Fitch Affirms Aruba's FC IDR at 'BBB'; Outlook Stable
NEW YORK, Sep 08, 2011 (BUSINESS WIRE) — Fitch Ratings affirms Aruba’s ratings as follows:
–Foreign and local currency Issuer Default Ratings (IDR) at ‘BBB’; –Short-term IDR at ‘F3′; –Country Ceiling at ‘A-’.
The Rating Outlook is Stable.
The rating affirmation and Stable Outlook balance the observed deterioration in fiscal accounts and government debt burden against the expected rebound in economic activity and fiscal consolidation during the forecast period. Moreover, despite the scale of the economic shock of the last two years, the island has maintained macroeconomic stability thanks to the government’s pro-active policy response.
Aruba’s structural strengths include a high level of per capita income of over USD20,000, social and political stability, good governance and a well-functioning legal system. Aruba benefits from a long history of macroeconomic stability and its tourism sector (the main stay of the economy) has demonstrated resilience to numerous domestic and external shocks. Fitch notes that a conservative banking system, the absence of capital flight, adequate international reserve coverage and the lack of a sustained real exchange rate appreciation continue to underpin the sustainability of the exchange rate peg.
The rating of Aruba incorporates the fact that it is part of the Kingdom of the Netherlands. Although Aruba gained ’status aparte’ in 1986, it benefits from strong links to the Dutch government (‘AAA’). On the other hand, the rating is constrained by the narrowness of the economy, structural weaknesses in public finances, a high government debt burden and a relatively modest medium-term growth potential.
The Aruban economy is recovering from the severe economic contractions of the last two years and is expected to record a growth rate of 10.5% in 2011, largely due to the re-opening of Valero, the U.S. oil refinery. The underlying growth dynamics are also improving due to a rebound in tourism and the execution of an ambitious infrastructure program.
‘Despite the negative headwinds from the U.S., Aruba could maintain healthy growth rates during the forecast period should the government successfully implement its pro-growth economic strategy,’ said Shelly Shetty, Head of Latin America Sovereign Ratings at Fitch. The growth strategy rests on increasing investment (primarily through Public-Private Partnerships) to overcome long-standing infrastructure bottlenecks, improve the Aruba tourism product and promote economic diversification. Fitch currently forecasts that real GDP growth could reach 3.5% in 2012 and 4% in 2013.
The fiscal deficit is expected to reach 7.6% of GDP this year from an underlying deficit of 9.3% (after excluding non-recurrent revenue) in 2010. The political commitment to correct fiscal deficits is strong, as highlighted by the passage of various structural reforms last year to reduce pressures emanating from pension and health care systems. The government’s fiscal objective is to reach a deficit of 3% of GDP by 2013 through higher economic growth as well as expenditure restraint although Fitch notes that downside risks remain.
Aruba’s general government debt burden of 55% of GDP is high relative to peers and has risen sharply over the past two years. Fitch’s base case assumes that the debt burden could potentially stabilize below 60% of GDP by 2013. However, the agency notes that the government does not face financing constraints and has been able to issue long-term debt in the liquid domestic capital markets at favorable interest rates.
‘The elevated government debt burden leaves Aruba vulnerable to potential external and domestic shocks and highlights the need for the government to continue with fiscal consolidation,’ added Shetty. However, Fitch notes that Aruba’s high per capita income, a good debt service record, a manageable maturity profile, the potential support from the Dutch government (should it be required) as well as its established track record of addressing fiscal vulnerabilities underpin its high level of debt tolerance.
Continued fiscal consolidation, sustained growth momentum and favorable debt dynamics would be positive for Aruba’s creditworthiness. On the other hand, failure to correct the large fiscal imbalances and/or slow economic growth that results in a substantive further increase in general government debt burden could place downward pressure on the ratings.
Additional information is available at www.fitchratings.com .
Applicable Criteria and Related Research: –’Sovereign Rating Methodology’, dated Aug. 15, 2011.
Applicable Criteria and Related Research: Sovereign Rating Methodology http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648978
SOURCE: Fitch Ratings
Shelly Shetty, +1-212-908-0324
One State Street Plaza
New York, NY 10004
Cesar Arias, +571 326-9999
Richard Fox, +44-203-530-1444
Cindy Stoller, +1-212-908-0526
Story courtesy of marketwatch.com