SINT MAARTEN/CURACAO – The Centrale Bank van Curaçao en Sint Maarten (CBCS) will tighten its monetary policy stance further by raising the pledging rate by 125 basis points to 4.75%. The pledging rate is the rate at which commercial banks can borrow at the CBCS in case of a liquidity shortage.
The current increase in the pledging rate is consistent with a projected further rise of interest rates on the international financial markets, particularly the fed funds rate. Although still solid, gross official reserves and the import coverage have been showing a declining trend over the course of 2022 and are expected to further decline in 2023.
Therefore, the Monetary Policy Committee (MPC)1 of the CBCS will continue to monitor the economic and monetary developments in the monetary union closely and tighten the monetary policy stance further if warranted.
Due to, among other things, persistent high inflation that curbs consumers’ purchasing power, tighter financial conditions, and spill-over effects of the war in Ukraine, global economic growth moderated substantially in 2022 and will ease further in 2023. Despite the higher inflation, real GDP continued to grow across the monetary union in 2022. “According to preliminary figures, Curacao records a real GDP expansion of 5.9% while Sint Maarten registers a growth of 5.1%.
Growth was in both countries sustained primarily by a recovery of stay-over tourism”, explained dr. Jardim, executive director of the CBCS. The economic projection for 2023 has been revised down due mainly to the projected economic slowdown in the main trading partners, i.e., the United States and the Netherlands.
“Real economic growth will slow across the monetary union in 2023 to 2.7% in Curaçao and 3.3% in Sint Maarten”, added dr. Jardim. The soaring international commodity prices, both oil and non-oil, have resulted in a sharp deterioration of the monetary union’s terms of trade. As a result, the deficit on the current account of the balance of payments widened at a faster pace than initially expected in 2022.
Despite a projected decline in international oil prices, the current account deficit will remain practically the same in 2023 as foreign exchange earnings from primarily tourism activities will increase at a slower pace due to a slowdown in external demand. As external financing and capital transfers will not be sufficient to cover the current account deficit, gross official reserves are projected to decline in 2022 – 2023.
In addition, according to the most recent estimates, the import coverage 1 The Monetary Policy Committee discusses the economic and monetary developments and the monetary policy stance at least on a quarterly basis.
The Monetary Policy Committee takes decisions on the monetary policy stance and the deployment of monetary policy instruments that are ratified by the Board of Executive Directors of the CBCS. drops to 4.5 months in 2022, still well above the norm of 3 months. Nevertheless, liquidity of the commercial banks showed a turnaround since October, ending the declining trend that started in March of this year.
To contain the persistent high inflation, the U.S. Federal Reserve (Fed) increased its federal funds rate six times in 2022. The last four times, the Fed rose its target rate by 75 basis points, reaching 3.75%-4.00% on November 2, 2022. The market expectation is that the Fed will further increase its fed funds rate in December of this year. An increase of the federal funds rate affects immediately the international money market rates and, consequently, the interest rates in the money market of the monetary union of Curaçao and Sint Maarten as the NAf. is pegged to the US dollar.
“Against this background, the CBCS has decided to increase the pledging rate by 125 basis points to 4.75%, effective November 29, 2022. This will be the third adjustment this year. In addition, the CBCS will continue to focus on the extension of the average maturity of the outstanding balance of certificates of deposit (CDs) through offering longer maturities (i.e., 12, 26 and 52 weeks) on the bi-weekly auctions of CDs.
“Since the changes in the CD policy introduced in September, the share of longer maturities increased, contributing to the extension of the average maturity of outstanding CDs. The CBCS will continue to stimulate the commercial banks to hold more funds locally to maintain a solid foreign exchange position”, dr. Jardim stated. Jardim also explained that the risks to the economic outlook for the monetary union are significant and remain tilted to the downside.
The spill-over effects of the war in Ukraine, notable higher than expected inflation that will affect disposable income, and a slower than anticipated growth or even recession in the monetary union’s main trading partners are the main risks to the outlook.
Tighter than anticipated global monetary policy and financial conditions, a further strengthening of the US dollar, a resurgence of global health scares, a further decrease in airline seat capacity and airlift, and the occurrence of natural disasters and extreme weather conditions are other factors that could negatively affect the economic outlook for the monetary union.
In addition, the implementation of fiscal austerity measures without room for public investments could pose a threat to the pace of economic recovery in both Curaçao and Sint Maarten. Meanwhile, for Curaçao specifically, the current imbalance on the labor market remains a downside risk while a resumption of activities at the refinery could support a faster than expected economic recovery. In the case of Sint Maarten, delays in reconstruction activities may slow down economic growth.