KPMGs Seminar Foundation for the Future Impact of global financial - - PowerPoint PPT Presentation

Ference Lamp 22 June 2012

KPMG’s Seminar Foundation for the Future

Impact of global financial and economic developments on small economies: Curacao, a case study

• 2 -
• Initial impact of banking crisis on Curacao
• Global economic and financial outlook
• Economic outlook for Curacao
• Directional solutions / suggestions

Agenda

Initial Impact on Curacao

• 4 -
• Economic growth of 3.9% in 2007:

–

Driven by tourism (occupancy, cruise and demand-led construction)

• Reassuring message from IMF in 2008, however, Curacao not immune:

–

Softened economic growth, from ~4% to ~2% in 2008

–

Tourism from the USA impacted negatively

• Local financial institutions not expected to be significantly impacted:

–

Solid liquidity profile supported by sound local deposit base

–

Relatively sound capitalization, albeit below international standards

–

Investors less exposed to international assets driven by 60% / 40% rule

• Debt relief program finally started with first payment in 2008:

–

Level of government debt was unsustainable at levels >80%

–

Borrowing and interest burden to decline, Debt / GDP ratio to decline

Curacao Initially Not Part of the Financial Tsunami in 2008

• 5 -
• World economic growth in negative territory
• Economies of main trading partners, the Americas and Europe,

significantly impacted with the larger markets in recession:

–

USA: ~ -3% (versus ~ +1.5% in 2007)

–

Netherlands: ~ -3.5% (versus ~ +2.0% in 2007)

• Economic environment impacting tourism negatively:

–

UNWTO: “In the face of the economic downturn the tourism industry is expected to continue its decline at least in the short to medium term.”

• Economic outlook lowered gradually post 2008 crisis:

–

IMF projected growth of 2.5% for 2009 in June 2008

–

Central Bank lowered forecast for 2009 to 1.0% in Q1 2009

However, Curacao Wasn’t Going to be Fully Isolated as of 2009

Global Economic Outlook

• 7 -
• United States:

–

Economy has gained some traction in 2011

–

Downside risks partially driven by potential spillovers from Europe

–

Economic growth is projected at 2% in 2012 and 2.5% in 2013

–

Outlook is for only modest increase in employment

• Europe / Euro Area:

–

Growth of 0.25% expected in 2012 markedly weaker than in 2011

–

In the euro area, GDP is projected to contract at an annual rate of 0.5% in the first half of 2012 and to start recovering thereafter

–

The mild recession is expected to be shallow and short-lived in many economies

• Netherlands:

–

CPB: Dutch economy is in recession, 2012 GDP will contract by 0.5%

–

DNB: Economy to contract by 0.6%, slow recovery to +0.6% in 2013

Some Growth but Significant Downside Risks Given Sovereign Debt Crisis 1

• 1. World Economic Outlook, April 2012. “Growth Resuming, Dangers Remain”. International Monetary Fund

• 8 -

European Growth Rates Negatively Impacted by the Euro Challenges

• 9 -

“When people are prepared to pay the German government for the privilege

• f holding its two-year

paper, and are willing to lend America’s government funds for a decade for a nominal yield of less than 1.5%, they either expect years of stagnation and deflation or are terrified of imminent

• disaster. Whichever it is,

something is very wrong with the world economy.” 1

• 1. Economist.

• 10 -

“However, notwithstanding its pivotal role, the idea that Germany has a problem with the EU is increasingly gaining ground. Berlin has been criticized for a lack of solidarity towards countries in difficulty, its reluctance to take incisive action, and its desire to impose on other nations the austerity model that it has implemented with such apparent success.” 1

• 1. Presseurop.

Economic Outlook for Curacao

• 12 -
• 2009: Economic contraction of 0.5%

–

Stay-over tourism declined by ~10.3% (Venezuela)

• 2010: Economic growth of ~0.1%, driven by government spending

–

Private demand shrank driven by lower investments versus 2009

–

Stay-over tourism declined by ~6.8% (Venezuela)

–

Unemployment rate again above 10%

• 2011: Economic contraction of ~0.6%, driven by lower private

spending

–

Stay-over tourism increased by ~14.2% (USA and Venezuela)

Subdued Economic Growth in 2009 – 2011 (1/2)

• 13 -
• Practically zero economic growth realized for several years:

–

Average GDP growth of less than 1% during the past 10 years

–

Unemployment declined from ~20% to ~10%

–

However, youth unemployment “improved” from ~ 35% to only ~25%

• Marginal growth despite:

–

Significant drop of Debt / GDP ratio and sound level versus neighbors

–

Change form period of high public debt burden constraining growth

Subdued Economic Growth in 2009 – 2011 (2/2)

• 14 -
• Economic growth sensitive to developments of U.S. and European

countries which are confronted with major downside challenges:

–

Sovereign debt crisis highly disruptive for advanced economies

–

Euro crisis impacting € / $ exchange rate negatively

• Slower growth for tourism expected:

–

UNWTO: continued growth in 2012 although at a slower rate

–

Curacao: growth of ~11% in 1Q2012 but low hotel occupancy rates

• IMF Outlook: “Available indicators suggest that domestic demand is

decelerating … in 2012 [GDP growth] well below WEO projections for the Caribbean region”

• CBCS outlook:

–

Global slowdown will affect the Curacao economy in 2012

–

GDP is projected to contract by 0.5% in 2012

Downward Pressures due to Sovereign Debt Crisis

• 15 -
• Local financial institutions again expected to be robust:

–

Bank capital and liquidity buffers appear solid

–

But credit quality starting to decline / non performing loans increasing

• However, risks are largely related to the large current account deficit:

–

Debt relief program led to significant liquidity in local markets:

• Less government refinancing
• Redemptions of government bonds

–

CBCS’ 60% / 40% rule steer significant sums to be invested locally

–

Financial crisis exacerbates scarcity of investment opportunities

–

Increased deposits lead to excess reserves and liquidity

–

Credit growth significantly above economic growth

• Curbing current account deficit via 6 months credit freeze:

–

Private investments will suffer

–

Impacts earnings of banks negatively

–

Questions about effectiveness and impact on the economy remain

Downward Pressures due to Specific Domestic Themes

Directional Solutions / Suggestions

• 17 -
• Grimm world economic outlook ...

… with economy of main trading partners struggling

• Local economy gradually impacted …

… with decade characterized by limited to zero growth … … and further contraction expected in the near future … … coupled with high (youth) unemployment

• Despite sound banking system …

… and low Debt / GDP ratio … … with ample liquidity available … … and credit growth outpacing GDP growth

• High current account deficit led to credit freeze …

… with unknown impact on the economy

Brief Recapitalization

• 18 -
• 1. Education / formation:

–

Lack of education keeps people from jobs that would lift them

–

Are we educating new generation that meets today’s demands?

–

Upgrade of educational system is crucial for competitive position

• 2. Labor market:

–

Too many regulations negatively impacts flexibility and economic competitiveness

–

Overhaul of labor regulations will also help reduce the growth of short- term contracts and the grey economy

• 3. Bureaucracy / administrative barriers / red tape:

–

Business sector has been complaining for ages about the government formalities, licensing and permit regimes that frustrate new initiatives

–

Elimination of two layer of government should have helped but is clearly not enough without removal of waste

Six Crucial Areas: (1) Education, (2) Labor and (3) Bureaucracy

• 19 -
• Governance impediments fosters lack of accountability impacting growth

prospects negatively

• IMF: “Relations between the central bank and the Curacao government

have turned acrimonious, and a recent Dutch government investigation raised serious concerns about governance in Curacao.”

• Recent accusations of nepotism and cronyism prevents perception of

meritocracy and therefore negatively impacts branding of Curacao and constraints relationships with trading partners unduly

Six Crucial Areas: (4) Good Governance

• 20 -

Six Crucial Areas: (5) Budget Discipline and (6) Economic Stability

• 5. Budget discipline:

–

Increasing debt service prevented sound investment policy

–

Debt relief program made unsustainable level of debt sustainable

–

However, Curacao surprised with a deficit of Naf 100mn in 2010 and Naf 160mn in 2011 which only appeared recently

–

Recent statements of Cft highlights serious concerns

• 6. Economic stability:

–

A low Debt / GDP ratio is crucial but not enough

–

Account deficit needs to be dealt with in a structural manner

–

Perceived political instability impacts rating and economic stability

–

Promised comprehensive tax reform should be implemented (in full)

–

Recent mud wrestling between the government and CBCS is not supportive for (any) stability

Curacao will fail in the long- term if it does not address the aforementioned six crucial areas and improve its competitive position !!

Masha Danki !