Honorable Prime Minister,
“You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be.” — Admiral James Stockdale.
The full impact of the COVID-19 crisis is slowly becoming clear. Large parts of St. Maarten’s economy have come to a virtual standstill and Government’s revenues have decreased to a level never experienced before (including the immediate aftermath of hurricanes Luis and Irma). The Netherlands has made a proposal for additional funding which has not been well received by local political powers. In a presentation to the PNP, Prof. Mr. F. Kunneman stated that the island (Curaçao) did not really have a choice. If it did not accept the offer, it would run out of funds and the Netherlands would then be forced (or able) to establish a Kingdom Administrative Measure (Maatregel van Rijksbestuur) and interfere in local government. Our own Council of Advice has opined that while the proposal of the Netherlands would not win a beauty contest, it did offer room for conditions, and the Council of Advice underscores that the conditions did not “drop out of the clear blue sky”, but were based on advices of Ombudsman, Social Economic Council, General Audit Chamber, Central Bank of Curacao and St Maarten, Government Accountants Bureau SOAB, CFT and IMF. Consequently, it is time for a clear analysis of the situation St. Maarten finds itself in.
The reduction in foreign exchange income as a result of the dual crises brought by Irma and COVID-19 does not result in an import reduction that is directly proportional. As such, the lack of any significant additional foreign exchange (in the form of tourism dollars or liquidity support) income, puts tremendous pressure on keeping the Antillean Guilder pegged to the US Dollar. This decreases the stability of the currency’s value, which is considerable economic risk. No significant inflow of foreign exchange to at least cover the import deficit puts the currency in crisis. This needs no additional explanation and is assumed to be a known parameter in the overall analysis of the options available.
Sint Maarten will need (at the very least) another NAF 263.2 million to cover the 2020 budget as presented on May 5th 2020, and that is if, and only if, the revenues of government do not deteriorate further than was anticipated prior to April 2020. If all stays the same, at least a similar amount would be needed for the year 2021, again assuming government revenues stay around NAF 347 million. That brings the total up to an absolute minimum of NAF 525 million and if there were any desires to execute some very much needed investments (education, the prison, the social security system and the economy come to mind) much, much more is needed.
In fact, it is very well conceivable that much more will be needed if the numbers released late last month in a writing to the Second Chamber are any indication. These indicate a drop of over 74% in the revenues reported in May compared to April, when the full impact of the COVID-19 crisis was still to come and the longevity perhaps still somewhat underestimated.
Topping this off is the fact that even prior to the COVID-19 crisis the country was already unable to meet its obligations, hence the liquidity assistance for the years 2017, 2018, 2019 and 2020 provided to her by Kingdom partner The Netherlands. After this crisis, the liquidity gap will be larger than the sums provided for yearly. From its inception Country St. Maarten has not been able to book an actual surplus in any of the years of its existence.
Currently, what is left of the local economy, is staying afloat artificially with emergency help from several banks, insurance companies and private pension funds, as well as a temporary payroll support program that covers only a part of the economy and ended with support for June.
Cruise arrivals are firmly at 0%, while occupancy is currently hovering at less than 20% on average for Q2. Literally everyone has felt the impact of this crisis, employers and their employees, hotels, car rentals, taxi-drivers, restaurants, wholesalers, retailers, all service providers and even grocery stores. At the moment, approximately 3000 families, close to 25% of our official population depend on food support provided to them by local NGO’s, funded by the Netherlands. Significant global recovery, which in return impacts our recovery, is continuously being pushed forward, with US and European economists now predicting their recoveries taking a much slower route, then the previously anticipated/hoped for “V” shaped recession, consequently this means that, even in a very ambitious scenario, any local meaningful recovery should not be expected for years to come, as our economy’s recovery will lag that of our source markets.
Without any meaningful economic recovery from this crisis the government will have nowhere near enough income. Even if significant options for economic diversification were available immediately and these were viable enough to completely replace the approximate 85% of GDP that tourism contributes in St. Maarten’s economy (something to date not accomplished, see Report Economic Diversification Study 2006) – then still these would not be solutions for the immediate short- to medium term insofar as these will likely require significant additional investments and expertise may not be available locally (yet).
While we must diligently seek viable and sustainable options for diversification within our economy, and the format within which the island may continue in pursuing its guests may need to change radically - for the time being the segment Tourism is here to stay, and it offers an option for at least some commercial activity, and with that an upturn in government revenues, so we should nurture what little there is.
In addition to investments in product that are required, the global tourism market and in turn Sint Maarten’s target markets are suffering through its biggest upheaval, perhaps ever. Cruise lines are extending their return dates far into the second quarter of 2021, and major fleet reductions may negatively impact cruise traffic for years to come. In addition, cruise lines may consider adapting their initial schedules to domestic-only to overcome travel restrictions.
The global economic crisis has resulted in many millions of layoffs worldwide, many of these in the market segment (mass tourism) that Sint Maarten has targeted. The recovery of this group will take years, and mass tourism as we know it may not recover to levels previously enjoyed.
IATA indicates that full air traffic recovery may not be possible for years to come, with 2024 now being anticipated. While international travel remains sluggish because at least in part of the travel restrictions that COVID-19 has brought. Add to this an airport that has not yet been rebuilt, and there is enough reason to doubt immediate bounce-back capacity of the stay-over segment as well, in truth St Maarten has had difficulty ever reaching pre-Luis numbers.
It is high time to re-think the current strategy and execute a repositioning within the new tourism market and target the higher income tourist that represents perhaps less volume but a higher yield per guest. A strategy that’s also more naturally in line with the limitations of finite space on a small island and – considering we are bound to have a lot less guests in the very near future – what better time to reposition and upgrade now.
For this course of action, substantial investments and reforms need to be made. In order to ensure that these investments in economic repositioning and recovery are to remain sustainable, broad reforms are preconditional. These should encompass, apart from the economy, also areas of education, social security, healthcare, constitutional state and the government apparatus. A constitutional state that performs optimally, contributes to social trust, which leads to lower transaction costs, more investments, more innovation, a reduction of inefficient withdrawal of resources from the economy. By approaching the situation at hand, from a broad perspective, the aim is to increase the resiliency of both society as well as the economy simultaneously.
In short the Country will need to borrow an enormous amount of funds if the government wants to prevent a close-down of government and to be able to pay its employees and finance its programs, including fulfilling its obligations to APS and SZV (which manages a.o. the AOV fund) AND execute a strategy that ensures sustainable economic survival after 2021.
The options for attaining the funds, on a very short notice, for this are limited. Even an option recently mentioned in Parliament which in short boils down to the sale of shares in Government Owned Companies (GOC’s) to SZV isn’t very likely to yield the revenues in time to prevent a government close-down and at any rate would not stretch to include any additional shortfalls in revenue, natural disasters or any investments in broad reforms, upgrades or repositioning. In all, a limited one time, stop-gap measure at most.
If this is deemed as a viable option, consideration should be given to the fact that shares are being sold to f.i. SZV (via AOV fund) in order to attain funds to ensure a.o. the regular disbursements to SZV & AOV ... so borrowing from Peter to pay ….. Peter!?!? Apart from many other issues clinging to this option, anyone can see this will only incite a never-ending merry-go round of tax increases as there is no other way for government to raise the capital to repurchase these shares and ensure the required return on investment to keep the AOV fund healthy (at least 6% but more likely 8% if risk premium is factored in). In comparison, when approved by the CFT, the government can borrow at 2% in the Netherlands. That rate is 75% lower.
With regard to borrowing, the CBCS indicated that St. Maarten would not be able to achieve fiscal sustainability of the public sector finances in the next 20 years when continuing as is. Furthermore, their analysis showed that if the government wants the debt-to-GDP ratio to return to its pre-crisis level in the coming 20 years, it will not be able to borrow anymore after 2020. Their conclusion is that, only if the government were to cut its annual expenditures by ANG 50 million for a period of 5 years, starting in 2021, a sustainable fiscal path would be achieved. Otherwise, the fiscal path will not be sustainable. However, an expenditure cut this size may not be feasible, which exposes the unsustainable fiscal stance. Lastly the analysis indicates that there is a deep imbalance in the public finances and budget dynamics. Given the magnitude of this imbalance, single-track fiscal policy (growth-oriented or revenue-oriented or debt-oriented) will not result in a recovery. Therefore, the current situation demands an integrated approach which include a.o.; broad & sustainable economic reforms, public expenditure reduction & changed dynamics (f.i. the annual increase in wages & salaries in unsustainable), increasing public revenues by improving compliance.
An option available for the required funds at this is moment, is the Netherlands.
The conditions under which these funds can be obtained are known and have by now been vetted by numerous experts, including our own Council of Advice.
Under the conditions set out, which include a new Kingdom Entity, the Country is looking at a period of about 6 years during which Sint Maarten’s financial, educational and healthcare systems as well as the areas of social security, constitutional state and the government apparatus are fortified in order for a more resilient and thriving society and economy to emerge. The entity will provide both financial as well as technical support and oversee efforts to ensure the completion of the transition. This means that when the plans are completed successfully, Sint Maarten will emerge reborn. It will emerge with a thriving society and economy and in a much better position to take care of its citizens and ensure their wellbeing by securing fundamental human rights and freedoms, legal security and good governance.
Consequently, when deciding on “taking or leaving” the Dutch offer for help, and heeding Admiral Stockdale’s advice, let’s establish the brutal facts:
• A brutal fact is that Tourism will not “just” bounce back.
• A brutal fact is that our economy couldn’t sustain itself prior to the dual blows of the Irma & COVID-19 crises, let alone sustain an increase in social spending.
• A brutal fact is that using what little reserves there are, (AOV/AWW and/or APS and/or the CBCS) will not be enough to guarantee our economic future.
• A brutal fact is that we cannot lay any claim on Dutch taxpayers as we chose not to be part of their system and don’t contribute to those funds.
• A brutal fact is that the Country package for St. Maarten contains many projects that have been agreed upon as needed for the improvement of Country St. Maarten.
• A brutal fact is that in the very near future we will need additional liquidity support for both the public and the private sector.
It is seconds to midnight. Sint Maarten must find the courage to confront these brutal realities and grab the opportunity to improve its outlook for the long term. Any possibility should be, with properly structured stakeholder involvement, considered at this point.
Using autonomy, or the perceived infringement there upon, as an excuse not to exhaust all avenues for help amounts to throwing sand in people’s eyes. We continue complaining while doing little, all while a Kingdom instruction looms. When will we take collective responsibility for our shortcomings, grab the bull by the horns and start planning our revival with the help being offered through the reform entity? We can be as autonomous as we want to be, by showing that we have a grip on reality and are willing to do what is necessary to ensure the best possible future for our population.
Sint Maarten has had the good fortune to have been offered help from the Netherlands during one of the worst economic crises in history. Considering Sint Maarten’s geographical position within the so called “hurricane-belt” that’s saying something. While there will be a transition period in which the (political) autonomy may be temporarily affected, some strides can be made by ironing out some of the details as mentioned in the CoA report.
In addition, the SHTA urgently advises the government to engage in constructive consultations regarding the terms and projects that are listed in the “Country Plan” keeping in mind instable financial and economic state of affairs as well as the people’s well-being and the exceptionally precarious situation that the population is faced with.
Yours sincerely, on behalf of our Board and Our Members,
The St Maarten Hospitality and Trade Association (SHTA)