PHILIPSBURG--The deficit on the current account of the balance of payments for the monetary union of Curaçao and St. Maarten will widen in 2016 as a result of a decline in the net export of goods and services. This decline is attributable to a projected increase in the imports, mitigated by a growth in exports, according to the Central Bank of Curaçao and St. Maarten.
Economic Developments in 2015 and Outlook for 2016 report, released over the weekend, further states that the increase in the imports is related to import of construction materials, because of the construction of a new hospital in Curaçao and several other investment projects on Curaçao and St. Maarten. The import by the wholesale and retail trade sector will “rise as a result of the projected increase in domestic demand and more tourism spending,” cited the report.
Oil imports will drop in 2016, because of the projected slight decline in international oil prices. Merchandise imports by free zone companies in Curaçao will, however, drop, related to a projected decline in re-exports.
Meanwhile, the export growth will be driven by more foreign exchange revenues from tourism, both in St. Maarten and Curaçao. However, the further decline in the re-exports by free zone companies will partly offset the growth in exports.
The external financing is projected to surpass the deficit on the current account. Hence the gross official reserves will rise further, albeit at a slower pace compared to 2015, said the Central Bank.
As the excess liquidity in the banking system is “still high,” the Central Bank will continue to direct its monetary policy at tightening the surplus in the money market throughout 2016.
Narrowing
The monetary union’s deficit on the current account of the balance of payments narrowed in 2015 compared to 2014 as a result of an increase in net export of goods and services, according to the Central Bank.
In addition, the income and current transfer balances improved during 2015. The increase in net exports was caused by a decline in imports, mitigated by a drop in exports. Imports declined mainly as a result of less spending on oil imports, owing to the significant drop in international oil prices and a decline in merchandise imports by the companies in Curaçao free zone.
Exports dropped because of, among other things, a decline in the foreign exchange earnings from bunkering activities, ascribable to the lower international oil prices during 2015. Furthermore, foreign exchange revenues from tourism activities were down, primarily due to a decline in cruise tourism in both Curaçao and St. Maarten.
Foreign exchange earnings from stay-over tourism rose in both countries, albeit the pace of growth weakened in St. Maarten.
Similar to 2014, re-exports by free zone companies in Curaçao contracted as a result of, among other things, the unstable situation and currency restrictions in Venezuela. In addition, despite an increase in the wages, salaries and contract payments by the Isla refinery, the refining fee dropped during 2015.
The deficit on the current account was covered by external financing, as reflected by a worsening of the portfolio investment and direct investment balances, mitigated by an improvement of the loans and credits balance. The issuance of bonds by the Government of Curaçao that were purchased entirely by the Dutch state was the main cause of the worsening of the portfolio investment balance. Another factor that contributed to the deterioration was that matured foreign debt securities held by institutional investors were not entirely reinvested abroad during 2015.
Meanwhile, net direct investments into the monetary union rose, driven by a growth in the claims of foreign parent companies towards their subsidiaries in Curaçao and St. Maarten.
The loans and credits balance improved mainly because of a drop in net trade credit received from abroad, attributable largely to the strong decline in merchandise imports by free zone companies in 2015. However, a decline in net trade credit extended to abroad, as a result of the lower re-exports by free zone companies, mitigated the improvement in the loans and credits balance.
Similar to previous years, net capital transfers into the monetary union contracted because of the phasing out of the development aid from the Netherlands. As the external financing exceeded the current account deficit, the gross official reserves of the Bank increased in 2015 by an estimated NAf.71.9 million, less pronounced than the NAf.459.9 million increase in 2014.
Drop
The current account deficit as percentage of the GDP in the monetary union dropped from 9.8 per cent in 2014 to 7.9 per cent in 2015. The external financing of the private sector as a percentage of GDP dropped as well. However, a current account deficit above 5 per cent of GDP can be considered unsustainable. Hence, in the case of our monetary union, the current account deficit is still high, states the Central Bank.
The import coverage increased from 3.9 months in December 2014 to 4.3 months in October 2015 as gross official reserves rose, while imports dropped. However, if corrected for the inflow of funds related to the bond issuances by the Governments of Curaçao and St. Maarten the import coverage would have been 3.5 months in October 2015.
Although the import coverage would have remained above the 3-month benchmark, it can be concluded that the economic performance of the monetary union alone is not leading to a sustainable improvement of the balance of payments.
Managing surplus
Throughout 2015, the bank continued its monetary policy aimed at tightening the surplus on the money market by offering more certificates of deposit (CDs) at higher interest rates. Consequently, the amount of outstanding CDs rose in 2015 compared to 2014. As the excess liquidity of the banking system has not translated into excess credit extension, the reserve requirement percentage was left unchanged at 18 per cent. The last adjustment of the reserve requirement percentage occurred in June 2014.
Up to October 2015, loans extended to the private sector contracted by 0.6 per cent on an annual basis in the monetary union. In Curaçao, private credit extension declined by 1.7 per cent compared to October 2014, resulting from declines in business loans (-3.7 per cent) and mortgages (-1.3 per cent) mitigated by an increase in consumer loans (0.5 per cent).
Meanwhile in St. Maarten, the amount of private sector loans outstanding was up by 2.7 per cent due to an expansion of 11.5 per cent in business loans primarily the result of planned investments in the tourism sector. By contrast, outstanding mortgages and consumer loans dropped by 0.7 per cent and 2.8 per cent, respectively.
