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Curacao's Deficit A Worry, Says Central Bank

by Phillip Morton, Investors

16 July 2012

Curacao runs the risk of falling into a cycle of posting recurring budget deficits if policy makers fail to implement a plan to consolidate the deficit, and support the competitiveness of the island as a financial services domicile, the Central Bank of Curacao and Saint Marteen has said in its latest annual report, on developments in 2011.

The report notes with concern that Curacao failed to achieve a balanced budget during 2011, despite a pledge made to the Netherlands upon its independence along with Saint Maarten. In order to retain a low-tax regime, in support of the island as an international financial centre, authorities must quickly implement fiscal consolidation while mitigating its impact on the economy, the Central Bank said.

Preliminary data reported by the Curacao government indicates that the territory registered a cash deficit of ANG169.3m (USD94.7m) in 2011. The failure of the Curacao government to implement crucial reforms to reduce health care spending was one of the major causes of the deficit in 2011, according to the Central Bank. Non-tax revenues remained subdued in 2011 due to low dividend payouts by state-owned enterprises and tax revenues were lower than expected. Moreover, the Central Bank reported that little room exists for further tax increases to support the budget given the 2011 tax-to-GDP ratio of Curacao of 26%, which was reported to be 3% higher than in Saint Maarten.

According to the report, the Curacao economy expanded by just 0.4% in 2011; slightly stronger growth than recorded in 2010 (0.1%), but conditions in the financial services sector still remain a cause for concern.

The financial services sector reportedly grew in 2011, due to an increase in net income from domestic financial services. However, real value added by the international financial and business services sector contracted in 2011. Performance was less positive in the banking sector. The Central Bank reported that although the capitalization of the domestic banking sector improved, due to larger capital buffers, assets grew nominally, and the ratio of non-performing loans-to-total loans increased markedly. The Central Bank noted the increase in this ratio indicates a "further worsening in quality of domestic banks' credit portfolios".

Commenting on the findings of the report, Emsley Tromp, President of the Central Bank of Sint Maarten and Curacao, stated:

"One of the important sectors that need our attention [in Curacao] is the international financial services industry."

"Despite many efforts, particularly by the sector itself, the industry has not regained its position as an international financial center. To revitalize the international financial services sector, which has always been an important pillar of the Curacao economy in terms of high level employment and foreign exchange revenues, the representative organization of the sector, the government, and the central bank should combine their forces to create the necessary conditions under which the sector can flourish again."

"Sustainable economic growth is key to achieving macroeconomic stability, reducing poverty, and creating broad-based well-being for the people. However, the measures to attain these objectives should be aligned with the budgetary restrictions, be economically feasible, and have a lasting effect."

The Central Bank report in particular criticized new rules introduced during 2011, which were said to have damaged Curacao's competitiveness. The central bank said the government's recent decision to promulgate the so-called 80/20 rule, which requires that local workers make up at least 80% of the work force for companies established in Curacao, "is not conducive" to addressing rigidities in the labour market, an area of reform it highlighted as being critical to fuelling job creation.

TAGS: tax | Netherlands | banking | financial services | international financial centres (IFC) | Curaçao | offshore | Saint Maarten | services

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