Published On: Thu, May 9th, 2013

Report of the President of the Central Bank -Dr. E.D. Tromp

Dr. Emsley TrompWILLEMSTAD -- Global economic growth decelerated during the third quarter of 2012.

Economic conditions weakened in most advanced economies because of fiscal adjustments, sluggish labor markets, and fragile financial environments. In the key emerging markets and developing economies, output growth slowed also.

Developments in the monetary union of Curaçao and Sint Maarten were mixed during the July – September period of 2012. Real economic growth in Curaçao decelerated from 0.6% in the third quarter of 2011 to 0.1% in the third quarter of 2012. In contrast, the available indicators for Sint Maarten pointed to a pickup of economic activity during the September quarter of 2012.

The economic slowdown in Curaçao can be ascribed to weakened net foreign demand combined with a contraction in domestic demand. Similar to 2011, net foreign demand expanded during 2012’s third quarter as the rise in exports exceeded the increase in imports. However, the gain in net foreign demand was less pronounced in this period compared to the third quarter of 2011. Domestic demand contracted due to a decline in public expenditures mitigated by a growth in private spending. Public expenditures declined as both public consumption and investment dropped. The contraction in public consumption was the result of lower expenditures on wages & salaries, while the decline in investments by the government was related to reduced spending on development projects. The growth in private spending was the result of more private sector investments, particularly in non-residential construction projects. In contrast, private consumption dropped. The meager third-quarter economic expansion was accompanied by a lower inflation rate of 2.4%, reflecting mainly reduced energy prices in Curaçao. However, the annualized inflation rate climbed to 3.2%.

A review by sector shows that the restaurants & hotels, transport, storage & communication, and manufacturing sectors contributed mainly to 2012’s third-quarter economic expansion in Curaçao. The growth in the restaurants & hotels sector stemmed from the positive development in tourism, reflecting increases in both stay-over and cruise tourism.

The transport, storage & communication sector performed well as both air transportation and harbor activities expanded. Air transportation and airport-related activities increased, backed by the rise in stay-over arrivals. Meanwhile, the harbor registered a growth in oil storage and cargo movements. The increase in oil storage activities can be ascribed largely to the upgrading and expansion of oil storage facilities in the port of Bullenbaai and an increase in the number of ships piloted into the port, in particular oil tankers and freighters. Growth in the manufacturing sector was caused mainly by an increase in the activities at the Isla refinery stemming from maintenance work on the cat cracker plant.

Output growth in the wholesale and retail trade sector decelerated considerably as a result of declines in domestic demand and re-export by the free-zone companies, mitigated by the increase in tourism. Meanwhile, real value added expanded in the financial services sector, albeit at a slower pace than in the third quarter of 2011, backed solely by an increase in domestic financial services. In contrast, international financial services posted negative results as indicated by a decline in wages and salaries. After a contraction in the third quarter of 2011, activities expanded somewhat in the construction sector, due mainly to increased investments in commercial properties. The gain in the construction sector was in line with the growth in business loans extended and the increased imports of construction material.

The upturn in private sector activities in Sint Maarten was the result of output growth in the main sectors of the economy, including the restaurants & hotels, transport, storage & communication, financial services, and construction sectors. Meanwhile, inflationary pressures eased as the inflation rate dropped from 5.6% in the third quarter of 2011 to 2.8% in the third quarter of 2012. The lower inflation was the result of a drop in international oil prices, mitigated by higher international food prices.

Growth in the restaurants & hotels sector of Sint Maarten was driven by increases in the number of cruise and stay-over tourists. The latter increase was due to, among other things, increased airlift in the September quarter of 2012 compared to 2011’s third quarter. The growth in cruise tourism was the result of a rise in the number and size of the cruise ships visiting the port of Sint Maarten. More airport-related and harbor activities contributed to a growth in the transport, storage & communication sector. Activities at the Princess Juliana International Airport expanded during the third quarter of 2012 as a result of increased passenger traffic. This increase was in line with the growth in stay-over arrivals. The harbor also performed well because of more ship calls and container movements.

The financial services sector performed well as the net interest income of the domestic commercial banks rose. The utilities sector also expanded as the production of both water and electricity increased. The construction sector showed signs of recovery due mainly to more residential construction projects.

The developments in Curacao’s public finances during the third quarter of 2012 were marked by the official instruction of the Kingdom Council to the Curacao government to balance its budget of 2012 and to take measures to compensate for the deficits incurred in 2010 and 2011. Contrary to the balanced budget rule agreed upon in the Kingdom Act Financial Supervision for Curaçao and Sint Maarten, the Curaçao government posted a budget deficit in 2010 and 2011 and without proper and timely measures, would have ended 2012 with a deficit as well.

The deficit of the Curacao government widened further in the third quarter of 2012 compared to 2011’s third quarter, resulting from a rise in expenditures. The main expenditure increases occurred in goods & services and other expenditures. Meanwhile, government revenues remained practically unchanged compared to 2011 because a growth in nontax and other revenues was offset by a decline in tax revenues. The latter decline was largely the result of fewer revenues from profit tax, import duties, and property tax. In contrast, sales tax revenues rose largely because of the increase in the sales tax rate in January 2012.

The government of Sint Maarten recorded a budget deficit of NAf.20.1 million in the September quarter of 2012, a turnaround compared to the surplus of NAf.12.3 million registered in the September quarter of 2011. This turnaround was the result of increased expenditures combined with a decline in revenues. Fewer entrepreneurial and property income and less revenue from income and profit taxes were the main causes of the decline in revenues. In contrast, taxes on goods and services and the property transfer tax increased.

The current account deficit of the balance of payments narrowed during the third quarter of 2012 compared to the third quarter of 2011. The increase in net foreign demand and an improvement in the income balance led to the smaller current account deficit. Net foreign demand rose as the increase in export of goods and services offset the rise in imports. The surge in exports was related to, among other things, increased foreign exchange earnings from the tourism and transportation sectors in both Curaçao and Sint Maarten. In addition, the refining fee increased to cover, among other things, maintenance work on the cat cracker at the Isla Refinery in Curaçao. Imports rose mainly because of more merchandise imports by the free-zone companies in Curaçao combined with increased imports of construction material. The increased imports of construction material were mainly attributable to the ongoing investments in commercial properties in Curaçao. Meanwhile, the income balance improved because of a rise in interest income received on foreign investments, combined with a drop in dividend payments to abroad.

The current account deficit was financed largely by official foreign exchange reserves. As a consequence, gross reserve assets dropped in the third quarter of 2012. The remainder of the deficit was covered by external financing of the private sector, reflected by a worsening in the direct investment, loans and credits, and portfolio investment balances. The direct investment balance deteriorated as local companies increased their liabilities with their direct investors and nonresidents purchased real estate in Curaçao and Sint Maarten. The worsening of the loans and credits balance was due to domestic companies’ withdrawals from their foreign bank accounts and a rise in net trade credits received from abroad. The portfolio investment balance deteriorated largely as a result of matured foreign debt securities held by local institutional investors and not reinvested abroad.

The money supply contracted in the third quarter of 2012 as both net foreign assets and net domestic assets dropped. Net foreign assets declined because of a drop in the net foreign holdings of the commercial banks, mitigated by an improvement in the central bank’s net foreign position. Meanwhile, net domestic assets shrank due to declines in miscellaneous balance sheet items and net credit extended to the governments. The drop in net domestic assets was mitigated, however, by a growth in net credit extension to the private sector. The latter growth was the result of a rise in loans extended in both Curaçao and Sint Maarten. All loan components in Curaçao registered an increase. Meanwhile, in Sint Maarten, the expansion in private credit extension was attributable to a rise in business loans, mitigated by a contraction in mortgages and consumer loans extended.

During the September quarter of 2012, the Bank continued to direct its monetary policy at the tightening of the surplus on the money market, given the persistent high deficit on the current account of the balance of payments and the declining international reserves. Therefore, the reserve requirement was increased monthly to reach 12.25% in September 2012. Moreover, the credit restriction that was introduced for the period March – August 2012 was extended for another 6-month period. However, as the growth in private credit extension and the decline in international reserves showed some moderation, the credit restriction was adapted slightly by allowing a maximum growth of domestic private credit extension of 1.00% for the period September 2012 – February 2013. The other monetary policy instrument, the auctioning of certificates of deposit (CDs), was not actively deployed during the quarter under review. During the biweekly auctions, the Bank aimed only at the refinancing of maturing CDs.

In pursuance of the instruction promulgated by the Kingdom Council of Ministers, the Curaçao government has embarked on a fiscal consolidation path to bring the 2012 budget in line with the norms established in article 15 of the Kingdom Act financial supervision Curacao and Sint Maarten. Several far-reaching measures to improve the country’s fiscal situation and, at the same time, safeguard the social security system have been taken. These measures include an increase in the retirement age for old age pension and the introduction of a general health insurance scheme. While these measures were urgently needed, in the short term they have created a false sense of security. It would be a mistake to think that strict adherence to those measures alone will bring about the much needed growth to create the fiscal room to address other policy areas. The disproportionate emphasis on fiscal consolidation without due regard to institutional building and structural measures has created a situation where growth prospects in the monetary union is tilted to the downside.

The anemic growth in the monetary union has been fueled by strong credit growth in Curacao and revival of the tourism sector in Sint Maarten. However, the persistent deficit in the current account of the balance of payments has put a limit on the effectiveness of further credit growth to shoulder growth in Curacao.

While elsewhere the focus is on a new chapter of prosperity and opportunity, we seem to be constantly revisiting our constitutional arrangement and bogged down in fiscal consolidation. Scarce resources and time are diverted from a much-needed revised vision for sustainable economic growth. Therefore, the next step the government should take is to stimulate economic growth by investing in education and health care, creating the right business climate, and ensure that growth is sustainable. In the immediate run, the government also should accelerate pending investment projects that can give a positive boost to the economy. These include the construction of a new hospital and several infrastructure projects. With respect to a new hospital, lengthy discussions have taken place for decades without any real progress on this project, so important to the wellbeing of our citizens. Decisions must be taken without further delay so that the project can finally be started and help put the economy on a path of sustainable economic growth. Fiscal consolidation will also bring its pressure to bear on the most vulnerable of the society. Effective social safety nets are critical. We must protect people from the sudden changes in fortune and ensure that they are not excluded from future success.

The government of Sint Maarten also has been facing major challenges with regard to the public finances. The 2013 budget is still in the process of obtaining the necessary approval by the financial supervision body, CFT. The challenge for Sint Maarten remains, creating new opportunities for growth. This means creating better environment for entrepreneurship and further diversification of the economy. This offers tremendous potential for growth. In addition, the country must reform its tax system to structurally increase its income base. At the same time, the process of setting up and strengthening of the public institutions and government apparatus must continue.

Sint Maarten is already working on reforms of its pension and health care systems, despite having a relatively young population. The recent developments in Curacao show that timely implementation of reforms in these areas is crucial to prevent uncertainty about the future of the government fiscal policy. Therefore, Sint Maarten should implement these reforms in a timely fashion to safeguard balanced budgets in the years ahead.

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