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 tourism to the country and an important trade partner.
• The government of the prime minister, Gilmar Pisas, is expected to encounter few challenges to governability, as the ruling coalition of centre and centre-right parties has a legislative majority. However, austerity measures adopted by the government to satisfy Dutch financing conditions could cause social unrest, posing risks to political stability.
• In 2022 EIU expects 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 over certain financing conditions could disrupt the flow of disbursements, aggravating fiscal pressures.
• After a partial recovery of an estimated 4% in 2021, real GDP growth will accelerate to 6% in 2022, aided by continued Dutch liquidity support and a robust, if partial, recovery in global tourism. However, high global food and energy prices-stemming from the Russia-Ukraine conflict-will be a headwind to growth in the 2022-23 forecast period.
• The current-account deficit will narrow slightly over 2022-23, 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 and food 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. However, little will happen in the short term, owing to more urgent concerns, such as pandemic recovery and high global inflation.
• Curaçao's high vaccination rate compared with larger Caribbean islands will make it more attractive to tourists during the northern hemisphere summer season and will allow the authorities to keep borders open.

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Key changes since March 11th

• We now expect real GDP to grow by 6% in 2022 (from 12.3% previously). We do not expect tourism to return to pre-pandemic levels until 2023, as global inflation and a weakened euro (stemming from the war in Ukraine) are making travel less affordable.
• Higher commodity prices and global supply-chain disruptions caused by the ongoing Russia-Ukraine conflict have prompted us to revise up our inflation forecast for end-2022, to 7.2% (from 4.5% previously).

The quarter ahead

• TBC-Restarting operations at Isla oil refinery: In mid-year the state-run Refineria di Korsou (RdK) is expected to announce the winner of bids to restart and operate the Isla oil refinery. The refinery has been idle since 2018, when a payment dispute between PDVSA (Venezuela's state oil firm) and ConocoPhillips (a US oil firm) stopped production.
• TBC-Global impact of Russia-Ukraine conflict: Stricter US and EU sanctions than those already announced would cause a sharper price spike, thereby raising inflation pressures and curtailing tourism from the US and Europe-Curaçao's main source markets.

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. The next general election is due in 2025

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: Ruisandro Cijntje (PNP)

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: Shalten Hato (MFK)

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

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

Central bank president

Richard Doornbosch

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Now one year into the term of the prime minister, Gilmar Pisas of the Movementu Futuro Kòrsou (MFK), EIU expects the political climate to remain stable over the 2022-23 forecast period. The MFK has formed a coalition government with the Partido Nashonal di Pueblo (PNP); 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 covid-19 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 administration 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, if it won the vote, the new government would have 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. In April the Staten unanimously voted for the government to continue to renegotiate the terms of an agreement that was signed under the previous administration to create the Caribbean Body for Reform and Development (COHO, a fiscal oversight body). The government and members of the opposition are concerned that the proposed COHO agreement will constrain the country's autonomy. 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 next general election is due in 2025 and we believe that the current coalition government will remain stable until the end of its term. The last general election was held on March 19th 2021, when the MFK emerged as the single largest party, with nine out of 21 seats in the Staten. Its decision to form a coalition with the PNP (which won four seats) gives it the simple legislative majority needed to pursue its reform agenda. The PAR (which also holds four seats) and the MAN (with only two) will struggle to find their footing and will present 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 the diversification of 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.

Global inflationary pressures stemming from the Russia-Ukraine conflict will pose a major policy challenge for Curaçao's government. However, Mr Pisas will continue to focus in the near term on reviving the economy in the wake of the covid-19 pandemic, which dealt a heavy blow to tourism. A recovery will depend on global tourism returning to pre-pandemic levels; on June 5th all pandemic-related measures were lifted for incoming international travellers, which we expect will support a strong, if partial, recovery in tourist arrivals in 2022. However, the vaccination rate appears to have plateaued; as at early June just under 70% of the population had received two doses (less than 1 percentage point higher than in March). This will keep the island vulnerable to any future, potentially more virulent, 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; 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. One item on the agenda that has made significant progress is the resumption of operations at the Isla refinery and the Bullen Bay Oil Terminal. In April the state-run refining company, Refineria di Korsou (RdK), stated that it planned to announce an operator by mid-year, having received proposals from three companies. Those facilities were being operated by PDVSA (the Venezuelan state-owned oil firm), but the lease expired in 2019. Although there are risks of delays, operations are likely to restart before the end of the year.

Curaçao will continue its fiscal consolidation efforts in 2022-23. However, global inflation will slow down the economic recovery from the pandemic, and stimulatory fiscal spending will be required, which means that there will be less progress on fiscal consolidation than previously expected. 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; during his election campaign, Mr Pisas was highly critical of these conditions-including adopting austerity measures in non-urgent areas of spending-but has not managed to change the situation, as the lack of other fiscal options means that he has little bargaining power.

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. Although Curaçao has not requested liquidity support yet this year, we expect the next tranche of funding to come in the third quarter, as higher global energy prices will strain the island's fiscal position. Although the MFK government is in a slightly stronger negotiating position than previous administrations, it is unlikely to be able to drastically alter the underlying terms of Dutch financing.

Fiscal consolidation over the forecast period will be supported by a rebound in tourism, although the sector will not return to pre-pandemic levels. 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 raise interest rates this year in order to combat inflation and in response to monetary tightening by the Federal Reserve (Fed, the US central bank). The pledging rate has been held at 1% since March 2020 and was finally raised in June this year by 1 percentage point, to 2%. We expect the central bank to continue to raise rates throughout 2022, in line with monetary tightening in the US. 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 monetary policy instrument and is currently at 19%. If the economic recovery proves slower than we expect, the CBCS will 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.

After real GDP grew by an estimated 4% in 2021 on the back of a recovery in tourism in the last quarter, we believe that economic growth will accelerate in 2022, to 6%. Growth in 2022 will be driven by a sharper rise in tourism inflows as vaccine coverage in major source markets increases, but Curaçao will not see a return to pre-pandemic tourism levels until at least 2023. Inflation in the US and the Netherlands-two large sources of tourists to Curaçao-will affect disposable incomes in those countries, and the war in Ukraine has weakened the euro against the US dollar, making it more expensive for Europeans to travel. A notable downside risk to the outlook for 2022 is the possible emergence of vaccine-resistant variants of covid-19; depending on the transmissibility and severity of infections caused, these variants could force the government to adopt fresh lockdown measures to stem the spread of the virus, which would constrain GDP growth. Another risk is the escalation of the Russia-Ukraine conflict, which could keep prices higher for longer, subduing tourism and investments.

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 uncertainties stemming from global inflation and the pandemic to linger throughout the forecast period, causing businesses to delay investment projects further. Activity at the Isla oil refinery is expected to restart this year, with an operator due to be selected by the end of June. There are risks of delays, and the resumption of operations is likely to come only later in the year, supporting stronger growth in 2023. 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 2022, ending the year at 7.2%, on the back of global supply-chain disruptions caused by the Russian invasion of Ukraine; this will keep prices of oil and food elevated, which will particularly affect Curaçao, as it imports a significant share of its food. 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 of 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 well as an escalation of the war in Ukraine, which could keep global commodity prices higher for longer. 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 depreciation 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 21% of GDP in 2022 and then narrow to 17.6% of GDP in 2023, from an estimated 20.4% 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, but the recovery in tourism will keep the current-account deficit from widening significantly. The deficit should then narrow in 2023 as commodity prices soften slightly and tourism growth accelerates. As at mid-March 2021 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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