Aruba's Outlook Downgraded To 'Negative' From 'Stable'

by Amanda Banks, Tax-News.com, London

16 June 2003

Factors such as the slow down in the US and global economy, the impact of the terrorist threat and the Iraq war on tourism and political instability in nearby Venezuela have combined to stifle the economy of Aruba in recent years, says ratings agency Fitch.

Consequently, the island has had severe difficulties in controlling public debt which has risen from 28% of GDP in 200 to 37% by the end of 2002, a situation which has led to Fitch downgrading the rating outlook for Aruba to negative from stable. The ratings agency has assigned a 'BBB' rating for both the country's local and foreign currency instruments.

The major factor Fitch cited for the negative outlook was the nation's "inability to cut public expenditures" which it said was "the primary reason for Aruba's stubborn fiscal deficit."

"Universal health care runs significant operating deficits, and attempts to curb supplier costs have recently been successfully challenged. Public sector personnel costs remain high in spite of the government's freeze on wage indexation and hiring. Arrears to the civil servant pension system have also risen and represent a less favorable source of public financing," Fitch continued, predicting that the "government could see a budget deficit of 3.5%-4% of GDP in 2003, potentially undermining the government's target of budget balance by 2007."

Whilst the agency noted that "government's indebtedness is still within the 'BBB' median of 40% of GDP," it went on to say that attacking debt in Aruba is "desirable given that the economy is small, open and undiversified, and hence more vulnerable to external shocks than its rating peers."

According to Fitch, the island's exteranl vulnerability was well understood and factors beyond the country's control have conrtibuted to its recent malaise. However, the agency pinned much of the blame on the slow pace of reform undertaken by the government.

"While outstanding problems are well understood, a slow pace of policy implementation reflects difficulties in executive coordination, political and legal miscalculations, and management capacity constraints. Fitch believes the government has an opportune window to act 2-1/2 years ahead of elections while it has a legislative majority," the agency observed

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