pandemic has increased the need for expansionary fiscal policy, and the incoming government will have little recourse other than to rely 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 urgent. Although the MFK has criticised the PAR for conceding to Dutch-imposed conditions, it will have little option other than to rely on Dutch assistance.

Curaçao's access to a third tranche of Dutch financing has been put at risk by the incoming government's opposition to the creation of a new oversight body, a condition set by the Netherlands. Although the Dutch government has not yet responded to the MFK-PNP coalition's request for IMF oversight, there is a significant risk that additional financing from the Dutch fails to come through, placing increased fiscal pressure on the incoming government. Given that the country has little recourse other than to rely on Dutch financing, the government will ultimately have to concede to several of the conditions imposed by the Netherlands, which will most likely include austerity measures, 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 for 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 it to be raised before 2022. 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. 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.

Curaçao's economy will recover partly in 2021, growing by 6.5%, 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 crossborder controls were the most stringent, thereby completely shuttering tourism. The economic recovery has been modest; the CBCS reported that in the third quarter of 2020 real GDP fell by 20.4% year on year-a smaller drop than the 30.3% contraction observed in the second quarter. On the demand side, all components fell, but the most pronounced decline was 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 that a new preferred bidder, the Curaçao Oil Refinery Complex (a privately held company), would take over the operating lease of the refinery, after negotiations with Klesch Group (based in Switzerland) failed. 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 additional tax increases 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 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 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 the 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 18.5% of GDP in 2021 and 15.1% of GDP in 2022, 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).

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