Fitch Revises Aruba's Outlook to Stable.

NEW YORK -- Fitch has revised the Outlook on Aruba sovereign ratings to Stable from Negative. In addition, Fitch affirms Aruba's ratings as follows:

-- Long-term foreign currency Issuer Default Rating (IDR) at 'BBB';

-- Long-term local currency IDR at 'BBB';

-- Short-term IDR at 'F3';

-- Country Ceiling at 'BBB+'.

According to Shelly Shetty, Fitch Senior Director and lead sovereign analyst for Aruba, 'The government's efforts to consolidate public finances in 2005 and measures taken to strengthen the financial viability of the universal health scheme are the key factors behind the revision of the Rating Outlook.' In 2005, the fiscal deficit declined to 3.8% of GDP (on an accrual basis) from 6% of GDP in 2004, and the budget for 2006 is targeting a further reduction to 1.7%. In 2006, the health care scheme (AZV) increased health premiums by two percentage points, which should help in eliminating losses at the AZV, thereby reducing the transfers from the government. The government has also reformed the public sector pension system for new employees, which should limit the increase in future pension liabilities. Although arrears to suppliers and public sector entities increased somewhat in 2005, the stock of arrears declined from 8% of GDP in 2003 to 4.5% of GDP in 2005, thereby boosting fiscal transparency. Finally, the government appears committed to further reducing the fiscal deficit by exercising more expenditure restraint and increasing revenue collection through tax administrative measures and, possibly, a package of tax increases. With these, and even with some slowdown in GDP growth, Fitch expects public debt to begin declining relative to GDP this year.

Aruba's investment-grade status is well-supported by its relatively high per capita income of over US$20,000, which is well above the 'BBB' median. Aruba's market-friendly institutional environment based on a well-functioning legal system, rule of law and legally protected rights, distinguish it from some other similarly rated sovereigns. Aruba's social and political stability and broad macroeconomic stability since gaining status aparte in 1986 also contrasts with some other 'BBB' rated sovereigns. In terms of key solvency ratios, while the general government debt (% GDP) at 45% is higher than the 'BBB' median of 34%, both net external debt and net public external debt (expressed as a percentage of current external receipts or CXR) are in line with the 'BBB' median. Finally, Fitch's rating also incorporates Aruba's strong links and the implicit support this implies for the island from the 'AAA'- rated Dutch government.

Aruba's rating weaknesses include structural weaknesses in its public finances and its small, narrow economy, which is vulnerable to external and domestic shocks. Fiscal rigidity remains high. Financial management capabilities also appear inferior to many other 'BBB' sovereigns because the 2006 budget has not yet been passed and the government relies on arrears to suppliers and the broader public sector to finance its deficit. The government is currently preparing a tax reform involving the introduction of a consumption-based sales tax, which would increase the contribution of indirect taxes to total revenue. The reform is intended to increase tax collection by 2% of GDP even though this package may entail tax relief on direct income taxes. If implemented, this reform could further boost the credibility of the government's plan to achieve a balanced budget by 2009, placing public debt on a downward trajectory.

Aruba's narrow economy needs to be diversified to boost its growth potential as the island's growth performance is lagging that of most rating peers. The government and the private sector appear to be in favor of moving towards higher-value-added tourism, and some hotels have already begun renovating their facilities to provide even more upscale services that will allow them to command a high premium on their rooms. Some of the other possible niches for diversification include healthcare and education, which would require a lowering of the higher marginal tax rates and making immigration laws more flexible. Fitch will closely monitor the government's strategy for attracting investment into new sectors. Higher growth is essential if Aruba is to improve its debt dynamics and the living standards of its residents. Finally, it is important for Aruba to maintain a strong foreign reserves cushion as it has a pegged exchange rate regime and Fitch views reserve declines in recent years with concern. In this regard, further fiscal consolidation could mitigate further pressures on the balance of payments.

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