ECONOMIC OUTLOOK ARUBA 2009 Directie Economische Zaken, Handel en Industrie Department of Economic Affairs, Commerce and Industry PUBLISHER The Government of Aruba FOR FURTHER INFORMATION The Department of Economic Affairs, Division Economic Policy and Development Cooperation L.G. Smith Blvd. # 160 Oranjestad Aruba Tel: (297) 582-1181 Fax: (297) 583-4494 E-mail: firstname.lastname@example.org Website: www.arubaeconomicaffairs.aw PRINTING, DESIGN AND LAYOUT Interprint Aruba Information in this publication may be published without prior permission, provided the source is acknowledged. TABLE OF CONTENTS FOREWORD.................................................................................................................................. 7 ACKNOWLEDGEMENTS............................................................................................................ 9 EXECUTIVE SUMMARY ........................................................................................................... 11 INTRODUCTION ......................................................................................................................... 17 1. THE WORLD ECONOMY .................................................................................................... 18 1.1 GLOBAL PERSPECTIVES ................................................................................................... 18 1.2 COUNTRY AND REGIONAL PERSPECTIVES ...................................................................... 24 1.3 GLOBAL EFFECTS ON THE ARUBAN ECONOMY ................................................................ 30 2. TOURISM ................................................................................................................................ 33 2.1 ARUBA TOURISM REVIEW 2007 ........................................................................................ 33 2.2 TOURISM IN THE CARIBBEAN ............................................................................................ 40 3. SECTORAL DEVELOPMENTS IN ARUBA ....................................................................... 48 3.1 AGRICULTURE, MANUFACTURING INCL. OIL REFINING ................................................... 50 3.2 UTILITIES ........................................................................................................................... 51 3.3 CONSTRUCTION ................................................................................................................ 52 3.4 TRADE ............................................................................................................................... 56 3.5 HOTELS AND RESTAURANTS ............................................................................................ 57 3.6 TRANSPORT, STORAGE AND COMMUNICATION ............................................................... 57 3.7 HOUSING ........................................................................................................................... 60 3.8 PUBLIC ADMINISTRATION AND EDUCATION ..................................................................... 60 4. MACROECONOMIC DEVELOPMENTS............................................................................. 65 4.1 MACROECONOMIC DEVELOPMENTS 2007 ....................................................................... 65 4.2 FORECASTING ERRORS .................................................................................................... 70 5. OUTLOOK 2008-2009 ........................................................................................................... 73 5.1 ASSUMPTIONS ................................................................................................................... 73 5.2 PROJECTIONS ................................................................................................................... 76 5.3 RISKS ................................................................................................................................ 86 6. APPENDIX .............................................................................................................................. 89 FOREWORD This second edition of the Economic Outlook for Aruba has been prepared in a time in which we are living uncertain moments with regard to the financial and economic developments in the world. Aruba’s economic performance depends on tourism related activities which make us very vulnerable to external shocks, especially fluctuations in the economy of the USA. Still, it is necessary to use these times of uncertainty to create new opportunities for the future. Aruba has gone in the past through several economic shocks, such as the closure of the Lago refinery in 1985, the economic crisis in 1992, the effects of 9/11 in 2001, and the effects of the missing US teenager in 2005. All those events marked a period in our lives and especially in the economy of Aruba. It shows us how vulnerable our economy is but at the same time it shows us that we can overcome those effects. We have done this in each of those moments in the past. Even though at this time it is not clear what and for how long the effects of the international financial/economic crisis will be on the economy of Aruba, we are anticipating a lower economic growth for 2009 and even a decline. In this Economic Outlook 2009 we will present you with three different scenarios based on assumptions of how our economy will react to the effects on the tourism market as a result of the international financial crisis. But at the end the economic performance will be a result of how we, government and private sector, prepare ourselves to react to the external shocks that will come in the coming months. 7 All together the private sector and the government will need to join forces to overcome these effects by engaging in a continuous partnership to stimulate communication between the stakeholders to protect our tourism industry and our economy in general. Minister of Finance and Economic Affairs Mr. N. J.J. Swaen 8 ACKNOWLEDGEMENTS Producing an economic outlook is a combined effort between several stakeholders. The data have to be collected and analyzed before it can be used in the MARUBA model. Scenarios are produced based on assumption which are discussed with stakeholders of the local economic sectors. Furthermore the developments in the international economy are followed and analyzed. For the Economic Outlook 2009 de Department of Economic Affairs, Commerce and Industry (DEACI) received the input of several stakeholders in the private sector and from the Commission Macro Model (CMM). The CMM is formed by the Central Bank of Aruba, The Aruba Investment Bank, the SIAD, the Department of Finance, the CBS, the SER and the DEACI. We want to express our thanks to the experts in the CMM, the Aruba tourism Authority, the tourism industry, the commercial businesses and government departments who have given their valuable support to produce this outlook. Furthermore the efforts of the team within the DEACI that is responsible for the production of the Economic Outlook 2009, Ms. Esther Willems and Ms. Esther Tiemes. 9 Producing the Economic Outlook 2009 for Aruba has been a tremendous challenge in this time of uncertainty. The financial/economic crisis in the world has been changing the international outlooks dramatically in the last two months, resulting in daily adaptations of the data. Projecting the future is usually a difficult task in which many variables have to be taken into consideration but predicting what will happen in 2009 is a huge challenge. Maria Dijkhoff-Pita Director DEACI 10 EXECUTIVE SUMMARY In this publication the economic developments in the year 2007 and the prospects for 2008 and 2009 are presented. For the quantitative projections the macro-economic model MARUBA was used. Important sources of data for this outlook include the Central Bureau of Statistics (CBS), the Central Bank of Aruba (CBA), the Department of finance, the Tax Department, AIB Bank N.V., the Social Economic Council, the Aruba Tourism Authority (ATA) as well as other government departments and interviews with key stakeholders. The global economy has entered a period of turmoil in the past year. The year has been characterized by major corrections in housing markets in a number of economies, financial distress, and by surges in the prices of oil and food. These developments have led to slow economic activity, as consumer and business confidence falls in the face of poor job and profit prospects. Weakness is expected to be mainly, though not exclusively, located in advanced economies. Growth is expected to decelerate in emerging and developing countries At the same time global inflation has been high over the past year. The main sources of this inflation have been high commodity prices, and financial conditions such as low interest rates and the depreciation of the dollar. Food prices had been increasing in the context of increasing demand from emerging market economies, demand from the bio-fuel industry and unfavorable weather conditions. Lately however oil and food prices have been stabilizing, although still remain at high levels compared to previous years. Consequently inflation is expected to moderate in 2009 in emerging and developing economies as well as in the advanced economies. An important factor contributing to the current slow-down in 11 economic growth is the financial crisis. At the root of the unraveling of the mortgage market is the housing bubble in the US, which burst in August of 2007. The decrease in housing prices following the bubble has caused major problems for financial institutions, undercapitalized banks and mortgage lenders. Resolving these problems and restoring confidence and liquidity in global financial markets is likely to remain a drag on the global economy. The global economy moderate from 5.2 percent in 2007 to 3.4 percent in 2008 and is expected to fall to 0.5 percent growth in 2009. A very gradual recovery is expected in 2010 reaching a 3 percent growth. However, the global outlook is high uncertain and pace of recovery depend highly on solid policy actions. Global tourism has also been cooling after a strong start of the year, as consumers start spending more carefully. The slow-down has been most pronounced in Asia and the Pacific. The Americas, Africa and the Middle East have also been feeling the effects on their tourism industry but to a lesser extent. The airline industry is suffering from high fuel prices and may start cutting frequencies and certain routes. It is looking like the Caribbean has had more arrivals in 2008 than in 2007, but the increase has mainly been witnessed in the first few months of the year. The Caribbean however is expected to fare relatively well in this global downturn, because the Caribbean tends to be more familiar, closer to home and often less expensive for US citizens compared to other destinations. This does not mean that the Caribbean is sheltered from the global economic downturn, and many Caribbean destinations are devising plans to limit the damage to their tourism industry. Aruba’s tourism industry, together with the Aruba Tourism Authority has invested in a comprehensive contingency plan based on maintaining the high quality reputation and increasing effectiveness of marketing. 12 The overriding idea is that short term planning to avert or limit a downturn should not jeopardize long-term necessity for market stability. This is why underlying global trends in tourism, such as women travelling without men, grandparents bringing grandchildren on vacation, spontaneous travel and religious traveling should be followed closely as they can present business opportunities to destinations. The effects of climate change on tourism are also very important to monitor and prepare for, since in many destinations, such as Aruba, tourism is closely connected with the natural environment. At the same time, visitors are become more environmentally conscious. In 2007 the tourism sector witnessed a recovery from the drop in economic activity that took place in 2006. Indicators, such as the number of stay-over visitors, visitor nights, the average daily rate and average length of stay confirm this recovery. This recovery mainly stems from the US, Canadian Colombian and Venezuelan markets. This growth was stimulated by the increase in room capacity due to the opening of the RIU in October of 2007, the opening of 138 extra timeshare rooms by the Marriot and the expansion of 245 hotel rooms by Divi Village and Aruba Phoenix resorts. The growth in tourism is also indicated by the PAEI (Partial Economic Activity Index) which indicated that the hotel and restaurant sector grew with 5.6 percent in 2007. The trade, utilities and housing industry also grew according to the PAEI while the public administration and education sector, as well as the transport, storage and communications and construction industries shrank in 2007. Trade increased by 8.6 percent mainly due to the increase in imports of pharmaceutical goods and other retail of specialized goods. The utilities sector also witnessed 13 more economic activity as water and electricity consumption increased. Investment in the sector were planned for the creation of the infrastructure for a windmill park by W.E.B Aruba N.V. and for the expansion and upgrading by ELMAR N.V. Conversely, the transport storage and communication sector decreased seeing that commercial landings, vessels entering the port, and the number of passengers transported by the public transportation company decreased. With respect to the construction sector, this sector decreased in 2007 as imports of cement and other construction materials decreased and high construction costs. While the activity in this sector may have slowed, there are still many private real estate projects in the pipeline for the 2008-2012. The public administration and education sector also decreased in economic activity as expenditures on personnel decreased and inflation increased. Investments were made in the context of the long-term program of the FDA in order to achieve a sustainable development. One of the main activities within this program is the created National Integral Strategic Plan. Other public investments focus on education, increase the development possibilities of vulnerable groups, improvements in law enforcement and public order. From a macroeconomic perspective, in 2007 the GDP grew with 2 percent. The source of this growth was mainly located in the tourism sector that led to an increase of export revenues. This growth compensated for the slow-down in investments as major investment projects were completed. In this year consumption increased as well, supported by the increase in tourism revenues. At the same time however a turnover tax was introduced, which despite compensations in the form of an increase in the minimum wage and lower wages and 14 income taxes, and inflation (which was high largely due to global influences) made consumers spend more conservatively. The projections for the outlook 2008 and 2009 are based on an increase of the number of tourism arrivals of 5.5 percent for 2008 and a decrease of 7.5 percent in 2009. This projection is mainly based on the expected occupancy, airlift, marketing and room capacity and prospect for tourism growth in the Caribbean. There is a great deal of uncertainty around the projections. The outlook for cruise tourism for 2009 is set on zero growth compared to 2008. Growth in the value of the export of goods and services will cause a real growth in GDP of approximately 1.3 percent in 2008. This will result in a nominal GDP of Afl. 4.9 billion in 2008. This is mainly due to a strong growth in the first months of 2008 which was made possible by a large increase in the supply of hotel and timeshare units. Consequently, the export revenues, mainly from stay-over tourism, are estimated to grow with 3.3 percent in 2008. In the previous years the import price was mainly explained by the inflation of the US due to the large share of imports originating in the US. However, we now see that since 2007 the development of the international price of crude oil and the exchange rate of the US dollar in comparison to the Euro have been influencing largely the increase of the import price of Aruba. As a result, the inflation has been strongly affected in 2008. The period average inflation was 8.0 percent in 2008, which contributed to a decline in the private consumption of 0.8 percent and investments of 0.5 percent. 15 Moreover, after the financial crisis was deepened Aruba started to experience a decline in the number of stayover visitors in the last months of 2008. This development is expected to prolong and will affect the tourism industry in 2009. Consequently, the real GDP will shrink with 2.1 percent in 2009. The private investment will be limited to a zero growth in real terms. Private consumption is estimated to drop with 0.7 percent in real terms. While the value of the import of goods and services is projected to grow with 1.2 percent in 2008, in 2009 it is estimated to drop with -2.0 percent in real terms. 16 INTRODUCTION The booklet that lies before you is the second annual economic outlook publication for Aruba . The purpose of this publication is to provide a general overview of economic developments in the world and in Aruba in particular and to provide projections of the main economic indicators for the year 2008 and 2009. For the quantitative projections the macro-economic model MARUBA was used. This model has been built according to the system of National Accounts. These accounts are composed by the Central Bureau of Statistics using the system of national accounts (SNA) of 1993. Important sources of data for this outlook include the Central Bureau of Statistics (CBS), the Central Bank of Aruba (CBA), the Department of finance, the Tax Department, AIB Bank N.V., the Social Economic Council, the Aruba Tourism Authority (ATA) as well as other government departments and interviews with key stakeholders. The first chapter describes economic developments on the global, regional and country level and the effects on the Aruban economy. Chapter 2 describes developments in the tourism sector in the year 2007 and the developments in the Caribbean. Then, in chapter 3 the developments that have taken place in the different economic sectors are reviewed. Furthermore, in chapter 4 we look at the developments in the year 2007 from a macroeconomic point of view. And finally, the macroeconomic outlook for 2008 and 2009 will be presented. 17 1. THE WORLD ECONOMY This chapter provides an overview of the global context in which the Aruban economy functions. First attention is drawn to the global economy and inflation in advanced and emerging and developing countries. The second section of this chapter looks at the economic outlooks of specific countries and regions. We then look at how the Aruban economy is related to the global economy. This chapter is based on the IMF World Economic Outlook of October 2008 unless 1 mentioned otherwise . 1.1 GLOBAL PERSPECTIVES 1.1.1 Global Economy The global economic landscape over the past year has been characterized by major changes in housing markets in a number of advanced countries, a deepening crisis in financial markets and by surges in commodity prices. In September of 2008, about a year after the initial warning signs of financial distress, a new phase of financial turmoil started as confidence in global financial institutions was badly 1 Key assumptions IMF World Economic Outlook 2008 Update (January 2009) built into the forecast: 1. Comprehensive actions by the US and European governments succeed in stabilizing financial market conditions and avoiding further systemic risks, yet it will take time to rebuild confidence in asset valuations and alleviate counterparty concerns 2. Prices of petroleum would average about $50 in 2009, in line with pricing in forward markets. 18 shaken and as large financial institutions went bankrupt, were taken over, were forced to merge or required public intervention. Liquidity on the interbank market dried up as well, as confidence in counterparties decreased significantly. Apart from the direct impacts of the financial crisis, these developments have also led to slowing economic activity, as consumer and business confidence falls in the face of poor job and profit prospects. In this environment the global economy has slowed down noticeably and prospects for the near future are not very positive with most risks being on the down side. The global economy moderate from 5.2 percent in 2007 to 3.4 percent in 2008 and is expected to fall to 0.5 percent growth in 2009 (see table 1). This is the lowest rate since World War II. Despite wide of different policy actions, the financial market remained extremely difficult for a longer period than expected in the last months of 2008. A very gradual recovery is expected in 2010 reaching a 3 percent growth. However, the global outlook is high uncertain and pace of recovery depend highly on solid policy actions. The weakness in global markets is mainly located in the advanced economies. In the last quarter of 2008 and the first quarter of 2009 the US economy has been facing no growth or even negative growth as tight financial conditions are increasingly being felt, despite the different fiscal stimulus. Most other advanced economies are expected to go through a similar period of slow economic growth. Growth in developing and emerging economies is also projected to decelerate sharply from 6.3 percent in 2008 to 3.3 in 2009. The main driver for this fall are lees export demand, financing, lower commodity prices and much tighter external financing constrains especially for economies with larger external imbalances. 19 The risks to these projections are mainly on the downside as financial stress could continue at very high levels and because credit constraints arising from cleaning up the balance sheets of financial institutions could be deeper and more prolonged than envisaged in the baseline scenario. Inflation risks are more balanced in light of the lower commodity prices and the slowing global economy. With respect to global imbalances, risks of protectionism in light of the stalling of the Doha Round of trade talks can also form a drag on the global economy, as well as risks created by the recycling of surplus from oil-exporters. 20 Table 1 World, Regional and Country Indicators and Projections. Real GDP growth Consumer Inflation 2007 2008 2009 2007 2008 2009 World economy 5.2 3.4 0.5 … … … Advanced economies 2.7 1.0 -2.0 2.1 3.5 0.3 Emerging market and 8.3 6.3 3.3 6.4 9.2 5.8 developing countries US 2.0 1.1 -1.6 2.7 2.2 1.6 Euro area 2.6 1.0 -2.0 2.2 2.5 1.5 The Netherlands* 3.5 2.3 -0.8 1.6 2.8 3.3 Latin America and the 5.7 4.6 1.1 5.4 7.9 7.3 Caribbean Argentina** 8.7 6.5 3.6 8.8 9.1 9.1 Brazil 5.7 5.8 1.8 3.6 5.7 5.1 Venezuela, Rep.** Boliv.de 8.4 6 2 18.7 27.2 33.5 Colombia** 7.7 4.6 3.5 5.5 7.3 5.5 Mexico 3.2 1.8 0.3 4.0 4.9 4.2 Caribbean** 5.6 3.7 2.9 7.8 6.7 7.9 The Bahamas** 2.8 1.0 1.2 2.5 4.5 3.5 Barbados** 3.3 1.7 1.0 4 9 6.4 Jamaica** 1.2 0.7 0.9 9.3 20.2 15.4 Trinidad & Tobago** 5.5 5.0 4.5 7.9 10.1 10 Japan 2.1 0.5 -0.2 -0.8 -0.6 -0.3 China 13.0 9.0 6.7 4.8 6.4 4.3 India 9.3 7.3 5.1 6.4 7.9 6.7 Source: IMF World Economic Outlook Update ( November, January 2009), *Source: CPB Macroeconomic Outlook September 2008 **Source: IMF World Economic Outlook (October 2008), 21 1.1.2 Global Inflation Inflation has been on the rise for a large part of past year. According to the IMF different factors have played mutually reinforcing roles in the commodity price boom on top of the typical supply and demand factors. Financial conditions, such as low interest rates and the depreciation of the dollar have been some of the factors contributing to this inflation. Food and oil price increases have been other important factors. On the demand side for food there has been an increase due to increasing incomes in emerging market economies. In addition, increased demand for food as input for often-subsided bio-fuels has added additional pressure on food prices. On the supply side weather conditions have negatively affected several harvests. All in all food prices have been on the rise globally, moderating only recently, but still remaining at higher levels than before. This price increase of food has been of particular concern in low-income countries, where food forms a large part of total consumption. Oil prices have recently declined by over 60 percent since their peak, in light of slowing global demand, a strengthening of the US dollar, and the financial crisis. But they still remain at levels higher in real terms than at any time in the past 20-years, and remain difficult to predict due to their volatile nature. In the context of stabilizing growth and a slight stabilization of commodity prices, inflation rates around the world are expected to moderate. In emerging and developing countries inflation remains at 9.2 percent in 2008 as not all the commodity-price increases have been fed trough. Once these are fed trough the inflation rate is expected to fall down to 5.8 percent in 2009 (see Table 1). In the advanced economies inflation is expected to fall back to 0.3 percent by the end of 2009, after having risen to 3.5 percent in 2008 (see Table 1). 22 1.1.3 Global Financial Markets Financial markets have been under great stress since the problems in the US subprime mortgage market were unveiled in the month of August of 2007. As the Bank for International Settlements observes in its latest annual report: “The duration of the turmoil, its scope and the growing evidence of effects on the real economy have come as a great surprise to most commentators, private as well as public.” At the root of the unraveling of the subprime mortgage market is the housing market bubble in the US, which burst in August of 2007. According to the IMF easy monetary policy at the beginning of the current decade seems to have contributed to the run up of housing prices and residential investment in the U.S, although its effect was probably amplified by the loosening of lending standards and excessive risk taking by lenders. The developments in the housing market and consequently in the mortgage market has caused major financial difficulties for undercapitalized banks and mortgage lenders. As mentioned in the Global Financial Stability Report of the IMF (January, 2009) market confidence has deteriorate due to gradually narrowing of funding. In addition the many credit markets remain at their peak. The financial system has been severely weakened by increasing losses on assets, uncertainty regarding the availability and cost of funding, and further deterioration of loan portfolios as global economic growth slows. Additionally, the interbank market with its liquidity providing function has also dried up as confidence in counterparties is low. The cleaning up of the balance-sheets of these financial institutions and restoring confidence and liquidity in the global financial markets is likely to slow down economic recovery. In the longer run however these efforts are expected to reap their full benefits. 23 1.2 COUNTRY AND REGIONAL PERSPECTIVES 1.2.1 The US The economy of the US is slowing as the financial turmoil has become apparent in its financial markets and has spilled over into the real sector of the economy. Since the summer of 2007, residential investment has been declining and inventories have been compressed. Consumption has decreased significantly as households face deteriorating balance sheets and tight bank lending conditions limits the availability of credit. US firms however, have remained relatively healthy despite the slowing economy and tighter credit conditions and exports have continued to boom. Business and consumer confidence however, have started to diminish. Consequently, economic activity in the US declined in the final quarter of 2008 and the first quarter of 2009 with respectively -1.1 and - 0.5 percent compared the same quarter of the previous year. On a year-in year basis growth declined from 2.0 percent in 2007 to 11.1 percent in 2008 to -1.6 percent in 2009 (see table 1) The economy is only expected to return to potential growth in 2010. The majority of risks surrounding this outlook are on the downside, as the credit-crunch may impose larger constraints on activity, housing price corrections may extend into 2010. The risk of deflation are rising and may play a larger risk for the outlook. In addition, the sharp increase in the issuance of public debt could have an adverse market reaction, unless government clarify their strategy to ensure long-term sustainability. Upside risks are that financial conditions could improve faster than expected due to stronger policy actions. This could boost consumer and business confidence and ease the credit crunch. By this means the US economy mind start recovering. 24 1.2.2 Western Europe While initially seeming to have escaped from the financial turmoil that originated in the US subprime mortgage market in 2007, the euro area and the UK have been undergoing major financial turmoil that has been weighing down economic activity. Confidence in the financial sector has fallen and many financial institutions have been forced to deleverage and recapitalize, a process that could take considerable time to complete. As a result, credit will be harder to obtain. As housing values fall, mainly in the UK, Finland, Greece, Ireland and Spain, the debt burden for many households is likely to increase and slow down consumption. However, households are likely to be less vulnerable to a drop in housing values compared to US consumers as savings tend to generally be higher and debt lower, sub-prime mortgages less wide-spread, loan-value ratios much lower, and opportunities for equity withdrawal much more limited. Inflation levels have at the same time remained at high levels despite falling somewhat following a drop in oil prices, but the response of wages has not been large, as inflation expectations have remained well-anchored. Furthermore, exports are expected to slow in the euro area in line with world demand and is expected to deteriorate further on. In this context economic growth in the euro area moderate from 2.7 percent in 2007, to 1.0 percent in 2008 and is expected to fall to -1.6 percent growth in 2009. In the UK real GDP growth felt from 3.0 percent in 2007 to 0.7 percent in 2008 and is projected to decrease further on to -2.8 percent in 2009. Again, most of the risk surrounding these projections are on 25 the downside. These include accelerated deleveraging in the financial sector set off by a broader credit crunch and broader asset price deflation, an sudden unwinding of global imbalances, and a sharp appreciation of the euro. The upside risk, although small, relates to still- strong employment that may possibly reinforce consumption more than expected. The volatility in energy prices pose either an upside or a downside risk. 2 1.2.3 The Netherlands Due to its relatively open character compared to other European countries, the Dutch economy is very susceptible to global economic developments. In 2007 the Dutch economy remained strong as the economy grew 1 percent each quarter, as spill-over’s from the mortgage crisis in the US had not yet spilled over to European markets. This quarterly growth resulted in an overall economic growth of 3.5 percent in 2007. In 2008 however, economic growth in the Netherlands was less than 2007 reaching a 2.3 percent (see Table 1) real growth. The main cause of the slow-down is the slowing economic activity in the export sector. In turn, this is to a large part due to the slowing demand from the global economy. Economic growth for 2009 is projected to be a 3 mere slow down to -0.75 percent . This further slow-down can be explained by a lower growth of domestic spending, particularly investment spending. 2 The source used for this section is the Newsletter of June 2008 and the Macro Economic Outlook 2009, both published by the Central Bureau of Planning of the Netherlands, June 2008 3 CPB Newsletter, December 2008 26 Despite the slow-down in economic activity tension on the labor market remains. In addition, inflation, resulting in part from strong commodity price increases, was 2.5 percent in 2008 is expected to be around 1.5 percent in 2009, compared to 1.6 percent in 2007. Taken together, tension on the labor market and inflationary pressure are projected to lead to an increase in wages of 3.75 percent in 2009. Household consumption is expected to fall to 0.0 percent in 2009 (the lowest growth rate of consumption since 2003), down from 2.1 percent in 2007. Investment is expected to decline with 6.0 percent in 2008. The export is projected to decrease with 2.3 percent in 2009. The weakening of world trade largely contributes to this slowdown together with a fast growth in wages and the relatively expensive Euro. The risks of the outlook for the Dutch economy are mostly on the downside. The largest of these risks appears to be the international financial crisis that could turn out to have more and more prolonged negative effects for the Dutch economy. The volatility in commodity prices also remains a risk, as they could turn out more negative or more positive than expected. Another risk is the risk related to the value of the euro in relation to the dollar which could turn out to be higher or lower than the 1.26 dollar/euro used to create projections. 1.2.4 Latin America and the Caribbean The IMF predicts a slow-down in Latin America and the Caribbean. Latin America has increasingly been affected lately by the international financial turmoil with equity prices falling, spreads widening, access to external financing dwindling, and exchange rates coming under pressure. The fall of the commodity prices since mid-2008 have been 27 undermining demand and the terms of trade in commodity-exporting countries in Latin America as commodities make up a large part of total exports and are an important source for government revenues. According to the ECLAC the economies of the Caribbean and Central America are expected to be hit the hardest by the global economic and financial crisis due to their dependence on demand from tourism which is generally income-elastic. Export of tourism related services is estimated to make up about 20 percent of the economies of the 4 Caribbean compared to 5 percent for Central America . Expected remittances are also expected to fall as the job market in developed countries weakens. The low-income classes in the Central American and Caribbean region are particularly dependent on these remittances. In Haiti, Honduras, Jamaica, El Salvador, Nicaragua and Guatemala these remittances make up between 15 percent and just under 40 percent of GDP. Inflation in the region has reached 5.4 percent, the highest inflation rate in five years. Inflation has hit double-digit levels in a number of countries, including the Republica Boliviariana de Venezuela, Bolivia and Paraguay. While in most countries inflation has not fed into nominal wage growth, this is not the case in Republica Boliviariana de Venezuela and Argentina. Within this economic environment, economic activity in Latin America and the Caribbean has reduced from 5.6 percent in 2007 to 4.6 percent in 2008 and is estimated to be 1.1 percent in 2009 (See table1). Current accounts are expected to move to deficits, after being in surplus since 2003, but the deficit is expected to 4 Preliminary Overview of the Economies of Latin America and the Caribbean, 2008 28 remain quite low. Reserve levels are high, and flexible exchange rates allow room for adjustment in a number of countries. The risks to the outlook for Latin America and the Caribbean are largely related to external developments. A deeper downturn could activate a sharp drop in commodity prices, while at the same time external financing condition could continue to tighten as global financial markets and institution remain under stress. 5 1.2.5 Emerging and developing economies The economic expansion in emerging and developing markets is losing 6 steam. Economic growth in emerging Asia was 7.8 percent in 2008 and is expected to shrink to 5.5 percent growth in 2009. In China growth is projected to decrease from to 9.0 percent in 2008 to 6.7 percent in 2009. In India economic growth is projected to slow from 7.3 percent in 2008 to 5.1percent in 2009. It is still expected however that China will soon overtake the US as largest manufacturer: Next year China will account for 17 per cent of manufacturing value-added output of $11,783 th billion and the US will make 16 percent (Financial Times, August 10 ). The risks to this outlook are firmly to the downside as a build-up of stress in the global financial system and a sharper than anticipated global slow-down could further weigh on activity and could further negatively affect exports and economic activity. A risk to the upside may be that domestic demand may turn out to be stronger than expected, with falling commodity prices improving real incomes and purchasing power. 5 Source: IMF World Economic Outlook October 2008 6 India, Pakistan, Bangladesh, Indonesia, Thailand, Philippines, Malaysia, Vietnam, Korea, Taiwan Province of China, Hong Kong SAR, Singapore. 29 Inflation in China has steadily declined since its 8.5 percent peak in April, as food prices have decreased. Core inflation, which is an indicator of second-round effects, has been rising modestly but remains contained. The outlook for inflation in China is 4.3 percent in 2009. In India, however, ground has been created for second-round effects as there has been high resource utilization, robust credit growth, and insufficient policy tightening. Inflation in India is projected to be 6.7 percent in 2009. 1.3 GLOBAL EFFECTS ON THE ARUBAN ECONOMY A small and open island economy can be vulnerable to external economic developments. Hence, international economic developments, such as the current financial crisis in the US and the world and the volatility in commodity prices are unquestionably relevant for the small open island economy of Aruba. According to the foreign trade statistics set up by the Central Bureau for Statistics, the US is the country with the highest percentage of the total import trade value in Aruba in the period 2000 until 2007 with more than 55 percent, followed by the Netherlands between 13-15 percent. The Aruban financial system is however, as opposed to the real sector of the economy, relatively 7 closed. According to the Central Bank of Aruba , banks and insurers in Aruba only have a small part of their assets abroad. Commercial banks mainly lend to residents and thus have little foreign exchange exposure originating from their loan activities. Additionally, strict rules and regulations regarding the holding of foreign investments have insulated to a large extent the supervised financial institutions from the ongoing 7 Press Release, October 9th, 2008 “The global nancial crisis and the Aruban Economy” 30 crisis. From this perspective, the Aruban economy is largely shielded from developments in global financial markets and institutions. We may however witness a drop in foreign investments as a credit crunch in international financial markets makes it more difficult to finance projects in Aruba. As foreign investment is an important booster of economic activity in Aruba, the international financial crisis may via this channel negatively affect our GDP growth rate. Moreover, because exports are the main driver of the Aruban economy, whatever affects the consumers abroad can affect our economy. Since the US is our major market (the US market generates about 71 percent of the total number of tourism arrivals), anything that happens there is likely to affect the Aruban economy. The exact transmission mechanism remains somewhat unclear given the complexity of the financial crisis, but a downturn in our major export markets is likely to affect the leading tourism indicators negatively. How much and in which way it will affect the economy also depends on the reactive steps, or rather, proactive steps taken by the tourism industry and authorities. Inflation is another factor that is largely determined by external development, because of the open nature of the Aruban economy, with the majority of imports coming from the United States and the Netherlands. In turn our import price influences our export price as the export sector consumes a lot of imported goods and services. Foreign inflation thus not only influences our import price and CPI, but also our export price. In addition, oil price fluctuations are likely to have a significant impact on the inflation rate in Aruba. Prices of products with a high weight depend heavily on the oil price. In addition, this will increase the costs 31 of production in Aruba. Oil prices also have a large effect on the cost of air travel, which is the main way tourists arrive on the island apart from cruise arrivals. However, when oil prices are hedged by the airlines, as was done previously, a drop or increase of the oil price may not directly lower or increase prices of airline tickets. Given the peg of the Aruban Florin to the US dollar and the Netherlands being an important source of imports, the external value of the dollar is another factor that has repercussion for the Aruban economy. A fall in the exchange rate of the dollar against the Euro for example is likely to change the composition of our exports by attracting more visitors from the euro area. A pre-condition for an increase in visitors from any destination however, is that there is sufficient airlift available to cater an increase in demand. The ministry of tourism, the ATA, and the tourism industry play an important role in stimulating this airlift supply. 32 2. TOURISM In the first section of this chapter an overview of the most important indicators of the performance of the Aruban tourism sector is presented. The data come from the ATA and the Tourism Profile 2007, published by CBS. 2.1 ARUBA TOURISM REVIEW 2007 The tourism sector is of considerable importance in Aruba as its role in the economic development of Aruba has become particularly significant through its potential to create jobs, increase government revenues, stimulate private investment and earn foreign exchange. 2.1.1 Stay-over visitors and nights As can be seen in figure 2.1, the tourism sector experienced a growth of 11.0 percent in the number of stay-over arrivals in the year 2007. This growth represents a recovery from the drop in 2006, when stay-over visitors decreased by 5.2 percent compared to 2005. Visitor nights also recuperated from the drop in 2006: the total number of visitor nights in 2007 was 5.879,888, which is an increase of 7.5 percent increase compared to 2006. This is in essence a recovery from the drop in visitor nights and stay-over visitors in 2006. 33 Figure 2.1 Growth in stay-over visitors and visitor nights 15 10 5 Stayover visitors, % change Number of visitor 0 nights, % change 2003 2004 2005 2006 2007 -5 -10 Source: Tourist Profile 2007, CBS, ATA. 2.1.2 Tourism performance indicators Important indicators of the performance of the tourism sector are the occupancy rate, the ADR (average daily rate) and the RevPAR (revenue per available room). These indicators can be used as proxies for the performance of the total tourism accommodation, but also can be used to proxy the performance of subsection such as hotel and time- share. With reference to figure 2.2 the growth in the stay-over arrivals has led to a total occupancy rate of 77.8 percent in 2007, which is a 1.3 percent increase compared to the year 2006. Consequently this growth has led to a total average daily rate of US$ 118.36 which is 2.5 percent more than in 2006. In line with this growth of the ADR, the revenue per available room (revPAR) also increased as can also be seen in figure 2.2. The total revPAR increased by 4.1 percent. When considering the hotel sector as separate from the time-share it is clear that much of the growth in occupancy rate and average daily rate in 2007 can be attributed to the growth in the time-share sector. Time share occupancy increased by 3.5 percent while hotel occupancy slightly increased by 34 0.3 percent. Similarly, the ADR of time-shares increased by 25 percent while the ADR of the hotel sector dropped by 0.5 percent. Figure 2.2 Tourism performance indicators 25 20 15 10 ADR, % change 5 0 -5 2003 2004 2005 2006 2007 -10 -15 Source: Tourist Profile 2007, CBS 2.1.3 Origin of visitors With respect to the origin of the visitors to Aruba, the US and Venezuela stand out, with the US having a 67.9 percent markets share and Venezuela having a 12.1 percent market share in 2007 . This is consistent with the observation that together, Venezuela and the US have made up approximately 80 percent of the total market since the year 2000.The recovery of 11.2 of the number of stay-over visitors has mainly taken place in US, Canadian, Venezuelan, and Colombian markets. In the year 2007 the US market increased by 3.1 percent while the Venezuelan market increased by a more than 60.0 percent compared to 2006. The Venezuelan market however, tends to fluctuate more than the more stable US market. At the same time the number of 35 Colombian stay-over visitors increased by 13.6 percent, while the number of Canadian stay-over visitors increased by 11.8 percent. 2.1.4 Average length of stay and tourism expenditures The annual average length of stay as shown in figure 2.3 increased from 7.8 days to 8 days by 2.2 percent in 2007 compared to 2006. This can be seen as a recovery of the drop in average length of stay in 2006. The average daily expenditure in 2007, however, dropped by 11.2 percent after a drop of 7.9 percent in 2006 (see figure 2.3). Figure 2.3 Average daily expenditure and average length of stay 140 8,0 120 7,9 100 7,8 Average daily 80 7,7 expenditure (CBS) (Stayover and 60 7,6 cruise) 40 7,5 Average length of 20 7,4 stay, days 0 7,3 2003 2004 2005 2006 2007 Source: Tourist Profile 2007, CBS As can be seen in the graph below there is a difference between the tourism revenues as measured by the Central Bank of Aruba and the CBS. This difference has been mainly due the increase in price of pre- 36 paid packages over the past couple of years. One part of the pre-paid package is a source of income for Aruba, while another part of it goes to 8 airlines and services abroad . Measuring how much revenue goes to Aruba versus abroad through the CBS survey has proven extremely difficult. The Central Bank of Aruba on the other hand, measures tourism revenues through credit card transaction to Aruban bank accounts. The CBS survey has thus tended to underestimate the tourism revenues due to the increase in the value of pre-paid packages. Figure 2.4 Tourism revenues 2500 2000 1500 CBS 1000 CBA CBA-CBS 500 0 2002 2003 2004 2005 2006 2007 Source: Tourist Profile 2007, CBS; CBA 8 According to the definition used by the CBS ‘A package tour comprises a number of tourist products which are purchased by the visitor as a single entity. There is one single charge for the whole package, which is usually cheaper than the aggregated cost of the items if purchased separately by the visitor. It is identified as a separate item because visitors who are supplying their expenditure breakdown cannot reliably break down their package expenditure into its component parts.’ 37 2.1.5 Cruise tourism As illustrated in figure 2.5 the number of cruise tourists visiting Aruba dropped in the year 2007. In 2007 there were 481,775 tourists while in 2006 there were 591.474. This represents a drop of 18.5 percent. This was largely due to the fact that the cruise ship Carnival destiny made its last visit to Aruba early 2007. At the same time however the drop was partially compensated by the decision of Pullmantur to use Aruba as a home port for its cruise ship “Blue Moon” with its capacity of 800 passengers. As usual, the typical seasonal fluctuations in number of cruise passenger were witnessed in 2007 with the first and last quarter of the year showing the most cruise passenger arrivals. Figure 2.5 Cruise passengers 800 600 400 Cruise Passengers, 200 thousands 0 2003 2004 2005 2006 2007 Source: Tourist Profile 2007, CBS Meanwhile, cruise calls increased slightly in 2007 despite the decrease in amount of cruise passengers, because of a decrease in the capacity of the ships (as indicated by the average number of passengers per ship). See figure 2.6 for a graphic representation. Furthermore, average daily cruise tourism expenditure has been estimated by DEACI to be Afl. 225 in 2008. The number of cruise visitors increased by 38 approximately 15 percent reaching a total number of 556.090 visitors for 2008. Figure 2.6 Cruise calls and cruise ship capacity 1900 320 1850 318 1800 316 314 Average 1750 312 no. of 1700 310 passeng 1650 308 ers per… 1600 306 2003 2004 2005 2006 2007 Source: Tourist Profile 2007, CBS 2.1.6 Other A concern in the tourism sector for the future is the introduction of a new immigration law that limits the period that a foreign worker can live and work in Aruba for 3 years. This law does not apply to people of Dutch nationality. Given the reliance of the tourism sector on foreign (non-Dutch) labor, this new law is likely to have consequences for the sector. More in particular, concerns have been voiced about the consequences for the quality of the labor force and the extra costs to the employers that the increased need for training brings along. Another concern is a proposed labor law that will limit the normal and over-time working hours, increasing costs and possibly compromising quality of service. 39 2.2 TOURISM IN THE CARIBBEAN 2.2.1 Global Tourism Tourism developments in Aruba should be seen in light of international developments. International tourism demand has cooled significantly in the period of May-August of 2008 according to the UNWTO Tourism Barometer. After a strong start of the year 2008, after the month of May the situation started to turn around, with in June, July and August growth being below 2 percent, compared to a still-strong growth of 8 percent in the month of May. This down-turn reflects the rising oil prices at the beginning of the year, economic deterioration of the situation as well as a drop in consumer confidence. The slow-down has been most pronounced in Asia and the Pacific. There was a stagnation in the Americas, Africa and the Middle East as well, but this was less pronounced. Europe has also seen its tourism industry stagnate since the summer months. Moreover, this slow-down is expected to continue into 2009. The UNWTO expects that travel to destinations closer to home are going to be favored compared to long-haul travel. Also, several segments are expected to be more resilient than others: visiting friends and family, repeat visitors, special interest and independent travelers. Destinations with a perception of good value for money and 9 having a favorable exchange rate are also expected to be remainred 9 Exchange rates have a relatively small effect on total international visitor arrivals. However, fluctuating exchange rates do affect how much visitors spend while they are here. Destinations with currencies against which a source market’s currency depreciates become comparatively more expensive, while in case of appreciations of the source market’s currency, they will become more expensive. So a weak dollar will benefit the USA as a destination but make destinations with stronger currencies less attractive for tourists with US dollars in their pockets. 40 stronger. Furthermore, it is expected that the tourism industry will likely focus on keeping costs down as much as possible. Within the tourism industry air travel is expected to be hit harder than other segments of the tourism industry. While oil prices may have fallen recently in light of the economic downturn, a stronger dollar means higher oil prices for non-US airlines. Oil prices are therefore likely to remain high. Additionally, many airlines have been locked in by hedging at high oil priced while oil prices have fallen. This burden on airlines also poses challenges for the destinations themselves, as airlines, in an effort to stay afloat, may cut frequencies and certain routes to reduce capacity. Long-haul travel is expected to suffer the most as people tend to choose closer destination in times of turmoil. 2.2.2 Caribbean Arrivals in the Caribbean have been higher than in 2007, but the main increase has been in the first three months of the year (in line with 10 global developments). According to ECLAC the Caribbean countries recorded growth of just 3%, with flat growth between June and August, owing to a decline in arrivals in the Bahamas, Barbados, Bermuda and Puerto Rico, four destinations which receive visitors mostly from the United States and Europe. After this the general trend is downward as US tourists are suffering an economic downturn back home. The US is living in an environment of high gas prices, higher airfare, scarcity of credit, poor performance of the stock markets and a housing market collapse, people are worried about their jobs, their retirement funds, their mortgages, their debts, the 10 Preliminary Overview of the Economies of Latin America and the Caribbean, 2008 41 value of their stocks and the value of the dollar. The Caribbean may however suffer less than other destination form the downturn in the US economy, according to the UNWTO because it is closer to home, more familiar and often less expensive for US citizens. Travel to Europe was down by 4 percent in the first 7 months of 2008, while there were growth rates of 3-5 percent of US tourists travelling to the Caribbean, Central and South America. This may indicate a shift of long-haul travel to short-haul in favor of these regions. This does not mean however that the Caribbean is safe from the economic storm. According to Business Monitor International Tourist arrival figures for the Dominican Republic will start to slow sharply, having already dropped 11.4 percent year on year in the month of September. The medium-term outlook for the tourist industry is also bleak, as Barbados’s main sources of tourist revenue, the UK and US, are likely to dry up. The persistence of global risk aversion means the industry could suffer from severe under- investment, highlighted by the 7.1 percent drop in lending to tourism- related borrowers, which could hamper growth beyond 2009. Furthermore, Business Monitor International is also concerned about the negative impact of damaged infrastructure on tourism in Antigua and Barbuda, which may already be in for a tougher time next year with slower global growth (particular in the US), financial sector turmoil in international markets, and heightened crime perceptions. Jamaica’s, the Cayman Islands and Guyana’s tourism sector are also threatened. 2.2.3 Industry and policy response in the Caribbean Many destinations in the Caribbean are focusing on increasing visibility and exposure in these turbulent times to limit the damage to their 42 11 tourism industries. New marketing strategies are being tried to make sure their destination stays top-of-mind for travelers planning their next vacation. Some destinations are convinced that price is a crucial factor in attracting tourists and are making efforts to lower the price to potential travelers. Strengthening relations with travel agent partners also tends to be part of efforts to limit the damage to tourism industries around the Caribbean. Private and public tourism entities are tending to work closer together to limit damage. In November President & CEO of the World Travel & Tourism Council (WTTC) called on governments around the world to work in partnership with the private sector of Travel & Tourism for the long-term sustainability of the industry. 2.2.4 Industry and policy response in Aruba Private and public authorities are working closely together in Aruba, as ATA and AHATA have developed a contingency plan in response to the economic down-turn and financial crisis that are threatening the Aruban Tourism industry. The Aruban government is investing $10 million in this plan. The plan is based on a set of strategies, which are the following: 1. Continue to create demand from the current markets, that have air service and where Aruba as a destination has good name awareness. 2. Seek to maintain current air service by creating demand in Aruba’s primary and feeder markets. This in order to assist the airlines in filling its seats 3. Invest in markets to ensure success of new airlines and flights and additional frequency of flights. COPA is a new airline that 11 “Caribbean adjusting forecasts, strategies for winter season” (Travel Weekly, November 2008) 43 started servicing Aruba from Panama and JetBlue has announced expansions from Boston and New York 4. Increase investments in markets with planned or potential market service. Charter services from Italy have started in early November and there are charters from Scandinavia starting at the end of 2009. Charters from the UK may also increase, In order for these charters to be successful Aruba will continue increase its support in these markets. 5. Motivate repeat visitors to return in 2009. 6. Not selling Aruba too cheap. ATA and AHATA believe Aruba is a product of high quality. 7. Right timing for marketing campaigns 8. Investing more money to ensure top of mind, awareness, and share of voice 9. Focus strategies on consumers that still have the potential to travel and focusing on the high-season when most revenue is generated in Aruba 10. Continuous monitoring of the situation and remaining flexible to change strategies The overriding idea is that short-term planning should not jeopardize long term necessity for market stability. 2.2.5 Climate Change International concern about climate change is increasing worldwide. Climate change is a major issue for the long term sustainability of tourism in two senses: climate change will have consequences for tourism and tourism is itself a contributor to climate change. There is now widespread scientific consensus that global warming is a reality 44 and it’s a man-made phenomenon. The principal greenhouse gas is carbon dioxide (CO2), generated by the combustion of fossil fuels, the changes in temperatures and other important features of climate will 12 manifest themselves differently across the regions of the world . The effect of changes in temperature and rainfall on market appeal of the Caribbean will depend on the interplay of push and pull effects in countries of origin and destination. Some of the effects of climate change are already apparent. The tourism industry and destinations are clearly sensitive to climate variability and changes. Climate defines the length and quality of tourism seasons and plays a major role in destination choice and tourist spending. In many destinations, tourism is closely linked with the natural environment. Climate affects a wide range of the environmental resources that can deter tourists, including water-borne pests (e.g. jellyfish) and extreme hurricanes. Climate change might start to affect visitor arrivals to Aruba if people start flying less as a result of other destinations having warmer summers. Aruba’s response to these concerns will be fundamental to the future success of the tourism sector. 2.2.6 New Tourism Trends A number of global tourism trends have been identified in the Country 13 Brand Index 2008 : 1. Women are traveling more frequently without men. The number of women-only travel companies has jumped 230 percent in the last six years, while women-only travel sites have proliferated. 12 Climate Change and Tourism, Responding to the Global Challenges, UNWTO 13 Country Brand Index 2008: Insights, findings and country rankings 45 Over half of all adventure travelers worldwide are women, and their average age is 45.8. 2. Grandchildren are accompanying their grandparents on vacation. Rich retirees in the US, Canada and Japan are traveling more, and this trend by itself is likely to continue increasing. At the same time, up to half of vacationing baby boomers now travel with their grandchildren, indicating a new segment of multigenerational travel. 3. Spontaneous travel has become more increasingly common as high-pressure lifestyles and developments in online travel have resulted in consumers taking more short trips each year. These trips are often booked with little advance notice. In fact, specific online sites have sprouted up catering to this growing “last- minute, few-days” traveler. 4. Religious traveling is another segment on the rise. The Vatican, for example, has launched the world’s first airline for Catholic pilgrims. Additionally, specialized tours cater to orthodox believers from several religions, ensuring that activities meet sometimes stringent religious standards. 5. There is a rise in people visiting attractions — places and/or species — that are seen as endangered or at some form of time-related environmental risk. From polar bear and harp seal excursions to rain forest and glacier vacations, many travelers are prioritizing these types of trips so they can experience the attraction in their lifetimes, before it is lost or irrevocably altered. 6. Citizens in destination countries are now becoming more critical about the brands their countries present. Much has been made about Botswana’s recent country branding efforts, that focus on opportunity and tranquility, which Botswana citizens feel does 46 not capture the country’s spirit or create excitement. Italy’s design community also rejected a new Italy country logo. The logo was subsequently dropped by the government. 7. In their quest for an authentic experience, travelers have recently been seeking out destinations such as Soweto, South Africa; Mumbai, India; and Rio de Janeiro, Brazil for experiences that expose them to poverty stricken communities or polluted areas. “Poorists” look for experiences that appeal to their empathy for the disadvantaged and give them exposure to a reality that is not available in expensive trips to exotic destinations. 47 3. SECTORAL DEVELOPMENTS IN ARUBA This chapter provides an overview of developments in the most important sectors of the Aruban Economy in the year 2007 and the start of 2008 and indications of future developments in these sectors. The partial economic activity index (PEAI) illustrates the trend in production volumes of seven industries. These seven industries together contribute 71.3 percent to the GDP of Aruba. With this measure an indication can be given as to the developments of the seven main industries of Aruba and of the GDP in a certain year. Below the industries of the PEAI can be seen graphically whereby it is evident that the four main industries influencing our economy are: other business and non-business services, trade, housing and hotels and restaurants (figure 3.1). 48 Figure 3.1 Share of the seven industries of the PEAI 6% Argriculture and manufacturing 16% 4% incl oil refining Utilities 9% Construction Trade 13% Hotels and restaurant 14% Transport, storage and communications Financial intermediary Housing 13% Public administration and 10% education Other business and non- 7% 8% business services Source: Central Bureau of Statistics Aruba In 2007 the PEAI dropped with 0.6 percent compared to 2006. This drop was caused by a drop in economic activity in the public administration and construction industry. Lower personnel costs in the public sector together with the high inflation rate were the main factors for the decrease of 11.6 percent in the public industry, while the construction industry shrank with 10.0 percent. This trend can also be seen in 2008. The statistics of CBS show during the first half of 2008, a drop of 1.7 percent in the PEAI compared to the same period of the previous year. As will be presented in the economic forecast for 2008, the main driver will be the performance in hotel and restaurant given the 49 strong growth in the number of visitor on the island in the first half of 2008. In table 3.1 and in the following sections volume developments of the industries will be briefly described for 2007 together with a general indication for 2008 and 2009. Table 3.1 Volume developments of the industries in percentage Industries 2006 2007 1Q 2Q 2008 2008 Utilities 0.0 2.6 -2.1 -3.5 Construction -2.7 -10.0 -5.7 -8.7 Trade -3.9 8.6 -6.8 -15.9 Hotels and restaurants -2.5 5.6 10.2 7.2 Transport, storage and -0.6 -0.6 17.7 6.4 communications Housing 3.3 2.7 2.2 2.4 Public administration and -2.9 -11.6 -14.4 12.9 education PEAI -1.3 -0.6 0.2 -3.6 Source: Central Bureau of Statistics Aruba 3.1 AGRICULTURE, M ANUFACTURING INCL. OIL REFINING The sector agriculture, livestock production and fishery constitute a small economic segment for the Aruba economy. Estimations are that the contribution to the GDP is marginal. The main characteristics of the sector are the small domestic market, the production aimed totally at local consumption. The sector is subsidized by the government through the department of agriculture, livestock & fishery which guarantees the production of some agriculture products by affiliated farmers. 50 The number of persons employed in the sector of agriculture, hunting, forestry and fishery is estimated to be around 250. The total establishments in this sector is likely to be approximately 40 companies. The trend is that the activities in agriculture, hunting and forestry have been growing since the last year while the fishery has shown a decline. As for manufacturing including oil, the refinery counts for approximately 13 percent of Aruba’s gross domestic product. It directly employs 695 people, and accounts, directly and indirectly, for 12 percent of Aruba’s employment. According to the statistics of the Central Bank of Aruba (CBA), the quantity of oil refined in 2007 increased with 6.6 percent to a level of 65,525 million. Barrels. The value of export of refined oil has increased with 4.9 percent in 2007 compared with 2006, while the value of import of crude oil grew with 10.7 percent. Conversely, the number of person employed by the refinery dropped with 2 percent in 2007. There are indications that due to the international development and reduction of international oil price that there will be less refining activities of oil in the last months of 2008 and in the year 2009. 3.2 UTILITIES As presented by CBS in 2007 there was a growth of 2.6 percent in the utilities industry. With regards to production of water, the main factor in 2007 has been an increase of 2.4 percent in the consumption of water on the island. This growth is mainly related to more connected premises. In addition, the production by W.E.B. Aruba N.V. and Valero increased with 2.6 percent, mainly caused by an increase in the number of users. Due to a strong growth of 6.2 percent in the number of 51 commercial users the total gas consumption (commercial and household consumption) registered an increase of 3.6 percent in 2007 compared to 2006. Furthermore, the utility industry experienced an increase in value of 6.6 percent in 2007. In the light of the ever increasing fossil fuel prices and the strong growth dependence on these fuel sources, W.E.B. Aruba N.V. has initiated a long-term strategic study looking into the year 2025 and focusing on the reduction of this dependence. They are looking into different scenarios including least cost, sustainability and a combination of the different alternatives. W.E.B. Aruba N.V. will be investing approximately Afl. 62 million in 2008 and Afl. 66 million on in 2009. Additionally, the plant will start in 2009 with investments regarding infrastructure for the building of a windmill park of 10 wind turbines by another company, which will have a contribution of 20 percent to the total capacity (in WH). In order to keep up with the growth the economy in 2007 ELMAR N.V. had to invest in expansion and upgrading. ELMAR N.V. will invest in 2008 and 2009 approximately Afl. 19 million each year. These investments will be in the expansion and maintenance of the transmission and distribution networks in order to optimize the reliability and quality of the supply of electric energy. 3.3 CONSTRUCTION The PEAI includes the import of materials by the Valero Refinery which can have a large, one may even say disproportionate, influence on the development of the added value of the total sector. The added value of 52 the construction industry declined in 2007 with 10.2 percent compared to 2006. One important indicator is the total import of cement, which shrank with 11.6 percent in 2007. The decrease in construction activities is primarily in the number of houses and apartments. Other import components of construction such as ironworks, pipes, and other construction related materials also dropped in 2007. The reason for this decrease can be related to the international economic conditions (the financial and housing market crisis) and the accelerated increase in the price of crude oil, which leads to excessive project costs and delays. Statistics of the CBS show that in 2008 the construction will decrease further. The first half of 2008 showed a decrease of 7.2 percent. After a few years of high growth in the construction sector, it seems that the activities have slowed down. There are still several projects to be executed - especially in condominium and other real estate related projects - but there are some delays in some of the projected projects. In 2007 the construction of the RIU Palace Hotel & Resort with 450 new hotels rooms was completed. Marriott also completed in 2007 with the construction of two more timeshare towers consisting of 138 new units. In addition, there were new hotel/timeshare units built by Grape Holding (Divi & Tamarijn). As stated previously, condominium and real estate projects have been slowing down in Aruba as well as in the region. The first condominium project that was completed in 2007 was the first Oceania building. It is expected that the showed projects in the Outlook of 2008 will be stretched out in the coming two or three years. 53 Table 3.2 Outline of planned condominium and shopping centers 2008 - 2012 Projects Units Location Start Start construction operation CONDOMINIUMS Oceania Resort II 55 Eagle Beach 2005 2007 FG Developers N.V. 35 Eagle Beach 2008 2010 Mar Azul 64 Oranjestad 2001 2009 Aruba Sands Development 124 Eagle Beach 2009 2011 HJC Realty (Jardines del Mar) 34 Eagle Beach 2007 2008 La Colina/Las Palmas (Tierra del 70 Palm Beach 2008 2011 Sol) Gold Coast Villes 267 Malmok 2006 2009 Ray Gar Properties NV(The Cliffs) 124 Palm Beach 2009 2011 Kasa Alba 21 Morgenster 2009 2011 Caico Group (Aqua Aruba) 568 Palm Beach 2009 2012 The Residence Divi Village 54 Eagle Beach 2008 2010 The White House 30 Washington 2009 2010 Kadushi Largo, St. Villas Kadushi Largo 26 Cruz 2009 2010 Wesley Developmnet (Las Islas) 20 Pam Beach 2010 2010 Modanza Green Parc 78 Paradera 2009 2011 Modanza Villapark 33 Paradera 2007 2011 Cunucu Arubiano/ 23 St. Lucia, St. 2007 2011 Sta Lucia Properties NV Cruz Azure Wave 32 Eagle Beach no indication Bubali Condo 8 Bubali no indication Ventanas Paraiso 28 Kamay no indication Palm Beach Condo 240 Palm Beach no indication Total 1935 54 Projects Units Location Start Start construction operation SHOPPING CENTERS Palm Beach Plaza / Landy 36 Palm Beach 2007 Corporation Morgan's Agua Park/Village Center 28 Palm Beach 2006 2009 / Impact Holding N.V. Dirkrom Realty N.V. Palm Beach 2007 2008 Goldenstrip Holdings N.V. Palm Beach 2008 2009 Castello de la Plaza N.V. Palm Beach 2008 2009 Wayaca Falls 19 Wayaca 2008 2009 Source: Department of Economic Affairs, Commerce and Industry of Aruba Furthermore, The SOGA started in 2006 with the construction of three government buildings; the Belfin building (Department of Finance and Tax Department), the ADRS building for the accommodation for the offices of the Prime Minister, the Minister of Tourism and Transport and the Council of Ministers and the Infra-building that will accommodate the department of Public Works (Dienst Openbare Werken), the Department of Infrastructure and Planning (Directie Infrastructuur en Planning) and the Department of Land Registry (Dienst Landmeetkunde en Vastgoedregistratie). The government will have purchase these buildings with the objective to own these after 25 years. The three buildings were completed in 2008. The total investment committed by SOGA for the three buildings was approximately Afl.50 million. 55 3.4 TRADE The trade industry experienced an increase in value of 8.6 percent in 2007 compared to 2006. According to the statistics of the CBS this growth is mostly caused by an increase in imports of pharmaceutical goods and medical and other retail of specialized goods as shown below in table 3.3. Table 3.3 Key Trade Indicators Key Trade indicators: % change Retail in non-specialized products, mainly food, beverages & tobacco as in supermarkets, mini-markets and toko's -17,2 Retail of pharmaceutical and medical goods 17,0 Retail in textiles, clothing, footwear and leather goods 2,4 Retail in household appliances, articles and equipment -15,5 Retail in hardware, glass & paint 2,5 Retail of books and office supplies -21,1 All other retail sale in specialized goods 44,3 Source: Central Bureau of Statistics Aruba On the other hand the first half of 2008 indicates that the trade industry shrank with 4.6 percent compared with the same period in 2007. This decrease is mainly caused by a drop in the import of mainly "Household appliances, articles & equipment ", “Books & office supplies and "Non- specialized goods as in supermarkets, minimarkets, etc ". 56 3.5 HOTELS AND RESTAURANTS This sector grew in 2007 with 5.6 percent compared to 2006. This growth was led by an increase in the number of visitor nights of 7.5 percent, reaching 5,879,888 nights in 2007. The occupancy rate in 2007 increased from 76.5 percent in 2006 to 77.8 percent. In addition, there was also an increase in tourism revenue according to the CBA of approximately 17 percent and a growth in the number of hotel rooms of 3.5 percent. As indicated in the Aruba Economic Outlook 2008 due to more room capacity in 2008 the hotel and restaurant industry was expected to grow. The RIU Hotel opened officially in October, 2007 and 450 rooms with an investment of US$120 million in upgrading and expansion. The first half of 2008 indicates of that this industry increased with 8.7 percent compared with the same period in 2007. However, the projections for the second half of 2008 are set on a decrease due to the financial crisis. By the end of 2007 Marriot Aruba Surf Club opened 138 extra timeshare units while Divi Village and Aruba Phoenix Resort have been expanding with 245 rooms which accounts for a total investment a total of US$50 million. In addition, Marriott Aruba Resort started in 2007 to upgrade its rooms and the lobby. 3.6 TRANSPORT, STORAGE AND COMMUNICATION This sector showed a slight decrease of 0.6 percent in 2007 compared to 2006. The main indicators of this sector are commercial landings, vessels entering the port, number of visitor nights and the number of passengers transported by the public transportation. As can be calculated from the table below, commercial landings, the number of 57 vessels and content in BRT entering the port of Aruba and transported passengers by Arubus dropped respectively with 1.2, 10.1 and 4.2 percent in 2007. Table 3.4 Key Transport Indicators 2006 2006 2006 2006 2007 2007 2007 2007 -Q1 -Q2 -Q3 -Q4 -Q1 -Q2 -Q3 -Q4 Commercial landings 3.20 3.14 2.94 4.32 3.09 2.98 3.57 3.79 1 1 8 8 8 5 9 3 Visitor nights 1,41 1,29 1,39 1,38 1,50 1,33 1,51 1,55 (in million) Port in contents (in 10,0 6,0 4,0 10,0 9,9 5,3 3,3 8,5 million BRT) Port in absolute 447 407 415 530 498 448 436 491 numbers Arubus 688. 660. 654. 636. 643. 602. 626. 656. (passengers) 928 757 244 850 800 947 136 958 Source: Central Bureau of Statistics Aruba The cruise tourism did experience a large drop of 18.5 percent in 2007 of reaching approximately 482 thousand visitors in 2007, primarily determined by the fact that Carnival Destiny made its last call to Aruba per January 5, 2007. The predominant reason for this decision was the high fuel price that made this segment not profitable for the cruise line. The cruise tourism remains important for the island, the average daily expenditure of a cruise visitor in Aruba is estimated by around Afl. 225 per visitor in 2008. The number of cruise visitors increased by approximately 15 percent in 2008 reaching a total number of 556.090 visitors. 58 However in 2007 Pullmantur started using Aruba as home port for the cruise ship “Blue Moon”, which carries 800 passengers mostl y European tourists. In addition, these tourists stay a few days in the hotels of Aruba. The statistics show a recovery in 2008 due to several new ships visiting Aruba like the Ocean Village (home porting), Aida Cruise, Disney Magic Cruise, Island Star, Enchanted of the Seas, Voyers of Oceania Cruises and Journey Azamara Cruises. In addition, the Aruba Ports Authority N.V. is focusing on renovation of the cruise terminal. The Aruba Airport Authority NV invested in airside improvements of the apron, runway and taxiways and into modification of the main concession area as well as for the arrival hall. These investments will continue through 2008 and 2009 together with investments regarding safety and security requirements, renovation of car rental offices, landscaping and other operational actions. As for the industry of communication this is a sector that has been growing on a high pace in the last years and has been contributing successfully to the GDP of Aruba. Investments are still relatively on a high level especially due to the demand for speed technology. A relatively new product on the market is the digital cable with is projected to grow even further in the coming years. 59 3.7 HOUSING This sector shows an increase of 2.7 percent in 2007 compared to 2006. The increase in 2007 is directly related to 835 (2.3 percent) new premises connected to the WEB-grid reaching 36,824 connected premises in 2007. Additionally, figures of the Central Bank of Aruba show that in 2007, total housing mortgage lending by commercial banks, pension funds, and life insurance companies went up by Afl. 64.5 million (5.3 percent) from Afl. 1 ,195.2 million in 2006 to Afl. 1,259.7 in 2007. The statistics of the first half of 2008 show a growth of 2.3 percent in this industry . According to the PEAI of the first half year of 2008 the housing industry shows a positive growth of 2.3 percent. 3.8 PUBLIC ADMINISTRATION AND EDUCATION According to the figures of the CBS this sector also saw a drop of 11.6 percent in 2006. This is mainly due to a decrease in the tariffs of the wage tax as compensation for the introduction of the BBO and the high level of inflation. It is important to note that the output of the Public Administration & Education sector is measured by wages and salaries. As for the investment made by the Fondo Desaroyo Aruba, a total amount of Afl. 22.5 million has been assigned, which corresponds with 10.8 percent more that in 2006. These investments were mainly in the sector sustainable development, education and good governance. The total amount assigned for 2009 is estimated to be Afl. 20 million. The total amount of investments that will be made through the 60 implementation of the activities pertaining to the long-term program 2006-2009 is set on a total of Afl.141 million. The long-term program 2006-2009 is largely a continuation of the long- term program 2001-2005. Activities in the program 2006-2009 are divided into four different sectors, namely good governance, education, and the social sector. The main goal of this long-term program is to obtain sustainable development for Aruba whereby a balance is obtained between the limited carrying capacity and the need for economic growth. It must be guaranteed that future generations will be able to achieve their ambitions. The activities executed in the earlier mentioned sectors will contribute towards achieving this goal. A total amount of Afl. 20 million will be invested in the sector good governance. The activities in the sector good governance will focus on the apparatus of the government whereby measures will be introduced to strengthen the operation of the government, its management, the implementation of policies and improvements in supervision tasks. One of the most important activities among these is the development of the National Integral Strategic Plan (NISP). According to stakeholders of all four before mentioned sectors, it is a requirement that Aruba has and executes such a plan. The plan entails amongst other items the updating of legislation, the streamlining of the legislative process and the issuing of instructions in this regard. In addition, a plan will be formulated for the provision of information by the government and the development of an integrated information system. The main focus of the long-term program 2006-2009, taking into consideration is sustainable economic development. A maximum 61 budget of Afl.60 million is available for this sector. This program consists of four main activities, namely: coastal management and the improvement of beaches, the continuation of the implementation of the structuring of waste water management, the completion of the second phase of the waste management facility and the implementation of a mobility plan according to the results of a mobility investigation. The education sector focuses its long-term program on various activities in order to obtain an increase in education level in Aruba. In order to obtain a greater return, amongst other activities, an adult training institute will be established, means will be provided for the benefit of educational policy regarding instruction language and books and dictionaries in Papiamento and other reference books in Papiamento. In addition, a system will be established that will measure the quality of the education in- and externally at the bachelor and master level including the accreditation of the University of Aruba. This quality system needs to be effective, efficient and integrated. Furthermore, the physical infrastructure of the University of Aruba and the Pedagogical Institute of Aruba will be adapted to better suit its educational purpose. A maximum amount of Afl. 27.5 million will be available for this sector. With the means provided by the FDA, the policy of the social sector is to increase the development possibilities of the most vulnerable groups in society which include, amongst others, children and adolescents, the elderly, persons on welfare and persons with limitations/handicaps. The vulnerable groups will be the target group because in many situations these persons have difficulty in obtaining a higher quality of life. It is very important in this context to prevent social exclusion and/or a reduction in quality of life. The social sector will focus its activities 62 mainly on the target group of children, adolescents and the elderly. The activities for this target group include, amongst other, the establishment of an institute for remedial education and the establishment of infrastructure for the supervision of adolescents and a care center for the elderly in San Nicolas. The social sector has a maximum budget of Afl. 33.5 million available for these purposes. th After September 11 2001, the Council of Ministers of the Kingdom of the Netherlands decided to intensify mutual cooperation in the field of counterterrorism and the improvement of law enforcement and national security of the Kingdom. This will be obtained by the reinforcement of legislation in this regard and the reinforcement of operational cooperation throughout the justice system and police forces. In addition, by the institution and maintenance of a proper intelligence infrastructure at organizations dealing with public order and by the reinforcement of controls and supervision within the financial sector the aforementioned mutual goals are to be achieved. The program for the years 2006-2007 with regard to law enforcement and public order is an integral part of the long-term program 2006-2009 though this program has its own budget and is presently being executed. A total amount of Afl. 10.2 million is available for the years 2006 and 2007. The activities that are being executed are, amongst others, the reinforcement of the executive tasks of the Financial Intelligence Unit (Meldpunt Ongebruikelijke Transacties, (MOT)). In addition, the reinforcement of the quality of the detective force and investments regarding the improvement of human resources of, among others, the Prosecutor’s Office, the Customs Department and the Police Department are also being executed. 63 Moreover, during 2007 and 2008 the Department of Economic Affairs coordinated the setup of a National Security Plan, that covers a long- term vision of National Security for Aruba. A participatory strategic planning process was employed to arrive at this National Security Plan. The aim and intention of the participatory planning process was to create a collectively direction for national security with different sectors beyond law enforcement and a set of priority focusing areas that would ultimately help to achieve the articulated vision. This plan runs from 2008 till 2012 and is being financed through Dutch Development Cooperation Program for an amount of Afl. 61 million. 64 4. MACROECONOMIC DEVELOPMENTS In the first section of this chapter we present the macroeconomic developments that have taken place in 2007. In the second section we look at some realized figures as compared to DEACI estimated for past years and discuss the analysis of forecasting errors. 4.1 M ACROECONOMIC DEVELOPMENTS 2007 According to DEACI estimates the GDP in 2007 grew 1.5 percent to a nominal value of Afl. 4565 million. The source of this growth was an increase in exports that compensated for a decrease in investments. Exports grew by 4.9 percent, due to an increase in the number of available rooms, visitor nights and tourism revenues (see chapter 2.1). 4.1.1 Government Tax revenues in 2007 amounted to Afl. 882 million, up from Afl. 858 million in 2006. In 2007 the turnover tax, BBO, was introduced and increased tax revenues with Afl. 132 million. At the same time revenues from income and wage taxes fell with Afl. 74 million, as part of a compensation plan for the turnover tax. Government consumption fell by Afl. 26 million to a total of Afl. 1,070 million. This decrease is mainly due to a decrease in 65 transfers to the general health insurance and a decrease in expenditure on goods and services. The decrease in transfers to AZV( general health insurance) took place because the AZV deficit was expected to be lower than in previous years. The AZV, however, ended up having a larger deficit than expected. The transfer of the government to cover this deficit occurred in 2008, and therefore shows up in the 2008 figures. These developments in government revenues and expenditures led to a financial deficit of Afl. 60 million on cash basis in 2007. This is a decrease of Afl. 52 million compared to 2006. After a worsening of the financial deficit in 2004, the government’s financial results have been improving over the years. The debt as a percentage of GDP has remained relatively stable around 45 percent of GDP. 4.1.2 Inflation The inflation rate is mainly influenced by three external factors: the oil price, the euro/dollar exchange rate and inflation in the US. In 2007, however, there was also the domestic influence of the introduction of the turnover tax that increased the inflation rate. The period average inflation for 2007 was 6.0 percent according to official CBS figures. The effect of the turnover tax is estimated to be around 3.0 percent and the remaining changes in the domestic inflation are mainly caused by the increase in the 66 prices of water, electricity and gasoline. These are the main products that are directly influenced by the oil price. After the payment of house rent, the payment of domestic fuel and power have the highest weight in the consumption basket that is used to compute the inflation rate in Aruba. The overall export price is linked to the value of goods and services in the previous year, the total of tourism revenues of the previous year, and other values of non-tourism exports. In 2007 the export price showed an increase of 3.5 percent, partly due to an increase in the cost price of exports. 4.1.3 Consumption In 2007 the minimum wage was set at Afl. 1.460 according to predicted inflation for 2007 and in compensation for the implementation of the turnover tax. This increase represents an increase of 7.3 percent compared to the previous year. People earning above minimum wage were compensated for the introduction of the turnover tax by lower wage and income taxes. According to a household survey conducted by the Aruba Investment Bank in June of 2007, the turnover tax remains a concern despite the compensation for the turnover tax. Although 86 percent of respondents claimed to still be able to cover their fixed expenses, most of them also claimed that they could only do so by foregoing luxury or otherwise nonessential items. 67 This is in line with the finding that 53 percent claim to be buying fewer products. Consumers also mentioned that in the first quarter of 2007 more attention should be paid to price monitoring by the government, and this concern nd increased in the 2 quarter of 2007. Moreover, the high price for gas also had a great effect on the discretionary income of consumers. The minimum wage together with the lower wage and income tax helped sustain consumption, while increased revenues from exports led to an increase of private consumption. Consumer credit rose in 2007 to Afl. 565.1 million, an increase of 30.8 percent. Private consumption in 2007 increased by 2.4 percent in real terms. 4.1.4 Investment The construction boom seems to have ended in 2007 when the large investments in 2006, related to the construction of the RIU Palace hotel and the Marriot Ocean Club Timeshare, were completed. Other planned projects appear to have been delayed. Moreover, the statistics of the Department of Public Works, the Department of Technical Inspection and the CBS indicate a drop in investments. First of all, construction permits that were granted in 2006 dropped, which reflects a drop in future investments. Secondly, the total volume of imports of cement and other construction material also decreased 68 in 2007. Finally, the Partial Economic Activity Index also shows a slow-down in economic activity in the construction sector of 10 percent. The reason for this decrease can be related to the increase of the price of crude oil, which leads to excessive projects costs and can therefore cause delays and negative net present values of projects. Taking into accounts all of these indicators private investments in Aruba show a decline of 2.0 percent in real terms in 2007. 4.1.5 Imports The developments of imports should be seen in conjunction with the developments in the export sector. Imports of goods and services in 2007 increased 0.8 percent in real terms compared to 2006. This growth is mainly due to the strong performance of the export sector, led by tourism, which requires imports. 4.1.6 Exports Exports increased in 2007 by 4.9 percent as tourism recovered from a drop in 2006 and a number of new rooms opened. The number of stay-over visitors grew with 11.2 percent to a total number of 772.073 visitors. This recovery is mainly from the US, Canadian, Venezuelan, and Colombian markets. For a more detailed review of the Aruban tourism sector in the year 2007 see chapter 3. 69 4.2 FORECASTING ERRORS The macroeconomic model for the Aruban economy plays an important role in the elaboration of DEACI predictions. The model is supplied with past data and basic assumptions about economic policy and international developments. The necessary data for the past are taken from the CBS wherever possible. If no actual figures are available for the past, the DEACI makes its own estimates based on expert opinion. The policy assumptions are based on the policy intentions set out by the government. International economic developments are evaluated by DEACI. In this DEACI relies in part on predictions and analyses by organizations such as the OECD, IMF and the Centraal Planbureau (CPB). To improve its predictions, the DEACI uses several other information sources. These include the views of experts, for instance with regard to investment trends and developments in particular sectors. The basis for the model is the Aruba National Accounts and results are compared to the figures of the official Aruba National Accounts. When there are forecasting errors, that is to say significant differences between the official Aruba National Account figures and the model forecasts, the sources of these differences are identified whenever possible and the model is calibrated to improve the model’s accuracy in the future. 70 Five sources of forecasting errors can be identified: 1. imperfections of the model used. This model may not adequately reflect the existing connections among the economic variables. If there are signs of this, the model’s outcomes are of course adjusted, but this cannot prevent all the mistakes in the model. 2. wrong or lack of data for economic developments in the recent past. This happens, for instance, when DEACI’s provisional actual figures turn out to be incorrect at a later stage. 3. incorrect policy assumptions. The fact that forecasts rest on economic policy intentions at any one time gives them a provisional character. If the government changes previously announced policies or takes new policy measures, then economic developments may well take a different turn than projected. 4. a wrong assessment of international economic developments. Because of the open nature of the Aruban economy, this can cause considerable forecasting errors. 5. other information sources used can also lead to predictions that turn out to be off the mark. 71 In order to adequately analyze forecasting errors to improve the economic modeling there needs to be access to enough detailed information regarding the errors. The limited amount of detailed information published makes an in-depth analysis of the forecasting errors more difficult. This is because the source of the difference between the National Accounts and the Economic Outlook projections can then not be found. When National Accounts becomes available in a publication, this can be used to find the source of the forecasting. However, with the figures of the National Accounts we have calibrated the model to improve the model’s accuracy. What can be said so far however is that the average yearly change in nominal GDP was estimated at 6.0 percent while according to the National Accounts the average yearly change in nominal GDP was 5.7 percent. Moreover, nominal GDP was estimated to have grown to Afl. 4,380 million, while the actual National Account figures show a nominal GDP of Afl. 4,334.10 million. It is noteworthy how close these figures are to each other, given the lack of data from 2002 onwards. 72 5. OUTLOOK 2008-2009 With the help of the macroeconomic model Maruba projections have been made of the main macro-economic indicators for 2008 and 2009. The estimates and projections presented in this chapter are based on information available through end-January 2009. In the third section of this chapter an overview of risk surrounding these projections are given. 5.1 ASSUMPTIONS The projections made in this outlook are based on the following assumptions. The number of tourism arrivals is expected to grow by 5.5 percent in 2008, as well as for the visitor nights. The growth in hotel rooms is projected to be around 10 percent. Due to the financial crisis it is estimated that the number of tourists will decrease by 7.5 percent in 2009. This projection is mainly based on expected occupancy, airlift, marketing and room capacity and prospect for tourism growth in the Caribbean. There is a great deal of uncertainty around the projections mainly because of the lack of recent tourism data in 2008 and the uncertainty regarding the financial crisis. 73 The statistics from the department of cruise tourism have shown for 2008 an increase of 15 percent in cruise visitors compared to 2007. This increase is mainly because of larger ships with more capacity. There are less calls registered for 2008 yet with more capacity visiting Aruba. The outlook for 2009 is set on zero growth. The government aims to implement the recommendations stated in the report of the National Commission on Public Finance. The report recommends the government to contain personnel expenses and expenses on goods and services to a 3 percent and 2 percent growth per year respectively as of 2007. Furthermore, it recommends to increase the level of investments to 2 percent of GDP as of 2007. The foregoing assumptions were not taken into the projections directly however, instead the budget for 2008 and 2009, presented by the Department of Finance, was used as a basis for this outlook. According to the budget 2008 the total expenditures will increase with 11 percent and will drop with 1 percent in 2009. Personnel expenses in 2008 will see an increase compared to the 2007 of 9.3 percent. In 2009 personnel expenses will increase with 2.8 percent compared to the 2008 budget. This increase is mainly due to the salary increases that the government decided upon in the course of 2008. The expenditure on 74 goods and services will increase in 2008 an 2009 with respectively 12.5 and 6.4 percent. In the preview years the import price was mainly explained by the inflation of the US due to the large share of imports originating in the US. Therefore, US inflation was used as one of the indicators for the import price of Aruba. We have seen that since 2007 the development of the international price of crude oil and the exchange rate of the US dollar in comparison to the Euro have been influencing for a large part the increase of the import price of Aruba. This has resulted in an increase of the inflation rate. The weight of oil in the consumption basket is estimated to be 15 percent directly, which includes the consumption of water, electricity and gasoline. Moreover, significant fluctuation in the euro/dollar exchange rate has been affecting the inflation rate via our imports from Europe. For that reason, the estimation of import price for 2008 and 2009 are based on a combination of the different factor presented above. For these calculations the January outlook of IMF and estimations of CPB as of December 2008 have been applied. 75 5.2 PROJECTIONS 5.2.1 Gross Domestic Product The nominal GDP growth is estimated to be 5.9 percent in 2007, which results in a nominal GDP of Afl. 4,588 million and a real growth of 2.0 percent. This is 0.2 percent less than projected in November 2007, which is mainly due to an unexpected drop in the private investments. For the calculation of the real GDP each GDP component is deflated with a separate price index, instead of only the CPI. For 2008 the projected GDP is lower than the outlook presented in November 2007. The main drivers to a lower growth is the unexpected higher inflation which leads to less consumption, less private investments and especially the drop in tourism in the last four months of 2008. As a result, the GDP is set to grow to a nominal value of Afl. 4,876 million in 2008 which in real terms is a 1.3 percent increase. Due to an unexpected financial crisis, leading to less tourism, the projections for 2009 are set on a negative growth of 2.1 percent for the real GDP, meaning a nominal value of Afl. 4,813 million. 76 Tabel 5.1 Macroeconomic outlook 2008 and 2009 2008 2009 Nominal GDP (Afl. mln.) 4876 4813 Real GDP ( percent) 1.3 -2.1 * Private consumption ( percent) -0.8 -0.7 * Government consumption (percent) -6.9 1.1 * Private Investments ( percent) -0.5 0.0 * Government investment (percent) 6.3 -1.0 * Exports ( percent) 3.3 -5.1 * Imports ( percent) 1.2 -2.0 Inflation ( percent) 8.0 4.1 * Real terms Source: Department of Economic Affairs, Commerce and Industry of Aruba 5.2.2 Inflation Since 2007 Aruba has been experiencing an unforeseen acceleration in the inflation rate. In the past the import price was mainly explained by the inflation of the US. We have seen that the international price of crude oil and the exchange rate of the US dollar in comparison to the Euro play a larger role on the increase of the import price of Aruba. Consequently, this development is affecting the inflation rate in Aruba. The US is the main source of imports for Aruba. However, because of the imports from the Netherlands and the devaluation of the dollar, prices for products originating from Europe are rising drastically. Another important development affecting inflation is the 77 increase in the international food prices. The period 14 average inflation for 2007 was 6.0 percent, which is partly caused by the introduction of the turnover tax as of January 1, 2007. The effect of the turnover tax is estimated to be around 3 percent and the remaining changes in the yearly domestic inflation levels are mainly caused by the increase in the price of water, electricity and gasoline. The trend of 2007 has continued into 2008 and therefore the period average inflation projected in the outlook of November 2008 of 3.9 has been revised to 8.0 percent. The difference is related to the high increase in the international oil prices which were not foreseen last year. This is 4.4 percent more than expected which then affects the projected GDP as well. Taking into account the projections made by the International Monetary Fund (IMF) in November 2008 and the Central Planbureau (CPB) in December 2008 with regards to the US inflation, the price of crude oil and the exchange rate of the US dollar, the inflation rate for 2009 is estimated to be 4.1 percent. 5.2.3 Exports In the first seven months of 2008 the number of tourism was strongly growing with an average of 12 percent compared to the same period in 2007. Due to a lack of tourist data from the Aruba Tourism Authority, the 14 Source CBS 78 estimations for 2008 are based on statistics of registered passenger arrivals by the department of immigration. This growth is mainly due to a large increase of approximately 10 percent in total available rooms on the island. When the financial crisis deepened Aruba started experiencing a drop in visitors. Between September and October Aruba has experienced a drop of 6 percent compared to the same two months in 2007. The prospect for 2008 is set on a 5.5 percent increase in the number of stay-over visitors, which is 2.2 percent less than the outlook of November 2007. This means a total of 814,537 stayover visitors and 5,738,036 visitor nights in 2008. Taking into account this information and projections up till January 2008, it is estimated that the number of tourists will decrease by 7.5 percent in 2009 compared to 2008 reaching 753,447 number of stayover tourists. This decrease is based on expected airlift, hotel bookings and different scenarios that have been considered as well as on expectations for tourism in the Caribbean. There is a great deal of uncertainty that may affect this estimation in the upcoming months. Also, the lack of recent tourism data in 2008 may increase the uncertainty around the projections. 79 Conversely, the statistics until December 2008 show an optimistic development for the cruise tourism in Aruba for 2008. The number of cruise visitors has grown by 15 percent in 2008. The trend of 2008 indicates a decrease in cruise calls, but an increase in capacity. This means that ships with larger capacity are visiting Aruba. It is assumed that the global demand for cruises in 2009 will remain at the same level as 2008. The projection made for 2009 takes into account the drop in fuel prices, the planned capacity for 2009 and the other recent information from the cruise industry which indicates that cruise lines are planning to eliminate the fuel tax on the cruise price. As a result, it is estimated that the aforementioned developments in tourism will lead to a total export value of Alf. 3,344 million in 2008 and are projected to decrease to Afl.3,061 million in 2009. 5.2.4 Investments After a few years of high growth in the construction sector it appears that investments are slowing down. The large investments of 2006 in the RIU Hotel and the Marriot Timeshare have been completed. According to the statistics of the Department of Public Works, the Department of Technical Inspections and the CBS, less construction permits were granted in 2006 and 2007. Given the lag between obtaining the permits and the actual 80 investment, this drop indicates a drop in investments in 2007. Figures on the total imports of cement and other construction materials also show a decline. In addition, the PEAI (Partial Economic Activity Index) confirms a slow- down in the construction sector of 10 percent. Reasons for this decline can be related to international economic conditions and the increase in the price of crude oil, which leads to excessive projects costs. The same reasons appear to be playing a role in the delay of several real- estate related projects. Taken into account these indicators and expert investment opinion, the volume of investments is expected to decline by 0.5 percent in real terms in 2008, and remain at the same level in 2009. There is no indication yet of a change in the projection for the private investments. 5.2.5 Consumption After a strong growth in 2007 in private consumption, this will drop in 2008. Due to the lag-effect of the higher inflation, lower investments and less growth in tourism, private consumption is estimated to decrease by 0.8 percent in real terms to a nominal value of Afl. 2,728 million. in 2008. The trend in consumer credit in 2008 also reflects little growth. In addition, the household survey carried out by the Aruba Investment Bank, indicates a drop in consumer confidence in Aruba which may indicate the 81 behavior of private consumption in 2008. Moreover, in 2009 it is expected to reach Afl. 2,823 million, which is a drop of 0.7 percent in real terms. 5.2.6 Imports The economy is mainly based on tourism and the local population has a high consumption quota for goods and services. The value of imports of goods and services is estimated to grow from Afl. 3,518 million in 2007 to Afl. 3,918 million in 2008, which is a 1.2 percent increase in real terms. Less private investments, less private consumption and higher inflation in 2008 have contributed to less growth of import of goods and service than expected. This slight growth is due to more export proceedings from tourism. Instead, due to poor performance of tourism in Aruba it is expected that the value of import of goods and services will decline to Afl. 3888 million in 2009 (-2.0 percent). 5.2.7 Government According to the budget of the Department of Finance the total tax revenue of the government will increase in 2008 and 2009 respectively Afl. 122 million and Afl. 7 million. According to budget of 2009 it is estimated that expenditure will increase by Afl. 122 million in 2008 and by Afl. 14 million in 2009. As a result, the financial deficit will 82 decrease from Afl. 64 million to Afl. 26 million. in 2009. These estimations are on a cash basis, consequently it may differ from the transaction basis method that is used by the Department of Finance. Higher tax revenue (12 percent) in 2008 will be primarily caused by an increase in tax on wages and income, tax on commodities and turnover tax. The main factors leading to an increase the total expenditure of the government of approximately 13 percent are increase in goods and services caused by the higher inflation, indexation of the wages of the government employees, and higher public investment. It is important to note that the financial crisis and the development in tourism may affect the government revenues. 83 Table 5.2 Government Revenue in Afl. million 2007 2008 2009 (1) (2) (2) Tax revenue 882 1004 1013 Taxes on income and profit 313 371 373 Taxes on commodities 281 301 295 Turnover tax 132 160 170 Taxes on property 59 66 64 Taxes on services 60 71 76 Foreign exchange tax 38 36 36 Nontax revenue 118 129 138 Grants 31 15 23 1. Figures from Central Bank of Aruba (CBA) on a cash basis 2. Estimates from the Department of Finance on a cash basis 84 Table 5.3 Government expenditure and total debt 2007 2008 2009 (1) (2) (2) Total Expenditure 1077 1192 1180 Wages 301 328 340 Employer's contribution 87 95 97 Wage subsidies 142 144 149 Goods and services 187 210 223 Interest 107 113 127 Development fund spending 32 32 35 Investment 19 36 20 Transfer to General Health Insurance (AZV) 85 137 88 Items n.i.e. 117 98 98 Lending minus repayments 21 20 20 Lending 24 28 28 Repayments -2.4 -8 -8 Financial surplus (+) deficit (-) -65 -64 -27 Total debt 2138 2138 2112 1. Figures from Central Bank of Aruba (CBA) on a cash basis 2. Estimates from the Department of Finance on a cash basis 85 Figure 5.1 Government operations in percentage of GDP 60 50 40 Government Debt in % of GDP 30 20 Government Expenditure in % 10 of GDP 0 2003 2004 2005 2006 2007 2008 Source: Department of Finance 5.3 RISKS The risks surrounding this outlook are mainly related to external developments because of the open nature of Aruba’s real sector and the small size of the economy. The outlook may turn out more negative depending on the duration and depth of the credit crunch. The risks are mostly on the downside as our main source country of tourism income is the US, which has been at the center of the global financial and economic crisis. If the credit- crunch may impose a larger constraints on consumer spending than expected and if housing price correction in the US will take longer than currently expected this may 86 weigh on the Aruban tourism industry, and thus exports. There is also uncertainty surrounding the inflation pressures as inflation pressures around the world may prove more persistent than expected. This would lead to a lower real GDP and depressed consumption. As the credit-crunch may impose larger constraints on activity, housing price corrections may extend into 2010 and inflation pressures may prove to be more persistent. Upside risks are that US firms may be able to maintain their spending patterns better than expected, despite financial strains, which would provide extra support for household incomes and therefore stimulate them to increase spending on tourism. Tighter external financing conditions due to the credit crunch and a worse than expected global economic outlook may also lead to delays or cancellation of planned investment projects. An upside risk is the possibility that the government may invest more than budgeted, due to a windfall increase in revenues related to a settlement reached with the Dutch 15 government regarding Plant N.V . How and when this money will be invested is still uncertain and therefore not included in the baseline scenario. Another domestic upside 15 See Memorandum of Understanding regarding Plant N.V. of September 29th, 2008. 87 risk is that consumer confidence may increase because of the drop in commodity and gasoline prices lower interest rate on mortgages which can stimulate the investments in housing market. Being an important Carnival year this may contribute to more consumption. An external upside risk is that the global down-turn may stimulate US to travel closer to home and to more familiar places thereby supporting the Aruban tourism industry. If downside risk materialize we may end up in the worst case scenario, which according to the Maruba projections could mean a decrease in real GDP up to 3.9 percent. Conversely, if the effect on tourism is limited and Aruba experience windfalls the real growth will be limited to -1.3 percent increase, which is the best scenario for 2009. 88 6. APPENDIX Macroeconomic indicators and projections 2007-2009 2006 2007 2008 2009 Consumption price percent 3.6 6.0 8.0 4.1 Import Price percent 4.8 5.0 10.0 1.3 GDP at market prices mln. Afl 4334 4588 4876 4813 Household consumption mln. Afl 2322 2549 2731 2823 Government consumption mln. Afl 988 960 1044 1088 Private investments mln. Afl 1430 1490 1614 1660 Government investments incl. Development fund spending (FDA) mln. Afl 67 68 75 77 Exports of goods and services mln. Afl 2824 3063 3344 3061 Imports of goods and services mln. Afl 3295 3518 3918 3888 Household consumption* percent 2.0 3.5 -0.8 -0.7 Government consumption* percent 2.3 -8.3 0.5 0.4 Private investments * percent 5.2 -1.5 -0.5 0.0 Government investments* percent -3.5 -25.0 22.4 -21.7 Exports of goods and services* percent -3.6 5.0 3.3 -5.1 Imports of goods and services* percent -1.2 1.7 1.2 -2.0 Nominal GDP growth percent 4.2 5.9 8.0 -1.3 Real GDP growth ** percent 0.5 2.0 1.3 -2.1 Total tax revenue and grant mln. Afl 991 1028 1148 1174 government Total expenditure government mln. Afl 1096 1070 1192 1178 Financial surplus (+) deficit (-) mln. Afl -112 -60 -64 -27 Total debt *** mln. Afl 2012 2138 2254 2302 Tax in % of the GDP percent 19.8 19.2 20.6 21.0 Expenditure in % of the GDP percent 25.3 23.3 24.5 24.9 89 2006 2007 2008 2009 Debt in % of GDP percent 47.2 48.4 46.2 47.8 GDP per capita Afl. 42081 44702 46145 45831 End-year population number 103000 104494 105676 105017 Total hotel rooms number 7316 7411 8147 8229 Visitors nights * 1000 number 5471 5880 6203 5738 Number of stayover visitors *1000 number 694 723 815 753 Cruise passengers *1000 number 591 482 556 556 Tourism receipts mln. Afl 1917 2264 2335 2031 Total hotel rooms percent 4.4 1.3 9.9 1.0 Visitors nights percent -3.9 7.5 5.5 -7.5 Number of stayover visitors percent -5.2 11.2 5.5 -7.5 Cruise passengers percent 7.0 8.2 15.4 0.0 Tourism receipts percent -1.8 17.1 11.0 -13.0 * Real terms ** For the calculation of the real GDP each GDP component is deflated with a separate price index, instead of only the CPI. For calculation of the GDP according to the National Account the CPI must be applied. In the current condition the export price and the import price may vary from the CPI which makes is necessary to use a separate deflators. *** Debt payments made with funds received from settlement of Plant N.V. are not included. Source: Department of Economic Affairs, Commerce and Industry Central Bureau of Statistics Central Bank of Aruba Department of Finance 90 Aruba Economic Outlook 2009 Aruba Economic Outlook 2009 Economic Outlook 2009 is a publication of: The Department of Economic Affairs, Commerce & Industry, The Goverment of Aruba. L.G. Smith Boulevard no. 160, Oranjestad, Aruba.
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