Fitch affirms Aruba's ratings

August 30, 2012 8:33 PM

Today Fitch Ratings has affirmed Aruba's ratings and stated that the rating outlook is stable.

Fitch affirms Aruba's ratings as follows:

--Long-term foreign and local currency IDR at 'BBB';
--Short-term local currency IDR at 'F3';
--Country Ceiling at 'A-'.

The Rating Outlook is Stable.

The rating affirmation and Stable Outlook are supported by Fitch's expectation  that economic growth should resume and fiscal consolidation will proceed over  the next two years supported by the expected reopening of the oil refinery, the  positive performance of the tourism sector, the implementation of an ambitious  stimulus program, and the adoption of additional revenue-enhancing and  cost-containment measures.

Aruba's ratings are underpinned by a high per capita income, strong political  institutions, social stability, a long track record of acroeconomic stability and demonstrated capacity to rein in fiscal imbalances. Aruba also benefits from broad support from the Dutch government as it is part of the Kingdom of the  Netherlands. Additionally, a conservative banking system, adequate international reserves coverage and the lack of a sustained real exchange rate appreciation continue to underpin the sustainability of the exchange rate peg.

These strengths are counterbalanced by Aruba's weak fiscal solvency ratios and modest medium-term growth potential. In addition, Fitch has long flagged the narrow base of the economy as a key source of vulnerability and this has been exposed with the recurrent suspensions of operations at the Valero refinery. The resulting volatility in GDP growth has been incorporated in Aruba's 'BBB' rating.

The Aruban economy expanded by 8.9% in 2011 but could contract by 2% in 2012 due to the temporary shutdown of the Valero refinery. The government is in advanced discussions to facilitate the sale of Valero to PetroChina. While the authorities expect the refinery to restart in October 2012, uncertainty surrounding the completion of the commercial transaction represents the chief downside risk to economic growth, fiscal and external accounts as well as the
international reserves position.

The longer the suspension of refining operations, the stronger would be its recessionary impact on production, oil exports, investment, employment and business confidence. However, unlike during the last refinery shutdown in 2009 - 2010, the growth of the hospitality industry and the implementation of a multi-year infrastructure stimulus program of about 37% of GDP would cushion the impact on domestic demand.

The government's fiscal consolidation strategy has relied on expenditure restraint and cost-saving entitlements reforms. The authorities also plan to boost tax receipts through the revaluation of real estate properties, the collection of tax arrears and increased excise levies. Fitch expects the fiscal deficit to fall to 6.9% of GDP in 2012 and converge to the 3% target by 2015,
two years later than stipulated in the official budgeting framework. The government is also discussing revenue-enhancing measures that could further support fiscal consolidation efforts.

General government debt has increased from 32% of GDP in 2008 to an expected 51% in 2012, which is higher than the 40% median of the 'BBB' category. This is eroding the authorities' fiscal space to respond to economic shocks. The debt burden could potentially stabilize at 50% of GDP by 2013 provided economic growth resumes and the fiscal forecasts materialize. Fitch notes that Aruba's access to international capital markets and domestic funding at fixed rates and long-term maturities provide financing flexibility. Moreover, the Aruban authorities are exploring potential support from the Netherlands to refinance
large external repayments coming due in 2013 and 2014, potentially mitigating future rollover risks and reducing the interest service burden.

Persistent economic growth underperformance or material deviations from the official deficit reduction targets would undermine debt sustainability and lead to a negative rating action. A permanent shutdown of the refinery and failure to maintain support from the Netherlands could also put downward pressure on the ratings. Conversely, a favorable growth trajectory and sustained reductions in the government debt burden would be positive for Aruba's creditworthiness.

Related article:

- S&P verlaagt outlook Land Aruba