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. The Netherlands is the main source of tourists to the country and an important trade partner.
• The new 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 new government over certain financing conditions will disrupt the flow of Dutch financing, aggravating fiscal pressures.
• The Economist Intelligence Unit expects that real GDP will grow by 6.5% in 2021, owing to an investment support package from the Netherlands, after contracting by an estimated 18.4% in 2020. Growth will rise to 11.5% in 2022, but real GDP will not return to pre-pandemic levels within the 2021-22 forecast period.
• The current-account deficit will narrow over the forecast period, driven by a resumption in tourism inflows. However, it will remain large, 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 Covid-19 pandemic.
• Curaçao's rapid vaccination rate compared with larger Caribbean islands will make it more attractive to tourists during the northern hemisphere summer season.

Download the numbers in Excel

Key changes since June 1st

• The Pisas government has reached a revised agreement with the Netherlands on the creation of a new fiscal oversight body, satisfying one of the conditions for obtaining additional Dutch financing. This will ease fiscal pressures in the near term.

The quarter ahead

• TBC-GDP (Q1 2021): The Centrale Bank van Curaçao en Sint Maarten (the joint central bank) reported that real GDP fell by 18.4% in 2020. In the first quarter of 2021 we expect real GDP to have contracted in year-on-year terms, mainly owing to base effects (the pandemic did not have a significant impact on output in the first quarter of 2020).

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) took office in June. The coalition controls 13 out of the 21 seats in the Staten

Main political organisations

MFK, nine seats; Partido Alternativa Real (PAR), four seats; PNP, four seats; Partido MAN, two seats; Kòrsou Esun Mihó, one seat; Trabou pa Kòrsou, one seat

Key ministers

Governor: Lucille George-Wout

Prime minister: Gilmar Pisas (MFK)

Administration, planning & services: Ornelio Martina (PNP)

Economic development: Ruthmilda Larmonie-Cecilia (acting)

Education, science, culture & sport: Sithree van Heydoorn (MFK)]

Finance: Javier Silvania (MFK)

Foreign relations: Carlson Manuel (MFK)

Health, environment & nature: Dorothy Pietersz-Janga (MFK)

Justice: Gilmar Pisas (acting)

Social development, labour & welfare: Ruthmilda Larmonie-Cecilia (PNP)

Traffic, transport & urban planning: Charles Cooper (MFK)

Central bank president

Richard Doornbosch

Download the numbers in Excel

Download the numbers in Excel

Download the numbers in Excel

After winning the general election on March 19th, the Movementu Futuro Kòrsou (MFK) and the Partido Nashonal di Pueblo (PNP) formed a coalition government, which was sworn in on June 14th. The new government is tasked with steering Curaçao's economic recovery from the Covid-19 pandemic, which has dramatically affected the small, tourism-dependent economy.

Although 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-will persist, the government's stronger legislative position compared with its predecessor will allow it to advance its policy agenda with relative ease. The coalition government holds 13 out of the 21 seats in the Staten (parliament), compared with 11 seats held by the previous govern-ment-a coalition between the Partido Alternativa Real (PAR) and the Partido MAN (MAN). As a result, the current government will experience fewer risks to governability than the previous administration.

Conditions of Dutch-led oversight and governance structures have proven extremely contentious in Curaçao. Although the MFK claimed prior to the March general election that a fresh poll would give the new government a stronger mandate in future negotiations with the Netherlands, The Economist Intelligence Unit does not expect the new government to have significantly stronger capacity than the previous one-led by the former prime minister, Eugene Rhuggenaath (2017-21)-to negotiate with the Dutch authorities, given that the country has little choice but to rely on the Dutch government for fiscal support. Therefore, 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 previous 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 21 seats in the Staten. The MFK capitalised on popular dissatisfaction with the Rhuggenaath administration by running on a platform of increasing Curaçao's autonomy by reducing dependence on and oversight from the Netherlands. Its decision to form a coalition with the PNP (which obtained four seats) gives it the simple legislative majority needed to pursue 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 obstacle to the govern-ment'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 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 new government's near-term policy focus will be the same as its predecessor's: to contain the economic fallout from the coronavirus pandemic, which is likely to linger until global tourism returns to pre-pandemic levels. On a positive note, the Covid-19 infection rate on the island has stabilised over the past few months, to an average of 30 cases per day, and the vaccination campaign had covered 61% of the population with at least one dose and 55% of the population with both doses as at September 14th. Owing to continued vaccine supply from the Netherlands-the main provider of vaccines to the Dutch Caribbean-we expect the island to achieve game-changing levels of immunity (60-70% coverage with both doses) over the next couple of months and herd immunity (85% coverage with both doses) by the end of 2021. This should position the country well for the upcoming tourism season, which starts in November.

Other 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 improving 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.

Dutch financing has been delayed owing to negotiations between the Pisas government and the Netherlands to revise the terms of a financing deal agreed under the previous administration, which envisaged the creation of the Caribisch Orgaan voor Hervorming en Ontwikkeling (COHO)-a fiscal over-sight body to support implementation of fiscal reforms on the island. The parties reached a revised agreement in early August, under which Curaçao will have more influence over fiscal reforms and will be responsible for creating and implementing fiscal and budgetary action plans. The old plan envisaged that these would be devised by the COHO. The compromise allows Mr Pisas to claim a political win, as he upheld his election pledges to strengthen Curaçao's autonomy and reduce its dependence on the Netherlands. The revised agree-ment also opens the door for the sixth tranche of Dutch financing, worth Naf168m (US$94m), to be disbursed over the remainder of the third quarter.

The ongoing pandemic has increased the need for expansionary fiscal policy, and the 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 assistance from the Netherlands.

Curaçao's access to a sixth tranche of Dutch financing was delayed by the Pisas government's opposition to the creation of a new oversight body, a condition set by the Netherlands. With a revised agreement reached in early August, which increases Curaçao's influence over fiscal reforms, Dutch financing should now be forthcoming. However, the Pisas government may still have to concede to several Dutch conditions that it opposes, given its heavy reliance on Dutch financing. These conditions are likely to include austerity measures, especially on non-emergency spending. The national debt will also rise as a result; according to the IMF, the primary fiscal deficit widened from 0.4% of GDP in 2019 to 14.9% of GDP in 2020, causing the national debt stock to reach 89.1% of GDP in 2020. The Fund forecasts that the 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 accom-modative 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 perform-ance. 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 fourth quarter 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 only partly in 2021, growing by 6.5%, after plummeting by an estimated 18.4% in 2020. Economic recovery in 2021 will break the chain of multi-year 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. Tourism came to a standstill during the health crisis and will be slow to recover, acting as a drag on output, as pessimism towards travel and tourism will linger until 2022, when vaccines become widely available globally. Once tourism activity normalises (which is expected in 2022), GDP growth will accelerate substantially, to 11.5%.

Although we do not forecast components of real GDP, we expect a partial recovery in 2021-22 to be driven by consumption, aided by fiscal support measures, and an anticipated pick-up in tourist arrivals from the fourth quarter. On the investment front, we expect pandemic-related uncertainties to linger throughout the forecast period, causing businesses to delay investment projects further. No significant public investment projects are pencilled in for 2021, but activity restarting at the Isla oil refinery in 2022 poses upside risks to our growth forecast for that year. However, any revival in activity is expected only in late 2022, as the government is looking for an operator for the refinery, after its Brazilian partner, Roberto Viana, pulled out of the deal. Therefore, main-taining liquidity support from the Netherlands will be crucial in stimulating recovery in 2021-22.

After slowing to 2.2% by the end of 2020, owing to a decline in domestic demand and a dip in average oil prices amid the coronavirus pandemic, inflation will accelerate to an average of 3.1% 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 2021-22 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 of 23.2% of GDP, after peaking at an estimated 24.8% of GDP in 2020 owing to a sharp downturn in the tourism sector. The narrowing of the current-account deficit will be modest in 2021, as a forecast rise in oil prices will lift the import bill and partly offset moderate export growth, and the services surplus will begin to widen gradually, to 9.6% of GDP by 2022, after falling in 2020 to 8.7% of GDP (from 15.3% of GDP the previous year). Overall, the current-account deficit will narrow to 24% of GDP in 2021 and 22.3% of GDP in 2022. In March official reserves for the currency union with Sint Maarten stood at Naf4.2bn (US$2.3bn), of which foreign-exchange reserves totalled Naf3bn.

Download the numbers in Excel