Economy: Curaçao developments in 2016
WILLEMSTAD - According to preliminary data and estimates of the Central Bank of Curaçao and Sint Maarten (CBCS), economic growth in Curaçao will remain flat in 2016, following an increase of 0.3% in 2015. Meanwhile, the annual inflation rate will be negative at -0.4% in 2016 reflecting primarily a fall in international oil prices partly offset by an increase in domestic food prices.
The economic stagnation in 2016 was the result of an increase in domestic demand that was offset by a decline in net foreign demand. The positive contribution of domestic demand to GDP growth was attributable to an increase in both private and public spending. Consumption as well as investments contributed to the increase in private demand. Private investment growth was consistent with a number of large investment projects in the tourism, transportation, wholesale & retail trade, and real estate sectors during 2016, including the upgrading of Curaçao’s airport and housing projects. Private consumption also rose, benefitting from higher disposable income due to lower income tax rates. The growth in public demand was driven by an increase in investments in, among other things, the construction of the new hospital and the upgrading of Curaçao’s road infrastructure. In addition, public consumption grew mainly because of higher outlays on goods and services. In contrast, net foreign demand contributed negatively to GDP growth because exports dropped at a faster pace than imports. The disappointing export performance can be explained by a decline in the foreign exchange earnings from refining, bunkering, air transportation, and tourism activities. The lower import bill reflected largely lower oil imports because of the decline in international oil prices.
An analysis of GDP by sector during the first six months of 2016 reveals that the decline in private sector activities in the restaurants & hotels, manufacturing, wholesale & retail trade, and transport, storage, & communication sectors was offset by an increase in activities in the construction, financial intermediation, and utilities sectors.
Real value added growth in the restaurants & hotels sector was negative due to a decline in the number of visitor nights. On the other hand, the number of stay-over visitors increased but at a slower pace compared to the first half of 2015, mainly because the expansion in the European market was dampened by a contraction in the South American market. The European market expanded primarily as a result of more visitors from the Netherlands and Germany. In contrast, the South American market declined because of a considerable drop in the number of Venezuelan and Brazilian visitors. Furthermore, the number of cruise tourists dropped in line with fewer cruise calls.
Real output in the manufacturing sector declined because refining and trading activities by the Isla refinery dropped. Furthermore, real value added in the wholesale & retail trade sector shrank because of less tourism spending and fewer activities at the free zone. The contribution of the transport, storage, & communication sector to GDP was also negative due mainly to a decline in air transportation services, reflected by a fall in passenger transportation services provided by the domestic airlines to abroad. Additionally, harbor activities shrank because of a decline in oil storage activities and fewer ships piloted into the port of Curaçao.
In contrast, the construction, financial intermediation, and utilities sectors performed well. Output growth in the construction sector was driven by increases in private and public investments. The positive performance of the financial intermediation sector resulted from an increase in real value added of the domestic financial services industry, supported by a rise in other fees & income earned by the domestic commercial banks mitigated by a decline in net interest income. However, the international financial services industry contracted because of a drop in wages & salaries and other operational expenses. The growth in the utilities sector was supported by an increase in the production of both water and electricity.
According to the latest projections, the government of Curaçao expects a budget surplus of NAf.5.5 million in 2016, an improvement compared to the deficit of NAf.1.6 million recorded in 2015. This improvement will be caused by an increase in revenues that will surpass the higher expenditures. Government revenues are projected to rise primarily because of higher non-tax revenues, especially more social security premiums. It should be noted that due to the amendment of Article 4, section 1 of the Budget Act, all expenses and income related to the social security bank, SVB, are included in the government’s budget as of January 2016. This amendment explains the significant increase in revenues and expenditures in 2016 compared to 2015. Furthermore, tax revenues are projected to increase slightly, largely because of more proceeds from taxes on goods & services. Meanwhile, government expenditures will go up due mainly to more outlays on transfers and subsidies, especially social security transfers and subsidies to government entities.
During 2016, the outstanding public debt of the Curaçao government grew by an estimated NAf.68.9 million to NAf.2.564 billion driven by increases in the foreign and domestic debt components. The foreign debt component rose mainly because of the issuance of a NAf.59.0 million bond in June, while the domestic debt component increased as a result of more outstanding arrears towards the public pension fund, APC, and the social security bank, SVB. Consequently, the debt-to-GDP ratio rose to 45.6% at the end of 2016.
Over the course of the past four years, the government of Curaçao implemented several reforms to improve the public finances. Although the fiscal situation has improved, there are still some issues that might pose a risk to the sustainability of the public finances in the medium term and, hence, need to be addressed. One of these issues is the deficit of the old-age pension fund (AOV) that is being financed through budgetary transfers. Furthermore, Curaçao’s debt-to-GDP ratio is currently above the benchmark of 40% that is considered prudent for a small open economy, while economic growth has remained lackluster. To ensure debt sustainability in the medium term, the government will have to take measures to stimulate a higher growth path, including addressing the weaknesses of Curaçao’s investment climate.