Philipsburg:--- President of the Central Bank Emsley Tromp and his advisors presented the 2010 annual report of the Central Bank for Curacao and St. Maarten to the Governor of St. Maarten, the Council of Ministers and the media. Tromp said St. Maarten must make every effort to diversify its tourism economy since tourism is the island’s main source of income.
Below is the president’s report on the 2010 report:
The world economy continued to recover in 2010 from the severe recession caused by the international financial crisis, but the pace of recovery was uneven. While the emerging and developing economies registered robust growth, the pace of expansion in the advanced economies was fairly modest as a result of private balance sheet adjustments and weak labor market developments. The economic recovery in the Netherlands Antilles also was subdued. After a contraction of 0.5% in 2009, the economy of the Netherlands Antilles expanded by a mere 0.1% in 2010. The economic expansion in 2010 was attributable mainly to increased government spending. Government consumption rose, owing mostly to increased outlays on goods & services related to the dismantling of the Netherlands Antilles. Meanwhile, government investments increased, reflecting the implementation of the Social Economic Initiative (SEI) program. In contrast, private demand shrank as a result of lower investments in 2010 than in 2009. This contraction in private demand was mitigated by increased consumer spending. The economic expansion was dampened by a decline in net foreign demand, as imports of goods and services rose while exports dropped. Over the course of 2010, higher international oil and food prices led to increasing inflationary pressures. As a consequence, inflation in the Netherlands Antilles rose from 1.6% in 2009 to 2.8% in 2010.
A review by sector reveals that output dropped in most industries, but the contraction was most pronounced in the manufacturing sector. The contraction in the manufacturing sector was due mainly to a decline in value added by the Isla refinery as a result of the prolonged shutdown of the refinery between March and December 2010. The construction sector also registered negative results. After the completion of several major projects in 2009, including the expansion of the harbor in Sint Maarten, no major investment projects were reported on the islands in 2010.
Output in the wholesale and retail sector dropped, although at a slower pace than in 2009. An analysis by island reveals that Sint Maarten in particular registered a decline in wholesale and retail activities. In addition, activities in the free zone in Curaçao contracted, reflecting a decline in the number of free-zone visits.
Economic growth also was dampened by the transport, storage, and communication sector, owing to, among other things, poor results in the harbors. In 2010, the number of ships and cargo handled in the harbors declined. In addition, both oil transshipment and oil storage activities contracted. Meanwhile, air transportation activities dropped because domestic airlines transported fewer passengers. The contraction in the transport, storage, and communication sector was mitigated by increased airport-related activities, attributable to a growth in total passenger traffic in Sint Maarten and Bonaire. Moreover, output rose in the telecommunication sector.
Activities in the restaurants and hotels sector contracted also. However, the contraction in 2010 was less pronounced than in 2009. The poor results in the restaurants and hotels sector were ascribable to a decline in stay-over tourism in Curaçao. The decline was caused by a drop in the number of stay-over tourists from South America, in particular Venezuela, but the decline was mitigated in part by a growth in the North American and European markets. In Sint Maarten, stay-over tourism expanded, owing to increased visitor numbers from Europe and South America. In contrast, the number of visitors from North America and the Caribbean decreased. Meanwhile, stay-over tourism in Bonaire performed well as a result of more visitors from Europe and the Caribbean. Cruise tourism in general expanded in 2010 compared to 2009 driven primarily by an impressive growth in Sint Maarten.
In contrast to most of the other sectors, real value added in the financial services sector rose, as a result of an increase in both domestic and international financial services. Growth in the domestic financial services sector was the result of increased net income of the domestic commercial banks. Meanwhile, the expansion in the international financial services industry reflected higher wages & salaries and other operational expenses.
The constitutional reforms within the Dutch Kingdom dominated the public sector developments throughout 2010. As of October 10, 2010, the Netherlands Antilles ceased to exist, and Curaçao and Sint Maarten became autonomous countries within the Dutch Kingdom. Meanwhile, Bonaire, Saba, and Sint Eustatius became special municipalities of the Netherlands. As part of the process of dismantling the Netherlands Antilles, the Dutch government financed development projects on the islands under the Social Economic Initiative (SEI) and provided debt relief to the governments of the Netherlands Antilles. The debt relief program was started in 2009 with the governments of the Netherlands Antilles receiving grants from the Netherlands for debt servicing and the payment of arrears. Meanwhile, on October 10, 2010, the Dutch state assumed the legal ownership of all outstanding securities of the Netherlands Antilles. Consequently, the debt-to-GDP ratio of the Netherlands Antilles dropped significantly from 74.0% at the end of 2009 to an estimated 32.3% in October 2010.
The general government recorded a cash surplus of NAf.772.7 million in 2010, a slight improvement compared to 2009. This improvement was the result of increased revenues, mitigated by higher expenditures. Government revenues rose, associated mainly with the transfer of withholding tax grants by the Netherlands related to the BRK agreement combined with the debt relief grants received in 2010. In contrast, tax revenues dropped because of a decline in tax receipts from goods and services, partly offset by increased revenues from taxes on income and profits. Moreover, nontax revenues contracted owing largely to fewer dividend payouts received by the government of Curacao from public enterprises. The growth in expenditures was driven by increased spending on wages & salaries and goods & services, partially moderated by lower transfers and interest payments. Transfers dropped because of fewer disbursements to the island governments and other government institutions since the dismantling of the central government. Meanwhile, interest payments shrank as a result of the debt takeover by the Netherlands in October 2010.
Similar to 2009, the balance of payments recorded a surplus in 2010, reflected by a further increase in net international reserves. However, the net international reserves grew at a slower pace than in the previous year. The surplus on the balance of payments was related to strong capital inflows, offsetting the current account deficit. The average import coverage rose to 4.3 months because the growth in official reserves outpaced the increase in merchandise imports.
The deficit on the current account widened significantly in 2010 compared to 2009, due mainly to a decrease in net current transfers received from abroad combined with a decline in net foreign demand. Net current transfers decreased considerably as the Dutch government transferred fewer funds for the repayment of matured securities that were issued by the governments of Curaçao and the Netherlands Antilles in 2010 compared to 2009. These transfers were part of the implementation of the debt relief program. Meanwhile, net foreign demand contracted as imports of goods and services rose and exports fell. The increase in imports can be ascribed largely to a surge in international fuel prices. Furthermore, increased domestic consumption contributed to higher merchandise imports by the free-zone companies. Exports dropped, led by a decline in the fee received for refining operations in Curaçao because of the prolonged shutdown of the refinery in 2010. In addition, re-exports by the free-zone companies declined, particularly to Venezuela. The export contraction was mitigated by increased foreign exchange earnings from bunkering activities reflecting higher international oil prices. In addition, foreign exchange receipts from the tourism sector rose. Net income received from abroad increased as interest and dividend payments to abroad shrank, while income earned on foreign investments rose.
The higher current account deficit was financed mainly by direct investments and loans and credits from abroad. Net direct investments expanded primarily because of an increase in the liabilities of domestic companies with their foreign affiliates and more real estate purchased by nonresidents. The loans and credits balance worsened due mainly to a transfer from the Netherlands of taxes on dividends paid by Dutch companies to their parent companies in the Netherlands Antilles, related to transactions in previous years. Also, the repatriation of foreign assets by financial corporations, the withdrawal of funds abroad by domestic companies, and increased net trade credits received on imports contributed to the growth in loans and credits from abroad. Meanwhile, capital transfers received from abroad increased significantly as the Dutch government assumed the legal ownership of all outstanding securities of the former Netherlands Antilles on October 10, 2010. This change in ownership also explains the considerable expansion in net portfolio investments abroad, as the creditors of the former Netherlands Antilles now have a claim on the Dutch government.
The monetary aggregates contracted in 2010 due to a decline in net domestic assets. The latter decline can be ascribed largely to a drop in net credit extended to both the central government and the island governments, reflecting the implementation of the debt relief program. Net credit to the private sector also shrank, driven by the redistribution of assets and liabilities of the banks following the constitutional changes. In contrast, net foreign assets increased as a result of the balance of payments surplus, the take-over by the Dutch government of the remaining outstanding debt securities of the Netherlands Antilles on October 10, 2010, and the revaluation of the gold stock.
Similar to 2009, the Bank relaxed its monetary policy further in 2010 motivated by the solid import coverage and the moderate growth in credit extension to the private sector. As a consequence, the reserve requirement percentage was reduced each month by 25 basis points to reach 7.75% as of October 2010. Moreover, during the biweekly auctions of certificates of deposit (CDs), the Bank focused solely on the refinancing of maturing CDs. Meanwhile, the pledging rate, which is the Bank’s official lending rate, was kept unchanged at 1.00%.
Policy considerations
Curaçao and Sint Maarten have been facing several challenges as autonomous countries in the Dutch Kingdom. Among other things, the governments of both countries have had to deal with new tasks and responsibilities, and create a new administrative apparatus while complying with the budget and interest burden rules agreed upon under the debt relief program. At the same time, both countries have had to face a turbulent international environment, stemming from, among other things, sharp movements in oil and food prices. These events served once more to drive home the fact that as small and open economies, we remain susceptible to changes in the world economy. An important lesson that can be drawn is that the new constitutional status alone is not a solution for all our institutional and economic challenges.
An important benefit of the process of constitutional changes, and in particular, the debt relief program, has been a fresh start with sound public finances. For many years, our fiscal deficits and high public debt burden constrained our economic growth. Today, as most countries, including the Caribbean countries, struggle with high public debt levels that hamper economic growth, our debt-to-GDP ratio is sound according to international standards. This is a great advantage compared to our Caribbean neighbors.
Nevertheless, our growth prospects for 2011 are poor. According to the Bank’s latest projection, the Curaçao economy will most likely contract by 0.7% in 2011. In a more optimistic scenario, the economy will expand slightly by 0.1%. However, in a pessimistic scenario, the economy will contract by 1.5%. Meanwhile, Sint Maarten will show no growth this year and might contract by 0.5% in a more pessimistic scenario.
On the other hand, the IMF projects that the Caribbean region will expand by 2.0% in 2011 following a 0.2% contraction in 2010. Apparently, despite having higher public debt levels than ours, most countries in the Caribbean are recovering at a faster pace than we are. In other words, Curaçao and Sint Maarten are lagging behind in the region.
To catch up with the region, we need to conduct policies that foster rapid and sustainable growth. Evidence suggests that well-targeted private investment is crucial for sustained growth. For example, to reach a 2% GDP growth in 2011, similar to the Caribbean average, private investments in Curacao would need to rise by 17%, all other things being equal. In the case of Sint Maarten, an expansion in private investments by 34% would be needed to achieve a real GDP growth of 2%. It does not appear that we will reach these levels of private investment growth in 2011 or beyond.
For private investments to grow at a faster pace, we must improve our investment climate. The Bank has emphasized on many occasions that macroeconomic stability, efficiently functioning markets, and low administrative barriers are fundamental elements for an investment climate that fosters private investments and, hence, economic growth. By addressing these areas, Curaçao and Sint Maarten will become more competitive vis-à-vis the region. Unfortunately, in several of these areas we are moving in the opposite direction.
Policy inconsistencies and uncertainties weaken investors’ confidence. The government of Curaçao and the government of Sint Maarten should provide more clarity and decisiveness about their policy agendas. For example, more clarity must be provided concerning the future tax system. Undoubtedly, both countries have to reform their system of taxation to ensure sound public finances. A central objective of the tax reform in both countries is to create an adequate revenue base to finance government spending. At the same time, the reform of the tax system should promote economic growth. Consequently, the tax rates, in particular the rates of direct taxes, must be lowered to reduce economic distortions created by the tax system. Lower rates also would improve our competitiveness vis-à-vis other countries, in particular those in the Caribbean region. Moreover, the tax system should be simple, more transparent, and more customer friendly, making it easier to administer and improving tax compliance.
In the case of Sint Maarten, reform of the tax system and improvement of tax collection are imperative to increase the government’s revenue base. Such a higher revenue base is necessary to adequately fund the new responsibilities and tasks that came with the country status. In Curaçao, the tax system needs to be reformed to make it more conducive to economic growth. Although reform of the tax system was announced by both countries, its implementation has encountered delays. Moreover, the composition of the final tax package in the reform is still unclear.
Market confidence and, hence, private sector investment also are encouraged when the government applies the rules of good public and corporate governance. Recent experiences in Curaçao underscore the importance of adherence to these principles by the government, in particular when it concerns the state-owned enterprises. In Curaçao, state-owned enterprises are prevalent in several key sectors. Sound governance of these companies is critical to ensure their positive contribution to Curaçao’s overall economic performance and competitiveness. As a consequence, the government should act as an informed and active owner and establish a clear and consistent ownership policy ensuring that the governance of the state-owned enterprises is carried out in a transparent and accountable way, with the necessary degree of professionalism and effectiveness. At the same time, however, the government should not be involved in the day-to-day management of these enterprises and should allow their executive and supervisory boards to execute their responsibilities independently and without interference. The supervisory boards of these enterprises should have the necessary authority, competencies, and objectivity to carry out their function of strategic guidance and monitoring of the management. At the same time, the state-owned enterprises should recognize the rights of all shareholders, treat them equitably, and provide equal access to corporate information. And, state-owned enterprises should be transparent towards the shareholders and the public in general.
Over the medium term, oil and food prices are expected to remain high and volatile on the international markets. Since Curaçao and Sint Maarten are very import dependent, higher prices on the international markets will worsen our net exports. Therefore, it is very important that both countries improve their export performance to mitigate, albeit only in part, a further worsening of net exports, which dampens economic growth. Although tourism has a high import content, it is still a very important pillar for both economies in terms of exports. Both countries need to further develop and diversify the tourism industry by tapping new markets such as the emerging economies in South America, along with the traditional US and European markets. In addition, we need to further develop and diversify our tourism product towards niche markets such as cultural, conference, and medical tourism. Furthermore, skill deficiencies in the tourism industry need to be addressed to employ local workers whenever possible. We also need to strengthen the international financial services industry, which traditionally has been an important pillar of the Curaçao economy and is a potential pillar of the Sint Maarten economy in terms of exports and high-skilled job creation. In light of the upcoming Caribbean Financial Action Task Force (CFATF) evaluation, it is important for us to be in compliance with the internationally accepted best practices.
The unstable international climate also poses challenges for the monetary union between Curaçao and Sint Maarten. Although the authorities of both countries have announced their intentions to create their own central bank, we still have to deal with the current reality of the union and, hence, the efforts necessary to defend the stability of the common currency. Policy coordination remains a necessary condition to achieve the objectives of the monetary union. Prominent among them is the stability of the guilder. Given the uncertain global macro-economic environment, the authorities have to remain vigilant to pursue their domestic policies without jeopardizing currency stability. Given the anemic performance of the economies of Curaçao and Sint Maarten, changes in the economies of our main trading partners may have a disproportionate impact on our own economies. The fact that the fiscal situation is in order is not a reflection of the policies pursued but rather the result of the debt relief program. The authorities should therefore use this unique opportunity to further strengthen the resiliency of the economy to future crises.
The consistent and timely implementation of the necessary policy measures will result in higher and sustainable economic growth. At the same time, we need to focus on reaching consensus through reconciliation of different views and opinions. After all, policy initiatives will always be more successful when they are broadly accepted in our society. Now that unemployment, particularly among the youth, is a major issue and concern is growing about the recent increase in crime and violence, we need to take the right actions in a timely and consistent way to reach sustainable economic growth levels that can lead to prosperity and well-being of all citizens of the new countries Curaçao and Sint Maarten.
Click here to view the 2010 Central Bank Annual Report