Country Report Aruba
The shutdown of Aruba’s oil refinery has put a major drag on economic growth. The economy contracted by -1.2% in 2012, while the growth figure for 2011 was strongly revised downwards. Due to the GDP contraction, public finance ratio’s worsened considerably.
Strengths and weaknesses
Aruba’s stands out positively compared to the region on multiple fronts, as its bureaucracy is rather efficient and corruption is low. Furthermore, Aruba’s operational environment is good and there are no major obstacles for foreign investment.
Relatively high income level
With an average income of USD 24,408 per head, Aruba has a relatively high standard of living, which mitigates social risks.
A narrow economic base
Aruba’s economy largely depends on the tourist and oil sectors. The shutdown of the oil refinery makes the country even more reliant on tourism. Furthermore, the tourism sector is highly dependent on the US, as 60% of the tourists come from the US.
In the past five years, the budget balance worsened from a surplus of 1% of GDP to a deficit of almost 10% of GDP. In the same time span, the debt to GDP ratio deteriorated from 42% to 67% of GDP.
1. A new economic shock
Last year, Aruba experienced a second economic shock in a time span of just five years. In 2009 Aruba was hit by the global financial crisis, which led to a large drop in tourist receipts and foreign direct investment. In 2011, the country experienced some growth, although economic growth for 2011 was strongly revised downwards from 8.9% to 3.7%. The second hit consisted of the shutdown of Aruba’s oil refinery in 2012, due to poor profitability. As a result, the economy contracted by 1.2% last year. All in all, Aruba’s economy has shrunk by 12.4% since its peak in 2008. Aruba’s economy is expected to growth by between 2% and 3% this year. Important remark is, however, that these projections come with great uncertainty.
2. Trend in the important tourist and oil sector
Both the tourist and trade sectors account for an important share of the Aruban economy, but their current trend however strongly deviates. Due to a reduction in utility prices, Aruba’s tourist sector has remained very competitive. This is reflected by more visitors, higher numbers of nights spent in hotels and a recovery of the occupancy rate (figure 1). In 2012, the price reduction was offset by higher volumes, for the first time since 2008, which led to an increase of the sector’s overall earnings. After a temporary shutdown in 2010, the Valero oil refinery was closed again in 2012, as the refinery was losing USD 500,000 per day. It is still hoped for that the refinery can restart its production, as a permanent shutdown will have a strongly negative structural impact on the economy, government finances and employment; the refinery is Aruba largest private employer, accounting for 5% of the labor force. Since the shutdown, the government has been searching for a buyer of the refinery, however with little success. Since the negotiations with PetroChina collapsed, there were rumors that the Venezuelan state-owned company (PDVSA) would be interested in the refinery. However, there has been no news on this front since the end of last year. In the meantime Valero Energy announced that it would convert the refinery into a refined products terminal. This would, however, involve significant layoffs, of around 90% of the employees.
3. Public finances
Due to a strong decline in economic activity, public finances have deteriorated. Aruba’s budget deficit worsened from 7.1% of GDP in 2011 to 9.7% in 2012, while its debt-to-GDP ratio climbed to 67% (figure 2). The government intends to lower its budget deficit, by both increasing its revenue and lowering its spending. Government spending will be lowered by a freeze on wage increases and other expenditures. Furthermore, government revenues will be enlarged by an increase in dividend payments from state-owned companies. Also, the government has signed an agreement with the Dutch government. Due to the accord, the Netherlands – with a significantly better rating – will issue bonds on behalf of Aruba. And as Aruba can issue bonds with a yield of 4-5% - as it did last year - compared to the Netherlands’ 2%, annual interest payments will be halved. In the accord, both parties agreed that the resulting saving will completely be used to lower the budget deficit.
4. Upcoming elections
The next parliamentary election is scheduled at the end of 2013. The Arubaanse Volks Partij (AVP) of Prime-minister Eman will try the materialize Mr Eman’s high approval rating. His approval rating might deteriorate in the coming months, though. Firstly, the economy will keep struggling, partly due to the fact that the Valero oil refinery remains closed. Secondly, Prime-minister Eman is currently tightening the external relationships with the Netherlands, which is reflected in the accord mentioned above. Both the opposition and part of the public, however, oppose to this trend, as they see it as an erosion of sovereignty. It is questionable to which extent the main opposition party, Movimento Electoral di Pueblo (MEP), can benefit from this, as it is internally divided.
Aruba is an autonomous country within the Kingdom of the Netherlands. Only defense and foreign affairs are still the responsibility of the Dutch government. Although this does not mean that Aruba will automatically receive financial back up from the Netherlands in case it runs into financial difficulties, Dutch support is rather likely. The willingness to do so will largely depend on the quality of the relationship, as well as the political climate in the Netherlands at that time.
Aruba is a parliamentary democracy. The current ruling party, the Arubaanse Volks Partij (AVP), has currently a small majority of 12 out of 21 seats in parliament. Both the party and its prime-minister, have a high approval rating. Aruba’s political framework is relatively sound compared to other countries in the region, as its bureaucracy is rather efficient and its corruption level rather low. Furthermore operational risk for foreign companies is limited. On the economic front, the country largely depends on tourism and the oil refinery. Since the latter was shut down due to financial distress in 2010 and 2012, the Aruban economy shrunk considerable. This has put a major strain on government finances. Nevertheless Aruba’s standard of living is high.