Fitch rates Aruba as junk on bleak tourism outlook

Fitch rates Aruba as junk on bleak tourism outlook

Debt Corporate & Sovereign Strategy Fixed Income Coronavirus Caribbean

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Fitch Ratings on Wednesday lowered its long-term foreign currency credit rating for Aruba to BB from BBB-, putting it two notches below investment grade, blaming the novel coronavirus, COVID-19, for an expected sharp drop off in tourism which is the Caribbean nation’s main source of income. 

In a statement, the ratings agency said the economic downturn in tourism receipts in the 2020-2021 period is expected to result in consolidated government debt-to-GDP rising to 92.6% in 2020 from 62.8% in 2019. The outlook for the credit is negative, based upon considerable downside to the

“We expect financial support in some form from the Kingdom of the Netherlands, of which Aruba is a member with 'status aparte', to assist the Government of Aruba's extraordinary financial requirements, in turn, facilitating the island economy's ability to absorb a very large shock,” Fitch said.

Aruba closed its national airport in March and Fitch said the government projected the tourism freeze and lockdown measures will cause an 80% drop in tourism receipts. The firm estimates that tourism, in 2019, was responsible for 63% of the economic output and 76% of its current external receipts.

While tourism is key, Fitch points out that foreign private capital backs the majority of hotel interests in Aruba. This focuses bank asset risks on consumer and other business loans, “which government emergency assistance measures will partially alleviate,” Fitch said.

The firm now expects Aruba’s real gross domestic product to contract 10% year-on-year with a dramatic increase in unemployment. A current account deficit is now expected to be 15% of GDP in 2020 is now projected from a small surplus in 2019.

Aruba plans to refinance most of its 2020 budget needs of $750 and its 2020 debt maturities externally, roughly $168 million of the $202 million total, likely before June when the second of three debt service peaks for the year is expected to occur.

The island’s central bank has already tightened capital controls, in the form of  restrictions of new FX licenses and dividend transfers.

“Fitch assumes that lending from the Netherlands and/or EU funds meets a substantial share of this financing need, but the modalities have yet to be determined. Negotiations between the governments of Aruba and the Netherlands concerning possible assistance and public finance expectations are underway with potential developments over the coming weeks,” the firm said.