Central bank develops new macro framework tool to assist
WILLEMSTAD, PHILIPSBURG - The COVID-19 liquidity support loans issued to Curaçao and Sint Maarten during the pandemic will have to be refinanced by October 2023. “These loans are significant and amount to approximately 22% of the GDP of Curaçao and 11% of the GDP of Sint Maarten. Under the current circumstances, both countries will have to reach an agreement with the Netherlands on the refinancing,” cautioned President of the Centrale Bank van Curaçao en Sint Maarten (CBCS) Richard Doornbosch in the Bank’s March Economic Bulletin. “In an environment of increasing interest rates in the international financial markets, having a public debt management strategy in place will be crucial to manage financing costs,” Doornbosch added. “It is currently assumed that both countries will be able to refinance the maturing loans. However, if no agreement is reached with the Netherlands on the refinancing or if the refinancing conditions are less favorable, this could worsen the public finances and affect the countries’ economic prospects,” the CBCS president further cautioned.
Initial low public debt-to-GDP ratios
When Curaçao and Sint Maarten became autonomous countries within the Dutch Kingdom, they started with relatively low public debt-to-GDP ratios thanks to the debt relief program. “Over the past decade, however, the public debt-to-GDP ratio of both countries rose sharply because of the liquidity support that the countries received amid recent massive economic shocks, borrowing to finance capital expenditures, and a decrease in nominal GDP levels,” Doornbosch explained.
According to the CBCS president, the standing subscription rule under the Kingdom Law on Financial Supervision has, to some extent, inhibited the countries to set a desired composition of their debt portfolio. Therefore, public debt management was not considered a high priority on the countries’ fiscal policy agendas.
Prudent degree of risk
The main objective of public debt management is to ensure that the government’s financing needs and payment obligations are met at the lowest possible cost over the medium to long run consistent with a prudent degree of risk. There is a broad consensus that public debt management plays an important role in reducing the exposure of the government budget to macroeconomic shocks. “A prudent debt management strategy involves, among other things, setting clear objectives for debt management and a limit for debt expansion, understanding the cost and risk implications of different strategies, and managing refinancing,” the CBCS president outlined.
Fiscal policy framework
“However, public debt management cannot be implemented in isolation. To be effective, it should be complemented by a medium-term fiscal policy framework. This framework provides projections of key macroeconomic variables, among which the primary balance that is crucial to determine future financing needs,” he continued. “Both Curaçao and Sint Maarten need a medium-term fiscal policy framework that focuses on building fiscal buffers in normal times while preserving debt sustainability. The framework should also take the project execution capacity of public investments of the countries into account. In addition, the current fiscal rules set in the Kingdom Law should be recalibrated to include a debt anchor.”
The CBCS recently developed a macro framework foundations tool for Curaçao and Sint Maarten. “With this tool, the CBCS can support the countries and it can be used to design a medium-term fiscal policy framework that better calibrates fiscal policies,” Doornbosch explained. “The Sint Maarten government has already formalized a working group with representatives from the Ministry of Finance, the Ministry of Tourism, Economic Affairs, Transport and Telecommunication, and the CBCS that will use this tool to create a fiscal policy framework for Sint Maarten.
