Fitch Downgrades Aruba to BBB-; Outlook Revised to Stable Fitch Ratings has downgraded Arubas long-term foreign and local currency Issuer Default Ratings (IDRs) to BBB- from BBB. Fitch has also downgraded the issue ratings on Arubas senior unsecured foreign and local currency bonds to BBB- from BBB. The Rating Outlooks on the long-term IDRs have been revised to Stable from Negative. In addition, Fitch has downgraded Arubas Country Ceiling to BBB from A- and affirmed the short-term foreign currency IDR at F3. KEY RATING DRIVERS Arubas downgrade and Stable Outlook reflect the following key rating drivers: Sovereign creditworthiness has deteriorated since 2009 due to the negative impact of recurrent suspensions of operations at the Valero refinery on growth, investment, the current account and foreign reserves. This highlights the islands narrow economic structure and vulnerability to external shocks. The focus of the fiscal stimulus response on selective tax cuts, expanding government payroll and increasing future commitments on public private partnership projects has accentuated budgetary rigidities and increased the challenges to reduce Arubas large fiscal imbalances and rising public debt burden. The budget deficit averaged 6.8% of GDP in 2010-2013, resulting in a jump in public debt from 40% of GDP to 60%, well above the 39% median of the BBB category. Interest payments to revenue, a key metric for debt sustainability, is expected to climb to 17% in 2014, double the BBB median of 8%. Material deviations from official targets have reduced confidence in the authorities commitment to fiscal consolidation. Reduced fiscal credibility and uncertainty over the medium term fiscal consolidation path has meant that the Governor of Aruba has requested the Secretariat of the Council of Financial Supervision of Curacao and Saint Maarten (CFT) to evaluate the fiscal position of Aruba before signing the 2014 budget and approving additional external financing operations. Arubas five-year average growth was negative 1.7% in 2009-2013, while the BBB median grew 3.1% during the same period. High dependence on cyclical tourism receipts, demographic challenges, labor market rigidities, lengthy legal disputes and structural impediments to start new businesses hinder domestic investment and economic diversification. Arubas current account balance deteriorated sharply to a deficit of 9.9% of GDP in 2013 from a surplus of 4.1% in 2012, following the permanent halt of fuel exports at the Valero refinery. International reserves fell 15% to USD654 million or 3.1 months of current external payments in 2013. Aruba is increasing its dependence on foreign exchange liquidity restrictions and external debt to maintain an adequate reserve position. Arubas Country Ceiling is one notch above the long-term foreign currency IDR reflecting the economys openness to international trade and capital, as shown by the large presence of foreign financial institutions and tourism corporations in the island. Nonetheless, the notch differential between the Country Ceiling and the long-term foreign currency IDR has been reduced to one from two notches due to the intensification of restrictions on the holding of foreign currency and convertibility controls for commercial banks. The revision of the Outlook to Stable reflects Fitchs expectation that economic growth will gain pace and Dutch oversight should result in adherence to stricter deficit reduction and debt sustainability standards in 2014-2016. A comprehensive package of entitlement reforms has mitigated the risk of unfunded pension liabilities and reduced the burden of the universal healthcare system on public finances. Fitch forecasts that growth will average 2.6% in 2014-2016, above the countrys estimated potential of 1.8% but lower than the expected BBB median of 3%. The recovery in the U.S., source of 57% of tourist visits in 2013, and a pickup in construction related to hotel developments, real estate and infrastructure support the improvement in investment and growth prospects. The current account deficit could narrow to an average 7.3% of GDP in 2014-2016, reflecting a tighter fiscal stance and a gradual substitution of fuel imports. Oil consumption fell 40% since 2007 and could decline 25% by 2016 due to technological enhancements, greater reliance on wind power and biogas and the construction of waste-to-energy plants. Arubas investment grade rating is underpinned by its higher per capita income than peers, track record of consensual structural reforms and membership of the Kingdom of the Netherlands, which has provided access to technical cooperation, development funds and emergency assistance during episodes of financial distress. RATING SENSITIVITIES The Stable Outlook reflects Fitchs 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 results in decreasing budget deficits and public debt burden; --Higher infrastructure execution and private investment leading to a sustained faster growth trajectory. Negative: --Material fiscal deterioration leading to a further escalation in government indebtedness; --Material reductions in international reserves and emergence of financing constraints; --Deterioration in the institutional relationship between Aruba and the Netherlands. KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions. --The growth and external forecasts assume that refining operations and fuel exports by Valero will remain suspended during 2014-2016. However, the company will continue to be a provider of transshipment services during this period. --Fitch factors in a recovery in the U.S. tourism market but a deceleration in arrivals due to fewer flight frequencies and stricter foreign exchange quotas for Venezuelan tourists. These two countries account for 76% of tourist arrivals to Aruba. --Fitch assumes that Aruba will continue to benefit from broad support from the Dutch government due to its position as part of the Kingdom of the Netherlands. Additional information is available on fitchratings.
Posted on: Wed, 23 Jul 2014 16:03:39 +0000
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