Annual Report 2015

Presentation by the President of the Central Bank

Centrale Bank van Curaçao en Sint Maarten

August 15, 2016

Dr. E.D. Tromp

Contents: I. Economic Developments

II. Monetary Developments

III. Macro-prudential

Developments

IV. Financial Sector Assessment

V. Domestic Financial Market

Developments

VI. Economic Outlook

2015 Annual Report Theme:

Historical banknotes issued by the Bank (1828 – present)

Economic Developments Real Sector

Part I

3

2013 2014 2015

Current account balance (in mln NAf.) -1,149.9 -858.0 -801.0

Change in gross foreign reserves of the

central bank (in mln NAf.)* 47.9 -459.9 -27.8

Change private loans (%) -1.0 -2.3 -0.5

Curaçao -0.6 -2.7 -1.3

Sint Maarten -1.9 -1.5 1.7

Real GDP growth (%)

Curaçao -0.8 -1.1 0.3

Sint Maarten 0.9 1.7 0.4

Inflation (%)

Curaçao 1.3 1.5 -0.5

Sint Maarten 2.5 1.9 0.3

*- sign means an increase

Developments in the monetary union

4

2.4%

0.1% 0.4% 0.9%

1.0%

121.7%

1.6%

-5.7 to -

7.5% 62.2%

1.0% 2.0% 1.0% 0.6% 6.9% 7.4%

7.5%

6.2%

7.0 to

7.2%

6.8 to

7.4%

5.3%

n.a.

-3.9%

2.4%

0.8% Aruba

United

States

Venezuela

Netherlands

Real GDP Consumer prices Unemployment rate

2014 2015 2014 2015 2014 2015

Macro-economic key figures: a comparison

5

Economic

development

Curaçao I. Real GDP in Curaçao

expanded by 0.3% in

2015.

II. Inflation rate turned

negative to -0.5%

mainly because of lower

international oil prices.

6

-1.1%

0.3%

1.5%

-0.5%

-2%

-1%

0%

1%

2%

3%

4%

2011 2012 2013 2014 2015

Real GDP Inflation Trend (Real GDP)

Development

in core inflation I. Core inflation is the

long-run trend in

inflation.

II. By measuring core

inflation as inflation

excluding electricity and

fuel prices, it seems that

the deflation of -0.5%

in 2015 turns to an

inflation of 1.6%.

7

-0.5

0.7

0.2

1.6

-1.0

0.0

1.0

2.0

3.0

4.0

2011 2012 2013 2014 2015

Inflation

Core inflation excluding electricity prices

Core inflation excluding fuel prices

Core inflation excluding electricity and fuel prices

2014 2015

Domestic expenditure, of which: -2.5 0.5

Private sector -3.2 0.2

- Investment -1.7 0.5

- Consumption -1.5 -0.3

Public sector 0.7 0.3

- Investment -0.1 0.6

- Consumption 0.8 -0.3

Foreign net expenditure, of which: 1.5 -0.3

- Export of goods and services 1.2 -0.7

- Import of goods and services -0.3 -0.4

Real GDP by expenditure -1.1 0.3

Source: CBCS estimates; real percentage changes.

GDP by

expenditure

of Curaçao

8

Sectoral performance in Curaçao in 2015

I. Growth in financial intermediation sector:

• Increase in domestic financial services.

• Decline in international financial

services.

II. Slower growth in restaurants & hotels sector:

• Growth in stay-over tourism.

• Decline in cruise tourism.

IV. Growth in construction sector:

• Increase in private and public investments.

III. Growth in transport, storage &

communication sector:

• Increase in air and sea transport.

9

Sectoral performance in Curaçao in 2015 (cont.)

IV. Decline in manufacturing sector:

• Decline in refining activities by

the Isla refinery.

• Increase in ship repair activities.

V. Decline in wholesale & retail trade

sector:

• Decline in consumer spending

and free-zone activities.

VI. Decline in utilities sector:

• Decline in water and electricity

production.

10

Output Gap Curaçao

3.4

3.6

3.8

4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bil

lio

ns

Real GDP

11

Output Gap Curaçao (Cont.)

3.4

3.6

3.8

4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bil

lio

ns

Real

GDP

Potential

GDP

12

Output Gap Curaçao (Cont.)

Output gap = (GDPactual – GDPpotential)/(GDPpotential)

-5.0%

-2.5%

0.0%

2.5%

5.0%

3.4

3.6

3.8

4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Bil

lio

ns

Output

Gap

Model

(r.h.s.)

Real

GDP

Potential

GDP

Negative Output

Gap

(2000 - 2006)

Positive Output

Gap

(2007 - 2012)

Negative Output

Gap (2013 - 2015)

13

I. Real GDP grew by

0.4% in 2015.

II. Consumer price

inflation fell to 0.3% in

2015 due to effects of

lower international fuel

prices.

Economic development Sint Maarten

14

1.7%

0.4%

1.9%

0.3%

0%

1%

2%

3%

4%

5%

2011 2012 2013 2014 2015

Real GDP Inflation Trend (Real GDP)

GDP by

expenditure

of Sint

Maarten

2014 2015

Domestic expenditure, of which: 3.6 -1.3

Private sector 1.2 -0.1

- Investment 0.5 0.6

- Consumption 0.7 -0.7

Public sector 2.4 -1.2

- Investment 3.6 -0.8

- Consumption -1.1 -0.4

Foreign net expenditure, of which: -2.3 1.7

- Export of goods and services 1.7 0.4

- Import of goods and services 4.1 -1.3

Real GDP by expenditure 1.7 0.4

Source: CBCS estimates; real percentage changes.

15

Sectoral performance

in Sint Maarten in 2015 I. Slower growth in the restaurants & hotels

sector:

• Slight increase in stay-over tourism.

• Decline in cruise tourism

II. Positive turnaround in the manufacturing

sector:

• Increased yacht repair activities due to

more yachts

III. Positive turnaround in the construction sector:

• Increase in private investments.

• Increase in building material imports

16

Sectoral performance in

Sint Maarten in 2015 (cont.)

IV. Positive turnaround in financial

intermediation sector:

• Increase in net interest income of

domestic commercial banks.

V. Muted growth in transport, storage &

communication sector:

• Decrease in harbor-related activities.

• Slight increase in airport-related activities.

VI. Negative turnaround in wholesale & retail

trade sector:

• Contraction in domestic spending,

mitigated by an increase in tourism

spending.

17

Output Gap Sint Maarten

800

1000

1200

1400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mil

lio

ns

Real GDP SXM

18

Output Gap Sint Maarten (Cont.)

800

1000

1200

1400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mil

lio

ns

Real GDP SXM

Potential Output SXM

19

Output Gap Sint Maarten (Cont.)

Output gap = (GDPactual – GDPpotential)/(GDPpotential)

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

800

1000

1200

1400

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Mil

lio

ns

Output Gap (r.h.s)

Real GDP SXM

Potential Output SXM

Negative Output Gap

(2000 - 2004)

Negative Output Gap

(2011 - 2015)

Positive Output Gap

(2005 - 2010)

20

Economic Developments Public Sector

21

Main developments Curaçao I. During 2015, the fiscal situation of Curaçao

improved compared to 2014 as reflected by a

narrowing of the deficit on the government’s

current budget.

II. The cost reducing measures implemented

during 2015 seem to have paid off.

III. In January 2015, the government issued a

NAf.245.4 million bond to finance the

construction of the new hospital. An additional

bond of NAf.33.3 million was issued in

December 2015.

IV. However, the rapidly increasing debt-to-GDP

ratio continues to be a threat to fiscal

sustainability that needs to be addressed.

22

Budget development Curaçao

23

-11.4 -1.6

1,602

1,661

1,590

1,659

-60

-40

-20

0

20

40

60

80

100

1,000

1,250

1,500

1,750

2,000

2012 2013 2014 2015

NA

f. m

ln

Budget balance (r.h.s.) Total expenditures Total revenues

Public debt and GDP: Curaçao

24

2,177

2,496

5,655 5,633

39%

44%

40%

20%

25%

30%

35%

40%

45%

50%

0

1,000

2,000

3,000

4,000

5,000

6,000

2012 2013 2014 2015

NA

f m

ln

Total public debt GDP Debt-to-GDP ratio (r.h.s.)

Main developments

Sint Maarten I. Balancing the budget, financial management,

and compensating the deficits incurred in

previous years are key challenges faced by

the Sint Maarten government:

i. The 2015 budget was only provisionally

approved by the CFT in March 2015;

ii. Instruction from the Kingdom Council

of Ministers on September 4th, 2015.

II. A surplus was recorded on the current

budget during 2015 due to an increase in

government revenues, combined with a

decrease in expenditures.

25

Budget development Sint Maarten

26

-8.2 1.5

438

437 430

439

-10

-5

0

5

10

15

20

200

300

400

500

600

2012 2013 2014 2015

NA

f. m

ln

Budget balance (r.h.s.) Total expenditures Total revenues

Public debt and GDP: Sint Maarten

698 693

1,887 1,903

37% 36%

40%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

250

500

750

1,000

1,250

1,500

1,750

2,000

2012 2013 2014 2015

NA

f m

ln

Total public debt GDP Debt-to-GDP ratio (r.h.s.)

27

Economic Developments External Sector

28

Main developments 2015 I. Lower current account deficit.

II. Decline net capital transfers from

abroad.

III. Increase in external financing, albeit at

a slower pace compared to 2014.

IV. As foreign financing was more than

sufficient to cover current account

deficit, gross official reserves increased.

29

-27.8 -459.9 47.9 277.5 Change in reserves

739.6 1,181.0 966.1 942.8 External financing

-7.0 23.1 62.2 69.7 Capital account

- 801.0 - 858.0 - 1,149.9 - 1,378.7 Current account

2015 2014 2013 2012

Balance of payments (transaction basis, NAf. mln)

30

Balance of payments developments (in % of GDP)

-11.4%

-10.6%

15.8%

9.8%

-30%

-20%

-10%

0%

10%

20%

30%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Current account balance External financing of the private sector

31

Contribution to foreign exchange income* in 2000 and 2015

(Curaçao)

*Income from the export of goods and services.

32

Freezone 7%

Bunkering 11%

Merchandise excl. freezone

6%

Transportation 8%

Refining 16%

Tourism 31%

International financial services

6%

Other services 15%

2015

Freezone 17%

Bunkering 6%

Merchandise excl. freezone

11% Transportation 7%

Refining 16%

Tourism 14%

International financial services

18% Other services

11%

2000

Contribution to foreign exchange income* in 2000 and 2015

(Sint Maarten)

*Income from the export of goods and services.

Bunkering 1%

Merchandise 9%

Transportation 2%

Tourism 74%

International financial services

2%

Other services 11%

2015

Merchandise 10% Transportation

2%

Tourism 79%

International financial services

2%

Other services 7%

2000

33

Tourism sector

34

1,136 1,090

1,622 1,675

0

400

800

1,200

1,600

2,000

2011 2012 2013 2014 2015

NA

f. m

illio

n

Curacao Sint Maarten

International financial sector

227.5 222.8

51.9

31.9

1.4 0

50

100

150

200

250

2011 2012 2013 2014 2015

NA

f. m

illio

n

Net operational income Profit tax BRK windfall

35

Refining fee (Curaçao)

36

737.5

572.8

0

100

200

300

400

500

600

700

800

2011 2012 2013 2014 2015

NA

f. m

illio

n

Monthly import coverage

0

1

2

3

4

5

6M

on

ths

Import coverage norm Import coverage corrected for standing subscriptionImport coverage estimate Import coverage

37

Monetary Developments

38

Part II

Main monetary developments I. Decelerated growth in money

supply.

II. Increase in both net domestic

assets and net foreign assets.

III. Decline in loans extended to

the private sector.

39

Money supply

40

3,744 3,787 4,042 4,186

0

1,000

2,000

3,000

4,000

5,000

2011 2012 2013 2014 2015

NA

f. m

illio

n

Net domestic assets Net foreign assets

Net domestic credit (change)

-80

-160 -159

-3

62

206

-400

-100

200

500

800

2011 2012 2013 2014 2015

NA

f. m

illi

on

Government Private sector Other

41

Private credit extension (annual growth)

42

-8%

-4%

0%

4%

8%

12%

16%

Loans to the private sector Monetary Union Loans to the private sector CuraçaoLoans to the private sector Sint Maarten

Credit-to-GDP Gap

43

-7.5%

-2.5%

2.5%

7.5%

12.5%

17.5%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Credit growth

Real GDP growth

Credit-to-GDP Gap (cont.)

44

35%

45%

55%

65%

75%

85%

-7.5%

-2.5%

2.5%

7.5%

12.5%

17.5%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Credit growth

Real GDP growth

Credit-to-GDP (r.h.s)

Credit-to-GDP Gap (cont.)

45

35%

45%

55%

65%

75%

85%

-7.5%

-2.5%

2.5%

7.5%

12.5%

17.5%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Credit growth

Real GDP growth

Credit-to-GDP (r.h.s)

Long-term trend: using Hodrick-Prescott filter (r.h.s)

Credit-to-GDP Gap (cont.)

46

35%

45%

55%

65%

75%

85%

-7.5%

-2.5%

2.5%

7.5%

12.5%

17.5%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Credit-to-GDP gap

Credit growth

Real GDP growth

Credit-to-GDP (r.h.s)

Long-term trend: using Hodrick-Prescott filter (r.h.s)

Monetary policy stance in 2015 Monetary tightening throughout 2015:

I. Reserve requirement was kept at

18.00% (since June 2014)

II. At the bi-weekly auctions, higher

amounts of certificates of deposit

were auctioned against various

maturities combined with higher

interest rates.

47

Macro- prudential Developments

48

Part III

Financial Stability Map The macroeconomic

environment shows the

biggest risk, followed by the

sovereign soundness of the

countries of Curaçao and

Sint Maarten.

Domestic

banking sector soundness

Domestic

insurance sector soundness

Domestic

pension sector soundness

Global financial

stability risk

Macroeconomic

environment

Sovereign

soundness

2014 2015

49

Financial Sector Assessment

50

Part IV

Commercial banking sector

51

I. The financial stability score

remained stable throughout the

years, but has seen a slight

deterioration in 2015.

II. The capital adequacy ratio

reached 13.9% at the end of

2015, well above the Basel 8%.

III. The banking sector’s efficiency

in using its assets reached 1.0%

at the end of 2015.

IV. Appropriate macroeconomic

policy efforts are needed to

improve the demand side of

credit extension.

221

247

193 183

1

1.5

2

2.5

3

3.5

4

4.5

5

0

50

100

150

200

250

300

2012 2013 2014 2015

NA

f. m

illi

on

Net income after tax Financial stability score (r.h.s)

Local non-life insurance sector

52

I. The overall stability score of

the sector remained stable over

the last four years.

II. Net profit doubled in 2014

compared to 2013, but was

achieved with investment

income rather than premiums

earned.

III. Underwriting result affected by:

policy premiums that do

not reflect the current

market risk, and

high underwriting

expenses.

35.2

28.9

14.5

29.8

1

1.5

2

2.5

3

3.5

4

4.5

5

0

5

10

15

20

25

30

35

40

2011 2012 2013 2014

NA

f. m

illi

on

Net profit after tax Financial stability score (r.h.s)

Local life insurance sector I. The overall stability score of

the sector remained stable over

the last four years.

II. Net profit increased by 36% in

2014 compared to 2013.

III. Challenges facing the sector:

High operating expenses;

High changes in

reserving; and

maintaining an adequate

investment yield ratio

given the global financial

stability risks.

53

36.9

65.5

39.2

53.2

1

1.5

2

2.5

3

3.5

4

4.5

5

0

10

20

30

40

50

60

70

2011 2012 2013 2014

NA

f. m

illi

on

Net profit after tax Financial stability score (r.h.s)

Pension sector I. The overall stability score has

deteriorated slightly in 2014

compared to 2013, but remained

below the level of 2011.

II. The coverage ratio reached

105.5% at the end of 2014,

above the required minimum.

III. The sector recorded a net loss

due to an increase in technical

provisions, whilst investment

income increased.

IV. Local investment opportunities

and policy efforts are vital to

maintain an adequate coverage

ratio.

54

104.9%

105.8%

107.2%

105.5%

1

1.5

2

2.5

3

3.5

4

4.5

5

104%

104%

105%

105%

106%

106%

107%

107%

108%

2011 2012 2013 2014

Coverage ratio Financial stability score (r.h.s)

Domestic Financial Market Developments

55

Part V

Local holders, 0.67%

DSTA holdings, 99.33%

Standing subscription I. Market for local government

bonds dried up.

II. The Bank lost an important

policy instrument, namely, the

ability to conduct open market

operations.

III. Local investors lost an

attractively yielding low-risk

investment instrument.

56

1m 3m 6m 1yr 2yr 3yr 4yr 5yr 7yr 8yr 9yr 10yr 15yr 20yr 25yr 30yr

-1%

1%

3%

5%

7%

Local yield US Treasury yield US Agencies yield Dutch Treasury yield

Domestic yield curve

Simulation of the local yield

in a scenario with no debt

relief or standing

subscription.

57

3m 6m 9m 1yr 2yr 3yr 4yr 5yr 6yr 7yr 8yr 9yr 10yr 11yr 12yr 13yr 14yr 15yr 20yr 25yr 30yr

-1%

0%

1%

2%

3%

4%

5%

9-Oct-10

31-Dec-10

31-Dec-11

31-Dec-12

31-Dec-13

31-Dec-14

31-Dec-15

Domestic yield curve (cont.)

The standing subscription

that allows the

governments of Curaçao

and Sint Maarten to

borrow at the very low

interest rates prevailing in

the Dutch capital market

provides perverse

incentives.

58

Economic Outlook

59

Part VI

Expected developments in the monetary union in 2016 and 2017

2014 2015 2016** 2017**

Current account balance (in mln

NAf.) -858.0 -801.0 -775.9 -822.9

Change in gross foreign reserves

of the central bank (in mln

NAf.)*

-459.9 -27.8 -174.7 -86.0

Real GDP growth (%)

Curaçao -1.1 0.3 0.2 0.6

Sint Maarten 1.7 0.4 0.8 1.0

Inflation (%)

Curaçao 1.5 -0.5 -0.4 0.2

Sint Maarten 1.9 0.3 1.0 1.7

*- sign means an increase

** projection CBCS.

60

Expected developments in Curaçao in 2016 I. The Curaçao economy is

projected to grow by 0.2% in

2016, attributable to an increase

in domestic demand mitigated by

a decline in net foreign demand.

II. Inflation will remain negative at

0.4% due to a projected decline in

international oil prices.

61

Expected developments in Sint Maarten in 2016 I. Sint Maarten’s real GDP is

estimated to grow by 0.8% in 2016,

benefitting from the projected

higher economic growth in the

United States.

II. Inflation will rise to 1.0% in line

with the projected increase in

inflationary pressures in the U.S.

62

Expected developments in Curaçao in 2017 I. Curaçao’s economy is projected

to expand by 0.6% in 2017 due

to increases in both domestic

and net foreign demand.

II. Consumer price inflation is

expected to turn positive to

0.1% because of a projected

increase in international oil

prices.

63

Expected developments in Sint Maarten in 2017 I. Sint Maarten’s real GDP is

estimated to grow by 1.0% in 2017,

driven by an increase in domestic

demand.

II. Inflationary pressures are expected

to rise to 1.7% due to an increase

in international oil prices.

64

Projection balance of payments 2016 - 2017 (transaction basis, NAf. mln)

-86.0 -174.7 -27.8 -459.9 Change in reserves

777.3 837.7 739.6 1,181.1 External financing

1.6 1.2 -7.0 23.1 Capital account

-822.9 -775.9 - 801.0 - 858.0 Current account

2017** 2016** 2015 2014

65

THEEND