National Economy Shrinks by 25+ Per cent due to COVID-19 Pandemic | SOUALIGA NEWSDAY

SINT MAARTEN (PHILIPSBURG) – The Central Bank of Curacao and Sint Maarten (CBCS) in its “Economic Developments in 2020 and Outlook for 2021” report, says that based on the Bank’s estimates, Sint Maarten’s real Gross Domestic Product (GDP) shrank by 26.8% in 2020, following an increase of 8.2% in 2019.

The report says that the significant decline in 2020 is the result of the stringent measures the government of Sint Maarten took to curb a local spread of the COVID-19 coronavirus, particularly a border closure of 3 months and a 24-hours curfew that lasted for approximately 5 weeks. The containment measures weighed heavily on economic activity in Sint Maarten, particularly the tourism sector which is the country’s main economic pillar.

Meanwhile, inflation rose from 0.4% in 2019 to an estimated 1.2% in 2020 due mainly to higher food prices reflecting global supply disruptions but moderated by a decline in international oil prices. The dramatic economic contraction in 2020 was underpinned primarily by a marked decline in net foreign demand.

Exports dropped significantly, reflecting mainly lower foreign exchange earnings from tourism and transportation services on the back of the containment measures, border closure, and deep recession in Sint Maarten’s main source markets. Foreign exchange earnings from businesses that cater to the tourism sector, including time-shares and rentals, also shrank.

The decline in net foreign demand was moderated by lower imports due to a drop in consumer spending and lower tourism spending. In addition, domestic demand shrank on the back of significantly lower private consumption as the containment measures related to COVID-19, notably the total lockdown in the second quarter of 2020, restricted mobility and the provision of most goods and services.

In addition, the worsened situation on the labor market because of the corona crisis and the labor compensation cuts in both the public and private sectors affected private consumption. However, the financial support that the government provided to the most affected groups in society amid the crisis moderated the drop in private consumption.

Furthermore, public consumption decreased due to lower spending on wages & salaries. By contrast, private and public investment rose modestly. The increase in private investment reflected primarily the reconstruction of the airport, that gathered speed following the settlement of the insurance claim. In addition, the moderate gain in public investment was driven mainly by the construction of the new hospital.

An analysis of the production side of GDP shows that the measures to curb an outbreak of COVID-19 took a severe toll on private sector activities during the first half of 2020. Except the utilities sector, real value added dropped sharply in all sectors of the economy during the January – June period of 2020. By contrast, the contribution of the public sector to GDP was positive reflecting primarily the financial support that the government extended to the most affected groups in society amid the corona crisis.

Significantly lower proceeds from taxes on goods and services, notably turnover tax, and a decline in the disbursements on public wages & salaries dampened, however, the positive contribution of the public sector. Real value added collapsed in the restaurants & hotels sector as the sector was actually shut down during the second quarter of 2020. The development in the sector can mainly be ascribed to the preventive measures, in particular the border closure, that the government put in place as of mid-March to contain a local spread of the COVID-19 coronavirus.

In January and February, stayover tourism performed well but this situation changed after the border closure as stay-over arrivals and cruise visitors dropped almost to zero. However, after the closing of nonessential businesses and other restrictions on restaurant services that came into effect in March 2020, restaurants were allowed to reopen for pickup, delivery and drive-thru services to the local public as of mid-May, which slightly moderated the deep contraction in the restaurants & hotels sector.

Real output shrank in the construction sector due mainly to the suspension of nonessential business activities during April and May 2020. However, after approximately five weeks, construction activities gradually resumed. The suspension of nonessential business activities, the border closure, and the lockdown also hit the wholesale & retail trade and the real estate, renting, and business activities sectors significantly. In the wholesale & retail trade sector, real value added shrank in line with the sharp decline in domestic demand and tourism spending.

Meanwhile, the negative outcome in the real estate, renting & business activities sector was consistent with the sharp drop in the number of stay-over visitors. Likewise, the transport, storage, & communication sector posted dramatic negative results as the border closure severely affected activities at the airport and harbor of Sint Maarten.

Activities at the airport came practically to a standstill following the border closure as total passenger traffic and commercial landings fell dramatically. Furthermore, air transportation services provided by the domestic carrier Winair dropped significantly. Meanwhile, the deep contraction at the harbor reflected a drop in the number of ships piloted into the port, i.e., freighters, tankers and cruise ships, and a decline in container movements.

The manufacturing sector also experienced a severe contraction as yacht repair activities came to a standstill amid the global pandemic. The development in the yacht repair sector was consistent with a dramatic decline in the number of yachts that visited the port of Sint Maarten in the first half of 2020. Activities in the financial intermediation sector also fell significantly as interest income of the domestic commercial banks dropped at a faster pace than interest expenses.

The development in net interest income can largely be ascribed to the moratorium policies that many commercial banks introduced amid the corona crisis, temporarily easing loan terms and conditions for impacted borrowers. In addition, fees & other income declined in the first half of 2020 mainly because of fewer bank transactions during the lockdown.

Finally, real output rose in the utilities sector, albeit at a slower pace compared to the first half of 2019. This development reflects an increase in the production of electricity only, while water production remained at the same level. As the demand for water and electricity is relatively inelastic, the utilities sector was the only sector that contributed positively to GDP.

The fiscal position of Sint Maarten deteriorated considerably during the first three quarters of 2020 compared to the same period of 2019, as the current budget deficit rose by NAf.110.4 million reaching NAf.132.9 million. This significant deterioration in the fiscal position can largely be ascribed to the economic and social impact of the COVID-19 coronavirus crisis and government support measures for the most affected groups society. The deterioration of the fiscal position was caused by an increase of NAf.59.6 million in government expenditures combined with an decline of NAf.50.8 million in revenues. Expenditures went up due mainly to COVID-19-related expenses (NAf.58.6 million), including payroll support to businesses, income support for sole proprietors, vendor license holders, bus and independent taxi and tour drivers, and unemployment support.

A decline in wages & salaries of NAf.8.0 million, primarily caused by vacancies that were not yet filled, combined with fewer patients sent abroad for medical treatment, mitigated the increase in expenditures The drop in revenues was largely the result of the impact of the COVID-19 containment measures on economic activity and reflected lower proceeds from taxes (NAf.42.6 million), licenses (NAf.8.7 million), and concession & fees (NAf.5.6 million). Tax proceeds dropped in every category with the drop in turnover tax (NAf.23.4 million), wage tax (NAf.5.4 million), and property transfer tax (NAf.4.4 million) being the most pronounced.

According to the latest projections,11 the government of Sint Maarten expects a deficit on the current budget of NAf.223.7 million in 2020 following the NAf.34.5 million deficit registered in 2019. 12 This drastic deterioration is caused by a decline of NAf.96.9 million in revenues combined with an increase of NAf.92.3 million in expenditures.

The main causes of the projected decline in revenues are a decline in tax proceeds of NAf.74.2 million combined with a drop of NAf.11.6 million and NAf.10.5 million in concessions & fees and licenses, respectively. Expenditures increase due to more COVID-19 related expenses (NAf.85.6 million), outlays on goods & services (NAf.7.9 million), and social security spending (NAf.6.9 million). The total public debt of Sint Maarten increased by NAf.98.3 million up to the end of September 2020 compared to the end of December 2019.

This increase was the result of a rise in the foreign debt component because of the receipt of liquidity support from the Dutch government. In April, Sint Maarten received NAf.50.2 million that was not yet disbursed in 2019 related to Hurricane Irma. NAf.44.0 million of this amount was transferred on a net basis because the Dutch government deducted NAf.6.2 million for expenditures made to temporarily house (11 Source: the Financiële Concernrapportage/Uitvoeringsrapportage, derde kwartaal 2020 of the government of Sint Maarten. 12 Source: the Financiële Concernrapportage/Uitvoeringsrapportage, derde kwartaal 2020 of the government of Sint Maarten.) detainees from Sint Maarten in Dutch prisons after Hurricane Irma.

In May 2020, Sint Maarten received a first tranche of NAf.44.1 million of liquidity support related to the corona crisis. A second tranche of NAf.19.4 million was received in August 2020. The liquidity support was provided in the form of 2-year interest-free bullet loans. By contrast, the domestic debt component declined by NAf.14.0 million mainly because the government reduced its arrears towards the social security bank, SZV, and the public pension fund, APS.

The increase in total public debt combined with the drop in GDP caused the debt-to-GDP ratio to rise from 33.5% at the end of December 2019 to 50.4% at the end of September 2020. The debt-to-GDP ratio is expected to increase further to 54.0% by the end of 2020 caused by the third tranche of liquidity support of NAf.61.2 million that the government of Sint Maarten received from the Netherlands. 13

Outlook 2021

Sint Maarten’s real GDP is projected to grow by 3.6% in 2021 driven by an increase in net foreign demand moderated by a decline in domestic demand. The projection reflects a conservative outlook for tourism, notably from Sint Maarten’s main market, the United States. Although the US economy is projected to recover, the country is currently going through a deep public health crisis that could affect stay-over tourism in 2021.

In particular, the new US administration could implement more stringent measures including restrictions on nonessential travel and cruise vacations in the first months of 2021, which is the high season for the tourism industry in Sint Maarten. The outlook also includes uncertainties regarding the funding of public investments and continuation of liquidity support from the Netherlands amid the corona crisis. The projected increase in net foreign demand is the result of an increase in exports, moderated by higher imports.

The gain in exports reflects primarily a gradual recovery of tourism. Despite the projected increase in 2021, foreign exchange earnings from tourism activities still will be 40% below the pre-corona crisis level.14 The projected higher import bill is caused primarily by more tourism spending. Meanwhile, domestic demand will put a drag on growth in 2021 due to lower private and public consumption.

Consumer spending will drop due to lower disposable income caused by higher inflation combined with the 12.5% cut in labor compensation in the (semi) government sector. The drop in public consumption reflects primarily an anticipated further decline in the outlays on wages & salaries. Private and public investment growth will accelerate in 2021 as construction projects such as the reconstruction of the airport and the new hospital, which were delayed in 2020 due to the containment measures, will gather speed.

Meanwhile, inflation is expected to increase to 1.8% in 2021, in line with the forecasted rise in the inflation rate in the United States, Sint Maarten’s main trading partner.15 The magnitude of Sint Maarten’s economic recovery in 2021 depends largely on the pace of global economic recovery once the coronavirus measures are relaxed. In particular, the pace of recovery in the United States and Europe will be crucial for the economy of Sint Maarten.

If the United States and Europe recover at a faster pace than anticipated, tourism demand also will increase more rapidly resulting in a faster recovery of Sint Maarten’s economy in the second half of 2021. The tourism industry also would benefit from the quick availability of a vaccine for the COVID-19 coronavirus, which could reduce the fear of travelling. A downward risk to the outlook is the escalation of government measures to prevent a revival of the spread of the coronavirus (i.e., second wave), which again would reduce economic activity.

(13 An agreement was reached between Sint Maarten and the Netherlands on December 22, 2020. 14 Level of foreign exchange earnings from tourism in 2019. 15 IMF World Economic Outlook, October 2020.)

Source: Souliga Newsday