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 the government of the prime minister, Gilmar Pisas, to encounter few challenges to governability, as the centre-right ruling party has a legislative majority. However, austerity measures adopted by the government to satisfy conditions of Dutch financing could cause social unrest, posing risks to political stability.
• In 2022 we expect the government to make progress on implementing recently introduced fiscal reforms. The Kingdom Council of the Netherlands will continue to provide fiscal supervision, but disagreements with the government over certain financing conditions could disrupt the flow of disbursements, aggravating fiscal pressures.
• Real GDP growth will accelerate to 12.3% in 2022-after a partial recovery estimated at 4.8% in 2021-aided by continued Dutch liquidity support and a significant improvement in global tourism sentiment (owing to greater vaccine coverage). This forecast assumes that no new particularly severe variant of covid-19 emerges.
• The current-account deficit will narrow slightly over the 2022-23 forecast period, driven by a partial recovery in tourism inflows. However, the deficit will remain large, as a recovery in domestic demand and a surge in oil prices will push the import bill up.
• Reforms to the currency union between Curaçao and Sint Maarten and the splitting of their shared central bank will be long-term goals, but little will happen in the short term owing to more immediate concerns, such as economic recovery from the pandemic.
• Curaçao's high 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 December 3rd

• Real GDP grew by 23.6% year on year in April-June 2021-markedly less than expected-despite a low base. We have therefore revised our GDP growth estimate for 2021, to 4.8% (from 6.5%), and our forecast for 2022 (to 12.3%, from 11.5%), owing to improved base effects.
• Stronger than expected fourth-quarter inflation data for 2021 and the global supply-chain disruptions caused by the ongoing Russia-Ukraine conflict have led us to revise up our inflation forecast for end-2022, to 4.5% (from 4.2% previously).

The quarter ahead

• TBC-GDP (Q3 2021): The Centrale Bank van Curaçao en Sint Maarten (the Curaçao and Sint Maarten joint central bank) reported that real GDP grew by just 23.6% year on year in the second quarter of 2021, despite a low base of comparison. We estimate that real GDP expanded more strongly in the third quarter, as tourism is likely to have picked up.

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 28th (Rosenmontag); April 15th (Good Friday); April 18th (Easter Monday); April 27th (King's Birthday); May 2nd (Labour Day); May 26th (Ascension Day); July 2nd (Flag Day); October 10th (Curaçao 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 last general election, in March 2021, the Movementu Futuro Kòrsou (MFK) and the Partido Nashonal di Pueblo (PNP) formed a coalition government, which was sworn in on June 14th and is led by the prime minister, Gilmar Pisas. Together, the parties hold 13 out of the 21 seats in the Staten (the unicameral parliament). Given that the previous government-a coalition between the Partido Alternativa Real (PAR) and the Partido MAN (MAN)-held just 11 seats, there will be fewer risks to governability for the Pisas government than for the previous administration, which had difficulties in advancing its policy agenda. Cross-party differences relating to the Dutch government's influence over Curaçao's internal affairs and economic policy (especially regarding fiscal support during the coronavirus pandemic) will persist, but the government's strong legislative position will allow it to advance its policy agenda relatively easily. The most important task facing the Pisas government is to steer Curaçao's economic recovery from the covid-19 pandemic, which dealt a significant blow to the small, tourism-dependent economy.

The conditions of Dutch-led oversight and governance structures have proven extremely contentious in Curaçao. Before being elected the MFK claimed that the vote would give the new government a stronger mandate in future negotiations with the Netherlands. The party ran on a platform of reducing Dutch influence on the island's fiscal and economic matters and lessening its dependence on Dutch financing. Since taking office Mr Pisas has managed to renegotiate some of the terms of an agreement to create a Caribbean Body for Reform and Development (COHO, a fiscal oversight body) that was signed under the previous administration. 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 funding. Nor do we expect the government to be able to overturn the main condition of Dutch support, namely the adoption of 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 also undermine the island's economic recovery.

The last general election was held on March 19th 2021. As we had expected, the MFK emerged as the largest single party in parliament, with nine out of 21 seats in the 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) within 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. This is particularly important in view of the enduring political and economic crisis in Venezuela, which has historically been a major commercial partner.

The Pisas government's near-term policy focus will be the same as its predecessor's: to revive the economy from the blow dealt by covid-19. Success is likely to depend on global tourism returning to pre-pandemic levels. On a positive note, the coronavirus infection rate on the island has dropped from a peak reached in January amid the spread of Omicron. As a result, the island has now removed most of its restrictions on international travellers, as well as on domestic mobility and activity. However, the vaccination curve appears to have flattened; as at mid-March just below 70% of the population had received two doses (just 3 percentage points higher than in December 2021). This will keep the island vulnerable to any future, potentially more deadly, variants of the virus; as such, the possibility of restrictions being reimposed at some point cannot be ruled out.

Other items on the 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 scope for undertaking recovery measures will depend on the level of Dutch financing that it manages to secure. By early November 2021 Curaçao had reportedly met the conditions needed to obtain its seventh post-pandemic tranche of financing-worth Naf76m (US$42.5m, or 1.4% of GDP)-from the Netherlands. This involved establishing various measures to reduce excessive spending at the Social Insurance Bank, undertaking reforms to the tax authorities and making efforts to reduce losses at the Curaçao Medical Centre. The disbursement of further financing this year will be conditional on the implementation of these reforms. We expect Curaçao to make steady progress on doing so throughout the forecast period.

Curacao's need for stimulatory fiscal spending will persist throughout our forecast period, as a full economic recovery from the pandemic is unlikely to take hold within that time frame. As such, the fiscal deficit will narrow only slightly in 2022-23. The government will have little option but to rely on Dutch financing to fund economic recovery efforts, as domestic revenue sources will remain inadequate in the near term. Liquidity funding is tied to progress on specific reforms and fiscal goals set by the Netherlands; Mr Pisas was highly critical of these conditions-including adopting austerity measures in non-urgent areas of spending-during his election campaign but has not managed to change the situation, as the lack of other fiscal options means that he has little bargaining power.

The seventh tranche of liquidity funding from the Netherlands will support countercyclical spending in the first quarter of 2022. We expect the government to continue making progress on implementing fiscal reforms that were introduced late last year, which will ensure further liquidity support from the Netherlands throughout 2022. We expect the next tranche of support to come in April. 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 an only gradual recovery in global tourism. According to the Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint central bank), the fiscal deficit narrowed in 2021 relative to 2020 (although its exact size has not been published) and public debt rose to 90% of GDP. Reining in non-emergency spending (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 CBCS to maintain an accommodative monetary stance this year 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 return 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. However, we expect the central bank to raise rates from the second quarter of 2022, in line with monetary tightening by the Federal Reserve (Fed, the US central bank), which is set to begin this month. However, monetary transmission mechanisms are weak and the CBCS's interest-rate decisions have only a limited impact on economic performance. The reserve requirement is the main momentary policy instrument and is currently at 19%. If the economic recovery proves slower than we expect, the CBCS would probably loosen this requirement to stimulate credit growth.

Reforming the currency union and splitting Curaçao and Sint Maarten's shared central bank will remain medium- to long-term goals, but little progress will be made in the short term, as the focus is on more pressing concerns, such as the post-pandemic economic recovery. Addressing reputational concerns stemming from high levels of fraud, tax evasion and money-laundering will remain a priority for the CBCS.

Economic growth in Curaçao will accelerate in 2022, to 12.3%, after a modest and partial recovery in 2021 estimated at 4.8%. Growth in 2022 will be driven by a sharper rise in tourism inflows as vaccine coverage in major source markets increases. Downside risks to the outlook for 2022 stem from the possible emergence of deadlier variants of covid-19, which, depending on the transmissibility and severity of infections caused, could force the government to adopt fresh lockdown measures to stem the spread of the virus, which would constrain GDP. An additional downside risk to growth is that rising inflation-caused in part by the surge in global fuel prices as a result of the Russia-Ukraine war-could dampen consumer confidence.

Although we do not forecast components of real GDP, we expect recovery in 2022-23 to be driven by consumption (especially private consumption), which will be aided by a continuation of some fiscal support measures and sustained growth in tourist arrivals. 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 at the Isla oil refinery is due to restart this year, posing upside risks to our growth forecast. However, any revival in activity will come late in the year, as the government is still looking for an operator for the refinery after its Brazilian partner, Roberto Viana, pulled out of an earlier deal. In view of this situation, Dutch liquidity support will be crucial in stimulating recovery in 2022-23.

Demand growth and rising oil prices pushed inflation up to 4.8% at end-2021. We expect consumer price inflation to rise further in the first half of this year on the back of global supply-chain disruptions caused by the Russian invasion of Ukraine, which will keep prices of oil (a chief import commodity for Curaçao) elevated. We then expect inflationary pressures to ease and inflation to end the year at the slightly lower level of 4.5%. Although monetary policy mechanisms are weak, a tightening cycle that we expect to begin this year will help to keep inflation in check. A stabilisation in import prices in 2023 will temper inflation, taking it to 3.7% by the end of the year. Risks to our forecasts include further tax increases as part of efforts to shore up the public finances. As much of Curaçao's consumer basket is 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 2022-23. 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 formed a currency union in 2010 and 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 throughout 2022-23 at least, with the Netherlands Antilles guilder pegged to the US dollar at Naf1.79:US$1.

We forecast that the structurally large current-account deficit will widen to 24.5% of GDP in 2022 and then narrow to 22.3% of GDP in 2023, from an estimated 24.2% in 2021. Our forecast for this year is based on a rise in food and fuel prices amid ongoing supply-chain disruptions caused by Russia's invasion of Ukraine; this will lift the import bill dramatically, driving the current-account deficit wider. The deficit should then narrow modestly in 2023 as commodity prices soften slightly and tourism growth accelerates. As at mid-March official reserves for the currency union with Sint Maarten stood at a comfortable Naf4.3bn (US$2.3bn, or 83% of GDP), with foreign-exchange reserves at Naf3bn.

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