Overview

     -- The deterioration in the balances of the government of Curacao's national pension fund as well as the health care fund has weakened the government's underlying fiscal stance.

     -- We are revising our outlook on Curacao to negative from stable.

     -- We are affirming our 'A-/A-2' sovereign credit ratings on Curacao.

     -- The negative outlook reflects our view that a failure to reverse the recent fiscal deterioration in a timely manner might lead to a downgrade.

 

The outlook revision reflects the potential for a downgrade if the weakening of the sovereign's fiscal stance over the past two years, mainly as a result of the deterioration of the country's public health and pension systems, is not stemmed. The deterioration in the fiscal stance is a result of the former government's failure to pass and implement important proposed legislation that included increasing the retirement age to 65 from 60 as well as raising the contribution rates by 2% for the AOV, the government's general old age pension fund. 

 

Furthermore, the AOV funds are being split between the various islands of the former Netherland Antilles. Curacao's population is, on average, older than the other islands of the former Netherland Antilles (St. Maarten, especially). 

The relatively older demographic profile of Curacao has resulted in a lower coverage ratio, with fewer workers covering a larger number of pensioners. The lower coverage ratio has, in turn, led to higher-than-expected deficits and a faster-than-expected depletion of pension fund assets.

 

Following parliamentary elections in October in which no single party won a majority, the formation of a coalition government is still pending. We expect a new government to be in place by early 2013. In the meantime, the current interim government has proposed a number of initiatives, which, if passed and implemented, would reverse the underlying deterioration of the general government's fiscal stance. These measures include increasing the retirement age, introducing a 2% contribution rate in both the health and pension systems, raising other taxes, and streamlining the government's workforce over 

the next three years (which alone is expected to significantly reduce the central government's deficit this year). Measures taken by the central government would bring it into a surplus position over the near term, allowing it to cover expected losses over the next four years in the AOV and general health care fund. 

 

A prolonged political process to form a government could lead to significant delays in taking adequate measures to reverse the recent deterioration. 

Additionally, an unwieldy governing coalition of various political parties could significantly delay introduction of the fiscal stabilization measures and could cloud the investment climate and undermine economic growth prospects, as they did under the last government. Also, the government faces a number of other challenges, including the uncertain prospects for the offshore sector (with bilateral tax treaties ending in 2018) and needed refurbishment of the government-owned refinery (with the lease with Petroleos de Venezuela S.A. terminating in 2019).

 

Outlook

The failure of Curacao to form a new coalition government that acts on measures to reverse the fiscal deterioration as well as improve the country's investment climate could lead to a downgrade. If a new coalition government can reach consensus on reform measures that are passed and implemented on a timely basis, the ratings could stabilize at the current levels.

 

Related Criteria And Research

Sovereign Government Rating Methodology And Assumptions, June 30, 2011

 

Ratings List

 

Ratings Affirmed; Outlook Action

                                        To                 From

Curacao

 Sovereign Credit Rating                A-/Negative/A-2    A-/Stable/A-2

 

Ratings Affirmed

 

Curacao

 Transfer & Convertibility Assessment   A-

 

(Reuters)