June 2, 2023 –WASHINGTON D.C. – According to a recent report by the International Monetary Fund (IMF), the monetary union of Curaçao and Sint Maarten needs to focus on strengthening external and financial sector resilience to ensure sustainable economic growth. The report highlights key areas of concern and provides recommendations to address potential vulnerabilities.
The report notes that the external current account deficit (CAD) of the union remained high in 2022 but is expected to decrease in the medium term. Factors such as high import prices and increased construction activity contributed to a CAD close to 20 percent of GDP. However, the stock of international reserves remained adequate at 4.5 months of imports. The CAD is projected to moderate to 11.6 percent of GDP in the medium term, driven by robust growth in tourism receipts.
Credit growth in the monetary union has been on the rise, reaching 3.9 percent year-on-year in March 2023. This growth has been primarily driven by mortgages in both countries and business loans in Sint Maarten. The IMF emphasizes the importance of strengthening the transmission mechanism of monetary policy in response to global tightening measures. The planned review of the 60/40 investment rule should comprehensively assess its effects on the economy, including efficiency, pro-cyclicality, and the stability of international reserves.
While the financial system in the union has weathered the pandemic well, the report highlights lingering vulnerabilities, particularly in asset quality. Capital buffers in the banking system have increased, profitability indicators have improved, and non-performing loans (NPLs) have declined to levels slightly below those of 2019. However, there are latent credit risks associated with the moratorium implemented in 2020, many of which have been restructured after the moratorium ended. These risks could potentially lead to an increase in NPLs and a reduction in capital buffers. The report recommends that the Centrale Bank van Curaçao en Sint Maarten (CBCS) closely monitor the housing market for signs of overheating and be prepared to employ macroprudential tools if necessary.
The IMF acknowledges the significant progress made by the CBCS in advancing financial sector reforms. The transition to risk-based supervision, improved understanding of risk levels in various institutions, and enhanced enforcement measures have all contributed to a more robust financial system. However, the report emphasizes the need for the authorities to finalize the legal framework for the launch of the deposit guarantee system.
Additionally, the resolution strategy for Ennia, a large insurance company under CBCS’ special administration regime since 2018, should be finalized without drawing down international reserves. The IMF also recommends establishing a well-designed Financial Stability Committee, which would facilitate collaboration and policy coordination within the monetary union, requiring close coordination among the CBCS and the governments of Curaçao and Sint Maarten.
In conclusion, the IMF report underlines the importance of strengthening external and financial sector resilience in the monetary union of Curaçao and Sint Maarten. By addressing the identified vulnerabilities, implementing appropriate policy measures, and enhancing coordination among relevant stakeholders, the union can foster sustainable economic growth and ensure financial stability.