Aruba, Tourism, Green Diversification and the “Dutch Club”

17 November 2014

As at Monday,17th November 2014

Aruba in a nutshell

The beautiful island of Aruba is located in the southern Caribbean Sea. It is located some 990 miles west of the Lesser Antilles and 18 miles north of Venezuela. It is a small island comprising of just under 70 square miles with a population of under 110,000. Together with Bonaire and Curacao it forms one third of the so called “ABC Islands” and collectively with the other Dutch islands in the Caribbean is often referred to as the “Netherland Antilles”.
Aruba’s GDP per capita of US$21,000 ranks it above most of the other islands in the region and in the last ten years it has achieved an average real growth in GDP of around 2%. With the exception of 2001, 2002, 2009, 2010, 2012 and 2013 Aruba has experienced positive economic growth in the last 25 years despite a major recession in its major “trading” partner the United States.


Recent shocks to the system

The Aruban economy has faced two major shocks in the last five years. The first arose because of the global financial crisis which hit Aruba’s tourism sector in 2009, and the second occurred as a result of the shutdown of oil refining facilities for two extended periods of 27 months between 2009 and 2012 because of lack of profitability.

An upmarket tourist location and a vision to diversify

Tourism currently accounts for 80% of Aruba’s total economic activity with 60% of all tourist visitors coming from the United States. Compared to other islands in the Caribbean Aruba is considered to be an “upmarket” tourist destination boasting some of the highest revenues generated per available hotel room in the Caribbean.The policy of the Aruban government is to attempt to promote investment in areas that will diversify the economy away from a general reliance on tourism. In an effort to create a more vibrant and diversified economy the government intends to promote Aruba as an international gateway for businesses wanting to enter Latin American markets. It also intends to offer tax incentives to businesses setting up in Aruba in the field of innovation and science.

The benefits of doing business in Aruba

Aruba has a politically stable parliamentary system and is strategically located to serve international business flowing between South America, the United States and Europe. Its infrastructure is modern with good road connections, modern utility services (electricity and water), and a developed telecommunications system.However there are negatives. First the personal income tax rate is, at close to 60%, one of the highest in the world. Second corporate tax rates are also comparatively high at 28%. Moreover Aruba also levies a tax on dividend payments making it uncompetitive in comparison to its “Dutch Neighbours” Curacao and Saint Maarten who do not currently levy a dividend tax. There are also institutional factors that make doing business in Aruba comparatively difficult. An inefficient civil service system can make the obtaining of necessary permits for foreign investors a lengthy process, and the checks on investors required by the Aruban Central Bank can mean that opening a bank account is a process that take months rather than days. Unemployment remains high representing 9.5% at the end of 2012 (the latest available published data on unemployment).
The current administration is addressing these issues in conjunction with help from the Netherlands. It is expected that corporate and personal taxes will be reduced, the dividend tax eliminated, and a move towards indirect taxes (imposition of value added tax and a turnover tax on the tourism industry).

Part of the “Dutch Club”

Aruba is one of the four constituent countries that form the Kingdom of the Netherlands. The other three members are the Netherlands, Curacao and Saint Maarten.
In April 2013 the Netherlands announced that it will allow Aruba to enjoy the benefits of the Netherlands international credit ratings in order to allow Aruba to borrow money on international markets at a much more favourable rate.
Effectively the Netherland will act as a private financier for Aruba. Since the Netherlands enjoys a credit rating of AA+ and floats bonds in the region of 2% the benefits to Aruba (rated at BBB+) may be as much as US$15m in annual interest payments.
As a result of this “special arrangement” Aruba now currently pays 4.5% on a ten year government bond compared to rates as high as 7% prior to the execution of the arrangement.
In the field of government bonds the perception of risk is everything.

Indicative Pricing and Yields on Aruban Securities

As at November 10th 2014 our indicative pricing on Aruban Securities was as follows:

Maturity Coupon Rating Bid Price Ask Price Offer Yield
06-Sep-15 6.400% N/A 102.250 103.250 2.34%
28-Nov-18 6.550% BBB+ 110.500 112.500 3.22%
14-Sep-23 4.625% BBB+ 99.750 101.750 4.38%

The Future

Because Aruba is an upmarket tourist destination it weathered the shock of the global financial crisis better than most tourist dominated economies. In simple terms its customers with higher disposal incomes and extensive savings still visited the Island in a steady steam.The link the Island maintains to the Netherlands and the latter’s willingness to underwrite Aruban Bonds secures Aruba’s ability to access funds on international markets provided that it addresses the institutional issues mentioned in this blog entry.

Aruba’s visions in respect of diversification appear sound and many of them – particularly the concept of acting as a gateway between the Latin Americas, Europe, and the United States – are visions that the government of Trinidad and Tobago might also consider in its attempts to diversify the local economy.

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