Aruba’s credit rating upgraded to ’BBB-’ by Fitch, positive outlook sustained

Investing.com -- Fitch Ratings has upgraded Aruba’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ’BBB-’ from ’BB+’, maintaining a positive outlook. The upgrade is a response to significant progress in reducing the island nation’s general government debt ratio, supported by recent substantial fiscal surpluses.

Aruba’s upgrade also reflects the successful implementation of three fiscal rules and the continued institutional and financial support from the Netherlands. Other factors contributing to the positive rating include strong governance, high per-capita income, large current account surpluses, and a solid accumulation of international reserves. However, the ratings are constrained by the still high, albeit rapidly declining, debt and interest burdens relative to peers, and the vulnerability of the tourism-dependent economy to external shocks.

The positive outlook is based on the anticipated continued improvement of Aruba’s fiscal metrics, including further decline in government debt-to-GDP. This is underpinned by the further institutionalization of the fiscal framework and deepening of ties with the Netherlands, represented by the potential passage of a Kingdom (TADAWUL:4280) Law.

Aruba experienced a second consecutive year of fiscal surpluses in 2024, with an estimated balance of 2.6% of GDP. This is a significant shift from a history of fiscal deficits that averaged 4.5% in the decade prior to the pandemic. As a result, general government debt-to-GDP has fallen rapidly to 66.0% of GDP in 2024, down from a peak of 100.1% in 2020. Fitch expects strong fiscal performance to continue, with fiscal surpluses of around 2.0% and primary balances of just under 6.0% over the next several years. Debt-to-GDP is forecast to decline to 57.6% by 2026.

A strong fiscal framework, incorporated in local legislation in December 2023, has driven these improvements. The framework establishes fiscal targets that include a minimum budgetary surplus of 1% of GDP, debt reduction targets of 70% of GDP by 2031 and 50% by 2040, and a cap on the public sector wage bill at 10% of GDP. The government has successfully complied with this framework, likely achieving the first debt reduction target six years ahead of schedule.

As a member of the Kingdom of the Netherlands with ’status aparte’, Aruba benefits from a high level of institutional and fiscal support from the Netherlands. The Dutch provided pandemic liquidity support loans (15% of GDP), which currently benefit from a reduced interest rate of 5.1% according to an agreement signed in October 2023. The rate will increase to 6.9% in May 2025, unless the aforementioned Kingdom Act is passed, upon which the rate will decline further to around 3.4%.

Aruba’s economy, driven by the tourism sector, grew by an estimated 6.8% in 2024. Growth is expected to moderate to 2.1% and 2.9% in 2025 and 2026, before slowing further toward potential, which is estimated at 1.5%. The rapid construction of hotels in recent years - rooms will grow by around 3,300 or 26% between 2024 and 2026, has driven growth, but will plateau as overtourism has highlighted domestic political concerns and puts strains on infrastructure, housing prices and the environment.

Elections were held in December 2024, which resulted in a win by the opposition. A coalition government, between AVP and FUTURO, will likely assume office in the spring. Early indications suggest that there will be few material changes to the fiscal framework. Ongoing consolidation and debt reduction are expected to continue due to the unanimous support for the fiscal framework in 2023. Relations with the Netherlands are expected to remain strong, although uncertainty about the passage of the Kingdom Act remains.

Aruba benefits from high current account surpluses, which reached an estimated 10.8% of GDP in 2024. These surpluses have contributed to a marked increase in international reserves, which reached an estimated $1.8 billion (7.3 months of current account payments) in 2024 and are forecast to hit $2.6 billion (10.1 months) by 2026. High buffers offset the ever-present risks from external shocks; although, Aruba has benefitted from being outside the hurricane belt.

Inflation fell to 1.7% in 2024, considering low global prices. Although, as a small open economy, Aruba is exposed to fluctuations in global prices, it does have some ability to shift the source of imports and cushions the pass-through effect on domestic prices by setting utility prices. Monetary policy is generally limited, and the transmission mechanism is weak. The fixed exchange rate is the main policy anchor.

Aruba has an ESG Relevance Score (RS) of ’5’ [+] and ’5’ [+], respectively, for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. These scores reflect the high weight that the WBGIs have in Fitch’s proprietary Sovereign Rating Model. Aruba has a high WBGI ranking at the 83rd percentile, reflecting its long track record of stable and peaceful political transitions, well established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption.

The Country Ceiling for Aruba is ’BBB’, 1 notch above the Long-Term Foreign-Currency IDR. This reflects moderate constraints and incentives, relative to the IDR, against capital or exchange controls being imposed that would prevent or significantly impede the private sector from converting local currency into foreign currency and transferring the proceeds to non-resident creditors to service debt payments. Fitch’s Country Ceiling Model produced a starting point uplift of +1notch above the IDR. Fitch’s rating committee did not apply a qualitative adjustment to the model result.

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