Emsley D Tromp: Recent economic developments and their
repercussions for small and medium-sized enterprises in Curaçao
Speech by Dr Emsley D Tromp, President of the Bank of the Netherlands Antilles (Bank van
de Nederlandse Antillen), at the ADECK fundraising lunch, Willemstad, 21 October 2009.
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Good afternoon ladies and gentlemen,
Our economy is currently facing many challenges. First, the world economy is experiencing
its greatest slowdown since the Second World War. This slowdown is affecting the Curaçao
economy in general and small and medium-sized enterprises in particular. At the same time,
we are in the process of constitutional changes leading to a status aparte for Curaçao. This
process provides us a unique opportunity to address certain weaknesses in our investment
climate, which, if corrected, would benefit small and medium-sized enterprises. I have been
asked to discuss the recent economic developments and their impact on the small and
medium-sized enterprises in Curaçao. However, before discussing the local situation, I shall
take a look at the international environment.
Ladies and gentlemen, since July 2007 the global economy has experienced a severe
financial crisis originating in the US housing and credit sectors. Due to the increased
integration of goods, services and financial markets, the crisis has spread from the housing
and credit markets in the United States to other markets and countries around the world. The
result has been a deep worldwide recession with severe economic and social impacts. Few,
if any economies have not been affected by the crisis. Output has contracted in the major
industrial countries, including the United States and the Euro area, and has slowed in the
emerging economies.
Fortunately, global economic growth has started to rebound and financial conditions have
improved markedly. World economic recovery has been driven largely by wide-ranging and
coordinated public intervention, particularly in the industrial countries through supporting
demand and reducing uncertainty and systemic risk in the financial markets.
The pace of recovery however, is expected to be slow, as uncertainties remain in the
financial markets, and public intervention will gradually have to be phased out. Against this
background, it is projected that the world economy will contract by 1% in 2009 and recover
by about 3% in 2010.
The global economic downturn has had severe repercussions for the Caribbean region. As
external demand dropped, output in countries with relatively large manufacturing sectors
contracted. In addition, foreign exchange revenues from tourism have been dropping
reflecting the weakening US, Canadian, and European markets. Inflows from remittances
and foreign direct investments have also been declining. As a consequence, real Gross
Domestic Product is expected to contract in most countries in 2009 including the Bahamas
by 3.9%, Barbados by 3.0%, and Aruba by 5.5%.
Contrary to most countries in the region, the economy of the Netherlands Antilles is not
expected to contract in 2009. One of the main reasons why our economy is an exception in
the region, is the implementation of the debt relief program and the Social Economic
Initiative. The inflow of debt relief funds has a positive impact on the current account of the
balance of payments. In addition, it contributes to a cash surplus at the general government
level and, hence, a decline in public sector debt. Thanks to the debt relief program, our
debtto-GDP ratio is projected to decline from 82% to 62% during 2009.
However, an analysis by sector shows that activities in the tourism-related industries have
been negatively affected by the world economic recession. All islands of the Netherlands
Antilles have experienced a drop in the number of stay-over visitors. In Curaçao, the number
of tourist arrivals dropped by 1.4% during the first half of 2009 as a result of a decline in the
North American and Caribbean markets. The South American and European markets, in
contrast, expanded during the first six months of 2009. The latter was largely related to the
appreciation of the Euro vis-à-vis the US dollar making Curaçao an attractive tourism
destination in terms of costs for Europeans. Meanwhile, hotel occupancy rates dropped from
86.5% in the first half of 2008 to 74.5% in the first six months of 2009. Activities in the
wholesale and retail trade sector weakened during the first months of 2009 because of the
decline in stay-over tourism, slower activities in the free-zone industry, and lower domestic
demand.
The transport, storage and communication sector showed a mixed performance in the first
quarter of 2009. On the one hand, airport activities, as measured by the number of
passengers handled, declined in line with the downturn in tourism. The number of
passengers transported by the national carriers dropped also. On the other hand, harbor
activities rose as a result of increased cargo movements and oil storage activities. The
manufacturing sector recorded a remarkable decline in value added, attributable to the poor
performance of both the "Isla" refinery and the Curaçao dry dock company.
The financial and construction sectors were the main contributors to economic growth in the
first quarter of 2009. The increase in financial sector activities was driven entirely by the good
performance of domestic financial services as activities in the international financial sector
declined due to the financial crisis. Construction work expanded largely because of ongoing
tourism-related projects. However, the growth in construction moderated compared to the
first quarter of 2008, in line with the slower growth in private investment.
Against this background and in line with the latest forecast for world economic growth, we
expect economic growth in the Netherlands Antilles to slow to 0.8% this year. Given the
expected recovery of the world economy, we project the Curaçao economy to expand by
1.3% in 2010.
Needless to say, the projected economic slowdown for this year translates into less activity
for small and medium-sized enterprises. These enterprises are either active in the sectors
being affected by the slowdown, including the hotel and restaurant sector, the wholesale and
retail sector, and the international financial services sector or they provide services to these
sectors. The main pressures faced by these enterprises are weak demand, both domestic
and foreign, and tighter credit conditions.
According to the Central Bureau of Statistics, 97% of all enterprises in Curaçao are small or
medium sized. These enterprises are crucial for the island economy, accounting for 56% of
employment and 31% of Gross Domestic Product.
Given their importance, it is imperative that actions be taken to help the small and
mediumsized enterprises survive the economic slowdown.
Ladies and gentlemen, we are currently in the historic process of the dismantling of the
Netherlands Antilles. In the near future, Curaçao will become an autonomous country within
the Dutch Kingdom. An autonomous status will provide us with the unique opportunity to
address certain economic issues in a more island-specific way and thereby stimulate
economic growth. This situation should be beneficial for the business community, including
the small and medium-sized firms.
A crucial factor in this new context is macroeconomic stability. In my view, one of the
greatest threats to our macroeconomic stability is our vulnerability to external shocks. Our
balance of payments has become more susceptible to external shocks with far-reaching
implications for the real economy. The rapidly expanding current account deficit in the last
few years, financed by capital inflows from abroad, brings to fore an increasing external
vulnerability, which has been masked by the recent inflows of funds related to the debt relief
program. A sudden reversal of capital flows could deplete our foreign exchange reserves
quickly, undermining confidence in our currency.
As we are preparing to close the last chapter of the Netherlands Antilles, it is crucial that we
address these vulnerabilities to promote the welfare of the new countries' citizens. With
regard to the monetary system in the new constitutional structure, it has been agreed that the
countries of Curaçao and Sint Maarten will form a monetary union with one central bank and
a common currency.
The balance of payments vulnerability however, compels us to consider alternatives, one of
which is dollarization. Three of the five islands comprising the Netherlands Antilles, i.e., the
BES islands, have chosen to introduce the US dollar as the legal tender once their new
status takes effect, while Sint Maarten is already de facto dollarized. Moreover, the US dollar
is widely accepted in Curaçao. Therefore, it would not be such a big step to formally dollarize
Curaçao and Sint Maarten.
Having the dollar as legal tender removes the possibility of a balance of payments crisis with
the risk of devaluation. An economic downturn or reversal of capital flows would not turn into
a currency crisis. An immediate benefit from the elimination of currency crises would be a
reduction of the country risk premium, consequently lowering interest rates. In other words,
the spread between the interest rates of the dollarized economy and the United States is
reduced. Lower interest rates benefit growth by reducing the cost of credit, encouraging
investments.
In addition, as a result of dollarization, transaction costs, related to the conversion into
foreign currency, are lowered. These lower costs would benefit trade, including tourism and
foreign direct investments. Due to the perceived currency risk, local financial institutions
might be more inclined to invest in foreign assets. In the absence of currency risk, the
appetite to invest capital locally might increase.
By adopting the US dollar, the financial system would become more open to international
capital flows. Capital mobility promotes financial intermediation, competition and efficiency
among institutions, and promotes confidence in the financial system. It also encourages
integration of the domestic financial system with the rest of the world.
Although the public finances of Curaçao and Sint Maarten are closely monitored by the
budget supervisor CFT, dollarization would provide an extra long-term constraint for fiscal
policy because it eliminates the possibility of printing money to finance fiscal deficits. Given
our long history of fiscal deficits and troubled adjustment programs, the restrictions on
increasing the money supply would improve our policy credibility.
Nevertheless, dollarization also has some disadvantages. First, the authorities lose monetary
policy as an instrument to steer the economy, limiting the available policy mix to correcting
macroeconomic disequilibria. Second, the "lender of last resort" function of the central bank
disappears. Finally, under dollarization, the central bank would lose its main sources of
income, i.e., investment of the foreign exchange reserves and seigniorage from issuing
banknotes.
With respect to the first argument against dollarization, the loss of a policy instrument, the
following counter argument can be made. Given the limited scope to pursue independent
monetary policy under the current exchange rate regime, this loss would not be substantial.
The recent adjustment periods have indicated that small open economies like ours are
limited to fiscal policies and structural measures to remain competitive and hence improve
their investment climates. With regard to the issue of profitability and the function of the
central bank as lender of last resort, it is important to put the current reality into perspective.
The lion's share of the central bank's profit consists of license fees, which will continue to
exist under dollarization. In addition, since the balance of payments constraint is no longer
binding, the need to hold foreign exchange reserves to maintain the peg no longer applies.
Therefore, the Bank's reserves will all become investable funds, thereby preserving the
Bank's profitability. To address the issue of lender of last resort, we need to accelerate the
introduction of a deposit insurance scheme. Aside from providing depositors with added
security, the funds of such a scheme, some of which can come from the current reserve
requirements, will support the function of lender of last resort. Moreover, the government
would have to assume this function even under the current exchange rate regime, which
became abundantly clear during the recent international financial crisis.
Hence, dollarization would result in no perceptible changes in the profit of the central bank
and hence no impact on the government budget. Rather, dollarization might lead to an
increase in the Bank's profit since the balance of payments constraint always has
constrained the Bank from pursuing a policy of profit maximization. The Bank also has
noninterest sources of income in terms of the fees it charges the financial institutions to cover the
costs of financial sector supervision.
Realistically assessing the advantages and disadvantages of dollarization for Curaçao
should be part of the public debate for choosing the most suitable monetary system for the
future countries in the Kingdom. The balance seems to point in the direction of dollarization,
given our vulnerabilities in the present world economic order.
However, dollarization does not stand alone as a remedy for economic ills. It must be
accompanied by a series of structural reforms to achieve economic growth and development
in the long term. These reforms will improve our competitiveness and create opportunities for
businesses, including small and medium-sized enterprises.
First is increasing labor market flexibility. In the absence of monetary policy instruments,
external shocks that require a change in real wages will not have lasting effects on the rate of
unemployment if the labor market is not flexible. Another aspect of the labor market that
needs to be addressed is the reduction in the qualitative mismatch between demand and
supply. In my opinion, education is crucial to reduce this mismatch. Our vocational
institutions should take into account to a much greater degree the skill needs of the private
sector.
A second area for reform is the further development of our capital market, promoting more
financing opportunities for entrepreneurs and more local investment opportunities for
investors. Increasing local investment opportunities has become even more relevant as a
result of the declining significance of government bonds as an investment instrument in light
of the debt relief. The development of private debt instruments and equity-based financing
especially should be promoted. These types of financing are still rarely used on our island,
but they are significantly cheaper than bank financing. Specifically for start-ups and small
and medium-sized enterprises, the establishment of a venture capital fund could be crucial to
raise the necessary financing for promising investment projects.
Another important area of reform is the reduction of administrative barriers. One of the most
common complaints from the business sector is the number and complexity of government
formalities and paperwork that frustrate new investment initiatives and, hence, the
opportunity for stronger economic growth. The elimination of the double layer of government
on the island is certainly a step in the right direction. However, it should be complemented by
streamlining administrative procedures aimed at eliminating all unnecessary bureaucracy
and simplifying the procedures for obtaining business and work permits and business visas.
We must realize that "entrepreneurial firms" are the ones that will really benefit from the
rising economic opportunities. In addition, the likelihood of surviving is also higher among
firms that are creative and entrepreneurial. In this context, being entrepreneurial entails
identifying and introducing new products, new ways of production, distribution, and
marketing. At the same time, an entrepreneur is not afraid to take risks. In my opinion, our
business owners should become more entrepreneurial to maximize the benefits from the
economic opportunities offered by the future country of Curaçao.
Ladies and gentlemen, small and medium-sized enterprises play a crucial role in our
economy as they are an important contributor to employment and GDP. As a result, we
should take all the necessary steps to create a business environment that stimulates the
creation and growth of truly entrepreneurial small and medium-sized enterprises especially
now when the world economy is recovering from a severe crisis and a new world economic
order is being developed.