Fitch Affirms Aruba at 'BBB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed Aruba's long-term foreign and local currency Issuer Default Ratings (IDRs) at 'BBB-' with a Stable Outlook. The issue ratings on Aruba's senior unsecured foreign and local currency bonds are also affirmed at 'BBB-'. The Outlooks on the long-term IDRs are Stable. The Country Ceiling is affirmed at 'BBB' and the short-term foreign currency IDR at 'F3'.

KEY RATING DRIVERS

The government is making progress in stabilizing the public finances. The central government deficit (also incorporating the Aruba Development Fund) was 3.7% of GDP in 2015, on a cash basis, as reported by the Central Bank of Aruba (CBA), in line with the government's target. The government's accrual basis figures showed the central government deficit at 2% of GDP. By either measure, the deficit has narrowed, having spiked to 9.4% of GDP in 2014 (on the CBA measure) as the government recapitalized the civil service pension fund APFA. Fitch expects the deficit to continue to narrow to 2017. The government wants to balance the budget by 2018 to bring down the government debt ratio.

The rise in government debt has slowed although it will remain high compared with the 'BBB' median. It reached 82% of GDP on a gross general government basis in 2015 and 64.8% of GDP on a consolidated basis. Fitch expects the government debt ratio to stabilize in 2017. External financing will play the main role in financing the deficit and upcoming maturities. Access to financing has improved with the timely approval of the 2016 budget; the introduction of the new fiscal oversight framework delayed the approval of the 2015 budget, hindering access to financing.

A supervisory arrangement with the Kingdom of the Netherlands agreed in 2015 has given a new impetus to fiscal consolidation. The Aruba Board of Financial Supervision (CAFT) monitors budget performance against deficit targets and advises on fiscal matters. To date, the bulk of the consolidation has come through higher revenues rather than spending reduction. The introduction of a new self-assessment system (VAS) for corporate income tax and an increase in the BAZV, a tax earmarked for the state-run health insurance system, generated extra revenues in 2015. The government may also introduce a financial transactions tax and a general expenditure tax (ABB). Spending pressures remain, although the government plans to cut the wage bill and make other savings in its medium term fiscal plan.

Tourism, the dominant services export, performed well in 2015, with visitor numbers from the core U.S. market growing 7.7%, ahead of the Caribbean average. The trend should continue in 2016. However, real GDP growth performance has been a persistent weakness compared with the 'BBB' peer group. The overall economy recorded another year of slow growth in 2015, expanding just 0.1% in real terms, held back by subdued private consumption and government spending.

Fitch expects 1% growth in 2016 and 2% in 2017, but with major upside risks if - as seems likely - the oil refinery re-opens. Converting and re-opening the oil refinery, which closed in 2012, to process Venezuelan heavy oil would have a major impact on growth, employment and government revenue. The government and refiner Citgo have pushed back the deadline for a final agreement to mid-May 2016. Fitch will revise its forecasts once it is confirmed the project is going ahead.

Aruba's ratings are supported by its relatively high income per head and sound governance indicators, which stem from its membership of the Kingdom of the Netherlands with separate status. Aruba has a stable two-party democracy and parliamentary elections to be held in September 2017 are likely to result in policy continuity. It has a spotless debt service record. These structural strengths are balanced by a narrow, tourism-dependent economic base and small size, which present a vulnerability to shocks.

Buffers against external vulnerability improved in 2015. A decline in imports, helped by lower fuel prices, and growth in services exports, led the current account back to a surplus of 4.1% of GDP in 2015, from a deficit of 5.4% of GDP in 2014. Reserves increased by USD150 million to USD710 million, strengthening backing for the longstanding peg of the florin to the USD.

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's view that upside and downside risks to the rating are evenly balanced. The main risk factors that, individually or collectively, could trigger a rating action are:

Positive:

--Successful fiscal consolidation that puts debt/GDP on a downward path;

--Higher private investment, including from the potential conversion and re-opening of the oil refinery, that leads to a sustained faster growth trajectory and a diversification of external revenues.

Negative:

--Fiscal deterioration leading to a further escalation in government indebtedness;

--Reductions in international reserves and emergence of financing constraints;

--Deterioration in the institutional relationship between Aruba and the Netherlands.

KEY ASSUMPTIONS

Aruba will continue to benefit from broad support from the Dutch government due to its position as part of the Kingdom of the Netherlands;

Absence of severe shocks to demand from key tourism markets.

Additional information is available on www.fitchratings.com

Applicable Criteria

Country Ceilings (pub. 20 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869287

Sovereign Rating Criteria (pub. 12 Aug 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=754428

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1003313

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003313

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160426006624/en/

Fitch Ratings
Primary Analyst
Charles Seville
Senior Director
+1-212-908-0277
Fitch Ratings Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Kelli Bissett-Tom
Associate Director
+1-212-908-0564
or
Committee Chairperson
Paul Gamble
Senior Director
+44 20 3530 1623
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
Email: [email protected]

Source: Fitch Ratings

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