Emsley D Tromp: Economic perspectives of Curaçao
Address delivered by Dr Emsley D Tromp, President of the Bank of the Netherlands Antilles (Bank van
de Nederlandse Antillen), on the occasion of the Corporate and Commercial Breakfast Meeting
organized by RBTT Bank, Willemstad, 3 May 2007.
* * *
Good morning ladies and gentlemen,
For this morning, I have been asked to give you an overview of the outlook for Curaçao's economy.
However, given the fact that our host, RBTT, is a regional player in the financial market, I cannot do
this without taking the regional outlook and our current political and socio-economic situation into
consideration.
Ladies and gentlemen, the Caribbean region has made impressive economic progress in recent years.
With a growth rate of around 5 percent in 2006, this progress was supported by strong private sector
performance, mainly in the construction and tourism sectors. The International Monetary Fund expects
2007 to become the fifth year of what is already the most vigorous period of recovery and expansion
since the 1970s. The outlook remains bright, as a growth rate of 4.2 percent is expected for 2008.
Similar to other economies in the Caribbean, Curaçao's economy is characterized by its smallness
and openness, which makes it highly vulnerable to external shocks. Furthermore, the Caribbean
economies are relatively less diversified - relying oftentimes on one export product. Contrary to most
economies in the region, Curaçao experienced an average annual economic growth of less than 1
percent during the past five years. Our weak economic performance has been accompanied by high
unemployment rates - especially among the youth - and increasing marginalization. Without
pretending that Curaçao's economic structure or factor markets are completely similar to those of
other economies in the region, I do believe that given these numbers, we can conclude that Curaçao
is lagging behind. The question then arises, what are we doing wrong?
Before answering this question, allow me first to put into perspective the recent economic
developments on the island of Curaçao. In 2005, the economy grew by a mere 0.8 percent, largely
owing to the financial services, wholesale and retail, and construction sectors. Although the official
figures for 2006 have not been published yet, it is expected that the economy has again grown, albeit
at a slightly slower pace than in 2005.
Growth in 2006 was mainly due to an encouraging performance in Curaçao's stay-over tourism. Rising
occupancy rates triggered a wave of new hotel projects and expansion of existing hotels. Furthermore,
the wholesale and retail sectors grew as a result of more activities in the free-zone and tourism, and
higher domestic spending. Activities in the construction sector also rose, due mainly to investments in
the tourism and transportation sectors on the island.
Ladies and gentlemen, Curaçao's economic recovery, however, is greatly affected by an increasing
fiscal imbalance, related to the high government debt. In addition, despite Curaçao being very open to
investment, the attractiveness of our investment climate to foreign and domestic investors still needs
major improvements. Due to the weaknesses in our investment climate, investment growth has been
modest compared to the region. In addition, for the last several years, we have been suffering from
constant changes in the Island's territory executive council. This has led to a lack of consistency in
government policy, which has not been very conducive to a good investment climate.
If we are to address our economic ills in an effective manner, we must try at least to grow at the
regional average. It is not only a matter of reaching more economic growth through higher domestic
demand, but more importantly through raising productivity growth and foreign demand. Hence, we
must catch up by reaching sustainable economic growth. Ladies and gentlemen, sustainable
economic growth is the key to improving the standard of living in our society. It is therefore of the
utmost importance for us to pursue sound policies to address the fiscal imbalance and to strengthen
our competitive advantage in order to attract more investments and hence promote sustainable
economic growth. In addressing these issues, we must also take into account the ongoing
constitutional reforms.
Ladies and gentlemen, as we all know Curaçao has arrived at an important historical cross-road. By
December next year, it is expected that the Antillean constellation will cease to exist and Curaçao will
become a separate country within the Dutch Kingdom. This status aparte will provide us with the
unique opportunity to address our social and economic problems in a more island-specific context.
However, constitutional changes alone should not be seen as a solution for all our social and
economic problems. The constitutional reform must therefore be accompanied by social and economic
reforms to foster sustainable economic growth.
As I have pointed out repeatedly, sound public finances are crucial to promote higher sustainable
growth, to create jobs, and to achieve social progress. Although several measures have been taken to
reduce public expenditures and public sector debt, the public finances have worsened over the years.
High fiscal deficits, combined with weak economic growth, resulted in a rising debt-to-GDP ratio. In
2005, the Island Territory of Curaçao reached a debt of NAf.2.5 billion, equivalent to a debt-to-GDP
ratio of 59 percent. When speaking about the debt of the country Curaçao we must also take the debt
of the Netherlands Antilles into consideration. I must stress that being part of the Netherlands Antilles,
each island has contributed to the accumulation to this high debt. In 2005, the Netherlands Antilles
had a debt of NAf.2.9 billion. By December 15, 2008, the Netherlands Antilles will cease to exist. Then,
each island will be allocated its share in the debt of the Netherlands Antilles. Therefore, given that the
debt of the Netherlands Antilles should be re-allocated among the islands of the Netherlands Antilles,
Curaçao's actual debt will increase to NAf.3.9 billion, leading to a debt-to-GDP ratio of 93 percent.
Such a debt burden poses serious risks to a sustained growth and hence the goal of improving our
standard of living. That is why debt relief is so important. As you all know, I have been a proponent of
the solution as contained in the "Concluding Statement" or "Slotverklaring", which was signed between
Curaçao, St. Maarten, and the Netherlands in November 2006, as it gives us the opportunity to
eliminate our unsustainable debt and start with a clean slate in the new constitutional status. In
addition, the "Slotverklaring" incorporates immediate economic stimulation through the Social
Economic Initiative. However, it is for our policymakers to decide whether a solution along the lines of
the "Slotverklaring" will be adopted or other solutions will be pursued. Up till now, no feasible
alternatives have been presented to solve our structural fiscal problems.
The so-called Monte alternative is fallacious on several grounds and as such cannot be considered a
credible alternative:
1. The central tenet of this plan is the so-called zero coupon bond alternative. By implementing
this solution which has been advanced in 2003 by the Debt Commission, it is contended that
we can substantially reduce our debt-to-GDP ratio. The momentum for refinancing part of the
debt with a zero coupon bond has passed. Since interest rates are now much higher than in
2003, when the debt commission recommended this, refinancing our debt (with the 0% bond
as collateral) will not yield the then envisioned interest savings. In addition, the debt ratio will
not fall due to this refinancing.
2. Due to some miscalculations, interest expenses will not decrease as much as the Monte
commission presented. Hence, the need for additional measures will become more pressing.
3. The expected yield of privatization is too optimistic. Moreover, the analogy with Holland is
also not substantiated by facts. Privatization had only a limited impact on the debt ratio in
Holland; the largest impact came from strong economic growth.
4. Fiscal discipline, an important aspect of the Monte-plan, will be undermined by the
suggestion of the committee itself to borrow from the central bank to redeem outstanding
treasury paper.
5. Monetary stability will become subordinate to central bank profits. The most important task of
a central bank is to promote monetary stability and not to maximize profit. Earmarking central
bank profits to guarantee interest payments by the Curacao government, as suggested by
Monte, will create unnecessary uncertainties, erosion of investors' confidence and may
therefore erode monetary stability.
6. The establishment of various new institutions will increase bureaucratic tangles and
competition in laxity.
Credible and realistic alternatives for the debt solution in the "Slotverklaring" require a swift and major
reduction in our debt and interest burden to free funds for our ailing health care, education, and
poverty alleviation. These alternatives should raise consumers' and investors' confidence, and not
distort our capital market..
Moreover, debt relief must be accompanied by safeguards to prevent a new build-up of debt to
unsustainable proportions. Fiscal discipline is not only needed for macro-economic stability, but also to
preserve funds essential for public investment, especially in health care, education, infrastructure, and
social safety nets.
Ladies and gentlemen, achieving significant and sustainable increases in per capita income require
higher investment and, more importantly, a substantial improvement in total factor productivity growth.
As a share of GDP, investment in Curaçao lags behind the Latin American and Caribbean region.
Therefore, we must strengthen our competitive advantage vis-à-vis the region.
Several studies have revealed the weaknesses of our investment climate, such as high utility and
labor costs, rigid labor laws, a qualitative mismatch between labor demand and supply, complicated
and time-consuming licensing procedures, and a complex tax system with opaque tax incentive
schemes. These weaknesses are compounded by the absence of a clear and consistent
investmentdriven growth-oriented economic policy and a weakened government administrative apparatus.
Therefore, it is important to have policies in place that foster both higher investment and a more
efficient use of resources.
The first area that should be addressed is the functioning of the labor market. Ladies and gentlemen,
the current rigid rules on hiring and firing, the mandatory benefits, and the high overtime compensation
are not attractive for investors. The current situation has led to socially unacceptably high
unemployment rates. Tight labor market regulations have adverse effects on economic performance
because they create rigidities that allow vacancies and unemployment to coexist, contributing to high
overall unemployment rates. To improve our competitiveness, it is crucial to be able to deploy labor
more flexibly, as long as individual protection against abuse is preserved.
Furthermore, our investment climate will benefit greatly from investment in education and training to
reduce the qualitative mismatch between labor demand and supply. Currently, both the construction
and hospitality sectors are experiencing a lack of qualified labor on our labor market. Improving the
quality of education is important for developing an adequate stock of human capital and hence
fostering economic growth. In sum, a more flexible labor market and a higher educated labor force
improve productivity, which is essential for a more sustainable long-term growth prospects.
Ladies and gentlemen, another area that needs our attention is the further development of our capital
market to promote a wider range of financing possibilities for investors. An inherent feature of
corporate financing in developing countries is the prevalence of bank-based financing. Because of the
limited degree of development of our capital market, equity-based financing is very rare on the island.
Equity-based financing could, however, be an alternative, especially for large investment projects and
projects with a high risk profile. Therefore, a good initiative to overcome this bottleneck would be the
introduction of a venture capital fund for risky investment projects. Through such a fund, equity
financing of start-up firms with promising projects can be stimulated by offering higher than usual
returns to investors. In addition, we should step up our efforts for the creation of a securities exchange.
In this respect, we can learn from the experiences of countries in the region, such as Barbados,
Jamaica, and Trinidad & Tobago, that have known securities exchanges for over twenty years.
Another weakness of our investment climate is the current administrative barriers, the long and
unjustifiable delays in administrative decisions by government departments and excessive discretion in
administrative functions. The existing red tape and bureaucracy weaken our competitiveness relative
to other economies in the region. Therefore, I hope that with the new constitutional status of Curaçao,
the elimination of the double layer of government will reduce the administrative barriers in the
government apparatus considerably. This will facilitate the decision-making process of policies and
projects.
Finally, numerous studies on the Curaçao economy in recent years have indicated that there is a need
for fiscal reform. With the new status approaching, Curaçao is going to have the opportunity to include
all the necessary reforms in a new tax system, which could have a positive impact on the investment
climate. In my view, the new tax system of Curaçao should be simple and transparent. Direct tax rates
should be competitive compared to other countries, especially in our region. These reforms are to
promote consumer spending and investment by increasing disposable income. This will lead to more
economic activities, and hence more tax revenues to finance the government's policy programs. In
that regard I welcome the study of the Ellis committee which should report to the government before
long.
Ladies and gentlemen, before I conclude, I like to emphasize that there cannot be sustainable
economic growth if we do not address our social ills. Therefore, we should continue to explore
possibilities to raise the old age pension (AOV) further to guarantee a decent life for our senior citizens
that depend solely on this state pension.
Second, we should improve the availability of low cost housing. If financial institutions in the
Netherlands Antilles provide, for example, for a period of say five years a limited number of mortgage
loans annually at concessionary terms to low income households, this will go a long way in alleviating
our housing problem. I am referring to loans at a 30-year term and 2% interest. This should help
reduce the backlog in low cost housing of the public housing foundation FKP and hence improve the
living conditions of more low income households.
Third, the necessary investments in the refinery should be accelerated with the aim of also lowering
the utility costs. A more lasting solution to our high utility costs together with our environmental
problem can be achieved by investing in the modernization of our refinery. This will not only improve
the purchasing power of the consumer, but it will also improve our competitive situation leading to
more growth.
Fourth, we should expand investments in our education also to attain social goals. Equipping our
socially weaker citizens with the right skills increases their chance for a job considerably and therefore
their prospects for a better life.
Ladies and gentlemen, we are in the midst of important constitutional changes. Changes that will have
far reaching implications for generations to come. I understand that due to the inherent uncertainties of
these changes and their implications for economic recovery, financial institutions, investors, and
entrepreneurs may be reticent towards taking risks. This attitude could slow down investments on the
island. To prevent a reversal of the economic recovery, the authorities should therefore address the
debt issue and the necessary macro-economic reforms in an adequate and swift manner. This will
create a solid foundation to become an autonomous country with bright prospects for the future.
Looking to the medium term, Curaçao's main challenge remains to reach a higher and sustainable
growth rate, and share the benefits of growth more equitably. With a more equitable and less divided
society, macroeconomic volatility will also be reduced. Towards the status of a country, Curaçao's
economic agenda should aim at building on past achievements and address current challenges and to
accomplish a stable macro-economic climate benefiting all layers of our society.
Thank you for your attention.