Update Country Report Curaçao 01 Apr 2022

What's happened?

Tourism arrivals to Curaçao picked up strongly in February, surpassing the figure recorded in January. However, despite these positive signs of rising economic activity, local business associations are warning that rising international energy and food prices (a consequence of Russia's invasion of Ukraine) will weigh on the island's nascent economic recovery.

Why does it matter?

Curaçao's tiny, heavily import-dependent economy makes it particularly vulnerable to shocks in global prices of food and fuel, meaning that rising inflation could offset the gains brought by a recovery in tourism. In the first two months of the year 70,940 tourists arrived in Curaçao-almost 80% of the total in January-February 2020 (before the coronavirus pandemic reached the island). However, in mid-March the Curaçao Business Association (VBC) released a statement warning that rising global food and fuel prices would push up costs in Curaçao, weighing on private consumption and business activity. Inflation was rising even before the Russia-Ukraine conflict; annual inflation reached 3.8% in December (latest data available), up from 2.2% at the start of 2021. Western sanctions on Russia and supply-chain disruptions will now exacerbate price pressures even further.

The VBC has called on the government to revise its current economic recovery plan to provide some relief to consumers and businesses affected by rising prices. The plan aims to consolidate the public finances (an important condition for Dutch financial support) by focusing on austerity measures, such as reducing public-sector and healthcare expenditure. In parallel, it aims to boost state revenue by improving tax collection and restructuring the tax authority. The VBC is calling for the sales tax to be reduced temporarily and for a sales-tax exemption for commercial goods to be reintroduced, having been withdrawn as part of the post-pandemic austerity drive. So far, however, the administration of the prime minister, Gilmar Pisas, has yet to announce any support measures such as fuel subsidies (which have been introduced in several countries in the region). In early March Mr Pisas said that Curaçao "[did] not need to worry or make any preparations at this point regarding the war in Ukraine".

What next?

On balance, we do not expect the government to reduce the sales tax, as doing so would weigh on state revenue collection in 2022 and complicate the fiscal consolidation process that is critical to receiving Dutch financing. However, there is an extremely high risk that popular frustration with a sharp reduction in real incomes forces the government to put austerity measures on hold. In such a situation, we would expect the Netherlands to be open to a temporary relaxation of its financing conditions.