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TEXT - S&P revises Curacao's outlook to negative
November 15, 2012 / 10:56 PM / 5 years ago

TEXT - S&P revises Curacao's outlook to negative

Overview
     -- The deterioration in the balances of the government of Curacao's 
national pension fund as well as the health care fund has weakened the 
government's underlying fiscal stance.
     -- We are revising our outlook on Curacao to negative from stable.
     -- We are affirming our 'A-/A-2' sovereign credit ratings on Curacao.
     -- The negative outlook reflects our view that a failure to reverse the 
recent fiscal deterioration in a timely manner might lead to a downgrade.

Rating Action
On Nov. 15, 2012, Standard & Poor's Ratings Services revised its outlook on 
Curacao to negative from stable. At the same time, we affirmed our 'A-/A-2' 
sovereign credit ratings on Curacao.

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

Furthermore, the AOV funds are being split between the various islands of the 
former Netherland Antilles. Curacao's population is, on average, older than 
the other islands of the former Netherland Antilles (St. Maarten, especially). 
The relatively older demographic profile of Curacao has resulted in a lower 
coverage ratio, with fewer workers covering a larger number of pensioners. The 
lower coverage ratio has, in turn, led to higher-than-expected deficits and a 
faster-than-expected depletion of pension fund assets.

Following parliamentary elections in October in which no single party won a 
majority, the formation of a coalition government is still pending. We expect 
a new government to be in place by early 2013. In the meantime, the current 
interim government has proposed a number of initiatives, which, if passed and 
implemented, would reverse the underlying deterioration of the general 
government's fiscal stance. These measures include increasing the retirement 
age, introducing a 2% contribution rate in both the health and pension 
systems, raising other taxes, and streamlining the government's workforce over 
the next three years (which alone is expected to significantly reduce the 
central government's deficit this year). Measures taken by the central 
government would bring it into a surplus position over the near term, allowing 
it to cover expected losses over the next four years in the AOV and general 
health care fund. 

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

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

Related Criteria And Research
Sovereign Government Rating Methodology And Assumptions, June 30, 2011

Ratings List

Ratings Affirmed; Outlook Action
                                        To                 From
Curacao
 Sovereign Credit Rating                A-/Negative/A-2    A-/Stable/A-2

Ratings Affirmed

Curacao
 Transfer & Convertibility Assessment   A-

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