Government finances A long term assessment Presented by Edwina Matos Pereira Walter Mosher June 22, 2010
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
Current fiscal landscape Aruba is running a chronic fiscal deficit Aruba s fiscal deficit is projected to reach Afl. 211.2 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% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 proj. 15.00% Fiscal deficit as percentage of GDP 2010 deficit including Afl. 80 mln for APFA Real GDP growth 3
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 1986 1992, tourism arrivals tripled Average growth rates 1986 1995 1996 2009 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% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Nominal GDP growth, 8% 4
Current fiscal landscape (continued) 60 2500 As a result, public debt continues to rise, and is projected to surpass 50 percent of Aruba s GDP. percent 50 40 30 20 10 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2000 1500 1000 500 0 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 1500 80 has had to increasingly 1000 60 40 borrow at commercial 500 20 0 0 terms (with higher interest). Afl. million Outstanding domestic debt (Afl. million) Interest payments Outstanding foreign debt (Afl. million) 160 140 120 100 Afl. million 5
35.00% Government finances as percentage of GDP 30.00% 25.00% 20.00% 15.00% 10.00% 00% 5.00% 0.00% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 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 1400 1200 1000 800 600 400 200 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Wages G&S Interest other Capital expenditure Government Revenue 6
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% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0.00% 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% 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Current expenditure as percentage of GDP Capital expenditure as percentage of GDP 7
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 2012 2030 (based on average GDP 1996 2009): Real: 1.5 percent, Nominal: 5.2 percent 10.00% 5.00% 0.00% 5.00% 10.00% Derivation of Long term growth assumption 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Average Real GDP growth (1996 2009) Real GDP growth Aruba Government finances 2010: based on the 2010 budget. Fiscal deficit 2010 (Land Aruba): Afl. 169.6 million. Total fiscal deficit 2010 (including FDA spending and additional contribution to APFA): Afl. 288.88 million. 8
Long term outlook Long term projections for the period 2011 2030 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
Scenario i Unchanged tax to GDP ratio (average 16.5 percent), including the elimination of BBO in 2011. Unchanged nontax to GDP ratio (average 2005 2009: 2.5 percent of GDP). No grants from the Dutch government from 2012 onwards. Unchanged noninterest expenditure to GDP ratio (average 2005 2009: 22.3 percent of GDP, of which: capital expenditure: 1.5 percent ) Interest payments linked to the debt level. 10
Scenario i 0.0 Fiscal balance (in Afl. million) 200.0 400.0 600.0 800.0 1,000.0 1,200.0 1,400.0 1,600.0 1,800.0, 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 11
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. 0.0 2.0 4.0 6.0 8.0 10.0 Debt increases from 51 percent of GDP in 2010 to 12.0 more than 100 percent in the long term. 14.0 Fiscal balance (in percent of GDP) 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 12
Scenario i 160.0 Government debt in percent of GDP 140.0 120.0 100.0 80.00 60.0 40.00 20.0 00 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 13
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 (2011 2016). Total APFA premium declines to 15.55 percent in 2023. 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: 2011 2015. From 2016 onwards: annual increase of 2 percent. Freeze on other current expenditures (2011 2012); 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
Scenario Changed policies i Fiscal balance (in Afl. million) 1,500.0 1,000.0 500.0 Balanced budget 0.0 500.0 1,000.0 1,500.0 2,000.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Changed policies 15
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 2019. 10.0 5.0 0.0 5.0 10.0 15.0 Fiscal balance (in percent of GDP) Balanced budget 2010 0 1 2 3 4 5 6 7 8 9 0 21 2 3 4 5 6 7 8 9 0 201 2012 2013 2014 2015 2016 2017 2018 2019 2020 202 2022 2023 2024 2025 2026 2027 2028 2029 2030 Changed policies 16
Scenario Changed policies i 160.0 Government debt in percent of GDP 140.0 120.0 100.0 80.00 60.0 NCPF recommendation 40.0 20.0 0.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Changed policies 17
10.0 50 5.0 0.0 5.0 10.0 15.0 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 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 160 140 120 100 80 60 40 20 0 Debt to GDP ratio of 40 percent: 2024. Government debt in percent of GDP 2010 2013 2016 2019 2022 2025 2028 Changed policies Changed policies incl. elimination bbo Changed policies Changed policies incl. elimination bbo 18
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) 2004 2009 1996 2009 Aruba 8.6 8.6 1.3 4.5 1999 2009 1996 2009 U.S.A 4.8 2.4 2.6 1.9 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. 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 10% Real GDP growth U.S.A. Real GDP growth Aruba 19
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) 10.0 8.0 6.0 40 4.0 2.0 0.0 2.0 4.0 6.0 8.0 10.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 Changed policies Changed policies incl. shock Changed policies Changed policies incl. shock 20
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
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
Thank you 23