Emsley Tromp: The policy challenges in the Monetary Union of Curaçao
and Sint Maarten
Speech by Dr Emsley Tromp, President of the Central Bank of Curaçao and Sint Maarten, at
the Inauguration of the Simpson Bay Causeway, Sint Maarten, 25 January 2014.
* * *
Good evening ladies and gentlemen,
First, allow me to congratulate the people of Sint Maarten on the inauguration of the Simpson
Bay Causeway. For many years, traffic congestion in this area was a major obstacle; it had
an increasingly negative impact on the quality of life on the island and was an impediment to
economic growth. We are convinced that the completion of this infrastructure project will
remove an obstacle to growth in Sint Maarten. Authorities now have to direct their policy
actions to other complementary measures to put Sint Maarten's economy on a higher and
sustained growth path. As you know, the Centrale Bank van Curaçao en Sint Maarten was
involved in the financing of this important project. The Bank's involvement, as I will elaborate
on later, was motivated by our desire to help further the development of the capital market in
Sint Maarten and, as with the Aqualectra loan, to broaden our instruments to conduct a more
market-based monetary policy. However, it would be a remiss if I do not mention here the
motivation and dedication with which my colleague drs Rob Reijnaert put into this endeavor
to make our participation possible. A heartfelt thanks is at the order. Thank you Rob!
I'd like to use this opportunity to discuss the main economic developments in the monetary
union during 2013 and the economic prospects for 2014. My focus today will be on the
economy of Sint Maarten. As mentioned, I will also elaborate on the reasons why, from a
monetary perspective, the Bank was actively involved in the process of financing the
Causeway project.
Ladies and gentlemen, preliminary figures reveal that economic developments in the
monetary union were mixed during 2013. On the one hand, Sint Maarten recorded an
economic expansion of 1.1%, which was a slowdown compared to the growth of 1.5%
registered in 2012. On the other hand, the economy of Curaçao shrank by 0.5% in 2013,
following a contraction of 0.1% in 2012. Both countries benefited from the lower international
oil and food prices during 2013. As a result, Sint Maarten's inflation rate dropped from 4.0%
in 2012 to 2.7% in 2013. Meanwhile, Curaçao posted an inflation rate of 1.5% in 2013, down
from the 2.3% a year earlier.
An analysis based on preliminary data of the sectoral performance in Sint Maarten shows
that the real GDP growth in 2013 resulted primarily from the manufacturing and the
construction sectors, mitigated by a decline in the financial intermediation sector. Real output
growth in the manufacturing sector was the result of more repair activities on yachts that
visited Sint Maarten. The construction sector performed well due to an increase in both
private and public investments. investments rose because of public infrastructure projects,
including the construction of the Simpson Bay Causeway.
In the utilities sector, real value added grew primarily because of an increase in water
production. Activities in the wholesale and retail trade sector also expanded because of a
rise in domestic spending, moderated by a decline in tourism spending.
Meanwhile, real value added growth in the restaurants & hotels sector remained flat,
attributable mainly to weakened activities in stay-over tourism. While the number of visitors
from North America and the Caribbean increased, the European, South American and
Central American markets witnessed a decline. Cruise tourism contracted during the first half
of 2013, but picked up afterwards.
The transport, storage & communication sector recorded no growth as an increase in
airportrelated activities was offset by a decline in activities in the harbor. Airport-related activities
rose, driven by more passenger traffic at the Princess Juliana International Airport. The poor
performance of the harbor was caused by a decline in the number of ships that visited the
port of Sint Maarten. The financial intermediation sector put a drag on real GDP growth, due
to a decline in net interest income of the commercial banks.
Looking ahead, growth in Sint Maarten has to be seen against the background of
developments in the world economy. In 2014, we expect world economic growth to
accelerate supported by increased output growth in the advanced economies. Meanwhile,
growth in the emerging economies will slow down. Sint Maarten will benefit particularly from
the projected improving economy of the United States. Therefore, real GDP in Sint Maarten
is projected to expand by 1.6% in 2014 driven by increased activities in the tourism and
transportation sectors. Meanwhile, inflationary pressures will ease to 2.4% due mainly to a
projected further decline in international oil and food prices.
Ladies and gentlemen, one of the main challenges that we have been confronting in the
monetary union is the high deficit on the current account of the balance of payments. The
current account of the balance of payments is structurally in deficit, as the trade deficit
cannot be compensated by the services, income, and current transfers balances. Since
2010, the deficit on the current account has been above 15% of GDP. Conventional wisdom
suggests that in the case of open and small economies such as Curaçao and Sint Maarten,
deficits over 4-5% of GDP are not sustainable in the long run.
Until 2011, high capital inflows and external financing exceeded the deficit on the current
account resulting in an increase in the gross official reserves. However, in 2012, a
turnaround occurred as the inflow of capital and external financing was not sufficient to cover
the current account deficit. Consequently, the monetary union recorded a deficit on the
balance of payments as reflected by a decline in our gross official reserves.
It is against this background that the Centrale Bank van Curaçao en Sint Maarten has aimed
its monetary policy at tightening the excess liquidity in the money market. Given the high
deficit on the current account of the balance of payments, a private sector credit growth
exceeding GDP growth, and a declining trend in international reserves, the Bank has been
gradually increasing the reserve requirement percentage. The rationale for increasing the
reserve requirement is that by reducing the available liquidity in the money market,
commercial banks' credit extension and thereby domestic spending and import growth can
be contained. However, increasing the reserve requirement alone has not been sufficient
because of the high excess liquidity in the money market.
Consequently, the Bank complemented the reserve requirement instrument with a credit
measure to contain the growth in private credit extension and bring it more in line with
nominal GDP growth. Since its introduction in February 2012, the credit measure has been
extended three times, for a period of 6 months, the current period ending at the end of
February 2014. Also, the credit measure has been eased gradually and loans to projects that
strengthen the economy and international reserves are exempted. At its introduction in 2012,
no growth of private credit extension was allowed; however, for the period September 2013
to February 2014, a maximum growth in credit extension of 3% compared to the end of
August 2012 has been allowed.
I should like to emphasize that the credit measure sets a limit only on the growth of credit.
Hence, in the case of Sint Maarten, where credit extension has actually been declining since
2011, the credit measure has no effect. The decline in private credit extension in Sint
Maarten clearly indicates certain weaknesses in the economy's macroeconomic
environment. These weaknesses may be the result of either a decline in the demand for
credit or a reduction in the supply of credit by commercial banks.
Ladies and gentlemen, so far, the Bank's monetary policy has produced the intended results
by moderating credit growth, improving the current account deficit on the balance of
payments, and stemming the decline in reserves in the monetary union. In 2013, the deficit
on the current account of the balance of payments dropped further, primarily because the
growth in exports of goods and services exceeded the rise in imports. Export growth was
driven largely by the tourism and transportation sectors, mitigated by a decline in the
reexport activities by the free-zone companies in Curaçao. Imports rose as a result of more
merchandise imports to meet tourism demand and the import of construction materials
related to investment projects, including the Simpson Bay Causeway. However, a decline in
merchandise imports by the free-zone companies in Curaçao combined with a decline in
domestic demand in Curaçao moderated import growth. Also, the lower international oil and
food prices contained the increase in the import bill.
The deficit on the current account was financed primarily by external financing to the private
sector, as reflected by a worsening of the direct investment, portfolio investment, and loans
and credit balances. As the inflow of capital during 2013 exceeded the current account
deficit, the balance of payments of the monetary union recorded a surplus as reflected by an
increase of approximately NAf.77 million in the gross official reserves.
We should not consider the improved situation on the balance of payments in 2013 as a
reason to lessen our efforts to address the imbalances on the current account. After all, the
current account deficit as a percentage of GDP is still too high. In this context, we must
realize that the deployment of monetary tools can bring only a short-term solution to a
structural problem. The situation on the balance of payments can be structurally improved
only if both Curaçao and Sint Maarten take the necessary actions.
An analysis of the developments on the current account of the balance of payments over the
period 2007-2012 reveals that the current account deficit was the result of imbalances in
both Curaçao and Sint Maarten. However, the deficit in Sint Maarten has been declining
during recent years while the deficit in Curacao has remained well above the benchmark of
4-5 % of GDP. Even though the center of gravity of the problem seems to be in Curaçao,
both countries bear responsibility for addressing the situation of the balance of payments in
the monetary union.
In this regard, regular consultations and coordination of policy actions between the two
countries are imperative. However, since 2010, the focus of the discussion has been on the
political wisdom of a monetary union between Curaçao and Sint Maarten rather than on how
this current situation should be addressed through coordinated actions.
The balance of payments can be structurally improved if both countries strengthen their
competitiveness vis-à-vis their main trading partners. Over the past years, the international
competitiveness of Curaçao and Sint Maarten, as measured by the real effective exchange
rate (REER), has deteriorated. The REER, which assesses a country's international price
competitiveness, has been deteriorating in Curaçao since 2009 and in Sint Maarten since
2008. The reduced competitiveness of both countries has contributed to the widening of the
current account deficit. Gains in competitiveness can be achieved through more wage and
price flexibility, increased labor productivity, and an improvement of the overall investment
climate. Therefore, the governments of Curaçao and Sint Maarten should embark on a policy
path of structural economic reforms to strengthen the balance of payments in a sustainable
way.
Ladies and gentlemen, as we celebrate the inauguration of this causeway, I would like to
address the reasons why the Bank facilitated the financing of the Simpson Bay Causeway of
Sint Maarten Harbour Group. As I mentioned on several occasions, we live in a period of
Unconventional Monetary Policy. In a speech during the National Economic Forum in
Curaçao on October 14, 2013, I quoted Jean-Claude Trichet1, the former president of the
European Central Bank: "...we all have had, since mid-2007, the great privilege to
experience extraordinary demanding and difficult times..." He went on to say: "The
widespread introduction of so-called non-standard monetary policy measures by major
central banks has been a defining characteristic of the global financial crisis." These
unprecedented monetary policy measures included the intervention in specific market
segments to support market functioning through actions such as the introduction and
expansion of asset purchase programs for commercial paper, corporate bonds, and
government debt. The main purpose of these measures, conducted by, for example, the
Bank of England, and the Federal Reserves of the United States and the Bank of Japan, was
to counteract market dysfunction and restore confidence.
Ladies and gentlemen, advances in understanding entail thinking in a somewhat different
way. Sometimes even a highly educated and broadly read person can feel resistance when
new knowledge takes us into areas we did not know were even there-spaces that are hard to
assimilate into the comfortable world we feel we know. Therefore, I would not be surprised if
several years hence, when students of monetary economics reading the history of this period
may be as dumbfounded regarding the resistance to innovation as we are now regarding the
seventeenth-century resistance to the discovery that the heart is a meat pump. Let us not
forget that it took the Catholic church 400 years after Galileo's arrest to concede what every
moderately well-educated person knew to be true: earth is not the center of the universe.
I have spent most of my professional life thinking and practicing monetary policy. The basic
tenet of my thesis was and is that in a small open economy such as ours, fiscal consolidation
is an indispensible condition for monetary stability. The debt relief program in the context of
the constitutional changes was the fulfillment of that expectation. However, suddenly in the
blink of an eye, the market for government bonds dried up, depriving the Bank of an
important policy instrument, namely, the ability to conduct monetary policy through open
market operations. At the same time, because of the conditions of the debt relief program,
more specifically the interest burden rule and the standing subscription, high yield investment
instruments for our local institutional investors on the local market became very limited. To fill
that vacuum, we embarked on the development of the corporate bond market.
Ladies and gentlemen, the development of a well-functioning corporate bond market in
Curaçao and Sint Maarten is an important, albeit not sufficient precondition for business
creation, investment, and economic growth. Along with equity financing and bank lending,
corporate bonds are one of the ways companies fund their investments, and they are
considered a stable and reliable source of finance. A well-functioning corporate bond market
enhances the efficiency of the financial system as companies compete with each other for
finance, and it expands the financial sector and promotes the use of cost-effective financing
instruments. However, while the corporate bond market has been gaining new momentum
elsewhere, the development is being viewed with apprehension here.
We embarked on this policy to develop a corporate bond market in 2009 when we acquired
the so-called Aqualectra bonds. In 2012, we participated in the bond issue of the Sint
Maarten Harbour Company. The case of Sint Maarten is a special one. Contrary to the
Aqualectra bond, the Sint Maarten Harbour bonds have a much wider and broader
participation as more market participants acquired the bonds. This increased participation is
also thanks to the standby arrangement according to which the Central Bank stands ready to
buy or sell bonds at all times as dictated by the monetary conditions of the union. However, a
necessary condition for this arrangement to be successful is that our public enterprises have
to be well managed and sound. In this regard, I concur with dr. Age Bakker2, chairman of the
Board of Financial Supervision - CFT - who last November during the Kingdom Conference
stated that, "The Sint Maarten economy has been performing well during the past decade.
The budgetary challenges in Sint Maarten are less pronounced than in Curacao, the
Netherlands, and Aruba. The main reasons are that Sint Maarten has a younger population,
well capitalized social funds, and sound public enterprises." That the Sint Maarten Harbour
Company is well managed, was another important consideration for the Bank to facilitate the
bond issue of the Sint Maarten Harbour Company.
Ladies and gentlemen, with a much broader set of policy instruments, we hope that the Bank
can continue to promote the stability of the guilder, thereby creating an environment
conducive to more growth and prosperity. As recent policy measures of the Bank
demonstrated, we were able to reduce the current account deficit and turn the balance of
payments deficit into a surplus. However, for these results to be sustainable, we have to
strengthen our export-generating capacity by making Sint Maarten a welcome place to
invest. That means that we have to bring our immigration, tax, investment, and labor and
product market policies in line with our objective to make Sint Maarten the preeminent place
to do business.
We also must realize that as long as a monetary union exists, efforts that benefit growth in
one of the countries of the union benefit the union as a whole. I am convinced that the
positive spin-off of the Simpson Bay Causeway for the economy of Sint Maarten and thereby
also the monetary union of Curaçao and Sint Maarten will prove that the actions of the
central bank were right.
Looking ahead, for the further development of the corporate bond market, it is imperative that
the government continues to ensure the sound management of public enterprises by
strengthening corporate governance, including transparency and accountability. After all,
sound and well-managed enterprises imply a lower risk premium and, consequently, a lower
interest rate. This condition will lead to more investment and higher economic growth.
Ladies and gentlemen, times have changed and so has our monetary policy. Since 2010,
Curaçao and Sint Maarten have comprised a monetary union and this union is facing some
challenges with the balance of payments. To effectively deal with those challenges, we need
to take coordinated actions. Recent policy actions in the union, both in the monetary and
fiscal fields, indicate that concerted action to address our economic challenges is possible.
However, we should remain always cognizant that these measures are taken ultimately to
improve the welfare of the citizens. Therefore, in the design and implementation of these
policy measures, due regard should be given to their social costs.
Thank you for your attention.