Government finances A long term assessment. Presented by Edwina Matos Pereira

Transcription

1 Government finances A long term assessment Presented by Edwina Matos Pereira Walter Mosher June 22, 2010

2 Structure 1. Aruba s current fiscal landscape 2. Long term outlook & scenarios 3. Aruba s GDP volatility 4. Risks to fiscal outlook 5. Conclusions CENTRALE BANK VAN ARUBA 2

3 Current fiscal landscape Aruba is running a chronic fiscal deficit Aruba s fiscal deficit is projected to reach Afl million (excluding the additional contribution to APFA) in 2010, and would have amounted to over Afl.400 million without the Valero settlement. Fiscal deficit and GDP growth 25.00% 20.00% 00% 15.00% 10.00% 5.00% 0.00% 5.00% 10.00% proj % Fiscal deficit as percentage of GDP 2010 deficit including Afl. 80 mln for APFA Real GDP growth 3

4 Current fiscal landscape (continued) Aruba s economic history 1985 closure of Lago 1986 mid 90s, investment boom Tax holidays Loan guarantees 1989 reopening oil refinery , tourism arrivals tripled Average growth rates Nominal GDP growth 12.89% 4.96% Government revenue growth 8.37% 5.29% Government expenditure growth 9.25% 5.44% 25% 20% 15% NominalGDP growth Mid 90s present 10% Tourism growth stabilizes and GDP output declines to a more sustainable level cent perc 5% 0% 5% 10% Nominal GDP growth, 8% 4

5 Current fiscal landscape (continued) As a result, public debt continues to rise, and is projected to surpass 50 percent of Aruba s GDP. percent Afl. million Public sector debt as a percentage of GDP Outstanding public sector debt (Afl. million) Both domestic and foreign 2500 debt have risen 2000 significantly and Aruba has had to increasingly borrow at commercial terms (with higher interest). Afl. million Outstanding domestic debt (Afl. million) Interest payments Outstanding foreign debt (Afl. million) Afl. million 5

6 35.00% Government finances as percentage of GDP 30.00% 25.00% 20.00% 15.00% 10.00% 00% 5.00% 0.00% Wage costs as percentage of GDP G&S as percentage of GDP Interest as percentage of GDP Other as a percentage of GDP Capital expenditure as percentage of GDP Government Revenue as percentage of GDP 1600 Government finances in Afl. million Wages G&S Interest other Capital expenditure Government Revenue 6

7 29.00% Expenditure as percentage of GDP 7.00% 27.00% 6.00% 25.00% 5.00% 23.00% 4.00% 21.00% 3.00% 19.00% 2.00% 17.00% 1.00% 15.00% % Current expenditure as percentage of GDP Linear (Current expenditure as percentage of GDP) Capital expenditure as percentage of GDP Linear (Capital expenditure as percentage of GDP) 31.00% Expenditure as percentage of GDP 29.00% 27.00% 25.00% 23.00% 21.00% 19.00% 17.00% 15.00% Current expenditure as percentage of GDP Capital expenditure as percentage of GDP 7

8 LONG TERM OUTLOOK Macro economic environment: GDP growth: 2010 (restart Valero in September 2010): Real: 2.0 percent, Nominal 4.7 percent 2011 (Valero operational, Ritz Carlton project, rebound tourism): Real: 6.5 percent, Nominal: 10.2 percent (based on average GDP ): Real: 1.5 percent, Nominal: 5.2 percent 10.00% 5.00% 0.00% 5.00% 10.00% Derivation of Long term growth assumption Average Real GDP growth ( ) Real GDP growth Aruba Government finances 2010: based on the 2010 budget. Fiscal deficit 2010 (Land Aruba): Afl million. Total fiscal deficit 2010 (including FDA spending and additional contribution to APFA): Afl million. 8

9 Long term outlook Long term projections for the period for the central government (including FDA). Long term demographic changes (i.e., the ageing gof the population) p are not taken into account. The potential deficits of the AOV fund are not included in the projections. Possible large investment projects (including public investments) are not yet taken into account. Scenarios for government finances Changed policies 9

10 Scenario i Unchanged tax to GDP ratio (average 16.5 percent), including the elimination of BBO in Unchanged nontax to GDP ratio (average : 2.5 percent of GDP). No grants from the Dutch government from 2012 onwards. Unchanged noninterest expenditure to GDP ratio (average : 22.3 percent of GDP, of which: capital expenditure: 1.5 percent ) Interest payments linked to the debt level. 10

11 Scenario i 0.0 Fiscal balance (in Afl. million) , , , , ,800.0,

12 Scenario i Despite a constant noninterest expenditure to GDP ratio, the fiscal deficit will continue to grow from 6 percent of GDP in 2010 to more than 10 percent in the long term. Increasing interest payments, as a result of rising government debt Debt increases from 51 percent of GDP in 2010 to 12.0 more than 100 percent in the long term Fiscal balance (in percent of GDP)

13 Scenario i Government debt in percent of GDP

14 Scenario Changed policies i The BBO tariff remains at 1.5 percent. Consequently, tax to GDP ratio of 18.1 percent. APFA reform in 2011: Total APFA premium of 31.5 percent ( ). Total APFA premium declines to percent in AZV: The Afl. 20 million increase in the contribution of the government of Aruba in 2010 will be eliminated. The remaining amount (Afl. 125 million) will increase by 50 percent of the inflation rate. Personnel costs (excluding APFA): annual increase of 1 percent. Freeze on goods and services: From 2016 onwards: annual increase of 2 percent. Freeze on other current expenditures ( ); From 2013 onwards: these expenses will increase by 50 percent of the inflation rate. Capital expenditures: equal to 2 percent of GDP (more than Afl. 100 million per year in the medium term). 14

15 Scenario Changed policies i Fiscal balance (in Afl. million) 1, , Balanced budget , , , Changed policies 15

16 Scenario Changed policies i Declining noninterest expenditure to GDP ratio contributes to decreasing the fiscal deficit from 6 percent of GDP in 2010 to nearly 2 percent in 2015 and a balanced budget in 2017/2018. Decreasing interest payments as a percentage of GDP. Debt decreases from 51 percent of GDP in 2010 to nearly 40 percent in Fiscal balance (in percent of GDP) Balanced budget Changed policies 16

17 Scenario Changed policies i Government debt in percent of GDP NCPF recommendation Changed policies 17

18 Scenario Changed policies i + Elimination i i BBO As a result of the BBO elimination Fiscal balance (in percent of GDP) in 2011, balanced budget could be reached in 2021 c.p. Balanced budget Debt to GDP ratio of 40 percent: Government debt in percent of GDP Changed policies Changed policies incl. elimination bbo Changed policies Changed policies incl. elimination bbo 18

19 Aruba s GDP volatility Aruba s economic performance, despite being rigid over the past 25 years, has been characterized by a high h level l of volatility (measured by the standard deviation). Table 1. GDP Growth Rate of Aruba and U.S.A. Peak of Cycle Bottom of Cycle Standard Deviation Average GDP growth rate (in percent) Aruba U.S.A As a result Aruba has a historic vulnerability to economic shocks, which makes Aruba s fiscal troubles all the more risky despite the expectation of an economic recovery. 10% 5% 0% 5% Real GDP growth of Aruba and U.S.A % Real GDP growth U.S.A. Real GDP growth Aruba 19

20 Aruba s GDP volatility Simulation of the impact of a new 2009 shock on the Aruban economy Suppose: real GDP growth drops to 8.6 percent in 2011 (nominal: 4.8 percent). Fiscal balance and government debt (in percent of GDP) Changed policies Changed policies incl. shock Changed policies Changed policies incl. shock 20

21 Risks to fiscal outlook Double dip recession Ageing population (lower labor productivity, healthcare cost, old age pension funds) BES fiscal restructuring Socioeconomic and political instability in Venezuela Oil price spike Terrorist attacks Pandemic crisis (bird flue, swine flue, etc.) Natural disasters (e.g. hurricane, earthquake) 21

22 Conclusions Aruba s fiscal deficit and public debt will continue to grow in case of no significant corrective reforms. There is no one solution to Aruba's fiscal troubles, instead a combination of reforms must be implemented. Aruba is susceptible to economic shocks, resulting in a significant risk to Aruba s fiscal outlook. Conservatism is necessary, even when things get better. A too high debt burden implies a limitation to stimulate the economy when Aruba is affected by negative economic shocks. A too high debt burden could entail difficulty to refinance debt. 22

23 Thank you 23