( BW)(NY-FITCH-RATINGS/ARUBA) Fitch Assigns Negative Rating Outlook to Aruba

BW5359 JUN 12,2003 8:54 PACIFIC 11:54 EASTERN     Business Editors     NEW YORK--(<a href=www.businesswire.com>BUSINESS WIRE)--June 12, 2003--Fitch Ratings, the international rating agency, has changed the Rating Outlook for Aruba to Negative from Stable, in light of rising challenges to the sovereign's fiscal sustainability. These are reflected in a steady rise in public debt from 28% in 2000 to 37% of GDP at end-2002, limited progress in curbing public expenditures, and widening arrears to suppliers in the first three months of 2003. Aruba has a 'BBB' rating for both its foreign and local currency ratings.     Aruba, which has status aparte within the Kingdom of the Netherlands, has recently seen demanding challenges to its tourism-dependent economy and public finances. This has arisen from the detrimental effects on tourism of the 9/11/01 U.S. terrorist attacks, slowing global and U.S. economies, the 2003 Iraq war and recent volatility in Venezuela.     Yet the inability to cut public expenditures is the primary reason for Aruba's stubborn fiscal deficit. Universal health care runs significant operating deficits, and attempts to curb supplier costs have recently been successfully challenged. Public sector personnel costs remain high in spite of the government's freeze on wage indexation and hiring. Arrears to the civil servant pension system have also risen and represent a less favorable source of public financing. The government could see a budget deficit of 3.5%-4% of GDP in 2003, potentially undermining the government's target of budget balance by 2007.     The government also faces somewhat greater constraints on income in 2003, as well as sharply higher public sector financing needs due to the realization of contingent liabilities amounting to 6.1% of GDP. The authorities exhibited good resourcefulness and self-reliance in obtaining financing for these liabilities without relying on the Dutch government. Nevertheless, government debt has also recently risen from 28% in 2000 to 37% of GDP in 2002. Government's indebtedness is still within the 'BBB' median of 40% of GDP, yet a lower debt burden in Aruba is desirable given that the economy is small, open and undiversified, and hence more vulnerable to external shocks than its rating peers.     Fitch finds that delayed action on the part of the government is also significantly contributing to fiscal deterioration. While outstanding problems are well understood, a slow pace of policy implementation reflects difficulties in executive coordination, political and legal miscalculations, and management capacity constraints. Fitch believes the government has an opportune window to act 2-1/2 years ahead of elections while it has a legislative majority. However, the agency is concerned that only limited progress will be made in reducing the budget deficit in 2003 by securing partial cost controls for the health care scheme and public sector rationalization, which could imply a further increase in debt to 40% of GDP in 2004.     Fitch will closely monitor government's near-term progress in fiscal consolidation. The agency would positively view measures to reduce supplier arrears; and a substantial effort to rein in health care costs. Meeting a clear timetable for policy implementation to achieve a trend reduction in expenditures is critical. The agency would also look for passage of health care premium increases and implementation of co-payment or deductible payment incentives; conversion of the civil servant pension fund into an independent public enterprise; and progress in heightening government efficiency and reducing personnel outlays.

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CONTACT: Fitch Ratings, New York
         Therese Feng, 212/908-0230 
         Shelly Shetty, 212/908-0324
         Matt Burkhard, 212/908-0540 (Media Relations)

KEYWORD: NEW YORK INTERNATIONAL LATIN AMERICA
INDUSTRY KEYWORD: BANKING BOND/STOCK RATINGS
SOURCE: Fitch Ratings