As a relatively small Caribbean island nation with a population upwards of 96,000, Aruba currently has a very high standard of living - excellent quality of health care, free enterprise philosophy mixed in with minimal government interference. Perhaps Aruba is truly a tropical paradise, perfect weather and economy? Maybe the weather since it averages 81 degrees Fahrenheit, but storm clouds are looming for the economy.
POLITICS:parliamentary democracy, sound institutions provides for political stability. As being part of the Kingdom of the Netherlands, Aruba has been qualified as an ‘Overseas Country and Territory’ by the European Union since 1964. This allows products originating in Aruba to be exported free of any import duties and quotas to the common market. Aruba obtained full autonomy of its internal affairs in 1986 while the Netherlands still provides for its defense and security. Also in 1986, Aruba achieved separation from the neighboring Netherlands Antilles Caribbean islands. Aruba today is an independent domicile of the Kingdom of the Netherlands (Europe), the sovereign movement for Aruba was halted by Aruba in 1990. Dutch today is the official language, the capital city is Oranjestad (a very European Dutch name). The Netherlands does provide for an aid package to Aruba.
ECONOMY:developed service economy. Major economic components include tourism, offshore banking & financial services, transshipment centre for oil refining since 1993 when it was revitalized again and agricultural. The overall balance of payments is close to par with tourism (cruise ship visitors included) receipts and net services income. There is a large volatility to surplus and deficit for the current account. Over the last 20 years, hotel & resort development has expanded significantly. The tourism industry is rebounding with strong growth after the slowdown following September 11, 2001 terrorist attacks on the United States.
Economic Statistics
GDP as measured by PPP amounted to $2.0 billion USD with corresponding GDP/Capita at approximately $28,000 (2004). Market GDP/Capita has it at $21,200 USD for year 2003. GDP growth figures include year 2004 at 3.5 percent, 2005 forecasted at 3.25 percent. Year 2003 nominal GDP growth at 5.2 percent, year 2003 real GDP growth at 1.5 percent (nominal less inflation), real GDP growth for 2002 contracted by 1.5 percent, 2001 again fell by a modest 0.7 percent. Inflation is projected at 2.5 percent for 2005. Inflation for 2003 at 3.7 percent, year 2002 was recorded at 3.3 percent, 2001 at 2.9 percent, year 1999 at 2.3 percent, year 1996 at 3.2 percent. The fiscal account is in deficit with year 2005 projected to be short by 4.5 percent of GDP. Aruba’s current account is in persistent deficit with the shortfall for year 2003 at 7.1 percent of GDP, year 2002 at 17.1 percent, 1997 at 11.9 percent while the trade component was in deficit at $713 million USD (2002). Unemployment is low at 1 percent. Major trading partners for exports include Netherlands, Colombia while imports from the United States and Netherlands.
POSITIVE:literacy rate at 97 percent, long life expectancy, government tax incentives, foreigners are allowed to buy real estate helping to provide for active foreign direct investment. Booming economy with much construction in hotels & resorts for the prosperous tourism industry, offshore banking - national plans to develop into a leading international financial services centre. CONCERN: high cost of oil imports, fiscal & current account imbalances, income inequality.
BANKING SYSTEM: foreigners are allowed to open bank accounts with commercial banks in Aruba taking advantage of the continued development of offshore banking services in Aruba and in the Caribbean region. The ‘Centrale Bank van Aruba’ (Central Bank of Aruba started operations on January 1, 1986, the same time the Aruban Florin (AWG) was introduced. The banking system is modern with ATM machines available, credit cards are accepted. The overall banking system lacks competition due to the small market which may result in slightly higher lending rates but it is stable with banks recording profits with low non-performing loans.
REGIONAL ANALYSIS: Caribbean
East Caribbean dollar (XCD) and other regional currencies tend to have currency pegs to the US-dollar. For the most part, these island nation’s have enjoyed stable economies as their economies have befitted from increased tourist visits and expanded into offshore financial services during the 1990’s. This favorable trend is expected to continue although regional tourism may decline with an upcoming global slowdown by 2006.
KNOWLEDGE:Economic Risks for the Florin
Economic risks to the economy and value of the florin include Aruba’s fiscal deficit - the overall high cost of the country’s safety net providing universal health care and state pensions. Accordingly, the debt to GDP ratio is climbing reaching 46 percent of GDP in 2004 after the fiscal shortfall came in at 5.5 percent for the year and 2005 forecasted is again to be in the red significantly. In order to correct these domestic fiscal deficiencies, a consumption tax should be implemented coupled with a lowering and simplification of personal income taxes. The bottom line is that the public sector is too big for the size of the economy. A growing risk to Aruba and several other non-hydrocarbon based countries is the current high world oil price which is impacting the current account. Finally, Aruba’s international foreign reserves should be increased to help insulate against macro-economic shocks.
CURRENCY: ISO Symbol ‘AWG’, Aruban florin, guilder. At time of review on April 11, 2005, the florin had an exchange value of 1.79 AWG to 1 US-dollar (USD). Both the Canadian dollar and US-dollar are widely accepted in Aruba as foreign currency maybe imported and exported for free. However, the florin cannot be exchanged outside of Aruba. A measured by purchasing power parity, the florin was in the range of 20 percent undervalued to the USD (July 2004) and 40 percent undervalued in year 2002.
CURRENCY HISTORY: the currency peg has been in place since 1986 at the current value of 1.79 AWG to the USD.
CURRENCY FORECAST:positive-stable in the short-term. Aruba’s association with the Netherland’s, a wealthy first world industrialized nation using the euro as their national currency certainly helps hedge currency risk for Aruba particularly in times of balance of payment difficulties. The current stable economy and sound political environment suggest a positive risk ranking for the florin, however, currency risks are evident in Aruba’s fiscal & current account shortfalls. If these fiscal & trade imbalances are not corrected, the currency peg might be vulnerable. Continued persistent economic deficits in these accounts may not garner continued support from the Netherlands over the medium to long term.
UPDATED:April 11, 2005
