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.
• EIU expects the government of the prime minister, Gilmar Pisas, 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 2023 we expect the government to make progress on implementing fiscal reforms introduced last year. 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.
• Real GDP growth will decelerate from an estimated 5.8% in 2022 to 3.7% in 2023, as high global food and energy prices will weigh on private consumption and tightening global financing conditions will dampen investment. In addition, an economic downturn in the US and Europe in 2023 will hamper the tourism recovery.
• The current-account deficit will narrow in 2023, driven by a recovery in tourist inflows. However, the deficit will remain large, assuming a continued recovery in domestic demand, and elevated oil and food prices will push up the import bill.
• The introduction of a new currency, the Caribbean guilder, is a long-term goal. However, little will happen in the short term, owing to more urgent concerns, such as pandemic recovery and high global inflation.
• The Isla oil refinery is set to come back online in 2023, after a consortium of US and Brazilian firms won the tender to restart it in June 2022. Production stopped in 2018, owing to a dispute between PDVSA (Venezuela's state oil firm) and ConocoPhillips (a US oil firm).

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Key changes since September 13th

• We now forecast a sharper than previously anticipated economic slowdown in the US and Europe in 2023. As this will dampen disposable incomes and hit tourist arrivals, we have revised our 2023 real GDP growth forecast from 4.5% to 3.7%.
• As a result, we now project a wider current-account deficit of 13.5% of GDP (revised from 12.5% of GDP) in 2023, as we expect weakness in US and European tourism. Delays in the operationalisation of the Isla oil refinery will also result in a wider income balance.

The quarter ahead

• TBC-Restart of operations at Isla oil refinery: The state-run Refineria di Korsou (RdK) has announced that a consortium of US and Brazilian firms will restart and operate the refinery. A contract was expected to be signed by early September, but has not yet been announced; nevertheless, we still expect operations to recommence in the near term.
• TBC-Resolution on creation of a Dutch-led oversight body: In September Curaçao, Aruba and Sint Maarten submitted to the Netherlands an alternative proposal for the establishment of the Caribbean Body for Reform and Development (COHO, a fiscal oversight body). The Dutch government signalled that it would respond in early 2023.
• TBC-Tourism arrivals (Q1 2023): Tourist arrivals to Curacao continued to grow in September. However, we expect a downturn in economic activity in the US and the EU to subdue tourism (particularly as the US and Europe are Curaçao's main sources of tourists).

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: 151,066 (January 2022; 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 (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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The prime minister, Gilmar Pisas of the Movementu Futuro Kòrsou (MFK), will benefit from political stability over EIU's 2023-24 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 centrist Partido Alternativa Real (PAR) and the centre-left 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 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 remain, but the government's strong legislative position will allow it to pursue its policy agenda relatively easily. Its priorities will be to develop the tourism sector and generate employment.

The conditions of Dutch-led oversight and governance structures have proven extremely contentious in Curaçao. Before the 2021 election the MFK claimed that winning would give it a stronger mandate in future negotiations with the Netherlands, having run on a platform that strongly opposed Dutch-imposed fiscal austerity. In particular, it criticised the scale of Dutch influence over the island's fiscal and economic matters and advocated for reducing the island's 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). In September the governments of Curaçao, Aruba and Sint Maarten submitted to the Netherlands an alternative proposal for the establishment of the body; the Dutch government is currently studying the proposal. In particular, Curaçao, Aruba and Sint Maarten are concerned that the COHO agreement as proposed by the Netherlands will constrain their autonomy. Despite its ambitions to reduce Curaçao's dependence on the Netherlands, we do not expect the Pisas administration 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 scheduled for 2025. 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 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.

The government's near-term focus will be to revive the tourism sector and generate employment, although efforts will be dampened by the impact of the global economic slowdown (especially in Europe and the US), which will present major headwinds to growth in 2023. Our bleak economic outlook for Europe and the US is likely to translate into subdued tourist arrivals from those markets in the first half of 2023 (which would ordinarily be the peak tourist season). This will deal a serious blow to Curaçao's tourism revenue, as Europe and the US accounted for nearly three-quarters of stayover arrivals to Curaçao in 2022.

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 oil refinery and the Bullen Bay Oil Terminal. In June Refineria di Korsou (RdK, the state-run refining company) announced that a consortium of US and Brazilian companies would operate the refinery and storage facilities-the facilities were previously being operated by PDVSA (the Venezuelan state-owned oil firm), but the lease expired in 2019. The contract is in the process of being drawn up, and operations are likely to restart in the coming months.

We expect that the government will continue its fiscal consolidation efforts in 2023-24; however, additional fiscal measures to offset high inflation and anaemic global growth mean that progress will be slower than we had 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 he has not managed to change the situation, as the lack of fiscal options leaves him with little bargaining power.

We expect the government to continue making progress on implementing fiscal reforms introduced late 2021. Curaçao also phased out liquidity support from the Netherlands around the same time, but it still has the option to request fresh support if needed. Given the current context of high energy prices, the government could well make this move in 2023 to ease the stress on 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 alter drastically the underlying terms of Dutch financing.

According to the Centrale Bank van Curaçao en Sint Maarten (CBCS, the Curaçao and Sint Maarten joint central bank), the fiscal deficit was 7% of GDP in 2021, and public debt stood at 86% of GDP. We believe that reining in non-emergency spending (such as on remuneration, hiring and appraisals) will prove difficult, but that revenue from enhanced tax collection efforts and tourism will increase significantly, bringing the fiscal account close to balance in 2023-24.

We expect the CBCS to raise interest rates this year to combat inflation and respond to monetary tightening by the Federal Reserve (Fed, the US central bank). In November the CBCS raised the pledging rate by 125 basis points to 4.75%. We expect the central bank to continue to raise interest rates in the first half of 2023, in line with the Fed (we currently forecast that the federal funds rate will peak at 4.50-4.75% by February), but 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 currently stands at 19%. If Curaçao's economic recovery proves slower than we expect, the CBCS will probably loosen this requirement to stimulate credit growth.

Reforming the currency union, introducing a new currency (the Caribbean guilder), 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. Furthermore, addressing reputational concerns stemming from high levels of fraud, tax evasion and money-laundering will remain a CBCS priority.

We forecast that real GDP growth will decelerate to 3.7% in 2023 as an economic slowdown and high inflation rates in the US, the euro zone and the Netherlands-main sources of tourists to Curaçao-affect disposable incomes in those countries. Another risk is the escalation of the war in Ukraine, which could keep prices higher for longer, subduing tourism and investments.

Although we do not forecast components of real GDP, we expect economic activity in 2023-24 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. Investment in the tourism sector will also help to buoy growth, despite uncertainty stemming from global inflation and tightening financing conditions. Activity at the Isla oil refinery is expected to restart in the first quarter of 2023, under the operation of a consortium of seven US and Brazilian companies, but there are risks of delays, as the contract, which was expected to be signed by early September, has not yet been announced.

Although monetary policy mechanisms are weak, a tightening cycle this year will go some way towards keeping inflation in check. We then expect import prices to stabilise in 2023, helping to bring inflation down to 3.7% by year-end (the CBCS does not have an inflation target), before moderating further in 2024. 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 Russia-Ukraine war, as this 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 2023-24. We expect the government to retain the Netherlands Antilles guilder during our forecast period, but efforts to introduce a new currency-the Caribbean guilder-have been made, and we believe that it will be introduced in 2024 or later (beyond our forecast period). Sint Maarten and Curaçao formed a currency union in 2010 and had intended to adopt the new currency jointly, but Sint Maarten's preference for adopting the US dollar delayed the initiative. In September it was announced that both countries had confirmed their commitment to a new currency, owing to the risk of stock shortages of the Netherlands Antilles guilder and the need to introduce new counterfeit security features for banknotes and coins. We expect the union to remain intact until the new currency is introduced, 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 narrow from an estimated 15.5% of GDP in 2022 to 15.1% of GDP in 2023. This is based on the assumption that a sharp rise in tourism income will offset elevated food and fuel prices amid ongoing supply-chain disruptions caused by Russia's invasion of Ukraine, and that commodity prices will soften. As at end-August official reserves for the currency union with Sint Maarten stood at a comfortable Naf5.2bn (US$2.9bn, or 86.2% of GDP), equivalent to 5.2 months of import cover, with foreign-exchange reserves at Naf2.6bn.

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