WILLEMSTAD - According to the Central Bank of Curaçao and St. Maarten, Curaçao’s real GDP dropped significantly by 9.6% in the first quarter of 2020, following a contraction of 2.1% in the first quarter of 2019. The sharp economic contraction during 2020’s first quarter can be ascribed largely to the closing of the refinery on December 31, 2019, and the measures that the government took from mid-March 2020, particularly the closure of the borders, to limit the local spread of the COVID-19 virus. Meanwhile, the inflation rate rose to 3.1% due mainly to price increases of beverages & tobacco and food.
An analysis of GDP by expenditure shows that the economic contraction in the first three months of 2020 was caused by a decline in domestic demand, mitigated by an increase in net foreign demand. The decline in domestic demand was attributable to both the private and public sectors. The drop in private spending stemmed from lower investments and consumption. As several private construction projects, particularly in the tourism sector, reached their final phase or were completed in 2019, the lack of new projects caused a decrease in private investment in the first quarter of 2020. Private consumption declined as the worsened situation in the labor market and higher inflationary pressures reduced consumers’ purchasing power. Even though the refinery, a major employer in Curaçao, closed, the effect on disposable income and, hence, private consumption was limited as Curaçao Refinery Utilities (CRU) hired all former employees for a period of 6 months at their basic salaries. Furthermore, the former employees received the first tranche of redundancy payments from the Isla refinery in the first quarter of 2020, also contributing to their disposable income.
Public demand fell because of a decline in public consumption and investment. The decline in public consumption resulted from lower expenditures on wages & salaries and goods & services. Meanwhile, after completion of the construction of the new hospital by the end of 2019, no significant public investments took place in the first quarter of 2020.
In contrast, net foreign demand contributed positively to GDP as the decline in imports surpassed the decrease in exports. The lower import bill can be ascribed largely to a sharp decline in merchandise imports, consistent with the drop in domestic demand. In particular, merchandise imports by the wholesale & retail trade sector went down. Also, lower volumes of oil products were purchased from abroad. The lower exports reflected mainly the decrease in foreign exchange earnings from refining, bunkering, and tourism activities. Meanwhile, as the Isla refinery sold part of its stock of oil products to settle the first tranche of redundancy payments, the change in inventory was negative in the first quarter of 2020.
An analysis of GDP by sector shows that all sectors contributed to the decline in real GDP during the first quarter of 2020. The closing of the refinery combined with the border closure to prevent a local outbreak of COVID-19 had a detrimental effect on economic activity.
Real output in the manufacturing sector declined significantly in the first quarter of 2020 because of the closing of the refinery in December 2019 pending the finalization of negotiations with a new operator after the expiration of the lease contract with PDVSA.
Real value added in the wholesale & retail trade sector dropped considerably in the first quarter of 2020, consistent with the decline in domestic demand. Furthermore, tourism spending went down as tourism activities fell markedly following the border closure mid-March. In addition, activities in the free zone shrank.
Following an expansion in the first quarter of 2019, real value added in the restaurants & hotels sector dropped in first quarter of 2020. All activity indicators recorded a decrease, i.e., the number of stay-over visitors, visitor nights, cruise tourists and cruise calls, and the hotel occupancy rate. The disappointing performance of the 2 The negotiations with Klesch Group to take over the refinery were terminated in July 2020. restaurants & hotels sector can primarily be ascribed to the border closure introduced as of mid-March 2020. Furthermore, the government restricted the operations of the restaurant sector by reducing the opening hours and maximum number of clients, followed by allowing only takeout services.
All key markets, except the Caribbean, plummeted. The North American market recorded a decline as the number of visitors from both the United States and Canada decreased. The contraction of the European market was driven largely by decreases in the number of visitors from the Netherlands, Germany, and Belgium. Furthermore, the South American market declined largely because of fewer visitors from Brazil, Venezuela and Surinam, mitigated by an increase in the number of visitors from Colombia. In contrast, the Caribbean market increased, although at a slower pace compared to the first quarter of 2019, because of the introduction of a direct flight connection from Trinidad & Tobago.3 The visitors from Trinidad & Tobago increased by 50%, while all other key Caribbean countries recorded a decline.
Real value added in the transport, storage & communication sector declined as harbor and airport-related activities dropped in first quarter of 2020 compared to 2019’s first quarter. The decline in activities at the airport was due primarily to less passenger traffic despite an increase in the number of commercial landings. Furthermore, domestic air transportation activities fell. Meanwhile, the poor performance of the harbor was the result of a decline in the number of ships piloted into the port of Curaçao, specifically cruise ships and tankers. The decline in the number of oil tankers was related to the closing of the Isla refinery at the end of 2019, while the decline in the number of cruise ships was attributable to the closure of the border. Container movements also declined in line with the sharp drop in merchandise imports recorded in the first quarter of 2020. By contrast, an increase in the number of freighters mitigated the decline in harbor activities.
Meanwhile, the construction sector contracted further in the first quarter of 2020, as both private and public investments decreased. Furthermore, real output decreased in the utilities sector, as a decline in water production was mitigated by a slight increase in electricity production.
The decrease in the financial intermediation sector was caused by a decline in both domestic and international financial services. Real value added in the domestic financial services sector dropped as reflected by a decline in other fees & income and net interest income of the commercial banks in Curaçao. Meanwhile, the decline in the international financial services sector was reflected by lower wages & salaries and other operational expenses.