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.
• EIU expects fewer challenges to governability for the government of the prime minister, Gilmar Pisas, owing to the centre-right ruling party's majority position in the legislature. Downside risks to political stability include social unrest stemming from austerity measures adopted by the government to satisfy conditions of Dutch financing.
• In 2022 we expect the government to make progress on implementing fiscal reforms introduced this year. The Kingdom Council of the Netherlands will continue to provide fiscal supervision, although disagreements with the government over certain financing conditions could disrupt the flow of Dutch financing, aggravating fiscal pressures.
• We estimate that real GDP will grow by 6.5% in 2021, owing to liquidity support from the Netherlands and modest recovery in tourism inflows. Growth will accelerate to 11.5% in 2022 as rapid vaccine coverage, both domestically and globally, bolsters tourism flows more significantly. Downside risks stem from the emergence of the Omicron variant.
• The current-account deficit will slightly narrow over the forecast period, driven by a partial recovery 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.

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Key changes since September 1st

• Progress on fiscal reforms has allowed the government to meet the conditions for receiving the seventh tranche of liquidity financing from the Netherlands. This will support government spending in the final month of the year, as well as in early 2022.
• Owing to a revision of historical inflation data from the Central Bureau of Statistics and stronger than expected inflation in March-August, we have revised our 2021 estimate and 2022 forecast for inflation upwards to 3.9% on average (from 3.1% previously).

The quarter ahead

• TBC-GDP (Q2 2021): The Centrale Bank van Curaçao en Sint Maarten (the joint central bank) reported that real GDP fell by 18.3% in the first quarter of 2021. In the second quarter, we estimate real GDP to have expanded dramatically in year-on-year terms, owing mainly to a very low base of comparison and a mild pick-up in tourism.

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

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EIU expects the political climate to be broadly stable over the 2022-23 forecast period. After winning the general election on March 19th, the Movementu Futuro Kòrsou (MFK) and the Partido Nashonal di Pueblo (PNP) formed a coalition government-led by the prime minister, Gilmar Pisas-which was sworn in on June 14th. The coalition government holds 13 out of the 21 seats in the Staten (parliament), compared with 11 seats held by the previous government-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, which had a more difficult time advancing its policy agenda.

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 strong legislative position will allow it to advance its policy agenda with relative ease. The most important task facing the MFK government is steering Curaçao's economic recovery from the covid-19 pandemic, which has dramatically affected the small, tourism-dependent economy.

Conditions of Dutch-led oversight and governance structures have proven extremely contentious in Curaçao. The MFK claimed prior to the general election that a fresh poll would give the new government a stronger mandate in future negotiations with the Netherlands, and also ran on a platform of reduced Dutch influence on the island's fiscal and economic matters, as well as less dependence on Dutch financing. Mr Pisas did manage to renegotiate the terms of an agreement signed under the previous administration that sought to create a new fiscal oversight body called the Caribisch Orgaan voor Hervorming en Ontwikkeling (COHO, a Caribbean reform and development body). However, we do not expect the new government to be able to wean the island off Dutch financing, given that it has few alternative sources of finance. Nor do we expect the government to be able to overturn the main conditions of Dutch financing-adopting austerity measures to enable fiscal consolidation. Downside risks to political stability and governability include civil unrest and strikes in response to austerity measures (as seen in June 2020), which would undermine the economic recovery.

The 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 unicameral Staten. 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. The PAR (which holds four seats) and the MAN (which holds only two seats) will struggle to find their footing and will pose few obstacles to the 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 2022-23 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 covid-19 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 15 cases per day. However, the vaccination curve appears to be flattening, with just over 60% of the population inoculated with two doses as at early December (up by just 5 percentage points over the past three months). We expect the vaccination drive to continue at this slow pace going into 2022. However, the emergence of a new, more contagious, covid-19 variant, Omicron, raises the risk of the government imposing renewed lockdown measures to contain its spread domestically.

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. By early November Curaçao had reportedly met the conditions to obtain its seventh tranche of financing (since the pandemic began, and the last one for 2021) from the Netherlands, worth Naf76m (US$42.5m, or 1.4% of GDP). Meeting these conditions entailed the introduction of a number of reforms to reduce excessive spending at the Social Insurance Bank, reforms to tax authorities and efforts to reduce losses at the Curaçao Medical Centre. Subsequent financing in 2022 will be conditional on the implementation of these reforms. We expect steady progress on these reforms in the forecast period.

The ongoing pandemic has increased the need for expansionary fiscal policy, and the government will have little recourse but to rely on Dutch financing to fund economic recovery efforts, as domestic sources of revenue generation will remain inadequate in the near term. Liquidity funding is tied to progress against specific reforms and fiscal goals set by the Netherlands-a condition of which Mr Pisas was highly critical during his election campaign earlier in 2021 but has not managed to modify owing to the lack of other fiscal options for the island. Conditions include adopting austerity measures in other areas of spending that are not urgent.

The seventh tranche of liquidity funding from the Netherlands will support countercyclical spending in the final quarter of 2021 and in early 2022. We expect the MFK government to continue making progress on implementing fiscal reforms that were introduced this year, which will ensure further liquidity support from the Netherlands throughout 2022. Although the MFK government is in a slightly stronger negotiating position than previous governments, it is unlikely to be able to drastically alter the underlying terms of Dutch financing.

Although we do not forecast fiscal balance and public debt, we expect fiscal consolidation over the forecast period to be weighed down by a gradual recovery in global tourism. 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 performance. 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.

Economic growth in Curaçao will accelerate in 2022 to 11.5%, after the economy showed a modest and partial recovery in 2021 of an estimated 6.5%. Growth in 2022 will be driven by a sharper rise in tourism inflows as vaccine coverage in major source markets continues to increase. Downside risks to our 2022 outlook stem from the emergence in late November of the highly mutated Omicron variant of covid-19, which, depending on its transmissibility and the severity of infections caused, could force the government to adopt fresh lockdown measures in an attempt to stem the spread of the virus, constraining GDP.

Although we do not forecast components of real GDP, we expect recovery in 2022-23 to be driven by consumption (especially private consumption), aided by some continued 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 currently pencilled in for 2022, but activity restarting at the Isla oil refinery next year 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, maintaining liquidity support from the Netherlands will be crucial in stimulating recovery in 2022-23.

Consumer price inflation will rise further in 2022-23 to 4.2% on average, after rising in 2021 on the back of demand recovery and rising oil prices, and ending the year at 4%. Price pressures over the forecast period will be driven by even stronger economic growth (as tourism growth gains steam), as well as a continued rise in most commodity prices (including oil). Upside risks to our forecasts include 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 22.6% of GDP by 2023, from an estimated 23.8% in 2021. This narrowing will be largely driven by an expansion of the services surplus as tourism recovers. Nonetheless, the narrowing will be modest, as a forecast rise in oil prices will lift the import bill and partially offset moderate export growth. As a result, the trade deficit will narrow only slightly, averaging 33.1% of GDP in 2022-23 (from an estimated 33.3% of GDP in 2021). In March official reserves for the currency union with Sint Maarten stood at Naf4.3bn (US$2.3bn), of which foreign-exchange reserves totalled Naf3bn.

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