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Friday, September 22 2017 @ 08:07 PM AST

Venezuela crisis spills over, Aruba economy contracts 2nd yr in a row

In 2016, for the second year in a row, the Aruban economy contracted. The foremost reason was a withering of the tourism sector, primarily due to the economic and political situation in Venezuela. The growth realized by other tourism markets, such as the United States, was not sufficient to fully offset this negative development. Likewise, local conditions also affected the economy negatively as domestic consumption slowed down, while private investment was virtually flat as the start of the anticipated full rehabilitation of the oil refinery was postponed to 2017.

Despite the economic slowdown, confidence of local businesses and consumers in the short-term prospects of the Aruban economy weathered well throughout 2016. Nevertheless, businesses and consumers continue to express concerns about future prospects and lingering uncertainties. Recent market studies also indicate that a majority of local consumers currently make use of e-commerce to buy directly from abroad, which significantly impacts local (retail) businesses. Likewise, offering private accommodations to foreign visitors remains a growing trend in the last few years.

Overall, domestic credit of the banking sector to the private sector expanded by 1.8 percent in 2016. Both business loans and housing mortgages contributed to the growth of domestic credit. On the other hand, consumer credit contracted, continuing its downward trend that has persisted since 2009.

In 2016, total government revenue as well as expenditure increased marginally, leading to a (cash-adjusted) financial deficit of Afl. 183.5 million (2015: Afl. 161.0 million). This deficit was financed mainly through net foreign lending. Total government debt grew by Afl. 47.2 million to Afl. 4,021.3 million in 2016, mostly the result of an Afl. 140.2 million expansion of foreign debt attributable to two large private placements on the international market in May 2016. With these developments, the debt-to-GDP ratio reached an estimated 84.2 percent as of end-December 2016 (2015: 82.5 percent).

As a result of falling energy prices and subdued prices of food and goods, deflationary pressures were experienced throughout 2016. Towards the end of 2016, the 12-month inflation rate stood at –0.9 percent. This development helped to improve Aruba’s competitive position relative to that of its main trading partner, the United States.
Money supply grew by 9.5 percent in 2016. This rise was caused by an Afl. 261.8 million net inflow of foreign funds, related mainly to tourism receipts and government foreign borrowing.

The overall balance of payments registered an Afl. 261.8 million surplus in 2016, compared to an Afl. 342.7 million surplus in 2015. Both the current account as well as the capital and financial account contributed to the surplus realized. Strong growth took place in the official reserves. Consequently, total reserves (including revaluation differences) stood at Afl. 1,892.4 million at the end of December 2016; the import coverage ratio improved from 4.6 months (end-December 2015) to 5.1 months.

SOURCE: Central Bank of Aruba

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