The Department of Economic Policy & Research (DEPR) hereby provides the First and Second Quarter Economic Report or commonly referred to as the Half Year Economic Report. In this report we look at the main economic indicators such as Turn-Over-Tax (TOT), Stay-over Tourism, Cruise Tourism, First Quarter Banking Statistics (i.e. Loans & Deposits), Government revenue, and GEBE (i.e. Water and Electricity). Unfortunately, at the time of compiling this report figures on Foreign Exchange and the Second Quarter banking figures were not available.

Despite the above-mentioned, DEPR was able to compile the relevant statistics to acquire a picture of the economy, mainly by utilizing historical data (i.e. 1998-2002) to ascertain a trend. By using this method, we can conclude that the economy is going through a contraction and that it can be considered relatively stagnant. There is some stagflation occurring, which means that the economy is contracting while prices are rising. This happens as demand is weakened and prices increase as businesses close and there is less competition.

To support these findings, TOT has remained stagnant, as there was a negligible change of less than 1% increases in TOT for the first half of 2002, compared to the corresponding period in 2001. In the past, TOT has always observed higher increases, even after factoring out inflation and changes in the rate of TOT. When we consider that TOT is our most comprehensive economic indicator of our economy and we observe a marginal increase in the first half of 2002, compared to 2001, it illustrates that the economy is slipping. In particular, since we have not factored out inflation from the equation.

There are signs that the economy is stagnant since the increase of TOT in the second quarter was smaller than the first quarter illustrating further stagnation. This is lead primarily as the ripple effect is felt in the domestic (i.e. local) economy, after the primary (i.e. tourist-based) economy has experienced its drop. The contraction of the domestic economy was proven, as previous drops in tourism did not impact TOT as severely, while with the current level of tourism TOT has dropped significantly, which suggests that the slowdown is now being felt throughout the entire economy.

Despite the above-mentioned, there are signs that a rebound is expected in the second half as many of the key economic indicators have shown a rebound. To support this finding, we see that Stay-over tourism has observed a decrease in the first half of 2002, compared to the first half of 2001. However, further scrutiny illustrates that stay-over tourism is slowly regaining its ground, as the decrease in the second quarter 2002 was not as severe as the first quarter 2002.

The expectation for the remainder of the year is that the third quarter might also observe a contraction, primarily because of the continued war and terrorism developments in the Middle East. This has resulted in travelers being more cautious and reluctant to travel especially outside the US borders. This naturally translates into a slowdown of economic activity, which is being felt throughout the entire world. Adding to this situation is the crisis in the financial (stock) market (i.e. NYSE, Nasdaq, Dow Jones, etc.) as a direct consequence of the scandals of large corporation (e.g. Enron, World Com, etc.). This has caused the stock market to experience a crisis, which has lead to investors pulling out of the stock market. The domino effect is being observed in the slippage of consumer confidence in the US, which continued to weaken the travel market.

When we analyze developments in the Cruise tourism industry, we observe a slightly different pattern. The cruise industry experienced a drop in the first quarter 2002 and rebounding strongly in the second quarter 2002, with a double-digit increase. One may argue that this market segment has a different characteristic such as they may have lower disposable incomes. Considering the cost of airline tickets, a visitor has to spend more to come to St. Maarten due to the high airline prices, even in the off-season, which makes it relatively difficult for visitors to come to St. Maarten, especially if they do not have high disposable incomes. This argument is probably why stay-over tourism continues to be weak as well.

To ascertain the validity of these arguments, we monitor developments in other areas of the economy to verify whether the analysis is correct. This cross-analysis is done by means of looking at government revenue especially the tourism-based revenue. When we look at government revenue, there was a slide in the first half of 2002, compared to the corresponding period of 2001. However, further analysis suggests that there is also a rebound, as the decrease in the second quarter of 2002 is less than the decrease in the first quarter.

With respects to the tourism-related government revenue, the same patterns were observed where there was a rebound in the second quarter of 2002, compared to the first quarter of 2002. Under the caption of tourism-related revenue are considered the following revenue namely, Timeshare-, Rental- and Room. The tourism related taxes, all showed the same pattern as described above, which entails a rebounding in the second quarter, compared to the first quarter.

When we look at developments in the banking sector, we saw a definite slowdown of activity. Based on historical data, we usually would observe a double-digit increase in the loan category, now the loans have only moderately increased. The area of concern is the spread between the loans and deposits, whereas before we would see a large spread between the increase of both variables. Now, we see a very small difference between loans and deposits.

This may be a result of a combination of deposits increasing and the number and/or amount of loans contracting. This translates into the market being liquid, which is required for interest rates to drop. However, due to economies of scale and the highly labor-intensive banking on St. Maarten, interest rate may not drop significantly further. It is expected that individual banks may reduce some interest rates to stimulate loans as their liquidity position increases further and to compete for additional market share or to regain loss market share.

Due to the fact that GEBE has been transferring many commercial accounts to large consumers, it is relatively difficult to utilize GEBE to crosscheck our economic indicators. This is especially true when it relates to the commercial and large consumer accounts. For this reason, we have to limit our analysis of the GEBE figures to monitoring developments in the domestic economy, which can be verified to ascertain patterns and consistency in our analysis.

When we use this approach, we also observed a general decrease in water sales. However, there is also a rebounding of domestic water sales in the second quarter compared to the first quarter, as the decrease was much bigger in the first quarter of 2002, compared to 2001. Similarly, the same pattern was evident with electricity sales namely the second quarter was better than the first quarter of 2002, compared to 2001. The only difference is that there were marginal increases in both quarters, which illustrates the stagnating factor of the economy.

In closing, it is evident that the economy has been impacted by the September 11, 2001 tragic events and it continues to suffer the lingering effects. This is self-evident as our economy is very open and dependent upon the tourism industry especially the North American market. Unfortunately, the North American market has been experiencing some economic woes themselves, which will undoubtedly affect our economy. The problem is even compounded further by the lingering war on terrorism, the crisis in the Middle East, and the possibility of America considering invading Iraq.

If the above-mentioned, does not materialize and barring hurricanes, then St. Maarten will experience a good high season. Obviously, in the interim businesses may be faced with lower sales, and the subsequent liquidity challenges, and possibly closures. However, this phenomenon is a yearly occurrence and businesses continue to open as others close, which offsets the negative impact of closures. This leads to frictional unemployment as individuals move from one job to the next. The secret to success is to be able to get over the hurdle (i.e. the off-season) and survive until the next tourist season.