WILLEMSTAD - The coronavirus outbreak dominates Curaçao’s 2020 outlook with real GDP projected to contract by 21.4%. This figure is a downward adjustment of 1.0 percentage point compared to the projection presented in the Annual Report 2019. The downward revision is caused mainly by a higher decline in expected stay-over arrivals in 2020 compared to 2019, a worsened labor market, and a higher projected inflation on the back of the surcharges imposed on fuel and energy by the government.
The revised outlook includes the effects of the 3-month border closure and the 6-week total lockdown that were implemented. Also, the effects of the first and second tranche of liquidity support that the government received from the Netherlands and the recent layoffs at the refinery are included in the revised outlook. However, the tax measures15 that were included in the previous outlook have been removed from the current outlook because it seems unlikely that these will go into effect in 2020.
The revised outlook for 2020 is based on the following assumptions:
– Part of the first and second tranche of liquidity support from the Netherlands that was allocated for payroll support and financial support for people who lost their jobs due to the crisis will moderate the decline in private consumption.
– The government of Curaçao will meet the conditions set by the Kingdom Council of Ministers for the second tranche of liquidity support, including a 12.5% reduction in the total package of labor conditions for all employees in the (semi) public sector. In addition, the maximum coverage of the payroll subsidy in the private sector will be reduced from 80% to 60%. These measures will have a negative effect on private consumption.
– The refinery will remain closed in 2020 and negotiations will be concluded in the fourth quarter of 2020. Production activities will resume gradually in 2021.
– Tourism will recover gradually following the border reopening in July 2020 for the European market. Overall, a decline of 60% compared to 2019 is assumed for foreign exchange earnings from tourism activities.
Inflation is projected to increase to 2.7% in 2020, reflecting mainly the surcharges on domestic fuel and energy prices introduced by the government, mitigated by a decline in international oil prices.
An analysis of GDP by expenditure shows that the projected deep economic contraction in 2020 is the result of a decline in both domestic and net foreign demand. Domestic demand will contract primarily because of a significant drop in private demand, mitigated by a slight increase in public spending. Private demand will decline because of lower consumption and investment. In particular, private consumption is projected to drop on the back of a decline in disposable income due to the worsened situation in the labor market and labor compensation cuts particularly in the private sector. The labor market has deteriorated due to layoffs at the refinery, hotels and restaurants, and other businesses that are downsizing or closing. However, government support measures, including the payroll subsidy, will moderate the decline in private consumption. Furthermore, private investment is projected to drop as several investment projects will be delayed or cancelled due to the COVID-19 pandemic. In contrast, public consumption will increase slightly, while public investment will remain muted. The projected increase in public consumption is driven by, among other things, more spending on goods & services provided to the public by means of food packages to those who became jobless or are financially incapable or barely able to support themselves due to the economic standstill caused by the total lockdown related to the coronavirus outbreak.
Net foreign demand also will contribute negatively to GDP due to a significant decline in exports, moderated by lower imports. The projected decline in exports reflects, among other things, lower earnings from tourism, bunkering, refining, ship repair, and transportation activities. Meanwhile, imports will go down because of the drop in domestic demand and lower tourism spending. Furthermore, a decline in the volume of oil products purchased abroad to meet local demand and the bunkering of aircrafts and ships will contribute to the lower import bill. The drop in local demand for fuel products stemmed from the 6-week lockdown that limited transportation activities. Furthermore, the decline in bunkering activities was caused by the border closure (i.e., a sharp decline in commercial flights and cruise calls) and the closure of the refinery (i.e., a sharp decline in the number of tankers visiting the port of Willemstad).