RaboResearch - Economic Research

Country Report Curacao

Country Report


Curacao flag

Curacao is currently facing difficult times, both politically and economically. While economic growth was again disappointing in 2012, Curacao’s political year was characterized with four different prime-ministers and the assassination of a politician.

Strengths (+) and weaknesses (-)

(+) High income level

Compared to other countries in the region, Curacao has a relatively high standard of living, with an income per capita of USD 22,619 in 2012. This gives the country some room to adjust in times of economic difficulty.

(+) A relatively strong institutional framework

Curacao’s institutions are quite strong, as most institutions of the Netherlands Antilles were located in Curacao and are based on Dutch example.

(-) A lack of fiscal discipline

Curacao ran budget deficits in 2010, 2011 and 2012. This comes as a surprise, as Curacao agreed upon having a balanced budget in exchange for the debt relief it received in 2010.

(-) Weak external position

A large current account deficit and a low level of foreign exchange reserves, within the monetary union, exposes the local economy to external liquidity risks.

Key developments

1. Economic growth disappoints

Economic performance has been weak in recent years. After an economic expansion of 0.6% in 2011, the economy contracted by 0.1% in 2012. The contraction was mainly caused by a reduction of both private and public demand. Positive contributors were private investment, the refinery and the utility sector, and external demand. The same conclusions can be drawn by looking at the production side of the economy. The more domestically orientated industries - manufacturing and construction - contracted, whereas the internationally oriented companies in the free-zone and tourism showed positive signs.

2. Government finances not on track

One of the conditions set for debt relief was that Curacao should run a balanced budget. In 2012 it became clear that Curacao had been running a budget deficit in both 2010 (excluding the debt relief) and 2011. Besides, indicators were pointing that without additional measures Curacao would be running a deficit in 2012 and beyond as well, due to rising government expenditures. The budget overruns are an indication that Curacao is not fully in control of its public finances.

3. Foreign currency reserves

Curacao forms a monetary union with St. Maarten, whereby the Antillean guilder (ANG) is pegged to the US dollar. Main implication of having a joint central bank is that the foreign exchange (FX) reserves and current account of both countries matter for the financial stability of Curacao. Since Curacao’s economy is 3.5 times larger than the economy of St. Maarten, the external position of Curacao matters the most. Both the FX reserves and the current account of the monetary union deteriorated in recent years. First, the FX reserves declined by USD 161.8 million, resulting in an import cover ratio of just 3 months at end-2012 (Figure 1). Second, the monetary union ran a total current account deficit of 19.5% of GDP in 2012, to which Curacao contributes most in both relative and absolute terms (figure 2). The deficit is partly offset by a surplus on the financial account, mostly due to inflows of portfolio investment in financial services in Curacao.

Curacao has been experiencing rapid credit growth. This was caused by excess liquidity in the economy due the debt relief in 2010 by the Netherlands, largely depriving the market of the possibility to invest in government bonds. Measures were taken to fight these problems. First, the reserve requirement for banks was raised from 10.5% at the end of 2011 to 14.25% at the end of 2012. Line of reasoning was that this would lead to higher interest rates, in turn leading to a decline of both consumption and imports, which would reduce the current account deficit and slow the decline of FX reserves. Second, a temporary credit freeze was instated between March and August 2012. The measures had the desired effect, as the level of FX reserves stabilized. Since then, the Central Bank allowed credit to grow by 1%, while the reserve requirement rate was raised to 16%.

Figure 1: Foreign exchange reserves
Figure 1: Foreign exchange reservesSource: Central Bank of Curacao and St. Maarten
Figure 2: Balance of payments
Figure 2: Balance of paymentsSource: Central Bank of Curacao and St. Maarten

4. Own central bank

Even after St. Maarten and Curacao agreed upon having a joint central bank in 2010, St. Maarten still thought of having its own central bank and adopting the US dollar. These thoughts were triggered by the debate on who to appoint as the seventh commissioner of the Central Bank. Besides, St. Maarten was unhappy with having only a small Central Bank subdivision on the island. In August 2012, these disputes were solved and both countries agreed that they would stick to the agreement of 2010, to have a joint central bank.

5. Political unrest due to the killing of a politician

Curacao had a turbulent year on the political front. In a time span of just one year, Curacao had four different prime-ministers. The situation became especially uncertain after the resignation of the technical government of Daniel Hodge in March and, even more so following the assassination of Helmin Wiels, of the Independent People (PS) Party, in May. The latter happened during the negotiations talks. The reason for the shooting is still unclear, but just after the shooting rumors popped up that Wiels’ assassination could be linked to his fight against corruption. Finally a new cabinet was sworn in June, whereby Ivar Asjes (PS) became the new prime-minister.

6. Rutte opens the door for further independence

Dutch Prime-Minister Mark Rutte visited the Caribbean islands that are part of the Kingdom of the Netherlands in July, and announced that the islands could become independent countries. There was only one condition; a majority of the people should support independence. According to a Dutch newspaper, Rutte is concerned about the quality of public governance and is afraid that the islands will need additional financial support, something he is not willing to provide.

Factsheet of Curacao
National facts of CuracaoSource: CIA World Factbook, Central Bank of Curacao and St. Maarten, EIU and S&P

Background information

Curacao is a small island in the Caribbean, with a population of nearly 150,000 people and an economic size of roughly USD 3 billion, its GDP per head amounts to 22,619. By the breakup of the Netherlands Antilles in 2010, Curacao became an independent country within the Kingdom of the Netherlands. Since its autonomous status, Curacao’s parliament is responsible for most local government issues, while the Netherlands is still in control over foreign and defense policies and some judicial functions. In addition, the Netherlands supervises Curacao’s finances. As most institutions of the Netherlands Antilles were located in Curacao and were based on Dutch institutions, the country benefits from a relatively strong institutional framework. However, due to corruption in the bureaucracy these benefits are not used to their full potential.

Curacao’s political system is both democratic and stable. However, from time to time some parliamentarians and government officials are accused of corruption. Although these allegations seldom lead in convictions, it seems evident that there are ties between politicians and criminals. In this respect the assassination of Helmin Wiels – a political leader – who was intent on fighting corruption, was alarming. Assassination of politicians on the island is very uncommon. It was the first time a local politician was killed.

Curacao has a relatively broad economic base, consisting among others of tourism, off-shore financial services and oil refining. Main weaknesses of the economy are the government’s persistent financial slippages and a weak external position. One of the conditions set for debt relief in 2010 was that Curacao was not allowed to run budget balance deficits. Curacao, however, has been running deficits in 2010 (only due to the debt relief the final budget balance was positive), 2011 and 2012, which demonstrates that Curacao is not fully in control of its own finances. Looking at the external position, both the large current account deficit and a low level of foreign exchange reserves are reasons for concern. In case Curacao will experience a balance of payments crisis its currency pact – the Antillean guilder (ANG) is pegged to the US dollar – may became unsustainable.

Economic indicators of Curacao
Economic indicators of CuracaoSource: Central bank of Curacao and St. Maarten, Moody’s and S&P

Due to very limited data availability, figures presented in this report should be regarded as indicative.

Maarten van der Molen
Rabobank KEO
+31 30 21 62666

naar boven