By Caribbean News Now contributor
ORANJESTAD, Aruba -- In response to the release by Fitch Ratings of an updated sovereign credit rating and outlook on Aruba, the island’s minister of finance and government organization, Juan David Yrausquin, said the Fitch report does not depict a true economic picture of Aruba.
Minister of Finance Juan David Yrausquin
On Wednesday, Fitch Ratings downgraded Aruba's long-term foreign and local currency issuer default ratings (IDRs) to 'BBB-' from 'BBB'. Fitch also downgraded the issue ratings on Aruba's senior unsecured foreign and local currency bonds to 'BBB-' from 'BBB'. The rating outlooks on the long-term IDRs were revised to stable from negative. In addition, Fitch downgraded Aruba's country ceiling to 'BBB' from 'A-' and affirmed the short-term foreign currency IDR at 'F3'.
According to Fitch, Aruba's downgrade and stable outlook reflect the following key rating drivers:
Sovereign creditworthiness has deteriorated since 2009 due to the negative impact of recurrent suspensions of operations at the Valero refinery on growth, investment, the current account and foreign reserves. This highlights the island's narrow economic structure and vulnerability to external shocks. The focus of the fiscal stimulus response on selective tax cuts, expanding government payroll and increasing future commitments on public private partnership projects has accentuated budgetary rigidities and increased the challenges to reduce Aruba's large fiscal imbalances and rising public debt burden.
The budget deficit averaged 6.8% of GDP in 2010-2013, resulting in a jump in public debt from 40% of GDP to 60%, well above the 39% median of the 'BBB' category. Interest payments to revenue, a key metric for debt sustainability, is expected to climb to 17% in 2014, double the 'BBB' median of 8%. Material deviations from official targets have reduced confidence in the authorities' commitment to fiscal consolidation. Reduced fiscal credibility and uncertainty over the medium term fiscal consolidation path has meant that the Governor of Aruba has requested the Secretariat of the Council of Financial Supervision of Curacao and Saint Maarten (CFT) to evaluate the fiscal position of Aruba before signing the 2014 budget and approving additional external financing operations.
Aruba's five-year average growth was negative 1.7% in 2009-2013, while the 'BBB' median grew 3.1% during the same period. High dependence on cyclical tourism receipts, demographic challenges, labor market rigidities, lengthy legal disputes and structural impediments to start new businesses hinder domestic investment and economic diversification.
Aruba's current account balance deteriorated sharply to a deficit of 9.9% of GDP in 2013 from a surplus of 4.1% in 2012, following the permanent halt of fuel exports at the Valero refinery. International reserves fell 15% to USD654 million or 3.1 months of current external payments in 2013. Aruba is increasing its dependence on foreign exchange liquidity restrictions and external debt to maintain an adequate reserve position.
Aruba's Country Ceiling is one notch above the long-term foreign currency IDR reflecting the economy's openness to international trade and capital, as shown by the large presence of foreign financial institutions and tourism corporations in the island. Nonetheless, the notch differential between the Country Ceiling and the long-term foreign currency IDR has been reduced to one from two notches due to the intensification of restrictions on the holding of foreign currency and convertibility controls for commercial banks.
The revision of the Outlook to Stable reflects Fitch's expectation that economic growth will gain pace and Dutch oversight should result in adherence to stricter deficit reduction and debt sustainability standards in 2014-2016. A comprehensive package of entitlement reforms has mitigated the risk of unfunded pension liabilities and reduced the burden of the universal healthcare system on public finances.
Fitch forecasts that growth will average 2.6% in 2014-2016, above the country's estimated potential of 1.8% but lower than the expected 'BBB' median of 3%. The recovery in the U.S., source of 57% of tourist visits in 2013, and a pickup in construction related to hotel developments, real estate and infrastructure support the improvement in investment and growth prospects.
The current account deficit could narrow to an average 7.3% of GDP in 2014-2016, reflecting a tighter fiscal stance and a gradual substitution of fuel imports. Oil consumption fell 40% since 2007 and could decline 25% by 2016 due to technological enhancements, greater reliance on wind power and biogas and the construction of waste-to-energy plants.
Aruba's investment grade rating is underpinned by its higher per capita income than peers, track record of consensual structural reforms and membership of the Kingdom of the Netherlands, which has provided access to technical cooperation, development funds and emergency assistance during episodes of financial distress.
In response, the government of Aruba reiterated its commitment to its fiscal consolidation plan, saying:
“In light of the release by Fitch Ratings today of an updated report on Aruba’s sovereign risk and financial position, the government of Aruba reiterates its commitment to its fiscal consolidation plan. Over the past few years we have made the economic choice to revive the Aruban economy after a 15% drop in economic activities due to the worldwide financial economic crisis and closure of the Valero refinery by investing in the long-term soundness and robustness of the country through significant investments in urban renewal, infrastructure, and sustainable energy projects. Following the recovery of the economy and confirmation of this by the IMF, Standard & Poor's, the Central Bank of Aruba, and today (again) by Fitch Ratings, the government of Aruba made a firm commitment in 2013 to a fiscal consolidation plan comprising austerity measures and structural social security reforms, while also investing in the quality of the life of the residents of Aruba, as well as in the infrastructure needed to ensure that our travel industry continues to meet the high-quality expectations of our visitors. The fiscal consolidation plan and the social security reforms came after extensive community-wide dialogues ensuring broad support for this plan.
“Like every other country, Aruba has been adversely impacted by the world-wide economic and financial crisis of 2008-2010. In response to the crisis, the Government of Aruba reacted swiftly to further strengthen the tourism industry, reduce dependence on mineral fuels, and establish new economic pillars to ensure long-term economic viability and social well being. Our current economy reflects these efforts, and the 2014 budget and recently passed major reforms are the confirmation of the government's commitment towards the fiscal consolidation plan we have agreed to with the electorate, our social dialogue partners, and the community in general.
“We are convinced that all of these efforts will have a positive impact on Aruba’s economic future. Standard & Poor's, another leading worldwide rating agency that rates Aruba, projects that these efforts will lead to Aruba's gross general government debt burden stabilizing near 60% of GDP, in line with countries of similar size and GDP. In fact, less than one month ago, Standard & Poor's affirmed Aruba's 'BBB+'/stable sovereign credit rating, at two rating levels above Fitch Ratings.
“We believe the Fitch report does not depict a true economic picture of Aruba, it overlooks multiple important fiscal, economic, and structural measures we have taken to reduce Aruba’s deficits in 2014 and beyond, and does not recognize our commitment to continue to pursue a path of fiscal sustainability over the medium term. We vow to continue to work with Fitch Ratings so they develop a better understanding of our achievements and also our progress in reaching our goal over time.”