advantages. First, it uses the aggregateconsumerpriceindex, which is available and relatively reliable in most emerging market economies. Second, it embeds information on actual price and wage setting behavior more fully than estimates of this behavior by financial market participants. Third, it captures the extent to which agents’ expectations are backward- or forward-looking since it reflects the expectations embedded in the consumer price index. The measure, however, assumes the existence of a representative agent as far as price and wage setting behavior is
: national accounts, government finance, and external sector data.
National Accounts: Data are compiled by the Central Bureau of Statistics (CBS) in Curaçao and by the Department of Statistics in Sint Maarten. Expenditure-side national accounts data have been published only up to 2009 in Curaçao and 2012 in Sint Maarten. Production-side data in current terms are partially available for Curaçao up to 2012. Detailed producer price indices to deflate national accounts aggregates are not available. Instead, the CBS uses the aggregateconsumerpriceindex (CPI) to
KEY ISSUES Context: The union’s current account deficit—the key economic vulnerability flagged in the previous (2011) consultation—has declined over the past few years, including thanks to fiscal adjustment in Curaçao. But it remains large. Curaçao’s growth and job creation remain lackluster, due to weak competitiveness, adverse sectoral trends (e.g., in the international financial center), red tape, and rigid labor laws. Sint Maarten’s tourism-based economy is recovering but remains vulnerable to shocks and suffers from weak administrative capacity—as underscored, for example, by weakening tax collection. Risks: Both Curaçao and, especially, Sint Maarten are exposed to shifts in tourism demand. Curaçao is vulnerable to the uncertain situation in Venezuela, its main trading partner. If long-discussed flexibility- and competitiveness-enhancing structural reforms are not implemented, both countries’ capacity to absorb shocks may prove limited, and pressures on FX reserves and, ultimately, the peg may intensify. Policy recommendations: Fiscal policies should entrench recent gains to facilitate continued external adjustment (especially in Curaçao) and build buffers against shocks. Curaçao should extend the reform of its pension system to public sector workers, further streamline its administrative apparatus, and address weak governance and finances in state companies. Sint Maarten needs to increase revenues to support an expanding administration, including through stronger tax collection and greater contribution from its profitable state companies. The common central bank must monitor closely the deterioration in banks’ loan portfolios and refrain from direct financing of non-financial companies. It should also use more standard sterilization tools to control banks’ excess liquidity. Urgent action is required to lower the cost of doing business and remove pervasive disincentives to both supply and demand of labor.
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