Emsley D Tromp: Threats and opportunities for the economy of Curacao
in a period of international financial turbulence
Speech by Dr Emsley D Tromp, President of the Bank of the Netherlands Antilles (Bank van
de Nederlandse Antillen), on the occasion of the fundraising seminar of the Stanley Lamp
Foundation, Willemstad, 4 April 2008.
* * *
Ladies and gentlemen, good afternoon,
I think you agree with me that to stand still at the impact of the international financial turmoil
on our economy is a well-targeted theme for this seminar. I very much appreciate this
initiative of the Stanley Lamp Foundation and the generous support provided by our local
KPMG office headed by Ralph. I fully endorse the objective of the foundation to promote the
education of our youth and, hence, their development and the development of our society as
a whole. This is a crucial condition for building up a successful country in the new
constitutional structure of the Kingdom. I think the late Stanley can be very proud on Ference
and Roan, who have become successful professionals and are a perfect example of the
huge return that good education generates, not only for them and the companies they work
for, but also for Curacao.
In my address this afternoon, I shall focus on the macroeconomic aspects of the current
international financial developments. First, I shall briefly describe the causes of the current
international financial instability and discuss some of the consequences on our economy.
This will be followed by a brief overview of the recent developments in the economy of
Curacao. Together with the opportunities created by the constitutional changes, I shall
subsequently indicate some of the reforms that are necessary to create a solid foundation for
strong sustainable growth and resilience against future external shocks.
The current international financial turmoil ranks very high on monetary policy makers' agenda
around the globe. Virtually every day brings a new surprise in the financial markets. The
scale and speed at which financial globalization has developed generated excesses in
financial markets that are currently unwinding. The recent events represent an overdue
repricing of risk, triggered by significantly higher-than-expected defaults in US subprime
mortgages. The ample availability of liquidity in the international financial markets promoted
the development of innovative but complex new securities with a distant link to the original
loan (the so-called originate and distribute model). The lively trade in these securities and,
hence, their high liquidity gave a false sense of reduced risk. Financial institutions worldwide
invested large sums in these securities. When American home owners got into problems
servicing their mortgages, among other things, caused by weakening economic
circumstances related to the sharply rising prices of oil and other raw materials, investors
became aware of the associated risks and started to sell these securities. Due to a lack of
buyers, prices dropped rapidly, making the securities worthless. Also other structured
financial products suffered from the evaporated trust in mortgage-backed securities. Because
of the enormous amounts invested in these securities, the write-offs have grown to gigantic
proportions, causing major problems for many well-known international financial institutions.
As a result, the share prices of these financial institutions fell sharply on securities
exchanges worldwide and dragged most other share prices in their fall. Investors have
become very nervous and react strongly on economic news resulting in volatile
developments in securities prices.
Since the origin of the current international financial instability lies in the United States, this
economy is expected to go through a brief recession this year, affecting also countries that
rely significantly on exports to the US market. As a result, world economic growth is
projected to slow. Particularly a US recession is likely to affect the number of American
visitors to our islands. The market share of American visitors in the total number of visitors
determines the impact on the tourism sector on the respective islands. In Curacao, this share
is approximately 20%, implying that the impact will be moderate.
What about the financial sector? Our local financial institutions have no or very limited
exposure to mortgage-backed securities or other structured financial products, resulting in a
negligible direct impact from the crisis around these securities. Of course, they will be
affected indirectly by the declining international interest rates and securities prices in the
wake of the financial crisis. The international financial and business services sector is likely
to be affected to a greater extent, because the companies operating in this sector are very
active in the international financial markets and have a larger exposure to innovative financial
products. Nevertheless, since these companies operate outside of our economy, the
domestic impact will probably be limited to some reduction in the services provided by local
companies and professionals.
Due to the peg of our guilder to the US dollar, the sharp reduction in US interest rates we
have witnessed in the last few months results also in lower domestic interest rates. This
development is enhanced further by the debt relief as part of the constitutional changes. The
repayment of a major part of the government debt by the Dutch government will result in an
increase of domestic liquidity and lower yields on new debt issues. Lower domestic interest
rates will promote higher consumption and investment growth, resulting in a higher growth
rate of our economy.
Given this favorable outlook, I like to turn now to the current state of our economy and the
likely impact of the current international financial turbulence on our economy. That is to say:
looking ahead, how does the consequent drop in the US interest rate affect our economic
developments? The economy of Curacao is finally picking up after a marginal annual
average growth rate of 0.3% in real terms since the end of the economic recession in 2001.
Economic growth increased to 1.4% in 2006 and a further acceleration is expected in 2007.
The inflation rate remained stable at 3.0%, which is relatively high as a result of the impact of
the rising world oil prices. The stronger growth was translated in an improvement of the labor
market. The unemployment rate started to decline from its peak of 18.2% in 2005 to 12.0% in
2007. Youth unemployment declined also during this period from 44.0% to 24.2%. Although
this decline is more than welcome, I think the fact that almost a quarter of our youth is
unemployed remains unacceptable.
The improved economic performance is primarily private sector led. Particularly private
investments grew strongly, but private consumption contributed also significantly to the
expansion. The high investment growth was due largely to the construction of new hotels and
the expansion of existing hotels. This wave of new investment projects was triggered by the
remarkable recovery in the number of tourists since 2006. During the previous three years,
the number of stay-over visitors remained stagnant, reflected by an average annual increase
of only a half percent. However, 2006 posted a growth of 6% and 2007 even 28%, the
highest growth figures in the Netherlands Antilles. Consequently, the occupancy rate rose
rapidly and has surpassed now the 90% limit. The rising occupancy rate created confidence
with the existing hotels that the time was right to expand their room capacity. In addition, the
potential for further strong growth in the number of tourists attracted new investors and the
attention of large international hotel chains. Curacao's tourism is still rather underdeveloped
compared to many destinations in the region, including Aruba and St. Maarten. So, there is
substantial room for further growth. Moreover, cruise tourism is also performing well after its
recovery in 2005, although the growth rate is decelerating.
The result of the investments in hotels is that room capacity will be expanded by
approximately 1,000 units in 2008. Based on current construction and intended projects in
the years ahead, an average 1,000 rooms per year will be added between 2009 and 2111.
Applying the common multiplier in the hotel sector that each room creates 2.5 direct and
indirect jobs, approximately 10,000 jobs will be created from now until 2011, enough to
eradicate unemployment in Curacao. Prominent among these are: (i) the Santa Barbara
Plantation master plan which envisions not only the luxury Hyatt Regency Curaçao hotel, but
also as a 30-slip marina, beach club, 52 vacation club units, 128 condominium homes, 106
residential lots and 94 terrace homes. Additionally, it will include an 18-hole championship
golf course, the first signature golf course on the island, designed by top golf architect Peter
Dye; (ii) The Rif master plan which encompasses not only the 243 room 5-star Renaissance
Hotel, but also a 50-slip marina, another 5-star hotel, a 3-star hotel, condominiums, a second
mega pier and food and retail facilities; and (iii) The Jan Thiel master plan which envisions a
5-star 350 room Westin hotel, condominiums and residential homes. The investments to
realize these projects run into billions of guilders, creating the prospect of strong economic
growth in the coming years. Realization of these projects may put us on growth path
consistent with sustainable double digit growth for some times to come.
Ladies and gentlemen, this encouraging outlook however, is not guaranteed. While the
prospect of a permanent resolution of our debt problem in the context of the constitutional
changes and the consequent drop in the US interest rate have significantly improved the
availability of funds to finance our growth, there are still some dark clouds on the horizon.
Our current investment climate has several deficiencies that will seriously hamper the
realization of these projects if not addressed adequately.
The policy agenda to enhance the investment climate should focus on those government
policies that promote incentives and opportunities for firms to invest productively, create jobs,
and expand. This policy agenda should cover a broad terrain including stability, security,
regulation, taxation, finance, infrastructure, labor markets, and a speedy and efficient
decision making process to approve project by the government apparatus. Since it involves
so many issues, investment climate improvements should be an ongoing process of policy
adjustment and fine tuning. We have to start now with these policy adjustments if we want to
make progress in the improvement of our investment climate and prepare our island
effectively on its new constitutional status of a country within the Kingdom.
With this in mind and with so many policy areas influencing investment-driven economic
growth, priorities are essential, and we must be careful to ensure that they are combined in a
coherent manner. If I have to make a selection, I would single out the following policy areas
to address with priority:
•
The labor market;
•
The capital market;
•
The existing red tape and bureaucracy; and
• The tax regime.
In these areas, the effectiveness of measures depends on policy transparency, good
governance, broad public support, and economic and political stability. I would like now to
share my views with you on the challenges for the government of Curaçao in addressing
these four policy areas on the road to the new constitutional status and a bright future.
One of the weaknesses of our investment climate is the still inflexible labor market, because
of the rigid rules on hiring and firing, the mandatory benefits, and the high overtime
compensation. Despite all the recommendations that have been given by international
organizations to reform the labor market regulations, little progress has been made. Indeed,
measures have been taken to flexibilize the labor market, but some of them have been
reversed, though approval procedures became more even-handed and decision times were
shortened. To enhance our competitiveness and potential growth, it is essential to be able to
use labor more flexibly, provided that individual protection against abuse is preserved.
Despite a decline in our unemployment rate, it remains high in double-digit figures, especially
among our youth. The main reason for Curaçao's structural unemployment is not so much
the absence of jobs, certainly not in view of the demand for labor in the booming tourism
sector, but a qualitative mismatch between supply and demand. Despite our high literacy rate
and the availability of institutions providing higher education and language training, many
investors find that the availability of well-trained workers is limited.
Our investment climate will, therefore, benefit greatly from public investment in education and
training to reduce the qualitative mismatch between labor demand and supply - an area
championed by the late Stanley Lamp. Being important determinants of our long-term growth
potential, we should therefore have an economic policy that focuses on enhancing
investments in physical as well as human capital. Investment in our human capital, for
example through improving education and training, will enhance the way that investments in
physical capital are put to use. The investments in human capital must be targeted towards
our youth as well as the unemployed population. This is especially important in view of the
thousands of jobs to be filled in our tourism sector in the coming years. You will agree with
me that economic progress should in the first place benefit our own people. We should
attract labor from abroad only if positions cannot be filled on the local labor market.
In addition, our education and training system should not only focus on the labor force in
those sectors where our economy has a competitive advantage. It should also focus on
creating a skilled labor force that can attract knowledge-based industries and services
companies, particularly in high value-creating activities, to promote diversification of our
economy. Such diversification is essential to reduce our vulnerability to external shocks. The
resulting increase in productivity will have a more permanent impact on our long-term growth
prospects. Thus, for Curaçao to become more attractive for investors, we must take some
major actions to improve the quality of our labor force and the functioning of the labor market.
Ladies and gentlemen, another major bottleneck for investments in our country is the lack of
long-term financing, the implicit high interest rates, and the absence of vehicles to provide
equity capital to the various projects that are being undertaken. The high cost of capital leads
to the postponement or even cancellation of business investment decisions. The issuance of
private debt securities, equity, and the establishment of a venture capital fund for promising
new businesses can be considered solutions to overcome these bottlenecks. Hence, the
further development of our capital market will make the transmission of financial resources to
investors more efficient and less costly. As a result, local investors will not have to rely solely
on bank financing, which is more expensive because of the intermediation costs involved.
This is an area where I think much progress can be made in light of the forthcoming
constitutional changes and the opportunities arising out of the current turbulence in the
international financial markets.
A welcome development in our domestic capital market is the prospect for a further decline in
interest rates, contributing to lower financing costs. Interest rates showed already a gradual
declining trend caused mainly by increased competition among domestic financial institutions
and from abroad. This trend is expected to be enhanced by the debt relief agreed with the
Dutch government coupled with the decline in US interest rates as a consequence of the
economic downturn. The redemption of a considerable part of the government debt will
substantially increase the availability of funds for the private sector at more attractive terms.
In addition, yields on new government bond issues will decline due to a lower risk premium
associated with a reduced debt and more competition among investors for these bonds. The
substantial oversubscription on the latest bond issue by the central government at prices
above nominal value serves as an example.
Another weakness of our investment climate is the current administrative barriers, the long
and unacceptable delays in administrative decisions by government departments and
excessive discretion in administrative functions. In particular, the requirements for start-ups,
procedures for obtaining permits for non-nationals, and migration regulations are seen as a
major source of frustration by the business community. Ladies and gentlemen, establishing a
business and getting a basic business license are automatic in most countries and are
usually accomplished in a matter of days or even hours. On our island, however, these
processes are discretionary and can take months or in some cases even more than a year.
The long delays in obtaining permits are equivalent to a substantial loss of opportunities to
capture investments. In other words, the existing red tape and bureaucracy weaken our
competitiveness relative to other economies in the region. If we are to benefit from the
current favorable environment with respect to the tourism sector and move to a path of
higher growth, it is essential that progress be made in this area.
One of the main changes accompanying the new constitutional status of Curaçao is the
elimination of the double layer of government. This will reduce the administrative barriers in
the government apparatus considerably, facilitating the decision-making process of policies
and projects. In this respect, it is important that the government streamlines its administrative
procedures, aimed at eliminating all unnecessary bureaucracy and simplifying the
procedures for obtaining business and work permits and business visas. In addition, the
creation of the mentioned one-window agency to serve potential investors as well as to
provide aftercare services to existing investors is long overdue. Moreover, when we start with
our new constitutional status, we must be cautious not to implement any new measures that
might have an adverse impact on our investment climate. What we should do is to embrace
the possibilities that the new status offers us by making our administrative system more
transparent and efficient.
Ladies and gentlemen, another policy area that needs our attention is the tax system, which
plays also a key role in shaping the investment climate. On the one hand, the government
needs revenues to fund the public services - including those that improve the investment
climate - and to accomplish its social goals. On the other hand, taxes represent a cost to
firms, which reduce their incentives to invest and create jobs. All societies, including our own,
struggle to find a balance between efficiency, equity, and sustainability of the tax system. To
realize such a balance, it is crucial that policy makers maintain an effective policy dialogue
with the business community.
A number of studies on the Curaçao economy conducted by international organizations in
recent years concluded that there is a need for fiscal reform. With the new status
approaching, Curaçao will have the opportunity to include all the necessary reforms in a new
tax system, contributing to the improvement of the investment climate.
In my view, the new tax system of Curacao should be simple and transparent. Direct tax
rates should be competitive compared to other countries, especially in our region, to
encourage consumer spending and investment by raising disposable income. This will lead
to more economic activities, broadening the base of the sales tax. In addition, a more
effective and efficient assessment and collection system should also be an important
component of the new tax system, since it can ensure budget neutrality in the face of the
reduction in direct tax rates.
Ladies and gentlemen, we are part of a globalized world and the current international
financial instability will also affect our economy, although I estimate the direct overall impact
to be rather limited. In fact, our economic performance is improving and the prospects are
encouraging, especially in tourism. To meet current and potential investors' expectations, we
should speed up the implementation of structural reforms to create an attractive investment
climate. Together with the changes taking place to prepare the island for its new
constitutional status, providing an excellent opportunity to correct the economic and social
imbalances in our society with substantial financial and technical Dutch support, we will be
able to create a solid foundation for strong sustainable growth in the years ahead of us. With
the right decisions, hard work, and broad consensus among all stakeholders, I am convinced
that we will realize a better future for all of us in the new country of Curacao.
Thank you for your attention.