Ratings

Foreign Currency: BBB+/Negative/A-2
Local Currency: BBB+/Negative/A-2
For further details see Ratings List.

Overview

  • The ratings on Aruba reflect the benefits of its strong links with the Netherlands, its prosperous economy, and its still-moderate general government debt burden.
  • However, there is a risk of a worsening government debt burden in the coming two years, potentially resulting from poor economic growth or slippage from the government's fiscal correction targets.
  • We are revising our outlook to negative from stable and affirming our 'BBB+/A-2' long- and short-term sovereign credit ratings.
  • The negative outlook reflects at least a one-in-three chance of a downgrade within the next two years based on the risk of a worsening government debt burden.

Rating Action

On June 25, 2018, S&P Global Ratings revised its outlook on Aruba to negative 
from stable. We also affirmed our 'BBB+/A-2' long- and short-term sovereign 
credit ratings on Aruba. In addition, we affirmed our 'BBB+' transfer and 
convertibility assessment.

Outlook

The negative outlook reflects the at least one-in-three possibility of a 
downgrade within the next two years based on the risk of a worsening 
government debt burden, potentially resulting from poor economic growth or 
slippage from the government's fiscal correction targets. Net general 
government debt, which includes liquid assets held by the public-sector 
pension fund, is likely to exceed 26% of GDP in 2018, up from 17% in 2013. The 
steady rise in the debt burden, along with interest expenses, threatens to 
weaken Aruba's public finances. 

We could revise our outlook to stable within the next two years if the 
combination of economic growth and strong policy execution help to stabilize 
Aruba's debt and fiscal trajectory. The combination of effective fiscal 
consolidation and Aruba's moderate external liquidity position would sustain 
investor confidence, contributing to better long-term growth prospects. 

Rationale

The rating reflects Aruba's strong ties with the Netherlands, which enhances 
political stability, checks and balances, and the rule of law. It also 
reflects a mature and democratic political system, an economy that is 
wealthier than its peers, and a long track record of a pegged exchange rate 
that anchors inflation expectations. On the other hand, our ratings on Aruba 
are constrained by the risks of its heavy reliance on tourism and its record 
of low GDP growth. As a small, open economy, Aruba is subject to sharp changes 
in its terms of trade, which could weaken its external profile.

Institutional and economic profile: Aruba's institutional strength, including its fiscal framework, should sustain investor confidence and support the government's plans for fiscal consolidation
  • Aruba's ties with the Netherlands anchor its institutional strength.
  • Aruba is wealthier than most of its regional peers but suffers from poor GDP growth prospects.
  • The ability of the coalition government to reduce fiscal deficits and to boost the island's medium-term GDP growth prospects will have an impact on its rating trajectory.
Aruba enjoys sovereign status (so-called status aparte) within the Kingdom of 
the Netherlands. Its constitutional ties with the Netherlands support 
political and institutional stability, policy predictability, and judicial 
certainty, as well as its creditworthiness. The government of the Netherlands 
is responsible for Aruba's foreign affairs and security, and the highest court 
is in The Hague. However, Aruba is responsible for its own fiscal and monetary 
policies, including taxation. Aruba has a stable and mature parliamentary 
system of government. Political power has alternated in Aruba between the 
Aruban People's Party (AVP) and the People's Electoral Movement Party (MEP) 
since it gained status aparte. 

Following the September 2017 election, the MEP (nine seats in parliament) was 
able to form a coalition government (total of 12 seats) with two small new 
political parties. The AVP, which governed Aruba during 2009-2017, moved into 
opposition with nine seats in parliament. Despite the change in government, we 
believe that the consensus on key economic and fiscal policies across the 
island's political parties will sustain policy continuity. 

The new MEP government, led by Prime Minister Evelyn Wever-Croes, faces the 
difficult challenge of advancing fiscal consolidation to stabilize and contain 
its debt burden, which has been rising steadily for many years. It also faces 
the task of promoting sustained economic growth, which has been complicated by 
the problems plaguing the island's former oil refinery, which has imposed a 
substantial economic setback to Aruba. Financial and other problems afflicting 
CITGO, a subsidiary of Venezuela's oil company Petroleos de Venezuela, have 
blocked progress in a project designed to turn the former refinery into a 
crude oil upgrader.

The MEP government announced important measures to be implemented on July 1, 
2018, to reduce its fiscal deficit. The most significant measure was an 
increase in the turnover tax to 3% from 1.5% and in the health levy to 3% from 
2%. The government plans to implement further reform to eventually shift the 
fiscal burden to indirect taxation from direct taxation, simplify the tax 
code, and boost the efficiency of tax collections. 

Aruba is a small, open economy with an estimated GDP per capita of US$24,400 
in 2018, which exceeds the income of most regional peers. We expect real GDP 
growth of 0.8% (and real GDP per capita to decline by 0.3%) on average during 
2018-2021. Tourism would remain the main economic driver, offset by the 
short-term negative impact of the government's fiscal consolidation efforts, 
which reduce purchasing power. Tourist arrivals (other than from Venezuela) 
grew 9% in 2017 and are likely to grow this year at least 5%, thanks in part 
to better flight connections with the U.S. market. 

Aruba's economy is highly concentrated in tourism activities, which makes it 
vulnerable to external shocks. Moreover, the island has limited capacity to 
build new tourism facilities, given the desire to maintain environmental and 
social balance. GDP growth is also affected by labor market rigidities and 
bureaucratic delays. Over the medium term, the government is seeking to 
attract higher investment and boost local entrepreneurship by investing 
heavily in an e-government platform to tackle red tape. 

The ability of Aruba's coalition government to effectively implement fiscal 
consolidation, stabilize public finances, and boost the island's medium-term 
GDP growth prospects will have an impact on its rating trajectory. 

Flexibility and performance profile: Recent track-record of fiscal consolidation in a context of high gross central government indebtedness and weak economic prospects
  • A recent track record of fiscal consolidation but ongoing deficits.
  • Aruba continues to trend toward an external creditor position.
  • A long-standing currency peg with the dollar constrains monetary policy.
Several years of poor GDP performance and fiscal deficits led to a significant 
increase in Aruba's general government indebtedness. Net general government 
debt rose to 24% of GDP in 2015 from only 7% in 2011. In 2015, the Kingdom 
Council, which includes the Netherlands and other members of the Dutch 
Kingdom, blocked Aruba's fiscal budget based on concerns about the 
deteriorating fiscal and debt trends. Subsequently, Aruba agreed with Council 
members to create the CAFT (College Aruba Financieel Toezicht), an independent 
council in charge of fiscal oversight. The CAFT was created under Aruban law 
and has members representing Aruba and the Netherlands. Aruba and CAFT reached 
an agreement on a fiscal consolidation path aimed at reaching a surplus of the 
consolidated government sector by 2018. 

The government was able to significantly reduce its fiscal deficits in 2015 
and 2016 through the implementation of a self-assessment framework for 
corporate taxes, stricter controls on personnel spending, and services 
expenditure. An important pension reform (undertaken in 2013) to alter the 
parameters of the island's general pension fund and its public-sector 
employees' pension fund also helped contain the fiscal deficit. 

Aruba was unable to follow its fiscal consolidation plan in 2017 due to 
election-related spending and shortfalls in fiscal revenue due to the problems 
of the crude oil upgrader project. Following the 2017 elections, the new 
government sought an agreement with the Kingdom Council on a revised fiscal 
consolidation plan by the end of June 2018. The new agreement will set the 
fiscal target for the new government period, where we expect the government's 
fiscal surplus target to be postponed to 2020, but also set a cap on its debt. 
In addition to increasing the turnover tax and health levy, we expect the 
government will focus on reducing its payroll and undertaking wider tax 
reforms in the next two years. We expect Aruba's general government (which 
includes the public-sector pension funds and various social welfare funds) to 
post an increase in its net debt of 0.4% of GDP on average during 2018-2021, 
below the 1.3% average during 2015-2017. However, poorer-than-expected GDP 
growth could limit the government's ability to comply with its targets.

We expect Aruba's net general government debt to stabilize and remain below 
30% of GDP during 2018-2021. Our definition of general government debt 
includes liquid assets held by APFA (the public-sector pension fund), 
excluding its holdings of central government debt. APFA's gross assets 
accounted for 58% of GDP in 2017, and a significant share is invested abroad. 
About half of Aruba's gross general government debt is denominated in foreign 
currency. We project that the government's interest payments will remain close 
to 10% of general government revenues during 2018-2021.

We believe that contingent liabilities are limited. The banking sector is 
profitable and has adequate capital, with assets representing 115% of GDP. The 
non-deposit-taking financial system is very small and poses little contingent 
risk to the sovereign. The nonfinancial public sector is generally run on 
commercial lines and, in our view, poses limited contingent liabilities to the 
sovereign. We estimate its total debt to be less than 7% of GDP (issued by the 
power and water utility, which services its own debt).  

Our base case is that Aruba's current account deficit (CAD) will average 0.6% 
of GDP during 2018-2021. Inflows of foreign direct investment should fully 
finance the modest CAD, helping to sustain Aruba's international reserves. We 
expect Aruba's gross external financing needs to remain around 110% of current 
account receipts (CAR) plus usable reserves during 2018-2021. We expect narrow 
net external debt to stabilize below 0% of CAR around 2019-2021. The favorable 
external profile reflects continued fiscal austerity, the strengthened 
financial position of pension funds after the 2013 reform, and greater 
reliance on domestic markets for funding government fiscal deficits. 

Aruba's longstanding currency peg with the U.S. dollar (since 1986 when the 
country gained its status aparte) anchors inflation expectations. On the other 
hand, it, along with a small local financial market, constrains monetary 
flexibility. The central bank mainly focuses on managing credit growth and 
other measures that help sustain the fixed exchange rate and domestic 
confidence. There are a few foreign currency controls, such as the 40/60 rule, 
which requires that regulated financial institutions (such as pension funds 
and insurance companies) allocate a minimum share of their investments 
domestically.

Key Statistics

 

Table 1

Aruba--Selected Indicators
(AWG mil.) 2011 2012 2013 2014 2015 2016 2017 2018f 2019f 2020f
ECONOMIC INDICATORS (%)
Nominal GDP (bil. LC) 4.56 4.54 4.62 4.74 4.82 4.74 4.83 4.90 5.00 5.10
Nominal GDP (bil. $) 2.55 2.53 2.58 2.65 2.69 2.65 2.70 2.74 2.79 2.85
GDP per capita (000s $) 24.8 24.2 24.3 24.6 24.6 24.0 24.4 24.4 24.6 24.9
Real GDP growth 3.5 (1.4) 4.2 0.8 (0.5) (0.2) 1.2 0.3 1.0 1.0
Real GDP per capita growth 2.6 (3.0) 2.4 (0.5) (1.8) (1.2) 0.7 (0.8) (0.1) (0.1)
Real investment growth 4.5 (8.4) (12.1) 14.2 (5.1) (0.7) (1.7) 0.3 1.0 1.0
Investment/GDP 28.5 26.6 24.0 22.9 21.5 22.0 21.5 21.5 21.5 21.5
Savings/GDP 18.1 30.1 11.1 17.6 24.1 25.0 21.4 21.7 21.2 20.3
Exports/GDP 67.8 65.2 68.6 69.9 69.6 69.8 70.8 70.8 70.8 70.8
Real exports growth 4.6 (5.8) 5.9 3.4 (0.1) 0.3 1.7 0.3 1.0 1.0
Unemployment rate 8.9 9.6 7.6 7.5 7.3 7.7 7.5 7.5 7.5 7.5
EXTERNAL INDICATORS (%)
Current account balance/GDP (10.4) 3.5 (12.9) (5.3) 2.6 3.0 (0.0) 0.2 (0.3) (1.1)
Current account balance/CARs (3.8) 2.7 (14.5) (5.8) 2.8 3.2 (0.0) 0.2 (0.3) (1.2)
CARs/GDP 273.4 128.9 89.2 92.0 96.0 94.2 90.9 93.3 95.1 97.0
Trade balance/GDP (28.9) (26.0) (42.5) (41.2) (34.2) (32.1) (36.1) (38.3) (39.5) (41.0)
Net FDI/GDP 19.1 (12.6) 8.6 9.2 (1.3) 1.1 2.9 2.0 1.9 1.9
Net portfolio equity inflow/GDP 0.5 5.8 2.8 4.1 2.3 1.8 (3.4) 0.5 (0.1) 0.2
Gross external financing needs/CARs plus usable reserves 107.8 104.2 125.2 117.1 108.3 107.2 110.1 109.0 109.4 109.9
Narrow net external debt/CARs (1.6) (1.3) 5.8 10.2 7.1 1.0 1.3 0.7 0.4 (0.0)
Narrow net external debt/CAPs (1.6) (1.3) 5.0 9.6 7.3 1.0 1.3 0.7 0.4 (0.0)
Net external liabilities/CARs 54.1 76.1 127.3 129.8 122.1 115.8 119.9 115.3 110.9 107.0
Net external liabilities/CAPs 52.1 78.3 111.2 122.7 125.5 119.6 119.8 115.6 110.6 105.7
Short-term external debt by remaining maturity/CARs 5.4 13.0 19.9 16.4 15.5 15.8 15.8 13.8 13.8 13.3
Usable reserves/CAPs (months) 0.2 0.7 0.8 0.5 0.5 0.6 0.6 0.5 0.5 0.5
Usable reserves (mil. $) 188 167 105 105 126 128 107 116 113 109
FISCAL INDICATORS (%, General government)
Balance/GDP (0.1) (7.3) (5.1) (6.3) (3.0) (1.7) (0.3) (1.6) (0.7) (0.1)
Change in net debt/GDP 7.6 6.0 3.7 5.7 2.4 1.7 (0.3) 1.4 0.7 0.0
Primary balance/GDP 2.9 (4.0) (1.5) (2.4) 1.2 3.0 4.3 3.1 4.0 4.6
Revenue/GDP 41.9 37.7 39.6 38.9 40.5 43.3 44.3 44.5 46.0 45.9
Expenditures/GDP 42.0 45.0 44.7 45.2 43.4 45.0 44.6 46.0 46.7 46.0
Interest /revenues 7.2 8.8 9.0 10.2 10.4 10.7 10.3 10.5 10.3 10.3
Debt/GDP 46.5 53.0 57.5 62.4 65.1 69.8 72.7 74.7 75.5 75.7
Debt/Revenue 110.9 140.7 145.3 160.6 160.9 161.2 164.1 167.9 164.1 165.1
Net debt/GDP 7.2 13.3 16.8 22.0 24.1 26.2 25.4 26.5 26.7 26.2
Liquid assets/GDP 39.2 39.7 40.8 40.4 41.0 43.6 47.3 48.2 48.8 49.5
MONETARY INDICATORS (%)
CPI growth 6.1 (3.8) 0.1 2.2 (0.9) (0.3) (0.3) 1.0 1.0 1.0
GDP deflator growth 3.0 0.8 (2.3) 1.8 2.1 (1.5) 0.8 1.0 1.0 1.0
Exchange rate, year-end (LC/$) 1.79 1.79 1.79 1.79 1.79 1.79 1.79 1.79 1.79 1.79
Banks' claims on resident non-gov't sector growth 2.8 3.4 5.2 4.2 (0.2) 1.8 3.4 1.3 2.0 2.0
Banks' claims on resident non-gov't sector/GDP 58.2 60.6 62.5 63.5 62.3 64.5 65.4 65.4 65.4 65.4
Foreign currency share of claims by banks on residents N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A
Foreign currency share of residents' bank deposits 14.1 14.1 18.4 16.7 13.5 11.1 9.4 9.4 9.4 9.4
Real effective exchange rate growth 2.5 (2.1) (5.2) (5.8) N/A N/A N/A N/A N/A N/A
Savings is defined as investment plus the current account surplus (deficit). Investment is defined as expenditure on capital goods, including plant, equipment, and housing, plus the change in inventories. Banks are other depository corporations other than the central bank, whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private-sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial-sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. LC--Local currency. CARs--Current account receipts. FDI--Foreign direct investment. CAPs--Current account payments. f--Forecast. The data and ratios above result from S&P Global Ratings' own calculations, drawing on national as well as international sources, reflecting S&P Global Ratings' independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

Ratings Score Snapshot

Table 2

Aruba--Ratings Score Snapshot
Key rating factors
Institutional assessment 2
Economic assessment 5
External assessment 3
Fiscal assessment: flexibility and performance 1
Fiscal assessment: debt burden 2
Monetary assessment 4
S&P Global Ratings' analysis of sovereign creditworthiness rests on its assessment and scoring of five key rating factors: (i) institutional assessment; (ii) economic assessment; (iii) external assessment; (iv) the average of fiscal flexibility and performance, and debt burden; and (v) monetary assessment. Each of the factors is assessed on a continuum spanning from 1 (strongest) to 6 (weakest). S&P Global Ratings' "Sovereign Rating Methodology," published on Dec18, 2017, details how we derive and combine the scores and then derive the sovereign foreign currency rating. In accordance with S&P Global Ratings' sovereign ratings methodology, a change in score does not in all cases lead to a change in the rating, nor is a change in the rating necessarily predicated on changes in one or more of the scores. In determining the final rating the committee can make use of the flexibility afforded by §15 and §§126-128 of the rating methodology.

Related Criteria

Related Research


In accordance with our relevant policies and procedures, the Rating Committee 
was composed of analysts that are qualified to vote in the committee, with 
sufficient experience to convey the appropriate level of knowledge and 
understanding of the methodology applicable (see 'Related Criteria And 
Research'). At the onset of the committee, the chair confirmed that the 
information provided to the Rating Committee by the primary analyst had been 
distributed in a timely manner and was sufficient for Committee members to 
make an informed decision.  

After the primary analyst gave opening remarks and explained the 
recommendation, the Committee discussed key rating factors and critical issues 
in accordance with the relevant criteria. Qualitative and quantitative risk 
factors were considered and discussed, looking at track-record and forecasts.  

The committee's assessment of the key rating factors is reflected in the 
Ratings Score Snapshot above.

The chair ensured every voting member was given the opportunity to articulate 
his/her opinion. The chair or designee reviewed the draft report to ensure 
consistency with the Committee decision. The views and the decision of the 
rating committee are summarized in the above rationale and outlook. The 
weighting of all rating factors is described in the methodology used in this 
rating action (see 'Related Criteria And Research').  


Ratings List

Ratings Affirmed; Outlook Revised
                                        To                 From
Aruba
 Sovereign Credit Rating                BBB+/Negative/A-2  BBB+/Stable/A-2

Ratings Affirmed

Aruba
 Transfer & Convertibility Assessment   BBB+               
 Senior Unsecured                       BBB+               


Certain terms used in this report, particularly certain adjectives used to 
express our view on rating relevant factors, have specific meanings ascribed 
to them in our criteria, and should therefore be read in conjunction with such 
criteria. Please see Ratings Criteria at www.standardandpoors.com for further 
information. Complete ratings information is available to subscribers of 
RatingsDirect at www.capitaliq.com. All ratings affected by this rating action 
can be found on S&P Global Ratings' public website at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.

Primary Credit Analyst:Manuel Orozco, Mexico City (52) 55-5081-4475;
manuel.orozco@spglobal.com
Secondary Contact:Livia Honsel, Mexico City + 52 55 5081 2876;
livia.honsel@spglobal.com

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