Fitch Affirms Aruba’s “BBB’ FCY IDR; Outlook Stable
Business
Tuesday, September 4th, 2007
Fitch Ratings-New York–August 30, 2007: Fitch Ratings affirms Aruba’s ratings as follows:
–Foreign and Local Currency Issuer Default Ratings at ‘BBB’;
–Short-term Issuer Default Rating at ‘F3’;
–Country Ceiling at ‘A-’.
The Rating Outlook is Stable.
Aruba’s ratings are supported by its relatively high per capita income of over USD20,000, which is well above the ‘BBB’ median of USD5,350, its market-friendly institutional environment, based on a well-functioning legal system, rule of law and legally protected rights, and its continued political and social stability. Aruba’s external solvency ratios such as net external debt and net public sector external debt (as a percentage of current external receipts) are also consistent with the ‘BBB’ median. Additionally, the rating incorporates the fact that Aruba is part of the Kingdom of the Netherlands (‘AAA’). Although Aruba gained status aparte in 1986, its strong links with the Dutch government and the implicit support for the island are unique. Aruba’s rating weaknesses comprise structural weaknesses in its public finances including a high level of budgetary rigidity and continued reliance on arrears to suppliers and the broader public sector as a source of financing, its relatively high public debt burden (47% of GDP) and its relatively low international liquidity in the context of its narrow economy.
“The Aruban government’s fiscal effort over the last two years is encouraging, and the prospects for modest consolidation appear reasonable in light of the revenue-enhancing tax reform implemented in 2007. Yet, restructuring of public spending and continued expenditure restraint are essential for achieving the targeted balanced budget in 2009,” said Shelly Shetty, Senior Director in Fitch’s Sovereign Group. Fiscal deficits have declined to 1.6% of GDP (on an accrual basis) in 2006 from 6% in 2004 and Fitch expects these to hover around 1% of GDP with public debt also declining gradually in the 2007-09 period. However, fiscal prospects could improve further if the government obtains additional tax revenues from Valero (the U.S. oil refinery) by winning its tax arbitration case against the company. Similarly, Aruba could receive significant transfers over the next year from the Dutch government related to the settling of the dispute between the two countries regarding certain hotel properties. If the additional funds are utilized for fiscal consolidation and repaying debt, it could facilitate a faster convergence of public debt to the ‘BBB’ median of 34% of GDP, mitigating one of Fitch’s concerns.
Aruba’s narrow economy is heavily dependent on tourism, and the island’s growth performance is lagging that of most rating peers, highlighting the need for the economy to diversify further. The tourism industry was hit last year by lower tourist arrivals and lower occupancy rates, with tourism receipts down by 2%. As a result, GDP growth is estimated to have grown by just 1.5% in 2006, significantly below the ‘BBB’ median of 4.9%. While the near-term outlook for tourism appears more promising, the envisioned expansion in hotel capacity in the coming years is likely to impose a greater strain on the island’s infrastructure and possibly its labor markets.
Finally, while the central bank has managed the economy well, the deterioration of the non-oil current account balance is a source of concern. Moreover, international reserves coverage remains modest in the context of Aruba’s fixed exchange rate regime. However, Fitch notes that partially offsetting these concerns is that fact that Aruba has not experienced any serious currency pressure since gaining status aparte in 1986, it has no history of capital flight and there is insignificant participation of foreigners in its local markets, which limits the possibility of large outflows in case of an external shock.
Contact: Shelly Shetty +1-212-908-0324 or Theresa Paiz Fredel +1-212-908-1534, New York.
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