Fitch Affirms Aruba's 'BBB' Foreign Currency Rating; Outlook Negative.

NEW YORK -- Fitch Ratings, the international rating agency, today affirmed its long-term foreign and local currency ratings of 'BBB' and 'BBB', respectively, for Aruba. The Rating Outlook is Negative.

The Negative Outlook was assigned last year in light of steady fiscal deterioration and rising government indebtedness. General government debt has risen from 28.5% of GDP in 2000 to 42.3% at the end of 2003, although the repayment of external contingent liabilities accounted for nearly 40% of the increase and was resourcefully handled by the government. Over the past year, the government has made some progress in laying the groundwork for future fiscal consolidation. However more still remains to be done to contain expenditure growth and reduce general government arrears to suppliers and domestic agencies, which stood at 8.3% of GDP at the end of 2003. While Fitch expects the recent rise in public indebtedness to level off given the boost to government revenues provided by renewed economic growth, the slow pace of fiscal consolidation is a concern given the narrow base of the economy and the vulnerability of government revenues to cyclical downturns and external shocks.

Institutional constraints and a lengthy public consultation process have been barriers to more decisive fiscal consolidation. The implementation of stricter cost controls, an expanded income basis for contributions, and ongoing negotiations on specialist compensation for the universal health care scheme is expected to secure fiscal savings of 0.3%-0.5% of GDP in 2004. Yet it is highly uncertain that a more cost-effective copayment scheme will be approved ahead of fall 2005 general elections.

Parliamentary approval is also required before the government can realize proposed reforms to the civil servant pension fund, APFA, that would enhance its medium-term financial sustainability. Planned regularization of government arrears to APFA, which would reduce outstanding arrears by 6.7% of GDP, has still not been implemented. While the government has sharply reduced its current liabilities to trade creditors, new 2003 budget arrears of 0.6% of GDP were incurred to the health care system. Yet it is important to note that Aruba has never incurred arrears with institutional creditors.

Aruba's creditworthiness is supported by a market-friendly institutional environment and a long track record of macroeconomic stability supported by a credible pegged exchange rate and stable banking sector. The sovereign maintains status aparte within the Kingdom of the Netherlands. Per capita income estimated at US$21,150 has favored political stability and strong social indicators. Recent developments supporting Aruba's creditworthiness include enhancement of the central bank's supervisory capacity and more rigorous directives for financial sector regulation. Net external debt levels, while rising, appear moderate and below the 'BBB' median.

Further progress in health care and APFA reforms to yield a material record of consolidation would be desirable. While the strong return of tourism in 2004 will help boost government receipts, public expenditures could still come under pressure ahead of 2005 elections. Fitch would also favorably view a return to primary balance, which would help stabilize government indebtedness, as well as further progress in resolving outstanding arrears.