Press Release: S&PGR Revises Aruba Outlook To Pos, Affirms ‘BBB+/A-2’ Ratings

The following is a press release from Standard Poor’s: OVERVIEW — The agreement between CITGO and Aruba to reopen its refinery could improve Aruba’s growth. However, uncertainty remains about the investment timeframe. — The ratings on Aruba reflect the strong ties with the Kingdom of the Netherlands, strengthened by a fiscal agreement. — We are revising our outlook on Aruba to positive and affirming our ‘BBB+/A-2’ sovereign credit ratings. — The positive outlook reflects our view that the reopening of the refinery could result in higher economic growth and a stronger external position. Coupled with the fiscal consolidation agreement, we could also expect a faster improvement in fiscal indicators. RATING ACTION On June 6, 2016, S&P; Global Ratings revised its outlook on Aruba to positive from stable. We also affirmed our ‘BBB+/A-2’ long- and short-term sovereign credit ratings on Aruba. In addition, we affirmed our transfer and convertibility assessment of ‘BBB+’. RATIONALE Our outlook revision reflects the agreement between Aruba and CITGO to reopen Aruba’s refinery. Uncertainty about CITGO’s capacity to have the refinery working in the planned timeframe weighs on our analysis, but if implemented, we would expect to see stronger foreign direct investment (FDI) inflows bolstering GDP growth, as well as a stronger external position. Faster growth, coupled with Aruba’s fiscal agreement with the Netherlands, could result in fiscal consolidation and debt decreasing faster than we expect in our base-case scenario. That said, the ratings on Aruba reflect its stable political system based on parliamentary democracy, its status as a member of the Kingdom of the Netherlands, and its relatively high $25,000 per capita GDP. They also reflect its narrow, open economy, which is highly dependent on tourism, and its limited monetary flexibility due to its fixed exchange rate. On May 13, 2016, CITGO reached an agreement to reopen Aruba’s refinery. CITGO will run the refinery under a 15-year lease agreement (with a 10-year extension option), and we expect it to invest around $1 billion on upgrading works and blend around 235,000 barrels per day of heavy Venezuelan oil. According to the plan, the refinery will be operating in 2018. The agreement also involved the refinery’s former operator Valero Energy Group, a U.S. oil company, which transferred the facility and gasoline stations assets to the Aruban government in exchange for a relief in its contractual obligations regarding environmental contingencies and the dismantling of the refinery. The sizable investment, which is equivalent to 40% of the country’s GDP, and the subsequent refining operations should bolster GDP growth, expand Aruba’s export base, gradually improve its external position, and potentially strengthen fiscal revenues (a new fiscal framework will be discussed in parliament). However, there is uncertainty about the timely execution of the agreement. We believe the possibility of CITGO being drawn into a potential Petroleos de Venezuela S.A. (PDVSA; Venezuela’s state-owned oil company) bankruptcy is low, but the company’s highly leveraged profile might limit its capital expenditure capacity. Moreover, we cannot rule out the possibility of PDVSA selling assets abroad, which could include CITGO, to generate additional foreign currency funding to make timely payments on its external debt. This could result in a significant delay of the planned reopening, and it’s the main reason we don’t include this operation in our base-case forecast. Therefore, our base case incorporates GDP growth of below 2% during 2016-2018, driven by somewhat higher tourism arrivals, a relatively stable tourist expenditure average, and faster execution of government public works. We expect GDP per capita of around $25,000 in 2016. GDP growth in 2015 was only 0.1%, below our expectation, because of low private confidence, lower available income given the recent pension and health care reforms (which reduced available income), delays on the main government infrastructure projects, and the postponement of the Bahia Principe Hotel (the largest private infrastructure project in the pipeline). Following pension and health care reforms (approved in 2014), the fiscal agreement with the Netherlands in May 2015, the establishment of the CAFT (College Aruba Financieel Toezicht, an independent council in charge of fiscal oversight), and expenditure containment and a more active revenue collection strategy, Aruba’s general government deficit declined to 3.3% of GDP in 2015 from 6.3% in 2014. (The general government deficit incorporates the results of the pension funds and various social welfare funds.) The fiscal agreement contemplates a 2% general government deficit in 2016, 0.5% deficit in 2017, and a surplus in 2018. Our base case estimates that Aruba will be able to broadly comply with the goals, and we expect general government deficits of around 2% of GDP on average during 2016-2018. In our opinion, successful execution of the government’s budget targets relies on both the CAFT being able to promote measures (if necessary) to achieve a surplus by 2018 and the timely reopening of the refinery, which is not considered in our base-case projections. In line with the 2015 results and our fiscal projections, we expect net general government debt (which includes APFA [the public-sector pension system] assets other than its holdings of central government debt) to stabilize during the next three years at around 23% of GDP. The low net general government debt is explained by the significant assets held by APFA, at around 40% of GDP. But considering the high gross central government debt (which we estimate at around 83% of GDP during 2016-2018), the interest burden will also continue to be high at 10% of general government revenues. That said, Aruba has enjoyed access to international debt markets, and as of year-end 2015, 50% of its debt was denominated in foreign currency. We believe that contingent liabilities are limited. The banking sector is profitable and has adequate capital. The nonfinancial public sector is generally run on commercial lines and, in our view, poses limited contingent liabilities to the sovereign. We estimate its total debt to be less than 7% of GDP (owed by the power and water utility). Under our base case, relatively low oil prices, moderate growth in tourism receipts, and lower government deficits will result in low current account deficits (CAD) of around 1% of GDP on average during 2016-2018. Some FDI inflows (mostly related to tourism activities) and government external debt should support stable international reserves during the same period. We expect narrow net external debt around 20% of current account receipts (CAR) during 2016-2018 and gross external financial needs to remain around 110% of CAR plus usable reserves during the same period. The gap between Aruba’s net external liabilities and its narrow net external debt (both measured as a percentage of CAR), which will remain about 100% of CAR, and the volatility on Aruba’s terms of trade highlight Aruba’s external vulnerability. A fixed exchange rate and a midsize financial system constrain the central bank’s ability to conduct monetary policy. Also, the central bank’s monetary policy instruments are limited mainly to reserve requirement on bank deposits. OUTLOOK The positive outlook reflects our view that within the next two years, there is greater than one in three likelihood that timely reopening of the refinery, in terms of investment and production, could lead to faster GDP growth than in our base case. The new refinery would likely expand Aruba’s export base and improve its external indicators. Coupled with the ongoing fiscal consolidation program, this should also help to reduce Aruba’s fiscal deficits and debt level. An improvement in Aruba’s economic profile and resilience could result in an upgrade within the next two years. In contrast, we could revise the outlook to stable within the next 12 months if there are significant delays in the refinery project, resulting in continued low GDP growth. Delays on the refinery, coupled with significant deviations from the fiscal consolidation agreement, could lead to a downgrade within the next 24 months. KEY STATISTICS RATINGS SCORE SNAPSHOT RELATED CRITERIA AND RESEARCH Related Criteria — Sovereign Rating Methodology, Dec. 23, 2014 — Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 — Use Of CreditWatch And Outlooks, Sept. 14, 2009 — Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009 In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see ‘Related Criteria And Research’). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The committee agreed that “external assessment” had deteriorated and that the “fiscal assessment” had improved. All other key rating factors were unchanged. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure Stock Market Quotes, Business News, Financial News from

Press Release: S&PGR Revises Aruba Outlook To -2-

consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook. The weighting of all rating factors is described in the methodology used in this rating action (see ‘Related Criteria And Research’).

Ratings Affirmed; Outlook To Positive
To From
Sovereign Credit Rating BBB+/Positive/A-2 BBB+/Stable/A-2

Ratings Affirmed

Senior Unsecured BBB+
Transfer & Convertibility Assessment BBB+

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at and at All ratings affected by this rating action can be found on the S&P; Global Ratings public website at Use the Ratings search box located in the left column.

Primary Credit Analyst: Manuel Orozco, Mexico City (52) 55-5081-4475;
Secondary Contact: Livia Honsel, Mexico City 5550812876;

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