Published On: Sat, Jan 5th, 2013

Report of the President of the Central Bank

The global economic recovery remained subdued during the second quarter of 2012, reflecting primarily fiscal consolidation in the advanced economies. Also, the financial markets continued to perform weakly. Meanwhile, activities slowed down in the emerging economies, notably China, Brazil, and India, due to, among other things, the weaker external environment, domestic capacity constraints, and fiscal tightening by the governments.

In Curaçao, real GDP contracted by an estimated 0.2% during the second quarter of 2012, a turnaround compared to the expansion of 0.9% registered in the second quarter of 2011. The economic contraction during 2012’s second quarter was accompanied by accelerated inflationary pressures reflecting mainly domestic factors, particularly higher domestic prices of gasoline and electricity, and the increased turnover tax rate as of January 2012. Consequently, inflation in Curaçao soared to 4.3% in the June quarter of 2012, up from 1.4% a year earlier. Furthermore, the annualized inflation rate climbed to 3.3%.

In Sint Maarten, private sector data indicate improved economic performance in the second quarter of 2012. The inflation rate dropped to 4.0% during the April–June period of 2012, a deceleration compared to the 4.7% inflation rate registered in the June quarter of 2011. The slowdown in consumer price inflation was largely the result of lower international fuel prices. In addition, the annualized inflation rate dropped to  5.2% at the end of June 2012 compared to 5.4% at the end of March 2012.

The economic contraction in Curaçao was caused by a decline in domestic demand, reflecting a drop in both private and public spending. Private spending fell due to a decline in real consumption ascribable to the increased inflationary pressures that eroded consumers’ purchasing power. Meanwhile, public demand contracted because  of lower government consumption and investment. In contrast, net foreign demand increased because the growth in exports of goods and services surpassed the rise in imports.

An analysis by sector shows that real GDP in Curaçao contracted because of a decline in public sector activities. In contrast, private sector activities expanded modestly by 0.3%. The latter expansion was driven primarily by the manufacturing, restaurants & hotels, and transport, storage, & communication sectors. The increase in real value added in the manufacturing sector was due mainly to maintenance work on the cat cracker at the Isla refinery. Also, ship repair activities increased during the second quarter of 2012.

The restaurants & hotels sector expanded as well, albeit at a slower pace than in the second quarter of 2011. Both stay-over and cruise tourism  contributed to the expansion. Stay-over tourism grew due to more visitors from South America and Europe. The increase from Europe was largely the result of more German visitors, offsetting a decline in the number of tourists from the Netherlands. In contrast, the number of stay-over visitors from North America and the Caribbean shrank.

The transportation, storage, & communication sector also contributed positively to private sector growth in the second quarter of 2012, but its role was less pronounced than a year earlier. The growth was attributable largely to more air transportation and airport-related activities, due to the rise in the number of stay-over arrivals. Activities in the harbor grew also because of more cargo movements and oil storage activities. The rise in the oil storage activities was the result of the upgrading and expansion of the tank facilities in the port of Bullenbaai. Real output rose as well 2 in the electricity, gas, and water sector, due largely to increases in water and electricity production and investments in the water plants.

Private sector growth was mitigated, however, by a decline in the construction sector as no major investment projects were implemented during the June quarter of 2012. Real value added in the financial services sector shrank as well because of a contraction in the international financial services as indicated by declines in wages and salaries and other operational expenses. In contrast, domestic financial services increased because of an increase in income earned, combined with a drop in expenses.

Output contracted also in the wholesale and retail  trade sector due mainly to a decline in domestic spending. More activities in the free zone and the increase in stay-over tourism mitigated the contraction in the wholesale and retail trade sector. In the free zone, activities increased despite a decline in the number of visitors.  In the real estate, renting, & business services sector, activities dropped as well, reflecting primarily fewer purchases of real estate and a slowdown of investments by nonresidents during the April–June period of 2012 compared to the second quarter of 2011.

The improved economic performance in Sint Maarten was driven mainly by an expansion in the restaurants & hotels sector, reflecting increased stay-over and cruise tourism. During the second quarter of 2012, stay-over tourism expanded owing to more visitors from North America, Europe, and South America. Moreover, activities expanded in the transport, storage, & communication sector backed by more ships piloted into the port and increased airport-related activities. The domestic financial services also contributed positively to the growth in Sint Maarten as net income of the domestic commercial banks increased. Meanwhile, the construction sector showed some signs of recovery as the value of mortgages extended increased during the second quarter of 2012 compared to the second quarter of 2011.

The deficit of the government of Curaçao widened to NAf.112.2 million in the second quarter of 2012 as the increase in expenditures exceeded the rise in revenues. The increase in expenditures occurred in wages and salaries, related to the payment of pension premiums. In addition, government transfers increased, to the road fund among other things. The rise in revenues was due to more earnings from sales and profit taxes and increased nontax revenues.

An analysis of the available government data of Sint Maarten indicates that the balance of the government worsened from a small surplus of NAf.2.2 million in the second quarter of 2011 to a small deficit of NAf.3.0 million in the second quarter of 2012. This turnaround was caused by increased government expenditures, mitigated by a rise in government revenues. A growth in nontax and other revenues and more tax income collected on goods and services and excises on gasoline led to the rise in government revenues. Regretfully, no breakdown was available of the government expenditures.

The deficit on the current account of the balance of payments declined in the second quarter of 2012 compared to the 2011’s second quarter, due mainly to an increase in net exports of goods and services. The latter increase was the result of increased exports mitigated by more imports.

The rise in imports was largely the result of more  merchandise imports by the free-zone companies. Also, investments in the refinery and water plant facilities in Curaçao contributed to the rise in merchandise imports. Export growth was  primarily the result of more foreign exchange earnings from the tourism industry in both Curaçao and Sint Maarten. In addition, the refining fee increased to finance, among other things, maintenance work on the cat cracker at the Isla refinery. Also, re-exports by the free-zone companies in Curaçao increased. The current 3 transfers balance improved as well during the second quarter of 2012 because of more current transfers received from abroad mitigated by a rise in current transfers paid to abroad. In contrast, the income balance worsened as a result of less interest income earned on foreign assets by resident companies, combined with increased dividend payments to abroad.

The current account deficit was financed largely by private net capital inflows, as reflected by a worsening of the portfolio investment and direct investment balances. The portfolio investment balance deteriorated largely as a result of matured foreign debt securities held by local institutional investors that were not reinvested abroad. The latter included debt securities that were issued in the past by the Netherlands Antillean entities and taken over by the Dutch government as part of the debt relief program. In addition, net direct investments into the monetary union increased, albeit at a slower pace than in the second quarter of 2011, reflecting increased liabilities of domestic companies towards their foreign affiliates and the purchase of real estate in Curacao and Sint Maarten by nonresidents. Meanwhile, the loans and credits balance improved, reflecting, among other things, increased foreign deposits by local companies. In contrast, the net trade credit balance worsened because net trade credits received increased while net trade credits extended dropped. Because total foreign financing exceeded the current account deficit, gross official reserves increased during the second quarter of 2012.

The money supply expanded in the second quarter of  2012 because of increases in both net foreign assets and net domestic assets. The increase in net foreign assets resulted from a rise in net foreign holdings of the commercial banks. In contrast, net foreign assets of the central bank dropped. Meanwhile, net domestic assets grew mainly because of a rise in net credit extended to the government, resulting from a drawdown of deposits. Moreover, net credit extended to the private sector posted a small growth. Private loans extended in Curaçao increased because the rise in mortgages outweighed the drop in consumer loans and business loans. In Sint Maarten, private credit extension declined due to a drop in consumer loans and business loans mitigated by an increase in mortgages.

During the second quarter of 2012, the Bank increased the percentage of the reserve requirement, its main monetary policy instrument, each month by 0.25 percentage points to reach 11.50% at the end of June 2012. Although the temporary credit freeze affects private credit extension and, hence, domestic expenditures and imports, this measure does not influence the excess liquidity in the money market. Therefore, the Bank continues to gradually increase the reserve requirement to curb the excess liquidity. The other monetary policy instrument, the auctioning of Certificates of Deposit (CDs), was not actively deployed. During the biweekly auctions, the Bank aimed only at the refinancing of maturing CDs. Therefore, the  amount of outstanding CDs remained unchanged.

During the past couple of months, it has become abundantly clear that the state of Curaçao’s public finances is worrisome. Without proper and urgent measures, the Curaçao government will face major liquidity problems during the first months of 2013. As a result of the fiscal situation and the uncertainties surrounding it, Standard and Poor’s has revised the outlook for the Curaçao economy from stable to negative. The credit rating  institution has indicated that if the fiscal situation does not improve, the rating of Curaçao is likely to be downgraded. Needless to say, such a downgrade will have a negative impact on investor confidence and, hence, the prospects for economic recovery.

In addressing the disequilibria in the public finances, the following policies should be placed at the forefront of the national agendas. First, the pension system should be reformed to adequately reflect the ageing of the population. Raising the retirement age is consistent with the progress we 4 have made in the general health care and the medical field as we live longer and are able to work longer, contributing to the recovery of the financial soundness of the old age pension fund (AOV). However, some differentiation should be considered to account for medical indications.

Second, the rapidly rising health care costs must be brought under control, among other things, through eliminating waste and inefficiencies, and putting more emphasis on prevention. Third, the transformation of the two layers of government into an efficient and effective government apparatus --the overriding rationale for the constitutional restructuring-- should be finalized soon.

Finally, corporate governance should be restored with the public enterprises to minimize the financial risks for the government budget. The fiscal reforms should be accompanied by a strategy to increase the growth prospects of the economy. This should be attained, on the one hand, by a change in the composition of the population whereby younger, highly skilled and educated professionals will be encouraged to immigrate to our shores. These professionals will contribute to a necessary expansion and rejuvenation of the population and, hence, create economies of scale and a broader base to support the social security and health care systems. On the other hand, more (foreign) investments should be attracted by addressing the current weaknesses of our investment climate, contributing to more economic activities.

E.D. Tromp

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