~In line with market expectations on the development of the US target policy rate~
Willemstad/Philipsburg – The Centrale Bank van Curaçao en Sint Maarten (CBCS) decided to pause its monetary policy tightening by leaving the pledging rate1 unchanged. This decision is predicated on the expectation that the Fed will leave its target policy rate unchanged as U.S.
inflation continues to decline. Furthermore, the development in the monetary union’s gross official reserves and import coverage are broadly in line with expectations. So far, the decline in both monetary policy indicators has been limited, but uncertainties remain.
According to the latest estimates, the deficit on the current account of the balance of payments of the monetary union dropped from 19.4% of GDP in 2022 to 13.7% of GDP in 2023. "The 2023 figure was revised up from the September estimate, due primarily to a higher projected current account deficit and a lower expected nominal GDP level for the monetary union. The higher current account deficit is attributed mainly to a lower improvement of the current transfers and
income balances, offset by a stronger net export of goods and services", explained CBCS executive director, Dr. José Jardim. The adjustment in the net export of goods and services reflects higher than- earlier expected exports, mitigated by higher imports. “The estimate for the export of goods and services has been adjusted upwards because of higher-than-initially projected foreign exchange earnings from tourism, bunkering, and transportation activities. Meanwhile, the higher
projected import bill is due mainly to a sharper increase in merchandise imports in the wholesale & retail trade and construction sectors”, he added.
Gross official reserves showed quite some volatility over the course of 2023 but towards the end of November practically reached the same level as at the end of 2022. This development was attributable mainly to the transfers of funds by the World Bank for the reconstruction of Sint Maarten and by pension funds from abroad, offset by the net purchase of foreign exchange and the withdrawal of dollar deposits by the commercial banks with the CBCS. For the entire year, a moderate decline in reserves is expected.
The import coverage declined from 4.6 months in December 2022 to 4.5 months in November 2023, driven by a higher projected demand for import of goods and services combined with a marginal decline in gross official reserves up to November. According to the latest estimates, the import coverage is expected to drop further in December 2023, reaching 4.4 months. This is still 1 The pledging rate is the rate at which commercial banks can borrow at the CBCS in case of a liquidity shortage.
well above the norm of three months. Meanwhile, the commercial banks’ liquidity remained fairly stable until the end of November 2023, following a downward trend in 2022.
The U.S. Federal Reserve (Fed) has paused hiking its target policy rate since September 2023, given the subdued outlook for U.S. inflation. The Fed’s future decisions are contingent on the development of U.S. inflation, employment, and banking stress. “A change of the Federal funds rate immediately affects the international money market rates and, subsequently, the interest rates in the money market of the monetary union of Curaçao and Sint Maarten as the NAf. is pegged to the US dollar. The market expectation is, however, that the Fed will leave its rate unchanged in December as the October inflation continued to move down”, Dr. Jardim explained.
“Against this background, the CBCS decided to leave the pledging rate unchanged at 5.75%, maintaining the 25 basis points spread above the Fed funds rate. Furthermore, the CBCS will continue to offer longer maturities (i.e., 12, 26, and 52 weeks) on its bi-weekly auctions of CDs with the aim to hold bank liquidity longer domestically to support the maintenance of a solid foreign exchange position”, Dr. Jardim concluded.
Willemstad December 6, 2023
CENTRALE BANK VAN CURACAO EN SINT MAARTEN