Emsley Tromp: How can we shape a better future for the Curaçao
tourism industry?
Keynote speech by Dr Emsley Tromp, President of the Central Bank of Curaçao and Sint
Maarten, at the annual general meeting, organised by the Curaçao Hospitality and Tourism
Association, Willemstad, 25 March 2015.
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Ladies and gentlemen, good afternoon,
It was with great pleasure that I accepted the invitation to share with you my views on the
importance of the tourism industry for the economy of Curaçao and how we can maximize its
growth potential. I firmly believe that for small open economies like ours, tourism, which is a
thriving industry, provides a solid foundation for growth. Suffice it to note that while Curacao's
economic growth has averaged a disappointing 0.6% over the past 10 years, stay-over
tourism in Curaçao has increased by an average of 8.1%. Today it is the country's most
important industry in terms of real value added, foreign exchange earnings, and employment.
The question now becomes, can we shape a better future for our tourism industry and make
it the driver for economic growth? Or put differently: do we still have room for more growth in
the tourism sector?
Ladies and gentlemen, I am convinced that we do. However, we need to keep in mind that
success in this industry depends, among other things, on our ability to remain an attractive
destination. In addition, this industry is very susceptible to changes in the external
environment. Conditions can change in the blink of an eye. Consequently, we need to
continuously enhance our ability to adjust to this changing environment. At the same time, to
achieve a higher growth path we need to address some important issues in our economy.
The world has changed drastically in recent decades, becoming more globalized with capital,
goods, knowledge, and especially people moving faster than ever. As the global economy
expands and people become wealthier, they will be spending a larger share of their income
on leisure activities, such as travelling. In 1950, for example, 25 million tourists travelled
around the world; in 2014, the number exceeded 1.1 billion. This record number in 2014
represented 4.7% growth compared to 2013, and 2014 was the fifth consecutive year of
higher than average growth since the global financial crisis. Tourism has become a major
driver of socioeconomic progress for developed, emerging, and developing economies as it
generates foreign exchange income, creates jobs and business opportunities for enterprises,
and encourages the development of infrastructure.
In 2014, tourism generated approximately US$ 1.4 trillion in global foreign exchange income,
approximately 30% of the export of services. According to the World Travel and Tourism
Council, tourism contributed 9% of global GDP and global employment. Tourism has risen
significantly in recent years and the World Trade Organization (WTO) expects this trend to
continue, reaching 1.8 billion tourists by the end of 2030.
As one of the world's fastest growing industries, tourism has brought about more
diversification and competition among destinations. Also, due to innovation and continuous
technological developments, tourists have become more hands-on, sophisticated, and
demanding. This shift in tourist behavior has led to new tourist destinations in addition to the
more traditional destinations of Europe, North America, and the Caribbean.
Tourism is also one of the most resilient global industries. Through the years, it has proven
capable of handling setbacks and adapting to the changing environment in which it has to
operate. Moreover, tourism helps preserve and stimulate countries' natural and cultural
heritage. Today, investments in tourism even take into account environmental aspects,
particularly the prevention of environmental degradation.
Ladies and gentlemen, moving now to our region, the Caribbean is commonly referred to as
the world's most tourism-dependent region. Tourism constitutes the region's most important
economic pillar, contributing 14% of Caribbean GDP and 11% of its total employment. Also,
the sector generates the largest share of foreign exchange income. In spite of its small scale
and vulnerability to external shocks, our region has registered continued growth in the
number of tourist arrivals. In 2014, for example, 26.3 million tourists traveled to the region,
representing a 5.3% growth compared to 2013.
Similar to most Caribbean economies, tourism is the most important pillar of the Curaçao
economy. This sector directly contributes 9.2% of GDP and 9.6% of employment. Moreover,
26.5% of foreign exchange earnings from the export of goods and services are generated by
the tourism industry. The industry also has indirect spin-off effects across all sectors of the
economy, particularly the hotels & restaurants, wholesale & retail trade and transportation
sectors. Furthermore, the tourism sector contributes to the economy in terms of investments
and government income. In this context, the tourism industry is highly labor intensive and,
therefore, creates opportunities for many small and medium enterprises that provide goods
and services to this industry.
Since 2011, the sector has been experiencing continued growth, driven by both stay-over
and cruise tourism. For instance, in 2014, 1.1 million tourists - both stay-over visitors and
cruise passengers - visited Curaçao, representing a 3.2% growth compared to 2013. This
positive development in the tourism industry over the past four years is attributable to, among
other things, an increase in our room capacity with the construction of new hotels, increased
airlift, and more marketing efforts to promote Curaçao as a tourist destination. However, a
comparison of our growth figures with those of other Caribbean destinations suggests we
have not yet reached our potential. For example, while Curaçao recorded a mere 2.5%
growth in 2014, stay-over tourism in Aruba grew by 9.5% and Sint Maarten recorded a
growth of 7.1%. This begs the question of why we cannot sustain stronger growth in
stayover tourism. To answer this question and increase growth, we can draw on the experiences
in the region.
If we are to sustain stronger economic growth overall, ladies and gentlemen, achieving
higher growth in the tourism sector is indispensable. During the past decade, Curaçao's
economic growth averaged a mere 0.6% per year. Meanwhile, unemployment, particularly
youth unemployment, remains unacceptably high.
In the period preceding 10-10-10, there were good reasons to think that a period of stronger
economic growth could be sustained. As part of the constitutional restructuring, Holland
provided us with debt relief, lowering the burdensome debt-to-GDP ratio to a healthy 35%.
The interest expenses of the public sector declined to NAf. 50 million from the towering figure
of NAf. 350 million. Government could now issue bonds under the same modalities as the
Dutch government, thereby implicitly achieving a AAA rating for its bonds. Meanwhile, our
foreign exchange reserves reached historic highs of nearly NAf. 2,7 billion. The constitutional
restructuring also meant that the wasteful duplication of the double layer of government was
eliminated leading to a more manageable public sector and thus public finance. These
developments led to much optimism and hence a favorable investment climate sufficient to
withstand the impact of the Great Recession. Curacao was among the very few countries
that managed to record growth in the aftermath of the developments of 2008. However, as
the old adage goes, not all that can be counted counts.
In the years that followed, the investment climate deteriorated quickly and the much-needed
investment dried up. The political headwinds that ensued after 10-10-10 and the fiscal
restraint required by the Kingdom government to bring our financial household in order
masked the developments I outlined above.
The government has focused primarily on meeting the conditions stipulated in the Kingdom
Financial Supervision Act. We have spent most of our energy on achieving and maintaining
fiscal sustainability, while neglecting strategies to stimulate economic growth. Even though
lengthy discussions have been ongoing about strengthening the economic pillars of Curaçao,
including ship repair and international financial services, and developing new economic
sectors, it is again only the tourism sector that has made significant progress.
As I have mentioned on earlier occasions, people often believe that stimulating economic
growth and the development and strengthening of specific economic pillars is the
responsibility of the government alone. However, developments in our tourism and financial
sectors have driven home the point that private sector-led initiatives are crucial to achieve
the desired development and growth of an industry. Meanwhile, the role of the public sector
is to create the right investment climate and regulatory framework for businesses to operate,
grow, and invest. This collaborative approach is the best recipe for creating sustainable
economic growth and progress.
In the case of our tourism sector, thanks to these joint efforts, Curaçao has been able to
benefit from increased airlift, which for many years was considered one of the main obstacles
to further growth. Increased airlift, however, must go hand in hand with increased hotel
accommodations. Otherwise, we will face the problem of having tourists willing to come to
the island, airlift to bring them, but no place to accommodate them.
Curaçao needs to be able to offer a high standard of hotels and luxury villas to cater to the
high-end market. Right now, some existing hotels need upgrading, and numerous projects
have been announced in recent years but construction activities have yet to start.
Ladies and gentlemen, if we want to achieve a higher growth path for tourism, we need to
invest more in the industry. Today's investment is tomorrow's growth. Investments are
needed to upgrade and expand our hotel capacity and other accommodations. However, a
major impediment remains vis-a-vis the availability of risk capital to finance large investment
projects in this industry. Shortage of risk capital is a major obstacle for tourism development
in many countries, and Curaçao is no exception. The main reason for the shortage of risk
capital is that hotel and other major investment projects in the tourism sector are typically
riskier and more complex than other investment projects and, hence, require specially
designed terms of financing.
Investment projects in the tourism sector, such as the construction of hotels, have relatively
high fixed costs and high operating expenses. In addition, hotel projects present a number of
risks associated with the project itself, the players involved in the project, and the project's
financial structure. Hotel projects also must take into account adverse external risks, such as
economic and political stability and exposure to natural disasters.
For these reasons, commercial banks and institutional investors are reluctant to provide the
necessary financing to the tourism industry. Consequently, private investors who cannot
meet the requirement of sufficient equity demanded by the financial institutions will not be
able to realize their projects and promising investment projects remain forever in the pipeline.
This situation has typically created certain challenges in our region and even had unintended
consequences for the industry. Nevertheless, this growth path should be pursued.
Ladies and gentlemen, you will not be surprised to learn that I do not share these concerns.
On the contrary, I am of the firm view that the time for muddling through is over. Blindly
super-imposing on us solutions that might have worked elsewhere, is done at the expense of
more problems in the future. To this point, I refer to the much-debated Aqualectra and the
Sint Maarten Harbour bonds that were bought by the Bank.
As I mentioned, as part of the constitutional restructuring of the Netherlands Antilles, the
Netherlands provided debt relief to the constituent parties of the former Netherlands Antilles.
By taking over the entire outstanding public debt of both the Central government and the
government of the island territory of Curacao, the market of government securities dried up
overnight. Even with this Nafl 4 billion market of government bonds, institutional investors
thought there were insufficient investment instruments available in the country. In addition,
with the disappearance of that market, the Central Bank was also deprived of an important
instrument in its arsenal for Open Market Operations, thereby constraining the effectiveness
of monetary policy. To provide impetus and further develop this market, the Central Bank
embarked on an asset purchase program to build its portfolio of corporate bonds. Although
views of those operations differed, the ultimate goal was to create a new instrument for the
conduct of monetary policy in line with our mandate - namely, to promote the stability of the
guilder.
The purchases of these bonds resulted in lower yields, which by no means were limited to
the individual bonds that were purchased. These lower yields have given rise to spillovers
that also compress the yield of bonds with a similar maturity. In addition, they also reduce the
overall duration risk borne by the market and lower the interest rate risk borne by investors,
accordingly affecting the entire term structure. The compression of interest rates creates
incentives for investors to rebalance their portfolio away from riskless securities.
Ladies and gentlemen, unconventional times call for unconventional measures. However,
these little understood asset purchases, aside from their positive impact on the development
of the corporate bond market and the lowering of electricity and water prices, have been
mired in unintended consequences, which have constrained their use to address our
financing needs in the tourism industry.
Various governments in the region have traditionally sought alternative ways to address this
shortage of risk capital and, hence, unlock private investments in the tourism sector. These
alternatives include the provision of guarantees and public-private partnerships. For
example, in the case of Aruba, the provision of government guarantees resulted in an
investment boom in the tourism sector in the late 1980s and early 1990s. From 1986 to 1992,
the number of hotel rooms there rose from 2,776 to 7,103, a growth of more than
150 percent. However, as we have witnessed, this experience is not without its risks to fiscal
sustainability.
Alternatively, governments could stimulate cooperation between the public and private
sectors to share investment costs, risks, responsibilities, and profits generated from tourism
projects. The degree of funding and risk allocation to the public and private sectors depends
on the asset procurement model chosen. This cooperative approach requires a high degree
of collaboration and, therefore, generates efficiency, cost effectiveness, synergies in terms of
knowledge, skills, and expertise, pooling of capital resources, innovation and diversity, and
effective utilization of public assets. On the other hand, the approach is complex,
timeconsuming, and entails some difficulties with regard to the implementation of the projects.
Government policies in the last few years have been dictated by the CFT-mandated fiscal
consolidation. While this consolidation is a necessary condition for macroeconomic stability,
the disproportionate emphasis on fiscal restraint at the expense of other areas of
government, has held back growth in recent years and given way to the view that this
operation may have pushed us into a longer-lasting valley of economic misfortune. The
economic jury is still out on whether this period of sub-par growth is temporary or not.
If we are to reverse this trend, ladies and gentlemen - and there are good reasons to think
that we can - and sustain a period of stronger growth, tourism is the key! If we take, for
example, the much anticipated Hard Rock Hotel, the construction phase of this project will
lead to an additional 0.2% real GDP growth a year, assuming a construction period of
2.5 years. Moreover, during the construction phase, 180 additional jobs will be created. Once
operational, the additional room capacity created by the Hard Rock Hotel will host more than
26,000 stay-over visitors per year. As a result, the hotel will contribute approximately 1.7% to
GDP and an additional inflow of foreign exchange revenues of NAf.62 million a year. The
hotel also will generate 300 direct and 150 indirect jobs. However, to realize this project, a
shortfall of risk capital in the order of NAf.172.0 million must be bridged.
Ladies and gentlemen, the government has raised over Nafl 500 million to finance its capital
expenditures during the last two years. If we are to compare the economic impact of these
borrowings with the potential impact of the abovementioned hotel project, we have to
conclude that the balance is unequivocally in the direction of the hotel project. While the
government borrowing may be necessary on social grounds, it has not created a single
permanent job nor will it add to long-term sustainable economic activities. A fraction of this
amount invested in hotel projects would produce an abundantly bigger sustained impact on
our level of economic activities.
Given the key insights we have drawn from the past, we have reason to be cautious. In
particular, any government assistance must be designed so it does not endanger our
hardwon fiscal stability. Therefore, I argue against any direct government assistance in terms of
participation in private sector investments.
Investments in tourist projects in the recent past have been possible thanks to the mezzanine
financing structure offered through the Social Economic Fund. Mezzanine financing is a
hybrid form of financing between debt and equity that gives the lender the right to convert its
debt title in ownership through an equity interest in the company if the conditions warrant it.
Mezzanine financing offers a solution when business opportunities are increasing but
investors lack sufficient equity capital and, hence, are unable to obtain the required debt
financing. However, mezzanine financing is not supposed to be a permanent feature of the
firm's capital structure.
Mezzanine financing offers the borrower flexibility in shaping amortization schedules,
including specifying special conditions for repayment, and other borrowing conditions.
Another advantage is that the borrower obtains financing while increasing his debt leverage,
thereby increasing his chances to obtain additional debt financing. From the provider's
perspective, mezzanine financing offers a higher interest rate compared to senior debt, such
as bank loans, and it is more liquid than private equity investments.
To meet the current needs in the tourism industry, the government could address the lack of
risk capital in various ways. The government of Curaçao is in the process of creating a new
development bank that should provide more risk capital for investments. In anticipation of
that new bank's creation, the government could encourage the OBNA to play that role and
make risk capital available now. Alternatively, the government could make mezzanine
financing fiscally attractive.
Ladies and gentlemen, in addition to addressing the financial bottlenecks, attention should
also be directed at other areas that can negatively impact the growth and development of the
tourism industry. One of these areas is the qualitative mismatch between labor supply and
demand. The tourism industry is an important employer; therefore, it is vital to equip our
youth with the necessary skill set to meet the requirements of this industry. If our youth lack
these skills, they will continue to have trouble finding jobs in this growing industry.
Ladies and gentlemen, as I mentioned, competition between tourist destinations has become
more intense. Consequently, tourist destinations need to address those areas where they lag
behind vis-à-vis their competitors. In this context, the rigidities in our labor market, our high
cost of doing business, and the complex administrative procedures and red tape in our
government apparatus need to be addressed. Numerous studies and reports have presented
recommendations on how to address these weaknesses of our investment climate. If we are
to achieve this higher growth path, we do not have time to muddle through.
In conclusion, we should not be content with our relatively low tourism growth rates
compared to the double-digit growth rates in other Caribbean countries. We need more
private investments to expand and continually improve our tourism product to meet the
tourists' changing needs. To increase private investments, we need to facilitate financing for
large investment projects. Moreover, achieving higher tourism growth is a joint effort, in
which collaboration between the public and private sector is indispensable. As a Dutch
saying goes: "Doing everything on your own is adding up. Collaboration is multiplying."
However, the joint effort is not limited to collaboration between the private and public sectors.
Each member of our community plays a part in the experience of tourists in our country.
Therefore, it is important to change our mindset and become more service-oriented and
customer driven.
Let me finish by saying that we need to be more ambitious and aim for excellence. A wise
man once said: "The biggest risk is not taking any risk... In a world that is changing quickly,
the only strategy that is guaranteed to fail is not taking risks."
Ladies and gentlemen, I thank you for your attention and wish you a fruitful meeting.