ANNUAL REPORT 2014 Centrale Bank van Curaçao en Sint Maarten | Annual Report 2014
CENTRALE BANK VAN CURAÇAO EN SINT MAARTEN
Simon Bolivar Plein 1, Willemstad, Curaçao URL: http://www.centralbank.cw – Email: info@centralbank.cw AUGUST 2015
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Centrale Bank van Curaรงao en Sint Maarten Annual Report 2014
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2014 ANNUAL REPORT THEME: LOCAL ART Over the course of years, the Centrale Bank van Curaçao en Sint Maarten has built a collection of local art through purchases and donations. The Bank’s policy to acquire art from artists of the countries Curaçao and Sint Maarten is part of its ongoing policy to support local artists. The Bank’s own collection of art comprises more than 260 pieces. This art is displayed in the offices of the Bank in Curaçao as well as Sint Maarten.
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Objectives of the Bank
CENTRALE BANK VAN CURAÇAO EN SINT MAARTEN Maintaining Financial and Monetary Stability
Promoting the stability of the currency
Promoting the soundness of the financial system
Promoting safe and efficient payments system
Established in 1828
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CONTENT 1.
Report of the President
7
2.
International Economic Developments
19
3.
General Economic Developments in the Monetary Union
25
4.
Monetary Developments and Policy
55
5.
Foreign Exchange Regulations
67
6.
Macro-prudential Developments and Policy
73
7.
Banking Sector Assessment
87
8.
Insurance Sector Assessment
103
9.
Pension Sector Assessment
131
10.
Supervisory Policies and Activities
143
11.
Domestic Financial Market Developments
153
12.
Financial Market Infrastructure
165
13.
Yearly Financial Statement
173
Organizational Chart
181
Contacting the Bank
188
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EUREKA Paula Evers 2009 Acrylic on linen 100.0 x 100 .0 cm
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REPORT OF THE PRESIDENT GENERAL OVERVIEW & POLICY CONSIDERATIONS GENERAL OVERVIEW
Dr. E.D. Tromp, President
The world economy continued to expand in 2014, albeit the pace of growth was moderate and differed considerably across the major economies. Growth in the advanced economies picked up, driven primarily by a steady recovery in the United States. Furthermore, following a contraction in 2013, the euro area showed a modest expansion in 2014. Growth slowed in most emerging market economies and developing economies, reflecting, among other things, tightened fiscal conditions. Meanwhile, global inflation remained subdued during 2014 due to lower international energy and food prices. In the monetary union of Curaรงao and Sint Maarten, economic developments diverged whereas inflation converged in 2014. Curaรงao recorded an economic contraction of 1.1%, while the economy of Sint Maarten expanded by 1.5%. Meanwhile, price pressures increased in Curaรงao with the annual inflation rate rising from 1.3% in 2013 to 1.5% in 2014, reflecting mainly higher domestic food prices. In contrast,
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inflation in Sint Maarten decelerated from 2.5% in 2013 to 1.9% in 2014 because of a decline in international oil prices. Curaçao registered negative economic growth in 2014 for the third consecutive year. The decline in real GDP reflected a drop in domestic demand driven by a fall in both private and public spending. The decline in private spending resulted from lower consumption and investment and was in line with the contraction in consumer loans and business loans extended during 2014. Lower public consumption, in particular outlays on goods and services, was the main cause of the decline in government spending. In addition, public investment declined from 2013 to 2014. However, the economic contraction was dampened by a rise in net foreign demand because in real terms, exports rose while imports dropped. Sectoral data reveal that output contracted in most industries of the economy, but was most pronounced in the wholesale & retail trade, transport, storage & communication, construction, and utilities sectors. Output in the wholesale & retail trade sector dropped primarily because of lower domestic demand and less activity in the free-zone sector. In the transport, storage, & communication sector, real value added dropped as a result of a decline in airport-related activities, reflected by less passenger traffic, notably transit passengers, and fewer commercial landings. In contrast, harbor activities rose, attributable to an increase in the number of ship calls and cargo movements. The disappointing performance of the construction sector was accounted for by a contraction in both private and public investments. Activities in the utilities sector
shrank as a result of a decline in electricity and water production. The financial intermediation sector and manufacturing sectors also contributed negatively to growth during 2014. The decline in the financial intermediation sector resulted from a drop in real value added in both the domestic banking sector and the international financial services industry. Output contracted in the manufacturing sector because a decline in ship repair actvities could not be compensated by increased refining and trading activities by the Isla refinery. By contrast, the restaurants & hotels sector continued to perform well, reflecting an accelerated growth in the number of visitor nights. However, the number of stay-over and cruise tourists increased at a slower pace in 2014 than in 2013. Growth in stay-over tourism was driven by more visitors from Europe and South America mitigated by a decline in the number of visitors from North America and the Caribbean. Sint Maarten’s economy benefited from a surge in the tourism sector – its main economic pillar – resulting in a real GDP growth of 1.5% in 2014, up from the expansion of 0.9% recorded in 2013. The main impetus for this growth came from increased domestic demand, reflecting higher private and public spending. Both
Curaçao registered negative economic growth in 2014 for the third consecutive year.
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private consumption and investment contributed to the increase in private demand. Meanwhile, the growth in public spending was caused solely by a rise in government investment with the purchase of the Emilio Wilson Estate and a new government administration building. By contrast, government consumption dropped mainly as a result of lower disbursement on goods and services. Net foreign demand dampened Sint Maarten’s economic growth during 2014 as the increase in imports, led by higher tourism and domestic spending, exceeded higher exports. An assessment of economic growth by sector shows that the restaurants & hotels, wholesale & retail trade, and transport, storage, & communication sectors were the main contributors to Sint Maarten’s economic expansion during 2014. The robust growth in the restaurants & hotels sector was supported by increases in both stay-over and cruise tourism. Stay-over tourism performed well, driven by more visitors from all major markets. Meanwhile, the surge in cruise tourism was the result of more and bigger cruise ships visiting the port of Philipsburg in 2014. Increased domestic demand and more tourism expenditures contributed to the growth in the wholesale & retail trade sector. The positive outcome in the transport, storage, & communication sector was attributable to the growth in both the airport-related and harbor activities. In line with the development in stay-over tourism, airport-related activities rose, as reflected by increased passenger traffic and more commercial landings. In addition, the local carrier Winair transported more passengers to the surrounding islands. The gain in harbor activities was sustained
Sint Maarten’s economy continued to register moderate growth.
by an increase in the number of ships, notably cruise ships. The utilities sector continued to grow in 2014 driven by higher water production, mitigated by a drop in electricity production. Following a contraction in 2013, the manufacturing sector contributed positively to Sint Maarten’s real GDP expansion in 2014 owing to an increase in yacht repair activities as a result of more yachts, in particular mega yachts, visiting the island. However, the financial intermediation and construction sectors put a drag on real economic growth in Sint Maarten during 2014. Output dropped in the financial intermediation sector as reflected by a decline in the net interest income of the commercial banks. The contraction in the construction sector was ascribable to a decline in the number of private and public construction projects in 2014. Public sector construction activity dropped in the wake of the completion of the Simpson Bay Causeway and the building of the National Institute for Professional Advancement. On the fiscal front, the government of Curaçao continued its efforts to attain sustainable public finances and to compensate the current account deficits that occurred in the period 2010-2012. To that end, in 2014 the government announced several cost-reducing measures. Besides upholding the vacancy stop imposed un-
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DEN HANCHI OTRABANDA Roald Schotborgh 2003
Oil paint on canvas 100.5 x 100.5 cm
der the instruction of the Kingdom Council of Ministers in 2012, the government negotiated throughout the year with the labor unions to contain personnel costs. However, these negotiations did not result in an agreement on specific measures, other than the inclusion of civil servants in the general health insurance scheme in 2015. In 2014, the current budget surplus of the Curaçao government narrowed to 0.3% of GDP from 1.7% in 2013, due to a decline in revenues mitigated by a drop in expenditures. The decline in revenues was primarily the result of a drop in nontax revenues stemming from fewer dividends received from government-owned companies. Tax revenues dropped as well, owing to lower proceeds from profit tax, wage tax, excises on gasoline, and import duties. Meanwhile, the decline in government expenditures was caused by lower outlays on goods & services, wages & salaries, and transfers & subsidies, mitigated by an increase in interest expenses. The higher amount of interest paid was the result of the issuance of bonds in 2013. During 2014, the government of Sint Maarten continued its efforts to develop
its public administration infrastructure and improve its financial management. Despite these efforts, the budgetary situation worsened, as reflected by a turnaround from a surplus of NAf.0.5 million in 2013 to a deficit of NAf.8.2 million in 2014. This turnaround was the result of lower revenues, mitigated by a drop in expenditures. The decline in revenues was attributable to a drop in nontax revenues resulting mainly from less concessions and fees collected by the Sint Maarten government in 2014 compared to 2013. Furthermore, a provision for the government pension fund, APS, was released in 2013, but did not occur in 2014. On the other hand, tax revenues increased mainly because of additional efforts to reduce backlogs and improve tax compliance resulting in more proceeds from income & profit tax, wage tax, and motor vehicle tax. Nevertheless, the marginal growth in tax income was not sufficient to realize the government’s development plans. Tax revenues as a percentage of GDP are still relatively low in Sint Maarten, i.e., approximately 18% of GDP compared to the Caribbean average of 21%. Therefore, increasing tax
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income and improving tax compliance remain challenges to expanding government spending and compensating previous budget deficits. Meanwhile, government expenditures dropped on the back of lower social security transfers as a result of a cutback in the government’s contribution to the social insurances. In addition, outlays on goods & services decreased mainly because of underspending. Both Curaçao and Sint Maarten issued bonds in 2014. The Curaçao government borrowed to finance the construction of a new hospital, while the government of Sint Maarten raised funds to purchase the new government building and the Emilio Wilson Estate, among other things. Because of the standing subscription, the Dutch State Treasury Agency was allotted the full amount of the bonds issued. Consequently, the debt to GDP ratio of both countries rose in 2014. By the end of 2014, the debt to GDP ratio of Curaçao amounted to 38.6% while Sint Maarten’s was 37.0%. As opposed to the decline of NAf.47.9 million recorded in 2013, gross official reserves increased by NAf.459.9 million in 2014 because the capital transfers and external financing were more than sufficient to cover the lower current account deficit. The average import coverage increased from 3.3 months in 2013 to 3.9 months in
In the monetary union of Curaçao and Sint Maarten, economic developments diverged whereas inflation converged in 2014.
2014 because gross official reserves rose while imports dropped. The deficit on the current account narrowed in 2014 compared to 2013 due mainly to a surge in net exports of goods and services complemented by higher net current transfers. Net exports increased because of a growth in exports combined with lower imports. More foreign exchange revenues from tourism activities in both Curaçao and Sint Maarten, more refining fees generated from trading and refining activities by the Isla refinery, and increased foreign exchange revenues from bunkering and international financial services in Curaçao contributed to the rise in exports. Export growth was dampened, however, by a decline in re-exports by the free-zone companies in Curaçao and less foreign exchange earnings from air transportation services. The latter decrease was due mainly to the demise of DAE in 2013. The decline in imports can be attributed entirely to developments in Curaçao. Lower merchandise imports by the freezone companies, the decline in domestic demand, and lower international oil prices resulted in the decline in the import bill. In contrast, in Sint Maarten, imports grew due to increased domestic and tourism spending. Meanwhile, net current transfers increased due to more government taxes received from abroad. The current account deficit was financed primarily by external financing as reflected by a worsening of the portfolio investment, loans & credits, and direct investment balances. The mentioned issuance of bonds by the governments of Curaçao and Sint Maarten purchased entirely by the Dutch State was one of the main causes of the deterioration of the portfolio investment
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Debt to GDP ratio of both countries rose in 2014.
balance. Another factor that contributed to the worsening of the portfolio investment balance was that matured foreign debt securities held by institutional investors were not entirely reinvested abroad during 2014. The loans & credits balance deteriorated mainly as a result of local companies repatriating funds abroad to finance part of their imports, and an increase in trade credits received on imports combined with the repayment of trade credits extended to abroad. Meanwile, net direct investments into the monetary union expanded largely because of increased liabilities of domestic companies towards their foreign investors and a rise in real estate purchases by nonresidents in Curaรงao and Sint Maarten. As in previous years, net capital transfers into the monetary union dropped in 2014 due to the phasing out of development aid from the Netherlands. The money supply expanded at a faster pace in 2014 than in 2013 as a result of a marked increase in net foreign assets, moderated by a decline in net domestic assets. The surge in net foreign assets was driven by the inflows from the Dutch State Treasury Agency (DSTA) related to the purchase of bonds issued by the governments of Curaรงao and Sint Maarten during 2014. In addition the DSTA paid principal and interest on debt securities taken over from the Netherlands Antillean entities as part of the debt relief program. By contrast, net domestic assets contracted mainly as a result of a decline in net credit exten-
sion to the private sector. Loans extended dropped in both Curaรงao and Sint Maarten. Both countries recorded a decline in consumer loans and business loans extended while mortgages expanded. An increase in government deposits from the proceeds of the debt securities issued by Curaรงao and Sint Maarten also contributed to the decline in net domestic assets. Throughout 2014, the Bank continued its monetary policy aimed at tightening the surplus on the money market by auctioning more Certificates of Deposit (CDs) and raising the reserve requirement percentage. To increase their attractiveness, the CDs were offered at higher interest rates. Consequently, the amount of outstanding CDs rose in 2014 compared to 2013. Meanwhile, the reserve requirement percentage was raised gradually during the first half of 2014 by a total of 100 basis points reaching 18.00%. Since June 2014, however, this percentage was left unchanged because the excess liquidity in the banking system did not translate into excess credit extension. The credit measure introduced in March 2012 was revoked on September 1, 2014, after an evaluation concluded it had produced the intended results as reflected by a decline in credit growth. Furthermore, the deficit on the current account of the balance of payments declined over the period 2012-2014, and the declining trend in
The deficit on the current account of the balance of payments declined over the period 2012-2014.
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reserves reversed in November 2013. Consequently, our import coverage increased to 3.9 months in 2014. In the area of financial stability, the Bank implements a macroprudential strategy which integrates the traditional microprudential supervision of institutions and monetary policy with the objective of influencing the financial system and its stability as a whole through regulation and supervision. The Bank’s Early Warning Monitoring System analyzes the potential sources of systemic risk, which shows that in the monetary union of Curaçao and Sint Maarten, the macroeconomic environment poses the biggest risk to financial stability, followed by the sovereign soundness of the countries of Curaçao and Sint Maarten. The macroeconomic environment is assessed by, among other things, analyzing the long-term trend of the economy including only structural policy changes. The output gap of the Monetary Union, defined as the difference between actual and potential GDP as a percentage of potential GDP, was once more negative in 2014 (-1.92%). The increasing recessionary gap shows that the economy is falling behind its potential growth and emphasizes the importance of comprehensive policy efforts by the government. By contrast, the risk of our domestic banking, insurance, and pension sectors has remained stable in recent years. Although the global financial stability risk has increased, the exposure to the stability of the Monetary Union is still considered limited due to the conservative nature of our financial sector. The external vulnerabilities, stemming from external shocks in our main trading partners, are reflected in the
The risks of our domestic banking, insurance, and pension sectors has remained stable in recent years.
macroeconomic environment and indicate an increase in risk. In line with the overall economic contraction the monetary union recorded in 2014, net profit of the local commercial banking sector dropped. Nevertheless, the Financial Soundness Indicators show that the commercial banking sector is still sound. The capital adequacy ratio is well above the 8% Basel benchmark. In addition, the risk in capital adequacy, asset quality, liquidity & funding, and sensitivity to market risk remained stable in 2014 compared to 2013, while the earnings and profitability risk increased. The stability and soundness of the domestic banking sector are good signs for the maintenance of financial stability, as the sector remains the biggest contributor to the financial development of Curaçao and Sint Maarten, with a share of approximately 57% of the total financial system assets. Data for the insurance and pension sectors are presented with a lag of one year. Over the course of 2013, both the local life and nonlife insurance sectors recorded a decline in profitability. In the local nonlife insurance subsector, risks in earnings & profitability increased while sensitivity to market risk declined. The risks in liquidity, asset quality, and capacity remained stable. The local life insurance subsector recorded an increase in the risk in capacity
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and earnings & profitability, while the risks concerning asset quality, sensitivity to market risk, and stability remained stable. Meanwhile, in 2013, the coverage ratio in the pension sector remained stable at 107% compared to 2012, above the required 100%. The sector’s risk to earnings & profitability increased while its risk to equity decreased. The other risk indicators remained stable.
POLICY CONSIDERATIONS During 2014, the gross official reserves of the monetary union increased significantly, resulting in a rise in the import coverage. Combined with a further decline in the current account deficit, the balance of payments appears to have improved substantially. However, this improvement should be interpreted with caution. The increase in the gross official reserves was related largely to bonds issued by the governments of Curaçao and Sint Maarten that were bought by the Dutch government. If corrected for the inflow of funds related to these bond issuances, the import coverage would have been 3.5 months in 2014. Although the import coverage would have
remained above the 3-month benchmark, it can be concluded that based on our economic performance alone the balance of payments would not have improved. The standing subscription that allows the governments of Curaçao and Sint Maarten to borrow at the very low interest rates prevailing in the Dutch capital market provides perverse incentives. First, the standing subscription gives an incorrect price signal. Under normal circumstances, government bond yields include country-specific risk premiums. Consequently, increasing indebtedness causes bond yields to go up, thereby increasing the cost of borrowing and, hence, imposing fiscal discipline on governments. This discipline is particularly important in a monetary union with an exchange rate peg which provides little scope for monetary sterilization. However, because of the standing subscription agreement, the government bond yields in Curaçao and Sint Maarten do not reflect the proper risk premiums of either country but the much lower risk premium of the Netherlands. Second, the standing subscription leads to a misallocation of resources. According to the standing subscription rule, the
SALT POND Herma 1998 Oil paint on canvas 23.0 x 36.0 cm
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The standing subscription that allows the governments of Curaçao and Sint Maarten to borrow at the very low interest rates prevailing in the Dutch capital market provides perverse incentives.
Dutch State Treasury Agency (DSTA) is legally obliged to bid on the debt securities issued by the two countries for the full requested amount. As the interest rates prevailing in the Dutch capital market are significantly lower than those based on the economic fundamentals in Curaçao and Sint Maarten, the main players in our local capital market, i.e., the banks and institutional investors, are in fact excluded because the yields do not reflect our economic realities. Meanwhile, our capital market has been characterized in recent years by high excess liquidity and a lack of investment opportunities. Third, under the current agreement, the interest burden rule is used as a benchmark to assess whether Curaçao and Sint Maarten are allowed to borrow. However, this interest burden rule is not a prudent benchmark for assessing debt sustainability, primarily because the current low cost of borrowing will not be permanent. Therefore, the debt to GDP ratio also must be considered in the decisions to borrow to prevent unsustainable debt servicing in the future. Since attaining the status of autonomous countries in the Dutch Kingdom, both Curaçao and Sint Maarten have seen their
debt to GDP ratios increase rapidly. Although these ratios are still relatively low compared to other countries in the region, Curaçao and Sint Maarten must be cautious lest their debt ratios again become unsustainable. In Curaçao, growth has been lackluster over the past several years. If the country’s poor economic performance continues, servicing debt in the future might soon become a challenge. In the case of Sint Maarten, it can be concluded that the price of becoming an autonomous country was inheriting part of the public debt of the former Netherlands Antilles, as Sint Maarten was not allowed to borrow before October 10, 2010. Sint Maarten can now borrow to finance investments, but tax revenues have been rising only marginally. Hence, the question arises whether Sint Maarten will be able to cover its current expenditures while complying with its debt obligations in the future. Given the risks of unsustainable debt levels in the near future, the authority of the Curaçao and Sint Maarten governments to borrow should be reconsidered except in extraordinary situations. Thus, the current golden rule stating that the current account of the budget must be at least in equilibrium, should be expanded. When the governments can no longer borrow, capital expenditures should be financed by surpluses on the current account of the budget. The overriding criterion to deviate from this rule would be in the case of a significant adverse external shock that negatively affects the economy by, for example, more than 5% of GDP. Curaçao and Sint Maarten are small open economies very susceptible to external shocks, including natural disasters. If they have to finance capital investments
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through surpluses on the current account budget, creating extra fiscal buffers to mitigate the social and economic costs from external shocks will not be viable. To provide for that buffer, an insurance-type stabilization fund can be established for the Dutch Caribbean from which temporary funds can be obtained to mitigate the impact of such an external shock (similar to the former Solidarity Fund). In the European Union, the establishment of a similar European Stabilization Fund is being explored, while in the Caribbean a Catastrophe Risk Insurance Facility1 has existed since 2007. The main benefit of such a fund is that the impact of a negative external shock on the government budget will remain limited. Instead of burdening future generations with unsustainable debt, the standing subscription rule can be used to provide the initial resources for the suggested stabilization fund. Each partner in the Dutch Kingdom, i.e., the Netherlands, Curaçao, Sint Maarten, and Aruba, should pay an annual fee to the fund. The fund could invest its resources in assets liquid enough to convert easily into cash if one or more countries require funds. If the fund’s resources are not sufficient when a shock occurs, the fund could borrow through the DSTA. Given that the fund would have to assess the size of the shock and the budgetary needs of the country requesting financial support, the fund could also assume the
1 The following countries are currently participating in the Caribbean Catastrophe Risk Insurance facility: Anguilla, Antigua & Barbuda, Bahamas, Barbados, Belize, Bermuda, Cayman Islands, Dominica, Grenada, Haiti, Jamaica, St. Kitts & Nevis, Saint Lucia, St. Vincent & the Grenadines, Trinidad & Tobago, and Turks & Caicos Islands.
role of the budget chamber for Curaçao, Sint Maarten, and Aruba when the current budget supervision authority, CFT, ceases to exist. This budget chamber would safeguard the integrity of the budgetary process and assess whether the countries are complying with their budget rule. To prevent free riding, a country requesting resources from the fund should have been in compliance with its annual obligations to the fund and have at least a balanced current budget. As a result, this fund would promote fiscal and debt sustainability for all the Dutch Caribbean countries as well as provide a cushion to mitigate the negative effects of external shocks. While this fiscal mechanism will go a long way to maintain our fiscal house in order, sound public finances alone are not sufficient to realize sustainable economic growth. In the short term, the economies of Curaçao and Sint Maarten will benefit from the high public investments. However, to achieve a durable higher growth path, the governments must facilitate private investments. Currently, investors tend to postpone investments because they lack confidence in the economy. To that point, targeted and consistent government policies are crucial in restoring investor confidence. Also, other weaknesses of our investment climate must be addressed. These weaknesses include the high administrative burden, labor market rigidities, and the high cost of doing business in Curaçao and Sint Maarten. As mentioned, the improvement of the balance of payments does not reflect our economic performance and, hence, cannot be considered sustainable. Increasing our competitiveness vis-à-vis other countries in the region and broadening our ex-
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An insurance type stabilization fund can be established for the Dutch Caribbean from which temporary funds can be obtained to mitigate the impact of external shocks.
port base are crucial steps to strengthen the balance of payments in a sustainable manner. At the same time, the capital market of the monetary union needs to be developed further to make capital for investments available at an affordable cost. In this context, the Bank will continue its efforts to further develop a corporate bond market. A growing corporate bond market will provide the countries of Curaçao and Sint Maarten with an attractive financing alternative to bank financing for government-owned and private entities and will create more local investment opportunities. Hence, such a market can support the economic development of the countries. In addition, monetary policy will be sufficiently accommodative to allow a recovery of private sector credit growth once business confidence and investments pick up. Finally, in the area of financial sector supervision, the Bank has made a number of efforts to enhance its supervisory instruments, improve transparency in the local financial market, and step up the protection of consumers in financial transactions. Specific legislation for the supervision of money transfer companies went into effect in Curaçao on March 1, 2015, but its enactment is still pending in Sint Maarten. Unfortunately, the latest draft of the much-needed legislation that harmonizes and updates prevailing supervision laws has not yet passed parliament. The
implementation of these laws in the entire monetary union will bring the Bank’s supervisory framework in line with the latest standards of the international supervisory bodies and will increase substantially the effectiveness of financial sector supervision. Moreover, to help assure that customers of financial services are able to make informed decisions and are protected against undue financial risks, the Bank issued a number of provisions on May 1, 2015. The provisions on the disclosure of interest rates on deposit accounts and pricing information on consumer credit are aimed at providing the public with information on the effective interest rates on deposits and consumer loans, taking into account all the conditions and costs attached to these financial products, visà-vis the nominal interest rates. Furthermore, the provisions on preventing overextension of credit were issued, requiring financial institutions to thoroughly assess the creditworthiness of customers before extending credit.
E.D. Tromp President
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FRUITVERKOPERS Aslya Ten Holt 1992 Acrylic on canvas 63.0 x 73.5 cm
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INTERNATIONAL ECONOMIC DEVELOPMENTS
2
GLOBAL, EURO AREA, AND LATIN AMERICA & THE CARIBBEAN GLOBAL ECONOMIC DEVELOPMENTS
unemployment rate fell slightly from 6.0% in 2013 to 5.9% in 2014. The inflation rate dropped to 3.5%, driven mainly by lower prices for oil and other commodities.
Similar to 2013, the global economy expanded by 3.4% in 2014,2 reflecting a faster output growth in the advanced economies combined with an economic slowdown in the emerging and developing economies. Nevertheless, the latter accounted for three-fourths of the global economic growth in 2014. Output growth in the advanced economies accelerated as a result of increased activities in all countries, in particular the United States and the euro area, except Japan. Advanced economies benefitted mainly from income growth, higher employment, improved consumer confidence, and stronger net foreign demand. Meanwhile, activities in the emerging and developing economies slowed down for a number or reasons, including slower investment growth, geopolitical tensions, and weak consumer and business confidence. At the same time, the global
Real output in the United States expanded by 2.4% in 2014, a slight acceleration compared to the 2.2% growth registered in 20133 (see Table 1). The faster output growth was driven by increased domestic demand mitigated by a decline in net foreign demand. Domestic demand picked up because of a sharp rise in private demand, while public demand dropped. Both consumption and investments contributed to the increase in private demand. The rise in consumer spending was reflected mainly by an increase in the purchase of durable goods, the result of improved consumer sentiment and better labor market conditions. Private investments also added to economic growth because of an increase
2 Source: International Monetary Fund.
3 Source: US Bureau of Economic Analysis.
THE UNITED STATES
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Table 1
Economic indicators (Global – United States) Global
United States
2013
2014
2013
2014
Real GDP (% change)
3.4
3.4
2.2
2.4
Consumer prices (%)
3.9
3.5
1.5
1.6
Unemployment rate (%)
6.0
5.9
7.4
6.2
Sources: US Bureau of Economic Analysis, US Bureau of Labor Statistics, International Labor Organization, and IMF World Economic Outlook April 2015.
in nonresidential construction along with a slowdown in residential construction. In contrast, public demand shrank because the decline in federal government spending outweighed the increase in state and local government spending. In addition, net foreign demand put a drag on economic growth because export growth in real terms was not sufficient to offset the surge in imports. Consequently, the current account deficit rose from USD 400.3 billion in 2013 to USD 410.6 billion in 2014. However, as in 2013, the current account deficit remained moderate at 2.4% of GDP. The U.S. unemployment rate dropped to 6.2% in 2014, resulting predominantly from job gains in the professional & business services, construction, food & beverages, health care, and manufacturing sectors. Meanwhile, the number of long-term unemployed workers dropped, while the number of persons employed part-time for economic reasons remained about the same. Inflationary pressures accelerated slightly from 1.5% in 2013 to 1.6% in 2014, ascribable mainly to an increase in food prices mitigated by a sharp decline in gasoline prices. Although both the unemployment and inflation rates were below
their long-run target of 6.5% and 2.0%, respectively, the Federal Reserve maintained the Fed funds rate at close to zero.
ECONOMIC DEVELOPMENTS IN THE EURO AREA Following a 0.5% contraction in 2013, real GDP in the euro area grew by 0.9% in 20144 as a result of increases in both domestic and net foreign demand. The increase in domestic demand was supported mainly by higher real disposable income, an accommodative monetary policy stance, favorable financing conditions, and loosened fiscal policy measures. In addition, net foreign demand contributed positively to output growth because, in real terms, exports increased faster than imports. The unemployment rate in the euro area declined slightly to 11.6%, still an elevated level. Price pressures dropped significantly to 0.4% in 2014, below the European Central Bank’s inflation target of 2.0%, driven mainly by lower oil prices.
4 Source: International Monetary Fund.
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THE NETHERLANDS After contracting by 0.7% in 2013, the Dutch economy increased by 0.9% in 20145 (see Table 2). The positive economic turnaround was led by an increase in domestic demand, reflecting increases in both private and public demand. The growth in private demand was attributable primarily to an expansion in investments. Gross fixed capital formation rose because of more investments in buildings, machinery, and software mitigated by fewer investments in vehicles, in particular automobiles and trucks. In addition, private consumption rose slightly as a result of higher real disposable income attributable mainly to an increase
Table 2
vestments registered growth for the first time since 2011. Public demand rose as well, owing to an increase in investments, while consumption decreased. In contrast, the contribution of net foreign demand to economic growth remained flat as export growth offset the increase in imports. Output growth in the Netherlands was reflected by all economic sectors, except the mining sector. In particular, the construction, manufacturing, and commercial business services sectors posted positive gains. As was the case in 2013, the Dutch public deficit amounted to 2.3% of GDP in 2014, below the EMU norm of 3.0%, while the public debt amounted to 68.8% of GDP, above the EMU debt ceiling of 60.0%. For the first time since the global financial
Economic indicators (Euro area – The Netherlands)
Euro area
The Netherlands
2013
2014
2013
2014
Real GDP (% change)
-0.5
0.9
-0.7
0.9
Consumer prices (%)
1.3
0.4
2.5
1.0
12.0
11.6
7.2
7.4
Unemployment rate* (%)
Sources: Central Bureau of Statistics of the Netherlands and IMF World Economic Outlook April 2015. * International definition.
in wages. The rise in private consumption was reflected by more purchases of durable goods, especially electronics, and more spending at restaurants & hotels. In 2014, both private consumption and in-
5 Source: Central Bureau of Statistics of the Netherlands.
crisis, the debt ratio remained about the same as the previous year. The Dutch unemployment rate rose slightly from 7.2% in 2013 to 7.4% in 2014, while the number of long-term unemployed workers increased considerably by 22.5%. At the same time, the inflation rate dropped to 1.0% in 2014, the lowest level registered
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in 25 years, ascribable mainly to a steep drop in oil prices mitigated by an increase in house rent. The lower inflationary pressures recorded in the Netherlands were in line with the price development in the euro area.
deceleration of job creation, and slower credit growth, as well as a decline in private investment. Inflationary pressures in the Latin American and Caribbean region rose considerably from 7.6% in 2013 to 9.3% in 2014, stemming mainly from higher food prices.
ECONOMIC DEVELOPMENTS IN LATIN AMERICA AND THE CARIBBEAN
VENEZUELA Contrary to the 1.5% growth in 2013, the Venezuelan economy contracted by 4.0% in 20146 (see Table 3). The Venezuelan economy went into a recession in 2014 after registering contractions in three consecutive quarters, attributable to a decrease in domestic demand mitigated by an increase in net foreign demand. Domestic demand in Venezuela decreased
Real output in Latin America and the Caribbean expanded by 1.1% in 2014, a deceleration compared to the 2.7% growth in 2013 and the slowest pace registered since 2009. The slower economic growth was concentrated in South America, attributable to an economic slowdown in all
Graph 1 Economic growth in Latin America and the Caribbean (%) 5 4 3 2 1 0 Latin America and the Caribb ean
Caribbean
Central America
2013
MĂŠxico
South America
2014
Source: Economic Commission of Latin America and the Caribbean
countries, except Colombia, and a contraction in the Venezuelan and Argentinean economies (see Graph 1). The economic slowdown resulted particularly from a slower growth in private consumption, reflecting higher inflationary pressures, a
because of a decline in private and public demand. The decline in private demand was reflected by a drop in consumption
6 Source: Banco Central de Venezuela.
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Table 3
Economic indicators (Latin America & the Caribbean – Venezuela)
Latin America and the Caribbean
Venezuela
2013
2014
2013
2014
Real GDP (% change)*
2.7
1.1
1.5
-4.0
Consumer prices (%)
7.6
9.3
40.6
62.2
Unemployment rate (%)
6.2
6.0
7.5
7.0
Sources: Banco Central de Venezuela, Instituto Nacional de Estadística Venezuela, and Economic Commission for Latin America & the Caribbean. * Venezuelan real GDP figures show an average of the first three quarters of 2013 and 2014.
and investments. Private consumption shrank mainly as a result of higher inflationary pressures that negatively impacted consumers’ purchasing power. Gross fixed capital investments tumbled as well, reflecting the weak business climate in Venezuela. In addition, public demand plummeted because the sharp decline in crude oil prices reduced government revenues from oil exports.
An analysis by sector reveals that the contraction in Venezuela’s real output was ascribable particularly to the trade & repair services, construction, manufacturing, and transport & storage sectors. Meanwhile, the inflation rate accelerated to 62.2% in 2014, due mostly to domestic shortages of goods.
In contrast, net foreign demand contributed positively to real output growth as exports increased while imports dropped. The rise in exports was driven mainly by an increase in the export of mineral and chemical products to Switzerland, the United States, and Brazil. However, oil exports dropped because of the decline in international crude oil prices. At the same time, imports dropped mainly because of a decline in the import of machinery and electrical equipment from China. During 2014, public sector exports and imports both increased, while exports and imports by the private sector dropped.
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GIFT FOR THE CHILDREN Ariadne Faries 2010 Acrylic on canvas 47.0 x 34.0 cm
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3
GENERAL ECONOMIC DEVELOPMENTS ECONOMIC DEVELOPMENTS IN CURAÇAO AND SINT MAARTEN GENERAL ECONOMIC DEVELOPMENTS IN CURAÇAO
third year in a row, Curaçao has recorded negative economic growth. Meanwhile, Curaçao’s inflation rate in 2014 accelerated to 1.5%, attributable mainly to higher food prices.
After contracting by 0.8% in 2013, the real GDP of Curaçao contracted further by 1.1% in 2014 as a result of a decline in domestic demand mitigated by an increase in net foreign demand (see Graph 2). For the
On the expenditure side, the dismal economic performance of Curaçao during 2014 was the result of a drop in domestic demand mitigated by an increase in net
Graph 2 Real GDP compositiona 4 3 2 1 0 -1 -2 -3 -4
2012 Domestic demand
2013 Net foreign demand
2014 GDP
Source: Centrale Bank van Curaçao en Sint Maarten. a Real percentage changes.
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foreign demand (see Table 4). Almost all components of the aggregate domestic demand shrank. Consumer spending fell, reflecting lower import duties collected and less consumer credit extended by the domestic commercial banks. Private investment contracted as well because of fewer construction activities and was consistent with the drop in business loans extended by the domestic commercial banks. In addition, public demand dropped because of decreases in consumption and investment. The decrease in public consumption was due mainly to fewer outlays on goods and services.
Table 4
In contrast, net foreign demand contributed positively to Curaçao’s economy because in real terms, exports grew while imports dropped. The growth in exports stemmed primarily from more bunkering, tourism-related activities, and refining fee earned by the Isla refinery, while the drop in imports was the result of a decline in private spending and lower merchandise imports by the free-zone companies.
DOMESTIC PRODUCTION Over the course of 2014, both the private and public sectors contributed to the de-
Curaçao - GDP by expendituresab 2013
2014
Domestic expenditures, of which:
-1.7
-3.0
Private sector
-1.5
-2.6
Investment
-0.6
-1.3
Consumption
-0.9
-1.3
-0.2
-0.4
0.7
-0.1
-0.9
-0.3
Changes in inventory
-0.2
0.0
Foreign net expenditures, of which:
1.1
1.9
Export of goods and services
-2.0
1.6
Import of goods and services
-3.0
-0.2
GDP by expenditures
-0.8
-1.1
Government Investment Consumption
Source: Estimates by the Centrale Bank van Curaçao en Sint Maarten. a Expenditure categories data are weighted contributors to GDP growth. b Real percentage changes.
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cline in economic activities on the production side. The real GDP contraction can be ascribed mainly to the wholesale & retail trade, utilities, construction and transport, storage, & communication sectors. In addition, the public sector contracted, owing to lower spending on wages & salaries and less tax revenues (see Table 5).
Table 5
Real value added in the wholesale & retail trade sector contracted by 2.3% in 2014 mainly because of lower domestic spending and fewer activities in the free-zone sector. The poor performance in the free zone was consistent with a decline in the number of visitors from all markets, except Venezuela. The largest decline in the number of free-zone visitors came from
Curaรงao - GDP by sectora 2013
2014
-0.4
-0.2
0.7
-0.9
Electricity, gas, & water
-2.8
-3.8
Construction
-0.7
-2.2
Wholesale & retail trade
-4.8
-2.3
2.3
2.9
Transport, storage, & communication
-0.8
-2.0
Financial intermediation
-0.9
-0.7
Real estate, renting, & business activities
-0.8
-0.7
Other community, social, & personal services
-2.0
-0.2
Private households
2.3
0.1
Total private sector
-0.8
-0.9
Public sector
-0.7
-1.4
0.7
-0.5
-0.8
-1.1
Agriculture, fishery, & mining Manufacturing
Restaurants & hotels
Taxes minus subsidies
GDP by sector
Source: Estimates by the Centrale Bank van Curaรงao en Sint Maarten. a Real percentage changes.
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Haiti and Jamaica. In addition, activities in the utilities sector contracted by 3.8% in 2014, reflecting decreases in both water and electricity production. In 2014, the transport, storage, & communication sector contributed negatively to real GDP growth (-2.0%) because of a drop in airport-related activities. The drop in airport-related activities was reflected by a contraction in total passenger traffic, particularly transit passengers, and the number of commercial landings. However, the harbor performed well due to more local container movements and ships, notably tankers, piloted into the port of Curaรงao. Output in the financial intermediation sector decreased by 0.7% during 2014 as a result of lower value added in real terms in both domestic and international financial services. Real value added of domestic financial services dropped as the increase in other fees and commissions of the domestic commercial banks was not sufficient to compensate for the inflation. At the same time, decreases in wages & salaries and other operational expenses led to the disappointing performance in the international financial services sector. Compared to 2013, real value added in the construction sector shrank at a faster pace in 2014 (-2.2%), attributable to a decline in both private and public investments. The negative performance of the construction sector was in line with fewer business loans extended by the domestic commercial banks, reduced sale of local construction materials, and lower imports of construction materials. During 2014, the manufacturing sector contributed negatively to real GDP growth (-0.9%) because the decline in ship repair
activities outweighed the growth in refining and trading activities by the Isla refinery. The decline in ship repair activities was reflected by a significant drop in the number of man hours sold (-21.5%) and the number of ships repaired (-39.9%). In contrast, real output growth in the restaurants & hotels sector accelerated in 2014 (2.9%) and can be explained by a faster growth in the number of visitor nights, despite a slowdown in the number of stay-over tourists. While the number of cruise calls declined, the number of cruise tourists increased, indicating that larger ships visited Curaรงao during 2014. At the same time, the number of stay-over visitors was up by 2.9% in 2014 compared to the 4.7% growth recorded in 2013. The slower growth in the number of stay-over visitors stemmed from a slowdown in the South American market combined with declines in the North American and Caribbean markets. The development in the South American market was primarily the result of a slower growth in the number of Venezuelan and Brazilian visitors. Meanwhile, the North American market contracted because the growth in the number of Canadian visitors could not offset the significant drop in the number of visitors from the United States. The disappointing performance of the U.S. market was the result of an increase in the number of Venezuelans residing in Miami travelling via Curaรงao to visit their family in Venezuela. Consequently, fewer seats were available for the U.S. travelers who wanted to stay in Curaรงao. The number of Caribbean visitors declined mainly as a result of fewer visitors from Aruba, the Dominican Republic, and Jamaica. In contrast, the European market segment expanded
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at a faster pace, led mainly by more visitors from the Netherlands because of increased airlift from Arkefly. Despite additional weekly flights by KLM for the German market, the growth in the number of German visitors was less pronounced in 2014 than in 2013. Contrary to the slowdown in the number of stay-over visitors, growth in the number of visitor nights accelerated consistent with the significant growth in the number of European visitors who typically stay longer (See Table 14 in Appendix I for more details).
INFLATIONARY PRESSURES Consumer price inflation in Curaçao rose from 1.3% in 2013 to 1.5% in 2014, largely the result of higher food prices (see Graph 3). An analysis of developments in the Consumer Price Index (CPI) components in Curaçao reveals that during 2014, the average prices rose in all categories with the exception of the category “Transport & communication” (-0.3%). The latter price drop was mainly the result of declining
fuel prices. In contrast, inflationary pressures accelerated in the categories “Food” (3.4%), “Beverages & tobacco” (16.7%), and “Clothing & footwear” (3.4%). The largest price gain was registered by the “Food” category, attributable mainly to a faster growth in the prices of potatoes, vegetables, and fruit. Price pressures in the category “Beverages & tobacco” have shown a faster annual growth since 2011, mainly because of the full-year effect of the higher turnover tax rate of 9.0% on luxury and unhealthy goods and services, including alcoholic beverages and tobacco, effective May 1, 2013. Meanwhile, prices increased in the categories “Housing” (0.5%) and “Housekeeping & furnishings” (1.2%), though less pronounced than in 2013. The lower inflationary pressures in the “Housing” category resulted from an increase in water tariffs mitigated by a drop in electricity prices. (See Table 15A in Appendix I for a complete overview).
Graph 3 Developments in consumer pricesa 70
5
60
4
50
3
40 2 30 1
20
0 2009 -1
a
2010 US (l)
2011 Sint Maarten ( l)
2012 Curaçao (l)
2013 Neth (l)
2014 Venezuela (r)
10 0
Annual percentage change.
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GENERAL ECONOMIC DEVELOPMENTS IN SINT MAARTEN
consumption, partly the result of underspending by the government, which translated into lower outlays on goods and services (see Table 6).
Despite suffering a direct hit from Hurricane Gonzalo in October 2014, real GDP grew in Sint Maarten by 1.5%, an acceleration compared to the sluggish 0.9% growth experienced in 2013. The 2014 growth in GDP was driven mainly by increased private sector activities, in particular, by robust growth in the tourism sector. In contrast, the public sector contributed negatively to GDP under the weight of tight fiscal rules (see Graph 4). Meanwhile, inflationary pressures in Sint Maarten decelerated to 1.9% in 2014, down from 2.5% recorded in 2013, due mainly to the effects of a steady drop in international fuel prices that began in the third quarter of 2014.
In contrast, government investment increased in 2014 with the purchase of the Emilio Wilson Estate and the new administration building. Meanwhile, private spending rose with increases in both private investment and consumption. Net foreign demand decreased because, in real terms, imports grew at a faster pace than exports. The rise in exports was driven primarily by more tourism-related activities. The growth in imports was reflected mainly by higher merchandise imports due to increased tourism-related activities and higher private spending.
On the expenditure side, aggregate domestic demand increased in Sint Maarten during 2014. However, this increase was mitigated by a contraction in government
An analysis by sector reveals that the expansion of Sint Maarten’s GDP in 2014 was due mostly to strong growth in the wholesale & retail trade, restaurants & hotels,
DOMESTIC PRODUCTION
Graph 4 Real GDP compositiona 4 3 2 1 0 -1 -2 -3 -4
2012 Domestic demand
2013 Net foreign demand
2014 GDP
Source: Centrale Bank van Curaçao en Sint Maarten. a Real percentage changes.
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Table 6
Sint Maarten - GDP by expendituresab
2013
2014
Domestic expenditures, of which:
1.0
5.5
Private sector
2.0
2.6
Investment
2.0
1.0
Consumption
0.0
1.6
-1.0
2.8
Investment
-0.5
3.9
Consumption
-0.5
-1.1
0.2
1.0
-0.3
-4.9
Export of goods and services
3.8
0.7
Import of goods and services
4.1
5.6
GDP by expenditures
0.9
1.5
Government
Changes in inventory Foreign net expenditures, of which:
Source: Estimates by the Centrale Bank van Curaรงao en Sint Maarten. a Expenditure categories data are weighted contributors to GDP growth. b Real percentage changes.
and transport, storage, & communication sectors on the back of higher cruise and stay-over arrivals (see Table 7). Real value added in the wholesale & retail trade sector grew by 3.6% in 2014, a faster pace compared to 2013, as a result of an increase in both domestic and tourism spending. The restaurant & hotels and transportation, storage, & communication sectors, in particular, recorded healthy growth in 2014, registering at 7.1% and 4.1%, respectively.
The higher growth in the number of cruise tourists was in line with the increased number of cruise calls as well as bigger ships during 2014. Cruise passenger arrivals to Sint Maarten hit a milestone in 2014, reaching over 2 million passengers, a growth of 12.1% compared to 2013. In addition, the number of passenger arrivals in the traditionally slower months of May through October grew significantly compared to the same period in 2013. Stayover tourism expanded in 2014 at a faster pace of 7.1% compared to 2013, reaching levels not seen since before the devasta-
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Table 7
Sint Maarten - GDP by sectora
2013
2014
0.0
0.0
-2.9
3.9
Electricity, gas, & water
0.8
0.1
Construction
5.8
-0.8
Wholesale & retail trade
2.3
3.6
Restaurants & hotels
2.8
7.1
Transport, storage, & communication
-1.9
4.1
Financial intermediation
-1.8
-1.3
0.5
1.4
Other community, social, & personal services
-0.6
1.2
Private households
-2.6
-0.7
Total private sector
0.8
2.0
Public sector
3.1
-0.6
-0.1
-0.1
0.9
1.5
Agriculture, fishery, & mining Manufacturing
Real estate, renting, & business activities
Taxes minus subsidies
GDP by sector Source: Estimates by the Centrale Bank van Curaçao en Sint Maarten. a Real percentage changes.
tion caused by Hurricane Luis in 1995. Growth in the North American market accelerated, up 8.6% compared to 2013. Passenger arrivals from the United States – Sint Maarten’s largest tourism market – increased by 8.3% compared to 3.2% in 2013, driven mainly by the US economic recovery as well as the upgrading of several hotels and increased marketing efforts.
All other major travel markets showed positive growth as well. Stay-over visitors from the South American market contributed positively to tourism mainly because of a large increase in visitors from Brazil (20.0%), mitigated only by Venezuela as it continued to slip further into economic turmoil. The European market also expanded in 2014, except for France, which showed a slight decline in arrivals compared to 2013.
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SPAANSE WATER Roald Schotborgh 2000
Oil paint on canvas 69.5 x 100.0 cm
The Caribbean market, with the exception of the Dominican Republic, registered overall growth due to more visitors from across the region. (See Table 14 in Appendix I.) Although the number of stay-over arrivals increased, the hotel occupancy rate declined slightly in 2014 to 67.4% compared to 68.8% in 2013.7 The passing of Hurricane Gonzalo in October, along with the remodeling and upgrading of several hotels, contributed to a lower occupancy rate in 2014. Activities in the transport, storage, & communication sector of Sint Maarten saw a positive turnaround of 4.1% in 2014 in contrast to the contraction of 1.9% experienced in 2013. This development is not unusual in the aftermath of a hurricane, when demand for transport, storage, and communication-related services goes up. Harbor activities also increased, reflected by a higher number of ships, particularly cruise ships, visiting the port of Sint Maarten. The number of commercial freighters decreased slightly compared to 2013; how-
7 The hotel occupancy rate needs to be interpreted carefully because one of the largest hotels in Sint Maarten is not included.
ever, overall tonnage shipped increased in line with the growth in domestic and tourism spending. Meanwhile, air transportation activities also rose during 2014, stemming from a rise in passenger traffic. Travel on Sint Maarten’s domestic carrier, Winair, saw a double digit (15.0%) increase in 2014, up significantly from the 4.8% growth seen in 2013, in line with the increase in passenger arrivals since Sint Maarten’s airport functions as a hub to the surrounding islands. Furthermore, the number of commercial landings increased in 2014. The positive contribution of the airport to real GDP growth was in line with the higher number of stay-over tourists. The utilities sector continued to grow in 2014, albeit at a decelerated pace compared to 2013. Water production increased, although less pronounced than a year earlier. A new water production plant near the port of Sint Maarten was inaugurated early in 2014 along with two large water storage tanks, increasing the water inventory. However, electricity production declined in 2014, due to, among other things, the passage of Hurricane Gonzalo as well as the increasing use of solar panels and energy efficient lighting.
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After a contraction of 2.9% in 2013, real value added in the manufacturing sector recorded a positive turnaround of 3.9% in 2014. The 2014 yachting season showed a marked increase in yacht repair activities as a result of more yachts, in particular mega yachts, visiting the island. Concerns within the yachting community eased over the presence of the Chikungunya virus in Sint Maarten, which led to less yachts visiting in 2013. Activities in the construction sector declined in 2014 compared to 2013 (-0.8%) due to a decrease in both private and public projects. Public sector construction activity dropped in the wake of the completion of the Simpson Bay Causeway and the building for the National Institute for Professional Advancement. There were no major public projects in 2014, with projects put on hold due to the government needing time to realize the necessary financing after significant investments like the purchase of the Emilio Wilson Estate and the new administration building. In addition, the number of private projects declined, consistent with the decrease in the number of building permits issued in Sint Maarten during 2014 as well as the smaller amount of cement imports compared to 2013. Finally, the financial intermediation sector also put a drag on the real economic growth of Sint Maarten in 2014 (-1.3%) as interest income of the domestic commercial banks dropped at a faster pace than interest expenses.
INFLATIONARY PRESSURES Consumer price inflation in Sint Maarten eased from 2.5% in 2013 to 1.9% in 2014 mainly because of reduced transportation
costs. The development in inflation in Sint Maarten was in line with the development in inflationary pressures in the United States. An analysis of the development in the CPI components reveals negative inflation in the category “Transport & communication” (-1.0%), due mainly to reduced fuel costs. In contrast, inflationary pressures increased in the categories “Food” (6.3%) and “Housing” (1.9%). The price increase in the “Housing” category was primarily the result of a rise in housing costs and yard maintenance in the aftermath of Hurricane Gonzalo. However, the price increase in “Housing” was mitigated by a decline in electricity prices. The increase in the “Food” category was mainly ascribable to price increases in grain products, meat & fish, potatoes, vegetables & fruit, and dairy products. Increases also occurred in the categories “Beverages & tobacco” (2.5%), “Clothing & footwear” (0.8%), and “Housekeeping & furnishings” (2.0%), although at a slower pace in 2014 than in 2013. Prices in the “Health” category (4.9%) rose considerably in 2014 resulting from, among other things, a doubling of the social insurance premiums of employees from 2.1% to 4.2% effective January 1, 2014. (See Table 15B in Appendix I for further details.)
PUBLIC FINANCES PUBLIC FINANCES OF CURAÇAO Cash overview and financing Over the course of 2014, the government of Curaçao continued to aim towards attaining sustainable public finances and compensating for the current account def-
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-1.1%
1.5%
23.2%
Economic contraction in 2014 for Curaรงao
Economic expansion in 2014 for Sint Maarten
Contraction was caused by a de-
The 2014 growth in GDP was driven
Gross
cline in domestic demand miti-
mainly by increased private sec-
NAf.460.0 million in 2014 reaching
gated by an increase in net foreign
tor activities, in particular robust
an import coverage of 4.0 months.
demand.
growth in the tourism sector.
icits incurred in the period 2010-2012. In line with these goals, several cost-reducing measures were announced in 2014. First, to further contain personnel costs, which amount to 12% of GDP, the government opted to uphold the vacancy stop originally imposed by the Kingdom Council of Ministers in 2012.8 In addition, during its negotiations with the labor unions, the government expressed its plans, among other things, to include all civil servants in the general health insurance scheme, increase their retirement age from 60 to 65, and introduce a temporary wage freeze. Eventually, it was decided that all civil servants will become part of the general health insurance scheme during 2015 but no consensus was reached regarding the other measures. Notwithstanding the setbacks in its projected wage bill cuts, the government still managed to run a surplus on its current account, amounting to NAf.15.0 million, or 0.3% of GDP (see Table 8). This surplus was lower than the surplus of NAf.94.8 million registered in 2013 and was ascribable to a decline in government revenues, miti-
8 On July 13, 2012, the Kingdom Council of Ministers instructed the Curaรงao government to take immediate action to balance the current account of its 2012 budget and multiannual projections.
Expansion in gross reserves reserves
increased
by
gated by a drop in expenditures. Government income fell by 7.4% due to declines in both tax and nontax revenues. The development in tax revenues was attributable mainly to lower proceeds from profit tax and wage tax. Excises on gasoline also dropped, reflecting mainly a transitory windfall in 2013 when the government received several back payments from 2012. In addition, in line with the decline in merchandise imports, import duties fell in 2014. Meanwhile, despite the economic contraction in 2014, sales tax revenues recorded a small increase, reflecting improved tax compliance. The decline in nontax revenues was due mainly to fewer dividend payments received from government-owned companies. On the expenditure side, outlays declined by 2.8%, owing to reduced spending on goods & services, wages & salaries, and transfers & subsidies. Total disbursements on goods & services dropped due to, among other things, cutbacks on the rent of office space and office operational costs. The decline in wages & salaries was in line with a drop in the number of civil servants in 2014 compared to 2013. Meanwhile, the downturn in transfers & subsidies was due largely to a decline in the transfers to households. By contrast, interest expenses rose as a result of the is-
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Table 8
Selected key figures of the government of Curaçao (in millions NAf.) 2012
2013
2014
Revenues
1,661.1
1,676.3
1,551.7
% of GDP
29.6%
29.6%
27.4%
1,431.0
1,423.4
1,402.5
% of GDP
25.5%
25.3%
24.8%
Nontax and other revenues
230.1
252.9
149.2
1,696.7
1,581.5
1,536.7
30.3%
28.1%
27.2%
49.1
50.3
61.2
Current budget balance
-35.5
94.8
15.0
% of GDP
-0.6%
1.7%
0.3%
Primary balance
13.5
145.1
76.2
% of GDP
0.2%
2.6%
1.4%
Tax revenues
Expenditures % of GDP Interest payments
suance of bonds in September 2013. (See Table 16A and 16B in Appendix I for more details.) Curaçao’s primary balance, defined as the budget balance excluding interest payments, deteriorated to 1.4% of GDP in 2014, down from 2.6% in 2013 (see Table 8). This deterioration stemmed from a decline in government revenues mitigated by a decline in expenditures. In June 2014, the government of Curaçao issued NAf.247.0 million in bonds to finance the construction of a new hospital. A portion of the proceeds of this loan was transferred to
USONA, the foundation assigned with the task of managing the construction of the new hospital in Curaçao. The remaining proceeds together with the budgetary surplus resulted in an increase in the balance on the government’s account with the central bank (See Table 9). Public sector debt During 2014, the outstanding public debt of the Curaçao government grew by NAf.256.7 million to NAf.2.177 billion as both the foreign and domestic debt components increased. The foreign public debt
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Table 9
Financing of the budget balance of Curaçao (in millions NAf.) 2013
2014
Monetary financing
-12.0
-61.0
Central bank
-39.9
-61.1
Commercial banks
-27.9
0.1
Nonmonetary financing
-82.7
46.0
62.6
247.0
-145.4
-201.0
94.8
15.0
Government securities with the public Other Current budget balance
rose by NAf.247.0 million as a result of the issuance of a bond loan in June 2014. Since the Dutch State Treasury Agency (DSTA) was allocated the entire loan, Curaçao’s foreign debt component grew from NAf.1.712 billion to NAf.1.959 billion. Meanwhile, the domestic share of Curaçao’s public debt expanded by NAf.8.6 million over the course of 2014 due mainly to higher arrears incurred with the government pension fund, APC. By the end of 2014, Curaçao’s debtto-GDP ratio registered at 38.5%, up from 34.1% at the end of 2013.
PUBLIC FINANCES OF SINT MAARTEN Cash overview and financing During 2014, the Sint Maarten government continued to work towards developing its public administration infrastructure and improving its financial management. However, the marginal growth in tax income continued to be a limiting factor to the government’s development plans. Consequently, increasing tax income and
tax compliance remain challenges that must be addressed to expand government spending and compensate previous budget deficits. In 2014, Sint Maarten registered a current budget deficit of NAf.8.2 million, a turnaround compared to the surplus of NAf.0.5 million registered in 2013. The worsened fiscal situation was the result of a decline in government revenues (12.5%) that surpassed the drop in government expenditures (10.7%). Sint Maarten’s primary balance, defined as the budget balance excluding interest payments, amounted to 0.2% of GDP in 2014. Although still positive, the primary balance worsened somewhat compared to the 0.6% of GDP recorded in 2013. This worsening is attributable entirely to lower revenues recorded in 2014 (see Table 10). An analysis of government revenues reveals that the overall drop in government income was caused in large part by a decline in concessions and fees collected during 2014. Concessions and fees declined mainly because the utility company GEBE prepaid its concession for the years
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Table 10 Selected key figures of the government of Sint Maarten (in millions NAf.) 2012
2013
2014
Revenues
450.9
491.5
430.2
% of GDP
25.6%
26.9%
22.8%
Tax revenues
327.4
328.8
339.2
% of GDP
18.6%
18.0%
18.0%
Nontax and other revenues
123.4
162.7
91.0
Expenditures
434.3
491.0
438.4
% of GDP
24.6%
26.9%
23.2%
Interest payments
11.6
10.7
11.6
Current budget balance
16.6
0.5
-8.2
% of GDP
0.9%
0.0%
-0.4%
Primary balance
28.2
11.2
3.4
% of GDP
1.6%
0.6%
0.2%
2014 through 2016 in 2013. Revenues also dropped because a provision for the government pension fund APS was released in 2013, but not in 2014. In contrast, tax revenues rose owing largely to increased earnings from wage, income, and profit tax. However, similar to 2013, tax revenues remained at 18.0% of GDP in 2014, a relatively low figure compared to the Caribbean region9 (see Graph 5). The growth
9 The average rate in the Caribbean is 20.9%. The calculation includes Montserrat, St Kitts and Nevis, St. Vincent and the Grenadines, The Bahamas, Barbados, Dominican Republic, Jamaica, Trinidad & Tobago, Curaรงao, Sint Maarten, and Aruba. Data source: IMF Government Finance Statistics, Aruba
in the proceeds from the wage tax was due mainly to the indexation of salaries in 2014 that automatically passes through into tax payable. Meanwhile, income and profit tax revenues surged because of increased government efforts to collect past due taxes. These efforts included reducing current backlogs and implementing measures to improve tax compliance. Earnings from the motor vehicle tax also rose because, contrary to 2013, the government issued new license plates in 2014 to effectively control compliance. Central Bank (Statistical Digest 2014) and CBCS.
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Graph 5 Tax revenues as share of GDP in selected Caribbean countries (%) 30
25
20
15
10
5
0 Dominican Republ ic (2011)
Bahamas (2012)
Sint Maarten (2014)
St. Kitts and Nevis (2012)
Arub a (2014)
Montserrat (2012)
St. Vincent and the Grenadines (2012)
Jamaica (2012)
Curacao (2014)
Trinidad and Tobago (2010)
Source: Government Finance Statistics (IMF), Statistical Digest 2014 (Central Bank Aruba), Government Data (CBCS).
By contrast, revenues from the turnover tax contracted due to late payment to the government. The decline recorded in expenditures in 2014 stemmed from a drop in social security transfers and lower outlays on goods & services. Social security transfers dropped mainly because of cutbacks in the government’s contributions to social insurances. As of 2014, the government no longer covers the health insurance of family members of civil servants. Meanwhile, the decreased spending on goods & services was partly the result of under spending by the government to remain within the budget. By contrast, disbursements on wages & salaries increased mainly as a result of the indexation of civil servants’ salaries in 2014 (See Tables 16C and 16D in Appendix I for more details). Sint Maarten issued new bonds in 2014, reflected by the NAf.173.2 million in-
crease in outstanding government securities compared to 2013. First, a NAf.143.0 million bond loan was emitted in June 2014 to finance several projects including the new government administration building and to recover the cash used to make investments in 2011 and 2012. Subsequently, in November, a second bond loan of NAf.30.7 million was issued for the purchase of the Emilio Wilson Estate. Part of the proceeds of these issues was deposited on the government’s account with the central bank. However, the resulting decline in monetary financing was mitigated by the withdrawal of funds from the government’s commercial bank accounts to cover the budget deficit and pay some of its arrears to creditors (See Table 11). Public sector debt In 2014, Sint Maarten’s public debt expanded by NAf.256.4 million to NAf.697.9 million (37.0% of GDP). This increase
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Table 11 Financing of the budget balance of Sint Maarten (in millions NAf.)
Monetary financing
2013
2014
55.8
-21.8
0.0
-63.1
55.8
41.3
-56.3
30.0
0.0
173.2
-56.3
-143.2
0.5
-8.2
Central bank Commercial banks Nonmonetary financing Government securities with the public Other Current budget balance
stemmed mostly from the bonds issued in June and November 2014. Because the Dutch State Treasury Agency (DSTA)10 was the only purchaser of these bonds, Sint Maarten’s foreign debt share rose by NAf.173.3 million. Meanwhile, the domestic share of Sint Maarten’s public debt grew by NAf.83.0 million due mainly to the buildup of additional arrears with the social security institution, SZV, and the public pension fund, APS.
DEVELOPMENTS IN THE BALANCE OF PAYMENTS INTRODUCTION During 2014, the deficit on the current account of the balance of payments of the monetary union narrowed by NAf.415.2 million compared to 2013. Consequently,
10 The Dutch State Treasury Agency (DSTA) has a standing subscription on all loans issued by Curaçao and Sint Maarten. All tenders are based on the current yield of public loans with similar terms issued in the Netherlands.
the current account deficit as percentage of GDP dropped from 15.5% in 2013 to 9.8% in 2014. The smaller current account deficit was caused largely by an improvement in the services balance and to a lesser extent an improvement in the trade balance. In addition, both the income and current transfers’ balances improved. Despite the smaller deficit on the current account, external financing expanded, while capital transfers dropped. As the capital inflow was more than sufficient to cover the current account deficit, the gross reserves of the central bank accumulated by NAf.460.0 million (see Table 12).
CURRENT ACCOUNT Net exports of goods and services in the monetary union increased by NAf.347.6 million during 2014 compared to 2013 as a result of a rise in exports (NAf.331.0 million) accompanied by a drop in imports (NAf.16.6 million). Below follows an analysis of the developments in net exports of
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Table 12 Balance of payments summary (in millions NAf.) 2012
2013
2014
Current account
-1,389.5
-1,153.2
-738.0
Capital transfers
69.8
62.2
23.2
External financing of the government
25.0
-5.7
-9.6
External financing of the private sector
919.5
972.7
1,100.8
Direct investment
110.5
139.7
124.3
Loans and credits
235.3
564.0
187.0
Portfolio investment
573.7
269.0
789.5
Change in gross reserves of the central bank*)
277.5
47.9
-459.9
Foreign exchange
197.2
217.4
-389.1
128.5
105.2
134.2
68.7
112.2
-523.3
Other claims
80.3
-169.5
-70.9
Statistical discrepancies
97.6
76.2
83.6
held at foreign central banks held at foreign commercial banks
*)
A minus sign implies an increase.
goods and services in Curaรงao and in Sint Maarten.11 Developments in the net exports of goods and services in Curaรงao In Curaรงao, net exports of goods and services increased by NAf.420.9 million
11 The current account of the monetary union is not equal to the sum of the current accounts of Curaรงao and Sint Maarten due to, among other things, the transactions between the two countries.
in 2014 compared to 2013 as a result of the growth in exports (NAf.290.6 million) combined with lower imports (NAf.130.3 million). The surge in exports was due primarily to more foreign exchange revenues from bunkering activities. The growth in exports was related also to an increase in the refining fee reflecting mainly more trading activities provided by the CRU12 to
12 The Curaรงao Refinery Utilities, a subsidiary of Refineria di Korsou.
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The Bank plays an important role in the dissemination of information on economic and financial topics concerning the countries Curaรงao and Sint Maarten.
Triggered by the slower demand from foreign merchants, merchandise imports by the free-zone companies also dropped. In addition, lower domestic spending added to the decline in imports. Finally, oil imports shrank, reflecting mainly the decline in international oil prices. Developments in the net exports of goods and services in Sint Maarten
the Venezuelan state oil company, PDVSA, in combination with higher production at the Isla refinery. In addition, foreign exchange revenues from the tourism industry grew during 2014 (NAf.78.4 million), at a slightly faster pace than in 2013. The higher growth rate stemmed from stayover tourism because cruise tourism earnings slowed down. However, the growth in tourism was not accompanied by a growth in foreign exchange generated by the transportation sector as foreign exchange receipts shrank by NAf.10.7 million because of a decline in air transportation. The drop in air transportation stemmed entirely from fewer transit passengers, related mainly to the demise of the domestic airline, DAE, in 2013. On the other hand, the international financial services sector showed clear signs of revival. After years of declining revenues and a stabilization in 2013, foreign exchange revenues grew strongly again in 2014 by NAf.38.0 million or 23.0%, caused by, among other things, an increase in trust activities. In addition to the transportation sector, export growth was dampened by a decline in re-exports by the free-zone companies (NAf.36.6 million), reflecting a significantly lower demand by Venezuelan merchants. Their demand dropped as a result of the currency restrictions imposed by the Venezuelan government.
In Sint Maarten, net foreign demand fell by NAf.54.3 million in 2014 compared to 2013, as the rise in imports (NAf.108.5 million) outweighed the increase in exports (NAf.54.2 million). The growth in imports was related largely to a rise in merchandise imports particularly by the wholesale trade sector and to a lesser extent by the retail trade sector. Both sectors expanded their imports to meet the growth in domestic demand and tourism spending. However, the import of construction material declined because of, among other things, the completion of the construction of the Simpson Bay Lagoon Causeway. Furthermore, lower international oil prices caused a decline in oil imports. Exports of goods and services increased as a result of a strong rise in foreign exchange revenues from the tourism sector. The tourism sector grew in 2014 at a significantly faster pace than in 2013. Following an increase of NAf.28.2 million (1.9%) in 2013, foreign exchange earnings from tourism expanded by NAf.102.0 million (6.6%) in 2014. The 2014 result came from a surge of NAf.82.2 million (15.1%) in foreign exchange receipts from cruise tourism combined with an increase of NAf.19.8 million (2.0%) in stay-over tourism.
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Developments in the income balance and current transfers balance The deficit on the income balance of the monetary union remained practically unchanged in 2014 compared to 2013 as an increase in labor income paid to abroad was offset by a rise in dividend and interest payments received on foreign investments. The increase in labor income paid was the result of more foreign labor hired by the hotel sector in Sint Maarten. Meanwhile, the deficit on the current transfers balance narrowed by NAf.63.2 million as current transfers received from abroad increased, while current transfers paid to abroad declined. The increase in received transfers was largely the result of a rise in government taxes received from abroad related to international financial services in 2014 compared to 2013. (See Table 17 in Appendix I for a detailed overview.)
DEVELOPMENTS IN THE FINANCIAL AND CAPITAL ACCOUNT In line with the deficit on the current account, the net foreign wealth of the private sector dropped by NAf.1,100.8 million in 2014. This change in the external financing of the private sector was due mainly to
a deterioration of the portfolio investment balance. The portfolio investment balance deteriorated by NAf.789.5 million in 2014, largely as a result of funds received from matured foreign debt securities held by institutional investors and not reinvested abroad. The bulk of these matured debt securities was issued in the past by the entities of the Netherlands Antilles and taken over by the Dutch government in October 2010 as part of the debt relief program. In addition, the worsening of the portfolio investment balance was caused by bond issues by the governments of Curaรงao and Sint Maarten to finance the construction of a new hospital in Curaรงao and several investment projects in Sint Maarten. Because of the standing subscription agreement, these bonds were purchased by the Dutch government. The loans and credits balance deteriorated by NAf.187.0 million in 2014 due to, among other things, the repatriation of funds abroad by local companies to finance their operations in the monetary union. Also, the net trade credits balance deteriorated because of an increase in trade credits received on imports in combination with repayments of trade credits extended by local merchants in the past.
BOOTJE AAN STEIGER Philip Rademaker 2001 Water paint on paper 43.5 x 55.0 cm
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Net direct investments into the monetary union expanded by NAf.124.3 million in 2014, a deceleration compared to the increase of NAf.139.6 million registered in 2013. The expansion in 2014 was due mainly to increased claims by foreign direct investors on their subsidiaries in Curaçao and Sint Maarten and the purchase of real estate by nonresidents. Also, claims of domestic direct investors on their foreign subsidiaries decreased. Meanwhile, capital transfers declined to NAf.23.2 million in 2014 as development aid funds from the Netherlands are being phased out. As the inflows from capital transfers and external financing were more than sufficient to cover the current account deficit, gross reserves increased by NAf.460.0 million in 2014. (See Table 18 in Appendix I for a detailed overview.)
DEVELOPMENTS IN THE REAL EFFECTIVE EXCHANGE RATE (REER) The Real Effective Exchange Rate (REER) is a measure of international price competitiveness and is defined as the nominal exchange rates adjusted for price differentials (i.e., inflation rates) between a
home country and its trading partners. An increase in the REER indicates an appreciation of the real effective exchange rate and, hence, a decline in price competitiveness. In Table 13, the REER is presented for Curaçao and Sint Maarten for the period 2007-2014. Since 2012, the REER of Curaçao has been depreciating, largely because of the high inflation rate in Venezuela, which accelerated particularly in 2014. If the REER of Curaçao is adjusted to exclude Venezuela, a slight appreciation was recorded in 2014, indicating a small deterioration in international price competitiveness. The REER of Sint Maarten shows a similar development as the REER of Curaçao adjusted for Venezuela. Sint Maarten’s international price competitiveness also deteriorated slightly in 2014, mainly because inflationary pressures were higher than in the United States, its main trading partner.
Table 13 Real Effective Exchange Rate in Curaçao and Sint Maarten (index 2007 = 100)
REER Curaçao
2007
2008
2009
2010
2011
2012
2013
2014
100.00
96.65
95.88
96.25
98.25
97.97
97.62
91.34
100.00
99.67
103.11
104.34
101.00
103.81
103.05
103.32
100.00
102.00
104.84
106.35
104.61
106.83
106.38
106.97
REER Curaçao excl. Venezuela REER Sint Maarten
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APPENDIX I Table 14 Stay-over tourism development by islandab Curaรงao
Sint Maarten
2013
2014
2013
2014
North America, of which:
-0.9
(-0.1)
-7.7
(-1.1)
4.8
(3.0)
8.6
(5.5)
U.S.A.
-0.6
(-0.1)
-13.6
(-1.6)
3.2
(1.7)
8.3
(4.4)
Canada
-2.2
(0.0)
30.2
(0.8)
14.5
(1.4)
10.5
(1.1)
Europe, of which:
0.4
(0.2)
6.3
(2.6)
-1.5
(-0.3)
3.1
(0.7)
The Netherlands
-4.6
(-1.4)
6.9
(2.1)
-2.4
(-0.1)
5.3
(0.2)
10.1
(3.1)
4.7
(1.5)
1.2
(0.0)
5.6
(0.2)
Venezuela
10.8
(2.3)
7.0
(1.5)
-4.1
(0.0)
-16.0
(-0.1)
Brazil
16.9
(0.4)
11.6
(0.3)
-2.6
(0.0)
20.0
(0.2)
Other
6.2
(0.5)
-4.2
(-0.3)
6.1
(0.1)
6.0
(0.1)
Caribbean, of which:
-2.8
(-0.2)
-13.8
(-1.0)
3.0
(0.2)
5.7
(0.3)
Aruba
-7.5
(-0.3)
-10.1
(-0.4)
Dominican Republic
18.0
(0.2)
-26.8
(-0.2)
8.4
(0.1)
-2.7
(0.0)
Other
-1.6
(-0.1)
-14.6
(-0.4)
2.1
(0.1)
7.2
(0.3)
Total
4.7
South & Central America, of which:
2.9
2.2
7.1
Source: Curaรงao Tourist Board and Sint Maarten Tourist Bureau. a Percentage change. b The weighted growth rates are depicted between brackets.
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Table 15A Curaรงao consumer prices (% changes) 2011
2012
2013
2014
Food
7.7
6.1
1.6
3.4
Beverages & tobacco
2.5
4.9
7.0
16.7
Clothing & footwear
0.6
1.2
1.1
3.4
Housing
0.8
2.4
2.5
0.5
Housekeeping & furnishings
1.4
2.5
2.4
1.2
Health
0.9
0.7
-1.5
0.5
Transport & communication
2.7
3.9
-0.8
-0.3
-0.1
1.4
0.6
1.6
Other
1.3
2.0
1.5
1.8
General inflation rate
2.3
3.2
1.3
1.5
Recreation & education
Source: Central Bureau of Statistics, Curaรงao
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Table 15B Sint Maarten consumer prices (% changes) 2011
2012
2013
2014
Food
9.1
11.4
6.2
6.3
Beverages & tobacco
9.8
7.9
3.3
2.5
Clothing & footwear
1.5
6.2
0.9
0.8
Housing
4.6
2.4
0.8
1.9
Housekeeping & furnishings
3.6
6.0
13.7
2.0
Health
1.5
1.4
0.2
4.9
Transport & communication
4.7
1.8
0.9
-1.0
Recreation & education
1.4
3.9
1.3
0.0
Other
3.1
2.7
3.1
1.4
General inflation rate
4.6
4.0
2.5
1.9
Source: Department of Statistics, Sint Maarten.
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Table 16A Budgetary overview of Curaรงao (in millions NAf.) 2012
2013
2014
Revenues
1,661.1
1,676.3
1,551.7
Tax revenues, of which:
1,431.0
1,423.4
1,402.5
712.9
674.1
649.1
43.9
43.3
43.5
Taxes on goods and services
502.8
540.9
545.4
Taxes on international trade and transactions
166.4
160.4
157.3
230.1
252.9
149.2
1,696.7
1,581.5
1,536.7
Wages and salaries
703.5
709.3
690.6
Goods and services
214.5
203.9
177.5
Transfers and subsidies
685.0
570.8
559.3
Interest payments
49.1
50.3
61.2
Other expenditures
44.5
47.3
48.1
-35.5
94.8
15.0
Taxes on income and profits Taxes on property
Nontax and other revenues
Expenditures
Current budget balance
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Table 16B Overview of selected tax revenues of Curaรงao (in millions NAf.) 2012
2013
2014
Taxes on income and profits, of which:
712.9
674.1
649.1
Profit tax
202.9
173.6
161.1
Wage tax
499.8
495.3
486.3
Taxes on property, of which:
43.9
43.3
43.5
Land tax/OZB1
26.1
27.4
35.8
Property transfer tax
16.9
14.5
15.9
Taxes on goods and services, of which:
502.8
540.9
545.4
Sales tax
367.2
390.2
391.9
Excises, of which:
79.2
94.4
84.5
Excise on gasoline
40.9
56.0
49.1
Motor vehicle tax
34.7
36.6
36.5
Taxes on international trade and transactions, of which:
166.4
160.4
157.3
Import duties
165.2
159.9
156.6
Onroerende Zaak Belasting, i.e., a real estate tax.
1
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Table 16C Budgetary overview of Sint Maarten (in millions NAf.) 2012
2013
2014
Revenues
450.9
491.5
430.2
Tax revenues
327.4
328.8
339.2
Concessions and fees
47.4
72.1
42.3
Licenses
11.6
12.1
16.5
Other revenues
64.5
78.5
32.2
Expenditures
434.3
491.0
438.4
Wages and salaries
177.7
197.0
198.7
Goods and services
124.4
113.1
97.8
Subsidies
86.6
86.1
94.2
Social security
20.5
74.2
25.0
Interest payments
11.6
10.7
11.6
Other expenditures
13.4
9.8
11.1
Current budget balance
16.6
0.5
-8.2
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Table 16D Overview of selected tax revenues of Sint Maarten (in millions NAf.) 2012
2013
2014
148.1
148.9
159.7
Profit tax
22.2
21.1
26.8
Wage tax
128.9
132.8
134.6
14.5
14.8
12.7
3.2
5.4
5.5
11.3
9.4
7.2
Taxes on goods and services, of which:
179.9
186.9
187.6
Turnover tax
134.6
140.5
139.9
Vehicle tax
8.5
7.2
8.9
Excise on gasoline
9.6
9.9
9.9
Taxes on income and profits, of which:
Taxes on property, of which: Land tax Property transfer tax
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Table 17 Detailed overview of the balance of payments (in millions NAf.) 2012
2013
2014
-3,478.9
-3,513.0
-3,427.4
Exports
1,931.1
1,553.8
1,549.7
Imports
5,410.0
5,066.8
4,977.1
Services balance
2,388.8
2,698.0
2,960.0
Receipts, of which:
4,434.0
4,756.3
5,091.5
Travel
2,478.4
2,578.9
2,759.2
399.1
500.9
488.4
1,556.5
1,676.5
1,843.9
181.3
180.8
227.5
2,045.2
2,058.3
2,131.5
Travel
661.2
684.7
726.3
Transportation
362.1
344.3
345.8
1,021.9
1,029.3
1,059.4
90.4
108.9
131.1
Income balance 1)
-134.6
-138.4
-134.0
Current transfers balance 2)
-164.7
-199.8
-136.6
-1,389.5
-1,153.2
-738.0
1,291.9
1,077.0
654.4
69.8
62.2
23.2
1,222.1
1,014.8
631.2
97.6
76.2
83.6
Trade balance
Transportation Other services, of which: Int. fin & bus. services sector Expenses, of which:
Other services, of which: Int. fin & bus. services sector
Current account balance
Capital & financial account balance Capital account balance Financial account balance
Net errors & omissions
1) 2)
Labor and investment income. Public and private transfers.
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Table 18 Breakdown of net changes in the financial account1 (in millions NAf.) 2012
2013
2014
Direct investment
110.5
139.7
124.3
Abroad 2)
-15.7
22.8
-85.2
In Curaรงao and Sint Maarten 3)
126.2
116.9
209.5
Portfolio investment 2)
573.7
269.0
789.5
Other investment, of which:
174.9
426.3
43.1
Assets 2)
643.9
33.9
-362.9
-469.0
392.5
406.0
Net lending & borrowing, of which:
85.5
132.0
134.3
Assets 2)
50.7
55.9
102.3
Liabilities 3)
34.8
76.0
32.0
Reserves 4)
277.5
47.9
-459.9
1,530.1
429.5
-16.2
-308.0
585.4
647.5
1,222.0
1,014.9
631.3
Liabilities 3)
Total assets 2) Total liabilities 3)
Balance
Transaction basis. A minus sign means an increase in assets. 3) A minus sign means a decrease in liabilities. 4) A minus sign means an increase in reserves. 1) 2)
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TRUPIAAL Roald Schotborgh 2003 Oil paint on canvas 104.0 x 129.0 cm
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MONETARY DEVELOPMENTS AND POLICY
4
PROMOTING THE STABILITY OF THE CURRENCY INTRODUCTION The monetary policy of the Bank is geared towards keeping the exchange rate of the currency, the Netherlands Antillean guilder (NAf.), stable against the US dollar. The Netherlands Antillean guilder remained in circulation in Curaçao and Sint Maarten after the Netherlands Antilles was dissolved in 2010 but will be replaced by a new currency in the future. Maintaining the external stability of the currency is pursued by preserving the fixed peg with the US dollar and guaranteeing the convertibility between these two currencies. The US dollar-peg is justified as most international trade transactions are conducted with the United States or settled in US dollars. Since 1971, the official NAf./$ rate of 1.79 has been firmly supported by the monetary authorities. Therefore, as an intermediate target of monetary policy, the Bank strives for a level of official reserves equal to approximately three months of imports, guaranteeing an unhampered flow of international transactions.
The Bank’s monetary policy instruments are aimed mainly at influencing the amount of domestic base money or, more specifically, the commercial banks’ available liquidity, which is reflected by their current account balances at the Bank. In the end, this approach should have an impact on the level of domestic credit extension, domestic spending, imports, and, ultimately, the level of official reserves. As a result of the credible dollar-peg, the inflation rate has closely followed the US inflation rate over the years, thereby keeping the competitive position of the two countries that form the monetary union, Curaçao and Sint Maarten, fairly stable.
MONETARY DEVELOPMENTS During 2014, the Bank continued to direct its monetary policy instruments toward reducing the excess liquidity in the domestic money market. First, the percentage of the reserve requirement, the main instrument, was increased gradually during the first half of 2014 to reach 18.00% on June
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16. Since then, this percentage has been left unchanged. The reserve requirement aims to influence commercial banks’ liquidity and, hence, the growth in credit extension. Second, the Bank tried to mop up more liquidity by auctioning Certificates of Deposit (CDs). By offering more attractive rates and higher amounts than matured at the auctions, the amount of outstanding CDs increased from NAf.14.0 million at the end of 2013 to NAf.90.0 million at the end of 2014. However, despite the high percentage of the reserve requirement and the increase in outstanding CDs during 2014, the amount of liquidity in the domestic money market was not curtailed. The commercial banks’ demand deposits at the Bank actually increased at the end of 2014 compared to the end of 2013.
MONEY SUPPLY Monetary growth accelerated during 2014, with broad money (M2) expanding by 4.0%, up from a 0.6% increase in 2013. The expansion in M2 was the result of a 5.6% increase in the narrow money component (M1) and a 2.6% increase in the near money component. The growth in M1 (NAf.193.7 million) was caused primarily by higher demand deposits, led by increases in both foreign and domestic currency deposits. The growth in M1 assets, which are used mainly for transaction purposes, may reflect the lack of credible investment opportunities and the low opportunity cost of holding liquid assets in an environment of low interest rates. M1 now accounts for nearly 47% of the money supply. The growth in near money resulted from increases in both private sector time deposits and savings deposits. The monetary expansion was accompanied by a strong
monetary base (M0)13 growth (25.4%), driven mainly by the accumulation of excess reserves by the commercial banks at the Bank. The subscription by the Dutch State Treasury Agency (DSTA) to bond issues by the governments of Curaçao and Sint Maarten during 2014 (NAf.426.1 million) caused an inflow of funds that resulted ultimately in an increase in commercial bank balances at the Bank.
FACTORS AFFECTING THE MONEY SUPPLY The monetary expansion during 2014 was driven by a substantial rise of NAf.476.1 million (13.4%) in the net foreign assets of the banking system, offset partly by a contraction in net domestic assets (see Table 19). The increase in net foreign assets was caused by inflows from the Dutch State Treasury Agency (DSTA) related to principal and interest payments on debt securities taken over under the debt relief program and subscriptions on the bond issues of the governments of Curaçao and Sint Maarten during 2014. Net domestic assets contracted by NAf.177.0 million (4.5%) during 2014 because a significant drop in net claims on the private sector and a higher net liability to the government sector were only partly offset by a lower net liability in memorandum balance sheet items. The contraction in net credit to the private sector in 2014 (-1.0%) was attributable entirely to the 2.3% contraction in loans extended. Following a 0.6% contraction in
13 M0 is a measure of the central bank’s monetary liabilities and consists of currency in circulation and the commercial banks’ current account balances.
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2013, private sector loans in Curaçao in 2014 contracted by 2.7% as consumer and business loans fell by 1.0% and 8.3%, respectively.
Net liabilities to the government rose by NAf.79.3 million (22.7%) during 2014, reflecting mainly increases in the deposits of the governments of Curaçao and Sint Maarten with the Bank because the funds raised with the bond issues were not yet entirely spent. (See Table 20 in Appendix II for more details.)
The contraction in business loans was caused by a reduction in loans to strengthen the cash flow of the country’s businesses. In contrast, mortgages increased by 0.8%, a deceleration compared to the 4.1% growth in 2013. In Sint Maarten, credit to the private sector declined for the fourth consecutive year. However, the decline in 2014 (-1.5%) was less pronounced than a year earlier (-1.9%). Consumer loans contracted more in 2014 (-7.9%) than in 2013 (-5.6%). The decline in outstanding business loans in 2014 (-3.8%) was less pronounced than in 2013 (-6.7%). These declines were mitigated by a 3.5% increase in outstanding mortgages at the end of 2014.
DEVELOPMENT IN INTEREST RATES The Bank kept its official lending rate, i.e., the pledging rate, unchanged at 1.00% during 2014. Domestic money market interest rates remained relatively stable throughout 2014, more or less in line with the prevailing low international interest rate environment. However, the Bank offered higher rates at the auctions of Certificates of Deposit
Table 19 Development in monetary aggregates (in millions NAf.) 2011
2012
2013
2014
2013
2014
Change Money supply
7,308.1
7,441.2
7,486.8
7,785.9
0.6%
4.0%
850.1
671.4
657.2
824.2
-2.1%
25.4%
3,227.5
3,541.4
3,921.1
3,744.1
10.7%
-4.5%
-621.6
-425.7
-349.5
-428.8
-17.9%
22.7%
Credit to the private sector
6,155.7
6,373.8
6,307.4
6,148.3
-1.0%
-2.5%
Net foreign assets
4,080.6
3,899.8
3,565.7
4,041.8
-8.6%
13.4%
Central bank
2,886.4
2,845.2
2,483.6
2,921.2
-12.7%
17.6%
Commercial banks
1,194.2
1,054.6
956.8
995.3
-9.3%
4.0%
Monetary base
Net domestic assets Net credit to the government
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(CDs). Contrary to the average drop of 3.3 basis points in the 4-week US dollar libor rate during 2014 compared to 2013, the highest rate accepted on 4-week CDs during 2014 (0.20%) was 8 basis points higher than in 2013 (0.12%). Furthermore, there was more appetite for CDs with maturities of 3, 6, and 12 months during 2014. The highest rates accepted on those terms were 32, 35, and 47 basis points, respectively. Almost no changes occurred in commercial bank borrowing rates in 2014. The average rate on time deposits increased from 1.7% to 1.8%, while the average rate on savings deposits remained unchanged at 1.2%. With respect to lending rates, the average mortgage rate dropped from 6.9% in 2013 to 6.7% in 2014. A similar development took place in time loans where the average rate decreased by 1.3 percentage point reaching 6.8% in 2014. In contrast, the average interest rate on current account overdrafts (7.4%) increased by 0.5 percentage point in 2014. The indicative yields on government securities in Curaçao and Sint Maarten are based on the relatively low effective yield of Dutch State loans with similar maturities
because the Dutch State Treasury Agency (DSTA) participates in the local tenders of government securities at yields prevalent in the Dutch capital market (i.e., the standing subscription). The increase to 1.2% in the average effective yield of 5-year government bonds in 2013 was reversed in 2014 as the yield dropped to 0.1% at end-December. A similar development occurred in Treasury bill rates. The 12-month Treasury bill rate dropped from 0.16% at the end of 2013 to 0.02% at the end of December 2014. (See Table 21 in Appendix II for a detailed overview.)
POLICY MEASURES The Bank’s monetary policy instruments include, among other things, the official lending rate (pledging rate), the reserve requirement, the auctioning of CDs, and credit restrictions. The pledging rate was kept unchanged at the historically low level of 1.00% in 2014, in line with developments in international interest rates, specifically US interest rates. To avoid interest arbitrage, the pledging rate is adjusted to changes in international interest rates to bring it in line with prevailing market rates. Commercial bank lending rates have
OFF CENTER Ailsa Anastasia 2011 Oil paint on paper 80.0 x 80.0 cm
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Since 1971, the official NAf/$ rate of 1.79 has been firmly supported by the monetary authorities. The Bank’s main reason for pegging the NAf to the US dollar is that over the years, more than 60% of its international trade relations have been conducted with the United States or in US dollars. To maintain the dollar standard, the Bank must ensure a sufficient supply of foreign exchange.
been rather insensitive to movements in the central bank’s pledging rate, primarily because of excess bank reserves. As such, the pledging rate serves more of a signaling function for the direction of market interest rates. During 2014, the reserve requirement and the auctioning of CDs, core instruments of the Bank’s monetary policy, were actively deployed. These instruments are aimed at influencing the liquidity and thus the money-creating capacity of the banking system. Furthermore, during the first eight months of 2014, a credit measure was in place.
RESERVE REQUIREMENT The reserve requirement is a liability-based instrument whereby the commercial banks are required to place a non-interestbearing deposit on a blocked account at the Bank for a period of one month. These funds cannot be used for the settlement of transactions. Consequently, the Bank immobilizes excess reserves by administrative fiat to influence the behavior of the commercial banks, especially credit extension. The reserve requirement is calculated as a percentage of the commercial banks’ domestic liabilities, adjusted for some bal-
ance sheet items.14 This percentage can be adjusted monthly, depending on the prevailing liquidity situation in the market. Excess reserves, i.e., the part of the current account balances at the Bank over and above the level necessary for the smooth settlement of daily transactions, have grown substantially since the debt relief in 2009-2010. To mop up excess liquidity, the percentage of the reserve requirement was raised gradually during the first half of 2014 by a total of 100 basis points reaching 18.00% as of June 16, 2014. This 18.00% is the highest percentage imposed on the commercial banks since the introduction of this instrument in 1993. On average NAf.1,116.5 million of bank liquidity was absorbed during the second half of 2014 (see Graph 6). The base upon which the reserve requirement is calculated increased by 1.8% in 2014 after declining by 7.0% in 2013. Because the excess liquidity in the banking system has not translated into excess credit extension, the reserve requirement percentage will be temporarily maintained at its current peak level.
14 The exclusion of long-term deposits (>2 years to maturity) is the main adjustment of domestic liabilities.
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Graph 6 Monetary policy instruments and money market liquidity (in millions NAf) 1,200 1,000 800 600 400 200 0 Dec-10
Jun-11
Dec-11
Jun-12
Reserve requirement
Dec-12
Jun-13
Dec-13
Demand deposits commercial banks
As the local commercial banks obtain their funding mostly through deposit taking, deposits account for more than 85% of their liabilities. This stock of deposits has been more than sufficient to fund their loan business. The environment of high excess liquidity in the banking system proved to be a challenge for the use of the reserve requirement to bring down the current account balances of the commercial banks at the Bank and, hence, the monetary base. The excess liquidity was fueled further by interest and principal payments received on local debt securities taken over by the Netherlands under the debt relief arrangement. Moreover, the subscriptions by the Dutch State Treasury Agency on the bonds issued by the governments of Curaçao and Sint Maarten contributed to the higher liquidity in 2014.
Jun-14
Dec-14
CDs
CERTIFICATES OF DEPOSIT The other instrument of monetary policy used by the Bank to mop up liquidity is the auctioning of Certificates of Deposit (CDs). Commercial banks and also institutional investors used to invest short-term funds in treasury bills. However, due to the debt relief, short-term government securities have dried up, leaving large cash balances on the commercial banks’ balance sheets. Through the issuance of CDs, the Bank tries to control the liquidity of the commercial banks, complementing the reserve requirement. These securities are issued for monetary policy reasons and serve a dual purpose. On the one hand, they offer an investment alternative to the commercial banks. On the other hand, they can be traded among the commercial banks and be pledged as collateral for borrowing at the Bank. Since the exclusion of the reserve requirement and the drying up of treasury bills, CDs are one of the few re-
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maining securities that can be used as collateral for debit balances with the Bank. During 2014, the Bank continued its liquidity absorption policy by offering higher amounts of CDs against various maturities combined with higher interest rates at its bi-weekly auctions. As a result, the amount of outstanding CDs averaged NAf.49.6 million, almost twice the level in 2013 (NAf.26.8 million). The amount of outstanding CDs increased from NAf.14.0 million at the end of December 2013 to NAf.90.1 million at the end of 2014 (see Graph 6).
CREDIT MEASURE Another policy measure in place in 2014 was the credit measure. This measure was prompted two years ago by the high and rising deficit on the current account of the balance of payments, private credit growth persistently exceeding economic
growth, and declining international reserves. The credit measure became effective in March 2012 as a temporary freeze on private credit extension for six months. The measure was prolonged for subsequent 6-month periods, each time slightly increasing the ceiling. As a result, credit growth was bound to a maximum of 3% in 2013 and 4% in 2014 compared to a base that was set at the end of August 2012. The measure contributed to a decline in private credit growth that turned negative as of December 2013. The decline in loans extended to the private sector occurred in both Curaรงao and Sint Maarten. The improvement in other monetary indicators, such as the rising trend in foreign exchange reserves since the end of 2013 and the solid import coverage ratio, prompted the Bank to revoke the credit measure as of September 2014.
BAILE RIBA LAMAN II Marlies Schoenmakers 2006 Ceramic sculpture 19.0 x 40.0 x 31.0 cm
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BOX: STABILIZING THE CREDIT-TO-GDP RATIO The credit-to-GDP ratio of the Monetary Union (i.e., private sector credit to nominal GDP) has followed a distinct upward trend, reflecting financial expansion over time. However, since 2012, the ratio has been declining. Therefore, the questions become: (i) what are the underlying forces that caused this deviation from the trend and (ii) should appropriate measures be taken to stabilize this ratio? The credit-to-GDP gap, i.e., the deviation from the trend, which was introduced by the Basel Committee of Banking Supervision as a countercyclical tool,1 will be estimated using a detrending method. The credit-to-GDP series consist of a trend component and a cyclical component:
đ??śđ??śđ??śđ??śđ??śđ??śđ??śđ??śđ??śđ??śđ??śđ??ś_đ?‘Ąđ?‘Ąđ?‘Ąđ?‘Ą_đ??şđ??şđ??şđ??şđ??şđ??şđ?‘Ąđ?‘Ą = đ?‘”đ?‘”đ?‘Ąđ?‘Ą + đ?‘?đ?‘?đ?‘Ąđ?‘Ą
(1)
with gt representing the trend component and ct the cyclical component. Applying a Hodrick-Prescott (1980) filter to the series will render a smooth stochastic trend which is uncorrelated with the residual cyclical component. This method will result in a trend which reflects the long-run structural policy changes instead of the short-term interventions through discretionary fiscal or monetary policies designed to smooth out short-term economic fluctuations. By solving the optimization problem, using a Ν of 400,0002 will render the following long-term credit-to-GDP ratio: ��
đ?‘‡đ?‘‡âˆ’1
đ?‘Ąđ?‘Ą=0
đ?‘Ąđ?‘Ą=1
min ďż˝(đ??śđ??śđ??śđ??śđ??śđ??śđ??śđ??śđ??śđ??śđ??śđ??ś_đ?‘Ąđ?‘Ąđ?‘Ąđ?‘Ą_đ??şđ??şđ??şđ??şđ??şđ??şđ?‘Ąđ?‘Ą − đ?‘”đ?‘”đ?‘Ąđ?‘Ą )2 + đ?œ†đ?œ† ďż˝[(đ?‘”đ?‘”đ?‘Ąđ?‘Ą+1 − đ?‘”đ?‘”đ?‘Ąđ?‘Ą ) − (đ?‘”đ?‘”đ?‘Ąđ?‘Ą − đ?‘”đ?‘”đ?‘Ąđ?‘Ąâˆ’1 )]2 đ?‘‡đ?‘‡
{���� }��=0
(2)
Next, the credit-to-GDP gap is calculated as the actual credit-to-GDP ratio minus its long-term trend. As can been seen from the graph, the last two years have recorded a negative gap, with 2014 registering a gap of -5.2%, indicating that credit has grown insufficiently relative to GDP, resulting in a imbalance. Furthermore, it can be observed that the tightening of monetary policy, in response to the downward trend in the foreign exchange reserves, has caused the credit-to-GDP ratio to decline (with a lag of approximately 6 months). Particularly, the introduction of the credit measure contributed to the decline in credit growth and hence, the deviation of the ratio from the long-term trend.3 However, monetary policy alone cannot be seen as the sole driver behind this development, as meetings with the commercial banks have identified that the deterioration in the macroeconomic environment has significantly influenced the demand side of credit extension. Lack of investors’ confidence, market saturation, increased competition from nonbank institutions, and lack of market opportunities were perceived as the main forces behind the contraction in credit demand. Therefore, resolving this imbalance by resorting to a countercyclical measure by which the current procyclical monetary policy will be loosened to leverage credit4 will only be effective if it is complemented with appropriate macroeconomic policy efforts to counteract the aforementioned underlying causes. Tightening of monetary policy
85%
17 .5%
Start credit measure Credit-to-GDP gap 12 .5%
75%
7.5%
65%
Credit growth
Real GDP growth
55%
2.5%
45%
-2 .5%
End credit measure -7 .5% 2000
Credit-to-GDP (r.h.s)
Long-term trend: using Hodrick-Prescott lter ( r.h.s)
35% 2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
1 The credit-to-GDP gap is considered an Early Warning Indicator and is used to detect imbalances in the financial sector.. 2 According to the technical literature, using a Îť of 400,000 performs well in picking up the long-term trend in private-sector indebtedness. 3 An increased growth of credit extension relative to economic growth can lead to a balance of payments deficit and hence can undermine the longterm stability of the currency. 4 The current import coverage is 4.1 months, which is a sound level.
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APPENDIX II Table 20 Monetary survey (in millions NAf.) 2012
2013
2014
Money supply (M2)
7,441.2
7,486.8
7,785.9
Money (M1)
3,365.3
3,450.8
3,644.4
331.8
340.6
351.3
Demand deposits, of which:
3,033.5
3,110.1
3,293.2
Netherlands Antillean guilders
2,292.3
2,325.6
2,408.1
741.2
784.5
885.1
Near money
4,075.9
4,036.1
4,141.5
Time deposits
2,149.5
2,092.7
2,139.7
Savings
1,926.4
1,943.4
2,001.8
Net domestic assets
3,541.4
3,921.1
3,744.1
Government sector
-425.7
-349.5
-428.8
Former central government
-113.1
-80.5
-77.3
Curaรงao
-180.7
-192.7
-253.6
Sint Maarten
-131.9
-76.2
-97.9
6,373.8
6,307.4
6,148.3
-2,406.8
-2,036.8
-1,975.4
Net foreign assets, of which:
3,899.8
3,565.7
4,041.8
Central bank
2,845.2
2,483.6
2,921.2
Commercial banks
1,054.6
956.8
995.3
Coins & notes with the public
Foreign currency
Factors affecting the money supply
Private sector Memorandum items
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Table 20 Monetary survey (in millions NAf.) cont. 2012
2013
2014
0.1
0.1
0.0
Private sector loans Curaรงao
4,170.6
4,145.0
4,034.9
Mortgages
1,782.4
1,855.6
1,870.5
945.3
890.6
881.4
Business loans
1,442.9
1,398.8
1,283.0
Private sector loans Sint Maarten
1,471.9
1,443.9
1,422.7
Mortgages
614.2
640.0
662.5
Consumer loans
348.2
328.7
302.9
Business loans
509.5
475.2
457.3
Government loans by commercial banks
Consumer loans
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Table 21 Developments in domestic interest rates (in %) 2012
2013
2014
1.0
1.0
1.0
0.20
0.12
0.20
Passbook savings
1.2
1.2
1.2
Time deposit (12 months)
1.6
1.7
1.8
Mortgages
6.7
6.9
6.7
Time loans
7.9
8.1
6.8
5-year government bonds (effective yield)
0.57
1.18
0.13
Treasury bills (12 months)
0.01
0.16
0.02
Central bank Pledging rate Maximum CD rate (1 month)
Commercial bank borrowing rates
Commercial bank lending rates
Government securities
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BOW III Ellen Spijkstra 2002 Photograph on aluminium 50.0 x 75.0 cm
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FOREIGN EXCHANGE REGULATIONS
5
FOREIGN EXCHANGE LICENSES AND FEES INTRODUCTION The foreign exchange regulations in Curaรงao and Sint Maarten are based on the Foreign Exchange Regulation of Curaรงao and Sint Maarten (2010). Effective October 10, 2010, these two autonomous countries within the Kingdom of the Netherlands formed a monetary union with a common currency and central bank. According to the foreign exchange regulation, current transactions are free in principle, while capital transactions require a license. Although capital transactions are bound by a license, the Bank has issued several foreign exchange notifications that have liberalized most capital transactions. The Bank applies a liberal licensing system with respect to capital transactions, i.e., licenses normally are granted upon request. The main objectives of the foreign exchange regulation are to: i.
promote international financial activities in Curaรงao and Sint
Maarten; for this reason, the ordinance contains special provisions for companies engaged in international financial and business transactions; ii. gather the necessary information and data essential for compiling the balance of payments; iii. support the monetary and economic policy efforts of the monetary authorities whereby the maintenance and safeguarding of the monetary reserves and, thus, exchange rate stability are considered of primary importance; and iv. prevent the use of Antillean guilders as a means of payment in the international payment system. The general foreign exchange policy is vested with the governments of Curaรงao and Sint Maarten. The Bank is charged with executing the foreign exchange regu-
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lations and managing the available foreign exchange reserves for account and risk of both governments. Therefore, the Bank is empowered to grant licenses and exemptions by virtue of the Foreign Exchange Regulation of Curaçao and Sint Maarten (2010).
FOREIGN EXCHANGE LICENSES In 2014, the number of foreign exchange licenses issued by the Bank dropped by 92 (11%) to 776 (see Table 22). This drop
can be attributed primarily to fewer foreign exchange exemptions granted to international financial and business companies (86) and for lending abroad (33). In line with the fewer licenses issued in 2014, the total transaction value related to the granted licenses decreased by NAf.331.2 million (54%) to NAf.277.7 million. All categories showed a decline in the value of licenses granted, except for the category “Other.” The largest declines occurred in the categories “Portfolio investment abroad” (NAf.142.0 million), “Transactions related to participations in local companies” (NAf.99.2 million), and “Transfer to
Table 22 Overview of foreign exchange licenses issued (in numbers and millions NAf.) 2013
2014
Description Number
Amount
Number
Amount
3
108.8
5
9.6
Transfer to own account abroad
32
62.1
32
18.1
Portfolio investment abroad
49
282.1
52
140.1
2
2.0
1
0.7
Borrowing abroad
30
84.7
36
50.9
Lending abroad
52
25.5
19
13.0
Intercompany financing
36
37.3
32
27.6
Request for foreign bank account
70
-
86
-
Request for local nonresident account
11
-
21
-
6
-
4
-
568
-
482
-
Other
9
6.4
6
17.7
Total
868
608.9
776
277.7
Transactions related to participations in local companies by nonresidents
Participation abroad
Granting guarantee abroad Exemption int. fin. & bus. serv. companies
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own account abroad” (NAf.44.0 million). The decline in the value of capital transactions that require a license can be attributed to, among other things, the recession in Curaçao reflected by a drop in private investments. In addition, lower international interest rates may be one of the factors that contributed to the decline in portfolio investment abroad.
LICENSE FEE Starting January 1, 1996, a fee was introduced for the license to operate as a for-
eign exchange bank. This license fee is assessed on the international transactions of foreign exchange banks and replaced the foreign exchange tax in force through December 1995. The license fee is calculated on the basis of the payments made by residents to nonresidents, with the exception of the re-investment of funds abroad, the re-exports of the free-zone companies, and payments by the government.15 The Bank assesses and collects the license fee
15 The exemption for payments in Aruban florins was revoked as of March 1, 2012, based on an agreement between the governments of Curaçao, Sint Maarten, and Aruba.
Table 23 License fees collected from 2012 through 2014 (in thousands NAf.) 2012 Curaçao
2013 Sint
Maarten
Curaçao
2014 Sint
Maarten
Curaçao
Sint Maarten
January
3,787.4
2,075.5
4,441.1
2,357.3
3,983.4
2,327.0
February
3,856.1
2,486.3
3,538.5
2,372.3
4,456.5
2,274.1
March
4,526.4
2,089.2
4,110.8
2,354.2
3,809.8
2,148.0
April
3,743.8
1,890.6
4,736.9
2,072.7
3,789.9
1,892.1
May
4,461.8
1,976.4
5,280.0
2,624.6
3,965.5
2,121.6
June
4,586.8
1,720.7
4,185.9
1,868.0
4,380.6
2,220.5
July
4,474.4
1,698.9
4,624.2
1,741.2
4,887.5
1,930.5
August
4,505.1
1,687.7
3,728.8
1,764.2
4,005.6
1,703.9
September
3,895.5
1,550.5
3,938.8
1,718.7
3,845.5
1,985.8
October
4,187.0
1,660.0
4,253.7
2,218.5
4,076.6
1,839.8
November
5,395.1
2,673.9
4,711.3
1,980.0
3,960.3
1,812.0
December
5,211.2
2,345.7
4,647.4
2,225.3
4,795.8
2,540.9
52,630.6
23,855.4
52,197.4
25,297.1
49,957.0
24,796.2
Total
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in Curaรงao and Sint Maarten, and the proceeds are remitted to the government of each country. Table 23 provides an overview of the license fees collected by Curaรงao and St. Maarten from 2012 through 2014. The
amount of license fees collected in Curaรงao dropped by NAf.2.2 million (4.3%) to NAf.50.0 million in 2014 compared to 2013. The amount of license fees collected in Sint Maarten decreased also in 2014 by NAf.0.5 million (2.0%) to NAf.24.8 million.
NO9 Ellen Spijkstra 2002 Photograph on aluminium 200.0 x 130.0 cm
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PUNDA BY NIGHT Paula Evers 2014
Mixed media on linen 72.0 x 72.0 cm
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MACROPRUDENTIAL DEVELOPMENTS AND POLICY
6
PROMOTING FINANCIAL STABILITY INTRODUCTION The recent financial crisis demonstrated that regulation and supervision aimed exclusively at maintaining stability on a microprudential level of individual institutions is insufficient. Macroprudential oversight is an essential prerequisite for rigorous crisis prevention. The Bank currently utilizes a macroprudential strategy that integrates traditional microprudential supervision of institutions and monetary policy with the promoting of financial system stability using instruments of regulation and supervision. This approach allows the communication of warnings against risks and imbalances and the identification and implementation of potential courses of action to avert threats. In this context, the Bank enhanced its Early Warning Monitoring System to foster a broader understanding of possible threats to the financial system, linkages between
financial stability and macroeconomic performance, and monetary and macroprudential policy tools. Furthermore, with this system, the Bank can also determine the distress of financial institutions and construct the necessary institutional risk reduction measures. Macroprudential instruments are policy measures that are: i.
set to dampen cyclical behavior in the financial system on both sides of the financial institutions’ balance sheets;
ii.
aimed at increasing the resilience of the financial system; and
iii.
designed to mitigate structural vulnerabilities in the financial system and limit systemic spillovers in times of stress.Â
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Graph 7 Financial Stability Map of the Monetary Union 2014 Domestic banking sector soundness
Domestic insurance sector soundness
Sovereign soundness
Domestic pension sector soundness
Macroeconomic environment
stability risk
Note: further distance from the centre indicates a higher risk.
This chapter begins with a look at the macroprudential developments in the Monetary Union, focusing on six different segments. This presentation is followed by an overview of the policy measures the Bank has implemented.
MACROPRUDENTIAL DEVELOPMENTS The Financial Stability Map of the Monetary Union in 2014 provides a graphic summary of potential sources of systemic risk and serves as a starting point for further analysis. The map tracks three financial sectors and three underlying conditions considered relevant for the financial stability of the Monetary Union.16 The three
16 Various indicators are used to analyze the important as-
underlying conditions that determine the risk of a systemic threat are discussed briefly below.17 As can be seen from the map, the macroeconomic environment shows the biggest risk, followed by the sovereign soundness of the countries of Curaรงao and Sint Maarten (see Graph 7). The domestic economic conditions of the Monetary Union affect the financial stability through various channels. The Monetary Union recorded a real GDP growth18 of -0.3% in 2014, with a long-term trend growth of 0.5%. The long-term trend is calculated using a detrending method
pects of the risks in each segment. 17 See Chapter 3 for an extensive analysis of the macroeconomic environment and sovereign soundness, and chapters 7 through 9 for the financial stability analysis of the banking, insurance, and pension sectors. 18 Real GDP growth is calculated using the GDP deflator based on IMF methodology.
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Graph 8 Overview macroeconomic environment Monetary Union 4%
150
3% 140
(r.h.s)
2% Output gap 130
1% 0%
120
-1% 110
-2% -3%
Real GDP growth
Long-term trend: using Hodrick-
100
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Note: the Monetary Union was established on October 10, 2010; the previous years are a compilation of Curaçao and Sint Maarten.
by applying a Hodrick–Prescott filter. This filter removes the cyclical components and focuses on the real business cycle theory which considers cycle fluxes as the efficient response to exogenous changes in the real economic environment. Therefore, the trend reflects the long-run structural policy changes instead of the short-term interventions through discretionary fiscal or monetary policies designed to smooth out short-term economic fluctuations. The resulting output gap, defined as the difference between actual and potential GDP as a percentage of potential GDP, recorded a negative deviation of 1.9 percentage points, reflecting a recessionary gap (see Graph 8). Compared to 2013, the negative gap has further increased, indicating that the macroeconomic environment remains the biggest risk to stability. External vulnerabilities are increasing because of the potential impact of external shocks, e.g., the crisis in Venezuela.
The sovereign soundness of the Monetary Union deteriorated in 2014, with the ratio of the current budget surplus to GDP declining from 1.28% in 2013 to 0.09% in 2014. This decline can be attributed to a decrease in government revenues, which surpassed the drop in government expenditures. The primary surplus to GDP ratio followed a similar trend, declining by 1.04 percentage points to 1.1% in 2014. The sovereign risk of the Monetary Union is increasing, as the current interest burden rule and low interest environment due to the standing subscription permitted the governments to borrow significantly, increasing their debt burdens. Consequently, the debt-to-GDP ratio is rapidly approaching the level that the IMF considers unsustainable for the countries of Curaçao and Sint Maarten and is a cause for concern (i.e., 40% of GDP). The soundness of the domestic banking sector remained stable over the last five years with a stability risk score of 3.1 in
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Graph 9 Overview of soundness of the domestic banking sector Upper-bo und Lo wer-bo und Av erage risk-weighted stability Hi gh
Risk category
5 4 3 2 1 Lo w 20 10
20 11
20 12
20 13
20 14
Indicating the five risk com po nents analyzed (see Chapter 7 for an extensive analysis).
2014, slightly above the five-year average of 2.8 (see Graph 9).19 The Capital Adequacy Ratio reached 14.2% at the end of 2014, well above the international standard, reflecting the capability of the banks to withstand shocks to their balance sheets. The domestic banking sector remains the biggest contributor to the financial development of Curaçao and Sint Maarten. With a share of approximately 57% of the total financial system assets (see Table 24), this sector is considered vital to the systemic presence of the financial sector and, hence, the financial stability of the Monetary Union.
sectors, also remained stable over the past few years, with a stability risk score of 2.8 in 2013 (see Graph 10).20 The score is expected to remain stable in 2014 with a slight upward correction. The domestic pension sector also showed stable scores over the past few years. The stability risk score in 2013 reached 2.6, the lowest value of the financial sector (see Graph 11). As with the insurance sector, the pension sector score is also expected to remain stable in 2014, with a slight upward correction so long as the government pension funds do not have to make more provisions. Last, the global financial stability risk is assessed on the basis of the top ten global risks, focusing on the likelihood of events
The domestic insurance sector, consisting of the life and general insurance sub-
19 For the stability score, a numbering system of 1 through 5 is used with 1 indicating low risk and 5 indicating high risk. The score is calculated with financial soundness indicators, calibrated by international benchmarking, supervisory standards and, trend analysis.
20 The insurance and pension sector assessment is based on data up to the year 2013. Based on current legislation, insurance companies and pension funds must submit their data within six months after the end of the reporting year. This means that most data are received after the Bank’s annual report is published. However, further on in the year, the 2014 data will be incorporated into the Bank’s Financial Stability Report.
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Table 24 Composition financial sector (% of total assets) 2013
2014
Domestic banking sector
56.4%
57.4%
Domestic pension sector
26.6%
26.2%
Domestic insurance sector
11.6%
11.0%
Special credit institutions
3.2%
3.0%
Savings banks
1.3%
1.2%
Credit unions
0.9%
1.1%
0.03%
0.03%
Investment institutions
and their global impact. The global financial stability risk score21 increased in 2014, reaching a value of 51. This score is significantly higher than the value of 36 in 2013 (see Graph 12). The biggest risks are the
21 The score is rendered between 1 and 90. The higher the score, the higher the global financial stability risk.
monetary policy actions of the FED in normalizing the interest rates and unwinding its balance sheets, a possible Greek exit from the European Monetary Union, and a liability shock from the unprecedented post-crisis investment program of China’s government that resulted in a slowdown in economic growth.
Graph 10 Overview of soundness of the domestic insurance sector Upper-bo und Lo wer-bo und Av erage risk-weighted stability High
Risk category
5 4 3 2 1 Low 2010
2011
2012
2013
Indicating the five risk components analyzed (see Chapter 8 for an extensive analysis).
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Graph 11 Overview of soundness of the domestic pension sector Upper-bo und Lo wer-bo und Av erage risk-weighted stability Hi gh
Risk category
5 4 3 2 1 Lo w 20 10
20 11
20 12
20 13
Indicating the five risk com po nents analyzed (see Chapter 9 for an extensive analysis).
Although the global financial stability risk has increased, the possible impact on the stability of the Monetary Union is still considered limited due to the conservative nature of the financial sector in Curaรงao and Sint Maarten.
The external vulnerabilities stemming from external shocks in the main trading partners are reflected in the macroeconomic environment and indicate an increase in risk.
Graph 12 Global financial stability risk
45 42
2013Q2
51
36
2013Q4
2014Q2
2014Q 4
Two-year average
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POLICY MEASURES EARLY WARNING MONITORING SYSTEM The Early Warning Monitoring System is developed by the Bank to monitor and control the soundness of the financial sector. The system performs financial stability assessments of the sector on a macroprudential level but also complements the microprudential supervision by analyzing all financial institutions. Furthermore, the system enables the Bank to perform regular stress tests to assess the resilience of the financial system to extreme, yet plausible shocks from both the local and international environments. Aside from the financial institutions, the Bank also performs regular foreign reserves adequacy tests. In addition, the system is used to conduct research on the behavior of macro and aggregated micro factors, thus acquiring knowledge on financial stability risk factors. The system also takes into account intra-Caribbean linkages and other international factors reflecting external risk exposures. A risk-based rating model is included in the system to detect the weak spots of the financial institutions, hence, complementing targeted supervision. Last, the system enables the Bank to analyze and test monetary and macro-prudential policy measures.
LOAN TO VALUE RATIO A loan to value ratio (LTV) is a measure of the banks’ lending capacity against the value of residential properties (i.e., the value of a house as collateral). The LTV is a key indicator of the ability of the mortgage market to provide financing. Residential property lending remains an increased risk
The innovation of monitoring financial stability draws a parallel with the value of early warning
activity, especially in small open economies where the turnover ratio is low. Introducing a LTV constraint will limit the procyclical interaction of real estate prices and households’ capacity to borrow based on the collateralized value of the real estate. Real estate prices have been rising significantly in the last few years. In addition, both the applied appraisal methods and the lack of consistency and supervision within the real estate sector have resulted in foreclosure values falling substantially below the appraisal values, increasing imbalances. Therefore, the LTV is one of the key factors that credit institutions should take into account when assessing a prospective borrower. The LTV ratio is applicable for mortgages and is 70% of the appraised value. As a macroprudential instrument, the LTV ratio enables the Bank to reduce the likelihood and/or magnitude of a real estate boom by limiting household leverage. By limiting the LTV ratio, the Bank is able to curb the feedback loop between the availability of mortgage credit and house price appreciation. Furthermore, restraining household leverage will enable the Bank to reduce the incidence and loss of default of residential household mortgage loans, contributing to the reduction of credit risk.
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DEBT TO INCOME RATIO The debt to income ratio (DTI) focuses on preventing consumers from being overextended with credit and fostering prudent credit extension practices, thereby protecting banks’ asset quality. The maximum DTI is set at 37% and is used in conjunction with the LTV to further dampen the cyclical behavior of collateralized lending by adding another constraint on households’ capacity to borrow. Considering the Bank’s stability task, both the LTV and the DTI can be adjusted in a counter-cyclical manner to address the time dimension of systemic risk. Furthermore, the Provisions on Preventing Overextension of Credit drafted in 2014, went into effect on May 1, 2015, for all locally operating lenders in Curaçao and Sint Maarten. These provisions state that a lender’s decision to extend credit to a consumer should be based on at least: i.
ii.
an acceptance policy approved by its highest governing body which aims, among other things, to prevent overextension of credit; and a thorough assessment of the creditworthiness of the consumer.
Lenders should obtain sufficient information on a consumer’s financial condition to assess the consumer’s creditworthiness. Approved credits must be well documented and must clearly substantiate the consumer’s creditworthiness. In addition, lenders should take appropriate measures to promote responsible credit extension practices during the credit relationship
and consider all other relevant regulations (e.g., Article 7A:1614g of the Civil Code22 and the APR provisions) before extending credit.
ANNUAL PERCENTAGE YIELD (APY) During 2014, the Provisions on the Disclosure of Interest Rates on Deposit Accounts (hereafter the “APY provisions”) also were drafted and went into effect on May 1, 2015, for all locally operating lenders in Curaçao and Sint Maarten. These APY provisions were issued pursuant to article 2, paragraph 2 of the National Ordinance on the Supervision of Banking and Credit Institutions 1994 and are aimed at providing the public with adequate information on the effective interest rates payable on deposit accounts. In addition, the provisions foster transparency in the local financial market and help the public make informed decisions with respect to deposit accounts. Credit institutions must at least disclose the Annual Percentage Yield and Nominal Interest Rate of deposit accounts: i.
when advertising counts, and
these
ac-
ii.
when responding to inquiries23 from clients and before opening an account.
22 The Bank reminds lenders that based on article 7A:1614g, paragraph 2 of the Civil Code, credit extension whereby a consumer assigns any right beyond 33.33% of the consumer’s net monthly wage is not allowed. Moreover, in accordance with article 7A: 1614g, paragraph 4 of the Civil Code, any such credit will be deemed null and void. 23 Inquiries made through but not limited to telephone, electronic media, and appointments.
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ANNUAL PERCENTAGE RATE (APR) During 2014, the Provisions on the Disclosure of Pricing Information on Consumer Credit (hereafter the “APR provisions”) had been drafted and went into effect on May 1, 2015, for all locally operating credit institutions in Curaçao or Sint Maarten. These provisions replaced those of July 2004 on the Bank’s website. The APR provisions are aimed primarily at the protection of consumers by providing them with adequate information to make an informed decision when applying for consumer credit. These provisions also serve to foster transparency in the local financial market and provide a uniform APR calculation method. The Annual Percentage Rate is a rate that equates, on an annual basis, to the present value of all future or existing credit commitments (i.e., credit drawdowns, repayments, and financial charges), agreed upon between the lender and the consumer. The APR must be calculated in accordance with the mathematical formula and method set out in the provisions. To accomplish the objectives of the APR provisions, lenders are required to clearly disclose APR-related information: i.
when advertising loans;
ii.
when responding to consumers’ inquiries on consumer credit; and
iii.
before extending consumer credit.
Furthermore, as of January 1, 2016, a maximum APR will be included in the APR provisions, the level of the APR is to be determined by the outcome of an investigation.
The maximum APR will apply for all new consumer credit.
LIMITS ON FOREIGN EXCHANGE POSITIONS The Bank uses a foreign exchange position policy tool to limit the banks’ accumulation of net foreign debt, which might ultimately contribute to a foreign exchange crisis. This policy states that banks are not allowed to have a negative net foreign assets position. Any negative position is subject to a penalty equal to the amount of the negative position multiplied by the Bank’s pledging rate.
CAPITAL BUFFER The Bank regards the capital buffer as the main pillar for resiliency. Capital provides the institutions with a cushion to absorb losses during times of stress. The international financial crisis showed that institutions’ capital buffers were neither high enough nor solid enough before the crisis to withstand significant shocks. In the context of the systemically important banking sector, the assessment of the reporting institutions’ capital adequacy is based on the “International Convergence of Capital Measurement and Capital Standards” (“Basel II”). A financial institution is expected to maintain capital commensurate with the nature and extent of encountered risks and the ability of management to identify, measure, monitor, and control these risks. The effects of credit, market, and other risks on the institutions’ financial conditions are considered when evaluating capital adequacy. The types and magnitude of risks inherent in the banking sector have prompted the Bank to require capital levels above the
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required international regulatory minimum for the banks operating in the domestic market. Hence, the Bank applies a minimum capital adequacy ratio of 10.5%, above the 8.0% Basel II minimum to raise the resilience of the banking institutions in periods of stress.
LIQUIDITY BUFFER The liquidity buffer is also regarded as essential in absorbing shocks during periods of stress. The Bank requires financial institutions to maintain a surplus liquidity position at all times. The Bank continuously evaluates the current level and prospective sources of liquidity to funding needs as well as to the adequacy of funds management practices relative to the institutions’ size, complexity, and risk profiles. In general, funds management practices should ensure that institutions are able to maintain a level of liquidity sufficient to meet their financial obligations in a timely manner and fulfill the financing needs of the community. Practices should reflect the institutions’ ability to manage unplanned changes in funding sources as well as react to changes in market con-
ditions that affect their ability to quickly liquidate assets with minimal loss. In addition, the Bank requires funds management practices ensuring that liquidity is not maintained at high cost or through undue reliance on funding sources that may not be available in times of financial stress or adverse changes in market conditions.
CONCENTRATION LIMIT The Bank deems it important to regulate large exposures of credit institutions. Exposure concentrations make a financial system vulnerable to shocks, either directly through balance sheet exposures or indirectly through asset fire sales and contagion. The core business of a credit institution is to extend credit to borrowers. Therefore, it is important to restrict the total amount owed by a single debtor or a group of connected debtors to a credit institution to avoid overexposure to one single entity. Monitoring and controlling the exposure of a credit institution is an integral part of the Bank’s prudential supervision because excessive exposure to a single client or group of connected
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clients might result in an unacceptable degree of concentration risk prejudicial to the solvency of a credit institution. Concentration limits are a micro-prudential measure but can also serve as a macroprudential tool to increase the resilience of the sector through restricting counterparty concentration and contagion risk. In addition, the Bank can also reduce the build-up of vulnerabilities by applying restrictions on a sectoral basis to reduce banks’ exposures to a particular sector and/or asset class.
DOMESTIC SYSTEMIC IMPORTANT FINANCIAL INSTITUTIONS Domestic Systemic Important Institutions (D-SIFIs) are financial institutions in our jurisdiction that have a significant potential impact on financial stability in case of a failure. To determine if an institution is domestic systemically important, the Bank uses a number of considerations, including: i.
size;
ii.
interconnectedness;
iii.
financial institution infrastructure (including considerations related to the concentrated nature of the sector); and
iv.
complexity (including additional complexities from cross-border activity).
The financial crisis taught us a vital lesson that moral hazard costs associated with direct support and implicit government guarantees to financial institutions can amplify
risk-taking, create competitive distortions, abridge market discipline, and augment the probability of distress in the future. As a result, the costs associated with moral hazard add to any direct costs of support that may be borne by taxpayers. Therefore, the Bank deems it important to perform stronger macroprudential supervision on the D-SIFIs and, if necessary, to impose additional macro-prundential restraints, such as additional capital buffers, to preserve the financial stability of the system.
DEPOSIT INSURANCE SYSTEM On October 1, 2009, a proposal for the establishment of a Dutch Caribbean Deposit Insurance System for the local banking sector of Curaçao, Sint Maarten, and the BES islands was presented to the respective bankers associations. Extensive deliberations within the working group resulted in a Memorandum of Understanding on the Implementation of a Dutch Caribbean Deposit Insurance System. This memorandum was signed in the first quarter of 2011 by the CBCS as the supervisory authority for Curaçao and Sint Maarten, the Dutch central bank as the supervisory authority for the BES islands, and the bankers associations representing the locally active banks on these islands. Some progress was made with respect to the drafting of the articles of incorporation of the foundation that will operate the deposit insurance fund and synchronization of the legal frameworks of the participating Kingdom partners on which the Dutch Caribbean Deposit Insurance System will be based. Participation in the deposit insurance system will be manda-
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tory for all domestically operating banks in Curaรงao, Sint Maarten, and the BES islands, including subsidiaries or branches of foreign banks and savings banks. The maximum amount to be compensated by the deposit insurance system, i.e., the insured limit, will be set initially at NAf.10.000 per bank client.24
24 After a five-year period, an evaluation of the financial strength of the system will determine whether or not to adjust the amount to be compensated..
A proposal for the introduction of a deposit insurance system for the credit unions in Curaรงao and Sint Maarten was presented to the association of credit unions on November 9, 2009, for comments. No comments were provided by October 31, 2012, and the ministers of Finance of Curaรงao and Sint Maarten were informed accordingly. The Ministers of Finance must decide on the introduction of the deposit insurance system for the local banks and credit unions of Curaรงao and Sint Maarten pursuant to article 39, paragraph 2 of the Banking Supervision Act.
TANKER VI Ellen Spijkstra 2002 Photograph on aluminium 50.0 x 75.0 cm
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HENDRIKSTEEG Saida Hernandez 2007 Oil paint on canvas 30.0 x 40.0 cm
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BANKING SECTOR ASSESSMENT
7
LOCAL COMMERCIAL AND INTERNATIONAL BANKING SECTOR INTRODUCTION One of the main tasks of the central bank is to promote the safety and soundness of the financial system. Supervising the banking and credit institutions contributes to this task and helps maintain public trust in a well-functioning financial system.
and the international banking sectors. The second part consists of a financial stability analysis of the local commercial banking sector using financial soundness indicators, thus helping the Bank fulfill its mandate to safeguard the funds of depositors and other creditors with these domestic financial institutions.
The banking sector, particularly the local commercial sector, plays an essential role in the financial development of the countries of Curaรงao and Sint Maarten. This sector represents approximately 57% of the total financial system assets.25
BALANCE SHEET AND INCOME STATEMENT
The first part of this banking sector assessment focuses on the balance sheet and income statement26 of both the local27
25 Financial system assets include assets from commercial banks, insurance companies, pension funds, credit unions, specialized credit institutions, saving banks, and investment institutions. 26 All data for the banks are compiled on a consolidated basis and in accordance with the IMF Accounting Framework and Sectoral Financial Statements. 27 Pursuant to Article 28 of the National Ordinance on the Supervision of Banking and Credit Institutions (PB 1994, no. 4) and under the authority granted to it, the CBCS executed an emergency measure on an institution as of December
LOCAL COMMERCIAL BANKING SECTOR The total assets of the local commercial banks decreased by 1.4% during 2014 compared to 2013, reaching NAf.15.3 billion. The slight contraction of the aggregate balance sheet of the commercial banks resulted primarily from decreases in currency and deposits (-6.9%), nonfinancial assets (-7.3%) and other assets (-15.0%).
2013. As a result, the sector data should be interpreted with some caution.
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Non-interest-bearing cash (-22.3%) was the sole contributor to the decrease in currency and deposits as interest-bearing cash expanded (6.4%). However, these declines were mitigated by expansions in loans (0.5%), investments (5.6%), and investments in unconsolidated subsidiaries and affiliates (76.4%). The rises in loans to agencies and institutions (52.9%) and other loans (39.1%) were the primary reason for the expansion in total loans, mitigated mainly by a contraction in loans to nonfinancial corporations (-1.5%). In addition, the increase in both debt securities (7.3%) and shares and other equity (1.4%) caused the expansion in investments. (See Table 25 in Appendix III for a more detailed look at the commercial banks’ aggregate balance sheet.) The total debt of the commercial banks declined by 0.6% from the end of 2013 to the end of 2014, with the decrease in currency and deposits (-0.4%) and total borrowings (-60.7%) exceeding an increase in other liabilities (10.6%). The decrease in currency and deposits can be attributed to a decrease in both demand (-3.1%) and time deposits (-17.8%), while savings deposits expanded (22.9%). Among other things, the share of interest-bearing deposits to total deposits increased, putting pressure on the commercial banks’ efforts to preserve their net interest margin. Last, capital and reserves declined by 7.7%, owing to contractions in the capital base (-7.4%) and general provisions (-9.1%). The commercial banks reported a total gross income (i.e., net interest income plus noninterest income) of NAf.893.1 million in 2014, a 4.3% decrease compared to 2013. Decreases in both interest income (-4.6%) and noninterest income (-3.7%)
The total assets of the commercial banking sector equals 203 percent of GDP of the Monetary Union in 2014
contributed to the decline in gross income. Furthermore, noninterest expenses remained about the same (0.2%) because the increase in salaries & other employee expenses (2.5%) was offset by a decline in other operating expenses (-4.0%). In addition, provisions doubled from NAf.30.8 million in 2013 to NAf.61.8 million in 2014. As a result, net income before extraordinary items and taxes declined by 25.7%, reaching NAf. 210.3 million in 2014. Furthermore, extraordinary items increased from NAf.-0.7 million in 2013 to NAf.15.7 million in 2014, while the income tax decreased by 6.1%, resulting in a 21.9% decrease in the net income after tax. Last, the dividends payable decreased by 36.4%. As a result, retained earnings decreased from NAf.140.8 million in 2013 to NAf.125.3 million in 2014 (-11.0%). (See Table 26 in Appendix III for a detailed breakdown of the commercial banks’ aggregate income statement.)
INTERNATIONAL BANKING SECTOR The total assets of the international banks reached NAf.52.9 billion at the end of 2014, a 7.0% increase compared to 2013. The expansion of the aggregate balance sheet of the international banks resulted primarily from expansions in currency and deposits (14.0%), loans (3.0%), and other assets (7.7%). Non-interest-bearing cash (30.5%) was the main contributor to the expansion
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in currency and deposits. However, these expansions were mitigated by a contraction in investments (-3.3%) as a decrease in shares and other equity (-13.0%) was offset in part by an expansion in debt securities (53.0%) (See Table 27 in Appendix III for a more detailed look at the international banks’ aggregate balance sheet.) The total debt of the international banks rose by 8.8% from the end of 2013 to the end of 2014, with increases in currency and deposits (28.5%), total borrowings (6.4%), and other liabilities (44.7%) exceeding the drying-up of interbank funds bought (-99.4%). The decline in interbank funds bought can be explained by a shift into time deposits, improving the maturity matching as the focus shifts from shortterm to long-term debt financing. The increase in currency and deposits can be attributed to an increase in all categories of deposits, with time deposits increasing the most (81.2%). As a result, the share of interest-bearing deposits to total deposits increased in 2014 by 13.3 percentage points compared to 2013, putting pressure on the banks’ efforts to preserve their net interest margin. Last, capital and reserves declined by 6.9% due to a decline in the capital base (-7.9%), mitigated by an expansion in general provisions (11.7%). The international banks reported a total gross income (i.e., net interest income plus non-interest income) of NAf.1.6 billion in 2014, a decrease of 0.8% compared to 2013. This marginal drop was caused by a decline in interest income (-3.5%), mitigated by an expansion in noninterest income (2.8%). Furthermore, noninterest expenses increased (2.9%), attributable to an increase in other operating expenses (8.1%), mitigated by a decline in salaries & other
employee expenses (-3.1%). Together with a decrease in provisions (-22.7%), the net income before extraordinary items and taxes declined by 0.8%, reaching NAf.472.9 million in 2014. In addition, extraordinary items increased from NAf.-49.0 million in 2013 to NAf.10.1 million in 2014 and income tax by 12.8%, contributing to a 13.0% improvement in the net income after tax reaching NAf.429.3 million. However, because of a fifteen-fold increase in dividends payable, the increase in retained earnings was significantly less pronounced (5.6%), totaling NAf.399.3 million in 2014 (See Table 28 in Appendix III for a detailed breakdown of the international banks’ aggregate income statement.)
FINANCIAL SOUNDNESS INDICATORS Financial soundness indicators (FSIs) are used by the Bank to support macroprudential analysis, which assesses the strengths and vulnerabilities of the financial sector. This monitoring task is part of the Bank’s continuing efforts to proactively undertake preemptive measures to structurally enhance the resilience of the financial system and its institutions against shocks and thus promote growth and macroeconomic stability. Ensuring financial stability and calling upon a macroprudential strategy involves integration with traditional microprudential supervision of institutions and monetary policy. An overview of financial stability in the commercial banking sector is represented in a cobweb, a snapshot of the components analyzed in the next section (see Graph 13). Movements away from the centre of the diagram represent an increase
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Graph 13 Financial stability Cobweb of commercial banking sector
Asset quality
Capital adequacy
Sensitivity to market risk
Earnings & pro tability
Liquidit y & funding
2012
in financial stability risks, while movements towards the centre of the diagram represent a reduction in risks. The cobweb is calibrated using international benchmarking, supervisory standards, and trend analysis. The risk in capital adequacy, asset quality, liquidity & funding, and sensitivity to market risk remained stable at the end of 2014 compared to 2013, while earnings & profitability risk increased. This overview is complemented by the aggregate balance sheet, aggregate income statement, and financial soundness indicators.28 (Tables 25 - 29 in Appendix
28 All indicators for the commercial banks are compiled on a consolidated basis and in accordance with the IMF guidelines and principles. They include both the core and the encouraged set of indicators defined by the IMF.
2013
2014
III provide details.) As can be seen from Table 29, more than half of the indicators underperformed the four-year quarterly average.
CAPITAL ADEQUACY Capital adequacy and availability ultimately determines the robustness of financial institutions to withstand shocks to their balance sheets. Capital provides not only a cushion for losses, but also a buffer for deposit insurance, while controlling excessive risk-taking by banks. The capital adequacy ratio (i.e., tier-1 and tier-2 capital to risk-weighted assets) reached 14.2% at the end of 2014, a decrease of 1.6 percentage points compared to the end of 2013. The capital adequacy ratio slightly underperformed the four-year quarterly
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average, indicating a rather stable trend in the capital stock of the commercial banks. Furthermore, the capital adequacy ratio is still well above the benchmark of 8% under the Basel II agreement and the Bank’s own benchmark of 10.5% (see Graph 14). The financial leverage ratio (i.e., tier-1 and tier2 capital to total assets) declined by 1.9 percentage points, reaching 9.0% at the end of 2014. Last, the NPL29 (net of provisions) to capital ratio decreased from 45% at the end of 2013 to 43% at the end of 2014, below the 4-year quarterly average
ties in the capital adequacy arising from credit risk. In conclusion, the risk in capital adequacy remained stable in 2014 compared to the previous years.
ASSET QUALITY The banks’ exposure to credit risk is also reflected in the NPL to total gross loans ratio. This ratio decreased from 11.9% at the end of 2013 to 11.0% at the end of 2014, indicating an improvement of the asset quality in the loan portfolio of the commercial
Graph 14 Trend analysis of the capital adequacy ratio
16%
16%
13%
13%
10%
10%
7%
7% 2011
2012
2013
Capital Adequacy R atio
Year to Year
Basel II
Yearly moving average
of 44%. Although this declining trend is a good sign, the current level still reflects a significant exposure of the banks’ capital to credit risk and underscores the importance of banks increasing their capacity to withstand losses from nonperforming loans. The Bank monitors this development closely since it indicates vulnerabili-
29 Nonperforming loans.
2014 CBCS benchmark
banks. This decrease is a good sign that the increasing trend of the last three years has reached a turning point. In addition, the provisions to NPL ratio of the banks increased with 6.7 percentage points, reaching 39% at the end of 2014, outperforming the four-year quarterly average. This development indicates that the banks are starting to abandon their reserved attitude towards precautionary measures to cover their credit risk, increasing their abil-
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ity to withstand possible macroeconomic shocks. The share of foreign currency loans in gross loans remained stable at 46% at the end of 2014. Furthermore, the ratio of foreign currency-denominated liabilities to total liabilities decreased slightly by 10 basis points to 54% at the end of 2014, underscoring the banks’ reliance on foreign currency. Last, the large exposures of loans, leases, and advances to capital ratio remained stable at 269% at the end of 2014, which is a normal level for local banking operations. The Bank monitors this ratio closely since it indicates vulnerabilities arising from concentration risk. In conclusion, the risk in asset quality remained rather stable in 2014 compared to the previous years.
EARNINGS & PROFITABILITY The banking sector’s efficiency in using its assets deteriorated, with the return on assets ratio reaching 1.3% at the end of 2014, 50 basis points lower than in 2013. The deposit takers’ efficiency in using their capital (i.e., return on equity ratio) developed similarly, decreasing by 2.3 percentage points to 14.2% at the end of 2014. The spread between lending and deposit rates decreased slightly by 30 basis points to 6.4% at the end of 2014. This decrease
in the spread between rates can be explained by a slight decrease in the lending rate. With respect to efficiency, the ratio of personnel expenses to noninterest expenses increased by 1.2 percentage points to 58% at the end of 2014, slightly above the four-year quarterly average. Furthermore, the banks were not able to maintain their efficiency in the use of their resources with regard to operational expenses as the share of noninterest expenses in gross income increased by 4.0 percentage points to 70% at the end of 2014. This decrease in the banks’ efficiency will put pressure on their profitability. In addition, the share of net interest earnings (i.e., interest earned less interest expenses) in gross income remained stable at 64% at the end of 2014, slightly below the four-year quarterly average. The value of this ratio indicates that the banks diversified their income, making it easier to withstand shocks. Last, aside from the abovementioned financial soundness indicators, the risk in the earnings and profitability of the banks also can be illustrated through their operational income. In 2014, the banks’ net operational income decreased by NAf.72.6 million compared to 2013, reaching NAf.210.3 million. In conclusion, the risk in earnings & profitability increased in 2014 compared to 2013 and equaled that of 2012.
PISKADO Nadya Moron 2009 Oil paint on canvas 61.0 x 91.0 cm
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LIQUIDITY & FUNDING The ample liquidity of the banking sector and the increasing trend of the last three years reached a turning point in 2014. However, the level of liquidity still reflects the strength of the sector to withstand shocks to its balance sheets. The liquid assets to total assets ratio decreased slightly from 30% at the end of 2013 to 27% at the end of 2014, just below the four-year quarterly average. This level reflects the banks’ ability to meet expected and unexpected demands for cash. Furthermore, the liquid assets to short-term liabilities ratio remained stable at 39% at the end of 2014, preserving the mismatch between the banks’ short-term assets and their liabilities. This development captures the extent to which the banks can meet shortterm withdrawals of funds without facing liquidity problems. Last, the total deposits to total loans ratio remained relatively stable at 140% at the end of 2014, indicating a high degree of stable funding (i.e., customer deposits) to illiquid assets (i.e., loans). The level of this indicator points to stable depositor and investor confidence in the long-term viability of the banking sector and diminishing potential liquidity stress. Therefore, the risk in liquidity & funding remained stable in 2014 compared to the previous years.
tive, both the lending and funding rates show a downward trend, with the funding rate showing the more pronounced decline. This trend will cease once the excess liquidity is driven back, with a turnaround in the decline of the funding rate signifying increased pressure on the net interest margin in the coming years. The mismatch between the asset and liability positions of foreign currency at the commercial banks improved, with the net open position in foreign exchange to capital ratio decreasing from 60% at the end of 2013 to 54% at the end of 2014, well below the four-year quarterly average. This decreasing trend in the ratio indicates an improvement in the banks’ sensitivity to market risk, lowering their exposure to exchange rate risk. The total foreign exposure relative to the banks’ capital position (i.e., the net foreign assets to total capital ratio) increased by 6.0 percentage points to 79% at the end of 2014. The relatively stable value of this indicator suggests that the banks managed to contain the pressure on their ability to withstand shocks from foreign markets. Note that the increase was attributable entirely to the decline in capital, as net foreign assets decreased in 2014 compared to 2013. Therefore, sensitivity to market risk remained stable in 2014 compared to the previous years.
SENSITIVITY TO MARKET RISK The net interest margin (i.e., the difference between the gross earning assets yield and the break-even yield) decreased slightly from 4.9% at the end of 2013 to 4.7% at the end of 2014. This development can be explained by a slightly decreasing lending rate, while the funding rate remained relatively stable. From a long-term perspec-
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APPENDIX III Table 25 Aggregate balance sheet of the commercial banks (in millions NAf.)
2011
2012
2013
2014
355.5
393.8
426.9
395.7
14,270.2
14,812.3
15,107.3
14,919.5
Assets I
Nonfinancial assets
II
Financial assets (III through VII)
III
Currency and deposits
3,933.2
4,166.6
4,577.6
4,262.9
(i) Non-interest-bearing cash
1,506.3
1,436.2
2,116.7
1,645.3
(ii) Interest-bearing cash
2,426.9
2,730.5
2,460.9
2,617.6
Loans
8,425.6
8,778.4
8,857.7
8,901.0
0.3
12.5
0.3
0.0
-
-
-
-
0.1
0.1
0.1
0.0
(iv) Agencies and institutions
45.1
53.5
55.8
85.2
(v) Other financial corporations
26.6
24.8
13.4
15.5
(vi) Nonfinancial corporations
4,515.6
4,824.9
4,857.2
4,783.5
(vii) Households
3,654.3
3,654.4
3,729.5
3,736.6
183.6
208.3
201.4
280.2
Investments
1,557.1
1,434.5
1,245.0
1,315.2
(i) Debt securities
1,173.4
1,048.4
894.3
959.4
383.6
386.0
350.7
355.8
82.2
93.6
84.8
149.5
272.1
339.2
342.2
291.0
14,625.7
15,206.1
15,534.2
15,315.2
IV
(i) Interbank loans (ii) Central Bank (iii) General government
(viii) Other V
(ii) Shares and other equity
VI
Investments in unconsolidated subsidiaries and affiliates
VII
Other assets
VIII
Total assets (= I + II)
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Table 25 Aggregate balance sheet of the commercial banks (in millions NAf.) cont.
2011
2012
2013
2014
12,411.7
12,885.1
13,087.0
13,040.9
(i) Total demand deposits
5,671.8
6,150.1
6,575.8
6,374.3
(ii) Total savings deposits
3,096.8
3,194.7
3,227.2
3,966.4
(iii) Total time deposits
3,643.1
3,540.3
3,284.0
2,700.1
31.1
20.0
143.4
56.4
504.1
525.9
500.2
553.0
12,947.0
13,430.9
13,730.6
13,650.3
Liabilities IX
Currency and deposits
X
Total borrowings
XI
Other liabilities
XII
Total debt (= IX + X + XI)
XIII
Capital and reserves
1,678.7
1,775.2
1,803.6
1,664.9
(i) Capital
1,382.6
1,466.0
1,455.6
1,347.4
10.2
10.2
11.3
11.4
-
-
-
-
285.9
299.0
336.7
306.1
14,625.7
15,206.1
15,534.2
15,315.2
(ii) Minority interest (iii) Subordinated debentures (iv) General provisions
XIV
Total liabilities and capital (= XII + XIII)
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Table 26 Aggregate income statement of the commercial banks (in millions NAf.)
2011
2012
2013
2014
I
Interest income
712.0
714.0
710.0
677.2
II
Interest expense
140.2
121.3
114.4
109.4
571.7
592.7
595.5
567.8
III
Net interest income (= I minus II)
IV
Noninterest income
377.5
325.1
338.0
325.3
V
Gross income (= III + IV)
949.2
917.8
933.5
893.1
VI
Noninterest expenses
573.2
601.4
619.9
621.0
334.2
343.4
352.1
360.9
99.9
100.1
91.6
90.9
139.0
157.8
176.1
169.2
51.4
86.3
30.8
61.8
324.6
230.1
282.9
210.3
(i) Salaries & other employee expenses (ii) Occupancy expenses (iii) Other operating expenses VII
Provisions Net income (before
VIII
extraordinary items and taxes) (= V minus (VI + VII))
IX
Extraordinary items
22.3
28.3
-0.7
15.7
X
Income tax
46.2
36.9
35.6
33.4
300.7
221.5
246.6
192.6
109.5
97.8
105.8
67.3
191.3
123.7
140.8
125.3
XI
XII
XIII
Net income after tax (= VIII minus (IX + X)) Dividends payable
Retained earnings (= XI minus XII)
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Table 27 Aggregate balance sheet of the international banks (in millions NAf.)
2011
2012
2013
2014
213.3
191.4
173.0
186.7
Assets I
Nonfinancial assets
II
Financial assets (III through VI)
42,346.5
47,545.2
49,236.4
52,691.2
III
Currency and deposits
20,737.4
25,586.1
22,878.3
26,080.2
5,877.5
9,147.5
10,272.4
13,409.2
(ii) Interest-bearing cash
14,860.0
16,438.6
12,605.9
12,671.0
IV
Loans
13,470.8
14,249.7
14,763.9
15,214.1
V
Investments
7,008.5
6,496.8
9,946.9
9,622.6
(i) Debt securities
1,139.3
1,202.3
1,462.9
2,238.2
(ii) Shares and other equity
5,869.2
5,294.5
8,484.0
7,384.4
VI
Other assets
1,129.7
1,212.6
1,647.3
1,774.4
VII
Total assets (= I + II)
42,559.8
47,736.6
49,409.4
52,877.9
(i) Non-interest-bearing cash
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Table 27 Aggregate balance sheet of the international banks (in millions NAf.) cont.
2011
2012
2013
2014
Currency and deposits
26,441.5
30,816.2
31,994.9
41,100.5
(i) Total demand deposits
16,526.6
20,054.7
20,006.6
20,233.9
(ii) Total savings deposits
1,242.3
1,566.3
1,243.7
1,400.6
(iii) Total time deposits
8,672.6
9,195.2
10,744.6
19,466.0
IX
Total interbank funds - bought
2,705.2
4,175.0
5,913.1
34.1
X
Total borrowings
7,637.2
6,323.0
5,126.2
5,452.5
XI
Other liabilities
623.6
745.9
690.5
999.0
XII
Total debt (= VIII + IX + X + XI)
37,407.4
42,060.2
43,724.7
47,586.1
XIII
Capital and reserves
5,152.4
5,676.4
5,684.8
5,291.9
(i) Capital
4,933.8
5,412.4
5,401.7
4,977.1
0.0
0.0
0.0
0.0
15.6
24.1
11.6
11.6
203.0
239.9
271.5
303.2
42,559.8
47,736.6
49,409.4
52,877.9
Liabilities VIII
(ii) Minority interest (iii) Subordinated debentures (iv) General provisions
XIV
Total liabilities and capital (= XII + XIII)
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Table 28 Aggregate income statement of the international banks (in millions NAf.)
2011
2012
2013
2014
I
Interest income
938.1
963.3
1,055.4
1,018.8
II
Interest expense
319.8
339.9
334.6
335.0
618.3
623.4
720.8
683.8
870.0
1,003.5
869.2
893.3
1,488.3
1,626.8
1,590.0
1,577.1
835.2
953.1
952.6
980.0
380.5
439.2
379.8
368.0
81.7
98.0
86.3
86.2
(iii) Other operating expenses
373.0
415.9
486.5
525.8
Provisions
122.3
78.6
160.7
124.2
530.9
595.1
476.7
472.9
126.3
176.0
-49.0
10.1
27.7
58.1
47.5
53.6
629.4
713.0
380.1
429.3
3.5
3.0
2.0
30.0
625.9
710.0
378.1
399.3
III
Net interest income (= I minus II)
IV
Noninterest income
V
Gross income (= III + IV)
VI
Noninterest expenses (i) Salaries & other employee expenses (ii) Occupancy expenses
VII
Net income (before VIII
extraordinary items and taxes) (= V minus ( VI + VII))
IX
Extraordinary items
X
Income tax
XI
XII
XIII
Net income after tax (= VIII minus (IX + X)) Dividends payable
Retained earnings (= XI minus XII)
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Table 29 Financial soundness indicators (in %; end of period)
4-Yr
2011
2012
2013
2014
Capital adequacy ratio
14.4%
13.9%
15.8%
14.2%
14.4%
Core capital adequacy ratio
12.5%
12.9%
13.0%
12.3%
12.9%
Capital to assets
10.7%
10.2%
10.9%
9.0%
10.0%
45%
47%
45%
43%
44%
10.9%
11.3%
11.9%
11.0%
10.8%
27%
29%
32%
39%
31%
47%
46%
46%
46%
46%
53%
54%
55%
54%
54%
268%
282%
269%
269%
290%
Return on assets
1.8%
1.5%
1.8%
1.3%
1.6%
Return on equity
16.7%
14.7%
16.5%
14.2%
15.7%
Interest margin to gross income
66%
65%
64%
64%
66%
Noninterest expenses* to gross income
64%
66%
66%
70%
66%
58%
57%
57%
58%
57%
6.8%
6.6%
6.7%
6.4%
6.6%
Avg.*
Capital adequacy
NPL net of provisions to capital Asset quality NPL to total gross loans Provisions to NPL Foreign currency-denominated loans to total loans Foreign currency-denominated liabilities to total liabilities Large exposures to capital Earnings & profitability
Personnel expenses to noninterest expenses** Spread between lending and deposit rates
* 4-year quarterly average ** Noninterest expenses = operational expenses Performed better than the 4-year quarterly average Performed worse than the 4-year quarterly average
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Table 29 Financial soundness indicators (in %; end of period) cont.
4-Yr
2011
2012
2013
2014
Liquid assets to total assets
25%
27%
30%
27%
28%
Liquid assets to short-term liabilities
33%
36%
39%
39%
36%
142%
141%
141%
140%
145%
4.7%
4.8%
4.9%
4.7%
4.8%
79%
77%
60%
54%
82%
78%
84%
73%
79%
92%
Avg.*
Liquidity & funding
Total deposits to total loans Sensitivity to market risk Net interest margin Net open position in foreign exchange to capital Net foreign assets to total capital
Performed better than the 4-year quarterly average Performed worse than the 4-year quarterly average
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IJZERSTRAAT Johannes Anemaet Oil on canvas 66.5 x 54.5 cm
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INSURANCE SECTOR ASSESSMENT
8
LOCAL AND INTERNATIONAL INSURANCE SECTOR INTRODUCTION One of the main tasks of the central bank is to promote the safety and soundness of the financial system. Supervising the insurance companies contributes to this task and helps maintain public trust in a wellfunctioning financial system. The insurance sector plays an important role in the financial development of the countries of Curaçao and Sint Maarten. This sector represents approximately 12% of the total financial system assets.30 The first part of this assessment focuses on the balance sheet and income statements31 of both the local and the international insurance sectors, making a distinction between the life and nonlife subsectors. The second part of this assessment consists of a financial stability analysis of the local in-
30 Financial system assets include assets from commercial banks, insurance companies, pension funds, credit unions, specialized credit institutions, savings banks, and investment institutions.
surance sector using financial soundness indicators, which help the Bank fulfill its mandate to safeguard the insurance companies. The insurance sector assessment is based on data for 2013. Based on current legislation, insurance companies must submit their data within six months after the end of the reporting year. This stipulation means that most data are received after the annual report of the Bank has been published. Later in the year, an updated assessment based on the 2014 data will be included in the Bank’s Financial Stability Report.
The total assets of the local insurance sector equals 42.0 percent of GDP of the Monetary Union in 2014
31 All data for the insurance companies are compiled on a consolidated basis.
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BALANCE SHEET AND INCOME STATEMENT LOCAL INSURANCE SECTOR Local nonlife insurance subsector The total assets of the local nonlife insurance companies reached NAf.557.9 million at the end of 2013, a 6.7% decrease compared to 2012. The contraction of the aggregate balance sheet of the nonlife insurance companies resulted almost entirely from the reduction in investments (-4.1%) and current assets (-13.1%). The decline in
deposits with financial institutions (-35.9%) was the primary reason for the contraction in total investments, mitigated mainly by an expansion in unconsolidated affiliated companies (20.6%) and other loans (20.1%). The composition of the investment portfolio of the local nonlife insurance companies is shown in Graph 15. (See Table 30 in Appendix IV for a more detailed look at the aggregate balance sheet of the local nonlife insurance companies.) The contraction of the total equity, provisions, and liabilities of the nonlife insurance companies resulted primarily from decreases in current liabilities (-16.9%)
Graph 15 Composition of the investment portfolio of the local nonlife insurance companies 2013
4%
2012
5%
11%
23%
11%
25% 19%
22%
1%
15% 2%
0%
13% 26%
23% 0%
(i) Real estate
(i) Real estate
(iii) Stocks
(iii) Stocks
(vi) Mortgage loans
(vi) Mortgage loans
(vii) Other loans
(vii) Other loans
(ix) Other investments
(ix) Other investments
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and provisions for insurance obligations (-8.7%), mitigated mainly by the increase in capital and surplus (3.2%). The decrease in the provisions for insurance obligations can be attributed mostly to the decrease in the net claim provisions (-10.2%). The local nonlife insurance companies reported a total gross income of NAf.241.1 million in 2013, a decrease of 6.6% compared to 2012. This contraction resulted almost entirely from a decrease in net earned premiums (-6.6%). Total expenses decreased from NAf.250.3 million in 2012 to NAf.241.8 million in 2013 (-3.4%), attributable mainly to decreases in net changes in various other provisions (-204.9%) and underwriting expenses (-3.2%) incurred, mitigated by an increase in net claims incurred. These mutations resulted in an underwriting result of NAf.-0.7 million at the end of 2013, a 110% decrease compared to 2012. The net investment income earned and capital gains or losses decreased by 43.1%, reaching NAf.12.3 million at the end of 2013. In contrast, extraordinary items increased from NAf.0.1 million in 2012 to NAf.5.1 million in 2013. As a result, the net operational result before taxes amounted to NAf.20.5 million, a 32.1% decrease compared to 2012. Furthermore, higher corporate taxes incurred and lower net unrealized gains or losses resulted in a decrease in net profit from NAf.28.9 million in 2012 to NAf.14.5 million in 2013 (-49.6%). (See Table 31 in Appendix IV for a detailed breakdown of the local nonlife insurance companies’ aggregate income statement.) Local life insurance subsector The total assets of the local life insurance companies increased by 4.7% in 2013 compared to 2012, reaching NAf.2.6 billion. The
expansion of the aggregate balance sheet of the local life insurance companies resulted primarily from expansions in investments (3.7%) and other assets (106.0%). All investment categories, aside from the bonds and other fixed income securities, contributed to the expansion (see Graph 16 for the composition of the investment portfolio). However, these expansions were mitigated by contractions in current assets (-14.5%) and items from separate accounts statement (-37.6%). (See Table 32 in Appendix IV for more details.) The increase in total equity, provisions, and liabilities of the local life insurance companies in 2013 was attributable to expansions in capital and surplus (8.0%), provisions for insurance obligations (4.9%), and current liabilities (32.1%), mitigated mainly by a decline in “items from separate accounts statement” (-37.6%). The increase in capital and surplus can be attributed mainly to an increase in the surplus (9.6%). The increase in net technical provisions for life insurances (5.0%) caused the expansion in provisions for insurance obligations. The local life insurance companies reported a total gross income of NAf.348.6 million in 2013, an increase of 6.7% compared to 2012. Increases in both “premiums and other policy considerations” (9.1%) and “net investment income and realized capital gains and losses” (3.1%) contributed to the increase in gross income. The total expenses increased from NAf.259.7 million in 2012 to NAf.298.8 million in 2013 (15.1%), attributable mainly to increases in both net benefits incurred (22.1%) and net operational expenditures incurred (27.0%). As a result, the net operational result before corporate taxes and net results from separate accounts decreased
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Graph 16 Composition of the investment portfolio of the local life insurance companies 2013
2012
3% 3%
3%
3%
3%
27%
1%
28%
36%
34% 8%
8%
20%
19% 2%
2%
(i) Real estate
(i) Real estate
(iii) Stocks
(iii) Stocks
(vi) Mortgage loans
(vi) Mortgage loans
(vii) Other loans
(vii) Other loans
(ix) Other investments
(ix) Other investments
by 25.8% to NAf.49.7 million. Last, due to a net unrealized loss of NAf.11.8 million, the net profit of the local life insurance companies declined by 37.5% to NAf.41.0 million in 2013. (See Table 33 in Appendix IV for more details.)
INTERNATIONAL INSURANCE SECTOR International nonlife insurance subsector The total assets of the international nonlife insurance companies reached NAf.3.6 billion at the end of 2013, almost the same as in 2012, because the expansion in in-
vestments (1.1%) was largely offset by the decline in other assets (38.9%). The rise in other investments (27.4%) was the primary reason for the expansion in total investments, mitigated mainly by a contraction in stocks (-28.1%) and in bonds and other fixed income securities (-19.3%). The composition of the investment portfolio of the international nonlife insurance companies is shown in Graph 17. (See Table 34 in Appendix IV for the international nonlife insurance companies’ aggregate balance sheet.) The expansion of the total equity, provisions, and liabilities of the international
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Graph 17 Composition of the investment portfolio of the international nonlife insurance companies 2013
2012
0%
0% 5%
19%
15%
6%
7% 8%
22% 23% 47% 48%
(i) Real estate
(i) Real estate
(iii) Stocks
(iii) Stocks
(vi) Mortgage loans
(vi) Mortgage loans
(vii) Other loans
(vii) Other loans
(ix) Other investments
(ix) Other investments
nonlife insurance companies resulted primarily from an increase in the capital and surplus (2.5%). This increase was mitigated mainly by the contraction in current liabilities (-40.6%). The increase in the capital and surplus can be attributed entirely to the increase in the surplus (8.4%), because capital declined (-16.0%). Provisions for insurance obligations remained stable as net claim provisions (15.1%) and other technical provisions (2.2%) expanded while net unearned premium provisions contracted (-16.8%). The international nonlife insurance companies reported a total gross income of
NAf.711.0 million in 2013, an 8.0% decrease compared to 2012. This contraction resulted mostly from a decrease in net other underwriting income (-80.2%). Total expenses decreased by 2.7% to NAf.552.7 million in 2013, attributable mainly to decreases in net changes in various other provisions (-70.1) and in net other expenses incurred (-54.0%), mitigated by an increase in net claims incurred (13.2%). These mutations resulted in an underwriting result of NAf.158.3 million in 2013, a 22.5% decrease compared to 2012. The net investment income earned and capital gains or losses decreased by 14.0%, reaching NAf.53.9 million in 2013. Similarly, ex-
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traordinary items deteriorated from NAf.3.7 million in 2012 to NAf.-8.9 million in 2013. As a result, the net operational result before taxes amounted to NAf.215.1 million, a 15.6% decrease compared to 2012. Furthermore, corporate tax rebates were offset by lower net unrealized gains or losses, resulting in a net profit of NAf.247.1 million in 2013, 13.5% lower than in 2012. (See Table 35 in Appendix IV for the aggregate income statement for the international nonlife insurance companies.) International life insurance subsector The total assets of the international life insurance companies increased by 11.7% in
2013 compared to 2012, reaching NAf.28.8 million. The expansion of the aggregate balance sheet resulted primarily from the expansion in investments (12.4%) because of the rise in bonds and other fixed income securities (16.2%). (See Graph 18 for the composition of the investment portfolio and Table 36 in Appendix IV for more details.) The increase in total equity, provisions, and liabilities of the international life insurance companies in 2013 was attributable to expansions in the capital and surplus (8.6%) and provisions for insurance obligations (12.9%). The increase in the capital and surplus can be attributed entirely
Graph 18 Composition of the investment portfolio of the international life insurance companies 2012
2013
17%
19%
81%
83%
(i) Real estate
(i) Real estate
(iii) Stocks
(iii) Stocks
(vi) Mortgage loans
(vi) Mortgage loans
(vii) Other loans
(vii) Other loans
(ix) Other investments
(ix) Other investments
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to the surplus (9.2%), while the increase in net other technical provisions (13.4%) caused the expansion in provisions for insurance obligations. The international life insurance companies reported a total gross income of NAf.4.2 million in 2013, an increase of 15.7% compared to 2012. The increase in “premiums and other policy considerations� (23.4%) contributed to the increase in gross income. The total expenses increased from NAf.0.9 million in 2012 to NAf.4.1 million in 2013 (367.6%), attributable mainly to increases in net benefits incurred and profit sharing to policyholders. As a result, the net operational result before corporate taxes and net results from separate accounts decreased by 96.9% to NAf.86.0 thousand. Last, due to higher corporate taxes incurred, the net profit of the international life insurance companies declined by 99.1% to NAf.24.0 thousand in 2013. (See Table 37 in Appendix IV for more details.)
FINANCIAL SOUNDNESS INDICATORS Financial soundness indicators (FSIs) are used by the Bank to support macroprudential analysis, which assesses the strengths and vulnerabilities of the financial sector. This monitoring task is part of the Bank’s continuing efforts to proactively undertake preemptive measures to structurally enhance the resilience of the financial system and its institutions against shocks and thus promote growth and macroeconomic stability. Ensuring financial stability and calling upon a macroprudential strategy involves integration with traditional microprudential supervision of institutions and monetary policy.
LOCAL NONLIFE INSURANCE SUBSECTOR An overview of the financial stability of the local nonlife insurance sector is represented in a cobweb, a snapshot of the components analyzed in the next sections (see Graph 19). Movements away from the center of the diagram represent an increase in financial stability risks, while movements towards the center of the diagram represent a reduction in risks. The cobweb is calibrated using international benchmarking, supervisory standards, and trend analysis. The risks in earnings & profitability increased in 2013 compared to the previous years, while sensitivity to market risk decreased. The risks in liquidity, asset quality , and capacity remained stable compared to 2012 (see Graph 19). The financial soundness indicators are presented in Table 38 of Appendix IV, and they show that half of the indicators performed worse than the four-year average. Capacity The gross written premium to total equity ratio continued to decline in 2013 from 135.4% in 2012 to 133.2% at the end of 2013. Total equity provides a cushion for absorbing losses. This ratio measures the adequacy of the cushion excluding premiums ceded to reinsurers. The decreasing trend is a positive development, with the insurers bearing less risk in relation to total equity.32 Furthermore, the net written
32 In this case, the ratio decreased in 2013 because total equity as the denominator increased. However, the opposite case of a decrease in gross written premiums will put pressure on earnings, resulting in a tradeoff between adequacy and earnings & profitability.
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Graph 19 Financial stability cobweb of the local nonlife insurance sector Capacity
Earnings & pro tability
Liquidit y
Sensitivity to market risk
Asset quality
2011
premium to total equity ratio also continued to decline, decreasing by 5.5 percentage points compared to 2012, reaching 96.8% in 2013. This ratio reflects risks arising from the underwriting business; thus, the decreasing trend is a positive development as net premium is a proxy of the amount of retained indemnity risk that should be covered by the insurers’ equity. 33 In addition, the disparity between the two ratios decreased in 2013, indicating that the insurers may be relying less on reinsurance. 34 Last, the solvency surplus
33 It should be kept in mind that the risk of the underwriting business is an important variable. For example, a homeowner’s insurance provider would need less equity per dollar of premium than a writer of worker compensation policies. 34 To the extent that the reinsurers are financially sound and make prompt payments to the insurer, this situation may not be a problem. However, the insurer is liable to the policyholder whether or not the reinsurer makes the necessary payments.
2012
2013
increased by NAf.15.2 million in 2013 compared to 2012, reaching NAf.214.8 million. Overall, the risk in capacity continued its decreasing trend in 2013. Earnings & profitability The loss ratio, i.e., net claims & claim adjustment expenses incurred to net earned premiums, increased by 4.9 percentage points in 2013 compared to 2012, reaching 54.4%, still below the internal supervisory limit of 60%. This ratio reflects the costs associated with losses compared to the premiums earned to cover these costs. The short-term payouts for losses mean that fewer revenues are available to earn investment income. For nonlife insurance companies, the majority of income should be generated by the premiums earned. Also, the underwriting expense ratio, i.e.,
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underwriting expenses incurred to net earned premiums, deteriorated, increasing by 2.6 percentage points in 2013 to reach 48.3% at the end of 2013, above the internal supervisory limit of 40%. This ratio reflects the percentage of premium income allocated to expenses, identifying companies that have excessive levels of underwriting expenses or a changing relationship between premiums earned and underwriting cost. The increasing trend in the ratio is cause for concern. This trend can also be seen in the combined ratio, which is the sum of the loss ratio and the underwriting expense ratio. In a sound situation, net premium retained should be enough to pay net claims and operational expenses. If this is not the case, the insurance company is recording a negative underwriting result and is financing net claims and expenses with investment income. The combined ratio continued to increase in 2013 to 102.7%, surpassing the threshold of 100%. In addition, the investment income ratio, i.e., investment income to premiums earned, decreased in 2013 by 3.6 percentage points, reaching 4.7% compared to 2012. If this turnaround continues together with decreasing investment income, the insurance sector may run into problems. Therefore, the Bank monitors this development closely. Last, the net profit continued its decline from NAf.35.2 million in 2011 to NAf.28.9 million in 2012, reaching NAf.14.5 million in 2013. In conclusion, the risk in earnings & profitability increased in 2013 compared to the previous years. Asset quality The investments to total assets ratio remained stable in 2013, increasing by only
1.3 percentage points to 56.7% compared to 2012. While the share of invested assets remained stable, the invested assets yielded only 5.1% of the total gross income in 2013, a decrease of 3.2 percentage points compared to 2012. Although there is a decrease in the yield, the level remains above the historical benchmark of 5%. Furthermore, the ratio of real estate & mortgage loans to invested assets continued to increase in 2013 by 40 basis points compared to 2012, reaching 11.7% at the end of 2013. This trend will be closely monitored as increased investments in real estate and mortgage loans, non-income-producing real estate, and overdue or restructured mortgage loans are relatively common sources of financial stress. Overall, the risk in asset quality remained stable in 2013 compared to the previous years. With the increasing pressure towards more earnings, the local nonlife insurance companies may be facing a tradeoff between asset quality, capacity, and earnings & profitability. Sensitivity to market risk The investment yield, i.e., investment income to average invested assets, dropped to 3.6% in 2013, 2.8 percentage points lower than in 2012. A decline in this ratio indicates that the local nonlife insurance companies have been taking less risk in selecting their assets. The value of this ratio falls within the internal supervisory limits of 1.5% and 5%, defined according to the current conditions in the capital market. The sector’s more risk-averse attitude is also reflected in the level of the stocks to invested assets ratio, with a share of less than 2%. However, the ratio of bonds and other fixed income securities to invested assets is undergoing a decreasing trend,
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which warrants some concern as these investment instruments bear low risks. This development suggests that with earnings under pressure, the local nonlife insurance companies may be shifting towards higher yielding investments in the future, thereby increasing their market risk. Although the sensitivity to market risk decreased in 2013 compared to the previous years, the higher risk outlook warrants a further analysis into the investment portfolio of the local nonlife insurance companies. A tradeoff between sensitivity to market risk and earnings & profitability may be occurring, with the outcome putting pressure on the capacity and asset quality. Liquidity For nonlife insurers, investments represent a less significant element in insurer performance because of the short-term nature of most of their liabilities – primarily claim provisions – compared to the liabilities of life insurers. Therefore, liquidity, i.e., the insurers’ ability to pay their shortterm obligations on time, represents a critical performance element outweighing the received premiums against the increase in risk to total equity. The liquid assets to adjusted current liabilities ratio remained stable at 107.1% in 2013 after decreasing by approximately 10 percentage points in 2012. This liquidity ratio gives an indication of the sector’s ability to pay its short-term obligations on time35 and should be equal or higher than 100%. Therefore, the liquidity risk remained
35 This ratio takes only the outstanding amount of assets into account. Individual holdings could be illiquid if they are too large to be marketed quickly under normal market conditions.
stable in 2013, but increased compared to 2011.
LOCAL LIFE INSURANCE SUBSECTOR The risk in capacity and earnings & profitability of the local life insurance sector increased in 2013 compared to 2012, while asset quality, sensitivity to market risk, and stability remained stable (see Graph 20). As can be seen from Table 39 of Appendix IV, half of the financial soundness indicators performed worse in 2013 than the four-year average. Capacity The change in total equity in 2013 versus 2012 decreased by 8.6 percentage points reaching 5.0%. This indicator measures the improvement or deterioration in the insurers’ financial conditions during the year and includes the effects of additional capital paid-in and contributed surplus. A lower value implies a worsening. The change in 2013 remained within the internal supervisory limits of -10% and +50%. Also, the change in the noncontributed surplus decreased in 2013 by 10.8 percentage points reaching 6.6%. This indicator is another general measure of the improvement or deterioration in the insurers’ financial conditions during the year. As such, it reflects the change in the surplus without taking into account the owners’ ability to contribute to the surplus to maintain it at an adequate level. Although the decreasing trend in the noncontributed surplus implies a worsening, its value remained within the internal supervisory limits of -10% and +50%. Last, the solvency surplus increased by NAf.26.4 million in 2013 compared to 2012, reaching NAf.276.2 million. In conclusion, the risk
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Graph 20 Financial stability cobweb of the local life insurance sector Capacity
Earnings & pro tability
Stability
Sensitivity to market risk
Asset quality
2011
in capacity increased in 2013 compared to previous years, but is not a cause for concern because the indicators remained well within their supervisory limits. Earnings & profitability The ratio of net income (including realized capital gains or losses) to net operational results decreased from 2012 to 2013 by 3.1 percentage points to 14.0%. This ratio provides an indication of the profitability of the insurers, where a zero or negative value warrants an in-depth analysis of the profitability by product line. The profitability of life insurers is influenced by factors such as actual mortality and morbidity of the insured, adequacy of investment income, and the level of commissions and expenses. The lower ratio warrants some
2012
2013
concern, especially in combination with the higher insurance expenses ratio, i.e., insurance expenses and noncorporate taxes to premium and other policy considerations. Compared to 2012, this ratio showed an upward trend, increasing by 4.2 percentage points to 24.0% in 2013, just below the internal supervisory limit of 25%. Furthermore, the investment income ratio, i.e., investment income to premiums earned, remained stable in 2013 compared to 2012 at 61.4%. Last, net profit in 2013 decreased by NAf.24.6 million to NAf.41.0 million compared to 2012. Therefore, the risk in earnings & profitability increased in 2013 compared to 2012, back at the level of 2011.
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Asset quality The investments to total assets ratio remained stable in 2013, decreasing by only 30 basis points to 81.9% compared to 2012. In addition to the stable share of invested assets, investment income also remained stable in 2013, comprising 36% of total gross income. Furthermore, the ratio of real estate & mortgage loans to invested assets remained stable at 5.9% in 2013 compared to the two previous years, well below the internal supervisory limit of 30%. Therefore, both the stability and low value of this ratio reflect a sound situation, resulting in a low risk in asset quality.
investment yields, financial stability, and the prevention of capital erosion. In Curaçao and Sint Maarten, investments accounted for 81.4% of total assets in 2013, with the biggest share representing bonds and other fixed income securities (33.3%), reflecting the long-term focus of the life insurance sector. With the increase in risk in earnings & profitability in 2013 and investment income accounting for a large share of the profit, a tradeoff between sensitivity to market risk and earnings & profitability may be evident in the future, which may put asset quality and capacity under pressure. Stability
Sensitivity to market risk The investment yield ratio, i.e., investment income to average invested assets, remained stable at 6.3% in 2013. The value of this ratio indicates that the sector is taking more risks in the selection of assets, since it is above the internal supervisory limit of 5%, defined according to current financial market conditions. This development is also reflected in the increase of the stocks to invested assets ratio and the decrease of the bonds and other fixed income securities to invested assets ratio. Therefore, the sensitivity to market risk remained stable in 2013 compared to the previous years.
The change in reserving for individual life insurance increased by 5.9 percentage points to 27.8% in 2013. This value indicates some instability as changes of more than 20% are cause for concern. Because the 2012 value did not deviate significantly from 2013, the risk in stability is considered to have remained stable but decreased compared to 2011.
However, investments represent a particularly critical element in the performance and stability of life insurers because of the long-term nature of most of their liabilities, i.e., technical provisions, compared to nonlife insurers. Due to this difference, one of the life insurance companies’ primary investment goals remains the conservation of assets, requiring competitive
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BLAUWE VAAS Jose Maria Capricorne 1993 Water paint on canvas 74.0 x 54.0 cm
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APPENDIX IV Table 30 Aggregate balance sheet of the local nonlife insurance companies (in millions NAf.) 2010
2011
2012
2013
0.2
0.1
0.4
0.6
Admissible assets I
Intangibles
II
Investments:
295.6
328.2
331.1
317.5
(i) real estate
27.5
30.8
36.6
38.2
28.0
52.3
63.0
76.0
15.9
3.2
3.5
5.2
86.8
97.6
84.7
80.8
-
-
-
-
1.2
3.4
0.8
0.7
43.5
21.9
42.4
50.9
88.1
101.7
82.6
52.9
4.5
17.4
17.5
12.8
157.7
182.3
202.7
176.0
39.4
57.0
63.7
63.8
492.9
567.7
597.9
557.9
(ii) unconsolidated affiliated companies (iii) stocks (iv) bonds and other fixed income securities (v) participation in nonaffiliated investment pools (vi) mortgage loans (vii) other loans (viii) deposits with financial institutions (ix) other investments III
Current assets
IV
Other assets
V
Total admissible assets
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Table 30 Aggregate balance sheet of the local nonlife insurance companies (in millions NAf.) cont. 2011
2012
2013
2014
Capital and surplus:
170.6
216.5
247.5
255.4
(i) capital
101.2
116.4
118.2
116.5
69.4
100.1
129.3
138.9
-
-
-
-
1.5
1.6
1.6
1.6
194.8
189.0
193.6
176.8
76.8
74.5
72.7
70.2
92.4
86.9
88.5
79.5
1.0
0.9
0.9
0.7
-
-
-
-
(v) Other technical provisions
24.6
26.6
31.4
26.4
IX
Other provisions and liabilities
17.1
11.7
11.3
4.5
X
Current liabilities
108.8
149.0
143.9
119.6
XI
Contingent liabilities
0.1
-
0.0
0.0
492.9
567.7
597.9
557.9
Equity, provisions, and liabilities VI
(ii) surplus (iii) less treasury stock VII
VIII
Subordinated instruments Provisions for insurance obligations: (i) Net unearned premium provisions (ii) Net claim provisions (iii) Net claim adjustment expense provisions (iv) Funds provisions
XII
Total equity, provisions, and liabilities
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Table 31 Aggregate income statement of local nonlife insurance companies (in millions NAf.) 2010
2011
2012
2013
263.6
256.4
256.9
239.8
-3.5
1.1
1.1
1.3
I
Net earned premiums
II
Net other underwriting income
III
Total gross income
260.1
257.5
258.0
241.1
IV
Net claims incurred
145.6
123.4
120.7
124.5
6.9
6.8
6.7
7.5
1.8
1.9
4.9
-5.1
-
-
-
-
117.9
109.9
117.3
113.5
1.4
-0.9
0.8
1.4
V
VI
VII
VIII
Net claim adjustment expenses incurred Net changes in various other provisions Policyholders' dividends and other similar benefits incurred Underwriting expenses incurred
IX
Net other expenses incurred
X
Total operational expenditure
273.6
241.2
250.3
241.8
XI
Underwriting result
-13.4
16.3
7.7
-0.7
15.2
15.8
21.7
12.3
0.9
5.8
0.8
3.9
17.6
0.3
0.1
5.1
20.2
38.1
30.2
20.5
1.7
3.4
4.8
6.3
18.5
34.7
25.4
14.3
0.1
0.5
3.5
0.3
18.6
35.2
28.9
14.5
XII
Net investment income earned and capital gains or losses
XIII
Other results
XIV
Extraordinary result
XV
XVI
XVII
Net operational result before taxes Corporate taxes incurred Net operational result after taxes
XVIII
Net unrealized gains or losses
XIX
Net profit or loss
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Table 32 Aggregate balance sheet of the local life insurance companies (in millions NAf.) 2010
2011
2012
2013
1.2
1.0
1.6
1.5
Admissible assets I
Intangibles
II
Investments:
1,775.6
2,007.0
2,051.9
2,127.3
(i) real estate
68.6
71.7
70.6
74.9
54.9
54.2
58.6
66.5
121.6
29.7
29.7
59.8
675.5
753.9
740.7
707.8
-
-
-
-
59.7
48.4
48.1
50.4
395.3
358.1
382.3
420.8
81.5
125.7
154.9
177.4
(ix) other investments
318.4
565.3
567.1
569.8
III
Current assets
192.4
244.2
298.0
254.9
IV
Other assets
50.1
55.4
97.5
200.7
212.5
40.0
46.0
28.7
2,231.8
2,347.6
2,494.9
2,613.1
(ii) unconsolidated affiliated companies (iii) stocks (iv) bonds and other fixed income securities (v) participation in nonaffiliated investment pools (vi) mortgage loans (vii) other loans (viii) deposits with financial institutions
V
VI
From separate accounts statement
Total admissible assets
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Table 32 Aggregate balance sheet of the local life insurance companies (in millions NAf.) cont. 2010
2011
2012
2013
261.0
289.8
329.3
355.6
94.8
94.8
86.5
89.6
165.8
194.6
242.4
265.7
-
-
-
-
0.4
0.4
0.4
0.4
1,686.4
1,946.5
2,058.4
2,158.9
1,650.4
1,907.9
2,021.5
2,122.3
1.1
0.8
0.7
0.7
0.0
0.0
0.0
0.0
34.9
37.7
36.1
35.9
51.2
57.6
48.5
59.7
9.9
4.4
3.6
3.4
10.8
9.2
9.1
6.6
212.5
40.0
46.0
28.7
2,231.8
2,347.6
2,494.9
2,613.1
Equity, provisions, and liabilities VII
Capital and surplus: (i) capital (ii) surplus (iii) less treasury stock
VIII
IX
Subordinated instruments Provisions for insurance obligations: (i) net technical provisions for life insurances (ii) net technical provisions for accident and sickness (iii) net other technical provisions (iv) other net policy and contract provisions
X
Current liabilities
XI
Other liabilities
XII
Contingent liabilities
XIII
XIV
From separate accounts statement
Total equity, provisions, and liabilities
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Table 33 Aggregate income statement of local life insurance companies (in millions NAf.)
I
II
Premiums and other policy considerations Net investment income and realized capital gains and losses
2010
2011
2012
2013
191.1
228.8
198.8
216.9
112.4
118.8
121.3
125.1
5.9
3.8
6.6
6.6
III
Net other operational income
IV
Total gross income
309.5
351.5
326.7
348.6
V
Net benefits incurred
103.5
116.8
106.3
129.7
97.7
140.4
99.8
97.7
58.1
52.7
51.1
64.8
1.0
1.1
-0.1
0.1
-
-
-
-
0.3
0.1
-0.8
0.2
VI
VII
VIII
IX
X
Change in provisions for insurance obligations Net operational expenditures incurred Net other operational expenditures incurred Net transfers to or from separate accounts Other changes affecting net results
XI
Profit sharing to policyholders
12.7
10.2
3.5
6.3
XII
Total operational expenditure
273.3
321.2
259.7
298.8
XIII
Extraordinary result
2.3
-1.2
-0.1
-0.1
38.5
29.0
67.0
49.7
10.4
2.9
12.4
0.8
28.1
26.2
54.6
48.9
4.5
0.7
1.1
3.8
32.6
26.9
55.7
52.7
6.0
10.0
9.8
-11.8
38.6
36.9
65.5
41.0
Net operational result before XIV
corporate taxes and net results from separate accounts
XV
Corporate taxes incurred Net operational result after
XVI
corporate taxes and before net results from separate accounts
XVII
Net result from separate accounts
XVIII
Net operational result
XIX
Net unrealized gains or losses
XX
Net profit or loss
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Table 34 Aggregate balance sheet of the international nonlife insurance companies (in millions NAf.) 2010
2011
2012
2013
-
-
-
-
Admissible assets I
Intangibles
II
Investments:
2,957.2
2,785.8
2,894.3
2,926.6
(i) real estate
-
-
-
-
7.9
7.7
8.1
8.6
243.3
175.7
192.8
138.6
648.2
352.6
225.9
182.4
-
-
-
-
-
-
-
-
1,257.0
1,363.4
1,388.9
1,370.0
750.5
809.7
638.7
666.4
50.4
76.8
439.9
560.6
507.9
830.1
663.2
662.7
0.0
52.2
53.0
32.4
3,465.1
3,668.1
3,610.5
3,621.7
(ii) unconsolidated affiliated companies (iii) stocks (iv) bonds and other fixed income securities (v) participation in nonaffiliated investment pools (vi) mortgage loans (vii) other loans (viii) deposits with financial institutions (ix) other investments III
Current assets
IV
Other assets
V
Total admissible assets
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Table 34 Aggregate balance sheet of the international nonlife insurance companies (in millions NAf.) cont. 2010
2011
2012
2013
1,891.5
1,974.5
1,895.4
1,942.9
434.0
443.3
459.4
385.7
1,457.5
1,531.3
1,436.1
1,557.2
(iii) less treasury stock
-
-
-
-
Subordinated instruments
-
-
-
-
1,524.9
1,631.0
1,629.3
1,626.1
493.5
450.5
397.7
330.8
188.3
303.5
285.4
328.6
0.1
0.0
0.0
0.0
-
-
-
-
843.0
877.1
946.1
966.7
1.5
6.1
3.8
4.0
47.3
56.4
81.9
48.7
-
-
-
-
3,465.1
3,668.1
3,610.5
3,621.7
Equity, provisions, and liabilities VI
Capital and surplus: (i) capital (ii) surplus
VII
VIII
Provisions for insurance obligations: (i) Net unearned premium provisions (ii) Net claim provisions (iii) Net claim adjustment expense provisions (iv) Funds provisions (v) Other technical provisions
IX
Other provisions and liabilities
X
Current liabilities
XI
Contingent liabilities
XII
Total equity, provisions, and liabilities
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Table 35 Aggregate income statement of international nonlife insurance companies (in millions NAf.) 2010
2011
2012
2013
504.4
608.9
714.9
699.5
8.2
12.9
57.5
11.4
I
Net earned premiums
II
Net other underwriting income
III
Total gross income
512.6
621.8
772.4
711.0
IV
Net claims incurred
286.5
334.6
368.2
416.9
1.2
1.6
1.6
4.4
3.6
34.0
69.0
20.6
0.0
-
-
-
27.4
63.5
81.2
88.6
7.8
-11.9
48.1
22.1
V
VI
VII
VIII
Net claim adjustment expenses incurred Net changes in various other provisions Policyholders' dividends and other similar benefits incurred Underwriting expenses incurred
IX
Net other expenses incurred
X
Total operational expenditure
326.6
421.9
568.1
552.7
XI
Underwriting result
186.0
199.9
204.3
158.3
75.5
62.1
62.7
53.9
19.2
-8.1
-8.4
11.8
2.6
6.6
-3.7
-8.9
283.3
260.5
254.9
215.1
12.6
15.0
15.1
-16.9
270.7
245.6
239.8
232.0
57.9
-56.6
45.8
15.1
328.6
188.9
285.6
247.1
XII
Net investment income earned and capital gains or losses
XIII
Other results
XIV
Extraordinary result
XV
XVI
XVII
Net operational result before taxes Corporate taxes incurred Net operational result after taxes
XVIII
Net unrealized gains or losses
XIX
Net profit or loss
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Table 36 Aggregate balance sheet of the international life insurance companies (in millions NAf.) 2010
2011
2012
2013
-
-
-
-
Admissible assets I
Intangibles
II
Investments:
95.1
24.6
16.6
18.7
(i) real estate
-
-
-
-
-
-
-
-
68.7
-
-
-
22.3
20.0
13.4
15.6
-
-
-
-
(vi) mortgage loans
-
-
-
-
(vii) other loans
-
-
-
-
4.1
4.7
3.2
3.1
-
-
-
-
5.6
7.3
9.1
10.1
-
-
-
-
100.7
31.9
25.8
28.8
(ii) unconsolidated affiliated companies (iii) stocks (iv) bonds and other fixed income securities (v) participation in nonaffiliated investment pools
(viii) deposits with financial institutions (ix) other investments III
Current assets
IV
Other assets
V
Total admissible assets
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Table 36 Aggregate balance sheet of the international life insurance companies (in millions NAf.) cont. 2010
2011
2012
2013
18.0
12.3
7.4
8.0
1.0
0.5
0.5
0.5
17.0
11.9
6.9
7.5
(iii) less treasury stock
-
-
-
-
Subordinated instruments
-
-
-
-
84.7
19.6
18.4
20.8
67.3
0.4
0.5
0.4
-
-
-
-
14.7
16.9
15.7
17.8
2.6
2.3
2.3
2.6
-2.0
-
-
-
Equity, provisions, and liabilities VI
Capital and surplus: (i) capital (ii) surplus
VII
VIII
Provisions for insurance obligations: (i) Net technical provision for life insurances (ii) Net technical provision for accident and sickness (iii) Net other technical provisions (iv) Other net policy and contract provisions
IX
Other liabilities
X
Current liabilities
-
-
-
-
XI
Contingent liabilities
-
-
-
-
100.7
31.9
25.8
28.8
XII
Total equity, provisions, and liabilities
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Table 37 Aggregate income statement of international life insurance companies (in thousands NAf.)
I
II
Premium and other policy considerations Net investment income and realized capital gains and losses
III
Net other operational income
IV
Total gross income
V
Net benefits incurred
VI
VII
VIII
IX
X
Change in provisions for insurance obligations Net operational expenditures incurred Net other operational expenditures incurred Net transfers to or from separate accounts Other changes affecting net results
2010
2011
2012
2013
10,433.0
5,533.0
2,676.0
3,302.0
-309.0
1,058.0
936.0
872.0
65.0
1.0
15.0
22.0
10,189.0
6,592.0
3,627.0
4,196.0
4,266.0
4,257.0
-794.0
1,318.0
5,766.0
42.0
69.0
-72.0
847.0
720.0
651.0
654.0
138.0
50.0
36.0
29.0
-
-
-
-
-66.0
-
-
-
XI
Profit sharing to policyholders
-3,805.0
1,665.0
917.0
2,181.0
XII
Total operational expenditure
7,146.0
6,734.0
879.0
4,110.0
XIII
Extraordinary result
0.0
0.0
0.0
0.0
3,043.0
-142.0
2,748.0
86.0
182.0
164.0
30.0
62.0
2,861.0
-306.0
2,718.0
24.0
-
-
-
-
Net operational result before corXIV
porate taxes and net results from separate accounts
XV
Corporate taxes incurred Net operational result after corpo-
XVI
rate taxes and before net results from separate accounts
XVII
Net result from separate accounts
XVIII
Net operational result
2,861.0
-306.0
2,718.0
24.0
XIX
Net unrealized gains or losses
6,498.0
0.0
0.0
0.0
XX
Net profit or loss
9,359.0
-306.0
2,718.0
24.0 127
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Table 38 Financial soundness indicators of the local nonlife insurance sector (in %; end of period) 2010
2011
2012
2013
4-Yr Avg.*
Gross written premium to total equity
200.0%
155.6%
135.4%
133.2%
156.0%
Net written premium to total equity
149.1%
116.6%
102.4%
96.8%
116.3%
Total loss ratio
57.8%
50.8%
49.6%
54.4%
53.2%
Underwriting expense ratio
44.7%
42.9%
45.7%
48.3%
45.4%
102.5%
93.7%
95.3%
102.7%
98.5%
5.6%
6.1%
8.3%
4.7%
6.2%
60.0%
57.8%
55.4%
56.7%
57.5%
9.7%
10.4%
11.3%
11.7%
10.8%
Investment yield ratio
5.1%
5.0%
6.5%
3.6%
5.1%
Stocks to invested assets
5.4%
1.0%
1.1%
1.6%
2.3%
29.4%
29.7%
25.6%
24.1%
27.2%
116.5%
116.8%
107.3%
107.1%
111.9%
Capacity
Earnings & profitability
Combined ratio Investment income ratio Asset quality Investments to total assets Real estate & mortgage loans to invested assets Sensitivity to market risk
Bonds and other fixed income securities to invested assets Liquidity Liquid assets to adjusted current liabilities
* 4-year average Performed better than the 4-year average Performed worse than the 4-year average
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Table 39 Financial soundness indicators of the local life insurance sector (in %; end of period) 2010
2011
2012
2013
4-Yr Avg.*
Change in total equity
11.0%
11.0%
13.6%
5.0%
10.1%
Change in non-contributed surplus
14.6%
18.1%
17.4%
6.6%
14.2%
Net income to net operational result
10.5%
7.6%
17.1%
14.0%
12.3%
Insurance expenses ratio
22.5%
16.9%
19.8%
24.0%
20.8%
Investment income ratio
58.8%
51.9%
61.0%
61.4%
58.3%
79.6%
85.5%
82.2%
81.9%
82.3%
7.2%
6.0%
5.8%
5.9%
6.2%
Investment yield ratio
6.5%
6.3%
6.0%
6.3%
6.3%
Stocks to invested assets
6.9%
1.5%
1.4%
2.8%
3.1%
38.0%
37.6%
36.1%
34.0%
36.4%
-12.0%
-38.6%
21.9%
27.8%
-0.2%
Capacity
Earnings & profitability
Asset quality Investments to total assets Real estate & mortgage loans to invested assets Sensitivity to market risk
Bonds and other fixed income securities to invested assets Stability Change in reserving
* 4-year average Performed better than the 4-year average Performed worse than the 4-year average
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STAIRCASE Herma 1998 Oil paint on canvas 33.0 x 23.0 cm
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PENSION SECTOR ASSESSMENT
9
PENSION SECTOR OF CURAÇAO AND SINT MAARTEN INTRODUCTION The pension sector plays an essential role in the financial development of the countries of Curaçao and Sint Maarten. This sector represents approximately 27% of the total financial system assets36. The first part of this pension sector assessment focuses on the balance sheet and income statement.37 The second part consists of a financial stability analysis of the pension sector using financial soundness indicators, which help the Bank fulfill its mandate to safeguard the pension funds. This pension sector assessment is based on data for 2013. Current legislation stipulates that pension funds submit their data within six months after the end of the year. This stipulation means that the majority of
36 Financial system assets include assets from commercial banks, insurance companies, pension funds, credit unions, specialized credit institutions, saving banks, and investment institutions. 37 All data for the pension funds are compiled on a consolidated basis.
the data is received after the Bank’s annual report has been published. However, later in the year, an updated assessment based on the 2014 data will be included in the Bank’s Financial Stability Report.
BALANCE SHEET AND INCOME STATEMENT The total assets of the pension funds reached NAf.7.5 billion in 2013, a 3.4% increase compared to 2012. The expansion of the aggregate balance sheet resulted from increases in all main asset categories, particularly investments (3.1%). The rise in stocks (15.6%)38 was the primary reason for the expansion in total investments, mitigated mainly by a contraction in deposits with financial institutions (-12.8%) and participations (-96.0%). The composition of the investment portfolio of the pension funds is shown in Graph 21. (See Table 40 in Appendix V for a more detailed
38 This development can be explained by an improved stock market climate, an international environment of low interest rates, and a lack of high-yielding bonds in the local market.
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The total assets of the pension sector equals the GDP of the Monetary Union in 2014
look at the pension funds’ aggregate balance sheet.) The rise in total equity, provisions, and liabilities of the pension funds was attributed mainly to increases in equity (31.9%) and technical provisions (2.2%). The increase in the surplus (32.0%) was almost entire-
ly the result of the expansion in equity. Provisions for pension obligations (2.5%) was the sole contributor to the increase in technical provisions as other technical provisions contracted (-59.4%). The pension funds reported a total gross income of NAf.611.4 million in 2013, a decrease of 21.8% compared to 2012. This substantial drop resulted primarily from a decrease in net investment income earned (-26.9%). Total expenses decreased from NAf.639.8 million in 2012 to NAf.505.0 million in 2013 (-21.1%), attributable primarily to a decrease in net technical provisions
Graph 21 Composition of the investment portfolio of the pension funds 2013 1%
2012 1%
2% 0%
14%
17%
2%
1%
16%
39%
44% 18%
2% 0%
2% 20%
0%
21%
(i) Real estate
(i) Real estate
(ii) Participations
(ii) Participations
(iii) Stocks
(iii) Stocks
(v) Participations in investment pools
(v) Participations in investment pools
(vi) Mortgage loans
(vi) Mortgage loans
(vii) Other loans
(vii) Other loans
(ix) Other investments
(ix) Other investments
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(-51.7%), mitigated mainly by an increase in pension benefits incurred (12.3%). Because extraordinary items and unrealized capital gains and losses were insignificant, net profit decreased from NAf.142.3 million in 2012 to NAf.106.0 million in 2013 (-25.5%). (See Table 41 in Appendix V for a detailed breakdown of the pension funds’ aggregate income statement.)
FINANCIAL SOUNDNESS INDICATORS An overview of financial stability in the pension sector is represented in a cobweb, a snapshot of the components ana-
lyzed in the next section (see Graph 22). Movements away from the centre of the diagram represent an increase in financial stability risks, while movements towards the centre of the diagram represent a reduction in risks. The cobweb is calibrated using international benchmarking, supervisory standards, and trend analysis. The risk in earnings & profitability increased in 2013 compared to 2012, while equity decreased. The risk in funding adequacy, asset quality, and sensitivity to market risk remained stable. As can be seen from Table 42 of Appendix V, more than half of the indicators outperformed the four-year average.
Graph 22 Financial stability cobweb of the pension sector Asset Quality
Earnings & Pro tability
Fundin g adequacy
Sensitivity to Market Risk
Equity
2011
2012
2013
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FUNDING ADEQUACY The main financial soundness indicator for the pension industry is the coverage ratio, 39 representing the difference between pension obligations and the resources set aside to fund them. The risk in funding adequacy shows a stable picture, with a slight increase of 1.3 percentage points, reaching 107.1% in 2013 compared
fined contribution plans. This composition bears strong similarity to the Dutch pension fund sector. However, compared to the Netherlands, Curaçao and Sint Maarten lag behind in pension reforms. In the Netherlands, for example, defined contribution plans have steadily increased in the last ten years, but defined benefit plans still form the majority (over 75% as per December 2014). Therefore, the Dutch
Graph 23 Trend analysis of the coverage ratio of the pension sector (in billions NAf.) 8
115%
7 6
110%
5 4
105%
3 2
100%
1 0
95% 2008
2009
2010
2011
2012
2013
Resources available for fund
Estimated technical provisions for fund
Estimated coverage ratio (%)
CBCS minimum (%)
to 2012, above the required minimum of 100% 40 (see Graph 23). The Bank closely monitors the pension funds with a coverage ratio below the 100% threshold. The pension schemes consist mostly of defined benefit plans, as opposed to de-
39 Coverage ratio = (Total assets – current liabilities)/ (Provisions for pension obligations + other technical provisions – defined contributions – re-assurance). 40 This ratio may differ from fund to fund depending on fund-specific circumstances, such as the average age of the participants and the financial strength of the sponsor. Therefore, the situation of individual pension funds may be a reason for the Bank to take supervisory actions.
coverage ratio can still serve as an important benchmark. At the end of 2013, the Dutch coverage ratio reached 110%, slightly higher than the coverage ratio in Curaçao and Sint Maarten, indicating the need to further strengthen funding adequacy and, hence, increase the sector’s capability to withstand shocks in the future. In conclusion, the risk in funding adequacy remained stable in 2013 compared to the previous years.
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ASSET QUALITY The pension funds’ investments accounted for 94.5% of their total assets in 2013 and yielded 60.3% of the sector’s total gross income, nearly the same as in 2012. The ratio of real estate & mortgage loans to invested assets underwent a significant decline in 2012, decreasing by 8.8 percentage points compared to 2011, and then remained stable in 2013 at 3.5%. This development along with the low value of the ratio indicates a sound situation, as excessive investment in real estate and mortgage loans, non-income-producing real estate, and overdue or restructured mortgage loans are relatively common sources of financial difficulties. Therefore, the risk in asset quality remained stable in 2013 compared to 2012, an improvement compared to 2011.
EARNINGS & PROFITABILITY The pension sector’s efficiency in using its assets deteriorated with the return on assets ratio reaching 1.4% at the end of 2013, 50 basis points lower than in 2012. Even with a lower ratio in 2013, the efficiency of the pension sector still improved compared to 2011 when the return on assets registered -0.8%. A similar development can be seen in the investment income to gross income ratio, decreasing by 4.1 percentage points to 60.3% at the end of 2013, slightly underperforming the fouryear average. On the other hand, the contributions to gross income ratio increased by 7.7 percentage points in 2013, outperforming the four-year average of 34.0%. On the expenditure side, the operational & other expenses to gross income ratio increased by 2.3 percentage points, reach-
ing 8.0% at the end of 2013. This increase is a reversal of the decline in 2012. The proportion of pension benefits incurred to total expenses continued its increasing trend, growing by 17.4 percentage points to 58.6% at the end of 2013. However, this ratio is outweighed by a decline in the change in net technical provisions to total expenses ratio, which decreased by 20.1 percentage points reaching 31.7% at the end of 2013. This decrease is considered positive indicating lower allocations to technical provisions. Overall, the expenditure side negatively outperformed the income side, reflecting a worsening of the income statement with the net profit decreasing by NAf.36.3 million to NAf.106.0 million in 2013. In conclusion, the risk in earnings & profitability increased in 2013 compared to 2012, but is still lower than the risk in 2011.
EQUITY The equity to total liabilities ratio of the pension funds reached 4.8% at the end of 2013, an increase of 1.0 percentage point compared to the end of 2012. This ratio outperformed the four-year average and almost reached the Dutch benchmark of 5.0%. The stronger equity position can be attributed to an increase in the surplus of funds. The increasing trend in the equity to total liabilities ratio since 2011 reflects a healthy development. Therefore, the risk in equity continued to decrease compared to the previous years.
SENSITIVITY TO MARKET RISK The share of stocks in total invested assets increased from 33.3% at the end of 2011 to 44.3% at the end of 2013, while the share
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of bonds and other fixed income securities decreased slightly from 27.5% at the end of 2011 to 20.4% at the end of 2013. This shift from low risk investment assets to higher risk products raises some concern. The decrease in bonds can be explained by a lack of reinvestment opportunities for local maturing bonds, as the standing subscription caused all local issued bonds to adopt the Dutch prevailing yield, which is substantially lower than the ‘real’ local yield. The increase in stocks can be explained by a lack of high-yielding opportunities on the local market and low international interest rates on debt securities.41 This shift was intended to maintain earnings and profitability, as the decrease in investment income cannot be fully absorbed by an increase in contributions, which grow gradually with the number of new participants.
a tradeoff between sensitivity to market risk and earnings & profitability, with the outcome putting pressure on both equity and asset quality and, ultimately, on the funding adequacy. In conclusion, the sensitivity to market risk remained stable in 2013 compared to 2012, but increased compared to 2011.
Furthermore, measures can be taken on the expenditure side, e.g., reduction of pension benefits, retrenchment of provisions, conditional indexation, and increase of the pension age. However, measures on both the income and the expenditure sides may increase social pressures. The implementation of structural reform requires broad public support and decisiveness by the government. Therefore, the pension sector will be challenged to
41 Movement towards more foreign investments will result in increased pressure on foreign reserves, which could ultimately undermine the external stability of the currency and increase the exposure of local financial institutions to global financial risks. The Bank is closely monitoring this development. A mitigating measure is the development of a corporate debt market to create attractive local investment opportunities. Furthermore, foreign investments that exceed the 60/40 rule are subject to a penalty. However, the improved monetary environment will be conducive to the exploration of a further easing of the investment rule by the Bank.
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SPANISH BAYONET Nena Sanchez 2002 Acrylic on wood 180.0 x 61.5 cm
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APPENDIX V Table 40 Aggregate balance sheet of the pension funds (in millions NAf.) 2010
2011
2012
2013
5,568.0
6,102.2
6,922.6
7,134.8
(i) real estate
94.9
124.0
115.3
117.9
(ii) participations
52.1
60.8
72.2
2.9
1,891.0
2,031.8
2,735.9
3,162.6
1,616.1
1,675.3
1,451.6
1,456.6
0.0
0.0
0.0
0.0
(vi) mortgage loans
603.1
627.8
129.6
130.4
(vii) other loans
782.7
767.6
1,247.8
1,234.9
450.0
768.7
1,118.1
974.4
78.1
46.1
52.1
55.0
1,221.2
519.3
268.3
295.7
Assets I
Total investments
(iii) stocks (iv) bonds and other fixed income securities (v) participations in investments pools
(viii) deposits with financial institutions (ix) other investments II
Current assets
III
Other assets
14.1
267.6
112.1
117.4
IV
Total assets
6,803.4
6,889.1
7,303.0
7,547.9
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Table 40 Aggregate balance sheet of the pension funds (in millions NAf.) cont. 2010
2011
2012
2013
276.3
178.6
276.2
364.4
1.9
1.5
1.6
2.0
274.4
177.1
274.6
362.4
6,337.5
6,455.4
6,770.4
6,920.3
6,337.5
6,438.7
6,738.6
6,907.4
0.0
16.7
31.8
12.9
102.9
80.4
80.6
83.2
86.6
174.6
175.8
179.9
0.0
0.0
0.0
0.0
6,803.4
6,889.1
7,303.0
7,547.9
Equity, provisions, and liabilities V
Equity (i) foundation capital (ii) surplus
VI
Technical provisions (i) provisions for pension obligations (ii) other technical provisions
VII
Other provisions and liabilities
VIII
Current liabilities
IX
Contingent liabilities
X
Total equity, provisions, and liabilities
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Table 41 Aggregate income statement of the pension funds (in millions NAf.) 2010
2011
2012
2013
I
Contributions
193.7
250.1
230.1
226.8
II
Net investment income earned
429.2
342.6
503.2
367.9
0.0
0.0
0.0
0.0
0.7
0.7
0.5
0.5
III
IV
Net realized capital gains and losses Benefits received from reinsurer
V
Other income
19.5
41.5
48.5
16.2
VI
Gross income
643.1
634.8
782.2
611.4
VII
Pension benefits incurred
206.6
280.0
263.8
296.1
338.7
358.7
331.8
160.3
0.1
0.2
0.2
0.4
3.4
3.2
3.5
3.3
25.5
39.9
34.1
38.9
0.8
9.6
6.5
6.1
575.0
691.6
639.8
505.0
VIII
IX
X
Change in net technical provisions Pension obligations transferred Reinsurance premiums incurred
XI
Operational expenses incurred
XII
Other expenses incurred
XIII
Total operational expenditure
XIV
Net operational result
68.0
-56.8
142.5
106.3
XV
Extraordinary results
0.0
-0.1
-0.2
-0.4
0.0
0.1
0.0
0.0
2.1
0.0
0.0
0.0
70.2
-56.9
142.3
106.0
XVI
Net unrealized capital gains and losses
XVII
Distribution of earnings
XVIII
Net profit or loss
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Table 42 Financial soundness indicators of the pension funds (in %; end of period) 4-Yr
2010
2011
2012
2013
106.9%
104.9%
105.8%
107.1%
106.2%
81.8%
88.6%
94.8%
94.5%
89.9%
12.5%
12.3%
3.5%
3.5%
8.0%
1.0%
-0.8%
1.9%
1.4%
0.9%
4.6%
8.3%
5.7%
8.0%
6.6%
Investment income to gross income
66.8%
54.1%
64.4%
60.3%
61.4%
Contributions to gross income
30.1%
39.4%
29.4%
37.1%
34.0%
35.9%
40.5%
41.2%
58.6%
44.1%
58.9%
51.9%
51.9%
31.7%
48.6%
4.1%
2.6%
3.8%
4.8%
3.8%
34.0%
33.3%
39.5%
44.3%
37.8%
29.0%
27.5%
21.0%
20.4%
24.5%
7.7%
5.6%
7.3%
5.2%
6.4%
Avg.*
Funding adequacy Coverage ratio Asset quality Investments to total assets Real estate & mortgage loans to invested assets Earnings & profitability Return on assets Operational expenses & other expenses to gross income
Pension benefits incurred to total expenses Change in net technical provisions to total expenses Equity Equity to total liabilities Sensitivity to market risk Stocks to invested assets Bonds and other fixed income securities to invested assets Investment yield
* 4-year average Performed better than the 4-year average Performed worse than the 4-year average
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HUISJE IN DE BUURT VAN FORT BEEKENBURG Herbert Boye Oil paint on canvas 62.0 x 81.5 cm
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SUPERVISORY POLICY AND ACTIVITIES
10
PROMOTING THE SOUNDNESS OF THE FINANCIAL SYSTEM INTRODUCTION One of the Bank’s core objectives is the promotion of safe and sound financial institutions and a well-functioning financial system in the countries of Curaçao and Sint Maarten. To that end, the Bank provides a regulatory and supervisory framework for prudential supervision and a fair and transparent financial market. The regulatory framework also promotes financial integrity and aims to prevent money laundering and terrorist financing. This chapter begins with the developments in the supervision of banks and credit institutions. Next, the supervision of institutional investors and insurance intermediaries is covered, followed by the supervision of trust service providers, investment institutions and administrators, and the securities exchange. Last, the supervision of information technology in the financial sector is discussed.
SUPERVISION OF BANKS AND CREDIT INSTITUTIONS OVERVIEW The Bank’s prudential supervision of credit institutions is aimed primarily at promoting the stability, integrity, efficiency, safety, and soundness of the financial system of the countries of Curaçao and Sint Maarten to safeguard the interests of the credit institutions’ depositors and other creditors. Bank supervision entails mainly the licensing of financially sound institutions and the performing of ongoing supervision using a risk-based approach through both onsite and offsite supervision. The emphasis is on monitoring the liquidity and solvency of the credit institutions. Furthermore, the Bank also monitors the credit institutions’ compliance with regulations on the detection and deterrence of money laundering and terrorist financing and the disclosure of information to the public.
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SUPERVISORY POLICIES The Bank is finalizing a New Chart of Accounts reporting system (NCoA) for credit institutions based on comments received from the banking sector and internal reviews, and it intends to implement the NCoA on January 1, 2016. The NCoA is based on International Financial Reporting Standards and the Basel II framework; reporting will be on a gross basis. The NCoA will apply to both locally operating and internationally operating banks. The NCoA software is being developed in cooperation with the Centrale Bank van Aruba. In addition, the Bank continued to refine its risk-based supervision approach, which allows the examiners to focus on the higher risk areas. The National Ordinance on the Supervision of Money Transfer Companies went into effect in Curaรงao on March 1, 2015. Because the implementation of a legal framework for the supervision of money transfer companies in Sint Maarten is still pending, the Bank maintains its upscaled policy with respect to money transfer activities in Sint Maarten. This approach helps to safeguard the integrity of the financial sector of Sint Maarten and to prevent its misuse for money laundering and terrorist financing activities. The draft Harmonization and Actualization of Supervision Ordinances of Curaรงao and Sint Maarten is still in the legislative process. This ordinance aims to harmonize and modernize existing supervision laws. The enactment of this draft national ordinance also will provide the Bank with more authority and legal instruments to supervise the financial sector and will allow the Bank to apply sanctions in addition to the
already existing possibility for imposing fines for the late submission of (prudential) reports and violation of the anti-money laundering and terrorist financing legislations and provisions & guidelines. The draft Harmonization and Actualization legislation addresses some of the comments made by the International Monetary Fund in its Offshore Financial Centers Assessment of the Supervision and Regulation of the Financial Sector and by the Caribbean Financial Action Task Force in the Mutual Evaluation Reports of both Curaรงao and Sint Maarten. When passed, this law will enable the Bank to execute its supervisory tasks more effectively. Last, the Bank is expanding its supervisory efforts by issuing guidelines to enhance transparency in the local financial market and to strengthen prudent credit extension practices. These guidelines are aimed at providing the public with adequate information on interest rates payable on deposit accounts and on preventing consumers from credit overload.
SUPERVISORY ACTIVITIES In 2014, the Bank conducted 9 onsite examinations at institutions operating with either a license or a dispensation from the Bank: 6 limited reviews, 2 targeted reviews, and 1 follow-up review. Furthermore, the Bank revoked the license of 4 institutions: i.
MeesPierson (Curaรงao) N.V.;
ii.
MeesPierson (NA) N.V.;
iii.
Van Lanschot Bankiers (Curaรงao) N.V.; and
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iv.
Coöperatieve Crediet Vereniging “Eureka”.
In addition, the Bank also issued 2 dispensations: i.
Aguila el Mana B.V.; and
ii.
Ultimate Financial Management Services B.V.
Due to developments that put the solvency of Girobank N.V. under great pressure, the Bank requested the Court of First Instance seated in Curaçao to place Girobank N.V. under the emergency measure. This placement was done on December 16, 2013, ex article 28 of the National Ordinance on the Supervision of Banking and Credit Institutions 1994, and the license of Girobank N.V. was revoked on that date. The emergency measure was requested to protect the depositors and other creditors of Girobank N.V.
SUPERVISION OF INSTITUTIONAL INVESTORS AND INSURANCE INTERMEDIARIES OVERVIEW The Bank is also entrusted with the supervision of institutional investors and insurance brokers. The main objectives of this supervision are to safeguard the financial and contractual interests of policyholders, beneficiaries, participants of pension funds, and other stakeholders of the insurance, pension, and insurance brokerage sector. To this aim, the solvency and liquidity of the institutional investors
and insurance brokers are closely monitored.
SUPERVISORY POLICIES In 2014, the Bank continued to induce institutions to comply with the Anti-Money Laundering and Combating of Terrorist Financing (AML/CFT) regulations and guidelines, including the National Ordinance Identification when Rendering Financial Services. This compliance continues to be an important component of the onsite examinations conducted by the Bank at life insurance companies and insurance intermediaries. With respect to the guidelines themselves, the Bank is currently in the process of updating the Provisions and Guidelines on AML/CFT applicable to the various sectors that the Bank supervises, to make them compliant with the revised Financial Action Task Force (FATF) recommendations (2012). In the case of the insurance industry, the updating relates to the Provisions and Guidelines on the Detection and Deterrence of Money Laundering and Terrorist Financing for Insurance Companies and Intermediaries. The Bank closely monitors the developments in the insurance industry locally and abroad on the basis of which its supervisory regime is enhanced. In 2014, these efforts were accomplished locally by supervisory meetings held with individual companies under the Bank’s supervision and by conducting onsite examinations. Local developments are also followed by maintaining frequent meetings with representative organizations such as the Curaçao & Bonaire Insurance Association for the insurance companies and the Unie van Assurantie Consultants for the insurance intermediaries.
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On the international level, regular meetings were held with the Dutch and Aruban supervisory authorities, i.e., De Nederlandsche Bank, the Autoriteit Financiële Markten, and the Centrale Bank van Aruba. The Bank also maintained close contact with the insurance supervisory authority in the United States, the National Association of Insurance Commissioners. In addition, working relationships with other supervisory authorities anchored in Memoranda of Understanding were enhanced.
During 2014, the committee consisting of representatives of the Bank and the insurance sector continued their discussions on the valuation guidelines for the Annual Reporting Automated System (ARAS) version 3.1. The Bank is in the process of testing the changes that have been made based on the findings. The intention is now to initiate the project to program the ARAS 3.1 version in a generic language. For the reporting of the financial year 2014, insurance companies should use ARAS version 2.7.
Furthermore, the Bank coordinates implementation of recommendations from international standard-setting bodies such as the FATF, the Caribbean Financial Action Task Force (CFATF), and the Organization for Economic Co-Operation and Development (OECD) In 2014, the institutional investors sector joined forces with the Bank during the financial sector assessment by the OECD. Both Curaçao (August) and Sint Maarten (October) were assessed in 2014.
Current developments in the pension sector also put more emphasis on the need for adequate risk management within pension funds. The Bank’s supervisory regime should be able to identify risks in pension funds and assess whether adequate control mechanisms are in place to mitigate these risks. To this end, the Bank will continue to enhance its supervisory regime comprising both desk supervision and onsite supervision. Furthermore, an internal committee of the Bank continued its work on drafting a new law on the supervision of pension funds during 2014. The new legislation enables the Bank to better supervise the pension sector, comprising not only the company pension funds but also other providers of collective pension schemes. The Bank intends to present a draft of the new legislation to the representative organization of pension funds (Caribbean Pension Funds Association) in the last quarter of 2015 for its comments.
Risk management has been put high on the agenda of the International Association of Insurance Supervisors (IAIS). Established in 1994, the IAIS represents insurance regulators and supervisors in nearly 140 countries. Curaçao and Sint Maarten are members of the IAIS represented by the Bank. The IAIS has issued insurance core principles, which are globally accepted requirements for the supervision of the insurance sector. Given the increasing complexity and interdependency of risks, risk management plays an important role among the IAIS standards. Within the boundaries of the legal framework on insurance in Curaçao and Sint Maarten, the Bank constantly strives to be compliant with these insurance core principles.
Last, the harmonization legislation will provide the Bank with a basis to perform market conduct examinations. However, as mentioned, the introduction of this legislation is still pending. New guidelines on
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BRASIA IN BLOOM Roald Schotborgh 2001 Oil paint on canvas 49.0 x 59.1 cm
market conduct will be developed once this legislation is enacted. The Autoriteit FinanciÍle Markten (AFM), De Nederlandsche Bank, the Centrale Bank van Aruba, and the Bank have agreed that they will strive for a level playing field in the area of market conduct in the Dutch Kingdom. Therefore, the Bank’s guidelines will be in line with the supervision done by the AFM in Bonaire, Sint Eustatius, and Saba (BES islands).
SUPERVISORY ACTIVITIES The Bank continued to apply and enhance the risk-based supervision approach in 2014. When performing risk-based onsite examinations, the Bank focuses on identifying risks within the key activities of the companies under supervision that might negatively affect their solvency position and the integrity of their operations. Apart from identifying these risks, the Bank also assesses the control measures applied to mitigate and/or control these risks. To this end, the Bank has identified seven key activities within insurance companies: premiums & underwriting, claims handling, reinsurance, reserving, investments, related parties, and outsourcing. Relevant
risks and related controls are recorded in a risk assessment matrix for each key activity. The examination procedures the Bank performs are documented in electronic work papers. Based on the assessment, the Bank will rate the inherent risks and controls in the risk assessment matrix of the functional activities. The Bank will report only on risk areas that are apparently not under control because of the institutions failure to mitigate related risk events. If deemed necessary, companies will be induced to take appropriate actions to address the detected risks. During 2014, 12 onsite examinations were conducted at supervised institutions, 3 of them at general insurance companies, 2 at life insurance companies, 2 at funeral insurers, 3 at pension funds, and 2 at insurance intermediaries. In addition to the risk-based approach applied during onsite examinations, the Bank is also enhancing the risk-based approach for the desk supervision of the institutional investors sector. To this end the Bank has identified five custom measures: total assets, surplus excess, net profit or loss, corporate governance, and year of
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last examination. Each custom measure is rated with a number and the sum of the numbers is determined in the Custom Measures Scoring Matrix. In addition to the custom measures, risk is determined in the Risk Scoring Metrics. The outcomes of both matrices are added resulting in the Total Entity Rating. Based on the Entity Total Rating and the results of the risk-based examinations, a risk-based audit plan is determined for a particular company in a given year.
SUPERVISION OF TRUST SERVICE PROVIDERS The Bank is also entrusted with the supervision of trust service providers. The main objective of this supervision is to preserve and foster the reputation of the countries of Curaçao and Sint Maarten as a sound, transparent, and reputable financial center. Furthermore, the supervision of trust service providers aims to protect the interests of the clients of trust service providers. Effective supervision comprises, among other things, assessing the financial soundness, business integrity, administrative organization, and internal control environment, along with the provision of quality trust services by the licensed institutions. From 2013 to 2014, the number of trust service providers with a license remained stable at 92. The number of trust service providers with a dispensation dropped slightly from 112 in 2013 to 108 in 2014. As a result, the Bank had a total of 200 approved trust service providers under its supervision at the end of 2014.
In 2014, the Bank maintained its qualitative and quantitative risk-based selection criteria for performing its supervision. The Bank made 28 formal visits to entities within the sector: 14 onsite investigations and 14 management meetings. Of those 28 formal visits, 24 were at trust service providers. In addition, the Bank held about 60 meetings with stakeholders in the sector, about 35 of them with trust service providers.
SUPERVISION OF INVESTMENT INSTITUTIONS AND ADMINISTRATORS The Bank’s prudential supervision of investment institutions and administrators is aimed at protecting the interests of investors and preserving and fostering the reputation of the countries of Curaçao and Sint Maarten as a sound, transparent, and reputable financial center. Exerting effective supervision comprises, among others things, assessing the financial soundness, business integrity, administrative organization, and internal control environment of the licensed institutions, as well as their provision of information to investors. Moreover, effective supervision also fosters the further development and proper functioning of the financial market of the countries of Curaçao and Sint Maarten. The number of supervised investment institutions and administrators remained stable at 33 in 2014. The Bank conducted four visits at investment institutions and administrators during 2014, all of them management meetings.
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SUPERVISION OF THE SECURITIES EXCHANGE The Bank also is entrusted with the supervision of the securities exchange. The main objective of this supervision is to protect investors on the securities exchange. Furthermore, the supervision of the securities exchange aims to preserve and foster the reputation of the countries of Curaçao and Sint Maarten as a sound, transparent, and reputable financial center. Exerting effective supervision comprises, among other things, ensuring transparency, business integrity, a proper administrative organization, and internal control environment, and adequate functioning of the securities market and exchange. The supervision of the securities exchange started in March 2010 when the exchange received its license. The exchange is still in its development stage. The Bank conducted various meetings during 2014 to keep abreast of the latest developments.
SUPERVISION OF INFORMATION TECHNOLOGY ASPECTS OF THE FINANCIAL SECTOR OVERVIEW Many business processes in most, if not all institutions are critically dependent on information technology (IT). To support organizations in successfully meeting today’s business challenges, the Bank develops provisions and guidelines to help the financial sector with the governance of IT and performs IT examinations at the financial institutions with an emphasis on risk analysis and IT governance.
SUPERVISORY POLICIES The application of computer and telecommunication technology is currently a widespread phenomenon in the financial industry, and the trend towards increasing automation is growing rapidly. Thus, the success of an organization will depend to a considerable degree on the quality of its computer and telecommunication systems and the extent to which it develops these systems to match the evolving needs of its business and its customers. Deficiencies in security and control procedures within those systems can pose a significant threat to the continuity of operations. Therefore, the Bank deems it important to provide senior management with a firm basis for evaluating the risks inherent in the use of computer technology and to increase its awareness of the general control elements that may help safeguard the institution’s operations against such risks. This awareness also will help to identify the automation-related risks that threaten the effectiveness and continuity of an institution’s operations and to understand their potential consequences, which might be as extreme as prolonged closure. In 2011, the Bank issued the Provisions and Guidelines for Information Security Management, which aim to further promote and ensure safe and sound practices with respect to information security management among the institutions subject to Bank supervision. The objective of information security management is to: i.
Maximize the protection of the supervised institutions’ information assets;
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ii.
Meet regulatory requirements; and
iii.
Minimize potential legal liability and reputational exposures in a cost-effective manner.
The information security management provisions provide principles for establishing a comprehensive information security management program and implementing an information security management framework. The objective of the information security management provisions is to safeguard the interests of the supervised institutions’ key stakeholders, their reputation, brand, and value-creating activities. Because the supervised institutions play a crucial role in our economy, it is important that the effects of disruptions, cyber threats, privacy violations, and other information security threats regarding their services to the public also are mitigated. The mitigation of these risks will contribute to maintain public trust and confidence in our financial sector. Ongoing innovations in information technology, competition among banking institutions, new market entrants, and mergers and acquisitions have contributed
worldwide to a wider array of electronic banking products and services. Curaçao and Sint Maarten also have experienced this development among its credit institutions, and the acceptance of electronic banking services has grown rapidly. Electronic banking carries benefits as well as risks to credit institutions. Because the characteristics of electronic banking increase and modify banking risks, thereby influencing the overall risk profile of banking, the Bank considers it important that credit institutions recognize, address, and manage these risks in a prudent manner. Worldwide fraud, identity theft, money laundering, and terrorist financing especially are inclined to move to countries where credit institutions provide electronic banking products and services and have inadequate risk management. Therefore, the Bank issued its Provisions and Guidelines for Safe and Sound Electronic Banking in 2007 in its continuous effort to promote and ensure safe and sound banking practices in Curaçao and Sint Maarten. The Bank encourages credit institutions to adopt stronger risk management and internal control to prevent these kinds of criminal activities. These provisions and guidelines provide guid-
BOTEN ONDER DAK Asyla ten Holt 1989 Oil paint on canvas 54.5 x 69.0 cm
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ance on the general principles of risk management for electronic banking and they outline suggestions for consumer security and education to all credit institutions subject to the Bank’s supervision. The provisions and guidelines should help credit institutions expand their risk-oversight policies and processes covering also their electronic banking services. Last, the Bank issued its Provisions and Guidelines for Information Technology Service Management in 2014 to further promote and ensure safe and sound practices regarding information technology service management of the institutions subject to its supervision. The objective of these provisions and guidelines is to deliver IT service support to the supervised institutions to fulfill their IT requirements and thus provide their customers with high quality services. These provisions and guidelines include the design, transition, delivery, monitoring, and improvement of IT services that support business processes. A paradigm shift is needed to further align IT and business processes. IT should no longer be considered as the technology supplier, but as a business enabler. Financial institutions can adopt new IT service models such as Infrastructure as a Service, Platform as a Service, and Software as a Service. These new models can exist together with the classical IT service model, where IT is an internal department delivering IT services to the organization.
SUPERVISORY ACTIVITIES During 2014, the final version of the Provisions and Guidelines for IT Service Management was presented to the supervised institutions through a seminar. During this
seminar, the following topics were presented: i.
International IT supervision;
ii.
Configuration Management;
iii.
Cloud computing and supervision;
iv.
National Cyber Emergency Response Team of the Caribbean.
Furthermore, meetings were conducted and correspondence was exchanged with various institutions regarding the implementation status of the “Provisions and Guidelines for Information Security Management and Business Continuity Management”. These activities were undertaken in light of the Bank’s deadline of July 1, 2015, by which all financial institutions should have completed and introduced their information security plans, procedures, and guidelines. Finally, the Bank conducted an IT examination with regard to the security of payment products offered by financial institutions in St. Maarten in 2014. During this examination, the safety of ATMs also was assessed. A similar examination was performed in 2013 at the banks in Curaçao. The results of these examinations led to the development of an ATM questionnaire and an updated version of the “Provisions and Guidelines for Safe and Sound Electronic Banking”. Both documents will be sent to the banks in Curaçao and Sint Maarten in the third quarter of 2015 for consultation and follow-up examinations.
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VIE AQUATIQUE Midzy Longuevergne 2006 Oil paint on canvas 100.0 x 100.0 cm
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11
DOMESTIC FINANCIAL MARKET DEVELOPMENTS CONTRIBUTING TO THE ECONOMIC DEVELOPMENT
INTRODUCTION The domestic financial market plays an essential role in the economic development of the countries of Curaรงao and Sint Maarten, as it provides economic agents with various options for allocating their savings and obtaining funds efficiently. Promoting further diversification of the financial system enhances risk pooling and risk sharing opportunities for investors and borrowers. In addition, the domestic financial market provides the government with funding possibilities like government bonds for dealing with fiscal deficits as an alternative to riskier external borrowing. Another benefit stemming from the issuance of government bonds is the establishment of a sovereign yield curve to facilitate the development of a corporate bond market.
From a central bank perspective, the domestic debt market is a vital instrument for the conduct of indirect monetary policy operations, as it enables the use of openmarket operations and interest rates to convey monetary policy signals across the whole maturity spectrum. The domestic financial market serves as a two-way information corridor between the Bank and market participants. During 2014, only the governments and the central bank issued securities42 on the capital markets of Curaรงao and Sint Maarten. The corporate bond market has remained small with only two bond issues during the past five years: an issue by a utility company of Curaรงao in 2009 and
42 The Bank Charter limits the agency function of the central bank to only the governments of Curaรงao and Sint Maarten. This limitation means that the Bank cannot facilitate or provide its expertise to government agencies or other parties that want to raise funds on the local capital market.
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an issue by the harbor of Sint Maarten in 2012. Privately owned as well as government-owned companies have preferred to finance their capital needs via the local banks or abroad.
in the domestic yield curve. The final part of the chapter provides an assessment of the corporate bond market of the countries of Curaรงao and Sint Maarten.
As can be seen from Graph 24, the majority of the local capital market consists of government-issued debt securities with a share of 86% (NAf.4.2 billion), followed by corporate bonds (12%, or NAf.569 million),
THE PLEDGING RATE OF THE BANK Towards the end of 2007, following the outbreak of the financial crisis, the Fed
Graph 24 Composition of the local capital market as per December 2014 (%)
2%
12%
Government securities Certi cates of D eposit Corporate bond s
86%
and Certificates of Deposit (2% or NAf.90 million) issued by the Bank as an indirect short-term monetary policy tool. The first part of this chapter focuses on the pledging rate of the Bank. The second part consists of an analysis of the nongovernmental security market, i.e., Certificates of Deposit. This analysis is followed by an assessment of the market for government securities, focusing on the composition of issued debt securities, the issuance during 2014, and the development
funds rate started to decline, dropping from 5.25% to a range of 0% - 0.25%, and it remained within that range from 2009 through 2014. The local pledging rate, i.e., the lending rate of the Bank,43 follows the trend of the Fed funds rate. As a consequence, the
43 The Bank will, in principle, limit the total amount of advances provided to each commercial bank to NAf.20 million. If commercial banks want to borrow more, the Bank will increase its lending rate by 2.00%.
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Bank’s lending rate dropped from a peak of 5.50% during mid 2006-mid 2007 to 1.00% at the end of 2008 and remained at this historically low level through 2014 (see Graph 25). In addition, the pledging rate is used to determine the legal interest rate, which is defined as the interest rate set by law on
Bank uses to control the liquidity in the local money market. They are offered via bimonthly auctions held according to a set schedule. There are four terms offered: 4, 12, 26, and 52 weeks, with increasing coupons based on maturity. Through the auctioning of CDs, the Bank provides an investment alternative to the commercial banks, since short-term government
Graph 25 Development in the pledging rate of the CBCS and the Fed funds rate (%) 6.0
5.0
4.0
3.0
2.0
1.0
2005
2006
2007
2008
2009
Pledging r ate CBCS
legally enforceable claims, such as legal judgements and overdue taxes. The legal interest rate is equal to the pledging rate published by the central bank plus 2 percentage points.
NONGOVERNMENTAL SECURITIES MARKET Certificates of deposit (CDs) issued by the Bank are the only tradable nongovernmental instruments available in the local money markets of Curaçao and Sint Maarten. CDs are a monetary tool that the
2010
2011
2012
2013
2014
Fed Fund s rate
securities have dried up due to the debt relief (see Graph 26). In addition, CDs are more flexible than the reserve requirement as they can be traded and pledged as collateral for borrowing at the Bank.44 In 2014, however, commercial banks did not trade in CDs in the secondary market.
44 CDs have the same pledging procedure as government securities.. Advances against the collateral of pledged CDs with a remaining term to maturity of no more than one year are limited to 90% of their nominal value. Pledged CDs may not be traded without prior approval of the Bank.
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Graph 26 Development in certificates of deposit and short-term government securities (NAf. millions) 150
500 450
125
400 90.1
350
100
300 250
75
200 50
150 100
25
50 14.0 0 2007-Dec
0 2008-Dec
2009-Dec
2010-Dec
2011-Dec
2012-Dec
Short-term government securities
As indicated in Graph 26, the amount of outstanding CDs increased from NAf.14.0 million at the end of December 2013 to NAf.90.1 million at the end of 2014. The subscription amounts were increased at each auction in an effort to mop up part of the excess liquidity in the money market. During 2014, the amount of outstanding CDs averaged NAf.49.6 million, almost twice the level in 2013 (NAf.26.8 million).
2013-Dec
2014-Dec
-hand scale)
During the 2014 auctions, the maximum interest rate on CDs averaged 34 basis points, 7 basis points higher than in 2013. Aside from the 52-week maturity, all CDs in 2014 were offered with a higher maximum coupon rate than in 2013 (see Table 43).
Table 43 Development in the maximum coupon rates of certificates of deposit 4 weeks
12 weeks
26 weeks
52 weeks
2012
0.12%
-
-
-
2013
0.10%
0.18%
0.27%
0.52%
2014
0.20%
0.32%
0.35%
0.47%
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GOVERNMENT SECURITIES MARKET
ticipate mandatorily alongside local participants at yields prevalent in the Dutch capital market.
COMPOSITION OF ISSUED DEBT SECURITIES
The composition of the debt securities by issuer can be seen in Graph 27. The securities of the former central government and island government of Curaçao of the Antillean constellation were taken over by the Netherlands, which registered NAf.1.76 billion at the end of 2014. This debt was owned entirely by local holders. These securities are different from the securities issued by the countries of Curaçao and Sint Maarten at the conclusion of and after the debt relief under the standing subscription. The total amount outstanding of this latter debt totaled NAf.2.5 billion, and was almost entirely owned by the DSTA.
The local market for government-issued securities has changed significantly as a consequence of the ‘standing subscription,’ which is an integral part of the debt relief offered by the Dutch government as a component of the constitutional changes. The combination of the debt relief and the standing subscription allowed a significant decline in the interest burden of the countries of Curaçao and Sint Maarten. A standing subscription requires that whenever the government of Curaçao or Sint Maarten issues debt securities, the Dutch State Treasury Agency (DSTA) will par-
Graph 27 Composition of debt securities by issuer, as per December 2014 (in millions NAf.) 3,000
2,459.9
2,500
1,958.6
2,000
1,500
1,775 1,396.2
1,000
500
0
501.2
360.6 0.0
0.0 Securities central government*
Securities island government Curaçao*
18
0.1
Securities country of Curaçao
Local holders
Securities country of Sint Maarten
DSTA holdings
Total
*= taken over by the Dutch government
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The DSTA bases its subscription price on the yield of a euro-denominated security of similar duration issued by the State of the Netherlands. The underlying assumption is that the Dutch high-grade sovereign securities market consistently will carry significantly lower interest rates than those common in the capital markets of Curaçao and Sint Maarten. Graph 28 Breakdown of debt securities by holder after the debt relief (%) DSTA holdin gs, 99.25%
Because the sovereign risk profile of the governments and the currency exposure created by the Antillean guilder through the fixed peg to the US dollar are not incorporated in the yields of government securities, activities in the capital market – especially those in the secondary market – have decreased drastically. As can be seen from Graph 28, less than 1% of the bonds issued under the standing subscription have been purchased by local investors. The standing subscription will be reviewed in 2015 as part of the evaluation of the Kingdom Act Financial Supervision Curaçao and Sint Maarten. Note that local holders still own approximately 42% of the outstanding debt as of December 2014 (see Graph 29).
Local holders, 0.75%
Dutch government securities are rated AAA by Standard and Poor’s, while Curaçao and Sint Maarten’s securities carry ratings of, respectively, A- and BBB+. 45 As a result, any new loans issued by the governments of Curaçao and, Sint Maarten carry a yield considered too low by local investors because it does not adequately reflect sovereign and foreign exchange risk factors.
45 The rating of BBB+ from Standard and Poor’s is equivalent to Moody’s Baa1 rating.
However, a distinct difference exists in the maturity of debt securities for the local holders versus those for the DSTA, with the majority of the bonds of the local holders maturing in 2018 (excluding the APNA debt46). These bonds still carry the high interest rates prevalent prior to the debt relief (see Graph 30).
ISSUANCE OF DEBT SECURITIES IN 2014 The outstanding debt as per December 31, 2014, for the country of Curaçao was NAf.1,977,031,000. On June 2, 2014, the Curaçao government issued a 30-year bond
46 APNA is the government pension fund of the former Netherlands Antilles. Part of the government debt to APNA that was taken over by the Netherlands consists of a 6.50% annuity for a period of 30 years.
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Graph 29 Government bond holdings as per December 31, 2014 (in millions NAf.) 4,500
4,235.2
4,000 3,500 3,000 2,500 2,000
1,958.6
1,775.3
1,500 1,000 501.2
500 0 Local holdings
DSTA holdings Curaรงao
DSTA holdings Sint Maarten
Total
Graph 30 Maturity schedule of government bonds (in millions NAf.) 700 600 500 400 300 200 100 2014
2015
2016
2017
2018
2020
2025
2029
2030
2035
2040
DSTA holdings Curaรงao
DSTA holdings Sint Maarten
Local holdin gs
Local holders (excl. APNA Debt)
2043
2044
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of NAf.247,036,000 with a nominal interest rate of 2.45%. The government of Sint Maarten issued four bonds during 2014. On June 2, 2014, the Sint Maarten government issued a 15-year bond of NAf.58,652,000
with a nominal interest rate of 2.25%, a 20year bond of NAf.44,818,000 with a nominal interest rate of 2.375%, and a 30-year bond of NAf.39,526,000 with a nominal interest rate of 2.45%. Furthermore, the
Table 44 Overview of bonds issued by the countries of Curaçao and Sint Maarten (in NAf.) Years to maturity
Coupon
Description of S/A bonds
Nominal amount
10
2.500%
Curaçao Oct 15 2010 - 2020
100,000,000
15
2.750%
Curaçao Oct 15 2010 - 2025
140,000,000
20
2.875%
Curaçao Oct 15 2010 - 2030
370,000,000
25
3.000%
Curaçao Oct 15 2010 - 2035
475,000,000
30
3.125%
Curaçao Oct 15 2010 - 2040
582,391,000
30
2.750%
Curaçao Sep 16 2013 - 2043
62,604,000
30
2.450%
Curaçao Jun 02 2014 - 2044
247,036,000 1,977,031,000
5
1.500%
Sint Maarten Oct 12 2011 - 2016
26,000,000
10
2.500%
Sint Maarten Oct 21 2010 - 2020
50,000,000
15
2.625%
Sint Maarten Oct 21 2010 - 2025
73,500,000
20
2.750%
Sint Maarten Oct 21 2010 - 2030
78,571,000
25
2.875%
Sint Maarten Oct 21 2010 - 2035
50,000,000
30
3.000%
Sint Maarten Oct 21 2010 - 2040
50,000,000
15
2.250%
Sint Maarten Jun 02 2014 - 2029
58,652,000
20
2.375%
Sint Maarten Jun 02 2014 - 2034
44,818,000
30
2.450%
Sint Maarten Jun 02 2014 - 2044
39,526,000
30
1.800%
Sint Maarten Nov 21 2014 - 2044*
30,271,000 501,338,000
* Sinking bond
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Sint Maarten government issued a 30year sinking bond of NAf.30,271,000 with a nominal interest rate of 1.80% on November 21, 2014.
The margin was apparently the premium for the sovereign and currency risks perceived by investors. Graph 31 simulates the local yield in a scenario with no debt relief or standing subscription. It reflects the expected higher local yields taking into account the lower yields on the international market. With the standing subscription, the interest rate of Antillean guilderdenominated bonds is based on the Dutch yield of similar bonds. This means that a
As a result, the total outstanding debt as per December 31, 2014 for the country of Sint Maarten was NAf.501,338,000 (see Table 44 for an overview of the outstanding debt securities).
Graph 31 Comparison of the several yields (%) 7% 6% 5% 4% 3% 2% 1% 0% 1m
3m
6m
1yr2
yr
3yr4
yr
5yr7
yr
8yr9
yr
10yr
15yr
20yr
25yr
30yr -1%
Local yield
US Treasury yield
DEVELOPMENT IN THE DOMESTIC YIELD CURVE The domestic yield curve prior to the debt relief and the standing subscription reflected the interest developments in US-denominated securities as a result of the peg between the US dollar and Antillean guilder. Traditionally, local yields were equal to US treasury yields of comparable terms plus a risk margin of about 2-3%.
US Agencies yield
Dutch Treasury yield
bond issued by the government of Curaรงao or Sint Maarten will bear a coupon that does not correspond to the interest rates prevalent in the local capital market. Furthermore, the coupon is not adjusted for either sovereign or currency risk. In Graph 32 the local yield curve is illustrated with the standing subscription as it evolved both before (October 9, 2010) and after the outstanding government bonds of the Netherlands Antilles were taken
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Graph 32 Development in the yield curve for local government securities (%) 5.0%
4.5%
4.0%
3.5% 9-Oct-10 3.0% 31-Dec-10 2.5% 31-Dec-11 2.0% 31-Dec-12 1.5%
1.0%
31-Dec-13
31-Dec-14
0.5%
0.0%
Table 45 Development in the 12-month average local yield (%) 2011
2012
2013
2014
3m
0.51%
0.04%
0.04%
0.06%
6m
0.84%
0.09%
0.06%
0.06%
9m
1.01%
0.10%
0.07%
0.07%
1yr
1.12%
0.10%
0.09%
0.07%
5yr
2.28%
1.00%
0.97%
0.51%
10yr
3.01%
1.98%
2.01%
1.41%
15yr
3.31%
2.40%
2.47%
1.90%
20yr
3.39%
2.48%
2.58%
2.05%
25yr
3.39%
2.46%
2.63%
2.13%
30yr
3.37%
2.45%
2.65%
2.16%
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over by the Dutch government as part of the debt relief. As can be seen clearly, the yield on local government securities has declined substantially since the introduction of the standing subscription. During 2014, the indicative yield in the local government securities market remained very low, similar to the yield in the Netherlands. Only for the short-term rate of 3 months was the average 12-month local yield higher in 2014 than in the previous year (see Table 45).
CORPORATE BOND MARKET An indispensable condition for monetary stability in a small open economy is creating a sound fiscal condition. The debt relief component of the constitutional changes was aimed at creating that condition for the new countries of Curaçao and Sint Maarten on October 10, 2010. However, the side effects of the attached standing subscription by the Dutch State Treasury Agency caused the market for government bonds to dry up, depriving the Bank of an important policy instrument, namely, the ability to conduct open market operations. This situation constrained the effectiveness of monetary policy, and local investors lost an attractively yielding low-risk investment instrument.
individual bonds purchased but also to bonds with a similar maturity. In addition, these corporate bonds also reduced the overall duration risk borne by the market and the interest rate risk borne by investors, hence affecting the entire term structure. Even with a local bond market of NAf.4.2 billion in government bonds and NAf.569 million in corporate bonds, local investors are seeking investment opportunities elsewhere. However, moving more to foreign investment options may result in increased pressure on foreign reserves, ultimately undermining the external stability of the currency and making local financial institutions more vulnerable to global financial risks. Therefore, this development is being closely monitored by the Bank. The Bank will continue its efforts to further develop a corporate bond market. A growing corporate bond market will provide the countries of Curaçao and Sint Maarten with an attractive financing alternative to bank financing for government-owned and private entities, and will create more local investment opportunities. Hence, such a market can support the economic development of the countries.
In reaction to this development, the Bank embarked on an asset purchase program to build a portfolio of corporate bonds. Although views on this program differed, the ultimate goal was to create a substitute for the conduct of open-market operations in line with the Bank’s mandate to promote the stability of the guilder. The purchases of these corporate bonds resulted in lower yields, which were limited not only to the
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BIDA DEN UN PUERTO Jean Girigori 2002 Mixed media on canvas 102.5 x 102.4 cm
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12
FINANCIAL MARKET INFRASTRUCTURE PROMOTING A SAFE AND SOUND PAYMENTS SYSTEM INTRODUCTION The financial market infrastructure facilitates the clearing, settlement, and recording of financial transactions and thus plays a critical role in the smooth functioning of the economies of Curaçao and Sint Maarten. Continuity and the orderly operation of the services provided through the financial market infrastructure will enhance the stability of markets. Hence, supervision of the financial market infrastructure is closely linked to preserving financial stability and is the reason that central banks oversee the financial market infrastructure and monitor, manage, and mitigate risks. The supervision of the financial market infrastructure is consistent with one of the Bank’s main objectives: to promote a safe and efficient payment system in Curaçao and Sint Maarten. This chapter begins with an overview of the financial market infrastructure in the countries Curaçao and Sint Maarten, focusing on the main payments and settlement systems, the main payment instruments, and trends and developments.
Next, a more in-depth description of the interbank clearing and settlement system is provided, followed by an overview of the regulation and supervision of the financial market infrastructure.
OVERVIEW OF THE FINANCIAL MARKET INFRASTRUCTURE MAIN PAYMENTS AND SETTLEMENT SYSTEM Curaçao and Sint Maarten have one main financial market infrastructure: the National Automated Clearing and Settlement System, formerly called Netherlands Antilles Clearing System (NACS2),47 a multi-currency, automated system for the settle-
47 In March 2008, the NACS system underwent a thorough upgrade and is now referred to as NACS2. The most important innovation was the consolidation of the technical infrastructure. NACS2 has replaced the former decentralized infrastructure with a single technical platform and features new functionalities designed to meet the needs of the financial market in the future. Several smaller upgrades have been made since 2008.
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ment of interbank payments. This system consists of three subsystems: I.
Large-value payments system;
II.
Retail payments system; and
III.
Securities, trading, custody, registry, clearing, and settlement system.
The large-value payments system of the Bank is a Real Time Gross Settlement system (RTGS). All interbank and large and critical financial transactions occurring in Curaçao and Sint Maarten are processed, cleared, and settled in NACS2-RTGS. The retail payments system comprises a financial infrastructure administered and regulated by the Bank. This infrastructure includes an Automated Clearing House (ACH), a Cheque Clearing House, and the CashNet system. Within the retail payments system, the Automated Teller Machines (ATMs) and Point of Sale (POS) networks clear through the CashNet system. The securities trading, custody, registry, clearing, and settlement system is composed of the Central Securities Depository administered by the Bank for government and corporate securities and the Dutch Caribbean Securities Exchange (DCSX).
MAIN PAYMENT INSTRUMENTS
The most used paper-based payment instrument is the cheque. The use of cheques is particularly popular with people who do not have a bank account and receive their salary by cheque on a monthly basis. The use of cheques is especially prevalent in some economic sectors such as construction. However, the volume and value of transactions are starting to stabilize and are expected to decline in the coming years. This prediction is based on the absence of a guarantee for payment when the issuer’s account has insufficient funds and the affordability and convenience of the use of electronic payment instruments. Technological advances continue to allow more individuals and businesses to shift towards electronic delivery of information instead of the exchange of paper-based documents. Non-paper-based instruments, i.e., electronic payments, continue to grow in both volume and value. Electronic transfers, i.e., the use of direct credits and debits through standing orders, have shown high growth. Companies are transferring salaries directly to their employees’ accounts, and bills are being paid directly via the bank to the creditors. Bank services are being promoted to help clients with the payment of utility bills,48 school fees, and the collection of their pensions. In addition, the use of online banking services is increasing, with more clients using the internet to make wire transfers and pay their bills.
The main payment instruments used in Curaçao and Sint Maarten include cash, cheques, electronic transfers, and payment cards. Other instruments entail money transfers through post offices and international remittances. 48 “Pagafasil” and “Pagatinu” are examples of services being offered to the public to pay their utility bills.
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Furthermore, payment cards are gaining territory in the retail payment services market, replacing cash and cheques at a fast rate. The simplicity of use, more safety compared to carrying cash, and the ease of conversion into cash are making payment cards the most common payment method used among the citizens of Curaรงao and Sint Maarten. Almost every bank in Curaรงao and Sint Maarten offers the possibility of credit and debit cards to their clients. The increase in the use of these payment methods seems to be a global trend. Not only is their local use becoming more popular, but most cards also are globally accepted. Cards with certification of Visa and Mastercard are internationally accepted and their use is promoted further with e-commerce innovations. In addition, internationally accepted credit and debit cards are now the most commonly used payment method for low and medium value transfers. Furthermore, the increasing popularity of online shopping is fostering the applications for such payment cards to engage in web-purchasing activities. Moreover, with most shops and businesses operating a POS system, customers are actively encouraged to acquire a credit or debit card; many customers even have multiple cards from different banks.
TRENDS AND DEVELOPMENTS The proportion of payments made with credit cards (Visa, MasterCard, Amex, Kompa Leon) and debit cards is growing. Each local commercial bank has its own payment services, including internet banking services enabling customers to access their bank accounts online, make transfers between their accounts, and process money transfers to third-party bank accounts.
In addition, banks allow their clients to use the POS infrastructure without extra charges.49 Furthermore, electronic money usage is increasing swiftly among the population. Currently, two electronic money storage instruments are available for retail payments in Curaรงao and Sint Maarten. The first instrument is the gift card, which is offered by local commercial banks in local currency. Gift cards are valid for 12 months after the date of purchase and are available in amounts of NAf.25 up to NAf.500. Gift cards are accepted by more than 4,000 merchants in Curaรงao, St. Maarten, and the BES islands.50 The second instrument is a money card, which acts as a prepaid credit card that can be reloaded at any bank branch and is valid for at least one year. No bank account is necessary to acquire the money card. It is used mostly for the management of personal travel expenses and purchases at web shops, but businesses also use it to manage advances to their staff for attending conferences and trainings. Another payment method gaining momentum is payments initiated with a smart phone. Currently, mobile phone banking enables bank customers to stay informed continuously about their account balance via SMS alerts of debit and credit transactions. Customers also can check their account balance and receive messages from their bank, all free of charge. Furthermore, some smart phone applications allow their users to recharge their prepaid
49 Only the merchants are charged to use the POS infrastructure. 50 Bonaire, Sint Eustatius, and Saba
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EL TORO Y LA LUNA Jean Girigori 2003 Mixed media on canvas 103.0 x 112.0 cm
phone account. Future features will include the possibility to transfer funds and pay utility bills via the mobile phone. Currently, mobile payments can take place only on the intra-bank networks. These networks are not yet connected allowing national clearing of transactions initiated via a smart phone. In the near future, local inter-bank online transactions and even international transactions will be made available.
bank transactions in US dollars and Antillean guilders.
GENERAL
The NACS2 Real Time Gross Settlement System (RTGS) is the platform that processes large-value payments. The RTGS functionality provides a mechanism for participants to settle large value and time critical payments on a gross basis with intraday finality. In NACS2, the settlement of funds occurs on an entry-by-entry basis. The transfers are tested for funds availability and settled individually, continuously, and in real time across the banks’ settlement accounts, provided that the originating institution has a sufficient available balance or that the balance is covered by collateral.
The National Automated Clearing and Settlement System developed by the Bank has been operational since November 1997. An upgrade of the system was released in March 2008 which adopted the name National Automated Clearing and Settlement System 2 (NACS2). The system upgrade offers interbank payment clearing and settlement services to Curaçao, Sint Maarten, and also Bonaire. The system offers both Real Time Gross Settlement and Automated Clearing House functionality for inter-
Furthermore, the Bank provides crossborder payment services to the financial and public sectors through Society for Worldwide Interbank Financial Telecommunication (SWIFT), by means of foreign correspondent banks. The procedures for fund transfers to foreign countries make use of predefined formats, stating the account to be debited at the Bank and the corresponding credit as well as the city, currency, and foreign bank account. Both transfers from and to foreign countries
INTERBANK CLEARING AND SETTLEMENT SYSTEM
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requested by financial entities and other economic agents are settled by the order or instructions received through SWIFT.
REGULATION AND SUPERVISION
UPCOMING DEVELOPMENTS
LEGAL AND REGULATORY FRAMEWORK
The Bank, in collaboration with the World Bank and the Center for Latin American Monetary Studies (CEMLA), has adjusted its NACS2 operating rules to meet international principles and standards set by the Committee on Payments and Market Infrastructures of the Bank for International Settlements51 and the International Organization of Securities Commissions. The draft operating rules have been reviewed by the local banks and are now in the process of final approval. The new NACS2 operating rules are scheduled for implementation before the last quarter of 2015. An important change in the NACS2 operating rules is that not only can local commercial banks participate, but also other institutions – such as credit unions, the treasury departments of the governments of Curaçao and Sint Maarten, and institutions – providing clearing and settlement services can do so as well, provided they comply with the requirements stipulated in the NACS2 operating rules. The rationale for this policy change is to provide more efficiency, safety, and oversight in the processing of payments.
51 The Committee on Payments and Market Infrastructures (CPMI) promotes the safety and efficiency of payment, clearing, settlement and related arrangements, thereby supporting financial stability and the wider economy. The CPMI monitors and analyses developments in these arrangements, both within and across jurisdictions. It also serves as a forum for central bank cooperation in related oversight, policy, and operational matters, including the provision of central bank services. The CPMI is a global standard setter in this area. It aims at strengthening regulation, policy, and practices regarding such arrangements worldwide.
The Bank, in collaboration with the World Bank and the Center for Latin American Monetary Studies, has drafted a legal framework for the financial market infrastructure. This Payments System Act is undergoing its internal review and is expected to be presented to the parliaments of Curaçao and Sint Maarten in the second half of 2015, with the aim of having the legislation enacted in 2016. Once the Payments System Act is enacted, the Bank will have enhanced power to carry out oversight of all payment systems in the countries and will be able to conduct in-depth monitoring of the financial market infrastructure performance and reliability. In its continuous efforts to promote and ensure safe and sound banking practices in Curaçao and Sint Maarten, the Bank issued in 2007 the “Provisions and Guidelines for Safe and Sound Electronic Banking.” These provisions and guidelines provide credit institutions, which are subject to the Bank’s supervision, with guidance on the general principles of risk management of electronic banking and provide suggestions for consumer security and education. The provisions and guidelines help credit institutions to strengthen their risk oversight policies and processes with respect to their electronic banking activities.
UPCOMING POLICY CHANGES Ongoing innovations in information technology and competition among banking
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institutions, new market participants, and mergers and acquisitions have contributed to a wider array of electronic banking products and services worldwide. Curaçao and Sint Maarten also have experienced this development among its credit institutions, and the acceptance of electronic banking services has grown rapidly. Electronic banking carries benefits as well as risks for credit institutions. Therefore, the Bank deems it important that these risks are recognized, addressed, and managed in a prudent manner. Furthermore, worldwide fraud, identity theft, money laundering, and terrorist financing are more likely to move to countries that lack adequate risk management practices in the provision of electronic banking products and services. Therefore, the Bank requires credit institutions
to adopt policies to enact stronger risk management practices, including internal control, to minimize the risk of occurrence of these illegal activities. Last, local financial institutions are starting to engage in derivative activities, such as interest rate swaps and foreign exchange forwards. These instruments are purchased or sold mainly on their clients’ request or for hedging purposes for their own balance sheet. To provide an adequate legal framework, the National Ordinance governing the Supervision of Securities Market Intermediaries has been drafted. This draft legislation will enable the Bank to conduct oversight over entities that provide securities clearing and settlement services and will enhance the efficiency and stability of the capital market of Curaçao and Sint Maarten.
CHANGA Wilson Garcia 2012 Oil paint on canvas 63.0 x 82.5 cm
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BEYESIMA DEN BANDA’RIBA Roald Schotborgh 2003 Oil paint on canvas 100.5 x 100.5 cm
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YEARLY FINANCIAL STATEMENT
13
STATEMENT FOR THE YEAR 2014 GENERAL The accounting principles applied by the Bank in this report are derived from the Financial Reporting Principles of the Centrale Bank van Curaçao en Sint Maarten52 (reference CBCS/2012/1) dated October 29, 2012, as approved by the Board of Supervisory Directors and stipulated by the Meeting of the Entitled Asset Holders on, respectively, June 28, 2013 (Curaçao) and July 31, 2013 (Sint Maarten). The following is a summary of the significant accounting principles applied. Assets and liabilities are valued at nominal value unless otherwise stated. Income is recognized on an accrual basis. Expenses are incurred in the period to which they relate. The 2014 figures are extracted from the unaudited financial statements and the
2013 figures are extracted from the audited financial statements.
NOTES TO THE BALANCE SHEET AS OF DECEMBER 31, 2014 GOLD Gold is valued at the prevailing market price at balance sheet date. Unrealized gains/losses related to market value changes are credited/charged to the profit and loss statement. Based on article 35, paragraph 2, and article 40 of the Bank Statute, the unrealized result is subsequently credited/charged to the result before profit distribution and to the appropriated reserve regarding gold revaluation. If the balance of this appropriated reserve becomes negative, the negative balance will be charged to the profit and loss statement.
52 “Grondslagen voor de financiële verslaggeving van de Centrale Bank van Curaçao en Sint Maarten.”
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Table 46 Balance sheet as of December 31, 2014 (before profit distribution (in NAf.) 2014
2013
902,444,065
904,137,206
2,616,438,150
2,235,599,687
371,208,854
367,733,657
Fixed assets
93,148,056
90,448,031
Other current assets
33,989,029
31,556,587
4,017,228,154
3,629,475,168
399,848,436
392,383,371
7,552,873
56,819,142
465,260,657
474,727,913
1,794,119,672
1,487,804,215
296,139,268
283,465,149
in guilders
90,100,000
14,000,000
in foreign currency
43,238,987
-
Funds in consignment
11,420,709
10,846,205
Other liabilities
14,766,468
14,991,323
Total liabilities
3,122,447,070
2,735,037,318
Assets Gold Foreign receivables and investments Domestic receivables and investments
Total assets
Liabilities & equity Liabilities Bank notes in circulation Nonresidents’ current accounts in guilders in foreign currency Residents’ current accounts in guilders in foreign currency Residents’ time deposits
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Table 46 Balance sheet as of December 31, 2014 (before profit distribution (in NAf.) cont. 2014
2013
62,189,000
68,154,262
Capital
30,000,000
30,000,000
Reserve fund
30,000,000
30,000,000
755,285,928
757,031,133
17,306,156
9,252,455
832,592,084
826,283,588
4,017,228,154
3,629,475,168
Provisions
Equity
Appropriated reserves Retained earnings
Total equity
Total liabilities & equity
FOREIGN RECEIVABLES AND INVESTMENTS The foreign receivables and investments represent current account balances and time deposits with foreign financial institutions, securities in foreign currency, bonds issued by the former country of the Netherlands Antilles and the Island Territory of Curaçao, the debts of which were taken over by the Dutch State as part of the debt relief in connection with the constitutional changes, and receivables from governments and institutions of other countries. The securities represent investment portfolios. The investment portfolios managed internally are – except for monetary reasons than can make market operations
necessary – held to maturity and valued at amortized cost. The investment portfolios managed externally are valued at the market price at balance sheet date. Unrealized gains/losses from market value changes with regard to the investment portfolios managed externally are credited/charged to the profit and loss statement. Based on article 35, paragraph 2, and article 40 of the Bank Statute, the unrealized result is subsequently credited/charged to the appropriated reserve, which is accounted for per each investment portfolio. If the balance of the appropriated reserve becomes negative, the negative balance will be charged to the profit and loss statement. Realized gains and losses are immediately accounted for in the profit and loss statement. The accrued interest with respect to
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Table 47 Profit and loss statement 2014 (in NAf.) 2014
2013
40,597,515
44,925,576
-299,856
-226,211
40,297,659
44,699,365
5,749,581
5,754,627
-1,690,206
-348,146,660
5,324,652
4,184,996
-54,999
107,534
-440,601
-563,202
Net investment and foreign exchange result
49,186,086
-293,963,340
Supervision income
10,238,644
6,158,449
1,769,536
1,326,350
Other income
12,008,180
7,484,799
Total income
61,194,266
-286,478,541
Depreciation of tangible fixed assets
5,046,081
5,002,006
Depreciation of intangible fixed assets
1,406,669
1,030,744
General operating expenses
48,433,020
51,798,534
Total expenses
54,885,770
57,831,284
6,308,496
-344,309,825
1,745,205
348,039,126
8,053,701
3,729,301
Income Interest income Interest expenses Net interest income Capital gain Net unrealized loss related to market value changes Realized foreign exchange result Net unrealized foreign exchange result Management and custody fee
Miscellaneous income
Expenses
Net result including loss from market value changes and unrealized foreign exchange result Withdrawal unrealized loss related to market value changes and unrealized exchange result from the appropriated reserves
Net result
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the investments is accounted for under the balance sheet item ”Other current assets.”
DOMESTIC RECEIVABLES AND INVESTMENTS The domestic receivables and investments relate to investments in bonds issued by semi-government institutions in Curaçao and Sint Maarten, and loans granted based on article 10, paragraph 3, sub f, of the Bank Statute, collateralized by a mortgage on real estate located in Curaçao and Sint Maarten or other collateral. The bonds are valued at their amortized cost and the loans at their nominal value less a provision for possible losses. The accrued interest with respect to the bonds and loans is accounted for under the balance sheet item “Other current assets.”
FIXED ASSETS These assets, which also include the printing cost of bank notes and the capitalized cost price or production costs of purchased and self-developed software applications, are – with the exception of land and art – valued at cost after deduction of accumulated depreciation, calculated on the basis of the expected useful life of the assets following the straight-line method. Land and art are valued at cost. Impairment losses, if any, are charged directly to the profit and loss statement.
OTHER CURRENT ASSETS This item includes, among other things, license fee receivable, accrued interest, prepaid expenses, coins and currency held as petty cash, accounts receivable, and
other short-term receivables. These assets are valued at their nominal value less a provision for possible losses.
BANK NOTES IN CIRCULATION This item represents the nominal value of the bank notes issued by the Bank that are in circulation at the balance sheet date.
NONRESIDENTS’ CURRENT ACCOUNTS This item represents the balances in current accounts of foreign banks and/or foreign government institutions. Foreign currency balances are converted into guilders at the Bank’s official mid-rates prevailing at the balance sheet date. The balances are mostly noninterest-bearing.
RESIDENTS’ CURRENT ACCOUNTS These accounts include the noninterestbearing balances in the current accounts of domestic banks, the governments of Curaçao and Sint Maarten, other government institutions in Curaçao and Sint Maarten, and the reserve requirement of domestic banks. Most of the balances are denominated in guilders. Foreign currency balances are converted into guilders at the Bank’s official mid-rates prevailing at the balance sheet date.
RESIDENTS’ TIME DEPOSITS These deposits include the balances in time deposits and certificates of deposit of domestic banks and government institutions. Foreign currency balances are converted into guilders at the Bank’s official mid-rates prevailing at the balance sheet date. These balances are interest-bearing.
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FUNDS IN CONSIGNMENT This item represents the nominal value of the Bank’s liability for money received in custody from third parties in conformity with the Ordinance on Money held in Consignation (P.B. 1886, no. 22).
OTHER LIABILITIES This item includes, among other things, license fee payable, accrued interest, and accounts payable.
PROVISIONS The balance of the provisions refers to, among other things, provisions for early retirement (VUT), “duurtetoeslag,” and medical expense premiums SZGBNA. These provisions are periodically calculated by an actuary.
CAPITAL Under article 34 of the Bank Statute the capital amounts to NAf. 30 million.
RESERVE FUND This fund concerns a reserve to be formed from the profit up to an amount of NAf. 30 million. Under article 34 of the Bank Statute, this reserve is intended to cover potential losses on the capital of the Bank.
APPROPRIATED RESERVES The appropriated reserves relate to the unrealized gains/losses from market value changes and foreign exchange results on the balance sheet items that comprise the foreign exchange reserves (gold, foreign receivables, and investments). The appro-
priated reserves are accounted for separately for gold, investment portfolios, and foreign exchange result. The unrealized gains/losses from market value changes and foreign exchange results are credited/ charged to the profit and loss statement when they originate. Based on article 35, paragraph 2, and article 40 of the Bank Statute, the unrealized results are subsequently credited/charged to the result before profit distribution and to the respective appropriated reserve. If the balance of the respective appropriated reserves becomes negative, the negative balance will be charged to the profit and loss statement. The revaluation of the foreign exchange reserves as of December 31, 2014 resulted in a net decrease of the appropriated reserves of NAf.1.752 million, consisting of an unrealized loss on gold of NAf.1.7 million, an unrealized gain on investments of NAf.3 thousand, and an unrealized loss on foreign exchange of NAf.55 thousand.
RETAINED EARNINGS This item represents the accumulated earnings of the Bank less dividends paid to the governments of Curaçao and Sint Maarten.
NOTES TO THE PROFIT AND LOSS STATEMENT 2014 INTEREST INCOME Interest income is generated mainly from current accounts, time deposits, bonds of the former country the Netherlands Antilles and the Island Territory of Curaçao (the debts of which were taken over by the
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Dutch State in connection with the constitutional changes), domestic bonds and loans, gold investments, and securities in foreign currency.
NET UNREALIZED LOSS RELATED TO MARKET VALUE CHANGES The net unrealized loss related to market value changes fluctuates based on the prevailing market prices at month-end of gold
and the securities in foreign currency managed externally.
REALIZED FOREIGN EXCHANGE RESULT These earnings result from the margin between the buying and selling rates applied by the Bank when trading in foreign currencies and from the differences in exchange rates arising from conversions.
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DAME DI ANOCHI Heleen Cornet 2008 Water paint on canvas 60.0 x 50.0 cm
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Organizational Chart Board of Supervisory Directors, Board of Executive Directors, Deputy Directors and Senior Officials as of June 1, 2015 BOARD OF SUPERVISORY DIRECTORS H. Lopez Th. Kok R.F. Pietersz Board of Executive Directors
E.D. Tromp President A.L. Schenker Secretary to the President
J.M. Hasselmeyer Executive Director
A.G. Romero Executive Director
S.T. Salesia Adjunct Director Supervision
G.W.T. Damoen Adjunct Director Risk & Compliance
B.M. Mezas General Counsel
E.T.M. de Lannooy Advisor to the Board
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Executive Director J.M. Hasselmeyer
Secretary M.S.L. Hamen
Deputy Director Financial Affairs A.M. Francisco Treasurer A.M. Francisco Currency Department S.G.M. Esterga-Martina Accounting M.E. Antonio
Payments & Settlements A.M. Francisco
Vault R. Mahes
Deputy Director Operational Affairs H.E. Jackson
Advisor Operational Affairs M.O. Suisse
Human resources H.E. Jackson
International Financial Affairs F.C. Constansia
Security S.A. Streden
St. Maarten Office L.L. Hassell
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Executive Director J.M. Hasselmeyer
Deputy Director Corporate Relations &Â Facilities Management R.R. Lourents Corporate Relations & Secretariat N.S. van der Wal
Archives & Registry R.R. Lourents
Facility Services V.J. Galvis
Purchase & Inventory J.A.L. Tromp-Tong
Internal Services N.N. Tromp
Coordinator Information & Communication Technology R.J. Manuel IT Manager R.A.F. Everts
Information Systems, Research & Development M.P.A. Mendes de Gouveia
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Executive Director A.G. Romero
Secretary N.O.A. Rijke-Lourensz
Deputy Director Monetary & Economic Affairs F.J.P. Matto Statistical Information & Reporting M.R. de Windt
Research Department C.M. Henriquez
Deputy Director Policy, International Affairs & Integrity R.I.M. de Weever-Garcia Policy H.L. Willems
International Affairs R.I.M. de Weever-Garcia
Integrity R.F. Rooi
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Adjunct Director Supervision S.T. Salesia
Secretary N.O.A. Rijke-Lourensz
Coordinator Banking Supervision R.A.R. de Lanoy Banking Field Supervision S.B. Wong
Banking General Supervision R.A.R. de Lanoy
Deputy Director Investment Institutions & Trust M.G. Allen Investment Institutions & Trust Supervision onsite M.V.B. Seferina
Investment Institutions & Trust Supervision off-site E.G.A. Cova
Deputy Director Investment Institutional Investors N.B. Davelaar-Mercelina Institutional Investors Field Supervision O.R.G. Matroos
Institutional Investors General Supervision J.T.T. Candelaria
Coordinator Information Management & Risk Analysis R.M. Vos
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Adjunct Director Risk & Compliance G.W.T. Damoen
Secretary A.L. Schenker
Internal Audit B. Debi-Tewari
Legal Counsel J. Sybesma
Strategy & Control J.G. Arias
Methods & Procedures R.R. Lopez
Information Security Officer M.R. Kross
Risk & Compliance Officer J.M. Chatlein
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Contacting the Bank CURAÇAO
SINT MAARTEN
Simon Bolivar Plein 1 Willemstad, Curaçao Phone: (599 9) 434-5500 Fax: (599 9) 461-5004 E-mail: info@centralbank.cw
Walter Nisbeth Road 25 Pondfill Philipsburg Sint Maarten Phone: (1721) 542-3520 Fax: (1721) 542-4307 E-mail: info@centralbank.cw
© Central Bank van Curaçao en Sint Maarten Design Theme: Local Art collection of the Bank Photo credits: Jeffrey Sybesma and Cyrus Brands
The art collection of the Bank comprises of the following artists: Ras Mosera
Jose Flores
Philippe Zanolino
Saida Hernandez
Tony Monsanto
Hipolito Ocalia
Carl Ariza
Samuel Ugueto
Yubi Kirindongo
M.H. Namias De Crasto
Wim De Waal
Sigrid Hortencia
Erwin Kranenburg
Wilson Garcia
Lucia Trifan
Ton Treling
Midzy Longuevergne
Jean Girigori
Herman Van Bergen
Stella Fraai
Patricia Johnson
Anton Vrede
Herbert Boyé
Herma
Margaritha Hodge
Cynric Griffith
Roald Schotborgh
Jesus Bodegas Jimenez
Nelson Carrilho
Antonia Guzmán
Ellen Spijkstra
Winfred Dania
Asyla Ten Holt
Ruby Bute
Heleen Cornet
Ailsa Anastasia
Roland Richardson
Marcel Van Duijneveldt
Brigitte Wawoe
Jose Maria Capricorne
Chris Engels
Ced Ride
Daniela Wicki
Tanya Van Esveld
Marlies Schoenmakers
Jozef Pieters
Paula Evers
Nena Sanchez
Joanne Den Dulk
Philip Rademaker
Johannes Anemaet
Hanah Nagel
Ariadne Faries
Ria Houwen
Nadya Moron
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ANNUAL REPORT 2014 Centrale Bank van Curaçao en Sint Maarten | Annual Report 2014
CENTRALE BANK VAN CURAÇAO EN SINT MAARTEN
Simon Bolivar Plein 1, Willemstad, Curaçao URL: http://www.centralbank.cw – Email: info@centralbank.cw AUGUST 2015
Annual Report 2014_CV_def.indd 1
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