Curacao Economic Outlook 2011

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Curacao Economic Outlook 2011

  1. 1. Curaçao Economic Outlook 2011 En route towards the strengthening of the economic structure of new country Curaçao
  2. 2. Contents PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 CHAPTER 1: MACROECONOMIC DEVELOPMENTS . . . . 10 1.1 International and Regional Developments and their Consequences for Curaçao . . . . . . . . . . . . . . . . . . . . . 10 1.2 Macro Economic Indicators for Curaçao . . . . . . . . . . . . . . . . . . . 26 1.3 Labor Market Developments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 1.4 Public Finances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 1.5 Monetary Developments in Curaçao . . . . . . . . . . . . . . . . . . . . . . 45 1.6 Balance of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 1.7 SEI Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 CHAPTER 2: SECTORAL DEVELOPMENTS . . . . . . . . . . . . 58 2.1 Production Sectors: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 2.1.1 Agriculture, Livestock and Fisheries . . . . . . . . . . . . . . . . . . . . . . 58 2.1.2 Oil Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 2.1.3 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 2.1.4 Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 2.2 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 2.3 Trade Sectors: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 2.3.1 Wholesale and Retail Trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 2.3.2 Economic Zones and E-commerce . . . . . . . . . . . . . . . . . . . . . . . 83 2.4 Transportation Sector: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 2.4.1 Air Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 2.4.2 Harbor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96 2.5 Tourism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101 2.6 Financial and Business Services: . . . . . . . . . . . . . . . . . . . . . . . .106 2.6.1 Commercial Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106 2.6.2 International Financial and Business Services . . . . . . . . . . . . .109 2.6.3 Insurance Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .113 2.7 Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .117 CHAPTER 3: ENHANCING BUSINESS CLIMATE . . . . . . .123 APPENDICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129 Appendix I: Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129 Appendix II: List of Tables and Figures . . . . . . . . . . . . . . . . . . . . . . . . . .131 Appendix III: List of Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133 2 Contents
  3. 3. Preface The Ministry of Economic Development, on behalf of the Government of Curaçao, is proud to present the Curaçao Economic Outlook 2011. This publication provides an overview of Curaçao’s macroeconomic and sectoral performance in 2010 and 2011, the latter based on the devel- opments up to the first nine months of the year, and in addition dis- cusses the prospects for the whole economy in 2012, underlining some key policy intentions for the near future to strengthen Curaçao’s eco- nomic structure. The Curaçao Economic Outlook 2011 was prepared by a team of policy advisors at the Ministry of Economic Development, with contributions from several government institutions, the private sector and sector-spe- cific associations, which shared their latest data and knowledge with the Ministry. Through these words, the Ministry would like to thank all who, in one way or the other, contributed to the realization of this publication. Ing. Luelo Girigorie, CPC, MSc. Head of the Directorate of Economic Policy 3 Preface
  4. 4. Executive Summary Macroeconomic developments The world economy continued to recover in 2010. As fears of global re- cession receded in 2009, businesses regained confidence and indus- trial production and trade boomed. The extent of growth differs per region: in the major advanced economies growth was modest while many emerging and developing countries saw robust growth rates. Un- employment remained high, particularly in advanced economies, while commodity prices increased sharply in 2010. The global economy is anticipated to continue growing, and again, ad- vanced economies are projected to grow at a slower rate in 2011 than emerging and developing economies. Commodity prices continued increasing at the beginning of 2011 but energy prices have receded. Food prices, however, have fallen to a much lesser extent. As a consequence inflationary pressure is lower in advanced economies than in emerging and developing economies. According to preliminary macroeconomic indicators, Curaçao’s econ- omy grew by a mere 0.1 percent in 2010. Growth was led by a moderate increase in public and private consumption but was mitigated by shrin- king public investments and exports. The consumer price index re- mained moderate at 2.8 percent in 2010. For 2011, an expansion of 0.3 percent of the real economy is expected. Growth is led, mainly, by foreign demand, which stimulates local de- mand. Inflation is estimated at approximately 2.4 percent in 2011. Traditionally, the CBS provides the relevant labor-market statistics through their Labor Force Survey. However, as the CBS was preparing intensely for the Census that took place in March and April of 2011, the Labor Force Survey was not conducted in 2010. Hence, the usual overview on participation, employment and unemployment is not avail- able in this edition. Some other indicators are used to describe the latest developments. 4 ExecutiveSummary
  5. 5. Preliminary figures on public finances up to October 10, 2010 indicate a surplus of NAF 32.3 million for the treasury of the Island Territory of Curaçao. The revenue and expenditure projections were based on a forecasted economic growth rate higher than the rate registered in 2010. Never- theless, the actual revenues turned out to be slightly higher than bud- geted, at NAF 911.4 million, while total expenditures turned out lower than budgeted, at NAF 879.1 million. Despite the extra liquidity in the domestic money market, the Central Bank conducted a passive monetary policy in 2010, owing to a slow- down in economic activities. The aggregate money supply of the Nether- lands Antilles decreased by NAF 241.7 million in 2010, while the net foreign assets improved by NAF 582.6 million. The official lending rate of the Central Bank remained unchanged at 1.00 percent in 2010. As per October 10, 2010, Curaçao and St. Maarten form a monetary union with a common currency, which at the moment is still the Nether- lands Antilles guilder, and a common Central Bank, the Central Bank of Curaçao and St. Maarten. The Central Bank’s monetary policy has remained directed at the promotion of a stable external value of the Netherlands Antilles guilder in 2011 and has been a common policy supported by both countries. The current account of Curaçao’s balance of payments deteriorated during 2010, reaching a deficit of NAF 1,633.4 million, mainly because of the worsening of the trade and the service balance and lower current transfers received from abroad. Capital transfers increased by NAF 10.7 million, linked to increased capital inflows from Dutch development-aid funds. The deterioration of the current account in 2010 as compared to the year before resulted in a drop in the net foreign wealth of the private sector. For 2011, the current account deficit is anticipated to stay at approxi- mately the same level as in 2010. The execution of the SEI program reached its peak during the last quar- ter of 2010, as the last day of the year was set as deadline to commit 5 ExecutiveSummary
  6. 6. the projects’ budget. By January 1, 2011, 97 percent of the budget was committed to 85 projects. The rest of the projects’ funds should have been committed by September 30, 2011 at the latest, to avoid under- spending of the SEI budget. At the moment of writing, negotiations are being prepared for a new deadline, because some projects have not been committed yet. The USONA approved a total of 110 projects for an amount of approxi- mately NAF 121 million, 33 of which are economic projects. Up to the end of 2010, not much of the budget for the economic projects had been touched. In 2011, however, the pace of these economic projects increased considerably, putting the execution of the projects in full swing. Sectoral developments An abnormally high level of rainfall brought the agriculture sector to its knees during the last months of 2010 and first months of 2011, result- ing in the import of fruits and vegetables that are otherwise grown lo- cally. Greenhouse initiatives are being tested to increase the local supply of fruits and vegetables. The livestock sector did not show remarkable developments. The growing lionfish population is threatening the fisheries industry. Policies to prevent overfishing are being prepared, while actions to com- bat the lionfish population have already started. Equipment malfunctions at the BOO plant resulted in a shutdown of the oil refinery for several months in 2010. The refinery started operating again in December 2010, but environmental groups are putting pres- sure on the refinery to reduce pollution, which leads to uncertainties with regard to its future. The distribution market was also affected by the shutdown of the refin- ery: traffic in the harbor diminished and, as a consequence, bunkering activities for the distributor decreased. Prospects are positive, however, and there are plans to expand the bunkering and aviation market. 6 ExecutiveSummary
  7. 7. During 2010, the international energy-price developments were not- incorporated into local energy prices. In 2011, two additional players have been allowed to enter the production market in the utilities sector. Furthermore, policies are being prepared to reduce utility prices and dependence on oil supply. Besides the oil refinery and the shipyard company, business by other players in the manufacturing sector remained the same or decreased slightly in 2010 as compared to 2009, owing to increased competition from imported products and high utility costs. The sector is positive about the future due to the planned policy measures, such as a reform of the tax structure and energy production. Sale of important raw materials for the construction sector decreased by between 8 and 22 percent in 2010 compared to 2009, since several major projects were completed in the course of 2010. The number of buildings completed in 2010 was slightly higher compared to 2009. The number of building permits issued in 2010 decreased, however, compared to the previous year. There are, nevertheless, many projects being planned and prepared, but the contracting portfolios are not known yet. Sales in the wholesale sector remained the same or decreased slightly, while sales in the retail sector increased slightly in 2010 compared to the year before. Challenges for the sector lie in remaining competitive and increasing the quality of the products supplied. There are 10 service e-zones in operation on Curaçao and 2 free-zones for international trading of goods. The total number of visitors to the free-zones decreased by approximately 16 percent in 2010 compared to 2009. It is expected that at least two additional service e-zones will be insti- tuted soon, but fewer e-zone license applications have been seen in 2011. The number of free-zone visitors is expected to increase. 7 ExecutiveSummary
  8. 8. Passenger traffic at the Hato International Airport dropped by 3.54 per- cent in 2010 compared to 2009. The economic crisis was largely to blame for this drop. Moreover, some airlines deleted routes to lower costs. Passenger traffic is predicted to increase slightly in 2011 be- cause the number of flights connected to Curaçao has increased. Harbor activities in terms of mooring ships (freighters, tankers and cruise ships) declined by almost 14 percent in 2010 compared to the year before. The volume of freight also decreased accordingly, from 97,913 TEUs in 2009 to 93,603 TEUs in 2010. Preliminary figures indicate that cruise-ship calls have increased to 249 in 2011, but will decline to 219 in 2012. The number of cruise visitors is expected to have increased in both years, despite the decline in calls in 2012, as bigger ships are expected to anchor. Tourism arrivals dropped by almost 7 percent in 2010 compared to 2009. Together with the increase in the room stock during recent years, this resulted in a 3 percentage point decline of the hotel occupancy rate. The number of cruise arrivals decreased to almost 390,000 in 2010, while the number of calls fell from 234 in 2009 to 221 in 2010. The decline in tourist arrivals is mainly caused by the substantial drop in arrivals from Venezuela. Arrivals from other South-American countries increased but were not enough to offset the decrease from Venezuela. In the first eight months of 2011, arrivals from Venezuela increased compared to the same period in 2010. Arrivals from North-America in- creased in 2010 and continue to be extremely positive in 2011. Arrivals from other Caribbean islands increased in 2010 and continued to in- crease in the first eight months of 2011. The Netherlands continue to be the largest market and contributed to the strong growth in arrivals from Europe in 2010. Growth has declined, however, in 2011. Lending rates at commercial banks were reduced to approximately 3 to 5 percent and saving rates were reduced to approximately 0.75 to 2 percent in 2010. Most banks experienced an increase in net income and loan portfolios expanded, stimulated by the lower lending rates. 8 ExecutiveSummary
  9. 9. Increased competition on the local market will continue increasing the volatility of interest rates while depreciation of the Euro will decrease investments and higher imported inflation will mitigate consumer spending. The international financial and business services sector is considered important for the local economy. It is perceived that this sector con- tributed mostly to the slight economic expansion in 2010. Therefore, concrete actions are being taken to maintain the country’s position on the OECD white list, to take Curaçao off Brazil’s black list, sign tax treaties with Brazil very soon and with other countries in the near future. Local insurance companies faced increased operational costs in 2010 because of the aftermath of tropical storm Tomas, but this had a mini- mum effect on their results. However, falling interest rates, the new constitutional status of the BES Islands and the anticipated introduction of a general healthcare insur- ance are threats to insurance companies. A number of healthcare coverage measures were proposed in 2009 which should have led to structural savings on healthcare spending. Some have been put on hold for further analysis while others will be in- troduced shortly. The definite location of the new hospital has been stipulated and the construction is planned to start in the second quarter of 2012. 9 ExecutiveSummary
  10. 10. 1.1 International and Regional Developments and Their Consequences for Curaçao Global Developments The world economy continued to recover in 2010. World economic growth was estimated by the IMF at 5.1 percent in 2010 after the con- traction of 0.7 percent in 2009. As fears of global recession receded in 2009, businesses regained confidence and industrial production and trade boomed in the first half of 2010, accelerating in the second half. The reduced excess capacity, accommodative policies and further im- provement in confidence and financial conditions encouraged invest- ments and sharply reduced the rate of job destruction. The extent of growth experienced differs per region. In the major ad- vanced economies, growth was modest, reaching an average of 3.1 per- cent in 2010. Many emerging and developing countries, on the other hand, saw robust growth rates, averaging 7.3 percent in 2010. Despite these growth rates, unemployment remained high, since the increase in unemployment in advanced economies was very severe du- ring the crisis years. Youth unemployment is a particular concern in emerging and developing countries, despite the low national overall un- employment rates. Following the collapse during the crisis, global capital flows rebounded sharply in 2010, but are still below pre-crisis averages of 2006/2007 in many countries. Strong growth prospects and relatively high yields are attracting capital flows into emerging markets, while sluggish ac- tivity and damaged financial systems continue hampering flows be- tween advanced economies. As a consequence, stock markets and credit have rebounded from the falls during the crisis, particularly fast in emerging markets, reaching or surpassing average pre-crisis levels in some of the larger markets. The robust capital flow to emerging markets may continue, even though 10 Chapter1:MacroeconomicDevelopments
  11. 11. questions about macroeconomic policies and geopolitical uncertainties could slow flows on the short run. The difference between advanced and emerging economies is not expected to diminish significantly, however. Furthermore, advanced economies face the challenge of preserving or regaining fiscal credibility owing to high public deficits and debts. Most of the advanced countries are planning to tighten fiscal policy. Most G20 advanced economies have made it their target to halve deficits by 2013 compared to the levels in 2010. However, well-specified medium- term measures to reduce debt remain absent in many advanced coun- tries, putting upward pressure on interest rates and lowering potential output and slowing economic recovery as a consequence. The eventual increase in interest rates would affect emerging economies also by destabilizing global bond markets, which would slow investments in general and thus in the developing economies in particular. Commodity prices increased sharply in 2010, especially in the second half of the year, owing to a combination of strong increase in demand (oil and food) and supply shocks (food), e.g. lower agricultural produc- tion because of unfavorable weather conditions. Commodity prices con- tinued increasing at the beginning of 2011 because of lower oil production, owing to unrest in the Middle-East and North-Africa, which resulted in increased overall marginal costs and thus higher costs of production in the agricultural sector. Nevertheless, in the last months of 2011, energy prices have receded to levels far below their peaks in that same year. Food prices, however, have fallen to a much lesser ex- tent. As a consequence inflationary pressure is lower in advanced economies than in emerging and developing economies, because food and fuel account for a higher share of consumption in the latter. In advanced economies, inflation is projected to be approximately 2.5 percent in 2011 and then recede to approximately 1.5 percent in 2012, while in emerging and developing countries inflation is likely to be around 7.5 and 6 percent in 2011 and 2012 respectively. The high ex- pected inflation in the emerging and developing economies is led by demand pressures (core inflation)1 . 11 Chapter1:MacroeconomicDevelopments 1 Excluding food and energy prices
  12. 12. The global economy is expected to continue growing. For 2011, the world economy is expected to grow by 4.0 percent and this same growth rate is expected in 2012. However, in advanced economies, again growth is expected to be lower in 2011–at 1.6 percent– than in emerg- ing and developing economies–at 6.4 percent. Output in advanced economies remains below potential, resulting in persistent high unem- ployment, and the situation is expected to remain so considering the low growth rate owing to pre-crisis excesses and crisis wounds. Further- more, consumer and business confidence has deteriorated and stronger activities are expected to be delayed. This makes the outlook point to low growth in 2012 also–at 1.9 percent. In emerging economies the crisis left no lasting wounds. Hence exports have recovered and shortfalls in external demand are compensated by domestic demand. Capital outflows turned into capital inflows because of better growth prospects and higher interest rates than in advanced economies. Growth in emerging and developing economies is estimated to decline from an average of 6.4 percent in 2011 to 6.1 percent in 2012, as capacity constraints, policy tightening and slowing foreign de- mand are expected to dampen growth. Latin America and the Caribbean According to estimates of the Economic Commission for Latin America and the Caribbean (ECLAC), the economy of the Latin American and Caribbean region grew by an estimated 6 percent in 2010. The upturn, however, has been uneven among the sub regions. Growth in 2010 firmed up the recovery that began in most of the re- gion’s economies in the second half of 2009, thanks to actions to coun- terbalance the impacts implemented by many of the countries in the region combined with improving conditions in the global economy. The stronger economic growth boosted demand for labor, thanks to which the region’s unemployment rate eased back to around 7.6 percent and the quality of new jobs improved. Economic growth was coupled with a slight rise in inflation, from 4.7 percent in 2009 to around 6.2 percent in 2010, basically reflecting the behavior of prices for a number of in- ternational commodity prices including food and fuel. Labor market per- 12 Chapter1:MacroeconomicDevelopments
  13. 13. formance, more readily available credit and brightening expectations boosted private consumption which, along with a significant increase in investment in machinery and equipment, became the engine of de- mand in 2010. Commodity exporting countries (agricultural, mineral and petroleum goods) benefited from terms-of-trade gains and higher export values. However, most of the Central American and Caribbean countries, once more, sustained net losses in terms of trade owing to higher import values, which worsened the current-account position. These adverse effects were partially offset by a slight upturn in tourism and in remit- tances sent home from developed countries by migrant workers. ECLAC projects a slight fall in the region’s growth rate to 4.2 percent in 2011 owing to the slightly dampened global economic outlook and the easing off of public spending as a stimulus in many countries because excess idle capacity has been used up. According to the IMF, the pace of expansion in Latin America and the Caribbean has begun to moderate because many economies have fully recovered from the global crisis and macroeconomic policies are being tightened. Growth remains above potential, at 4.5 percent in 2011 and 4.0 percent in 2012, with indicators suggesting that mainly exporting economies (in South America) may be overheating. Economic growth is projected to slow as domestic demand growth moderates, in response to less accommodative macroeconomic policies, and external demand weakens. The outlook for commodity exporting countries (e.g. Argentina, Chile, Paraguay, Peru and Uruguay) is positive with growth rates of approxi- mately 6 percent in 2011. Growth in South America is projected average 4.9 and 4.1 percent in 2011 and 2012 respectively. In Central America and the Caribbean, economic activity remains subdued, reflecting stronger trade linkages with the U.S. and other advanced economies and, in some cases, high levels of public debt. Growth will continue to be constrained by slow recovery of remittances and tourism at between 3.3 and 3.9 percent in 2011 and increase to between 4.0 and 4.3 percent in 2012. 13 Chapter1:MacroeconomicDevelopments
  14. 14. Inflation is projected to increase from 6 percent in 2010 to 6.7 percent in 2011, because of the overheating and as commodity prices in- creased in 2011, but to recede to 6 percent in 2012 as activity moder- ates and commodity prices stabilize. The region faces some downside risks, however: sharper slowdown in advanced economies would dampen growth, especially in economies dependent on trade, tourism spending and remittances. Moreover, the strong presence of Spanish banks in the region could raise some risks while potential spillovers from China could show up through trade dampening the outlook for the commodity exporting countries. However, domestic demand growth could exceed expectations if global risks un- wind quickly, resuming the strong wave of capital flows to the region, which is an upside risk. The risk pattern is reinforced by the region’s in- ternal and external integration. An eventual slowdown in global growth would cause a drop in the region’s commodity export. Furthermore, many neighboring countries are profiting from strong growth in Brazil. Consequently, an abrupt slowdown in activities in Brazil would adversely affect the region. The challenge that lies ahead is to maintain the region’s resilience to potential problems. North America According to the IMF, the US economy grew in 2010 by almost 3 percent in real terms, after contracting by 2.6 percent in 2009. This recovery was mainly supported by private demand. By the last quarter of 2010, consumer demand was rising at its fastest pace in five years. Low cor- porate borrowing rates and the easing tightness of lending conditions reflected improved financial conditions resulting in a pickup of eco- nomic activities. This has helped to rebuild consumer confidence despite poor performing labor and housing markets. After shredding more than 8.5 million jobs during crisis years, the labor market has managed to add 1.5 million jobs, which was barely suffi- cient to keep up with growth of the work-age population. A large part of the decline in the unemployment rate is attributable to a decline in par- ticipation. The unemployment rate reached 9.6 percent in 2010. 14 Chapter1:MacroeconomicDevelopments
  15. 15. According to forecasts of the IMF, the real GDP of the US will increase by 1.5 percent in 2011 and in 2012 by 1.8 percent with a large number of unsold properties and high mortgages repressing consumption. House prices in the US have been declining, with harmful effects on household and financial balance sheets, deteriorating household and business confidence. Unemployment is high at approximately 9.1 per- cent in 2011 and is expected to remain so in 2012, holding back wages. The fiscal deficit and debt have resulted in a decreased solvency rating for the US, and financial turmoil in the Euro area has tightened financial conditions and weakened global demand with consequences for the US also. Inflation is moderate at 3 percent in 2011, but up from 1.6 percent in 2010. In 2012, the inflation rate is predicted to drop back to 1.3 per- cent, in line with the pullback of commodity prices. There are, however, some downside risks to the projected economic growth in the US: growth will suffer if the temporary payroll tax cuts and increased unemployment insurance are discontinued in 2012 and if political consensus on the design of debt reduction is not reached soon. Furthermore, prolonged delay in recovery of house prices, sustained losses in equity markets and upside risks on commodity prices would further repress consumer spending. Sooner-than-expected restored financial stability and consumer and business confidence could strengthen growth on the short run. The main challenge for the US lies in reducing the structural deficit and public debt in an environment of weak growth and high unemployment. Economic developments in Canada in 2010 mirrored developments in the U.S.A. The deceleration reflected the drag on Canadian export from weak US activity, strong import growth from investment spending and cooling of domestic activities. Canada’s GDP is estimated to have increased by 3.3 percent in 2010 and is projected to expand by 2.1 percent in 2011 and by 1.9 percent in 2012, with domestic demand being the force behind the growth. Job creation has rebounded at a faster pace compared to the U.S.A., but a slower pace of recovery over the near term is expected to keep unem- 15 Chapter1:MacroeconomicDevelopments
  16. 16. ployment at approximately 7.5 percent in 2011 and 2012. US risks are expected to shape Canada’s outlook through real and financial spillovers. Europe The IMF estimates that GDP in Europe grew by 2.2 percent in 2010, despite financial turbulence in peripheral countries of the Euro area during the last quarter of 2010. Concerns about banking sector losses and fiscal sustainability caused sovereign spreads to widen in the Euro area. The situation was controlled by strong policy responses at national and EU level with measures to improve fiscal balances and to push for- ward with structural reforms in the affected areas, liquidity support and security purchases by the ECB. Therefore, the damage to economic activity was limited to affected areas only and did not spread to the rest of Europe. Nevertheless, the ongoing fiscal tightening and the effect of the crisis on consumer and business confidence are repressing growth this year, especially after the first quarter. The year 2011 is predicted to show a real expansion of 2.0 percent in Europe while for 2012 a 1.5 percent growth is estimated. Growth in emerging countries was higher in 2010 at 4.5 percent, com- pared to 1.8 percent in the advanced economies, and is predicted to be higher at 4.3 percent in 2011. In 2012, however, growth in emerging countries is expected to decline to 2.7 percent as domestic and external demand moderates. In advanced countries, GDP growth of 1.6 and 1.1 percent in 2011 and 2012 respectively is expected. Prospects across regions are likewise divergent, reflecting differences in the state of public and private balance sheets and the stance of macroeconomic policies. Germany for instance, which has been the continent’s growth locomo- tive, grew by 3.6 percent in 2010, but growth is expected to slow down to 2.7 percent in 2011 and to 1.3 percent in 2012. The expected slow- down is due to the withdrawal of fiscal support and an expected slow- down in external demand growth. 16 Chapter1:MacroeconomicDevelopments
  17. 17. Retrenchment of fiscal stimulus, which is expected to reduce consump- tion growth and weaken export growth as consequence of slower exter- nal demand, will cause France’s growth rate in 2011 and 2012 to be in line with the 1.5-percent growth rate of 2010. In advanced economies outside the Euro area, activity growth is like- wise differentiated. The UK’s economy, for instance, grew by 1.4 per- cent in 2010 and is projected to grow by 1.1 percent in 2011 and 1.6 percent in 2012 as fiscal consolidation dampens domestic demand. In Sweden, real activity grew by 5.7 percent in 2010, but the growth rate is expected to decelerate to 4.4 and 3.8 percent in 2011 and 2012 respectively amid improving financial conditions and signs of over- heating in the real-estate sector. In emerging Europe, recovery is expected to continue, boosted by inter- nal demand, owing to credit growth accompanied by accommodative macroeconomic policies. Growth is expected to remain more subdued in countries that experienced unsustainable domestic booms. In general, countries that avoided major imbalances and have benefit- ted from the strong rebound in global manufacturing are close to pre- crisis growth rates in 2011. Some others are below pre-crisis rates because of sharp economic adjustments as consequence of the finan- cial crises while others are recuperating from recent crises while ad- dressing a number of challenges, such as weak banking systems and high unemployment. The rest of the European countries are likely to grow at less than pre-crisis averages as some are shaken by contagion from the Euro area periphery while others are less affected. Inflation has remained subdued in advanced Europe at 1.9 and at 2.5 percent in 2010 and 2011 respectively, and is expected to remain low at 1.5 percent in 2012 in the absence of inflation expectations and be- cause there is still excess capacity. In emerging Europe, inflation has been higher at 5.3 percent in 2010 and 2011 but is expected to decline to 4.5 percent in 2012. 17 Chapter1:MacroeconomicDevelopments
  18. 18. The uncertain environment dominated by tension from the euro area debt crisis imply downside risks to growth in Europe, as well as negative spillovers from slower US growth. Securing debt sustainability and strengthening the financial systems remain a priority for most European countries. The largest economies are already implementing measures to reduce their deficits. Commonwealth and Independent States Recovery in CIS has been proceeding at a steady pace, supported by higher commodity prices that have been boosting production and em- ployment in the region’s exporting countries. The rebound in real activity in Russia is also benefiting other countries through trade, remittances and investment. On the other hand, dependence on external financing and lingering banking sector vulnerabilities are holding back growth in several CIS economies. Real activity in CIS increased by 4.6 percent in 2010 and is projected to expand by 4.6 percent in 2011 and by 4.4 percent in 2012, but growth prospects differ within the region. In Russia and other energy exporters, growth is estimated to pick up modestly with growth rates at approximately 4.5 percent in 2011 and 2012. Growth is expected to slow down slightly in 2012 compared to 2011 as energy prices decline somewhat. Energy importers are ex- pected to benefit from the rebound in remittances from Russia and oth- ers from the return of financial stability. Inflation in the region has been on the rise, led by higher commodity prices, especially in the first half of 2011, the high share of food in the consumption basket and demand pressure. For most countries in the region, prospects depend highly on the economic development in Russia, the rest of the world and commodity prices. Higher commodity prices represent an upside risk to commodity exporting coun- tries. But global slowdown would reduce commodity prices, dampening the prospects for the region. Furthermore, lower external demand from advanced economies represents a downside risk. The key challenge is to abort crisis-related macroeconomic and financial 18 Chapter1:MacroeconomicDevelopments
  19. 19. policies in a way that provides sufficient support to the incomplete re- covery without jeopardizing price stability, reduce external vulnerability and raise potential growth through a more diversified pattern of eco- nomic development. Asia Real GDP growth in Asia is moderating after a sharp rebound from the global crisis, with a GDP growth of 8.2 percent in 2010 and a projected growth of 6.2 and 6.6 percent in 2011 and 2012 respectively. The strong rebound is supported by a strong export performance, private domestic demand and in some cases rapid credit growth. Asia continues to outpace other regions but external demand in emerging Asia has dampened recently because of slowdown in the US and the Euro area. Inflation in Asia averaged 4.1 percent in 2010 and is projected to average 5.3 and 4.0 in 2011 and 2012 respectively. Inflation was higher in developing Asia than in advanced Asia in 2010, and the difference is likely to remain. Inflation pressures are higher in economies with sustained credit growth, positive output gaps, and/or relatively accom- modative policies. China, today the world’s second largest economy and its leading ex- porter and manufacturer, will remain a powerful source of external de- mand for Asian producers in the foreseeable future. Growth in China is projected to remain robust at 9.5 percent in 2011 and 9.0 percent in 2012 after growing by 10.3 percent in 2010, driven by private demand caused by rapid investment growth, favorable labor market conditions and continued policies to increase disposable income of households. Inflation pressure in China remains, but efforts to withdraw credit stimu- lus and to restrain property price inflation have been gaining ground. India’s economic growth slowed down in the last quarter of 2010 as the manufacturing sector was held back in the wake of multiple interest-rate increases by the central bank amid rising prices. The Reserve Bank of India raised its benchmark lending rates in seven equal installments of 0.25 percentage points since the beginning of 2010 to control rising prices. 19 Chapter1:MacroeconomicDevelopments
  20. 20. The Indian economy grew by 10.1 percent in 2010, led by infrastructural investments, and is forecasted to grow by 7.8 and 7.5 percent in 2011 and 2012 respectively, driven by private consumption. After a rapid growth at 8.4 percent in 2010, growth in the newly indus- trialized Asian economies is projected to moderate at 4.7 percent in 2011 and 4.5 percent in 2012 as activity moderates to close positive output gaps. Both the internal and external private demand remain important drivers behind growth. ASEAN economies grew by 6.9 percent in 2010 and are projected to grow by 5.3 and 5.6 percent in 2011 and 2012 respectively, driven by domestic demand. ASEAN economies are led by Indonesia, where strong consumption and recovery in investments are projected to raise growth to 6.4 percent in 2011 and 6.3 percent in 2012. Japan, the third largest economy in the world after the US and China, grew by 3.9 percent in 2010 and was one of the highest among the advanced economies. Japan’s growth was driven by significant fiscal stimulus and a rebound in exports. Forecasts for 2011 are somewhat pessimistic, because of damages caused by the Tohuku earthquake. Japan’s economy is projected to contract by 0.5 percent in 2011, de- spite an expected vigorous expansion in the second half of 2011. Growth is projected to increase to 2.3 percent in 2012, with activity sharply rebounding on reconstruction investment. Japan experienced deflation of 0.7 percent in 2010 and further deflation is projected of approximately 0.5 percent in 2011 and 2012. In Australia, flooding in key mining and agricultural regions subtracted from growth in 2010. The economy grew by 2.7 percent in 2010 and for 2011 and 2012 the economy is projected to grow by 1.8 and percent respectively. In New Zealand, despite the recent earthquakes, growth is projected to pick up. In 2011 a 2.0-percent growth rate is projected after already increased economic activities of 1.7 percent in 2010. In 2012 growth is expected to rise to 3.8 percent supported by strong terms of trade and positive trade spillovers from the region. 20 Chapter1:MacroeconomicDevelopments
  21. 21. The financial turbulence in the Euro area and the US pose downside risks for the region, since these would affect export in Asia through trade linkages. Despite increase in intraregional trade in Asia, two-third of the final demand comes from outside the region. The Middle East and North Africa According to the Economist Intelligence Unit (EIU), economic growth in the Middle East and North Africa (MENA) picked up in 2010, boosted by the increase in oil prices, a stronger global economy and loose do- mestic policy conditions. According to estimates of the IMF, GDP in MENA grew by 4.4 percent in 2010. Production in many countries in the region has been boosted by higher commodity prices and external demand. In addition, government spend- ing programs have been fostering recovery in many oil-exporting coun- tries. In contrast, political discontent and high unemployment are causing social unrest in a number of countries, which might dampen short-term economic growth as these factors weigh heavily on tourism receipts, capital flows and investment. Based on the above mentioned factors, the IMF forecasts that economic activities in the region will increase by 4 percent in 2011 and by 3.6 percent in 2012. Growth in oil-exporting countries is projected to pick up to almost 5 per- cent in 2011, slightly higher than the 4.4 percent in 2010. In Qatar, for instance, economic activity is projected to increase by 18.7 percent boosted by continued expansion in natural gas production and large in- vestment expenditures. In Saudi Arabia, growth is forecasted to be 6.5 percent, supported by public infrastructural investments. In the Repub- lic of Iran, growth is anticipated to stall temporarily as subsidies for en- ergy and other products are phased out. This reform is expected to yield benefits on the longer run. Disruptions of oil production in Libya in- creased oil supply by other OPEC suppliers. In oil-importing countries, growth in economic activity is more subdued, down to 1.4 percent in 2011 compared to 2010 (4.5 percent). 21 Chapter1:MacroeconomicDevelopments
  22. 22. Activity in some countries will be constrained by domestic social unrest and an associated slow recovery in tourism receipts and remittances. Growth in oil-importing countries is projected at 2.6 percent in 2012, harmed by a slow recovery in investment. Inflation is high in the MENA region, reaching almost 10 percent in 2011, but is expected to decline somewhat in 2012, reflecting receding commodity prices. For oil-exporters, inflation is forecasted to fall from 10.8 percent in 2011 to 7.6 percent in 2012 while for oil-importing countries, inflation is anticipated to stay below 8 percent during 2011 and 2012. Downside risks are the domestic effects of political and social unrest that could be larger than expected, especially if unrest spills over to additional countries in the region. In addition, financial markets have not stayed immune, and as these developments on the financial market continue, higher funding costs for governments and firms could be the result. Moreover, weak performance of advanced economies, mainly the US and Europe, could adversely affect the region’s export earnings, fiscal and external imbalances and growth. The MENA region is challenged to raise growth and tackle high unem- ployment, mainly among young people. Oil exporters should strengthen or develop financial systems and promote economic diversification. Sub-Saharan Africa Sub-Saharan Africa has recovered well from the financial crisis. The region grew rapidly in 2010 by 5.4 percent. Growth in domestic demand remained robust, trade and commodity prices rebounded and macro- economic policies remained accommodative. Terms of trade gains are supporting the region’s external balances and gradual reorientation of export towards fast-growing regions such as Asia is being sustained. As a consequence, according to the IMF, real activity in Sub-Saharan Africa is projected to expand by 5.2 and 5.8 percent in 2011 and 2012 respectively. 22 Chapter1:MacroeconomicDevelopments
  23. 23. However, prospects differ considerably within the region. Growth is being led by the low-income countries which are projected to grow by approximately 6 percent in 2011 and by 6.5 percent in 2012, stimu- lated by launching of oil production (Ghana) and infrastructural invest- ment and improved agricultural production (Kenya and Ethiopia). The prospect of oil-exporting countries is likewise positive, with a fore- casted growth rate of almost 6 percent in 2011 and over 7 percent in 2012, sustained by continued strength in domestic public investment spending and strong rebound in oil production in Angola following the disruption in 2011. Middle-income countries are more vulnerable to the crisis as they are more integrated with the global market, hence recovery is delayed. In South Africa, the region’s largest economy, recovery is projected to remain relatively modest at approximately 3.5 percent in 2011 and 2012, because of an increase in unemployment, high household debt, low capacity utilization, the slow down in advanced countries and substantial real exchange rate appreciation. Growth is driven by private consumption and investment supported by a low interest rate environment. The region is vulnerable to some external forces, however. Europe is the main trading partner for the region’s non-oil exporting countries. Consequently a slowdown in Europe hurts manufacturing exporters in the region. Implications for Curaçao After contracting by 0.5 percent in 2009, activities in Curaçao increased by 0.1 percent in 2010, lagging far behind the Latin American and Caribbean region in general and the Caribbean in particular. The slight increase in economic activities is attributable to increased public consumption of goods and services with regards to the dismantling activities and the SEI program and increased private consumption. These increases were offset by decreased public and private invest- ments and export. 23 Chapter1:MacroeconomicDevelopments
  24. 24. Curaçao is largely dependent on the import of goods from its main trading partners, Venezuela, the U.S.A. and the Netherlands. Hence, inflationary pressure in these regions leads to increased inflation in Curaçao. Inflation remained subdued in the main trading countries and as a consequence inflation in Curaçao remained moderate at 2.8 percent. For 2011, the economy is expected to expand by 0.3 percent and inflation to be slightly lower than the year before. However, since Curaçao’s export of principally (tourism) services is largely to the main trading countries, the risks of decreased growth in these coun- tries pose risks to the island’s medium-term macroeconomic perfor- mance. Any slowdown in growth in these countries would negatively affect demand for the island’s tourism services. Curaçao has achieved a sustainable level of public debt and this poses prospects for stable long-term economic growth in general where investments in infrastructure and socio-economic projects can be improved. A compulsory balanced budget rule has been set, aimed at avoiding the unrestrained buildup of public debt in the future. On the downside, development aid from the Netherlands is planned to stop by 2013, threatening the infrastructural and socioeconomic invest- ments. Sources: Deloitte: 4th Quarter 2010: Global Economic Outlook. Multi Speed Recovery. Economist Intelligence Unit, (The Economist) May 2011 International Monetary Fund: World Economic Outlook, April 2011 International Monetary Fund: World Economic Outlook Update, June 2011 International Monetary Fund: World Economic Outlook, September 2011 United Nations: Economic Development in Africa 2010 south – south Coopera- tion: Africa and the new forms of Development Partnership World Bank: East Asia and Pacific Economic Update 2011, Vol.1 World Bank: Global Economic Prospects; Crisis, Finance and Growth 2010. 24 Chapter1:MacroeconomicDevelopments
  25. 25. Websites: http://www.unctad.org http://www.nytimes.com http://www.blogjaviervega.blogspot.com http://www.cfr.org/refugees-and-the-displaced/eu-concerns-over-mideast-mi- grants/p24672 http://www.eclac.org/cgi- bin/getProd.asp?xml=/publicaciones/xml/4/41974/P41974.xml&xsl=/de/tpl- i/p9f.xsl&base=/tpl-i/top-bottom.xslt 25 Chapter1:MacroeconomicDevelopments
  26. 26. 1.2 Macroeconomic Indicators for Curaçao Introduction This section presents preliminary figures on Curaçao’s macroeconomic performance in 2010, and a macroeconomic analysis for a short-term forecast. The figures presented for past years are actual figures com- piled by Curaçao’s Central Bureau of Statistics (CBS). The macroeco- nomic analysis of the forecast is carried out with the help of the macroeconomic model Curalyse and is based on expected develop- ments in the main sectors and implementation of planned economic reforms. Macroeconomic review 2010 In 2010, Curaçao’s economy grew by a mere 0.1 percent. Growth was led by a moderate increase in public and private consumption but was mitigated by shrinking public investments and exports. The consumer price index remained moderate in 2010, despite increased interna- tional prices for food and oil. Table 1.1 presents the main macroeco- nomic indicators. The figures for 2008 are actual, while those for 2009 and 2010 are based on preliminary analysis by the CBS. Table 1.1 Macroeconomic indicators 2008-2010 Nominal Figures (in millions NAF) 2008 2009* 2010* Private consumption 3662.0 3560.2 4127.2 Private investment 1905.7 1921.3 1965.7 Public consumption 812.2 797.7 856.3 Public investment 70.4 70.5 70.4 Export of goods and services 3547.9 3100.5 2934.2 Import of goods and services 4926.4 4315.1 4669.7 Gross Domestic Product 5071.8 5135.2 5284.1 26 Chapter1:MacroeconomicDevelopments
  27. 27. Volume Mutation (in %) Private consumption 2.6 -4.5 12.8 Private investment 14.8 -0.9 -0.4 Public consumption 0.0 3.2 6.3 Public investment 2.3 -1.6 -2.8 Export of goods and services 15.5 -14.1 -7.9 Import of goods and services 16.1 -13.9 5.3 Gross Domestic Product 2.2 -0.5 0.1 Price mutation (in %) Inflation 6.9 1.8 2.8 Source: Central Bureau of Statistics *Preliminary figures Macroeconomic Outlook for 2011 and beyond This section presents the macroeconomic outlook for 2011 and 2012 based on expected developments in the main sectors and implemen- tation of planned economic reforms such as those mentioned in the SEI policy program, reforms of the process to obtain business permits and the tax reform. The macroeconomic outlook for 2011 is based on the local and interna- tional, macroeconomic and sectoral developments for the first six to nine months. This trend has been extended for the remainder of the year. Due to uncertainties with regard to Curaçao’s economic development, e.g. the implementation of economic reforms, the elimination of red tape within the government and the macroeconomic development of Curaçao’s main trading partners, the outlook for 2012 is based on two possible scenarios, an optimistic and a cautious one. For 2012, a baseline reference path is given, on the assumption of an unchanged policy. This baseline scenario is used to measure the eco- nomic impact of the assumptions made in the two other scenarios. The assumptions made in the baseline scenario do not reflect policy assumptions of neither the government nor other experts on the island. 27 Chapter1:MacroeconomicDevelopments
  28. 28. Outlook 2011 This section presents the assumptions which are used to forecast the macroeconomic developments in 2011. The assumptions mentioned below occur autonomously and, as mentioned previously, are based on indications of the developments in the first six to nine months of 2011: · An increase in the number of stay-over arrivals, especially from the North-American and South-American market, mitigated by a slow- down of arrivals from the European market. This is reflected by a 7-percent increase in stay-over nights in 2011 compared to 2010; · A 1-percent decline in private investments. The incentives to invest remain withheld owing to, among other factors, the lower occupancy rate of hotels in the past years and international economic and financial turmoil. The previous decline in occupancy rates resulted in postponement of planned investments in room inventory to 2012; · NAF 20 million in total investments related to SEI projects; · Public finances show no deficit, in accordance with the agreements with College financieel toezicht (Cft). Real public consumption declines by approximately 10 percent, as it picks up in the third and the fourth quarter of 2011. Public investments increase by 20 percent in 2011 compared to 2010 as they slow down in the second half; and · Non-tourism exports show no real growth in 2011 compared to 2010. The results based on the abovementioned assumptions are presented in table 1.2. The increase in exports in the form of tourism services results in a higher demand for local products and services. No invest- ments to handle the increased demand are shown, because there already is sufficient inventory to deal with the increased demand of the tourism sector. As business production increases to accommodate the higher local demand, employment by enterprises grows. However, this growth in employment is not sufficient to stimulate a decrease in the number of unemployed. The increased employment of businesses, combined with the increased wage rate, results in an increased con- sumption of 0.2 percent. This increased consumption can be derived 28 Chapter1:MacroeconomicDevelopments
  29. 29. from the 1.4-percent increase in the number of 210-feet containers en- tering in the first nine months of 2011 compared to the same period of 20102 and from the slight increase in the amount of consumer loans and mortgages in the first nine months3 of 2011 compared to the same period in 2010. The real economy grows by 0.3 percent in 2011 compared to 2010. In- flation is estimated at 2.4 percent. Table 1.2 Macro economic outlook for 2011 Changes (compared to 2010) 2011 Prices in % Wage rate businesses 3.1 Consumption price 2.4 Volumes in % Tourist days 7.0 Exports 3.7 Imports 0.0 Private consumption 0.2 Business investments -4.0 Business production 0.3 Real GDP growth 0.3 Number *1000 Unemployment 0.2 Source: Curalyse Outlook 2012 This section presents a forecast of the macroeconomic developments in 2012 and is based on expected developments in the main sectors and planned reforms, such as the introduction of a Competition Author- ity, elimination of red tape and the introduction of a new tax structure. The current tax structure is perceived as complicated and uncompeti- tive because of its high tariffs. Hence, a reform of the structure is needed to improve Curaçao’s competitive position compared to the region and other countries of the Dutch Kingdom. 29 Chapter1:MacroeconomicDevelopments 2 Source: Curaçao Ports Authority 3 Source: Central Bank of Curaçao and St. Maarten
  30. 30. Baseline scenario For the purpose of measuring the impact of the possible scenarios, first the baseline scenario is given. The assumptions of the baseline scenario are: · A 2-percent increase in stay-over nights, which is the average over the past 15 years; · The amount of private and public consumption and investment will remain at the same level in 2012 as in 2011; · The investments and reforms within the framework of the SEI will be neglected; and · Exports in the non-tourism sectors show zero growth in 2012 compared to 2011. The macroeconomic effect of the baseline scenario is presented in table 1.3. In this scenario, growth in 2012 is led by the increase in tourism arrivals which manifests itself in a 2-percent increase in the number of stay-over nights. This slight increase in tourism demand encourages a slight (0.1%) increase in business production and, as a consequence, in real GDP also of 0.1 percent. The increased demand is not enough to increase the number of jobs available and accommo- date citizens that are entering the labor market. Hence, the number of unemployed persons increases by 300. Inflation is estimated to follow the trend in 2011 at 2.3 percent. Optimistic scenario For the optimistic scenario, the following assumptions are made: · Stay-over nights will increase by 10 percent in 2012 compared to 2011 owing to intensified marketing efforts in existing markets and the tapping of new markets such as Canada and Germany; · The new fiscal structure is introduced as of January 1, 2012 and includes: o a decrease in profit tax, from 34.5 percent to 27.5 percent; o a reform of the structure of wage and income taxation; o an increase of turnover tax from 5 to 6 percent; and o a decrease of the excise duty on gasoline of NAF 15.75 per 100 liter and on Low Sulfur Diesel of NAF 8.50 per 100 liter. 30 Chapter1:MacroeconomicDevelopments
  31. 31. · Private investments increase by NAF 38 million as investments in room inventory are continued. The hotel occupancy rate reaches the level of 75 percent, which will encourage new investments in the tourism sector; · Investments within the framework of the SEI amount to NAF 40 million in 2012; and · The Competition Authority and Red Carpet instead of Red Tape are fully introduced implying an increase of labor productivity of 0.25 percent. · Other assumptions remain the same as in the baseline scenario. The macroeconomic impact of the optimistic scenario is given in table 1.3. In the optimistic scenario, growth in 2012 is led by an increase in the number of stay-over nights, increased private investments and increased labor productivity. Stay-over nights increase by 10 percent in 2012 owing to, among other factors, increased marketing efforts in the North-American market, especially in the North-Eastern part of North America and the new air connection established with Air Berlin in the last quarter of 2011. The higher number of tourists in 2011 and the first months of 2012 gives a boost to private investments in 2012 with a NAF 38-million expansion of the room inventory as planned, according to the Curaçao Tourist Board (CTB). Most of the remaining SEI budget is used. Hence, SEI investments are for an amount of NAF 40 million. The SEI investments accelerate public consumption and investment as several SEI projects are co-financed by the government. The higher tourism demand, public consumption and public and private investments boost economic growth by increasing business production, which on its turn boosts job creation. Unemployment is reduced by 200 persons, contributing to an increased real private consumption of 0.2 percent. The growth of private consumption is mitigated by the higher turnover tax, which causes an increase in prices. The interaction between increased local demand and supply results in an increased real GDP of 0.9 percent. The wage rate is increased because of the increase in productivity. 31 Chapter1:MacroeconomicDevelopments
  32. 32. The increase in turnover tax and wages results in an inflation of 3.4 percent in 2012. Cautious scenario The cautious scenario is based on the following assumptions: · The marketing efforts are less intense compared to the optimistic scenario, resulting in a 6-percent increase in stay-over nights in 2012 compared to 2011; · The new fiscal structure is introduced per January 1, 2012 as men- tioned in the optimistic scenario; · Private investments increase by NAF 20 million compared to 2011; · Investments within the framework of the SEI are for NAF 20 million; and · The introduction of the Competition Authority and Red Carpet in- stead of Red Tape is delayed, implying an increase in labor produc- tivity of only 0.1 percent. · Other assumptions remain the same as in the baseline scenario. For the cautious scenario, a 6-percent increase in stay-over nights is considered in 2012. The increase in tourism demand of the previous and current year induces investments in room inventory by NAF 20 mil- lion. SEI investments are for another NAF 20 million, boosting public consumption and investments. The higher tourism demand, public consumption and private and public investments give a boost to economic growth through an increase in demand for local products and services. However, due to increased labor productivity, the demand for labor remains idle. The lack of job creation has a negative impact on consumption as the purchasing power of households decrease because of the increased consumption prices and is not compensated by an increase in wages. Business production and real GDP increase by 0.3 percent each, lack- ing force to increase employment. Unemployment increases by 200 per- sons due to migration and demographic developments. Inflation is at 3.3 percent, as the turnover tax is raised and wage rates are increased. 32 Chapter1:MacroeconomicDevelopments
  33. 33. Table 1.3 Macroeconomic impact scenarios 2012 Changes (compared to 2011) Baseline Optimistic Cautious Prices in % Wage rate businesses 2.9 3.7 3.3 Consumption price 2.3 3.4 3.3 Quantities in % Tourist days 2.0 10.0 6.0 Exports 1.0 3.8 1.9 Imports -0.4 3.2 1.5 Private consumption -0.1 0.2 -0.6 Business investments -0.2 3.8 1.9 Business production 0.1 0.9 0.3 Real GDP growth 0.1 0.9 0.3 Number *1000 Unemployment 0.3 -0.2 0.2 Source: Curalyse 33 Chapter1:MacroeconomicDevelopments
  34. 34. 1.3 Labor-Market Developments Introduction This section will give a summary of important developments regarding the labor market in Curaçao. Unfortunately, the labor market statistics4 for 2010 are not available because the CBS did not conduct the Labor Force Survey. As a consequence, a different approach is used this time. Based on some other useful indicators, an approximation of the developments is discussed. These indicators are: o the number of requests for dismissal; o the number of new registrations for assistance in finding a job; and o the number of vacancies and placements into these vacancies. The statistics were collected from the Ministry of Social Affairs, Labor and Welfare (the former DirAZ and DWI). An overview from 2006 on is given for the purpose of comparing the developments in 2010 to those of previous years. Local Developments Dismissal Requests Table 1.4 provides an overview of different developments related to dis- missals in Curaçao. In certain cases, when an employer wants to terminate a contract with an employee, the approval of the former Directorate of Labor Affairs (DirAZ, now a section of the Ministry of Social Affairs, Labor and Wel- fare) is needed. The dismissal legislation is primarily meant to protect the weaker party of the labor market, the employee, from unreasonable and arbitrary dismissal, but also keeps the interests of the employer in mind. Since proper functioning of the business comes first to the employer, the possibility should exist to discharge employees within a relatively short period of time depending on the business results. 34 Chapter1:MacroeconomicDevelopments 4 Traditionally, the Central Bureau of Statistics (CBS) provides the relevant statistics through their Labor Force Survey. However, CBS was preparing intensely for the Census that took place in March and April 2011.
  35. 35. A dysfunctional employee may also hamper the company’s operation, so in such cases too it should be possible for the employer to terminate the work relation with such an employee. The dismissal ordinance is not applicable to: · employees of public corporations (civil servants, as well as laborers and employees working for the government on labor contracts); · educational personnel and teachers; · clergymen (priests and ministers, for example); · employees that perform domestic labor in private households (do- mestic personnel); · directors’ labor contracts; · fixed-term labor contracts, except fixed-term contracts that are di- rectly or indirectly preceded by a contract without a fixed term or contracts in which the same worker has successively worked for dif- ferent employers, who can reasonably be considered to be each other’s successors with regard to the work performed; and · in cases of bankruptcy. In some other cases approval from the Directorate is not required, e.g. dismissal “on the spot” (in case of theft, gross neglect of duties, drunk- enness or debauchery during work by the employee), dismissal by mu- tual consent, the expiring of a fixed-term labor contract, dismissal within the trial period or dissolution of the labor contract by court. As can be seen in table 1.4, a total of 128 collective requests for dis- missal were made in 2010 involving a total of 319 employees. The Di- rectorate approved 230 of these individual dismissal requests. These employees lost their jobs. An additional 24 employees also lost their jobs when they agreed to terminate the labor agreement without going through the dismissal evaluation process (mutual consent). A total of 24 individual requests were declined by the Directorate. The number of submitted requests for dismissal was higher in 2010 compared to the previous years. The number of employees involved in the requests almost doubled compared to 2009 and the number of re- quests consented was more than double the number in 2009. A total 35 Chapter1:MacroeconomicDevelopments
  36. 36. of 254 employees went through the evaluation process at the Direc- torate and lost their job (requests consented and mutual consent) in 2010, compared to 114 in 20095 . Of all the requests submitted in 2010, 39 were for business/economic reasons, involving 221 employees, of which 168 were approved by the Directorate and 10 employees agreed to leave by mutual consent (com- pared to 26 requests based on business/economic reasons, involving 86 employees, 48 of which were approved and 4 left by mutual consent in 2009)6 . Table 1.4 Dismissal Requests Dismissal Requests 2006 2007 2008 2009 2010 Number of requests submitted 97 96 88 94 128 Number of employees involved 310 470 350 162 319 in requests submitted Number of requests approved 238 398 248 99 230 Number of requests declined 27 14 10 26 24 Mutual consents/request withdrawn 33 58 92 37 60 *mutual consents n.a. n.a. n.a. 15 24 *requests withdrawn n.a. n.a. n.a. 22 36 Source: Ministry of Social Affairs, Labor and Welfare (the former Directorate of Labor Affairs, DirAZ) Employment mediation and placement According to figures provided by the Ministry of Social Affairs, Labor and Welfare (table 1.5), a total of 1203 persons applied for employment mediation in 2010. This is significantly less than in 2009. It is moreover remarkable that the number of new registrations has been decreasing over the years, in line with the decrease in the unemployment rate. The number of vacancies in 2010 decreased compared to 2009, and so did the number of placements in these vacancies. Simple calcula- tions reveal moreover that the ratio of placements per vacancy deteri- orated in 2010 compared to 2009. In 2010, 35.9 percent of the 36 Chapter1:MacroeconomicDevelopments 5 Source: Ministry of Social Affairs, Labor and Welfare (former Directorate of Labor Affairs) 6 Source: Ministry of Social Affairs, Labor and Welfare (former Directorate of Labor Affairs)
  37. 37. vacancies was filled by jobseekers registered at the Ministry of Social Affairs, Labor and Welfare, while 40.6 percent of the vacancies was filled in 2009. Over the past five years, the ratio of placements per va- cancy was the highest in 2007, with 45.8 percent of vacancies filled by jobseekers registered at the Ministry of Social Affairs, Labor and Wel- fare. Table 1.5 Mobility in the Search for Employment Year New registrations Vacancies Placements Placement per vacancy 2006 2,269 797 281 0.353 2007 1,658 633 290 0.458 2008 1,868 953 343 0.360 2009 1,568 652 265 0.406 2010 1,203 537 193 0.359 Source: Ministry of Social Affairs, Labor and Welfare (the former DWI) Minimum wage Per September 1, 2008, the minimum wage had been set at NAF 7.30 per hour and was adapted again per 2011. Per January 1, 2011, the minimum wage was indexed for inflation and has been set at NAF 7.53 per hour. ‘Rumbo pa trabou’ Project It is the objective of the government to help as many people as possible to enter the labor market. The tourism and construction sectors have been identified as potential sectors to easily accommodate employees on different levels, but especially on the less skilled level, which is the bottleneck in Curaçao. Therefore, a project has been started to guide potential employees into jobs in these two sectors. ‘Rumbo pa Trabou’, which literally means ‘heading towards employment’ in Papiamentu (Cu- raçao’s native language), is a project financed with SEI funding. The project is planned to last for three years and cater to approximately 450 persons. Not only unemployed persons are eligible to participate, but also people who are currently working but want to upgrade their knowledge/competency. The program will focus on training and place- 37 Chapter1:MacroeconomicDevelopments
  38. 38. ment of people on the local labor market. Participants are guaranteed a job after finishing the program and will be assisted during the first six months of their new job. Outlook Currently, citizens are allowed to retire at the age of 60. At this age, each legal citizen is entitled to a social pension (AOV). The amount of the pension varies according to the number of years a person has been in Curaçao during his/her adult life (from age 15 to 60)7 . The pension structure is based on a social system in which the active working pop- ulation pays a premium according to their salary to support the fund that pays the current retired population. According to calculations from the Central Bureau of Statistics, Curaçao is also facing the phenomenon of an aging population. The ratio of the working age population over the number of citizens 60 years of age or older has been decreasing and is expected to decrease further in the future (table 1.6). Considering this expected development, the current general pension fund system is unsustainable. Furthermore, it is important to mention that some citizens depend totally on the govern- ment pension at reaching the retirement age. Possibilities to alleviate the problem with the pension fund are being discussed. A possible decision is to increase the retirement age. Table 1.6 Development of the Population Age group 2005 2010 2020* 2030* 0-19 39,721 40,739 36,057 31,371 20-59 71,760 76,348 82,298 77,287 60+ 21,366 25,093 33,941 43,129 Total 132,847 142,180 152,296 151,787 Ratio 20-59 to 60+ 3.36 3.04 2.42 1.79 Source: Central Bureau of Statistics Curaçao (www.cbs.an) * Forecasted figures 38 Chapter1:MacroeconomicDevelopments 7 For each year the person spends abroad, the pension is reduced. The reduction varies over time. According to information from the SVB, the entity charged with the general pension fund (AOV), over the period of September 1, 1960 to January 1, 1975 a reduction of 2 percent per year would apply. Over the period of January 1, 1975 to January 1, 1991, a reduction of 2 1/8 percent per year would apply. Per January 1, 1991, a reduction of 2 2/9 percent applies.
  39. 39. Considering the pool of unemployed and in an effort to stimulate among locals, a new act has been proposed to the Executive Council. This proposal sets a quota on the number of foreigners working in the firms in Curaçao. A ratio of 1 foreigner per 5 locals (20% foreigners and 80% locals) in each firm has been proposed. In the proposal, locals are defined as persons born in Curaçao or whose mother or father, with Dutch citizenship, was born in Curaçao, or persons born on one of the other islands of the former Netherlands Antilles and living in Curaçao by October 10, 2010. The proposal has been approved by the Council and is awaiting legisla- tion. It can be expected that some businesses will have difficulty to with this act. 39 Chapter1:MacroeconomicDevelopments
  40. 40. 1.4 Public Finances Introduction The year 2010 marked a transition year for Curaçao and the public finances of Curaçao. On October 10, 2010, Curaçao became an autonomous country within the Dutch Kingdom and the two govern- ment levels (the government of the Netherlands Antilles and of the Territory Curaçao) were merged into one for the government of Curaçao, including the civil servants and ongoing projects. Preliminary figures on actual revenues and expenditures up to October 10, 2010 indicate a surplus for the treasury of the Island Territory of Curaçao. The differences between the budgeted and actual amounts will be analyzed based on the financial report of the Government of the Island Territory of Curaçao. In addition, the debt position at the end of 2010 and the future fiscal policy will be discussed. Financial Report Table 1.7 provides an overview of the revenues and expenditures for 2010, up to October 10. All actual figures included in the financial report are on cash basis and all projected figures are on transaction basis. The projection of the revenues and expenditures were based on a forecasted economic growth of 1.5 percent in 2010, while a lower growth rate has been registered. Nevertheless, the actual revenues turned out slightly higher than budgeted while total expenditures turned out lower than budgeted. A total of NAF 908.9 million was budgeted in revenues, whereas actual revenues amounted to NAF 911.4 million. Total expenditures were estimated at NAF 893.4 million but only a total of NAF 879.1 was actually spent. This resulted in an operational balance of NAF 32.3 million, higher than the NAF 15.5 initially estimated. The slight increase in revenues is owed to improved profit-tax revenues, but disappointing non-tax revenues compared to the amounts initially budgeted. Up to October 10, 2010, the government collected NAF 193 40 Chapter1:MacroeconomicDevelopments
  41. 41. million in profit tax, which is NAF 25.6 million more than the amount initially estimated. This improvement in the amount collected in profit tax indicates a fortunate 2009, especially for local businesses, but also improved compliance to remittance. Up to October 10, 2010, non-tax revenues amounted to NAF 152.1 million, which is more than NAF 30 million lower than estimated. The disappointing items were the dividends and other income from govern- ment-owned limited liability companies. With regard to the expenditures, mainly the lower expenditures on per- sonnel costs, goods and services and interest payments contributed to the lower than estimated total expenditures, as can be seen in the table. The lower expenditure on personnel costs is partly because the amount to be paid in wages, especially to teachers, was overestimated. Moreover, the payments to the pension fund of public employees (APNA) lagged behind the amount initially estimated due to payments in connection with early retirements. It is expected that APNA will charge these costs in a later stage. With regard to the goods and services, there was less money spent on temporary personnel and housing. Consultancy costs were invoiced for less than budgeted, but more invoices over this period are expected in a later stage. On the other hand, the amount spent on medical costs turned out higher than the amount budgeted. It is important to mention that medical costs is the largest category of goods and services and consists mainly of medical costs of pro-pauper patients and civil servants. Medical costs were underestimated because of pending measures with regard to the costs of medication. However because the measures were not executed, the expected reduction in costs of medication was not effectuated. Interest payments were NAF 3.5 million lower than estimated because of payments received from the Netherlands in connection with the debt- relief program. 41 Chapter1:MacroeconomicDevelopments
  42. 42. Table 1.7 Financial Report for the Island Government of Curaçao, January 1 to October 10, 2010 (in millions NAF) Projection Actual Total Revenues 908.9 911.4 Tax revenues Profit tax 167.4 193.0 Wage tax 382.2 392.9 Income tax 0.7 3.0 Taxes on property 23.2 22.0 Taxes on goods and services, including road tax 57.2 71.5 Other taxes 19.4 11.2 Non-tax revenues 186.1 152.1 Capital revenues 0.8 0.0 Grants 72.0 65.7 Total Expenditures 893.4 879.1 Personnel costs 303.0 295.6 Goods and services 288.0 278.6 Subsidies, including to public companies 38.2 43.5 Transfers 151.1 152.2 Interest payments 105.9 102.4 Capital expenditures 6.9 6.9 Operational Balance 15.5 32.3 Source: Ministry of Finance Debt position During the preparations towards getting the new constitutional status, it was agreed between the government of the former Netherlands Antilles and the Netherlands that the country of the Netherlands Antilles (including the individual islands) would receive debt relief. This debt relief is a partial debt forgiveness combined with a slowing down of debt accumulation. The Netherlands took over an amount of outstanding loans and future accumulation of debt has been restricted by the Cft. 42 Chapter1:MacroeconomicDevelopments
  43. 43. Figures received from the Ministry of Finance indicate that Curaçao’s debt position was approximately NAF 2,190 million per October 10, 2010. Fiscal Policy In order to remain competitive compared to other countries in the region and other countries of the Kingdom in terms of business climate, an adjustment of the fiscal policy has been prepared. The basis of this plan was a shift from direct to indirect taxation. It is imperative for this shift to remain neutral for the government budget. That requires that the shift should not decrease the government revenues. This plan was proposed to the Council and has been approved. The proposed adjustments are: · A decrease of the profit-tax tariff from 34.5 to 27.5 percent; · A decrease of the wage and income-tax burden according to table 1.8, accompanied by an increase of the rebate to NAF 1,700; · An increase of the turnover tax from 5 to 6 percent; · A decrease of the excise duty on gasoline and Low Sulfur Diesel of NAF 15.75 and NAF 8.50 respectively per 100 liter in 2012. Table 1.8 Current and proposed wage and income taxation Current Proposed Income Tariff Income Tariff up to NAF in % up to NAF in % 26,601 13.0 27,200 12.0 39,902 20.8 41,000 20.0 55,419 27.3 57,000 27.0 83,128 35.1 85,600 33.0 117,487 41.6 121,000 40.0 Higher 49.4 Higher 49.0 Source: Ministry of Finance These adjustments will be accompanied by measures to increase the compliance with tax remittance by businesses. The budget neutrality is realistic, based on the fact that a reduction in 43 Chapter1:MacroeconomicDevelopments
  44. 44. profit and income tax will lead to increased expenditures by households and businesses while the increased turnover tax will mitigate the spend- ing pattern. Based on calculations made by the Ministry of Economic Development, the proposed fiscal policy will have a positive economic effect. 44 Chapter1:MacroeconomicDevelopments
  45. 45. 1.5 Monetary Developments in Curaçao Introduction8 The new constitutional relations within the Dutch Kingdom became effective on October 10, 2010. In this respect, the Netherlands Antilles was dismantled and the islands that were parts of this constitutional struc- ture obtained a new status. Curaçao and St. Maarten became auton- omous countries within the Dutch Kingdom while Bonaire, St. Eustatius and Saba opted for direct ties with the Netherlands. The new constitutional setting had its effects on the monetary policy framework. As of October 10, 2010, Curaçao and St. Maarten formed a monetary union with a common currency and a common central bank. The common central bank is the Central Bank of Curaçao and St. Maarten, which is the legal successor of the former Central Bank of the Netherlands Antilles. For the time being, the Netherlands Antilles guilder will remain legal tender in both Curaçao and St. Maarten. A monetary union with one common currency and one central bank requires a synchronized monetary policy and budget policy, sound finances and uniform legislation. Therefore, close policy coordination between Curaçao and St. Maarten is a precondition for the monetary union between Curaçao and St. Maarten. The main objectives of the new monetary authority, the Central Bank of Curaçao and St. Maarten, are: · to promote a stable external value of the legal currency of Curaçao and St. Maarten; · to promote a sound financial system in Curaçao and St. Maarten; and · to promote safe and efficient money transfer in the monetary union. 45 Chapter1:MacroeconomicDevelopments 8 Source: Press Release 2010-010, Central Bank of Curaçao and St. Maarten, 2010
  46. 46. To realize the abovementioned objectives, the Central Bank of Curaçao and St. Maarten (hereafter: the Central bank) is in charge of among other things: · safeguarding the soundness of the financial system; · managing the foreign exchange reserves; · formulating and implementing the monetary policy; and advising the government on financial and economic matters. Monetary developments in 20109 Monetary policy The objective of the monetary policy is to safeguard the stability of the external value of the Netherlands Antilles guilder at a fixed exchange rate of NAF 1.79 for 1 USD. To preserve the confidence in the exchange rate, the Central Bank aims at maintaining a level of official reserves (excluding gold) worth three months of merchandise imports. Conse- quently, the developments in the aggregate money supply, the private credit extension and the foreign asset position of all commercial banks are the most important indicators for the Central Bank in considering policy adjustments. The Central Bank’s most important instruments to conduct monetary policy are the reserve requirement on the domestic liabilities, combined with a bi-weekly tender system of Certificates of Deposit (CDs) and the requirement of a positive Net Foreign Assets position of all commercial banks. These monetary instruments influence the domestic money market. In 2010, the Central Bank conducted a passive monetary policy as a consequence of the extra liquidity in the domestic money market and a slowdown in economic activities in that year. The surplus of liquidity in the domestic money market during 2010 was mainly attributed to the inflow of debt relief funds by the Dutch government and the risk 46 Chapter1:MacroeconomicDevelopments 9 Source: Quarterly Bulletin, Central Bank of Curaçao and St. Maarten, 2010
  47. 47. aversion of investors10 . Under normal conditions, a surplus of liquidity in the domestic money market will lead to excessive credit expansion by commercial banks. However, the slowdown in economic activities impeded an excessive credit expansion by the commercial banks. Con- sequently, the official reserves exceeded the adequate level and the domestic credit expansion remained at an adequate level. Based on the abovementioned developments in the domestic money market, the Central Bank deployed only one of the monetary instru- ments, in this case the reserve requirement combined with a bi-weekly tender system of CDs. During 2010, the Central Bank lowered the per- centage of the reserve requirement by 2.5 percent, reaching a percent- age of 7.75 percent in December 2010. In addition, the Central Bank offered only the amount of maturing CDs at the biweekly auctions, im- plying that no extra CDs were offered in 2010. Monetary indicators11 The aggregate money supply decreased by NAF 241.7 million (3.2%) in 2010. This was attributable to a substantial drop in net domestic assets (36.2%) mitigated by an increase in net foreign assets. The significant decline in net domestic assets can be ascribed to the decrease in the domestic assets (debt) of the government as a conse- quence of the implementation of the debt relief program, through which the Dutch government acquired the outstanding government paper of the former central government. Net foreign assets12 improved by NAF 582.6 million (18.0%) in 2010 as a result of the increase in the official reserves. The increase in the official reserves was mostly due to the transfer of dividend tax by the Netherlands related to the Kingdom tax arrangement (BRK). 47 Chapter1:MacroeconomicDevelopments 10 Investors prefer to keep their funds domestically as a result of the risks of international securities markets. 11 Due to the constitutional changes per October 10, 2010, the figures of the last quarter of 2010 do not lend themselves to a comparison with the figures of the previous year. Therefore, the figures of the last quarter have been excluded from the comparison with the figures of year 2009. 12 The net foreign assets comprise the official reserves and the commercial banks’ net foreign as- sets.
  48. 48. This dividend tax is from subsidiaries of Dutch companies on the island. The central bank’s net foreign assets increased by 21 percent and the net foreign assets of commercial banks increased by 11.5 percent. Developments in domestic interest rates The Official lending rate of the Central Bank remained unchanged at 1.00 percent in 2010. During 2010, interest rates related to the treasury papers and government bonds increased slightly. The interest rates of the domestic commercial banks, with the exception of the average interest rate on current-account overdrafts, declined further during 2010. The average interest rate on mortgages dropped to 6.69 percent. In addition, the average interest rate on passbook savings and 12- month time deposit declined to 1.11 and 1.65 percent respectively. Outlook The Central Bank’s monetary policy will remain directed at the promo- tion of a stable external value of the Netherlands Antilles guilder. In this regard, the monetary policy will also be a common policy supported by Curaçao and St. Maarten. In the first half of 2011, for instance, the Central Bank saw a strong decrease in foreign reserves. Despite this decrease, the reserves remained well above the norm of at least three months’ worth of imports. However, to prevent further decreases to dangerous levels that could put pressure on the Netherlands Antilles guilder, the Central Bank increased the reserve requirement for commercial banks from 7.75 to 9.75 percent. 48 Chapter1:MacroeconomicDevelopments
  49. 49. 1.6 Balance of Payments Curaçao’s Balance of Payments in 2010 Table 1.9 shows the Balance of Payments (BOP) developments for Cu- raçao from 2007 to 201013 . As per October 10, 2010, the Central Bank of Curaçao and St. Maarten compiled and published a separate BOP for Curaçao. The figures presented in table 1.9 are therefore related to Curaçao, contrary to the figures presented in the previous editions of the Curaçao Economic Outlook. Nevertheless, if necessary, develop- ments particular to other Caribbean part of the Dutch Kingdom will be mentioned. Table 1.9 Curaçao’s Balance of Payments Millions NAF 2007 2008 2009 2010** Current Account -975.3 -1,336.4 -859.3 -1,633.4 Trade Balance -2,030.9 -2,178.3 -1,901.6 -2,181.9 Service Balance 900.7 768.3 703.2 446.2 Income Balance 88.7 -12.5 -86.5 -19.1 Current Transfers 66.2 86.1 425.6 121.4 Capital Transfers 32.2 44.3 40.7 51.4 External financing 728.2 1,242.6 410.5 1,030.1 of the private sector Direct investments 202.3 264.6 89.3 133.1 Loans and credits 697.9 1,013.1 435.4 1,513.7 Portfolio investments* -172 -35.1 -114.2 -616.7 Change in reserves* 5.8 -45.9 324.3 382.4 ** Preliminary figures * Negative numbers indicate an increase Data are derived from the statistics of the Central Bank of Curaçao and St. Maarten Compared to the last three years, Curaçao’s balance of payments’ cur- rent-account deteriorated significantly during 2010, reaching a deficit of NAF 1,633.4 million (30% of GDP). Curaçao has, as do other islands in the Caribbean area, a small scale and open economy which is to a 49 Chapter1:MacroeconomicDevelopments 13 Preliminary figures
  50. 50. large extent dependent on imported goods, which is generally reflected in a deficit in the current account balance. The current account’s deterioration was due mainly to the worsening of the trade balance, service balance and lower current transfers re- ceived from abroad. According to the developments on the current ac- count, the capital and financial account worsened in 2010. Current account Developments in the trade and service balance will usually determine developments in the current account. These are basically the main com- ponents and have a significant effect on the current account. In con- trast with the traditional surplus on the service balance, the trade balance of Curaçao has been deteriorating continuously due to increas- ing imports over exports. Compared to 2007, the trade balance deficit expanded reaching 40 percent of the GDP in 2010. Both the import and export of merchandise grew slightly in 2010 com- pared to 2009. The higher import is related to higher commodities im- port bills, surging demand for imported goods driven by tourism spending, increased domestic spending and imports from e-zone com- panies to stock up inventory. In 2010, the import of goods was valued at NAF 3,404.6 million, up 10 percent from NAF 3,109.8 million in 2009. The higher export of goods can be ascribed to, among other things, higher income received from bunkering activities at the airport. Compared to 2009, the service balance earnings received from the ex- port of services shrank by 10 percent in 2010, mainly as a conse- quence of the 56-percent decline in the refining fee. The lower refining fee was a result of the shutdown of the Isla refinery due to power fail- ures at the Build Own and Operate (BOO) power plant from March 2010 up to December. Contrary to the decline in the refining fee, revenues from the tourism sector rose slightly (7%) in 2010 compared to 2009. While overall stay-over arrivals declined by 6.8 percent, stay-over nights grew by 5 percent reflecting the higher average spending in 2010 com- pared to 2009. 50 Chapter1:MacroeconomicDevelopments
  51. 51. Furthermore, the income balance improved slightly in contrast to the cur- rent transfers balance, which deteriorated by more than NAF 300 million due to less debt relief grants transferred by the Dutch government. Capital and Financial Account In 2010, capital transfer increased by NAF 10.7 million. This increase is related to an increased capital inflow received from Dutch govern- ment development aid. The deterioration of the current account deficit in 2010 as compared to the year before resulted in a drop in the net foreign wealth of the pri- vate sector. The change in the financing of the private sector was due to a deterioration of the direct investments balance (NAF 133.1 million) and the loans and credits balance (NAF 1,513.7 million), partially mitigated by the improvement in the portfolio investment balance (NAF 616.7 million, see table 1.9). The worsening of the direct investment balance is due to increased foreign direct investments in Curaçao. Regarding the loans and credits balance, the net trade credit balance worsened because trade credits received on imports exceeded repayments on trade credits. Foreign Currency Reserve in 2010 Deterioration of the current account resulted in a decline of NAF 433.1 million in net foreign assets held by the commercial banks, which was offset by NAF 50.7 million in net foreign assets held by the central bank. Balance of Payments in 2011 For 2011, it is expected that the current account deficit will stay at approximately the same level as in 2010. The expected slower economic activities, in the construction sector for instance, is expected to partially offset the higher import expenses, reflecting both fluctuating commodities prices on the international market as well as the increase in the volume of imported goods related to the expected growth in tourism14 and private spending. 51 Chapter1:MacroeconomicDevelopments 14 In the first quarter of 2011 stay over arrivals to Curaçao grew by 16 percent compared to the same period in 2010.
  52. 52. Furthermore, the service balance surplus is expected to grow slightly as a result of the expected growth of the export of services and the con- tinuation of the activities of the Isla Refinery. Regarding exports of goods, a small decrease in volume is expected, driven by lower demand due to the expected economic performance of the main trading partners. Furthermore, capital inflow related to Dutch development aid funds is expected, resulting partially in upward pressure on the foreign reserves. Considering the investments in the tourism sector (Tourism Master Plan 2010-2014), the direct investment balance is expected to worsen in 2011. The loans and credits balance is expected to worsen in 2011 due to, among other things, a decline in net trade credits. Sources: Quarterly Bulletin 2010-III, Bank of Curaçao and St. Maarten Statistical tables, Balance of Payments Curaçao, Bank of Curaçao and St. Maarten Strategic Tourism Master plan for the Island of Curaçao 2010 – 2014, December 2009 Historic Overview, Stay-over Arrivals, Curaçao Tourist Board, July 2011 Overview , Visitor Nights Overview, Curaçao Tourist Board, July 2011 52 Chapter1:MacroeconomicDevelopments
  53. 53. 1.7 SEI Program Introduction The long-term objective of the Social Economic Initiative (SEI) program is to provide Curaçao with a sustainably improved social and economic perspective by creating: · A sound government finance; · A reformed economic structure; · A reorganized public administration; · An investment program; and · A social safety net. After a slow start in drafting and submitting financial proposals by project owners in 2008, a sharp increase was seen in 2009 and 2010, in proposals being submitted to USONA for review, approval and signing of the financial agreements. Very ambitious goals were set at the start of this process, as the government believed that it was possible to have all the project proposals drafted and submitted to USONA by November 2009. Later this target date was extended to June 2010 and more pro- longations followed. During this period, some critics identified some serious hurdles in reaching this ambitious goal, e.g. capacity issues, different priorities and limited number of contractors for the infrastruc- tural projects. In the final report on the progress of the SEI projects for 2010, USONA was positive with regard to the number of project proposals being signed into financial agreements. The execution of the SEI program reached its peak during the last quarter of 2010, particularly in Decem- ber, as December 31 was set as deadline to commit to the budget by awarding the project to a consultancy firm/contractor for execution. The result was an approval of 97 percent of the SEI fund in projects. In the annual consultation round held at the end of 2010, it was decided that an addendum would be attached to the proposal of May 23, 2008 53 Chapter1:MacroeconomicDevelopments
  54. 54. that expired on December 31, 2010. This consultation round resulted in an agreement in January 2011 between the government of Curaçao and the Dutch government to guarantee spending of the total budget and a new deadline to commit the projects. Three objectives were agreed on: 1. All development aid will be terminated by 2012. 2. Projects and reforms important to reach SEI objectives that had en- countered delays will be addressed with high priority 3. The future of the oil refinery must be analyzed in accordance with an agreed planning. The new deadline to commit all resources for the pending projects had been set on September 30, 2011. The expected result was that all pro- jects on the Ministry of Economic Development’s list would be commit- ted. Reaching this goal is very important to avoid underspending of the SEI funds. The following section gives an overview of the status of selected projects submitted to USONA by the former Island Territory of Curaçao, now the government of Curaçao. The focus will be on economic and in- frastructural projects. Status of selected economic and infrastructural SEI projects15 During the period of 2008 to 2010, there were a total of 110 projects for which an agreement has been signed between the government of Cu- raçao and the government of the Netherlands through USONA. Of these 110 projects, 33 belong to the economic sector of the government. The remaining projects belong to the educational and social sector. The contribution of the Dutch government to these 110 projects has been estimated at NAF 121 million. A total of 85 projects have been committed by USONA, for an amount of NAF 118.5 million. The government of Curaçao contributes with NAF 68,664,831 to 13 54 Chapter1:MacroeconomicDevelopments 15 Source: PMU Progress Report, March 2011; USONA Progress Report, December 2010.
  55. 55. projects, seven of which are economic projects. These seven projects are mentioned below in table 1.10. Table 1.10 The Contribution of the Local Government in the Economic SEI Projects Project Contribution of the of Curaçao Curaçao Economic Development Board 1,100,000 Klein Hofje 19,070,000 Tourism Marketing Plan 15,300,000 Hospitality Training for the Unemployed 2,274,725 Upgrading of the EEG weg 2,350,000 Renovation of Urban Area Sewerage 2,164,500 Signposts 3,545,000 Total 45,804,225 The ministry of Economic Development has identified a few projects based on their major macroeconomic impact, by means of the size of the investment and the proposed measures intended to improve the economic performance and structure. These projects are “Small and Medium Entrepreneurship” (SME), up- date of the business establishment policy, “Red Tape”16 , Competition Policy, Long-Term Economic Policy, infrastructural projects, “Research on Dutch and European Subsidy Arrangements” and the “Tourism Mar- keting Plan”. Small and Medium Entrepreneurship NAF 100,000 has been reserved to prepare an SME policy. Although by the end of 2010 not much progress had been registered, the pace was increased in 2011 and, at the moment this publication is being prepared, the policy is ready to be implemented. 55 Chapter1:MacroeconomicDevelopments 16 Additional information about the “SME policy”, the update of the establishment policy and “Red Tape” is found in chapter 3 of this publication
  56. 56. Update of the business establishment policy An amount of NAF 150,000 has been reserved for this project. The policy is being prepared in order for the implementation to start by January 2012. Considering the importance of this policy for the island, the project is being closely monitored by USONA. Red Tape An amount of NAF 90,000 has been reserved for this project. Up to December 31, 2010, this amount had not been drawn on. The financial agreement with USONA was signed in March 2011, and at the moment of preparing this publication the project has been committed and tendered and ready to be executed. Competition Policy Although the budgeted amount of NAF 750,000 had not been touched yet by the end of 2010, the project is in full execution and in its last phase. It is expected that the policy will be ready by the beginning of 2012. This project also gets extra attention from USONA, considering the expected impact. Long-term Economic Policy An amount of NAF 1,000,000 has been reserved for the preparation of a long-term economic policy. Because of the delay in the preparations, this project is being intensively monitored by USONA. The execution of the project has been entrusted to the Ministry of General Affairs. At the time of this writing, the project is about to be committed. Infrastructural Projects The selected projects are “Weg naar Fuik” (the Road to Fuik), “Weg naar Rondeklip” (the Road to Rondeklip), Caracasbaaiweg, signposts, upgrading of the EEG weg, improvement of the Rif area, renovation of the sewage system in the urban area and Piscadera. Several of these infrastructural projects have been undergoing scrutiny due to proce- dural errors that were detected. 56 Chapter1:MacroeconomicDevelopments

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