Debt-to-GDP ratio drops due to debt relief program

POSTED: 08/28/11 10:13 PM

St. Maarten – President Dr. Emsley Tromp presented the Central bank’s 2010 annual report yesterday afternoon during a press conference at the bank. This article contains the integral text of the first part of his presentation.
The world economy continued to recover in 2010 from the severe recession caused by the international financial crisis, but the pace of recovery was uneven. While the emerging and developing economies registered robust growth, the pace of expansion in the advanced economies was fairly modest as a result of private balance sheet adjustments and weak labor market developments. The economic recovery in the Netherlands Antilles also was subdued.
After a contraction of 0.5% in 2009, the economy of the Netherlands Antilles expanded by a mere 0.1% in 2010. The economic expansion in 2010 was attributable mainly to increased
government spending. Government consumption rose, owing mostly to increased outlays on goods & services related to the dismantling of the Netherlands Antilles. Meanwhile, government
investments increased, reflecting the implementation of the Social Economic Initiative (SEI) program. In contrast, private demand shrank as a result of lower investments in 2010 than in
2009. This contraction in private demand was mitigated by increased consumer spending. The economic expansion was dampened by a decline in net foreign demand, as imports of goods and services rose while exports dropped. Over the course of 2010, higher international oil and food prices led to increasing inflationary pressures. As a consequence, inflation in the Netherlands Antilles rose from 1.6% in 2009 to 2.8% in 2010.

A review by sector reveals that output dropped in most industries, but the contraction was most pronounced in the manufacturing sector. The contraction in the manufacturing sector was due mainly to a decline in value added by the Isla refinery as a result of the prolonged shutdown of the refinery between March and December 2010. The construction sector also registered negative results. After the completion of several major projects in 2009, including the expansion of the harbor in Sint Maarten, no major investment projects were reported on the islands in 2010.
Output in the wholesale and retail sector dropped, although at a slower pace than in 2009. An analysis by island reveals that Sint Maarten in particular registered a decline in wholesale and retail activities. In addition, activities in the free zone in Curaçao contracted, reflecting a decline in the number of free-zone visits.
Economic growth also was dampened by the transport, storage, and communication sector, owing to, among other things, poor results in the harbors. In 2010, the number of ships and
cargo handled in the harbors declined. In addition, both oil transshipment and oil storage activities contracted. Meanwhile, air transportation activities dropped because domestic airlines
transported fewer passengers. The contraction in the transport, storage, and communication sector was mitigated by increased airport-related activities, attributable to a growth in total
passenger traffic in Sint Maarten and Bonaire. Moreover, output rose in the telecommunication sector.
Activities in the restaurants and hotels sector contracted also. However, the contraction in 2010 was less pronounced than in 2009. The poor results in the restaurants and hotels sector were ascribable to a decline in stay-over tourism in Curaçao. The decline was caused by a drop in the number of stay-over tourists from South America, in particular Venezuela, but the decline was mitigated in part by a growth in the North American and European markets. In Sint Maarten, stay-over tourism expanded, owing to increased visitor numbers from Europe and South America. In contrast, the number of visitors from North America and the Caribbean decreased.
Meanwhile, stay-over tourism in Bonaire performed well as a result of more visitors from Europe and the Caribbean. Cruise tourism in general expanded in 2010 compared to 2009 driven
primarily by an impressive growth in Sint Maarten.
In contrast to most of the other sectors, real value added in the financial services sector rose, as a result of an increase in both domestic and international financial services. Growth in the domestic financial services sector was the result of increased net income of the domestic commercial banks. Meanwhile, the expansion in the international financial services industry reflected higher wages, salaries and other operational expenses.

The constitutional reforms within the Dutch Kingdom dominated the public sector developments throughout 2010. As of October 10, 2010, the Netherlands Antilles ceased to exist, and Curaçao and Sint Maarten became autonomous countries within the Dutch Kingdom. Meanwhile, Bonaire, Saba, and Sint Eustatius became special municipalities of the Netherlands.
As part of the process of dismantling the Netherlands Antilles, the Dutch government financed development projects on the islands under the Social Economic Initiative (SEI) and provided
debt relief to the governments of the Netherlands Antilles. The debt relief program was started in 2009 with the governments of the Netherlands Antilles receiving grants from the Netherlands
for debt servicing and the payment of arrears. Meanwhile, on October 10, 2010, the Dutch state assumed the legal ownership of all outstanding securities of the Netherlands Antilles.
Consequently, the debt-to-GDP ratio of the Netherlands Antilles dropped significantly from 74.0% at the end of 2009 to an estimated 32.3% in October 2010.

The general government recorded a cash surplus of NAf.772.7 million in 2010, a slight improvement compared to 2009. This improvement was the result of increased revenues, mitigated by higher expenditures. Government revenues rose, associated mainly with the transfer of withholding tax grants by the Netherlands related to the BRK agreement combined with the
debt relief grants received in 2010. In contrast, tax revenues dropped because of a decline in tax receipts from goods and services, partly offset by increased revenues from taxes on income and profits. Moreover, nontax revenues contracted owing largely to fewer dividend payouts received by the government of Curacao from public enterprises. The growth in expenditures was driven by increased spending on wages & salaries and goods & services, partially moderated by lower transfers and interest payments. Transfers dropped because of fewer disbursements to the island governments and other government institutions since the dismantling of the central government.
Meanwhile, interest payments shrank as a result of the debt takeover by the Netherlands in October 2010.

Similar to 2009, the balance of payments recorded a surplus in 2010, reflected by a further increase in net international reserves. However, the net international reserves grew at a slower pace than in the previous year. The surplus on the balance of payments was related to strong capital inflows, offsetting the current account deficit. The average import coverage rose to 4.3 months because the growth in official reserves outpaced the increase in merchandise imports.
The deficit on the current account widened significantly in 2010 compared to 2009, due mainly to a decrease in net current transfers received from abroad combined with a decline in net
foreign demand. Net current transfers decreased considerably as the Dutch government transferred fewer funds for the repayment of matured securities that were issued by the governments of Curaçao and the Netherlands Antilles in 2010 compared to 2009. These transfers were part of the implementation of the debt relief program. Meanwhile, net foreign demand contracted as imports of goods and services rose and exports fell. The increase in imports can be ascribed largely to a surge in international fuel prices. Furthermore, increased domestic consumption contributed to higher merchandise imports by the free-zone companies.

Exports dropped, led by a decline in the fee received for refining operations in Curaçao because of the prolonged shutdown of the refinery in 2010. In addition, re-exports by the free-zone companies declined, particularly to Venezuela. The export contraction was mitigated by increased foreign exchange earnings from bunkering activities reflecting higher international oil prices. In addition, foreign exchange receipts from the tourism sector rose. Net income received
from abroad increased as interest and dividend payments to abroad shrank, while income earned on foreign investments rose.
The higher current account deficit was financed mainly by direct investments and loans and credits from abroad. Net direct investments expanded primarily because of an increase in the liabilities of domestic companies with their foreign affiliates and more real estate purchased by nonresidents. The loans and credits balance worsened due mainly to a transfer from the Netherlands of taxes on dividends paid by Dutch companies to their parent companies in the Netherlands Antilles, related to transactions in previous years. Also, the repatriation of foreign assets by financial corporations, the withdrawal of funds abroad by domestic companies, and
increased net trade credits received on imports contributed to the growth in loans and credits from abroad. Meanwhile, capital transfers received from abroad increased significantly as the
Dutch government assumed the legal ownership of all outstanding securities of the former Netherlands Antilles on October 10, 2010. This change in ownership also explains the considerable expansion in net portfolio investments abroad, as the creditors of the former Netherlands Antilles now have a claim on the Dutch government.

The monetary aggregates contracted in 2010 due to a decline in net domestic assets. The latter decline can be ascribed largely to a drop in net credit extended to both the central government
and the island governments, reflecting the implementation of the debt relief program. Net credit to the private sector also shrank, driven by the redistribution of assets and liabilities of the banks following the constitutional changes. In contrast, net foreign assets increased as a result of the balance of payments surplus, the take-over by the Dutch government of the remaining outstanding debt securities of the Netherlands Antilles on October 10, 2010, and the revaluation of the gold stock.

Similar to 2009, the Bank relaxed its monetary policy further in 2010 motivated by the solid import coverage and the moderate growth in credit extension to the private sector. As a consequence, the reserve requirement percentage was reduced each month by 25 basis points to reach 7.75% as of October 2010. Moreover, during the biweekly auctions of certificates of
deposit (CDs), the Bank focused solely on the refinancing of maturing CDs. Meanwhile, the pledging rate, which is the Bank’s official lending rate, was kept unchanged at 1.00%.
(See our front page story for the Central Bank’s policy considerations).

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