Country Report

Netherlands Antilles

March 2007 The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom

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Netherlands Antilles

1

Contents Netherlands Antilles 3

Summary

4

Political structure

5 5 6

Economic structure

7

Outlook for 2007-08

7

The political scene

9

Economic policy

10

The domestic economy

12

Foreign trade and payments

Annual indicators Quarterly indicators

The region 14

Summary

15

Outlook for 2007-08

18

Recent developments

List of tables 9 10 11 12 12 13 21 21

Netherlands Antilles: general government finances Netherlands Antilles: contribution to gross domestic product growth Netherlands Antilles: gross domestic product growth by sector Netherlands Antilles: stopover tourism Netherlands Antilles: cruise tourism Netherlands Antilles: current-account balance The region: tourist arrivals, 2006 The region: cruise passenger arrivals, 2006

List of figures 7 7 11

Country Report March 2007

Netherlands Antilles: gross domestic product Netherlands Antilles: consumer price inflation Netherlands Antilles: 12-month consumer price inflation

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Netherlands Antilles March 2007

Summary Outlook for 2007-08

The deadline for establishing the new constitutional status of the islands that compose the Netherlands Antilles has been put back from July 2007 to December 15th 2008. Four of the islands have signed an agreement with the Dutch government that will see St Maarten reduce its ties with Holland by becoming an autonomous state within the Kingdom of the Netherlands. The three smaller islands—Bonaire, St Eustatius and Saba—will strengthen their links with the Dutch, through gaining a new status that is equivalent to that of Dutch municipalities. The largest of the five islands, Curaçao, is demanding the renegotiation of the November 2006 accord, which established the broad manner in which the Federation would be broken up. The accord envisages Curaçao—as with St Maarten—becoming fully self-governing, except for in matters of defence, foreign policy and law enforcement, which would continue to be the responsibility of the Dutch government. When the split does go ahead, the Dutch offer to assume all the public debt of the islands will provide a boost to the economies of all the islands from 2009. In the meantime, the Economist Intelligence Unit expects economic growth in the forecast period to remain low, at 1.5-2.5%.

The political scene

A framework agreement for political transition was signed by four of the five islands on February 12th 2007. A new coalition in the Netherlands—which does not include the right-wing Volkspartij voor Vrijheid en Democratie (VVD)—has been welcomed in the Netherlands Antilles. Island council elections are to be held on April 20th. Papiamento has been designated an official language.

Economic policy

As part of the upcoming change in political status, the Dutch government has agreed to assume responsibility for the public debt.

The domestic economy

Second-quarter GDP growth reached 1%. On the supply side, the main contributors to growth in the private sector were the manufacturing, construction, and wholesale and retail sectors. Inflation eased in the final months of 2006. Tourist arrivals increased in Curaçao and Bonaire in 2006, but fell in the other islands.

Foreign trade and payments

Editors: Editorial closing date: All queries: Next report:

Country Report March 2007

The current account has turned to deficit.

Martin Pickering (editor); Fiona Mackie (consulting editor) March 14th 2007 Tel: (44.20) 7576 8000 E-mail: [email protected] Full schedule on www.eiu.com/schedule

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Netherlands Antilles

Political structure Official name Form of government

A federation of Curaçao, Bonaire, St Eustatius, St Maarten and Saba; parliamentary democracy responsible for internal affairs; the Netherlands controls external affairs. The islands plan to end the federation in 2007: Curaçao and St Maarten are seeking autonomy; Bonaire, St Eustatius and Saba would become Kingdom Islands, a newly created status that has yet to be defined

The executive

The Council of Ministers is responsible to the Staten (parliament)

Head of state

Queen Koningin Beatrix Wilhelmina Armgard van Oranje-Nassau of the Netherlands, represented by a governor, Frits Goedgedrag, and on each island by a lieutenant-governor

National legislature

Regional legislatures Legal system

Elections Main political organisations

Senior ministers Key ministers

Central bank president

Country Report March 2007

Netherlands Antilles

The Staten, a 22-member assembly, is elected by adult suffrage every four years; 14 members are elected from Curaçao, three each from St Maarten and Bonaire, and one each from Saba and St Eustatius Each island elects an island council to govern internal affairs, excluding finance, police, telecommunications, education and healthcare Courts of first instance on each island, appealing to a High Court of Justice operated jointly with Aruba; High Court justices are appointed by the Dutch crown in consultation with the Council of Ministers; the final court of appeal is the Supreme Court in the Netherlands May 2003 (island councils); January 2006 (Staten); next elections April 2007 (new island government) Partido Antia Restruktura (PAR); Partido Nashonal di Pueblo (PNP); Partido Democratiko Bonairano (PDB); Democratische Partij-St Maarten (DP-StM); Frente Obrero de Liberashon (FOL); Partido Laboral Krusado Popular (PLKP); Movimentu Antiyas Nobo (MAN); Democratische Partij (DP); Democratische Partij Curaçao (DPC); Democratic Party-Statia (DP-StE); Union Patriotiko Bonairano (UPB); Windward Islands People’s Movement (WIPM); National Alliance (NA, based in St Maarten); Progressive Democratic Party (PDP) Prime minister

Emily de Jongh-Elhage (PAR)

Constitutional & domestic affairs Economic affairs & labour Education & culture Finance General affairs & foreign relations Heath & social development Justice Telecommunications & transport

Roland Duncan (NA) Burney El Hage (UPB) Omayra Leeflang (PAR) Ersilia de Lannooy (PNP) Emily de Jongh-Elhage (PAR) Sandra Smith (MAN) David Dick (PAR) Kenneth Gijsbertha (MAN)

Emsley Tromp

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Economic structure Annual indicators 2002 a 2.9 0.3 0.4 172.6 516.7 1,532.1 -24.6 406.3 1.79

GDP (US$ bn) Real GDP growth (%) Consumer price inflation (av; %) Population (‘000) Exports fob (US$ m) Imports fob (US$ m) Current-account balance (US$ m) Reserves excl gold (US$ m) Exchange rate (Naf:US$)

2003 a 3.0 1.4 2.0 176.6 567.4 1,596.1 -61.8 372.9 1.79

2004 a 3.1 1.1 1.4 180.7 672.5 1,885.1 -205.1 415.4 1.79

2005 b 3.2 1.5 3.4 a 185.5 a 840.3 a 2,194.7 a -200.1 a 545.4 a 1.79 a

2006 b 3.4 1.2 3.1 a 190.2 1,054.6 2,510.5 -376.7 531.4 1.79 a

a Actual. b EIU estimate.

Origins of gross domestic product 2004 Agriculture, fishing & mining Manufacturing Public utilities Construction Commerce Hotels & restaurants Transport, storage & communications Other services GDP at factor cost

% of total 0.7 5.1 3.7 3.8 13.8 4.0 7.0 52.2 100.0

Components of gross domestic product 1997 Private consumption Government consumption Gross fixed investment Private Public Change in stocks Exports of goods & services Imports of goods & services GDP at market prices

% of total 59.9 24.8 19.8 18.0 1.8 1.0 70.9 -76.5 100.0

Main destinations of exports 2005 US Panama Guatemala Haiti The Bahamas

% of total 32.7 9.9 7.8 6.2 5.0

Main origins of imports 2005 Venezuela US Italy The Netherlands Panama

% of total 52.0 21.3 4.9 4.6 4.5

Country Report March 2007

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Netherlands Antilles

Quarterly indicators Prices Consumer prices (2000=100) Consumer prices (% change, year on year) Financial indicators Exchange rate Naf:US$ (end-period) Exchange rate Naf:US$ (end-period) Deposit rate (av; %) Government bond yield rate (av; %) Lending rate (av; %) Treasury bill rate (av; %) M1 (end-period; Naf m) M1 (% change, year on year) M2 (end-period; Naf m) M2 (% change, year on year) Sectoral trends in tourism Stay-over visitors (‘000) Net receipts (current account; Naf m) Foreign trade and payments (US$ m) Goods: exports fob Goods: imports fob Merchandise trade balance fob-fob Services balance Income balance Net transfer payments Current-account balance Reserves excl gold (end-period)

2004 4 Qtr

2005 1 Qtr

2 Qtr

3 Qtr

4 Qtr

2006 1 Qtr

2 Qtr

3 Qtr

106.7 2.0

107.7 2.7

108.5 2.9

110.0 3.8

111.1 4.1

111.8 3.8

112.2 3.4

113.0 2.7

1.79 1.79 2.78 6.75 10.67 3.70 1,406.5 12.8 4,594.2 11.5

1.79 1.79 2.75 6.75 10.18 3.89 1,573.2 18.0 4,835.4 13.0

1.79 1.79 2.74 6.58 9.01 3.50 1,668.7 23.5 5,044.8 17.2

1.79 1.79 2.84 6.25 10.30 3.11 1,527.2 12.2 4,932.2 14.2

1.79 1.79 2.78 6.25 8.92 3.57 1,574.3 11.9 5,057.0 10.1

1.79 1.79 2.76 6.30 8.38 4.68 1,483.6 -5.7 5,161.8 6.8

1.79 1.79 2.77 6.45 8.27 3.62 1,469.6 -11.9 5,150.5 2.1

1.79 1.79 2.78 6.95 10.81 5.78 1,421.3 -6.9 5,122.1 3.9

193.3 324.4

228.8 452.6

181.5 318.5

167.2 258.4

192.7 391.4

222.6 494.5

192.9 342.1

172.1 n/a

214.4 -548.8 -334.4 274.5 4.8 22.2 -32.9 415

184.5 -516.6 -332.1 328.4 1.7 4.9 3.0 491

206.0 -549.2 -343.2 254.4 1.3 110.1 22.6 545

209.3 -553.1 -343.8 179.3 13.5 -1.2 -152.2 471

240.5 -575.9 -335.4 263.3 -9.8 8.5 -73.4 462

250.2 -610.2 -360.0 351.6 7.8 -1.7 -2.3 501

243.7 -602.0 -358.3 265.5 -4.7 -10.0 -107.5 492

n/a n/a n/a n/a n/a n/a n/a 479

Sources: IMF, International Financial Statistics; Bank van de Nederlandse Antillen.

Country Report March 2007

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Outlook for 2007-08 The deadline for establishing the new constitutional status of the islands that comprise the Netherlands Antilles has been put back from July 2007 to December 15th 2008. Four of the islands have signed an agreement with the Dutch government that will see St Maarten reduce its ties with Holland by becoming an autonomous state within the Kingdom of the Netherlands. The three smaller islands—Bonaire, St Eustatius and Saba—will strengthen their links with the Dutch, through gaining a new status that is equivalent to that of Dutch municipalities. The largest of the five islands, Curaçao, is demanding the renegotiation of the November 2006 accord, which established the broad manner in which the Federation would be broken up. The accord envisages Curaçao—as with St Maarten—becoming fully self-governing, except for in matters of defence, foreign policy and law enforcement, which would continue to be the responsibility of the Dutch government. Curaçao is seeking greater fiscal autonomy than currently envisaged. It is unclear how the situation will be resolved, but any resolution is unlikely before Curaçao’s island council election on April 20th. With the Dutch government pledging to assume liability for the public debt and provide funds for restructuring, Curaçao looks like it will eventually go along with the agreement. When the split does go ahead, the Dutch offer to assume all the public debt of the islands will provide a boost to the economies of all the islands from 2009. In the meantime, the Economist Intelligence Unit expects economic growth in the forecast period to remain low, at 1.5-2.5%. Netherlands Antilles: gross domestic product

Netherlands Antilles: consumer price inflation

(% change, year on year)

(av; %)

Netherlands Antilles

US

Netherlands Antilles

4.0

3.5

3.5

3.0

3.0

US

2.5

2.5

2.0

2.0

06

05

04

03

06

0.0

05

0.5

0.0

04

0.5

03

1.0

2002

1.0

2002

1.5

1.5

The political scene A framework agreement for political transition

Country Report March 2007

On February 12th the governments of four of the five islands that comprise the Federation of the Netherlands Antilles (Bonaire, St Maarten, St Eustatius and Saba) met with the Dutch government in St Maarten to sign a framework agreement over the transition to a new constitutional status for the islands. As agreed in November, St Maarten will become an autonomous island within the

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Netherlands Antilles

Kingdom of the Netherlands. The three other islands will become part of the Netherlands, attaining a status similar to that of a Dutch municipality. The target date for effecting the transition has been delayed from July 2007 to December 15th 2008. There is broad consensus over the move for the four smaller islands in the Antilles. However, Curaçao, the largest of the five islands, was only afforded observer status at the St Maarten meeting, owing to its demands for the November 2006 accord (which established the broad manner in which the Federation would be broken up) to be renegotiated. There is opposition within Curaçao to the proposed new structure, and in late November, Curacao’s Island Council voted (by 13 votes to six) against the agreement. The accord envisages Curacao becoming fully self-governing, except for in matters of defence, foreign policy and law enforcement, which would continue to be the responsibility of the Dutch government. The largest party in the Curaçao Island Council, the Partido Antia Restruktura (PAR), is in favour of signing the accord as it is, but most other parties are not. The sticking point is fiscal management: as part of the agreement the Dutch government has signalled that it is willing to assume responsibility for the federation’s Naf5bn of public debt (US$2.8bn, equivalent to 81.8% of GDP at end-September 2006). But in order for the liability to be assumed by the Netherlands, the Curaçao and St Maarten island governments would have to agree to a series of rules governing fiscal management, which the dissenting parties within the Curaçao Island Government are unwilling to cede. A new coalition in The Hague is welcomed

Following elections in November 2006 a new governing coalition was installed in the Netherlands on March 1st, and there are signs that relations between the Dutch and the Netherlands Antilles will improve after a sticky few years. The main reason is the absence of the right-wing Volkspartij voor Vrijheid en Democratie (VVD, People’s Party for Freedom and Democracy), which had been responsible for a bill that would have allowed the deportation of Antillean and Aruban youngsters found guilty of crimes in the Netherlands. The measure was considered by the Antillean and Aruban governments to be unconstitutional, since it discriminated between Dutch citizens from the European and the Caribbean part of the Kingdom. The proposal has been withdrawn by the new government.

Island elections to be held in April

Island Council elections are due to be held on April 20th. The elections look like they will be characterised, as recent elections have been, by more fringe parties entering the frame, taking advantage of public disaffection with the traditional parties. Voter cynicism has not been helped by a large number of politicians that have changed party allegiance since the last island elections, some between ideologically opposed parties. The Frente Obrero de Liberashon, which emerged as Curaçao’s largest party following the last island elections, has joined with the Partido Independensha in an electoral coalition, the Frente Obrero Liberashon 30 di mei den Aliansa ku Partido Independensha. The current main governing PAR has listed four women in its top five positions on its electoral list, including the prime minister of the Federation, Emily de JonghElhage, and the minister of education, Omayra Leeflang.

Country Report March 2005

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Papiamento becomes an official language

9

On March 6th the Staten (the parliament) unanimously passed a motion to grant Papiamento the status of an official language. This follows ten years of debate started by Marta Dijkhoff (PAR), then the minister for education, and brings the number of official languages (with Dutch and English) to three.

Economic policy Dutch government to assume responsibility for public debt

As part of the framework agreement governing the political transition, the Dutch government has offered to assume responsibility for the Netherlands Antilles’ public debt, which stood at Naf5bn (81.8% of GDP) at the end of September. In addition, the Dutch government has announced that it has ringfenced NAf 1bn (US$165m) for a number of investment projects and the payment of some public debt. All four islands that accepted the conditions of the new political structure were openly delighted with the levels of financial assistance that the Dutch government is willing to commit, levels that would allow the islands to make a fresh start without the burden of such substantial public debt that has held them back in recent years. The Dutch Minister for Kingdom Relations, Atzo Nicolaï, who was largely responsible for the relative ease with which the agreement was reached, was widely praised by the governments of the four co-operating islands. The fiscal deficit deteriorated over the first nine months of 2006, despite a reduction in expenditure. The deterioration was due to a 69.1% year-on-year fall in non-tax revenue. In the second quarter of 2005 non-tax revenue had risen sharply in year-on-year terms because of a one-off transfer of dividend tax collected by the Dutch tax authorities: there was no such windfall in the second quarter of 2006. Netherlands Antilles: general governmenta finances (Naf m; Jan-Sep)

Revenue Tax Non-tax Expenditure Current Capital Budget balance Total debt (end-period) % of GDP Domestic debt Foreign debt

2005 1,257.8 924.6 333.2 1,277.5 1,261.2 16.2 -19.8 4,641.9 80.3 3,927.2 714.6

% change 2006 year-on-year 1,071.7 -14.8 969.0 4.8 102.8 -69.1 1,226.9 -4.0 1,221.4 -3.2 5.3 -67.3 -155.2 683.8 4,993.8 7.6 82.8 3.2 4,220.6 7.5 773.3 8.2

a Central government plus Curaçao island government. Source: Bank van de Nederlandse Antillen.

Country Report March 2007

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The domestic economy Second-quarter GDP growth reaches 1%

The Bank van de Nederlandse Antillen (BNA, the central bank) has reported that economic output in the second quarter reached 1% year 0n year, below the rate recorded in the second quarters of 2004 and 2005, but above the growth rate (0.7% year on year) recorded in the first quarter of the year. Private spending growth of just 0.3% year on year was more than offset by a positive net contribution from trade in goods and services, as imports contracted, owing in part to a loss in purchasing power owing to a rise in consumer prices. Netherlands Antilles: contribution to gross domestic product growth (2nd quarter; % change year on year) Domestic expenditure Private sector Investment Consumption Government sector Investment Consumption Changes in inventory Foreign net expenditure Export of goods & services Import of goods & services GDP

2004 1.5 -0.5 -0.3 -0.2 2.0 -0.4 2.4 -0.5 0.6 7.3 6.8 1.6

2005 9.3 10.0 5.4 4.6 -0.7 -0.2 -0.5 0.2 -7.8 3.6 11.4 1.7

2006 0.7 0.3 0.1 0.2 0.2 0.0 0.2 -0.2 0.6 0.1 -0.5 1.0

Source: Bank van de Nederlandse Antillen.

On the supply side, the main contributors to growth in the private sector were the manufacturing, construction, and wholesale & retail sectors. A rise in expenditure on wages and salaries led to an increase in the value-added in the public sector. Total value-added in the manufacturing sector expanded in the second quarter owing to a rise in output in Curaçao’s ship-repair industry and the Isla refinery. The tourism sector also performed well on all islands, with total stopover arrivals up by 6.2% year on year in the second quarter, leading to an increase in activity in the restaurant and hotels sector. Activity in the transportation, storage & communication sector (which accounts for around 7% of GDP) fell in the second quarter, as the air transportation and harbour sectors registered poor results. The total cargo movements in Curaçao and the number of ships piloted into the harbour contracted during the second quarter. However, the increase in oil storage, oil transshipment, and airport-related activities offset the fall in harbour activities. The airport-related activities grew, as both total passenger traffic and the number of commercial landings were up in the Netherlands Antilles, in line with the growth in stopover tourism.

Country Report March 2005

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Netherlands Antilles: gross domestic product growth by sector (% real change, year on year; Apr-Jun) Agriculture, fishery & mining Manufacturing Electricity, gas & water Construction Wholesale & retail trade Restaurants & hotels Transport, storage & communication Financial intermediation Real estate, renting & business activities Private households Total private sector Public sector GDP

2004 3.7 0.4 1.1 1.3 2.2 4.9 -1.2 0.9 0.3 -1.4 0.8 6.0 1.6

2005 -5.1 -2.1 1.8 5.4 4.3 -1.6 -0.8 3.3 1.0 -0.6 1.5 5.8 1.7

2006 -4.2 4.7 -0.7 3.6 3.4 1.6 -0.6 -0.2 0.7 1.5 1.3 1.8 1.0

Source: Bank van de Nederlandse Antillen.

Inflation moderates in the final months of the year

The 12-month rate of consumer price inflation moderated in the final quarter of the year, having exceeded 3.5% in each of the first five months of the year. This was partly a result of a higher base of comparison in mid-2005, with high rises in international oil prices falling out of the equation in mid-2006. With a currency linked to the US dollar and a large proportion of trade done with the US, inflation tends to reflect changes in consumer prices in the US. By the end of the year, with oil prices starting to fall, inflation fell to 2.2% in both November and December. The main price rises in 2006 were recorded in the food, housing, transport and communications, and beverages and tobacco categories. Netherlands Antilles: 12-month consumer price inflation (% change, year on year) Netherlands Antilles

US

5.0 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct 2001 02 03 04 05 06 Sources: Bank van de Nederlandse Antillen; Bureau of Labour Statistics.

Tourist arrivals rise in Curaçao and Bonaire

Country Report March 2007

After a weak first three quarters, stopover tourist arrivals in Curaçao and Bonaire picked up in the final quarter of 2006, helping to contribute to aggregate growth in arrivals of just 0.9% year-on-year. Over the year as a whole, arrivals were up by 1.5%, to 781,890. The number of visitors to the main tourist centre, St Maarten, fell in the final quarter of the year, by 2.3%, bringing arrivals to the island marginally down over the whole year.

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Netherlands Antilles: stopover tourism (no of visitors) 4 Qtr 2005 57,801 15,167 115,205 1,778 2,699 192,650

Curaçao Bonaire St Maarten Saba St Eustatius Total

2006 % change 61,770 6.9 16,520 8.9 112,598 -2.3 1,591 -10.5 1,887 -30.1 194,366 0.9

Full year 2005 222,071 62,550 467,861 7,350 10,355 770,187

2006 % change 234,246 5.5 63,348 1.3 467,804 0.0 6,908 -6.0 9,584 -7.4 781,890 1.5

Source: Bank van de Nederlandse Antillen.

In 2002-05 cruise tourism to Curaçao struggled, whereas that to St Maarten thrived, but this trend was reversed in 2006. Although the number of ship calls to Curaçao increased by only 2.5% in 2006, the introduction of ships with greater capacity enabled a more rapid increase in the number of passengers landing, with numbers to Curaçao up by 16.5% year on year. This compares with a fall in numbers to St Maarten, the islands’ most important cruise ship destination. Netherlands Antilles: cruise tourism 4 Qtr 2005 Total cruise calls Bonaire Curacao St Maarten Total Total cruise passengers ('000) Bonaire Curacao St Maarten Total

2006 % change

Full year 2005

2006 % change

23 62 191 276

36 85 195 316

56.5 37.1 2.1 14.5

89 200 641 930

78 205 609 892

-12.4 2.5 -5.0 -4.1

15.6 98.5 449.3 563.4

27.6 119.9 411.2 558.7

77.3 21.7 -8.5 -0.8

40.1 276.0 1,488.5 1,804.5

61.8 321.5 1,421.6 1,805.0

54.3 16.5 -4.5 0.0

Source: Bank van de Nederlandse Antillen.

Foreign trade and payments The current account turns to deficit

Merchandise export earnings increased by 18.3% year on year in the second quarter, boosted by increased earnings from bunkering activities, owing to higher average oil prices. Re-exports by the free zone companies in Curaçao grew to meet increased demand from Venezuela and other Caribbean islands. Second-quarter import growth of 9.6% was owing largely to higher average oil prices, as well as stronger demand for goods driven by the growth in tourism and increased domestic spending. The services surplus strengthened in line with a small rise in foreign-exchange receipts from tourism. The current-account balance deteriorated by Naf152.7m in the second quarter, as the US$110m second-quarter surplus in current transfers turned to a deficit in the second quarter of 2006. This was owing to a large transfer of dividend tax by the Dutch tax service in the second quarter of 2005, which did not occur in the second quarter of 2006. The income balance also turned negative owing to

Country Report March 2005

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dividends paid by domestic companies to their parent companies abroad. As a result, over the first half of the year the current-account turned to a deficit of US$109.8m, equivalent to 3.3% of GDP. The current-account deficit was financed largely by net foreign reserves, which fell by Naf53m in the first half of the year. Netherlands Antilles: current-account balance (US$ m unless otherwise indicated)

Merchandise exports Merchandise imports Trade balance Services: credits Services: debits Services balance Net investment income Net current transfers Current-account balance

2005 2 Qtr 206.0 549.2 -343.2 488.5 234.2 254.4 1.3 110.1 22.6

2006 2 Qtr 243.7 602.0 -358.3 494.2 228.7 265.5 -4.7 -10.0 -107.5

% change 18.3 9.6 4.4 1.2 -2.3 4.4 n/a n/a n/a

2005 Jan-Jun 390.5 1,065.8 -675.3 1,019.8 437.0 582.8 3.0 115.0 25.6

2006 Jan-Jun 493.9 1,212.2 -718.3 1,060.9 443.9 617.0 3.1 -11.7 -109.8

% change 26.5 13.7 6.4 4.0 1.6 5.9 1.9 n/a n/a

Source: Bank van de Nederlandse Antillen.

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The region March 2007

Summary Outlook for 2006-07

The political outlook for the region is broadly stable, but there are risks posed in some jurisdictions by weak mandates and difficult policy choices. In Belize the government is attempting to negotiate a complicated debt restructuring. The one-seat majority held by Grenada’s government makes it vulnerable. The Suriname government, led by Ronald Venetiaan, is an unwieldy seven-party alliance. Desi Bouterse, a former military dictator of Suriname, is due to face murder charges, and political stability could be undermined. Elections are due within the forecast period in the Bahamas in 2007 and Barbados in 2008, but neither of these polls poses major risks. In Jamaica and in Trinidad and Tobago elections are due by January 2008. In both countries, early elections are a possibility. In Belize elections due by June 2008 are likely to lead to a change of government. High public debt levels will keep many governments under pressure. The pace of regional growth will slow, mainly reflecting declines in the sugar and banana industries. Prospects for mining and financial services are more positive.

Recent developments

Caricom countries started discussing the formation of a single economy by 2008. But the difficulties in achieving this goal were highlighted by the Central Bank governor of Trinidad and Tobago, Ewart Williams, who noted that there has been no move towards convergence of monetary or fiscal policy. New steps towards combating narcotics traffic have been taken. Suriname, Guyana and Trinidad and Tobago signed in October a treaty with US, UK, France and other countries to create an intelligence-sharing network. There was some success in October and November in intercepting large consigments of cocaine in the Caribbean. Changes were announced in the operation of the EU quota system for bananas in 2007, which will benefit Suriname and Belize. Preparations for the 2007 Cricket World Cup advanced, with stadiums on several islands built with grants or soft loans from India, China and Taiwan. Steps to restructure regional airlines were taken in the past three months, with the formation of a new Caribbean Airlines (CA) and other transactions under way. In most Caribbean destinations, stopover tourist arrivals increased in 2006, benefiting from reasonably strong demand in North America and Europe. In contrast with earlier predictions, the 2006 hurricane season was the quietest since 1997.

Editors: Editorial closing date: All queries: Next report:

Erica Fraga (editor); Fiona Mackie (consulting editor) December 12th 2006 Tel: (44.20) 7576 8000 E-mail: [email protected] Full schedule on www.eiu.com/schedule

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Outlook for 2007-08 Most Caricom countries have elections ahead

Several major Caribbean Community (Caricom) members will hold general elections within the forecast period. In Jamaica, elections are constitutionally due by January 2008. Early elections have been widely expected there, but a corruption scandal may cause the government to put any such plans on hold. Trinidad and Tobago’s elections are also due by January 2008, but are likely to happen sooner. Party politics remains racially polarised, and discontent is fuelled by a rising crime rate and corruption charges against politicians from both main parties; however, the government will benefit from a booming economy. An election in the Bahamas is due by August 2007 and the government remains the favourite to win, while in the event of an opposition victory, broad policy continuity could be expected. Similar considerations apply to a Barbados election, due by September 2008, but also likely to be brought forward. However, a Belize election due by June 2008 is likely to lead to a change of government, as the People’s United Party (PUP) government of the prime minister, Said Musa, has been forced into an unpopular austerity programme, after a series of damaging financial scandals, and suffered a landslide defeat in March 2006 local elections. Other Caricom members have much of their parliamentary terms still to run, although some also face a difficult political environment. In Guyana the newly re-elected government faces deep concerns over crime and political violence, as well as a frequently uncooperative opposition. In Grenada the government has a single-seat majority, but has contained the pressure from damaging corruption allegations. With half of the parliamentary term still to run, the government will resist pressure for early elections. In Suriname the coalition government led by Ronald Venetiaan heads an unwieldy seven-party alliance. With the main opposition leader, a former military dictator, Desi Bouterse, due to face murder charges in the coming months, political stability could be undermined. Under a schedule to be finalised in February, the federation of the Netherlands Antilles is expected to dissolve in July 2007. Curaçao and St Maarten will become separate members of the Kingdom of the Netherlands, along with the Netherlands itself and Aruba. Saba, St Eustatius and Bonaire will become autonomous municipalities within the Netherlands and within the EU. The Netherlands will take on responsibility for the federation’s US$2bn public debt. St Maarten and Curaçao will share a judicial system, but will have separate police forces.

The drug trade is a regionwide security threat

Country Report March 2007

The major security challenge throughout the region will remain the drug trade and organised crime, dominated by large, internationally linked criminal organisations. Lower-level gangs are also involved in small-scale drugtrafficking, extortion and violent crime. At both levels, corruption of public officials and the undermining of laws and institutions is a persistent problem. Drug seizures and arrests in Jamaica since the October 2004 launch of Operation Kingfish, an anti-crime initiative with international support, have led to some displacement of trafficking to the eastern Caribbean, Central America and Mexico, as drug shipments are re-routed.

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All Caricom member states, with the exceptions of the Bahamas and Haiti, have now joined the subregion’s Single Market. Although in practice the launch of the single market will have only a modest impact on the trade of goods, it is expected to have a more significant effect in other areas, such as the movement of labour. Most traded goods are already covered by Caricom’s existing freetrade agreements (FTAs), whereas intra-Caricom trade accounts for only a small proportion of exports, and there is limited potential for further expansion. The members of the Organisation of Eastern Caribbean States (OECS) have secured a number of exceptions, allowing them to maintain protection in selected areas. They will also be the main beneficiaries of a proposed regional development fund. Progress towards creating a Caricom Commission with powers to implement community decisions will be slow. Headway on the implementation of a single economy, scheduled for 2008, will be even more difficult, as governments are unlikely to concede control over monetary and exchange rate policy, and voters in countries with relatively strong currencies would react strongly against any proposals for a common currency unit. Plans to increase trade flows face slow progress

Initiatives aimed at increasing trade flows outside the region have little impetus, and advances will be slow. These include negotiations on an economic partnership agreement with the EU, talks within the World Trade Organisation (WTO) and proposals for a trade agreement with the US. Regional governments and much of the private sector continue to see liberalisation as a threat to highcost protected industries. Most Caricom businesses have not benefited from existing bilateral trade pacts in force over the last 20 years, such as the Lomé and Cotonou conventions (with the EU), and the Caribbean Trade Partnership (with the US), formerly the Caribbean Basin Initiative (CBI). A lack of economies of scale and structural reforms will continue to undermine the potential advantages available from these accords.

Public finances will remain under strong pressure

In most of the region, the public finances will remain under pressure. Public debt as a percentage of GDP remains extremely high and will pose an increasing risk in an international environment of tighter liquidity, which is expected to reduce investor appetite for emerging-market debt. Current spending commitments remain high. The fact that taxes on trade will continue to trend downward, in line with international commitments, further complicates the fiscal situation. In this adverse scenario, governments will have to run bigger primary surpluses to maintain debt ratios at their current levels. Countries that have not already done so will seek to introduce a value-added tax (VAT) to help offset the downward trend in trade taxes. In many countries in the region, however, resistance to expenditure cuts or tax increases will make fiscal improvements hard to achieve. With the outlook for international oil prices firm, especially in the first half of the outlook period, the cost of subsidising fuel imports in some countries will remain high, and will represent another source of pressure on fiscal accounts. Further adverse fiscal effects will result from the reduction in EU price support for sugar, starting from 2006.

US downturn will hit tourism

The outlook for tourism across the region is mixed. As the US economy slows significantly in 2007 before staging a modest recovery in 2008, the Economist Intelligence Unit expects tourism demand growth to slow. This will be offset in

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part by a forecast weakening of the US dollar against the euro and sterling in 2007-08, which will make Caribbean tourism more affordable to European residents. The Cricket World Cup, which will happen in March-April 2007, is expected to benefit the tourism sector. From January 2007 US nationals returning from the Caribbean by air will have to carry passports. This may have a serious effect on the Caribbean, particularly on destinations such as Jamaica and the Bahamas, where 70% or more of stopover arrivals originate in the US. High oil prices in the first half of the outlook period will also weigh on tourism, pushing up air fares. In 2008, as oil prices start to recede, this negative effect will be reduced. Large tourism-related investment projects are in progress in several countries. This will boost the construction sector and support growth in some specific destinations. Risks to the outlook for tourism include a steeper than anticipated downturn in consumer demand in the US. There is also some risk of a resurgence of concern over terrorism or an increased level of alarm concerning avian flu. In the longer term, stopover tourism in the Englishspeaking Caribbean will continue to face strong competition from cruise ships and lower-cost destinations in the Hispanic Caribbean; adding to the existing advantages enjoyed by cruise lines, they will be exempt from the US passport requirement until June 2009. Cuts in sugar prices paid by the EU pose challenges

EU sugar prices, fixed until 2006 at €523.70 (around US$670) per tonne, will be cut by 36% by 2010, to reach €335. Under proposals made in May, EU assistance for adjustment by the 18 African Caribbean and Pacific (ACP) sugar producers would be €40m this year, rising to €165m in 2007 and an annual average of €184m for the period to 2013. Guyana, Belize, Barbados and Jamaica are expected to push for ambitious investment programmes, in most cases incorporating ethanol production, whereas the Trinidad and Tobago sugar industry is more likely to wind down gradually. Caribbean governments are lobbying for unused EU and US quotas from suppliers with falling production volumes, such as Barbados and Trinidad, to be passed to Caricom producers with spare capacity, mainly Guyana. The future of the EU banana import regime remains uncertain. From the start of 2006 lower tariffs for Latin American bananas came into effect, and although preferential quotas for Caribbean producers remain in place, these may be subject to further challenge through the WTO. A decline in output is expected, especially in the second half of the forecast period. Suriname and Belize will be partly compensated for this in 2006 by the fact that the proportion of ACP banana exports allocated on a first come, first served system will be increased.

High prices support mining investments

Country Report March 2007

High prices are supporting investment in increasing mining production in the region, which will help offset a projected fall in prices later in the forecast period. Suriname will benefit from a high level of gold production during a period of relatively strong prices for gold, as well as from the prospect of further large-scale investment in bauxite, and onshore and offshore exploration for oil and gas. Large-scale investment in aluminium in Jamaica will be of significant benefit. Trinidad and Tobago will continue with efforts to become a centre for higher value-added metals processing, owing to its greater capacity for generating electricity.

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Financial sector’s performance will vary across the region

The outlook for financial services is mixed. The domestic and regional sectors are performing strongly in Trinidad and Tobago, Barbados and the Bahamas. Some financial institutions in other economies continue to suffer from nonperforming loan portfolios and other imbalances. Some Trinidad and Tobago institutions hold significant assets in the most heavily indebted Caribbean economies. The offshore financial sector has fair prospects in the best established and most consistently regulated jurisdictions, but the continuing need for OECD countries to close money-laundering and tax loopholes will place limits on growth prospects for some Caribbean financial centres.

Recent developments Economic integration dominates political agenda

The issues of economic integration and increased international cooperation on the combat of drug trafficking have continued to dominate the regional political agenda. With the completion of the single market in 2006, the Caribbean Community (Caricom) started to discuss the formation of a single economy, which is scheduled to be launched by 2008. Stated aims include a regional strategic sectoral plan, an investment code, harmonised fiscal incentives and the framework for a regional capital market. Monetary union would also require a common currency and a regional central bank. However, there is not consensus among policymakers in the region about the feasibility of moving to a single economy, which shows that increased integration remains a difficult goal. Although the Caricom secretary-general, Edward Greene, said in October that implementation by 2008 was a realistic goal, the Central Bank governor of Trinidad and Tobago, Ewart Williams, noted in a November speech that there is no effective move towards convergence of monetary or macroeconomic policy. Mr Williams highlighted that Trinidad and Tobago’s energy-based economy would in many situations require restrictive monetary policies at times when tourism-based island economies need an accommodative stance. He also noted that in spite of regional integration of the banking system, lending rates remain high, with spreads ranging from 7% in Trinidad and Tobago to 12% in Jamaica. Indicating intentions for closer integration, 12 South American countries, including Guyana and Suriname, agreed in November to abolish visa requirements from February. However, citizens of Suriname, Dominica, Guyana and Jamaica will need visas to visit either the Dutch or French half of St Maarten. There are also concerns that a large number of Jamaicans will be required to leave the Cayman Islands under new work-permit and residentstatus regulations.

Efforts to combat narcotics traffic are stepped up

Country Report March 2005

In a further attempt to improve international coordination of counter-narcotics efforts, Suriname, Guyana and Trinidad in October signed the Paramaribo declaration with the US, UK, France, Netherlands, Colombia, Brazil and Venezuela, providing for an intelligence-sharing network; coordinated sting operations and other actions; and tighter controls on money-laundering. Suriname was given the lead to set up a secretariat to monitor and oversee implementation of the agreement. The ten largest drug-trafficking organisations in the region will be identified and targeted.

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There have been some successes in recent months in intercepting large consignments of cocaine in the Caribbean and nearby Atlantic waters. These were passing through the region, with no evidence for an island landfall. A French naval vessel seized four tonnes of cocaine from a Panamanian ship en route to Spain. An operation by UK, US, the Netherlands and Belgium seized 3.5 tonnes of cocaine. The British navy in November seized 2.9 tonnes of cocaine from a Venezuelan fishing boat. The Caribbean Court of Justice (CCJ) on November 7th ruled that the Barbados appeal court had been right to commute the death sentences of two convicted murderers whose appeal to the Inter-American Court of Human Rights had not yet been heard. The Barbados government has been attempting for some years to reintroduce hangings, and had hoped that the CCJ would pay less attention to human rights safeguards than the Privy Council in London, which is still the highest court of appeal for most Caricom member states. The CCJ holds this function for Barbados and Guyana, and has heard a total of four appeals since it was established with support from a US$100m trust fund in April 2005. Transparency International’s corruption perceptions index for 2006 showed Barbados scoring much better than the rest of the region, with a ranking of 24, just below that of Spain. Haiti had the lowest score worldwide, while Guyana ranked with Russia at 121 out of 163 countries. There was a decline in Trinidad and Tobago’s ranking, to 79, and an improvement in Jamaica’s, to 61. Moves towards trade agreements remain slow

The director-general of the Regional Trade Negotiating Machinery, Richard Bernal, said in November that Caricom is considering an approach to the US with a request for a bilateral trade agreement. But concerns in the US regarding the impact of tariff reductions and the fact that a WTO waiver is required for existing US trade concessions under the Caribbean Trade Partnership remain barriers to progress in this area. Talks are due to re-start on a new free-trade agreement (FTA) with Canada. Negotiations were initiated in 2001, but have made little progress in four meetings since that date, the most recent in March 2005. Caricom has lobbied for restoration of preferential treatment in Canada for Caribbean rum. Canada has meanwhile applied for a WTO waiver for the existing Caribcan trade agreement to run from December 2006. In November Ecuador and Colombia launched a new WTO challenge to the EU banana import regime. Under the EU’s current arrangements, which took effect at the start of 2006, Latin American bananas pay a duty of €176 per tonne, with a duty-free quota of 775,000 tonnes for traditional Caribbean and African suppliers. Further changes are under consideration, including a possible transition to a tariff-only preference system from 2008, a date which would be two years later than originally envisaged. Under the existing system, there was an 8.2% year-on-year increase in Latin American banana sales to the EU during the first eight months of 2006. They made up 79.5% of EU banana imports, slightly down from 80.9% in the year-earlier period. Ecuador’s market share fell to 27.5% from 29.9%, while that of African, Caribbean and Pacific (ACP) bananas increased to 20.5% from 19.1%. Over the longer term, Caribbean bananas have dramatically lost market share as a result of a reduction in trade preferences.

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Banana exports to the EU from Jamaica were reduced by 73% in 2001-05, while exports from the Windward Islands are down by 72% since 1995. Changes have also been announced in the operation of the quota system. For 2007 the proportion of ACP banana exports allocated on a first come, first served system will be increased to 81%, with licences based on historic exports required for the remaining 19%. This will benefit Suriname and Belize, which have comparatively low costs and do not have historic quotas, while damaging the interests of Jamaica and the Windward Islands. Preparations for the 2007 Cricket World Cup progress

Preparations for the 2007 Cricket World Cup in March-April 2007 continued. Grounds are expected to be ready on time, with new stadiums on several islands built with grants or soft loans from India, China and Taiwan. The overall cost to regional governments of preparations for the event is estimated at US$250m. Under a Memorandum of Intent (MoI) signed on October 26th, Caricom will implement an Advanced Passenger Information System during the World Cup, under which airlines will supply information on inbound passengers for screening within the Caribbean and by the US through a Joint Regional Communications Centre, to be compared with a watch list. Under the US Intelligence Reform and Terrorism Prevention Act, also known as the Western Hemisphere Travel Initiative, the US will from January 23rd require citizens returning by air from the Caribbean to hold passports. Estimates of the proportion of US citizens currently holding passports vary significantly depending on the source. A report from the World Travel and Tourism Council estimates that 188,300 jobs will be lost as a result of the measure, along with US$2.6bn in foreign exchange earnings. The study estimates that 80% of US visitors to Jamaica, 30% of those travelling to the Bahamas, and 25% of US arrivals in Antigua do not hold passports. However, the US Department of Homeland Security estimates that 75% of US travellers to the Caribbean already have passports. The Jamaican tourism minister, Aloun Ndombet Assamba, also reported in November that 95% of visitors from the US arriving in August 2006 held passports, up from 82% a year earlier.

Regional airlines restructure

Restructuring of regional airlines continues. A new company, Caribbean Airlines will from January replace BWIA as the Trinidad and Tobago national airline, with restructuring costs of US$360m. Caribbean Airlines will not fly the London route, which will be handled by British Airways under a code-sharing arrangement. Two loss-making short-haul airlines, LIAT and Caribbean Star, are expected to finalise plans for a merger in early 2007; the new operation would have a dominant market position for traffic within the eastern Caribbean. Air Jamaica in October failed to gain cabinet approval for a business plan; no further details were released. The airline lost US$136m in 2005. In the expectation of higher traffic, Virgin Atlantic will increase its Caribbean capacity by 20% for the 2006/07 winter season.

Tourism activity has increased

In most Caribbean destinations, stopover tourist arrivals have increased in 2006. Overall, the region has benefited from reasonably strong demand in North America and Europe, and from hurricane damage in 2005 to competing destinations in Mexico. The Cayman Islands and Grenada, where arrivals were

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depressed last year because of damage to hotels from Hurricane Ivan in 2004, have shown a strong recovery, as has Jamaica. Aruba has suffered from a US boycott, organised in protest against a perceived lack of response to the murder of a US tourist in 2005, while arrivals are also down in St Lucia, and in a number of minor destinations. Cruise passenger arrivals have again been volatile, with large year-on-year changes. There is a continuing shift to destinations that are relatively close to the US mainland. Cruise lines launched seven new ships in 2006, and are concerned that passenger numbers have been below expectations, with high fuel costs, market softness in North America and increased perceptions of hurricane risk. In contrast with earlier predictions, the 2006 hurricane season was the quietest since 1997, with no Category 4 or 5 storms. There were 28 named storms in 2005. Initial predictions were for 17 in 2006. In the event, there were only nine. The region: tourist arrivals, 2006 Destination Anguilla Antigua-Barbuda Aruba Bahamas Barbados Belize Bermuda Bonaire British Virgin Island Cayman Islands Curaçao Grenada Guyana Jamaica Montserrat St Lucia St Marteen St Vincent and the Grenadines Suriname Trinidad and Tobago

Period Jan-Sep Jan-Sep Jan-Jul Jan-Aug Jan-Sep Jan-Aug Jan-Oct Jan-Jun Jan-Aug Jan-Sep Jan-Sep Jan-Aug Jan-Sep Jan-Oct Jan-Oct Jan-Oct Jan-Jul Jan-Jul Jan-Mar Jan-Jun

Arrivals 56,014 193,571 407,786 1,124,631 420,962 181,717 262,371 32,266 268,437 202,961 172,479 84,938 81,295 1,388,555 5,694 254,296 299,010 61,475 34,887 232,743

% change, year on year 18.7 4.0 -10.2 1.1 4.1 4.7 9.9 -5.9 3.1 69.0 5.0 24.3 -6.2 16.5 -18.6 -4.6 0.3 5.8 -6.3 -1.0

Arrivals 278,691 362,554 2,108,791 351,574 440,384 326,267 304,394 1,430,762

% change, year on year -3.4 5.5 -4.8 -11.5 -23.1 41.8 5.1 5.5

Source: Caribbean Tourism Organization.

The region: cruise passenger arrivals, 2006 Destination Antigua-Barbuda Aruba Bahamas Barbados Belize Bermuda British Virgin Islands Cayman Islands

Country Report March 2007

Period Jan-Jun Jan-Aug Jan-Aug Jan-Sep Jan-Aug Jan-Oct Jan-Aug Jan-Sep

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Curaçao Grenada Jamaica St Lucia St Maarten St Vincent and the Grenadines Trinidad and Tobago

Jan-Sep Jan-Aug Jan-Oct Jan-Oct Jan-Jul Jan-Jul Jan-Apr

201,606 140,287 1,049,432 260,475 868,866 63,572 62,897

13.6 -24.4 17.3 -7.8 -4.0 85.8 63.9

Source: Caribbean Tourism Organization.

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