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Country Report Curaçao

Country Report


Flag Curacao

Curacao had a slightly disappointing economic performance in 2013. However, both Curacao’s external position and public finances improved. Nevertheless, these remain important weaknesses. 

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 21,306 in 2013.

(+) A relatively strong institutional framework

Curacao’s institutional framework is quite strong compared to its regional peers. However, political turmoil and stories of corruption are not uncommon.

(-) A lack of fiscal discipline

Curacao ran budget deficits in 2010, 2011 and 2012. This comes as a surprise, as Curacao agreed to have balanced budget in exchange for the debt relief it received from the Netherlands in 2010. It seems that the government is trying to tackle the island’s fiscal problems, but whether this is structural must be seen.

(-) 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. Despite economic contraction, some improvements are made

In 2013, Curacao’s economy contracted by 0.8% y-o-y. The contraction can mainly be attributed to a drop in in both consumption and investment. Private consumption fell by 0.8%, which is probably caused by measures taken by the government, including a rise in social premiums, a deterioration of the labour market, as the unemployment rate reached 13% in the third quarter of 2013 from 9.8% a year earlier and a slowdown of private credit growth. The slowdown in private credit growth can partly be explained by an increase of the reserve requirement for banks. The Central Bank raised the reserve requirement from 14.25% at the end of 2012 to 17.00% at the end of 2013. At the end of 2011 the requirement still stood as 10.5%. The objective of this measure was to improve the external position of the monetary union, which consists of Curacao and St. Maarten, through a reduction of domestic demand. Combined the countries had a current account deficit of 19.4% of GDP in 2012, while FX-reserves were falling quickly. The policy seems to have had some effect, as the current account deficit decreased to 15.9% of GDP in 2013. However, the deficit is still considerable and since the deficit could not be completely financed through the financial account, the Central Banks foreign reserves declined further. As a result, the monetary union currently has an import cover of only 3.3 months.

A bigger balance of payments adjustment is therefore necessary. The fact that Curacao’s economy is more than three times larger than that of St. Maarten and that the current account deficit is fully caused by Curacao (although we note that the data must be interpreted with caution), implies that a reduction of the deficit must largely come from Curacao. Since a strong increase of exports is not expected, a reduction of the current account deficit has to be accomplished predominantly through a reduction of imports, which on its turn necessitates a fall of disposable income.

2. Improvements made in public finances

One of the conditions set for debt relief by the Netherlands in 2010 was that Curacao should run a balanced budget. However, in 2010 (excluding the debt relief), 2011 and 2012 Curacao was running a budget deficit. In 2013, the government turned this deficit into a surplus of 1.4% of GDP. In July 2012, the College Financieel Toezicht (CFT, an independent body which is in charge of monitoring the government finances of Curacao and St. Maarten) gave the government of Curacao the instruction to bring government finances in order. Since then the government has introduced a general health insurance scheme to lower health care costs, adopted a law that will gradually raise the retirement age from 60 to 65 years, lowered the size of the public apparatus and applied a further differentiation in the sales tax rate. Although all these measures had a downward pressure on economic growth, they have made public finances more sustainable.

Figure 1: Economic performance
Figure 1: Economic performanceSource: Central Bank of Curacao and St. Maarten
Figure 2: Balance of payments
Figure 2: Balance of paymentsSource: Central Bank of Curacao and St. Maarten

3. Rising tensions with Venezuela

A decision by an Aruban court to detain Hugo Carvajal, a retired Venezuelan general and former head of Venezuela’s military intelligence, on US drug trafficking charges triggered an angry response by Venezuela. Venezuela denied that the drug trafficking took place and called the arrest a “kidnapping”. Aruban officials accused Venezuela of reacting aggressively, after Venezuela had sent naval vessels to the area. In addition, flights from Venezuela to Curacao were halted and threats were expressed that Curacao’s oil refinery would be closed. Finally, the Dutch authorities, which are responsible for the foreign affairs of both Aruba and Curacao, accepted Venezuela’s argument that Carvajal enjoyed political immunity. The impact of the Venezuelan measures could have been substantial, as the refinery employs 1,000 people directly and 400 indirectly. Furthermore the refinery accounts for almost 10% of Curacao’s GDP. In addition, Venezuelans make up 20% of the stay-overs on Curacao.

Factsheet of Curacao
Factsheet of CuracaoSource: CIA World Factbook, Central Bank of Curacao and St. Maarten, EIU

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 amounted to USD 21,306 in 2013. When the Netherlands Antilles was broken up in 2010, Curacao became an independent country within the Kingdom of the Netherlands. Since the country gained its autonomous status, Curacao’s parliament has been responsible for most local government issues, while the Netherlands has remained in control over foreign and defense policies and some judicial functions. In addition, the Netherlands supervises Curacao’s public 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 to convictions, it seems evident that there are ties between politicians and criminals. In this respect, the assassination in 2013 of Helmin Wiels – a political leader – who was intent on fighting corruption, was alarming. 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. However, persistent fiscal slippages and a weak external position are macro-economic vulnerabilities. One of the conditions set for debt relief in 2010 was that Curacao was not allowed to run budget 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 suggests that Curacao is not fully in control of its own finances. Positive in this respect is that some structural issues have been tackled and that Curacao was running a surplus in 2013.

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, *Monetary Union data (so the data includes St. Maarten)

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

According to the 2014 Article IV Consultation with Curaçao and Sint Maarten: Preliminary Mission Conclusions of the IMF (20 May, 2014): “There remains an urgent need to upgrade the statistical infrastructure. Substantial data gaps hinder effective macroeconomic diagnosis and surveillance and complicate policy-making in both countries. For example, national accounts data are incomplete and published only with very long lags, there are no data on GDP deflators or on the international investment position, and fiscal data do not adhere consistently to international classification standards”.

Maarten van der Molen
Rabobank KEO
+31 30 21 62666

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