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S&P Affirms Aruba 'A-/A-2' Sovereign Credit Rating

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S&P Affirms Aruba "A-/A-2' Sovereign Credit Rating

Fri Jun 8, 2012 5:13pm EDT

Overview    
     -- We affirmed our 'A-/A-2' sovereign credit ratings on Aruba.    
     -- The stable outlook on Aruba reflects our expectation that the     
government will be able to return shortly to its medium-term fiscal plan to     
reduce the central government deficit towards 3% of GDP in 2014.    
     -- We expect that the government would implement further measures to     
contain fiscal slippage in the event the reopening of the island's oil     
refinery is delayed beyond a couple of months.    
    
Rating Action    
On June 8, 2012, Standard & Poor's Ratings Services affirmed its 'A-/A-2'     
sovereign credit rating on Aruba. The outlook on the ratings is stable.     
Standard & Poor's 'A-' transfer and convertibility assessment remains     
unchanged.    
    
Rationale    
Aruba's prosperous economy with per capita GDP of about $25,000, stable     
democracy, high level of social development, and strong government balance     
sheet support its creditworthiness. A narrow economic base, limited monetary     
and external flexibility, and a sizeable gross general government debt burden     
(which is more than offset by public sector pension assets) are credit     
constraints.     
    
The Aruban economy had been recovering rapidly since the recession of 2009 and     
2010, with growth approaching 9% in real terms last year. The recent decision     
by Valero, the owner of the island's oil refinery, to suspend operations was a     
setback to the economy and to the government's fiscal plans to reduce its     
deficit in coming years. The refinery, which directly and indirectly employs     
about 5% of the island's workforce, is the largest single private-sector     
employer. A potential closure of the refinery would, absent substantial fiscal     
adjustment, hinder the government's intent to reduce its fiscal deficit     
towards 3% of GDP in 2014 (one year later than originally planned) from an     
estimated 6.8% of GDP this year. A potential closure would also weaken     
external liquidity.    
     
We expect that the combination of the reopening of the oil refinery, favorable     
growth prospects in the coming year, and various other minor fiscal measures     
are likely to restrain the recent rise in the general government's gross debt     
burden and stabilize it around 50% of GDP in the coming couple of years. (In     
its calculation of gross debt, Standard & Poor's excludes central government     
debt that public sector pension and social welfare plans hold.)     
    
Outlook    
The stable outlook reflects our expectation that the government will be able     
to reduce the central government fiscal deficit towards 3% of GDP in 2014 from     
an estimated 6.8% of GDP this year. We expect that the government would     
implement further measures to contain fiscal slippage in the event the     
reopening of the refinery is delayed beyond a couple of months.    
    
The rating could fall if slower economic growth and the prolonged suspension     
of the refinery results in a higher debt burden. The closure of the refinery     
could also negatively impact exports more than imports, possibly contributing     
to a fall in foreign exchange reserves and an increase in the country's net     
external liability position.      
    
Over the long term, the rating could rise if successful resolution of the     
refinery issue, along with other policies, contributes to a more     
favorable-than-expected fiscal and debt trajectory and higher-than-expected     
GDP growth beyond 2012. That, combined with improving external liquidity to     
strengthen the pillars sustaining confidence in the fixed exchange rate, could     
result in a higher rating.    
    
Related Criteria And Research    
     -- Aruba, Dec. 16, 2011    
     -- Sovereign Government Rating Methodology and Assumptions, June 30, 2011    
    
    
    
Ratings List    
Ratings Affirmed    
    
Aruba    
 Sovereign Credit Rating                A-/Stable/A-2          
 Transfer & Convertibility Assessment    
  Local Currency                        A-                     
 Senior Unsecured                       A-                     
    
Complete ratings information is available to subscribers of RatingsDirect on     
the Global Credit Portal at www.globalcreditportal.com. All ratings affected     
by this rating action can be found on Standard & Poor's public Web site at     
www.standardandpoors.com. Use the Ratings search box located in the left     
column.

Last Updated on 26 June 2012