Country Report Aruba
Although Aruba’s economy grew again in 2013 its economic outlook remains bleak. Government finances in particular are a reason for concern, as Aruba’s deficit is still large, its debt level high and control over public finances weak.
Strengths (+) and weaknesses (-)
(+) Business environment
Aruba’s stands out positively compared to the region on multiple fronts, as it is a stable democracy 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 24,429 per head, Aruba has a relatively high standard of living, which reduces social risks.
(-) A narrow economic base
Aruba’s economy currently largely depends on the tourism sector. Furthermore, the tourism sector is highly dependent on the US, as 57% of the tourists come from the US.
(-) Weak government finances
In the past six years, the budget balance has worsened from a surplus of 1% of GDP to a deficit of a spacious 7% of GDP in 2013. In the same time span, the debt to GDP ratio has deteriorated from 42% to 74% of GDP. In addition, control over public finances is weak.
1. A new economic shock
Aruba has experienced two major economic shocks in the last five years. The global financial crisis in 2009 and the shutdowns of Aruba’s oil refinery in 2010 and 2012 have led to a cumulative GDP contraction of 15%. In 2013, the economy however grew again by 3.9%. Although a proper division by sector is not available yet, economic growth seems to be backed by a strong growth in the tourism sector. Although each visitor –on average - spent fewer nights in hotels, the total number of nights spent in hotels increased by 3.2% compared to 2012 due to a strong rise of the number of visitors. A remarkable trend last year was the drop of inflation from +0.6% in 2012 to -2.3% in 2013, which can largely be explained by one-off events. In August 2012, water tariffs were reduced by 30.8% and in November 2012 electricity tariffs were lowered by 15.6%. As the lower utility tariffs have improved the purchasing power of households, consumption growth also contributed to economic growth. Inflation measures the price development of consumer products and the GDP deflator the price development of all goods and services produced in the economy. However, they mostly follow more or less the same trend. Due to a negative GDP deflator, Aruba’s nominal GDP growth was lower than its real GDP growth, 1.9% versus 3.9%. Aruba’s economic outlook is modest, as the economy is projected to grow by 3.0% in 2014 and by 3.5% in 2015. This projection comes however with great uncertainty, as there are both up- and downside risks. A reopening of Aruba’s oil refinery would boost GDP growth considerable. On the other hand, government finances are still in a poor shape and the implementation of additional austerity measures would contribute negatively.
2. Trend in the important oil sector
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 was hoped for that the refinery could restart its production, as a permanent shutdown would have a strongly negative structural impact on the economy, government finances and employment. However, throughout 2013 and the beginning of this year Valero (the owner of the refinery) has not been able to find a new user. In December 2013, there were rumors that Valero and Venezuela’s state-run oil company, PDVSA, had started talks to lease some units of the refinery, but until now a deal has not been reached.
3. Public finances a reason for concern
Due to a strong decline in economic activity, public finances have deteriorated in recent years. In 2013 Aruba’s budget deficit stood at 7.2% from 8.9% in 2012. Meanwhile its debt-to-GDP ratio climbed from 68% in 2012 to almost 74% in 2013. The combination of a large budget deficit and a rising public debt level are reason for concern. In addition, the government lacks control over public finances. In its annual report of 2013 the Raad van Advies (the board of advice) expressed its concerns over public finances in Aruba. And despite a large numbers of recommendations in previous years nothing has changed significantly in 2013. To name a few shortcomings; the budget for 2013 was approved at the end of 2013, the content and quality of the budget was inadequate, the projections were often unrealistic, there was a lack of budget discipline and supervision, the relevant and correct figures, and approved annual reports were missing. That said, the government has also taken difficult steps in recent years to tackle the high deficits. It has, for instance, taken measures to take away weaknesses in its medical insurance scheme and its civil service pension plan; including raising premium payments and the retirement age, as well as introducing a new mandatory general pension plan. From 1 January 2015 onwards, the retirement age will be gradually raised from 60 years in 2015 to 65 years per 1 January 2024.
4. Second term for Mike Eman
In the parliamentary elections of September last year, the Arubaanse Volkspartij (AVP) of Mike Eman won 13 of the 21 seats. In the previous election, the AVP got 12 seats. On 30 October, Mike Eman was inaugurated for his second term. With regards to government finances the new government’s aim is to have a balanced budget at the end of its term. In addition, the government will implement a “balanced Budget Rule” per 1 January 2016.
Aruba is an autonomous country within the Kingdom of the Netherlands. Only defence and foreign affairs remain the responsibility of the Dutch government. Aruba will automatically receive financial back up from the Netherlands in case it runs into financial difficulties. However, although not guaranteed, Dutch support is imaginable. This will largely depend on the quality of the relationship, the budget discipline of the government, 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), currently has a majority of 13 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 democracy is stable and its corruption level rather low. Furthermore, operational risks for foreign companies are limited. On the economic front, the country largely depends on tourism and the oil refinery. But, since the latter was shut down due to financial distress in 2010 and 2012, the Aruban economy has shrunk considerable. This has put a major strain on government finances. Nevertheless Aruba’s standard of living is high.