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International Monetary Fund. Western Hemisphere Dept.
The 2023 Article IV Consultation with the Kingdom of The Netherlands—Aruba discusses that economic activity rebounded strongly. Real gross domestic product grew by 27.6 percent in 2021 and further expanded by 7.3 percent in 2022, reinforced by the recovery of tourist arrivals following the lifting of the restrictions introduced during the pandemic. The economy is expected to grow at a moderate pace in 2023 as the post-pandemic rebound in tourist arrivals wanes. Inflation is projected to decelerate with slowing domestic demand and lower international commodity prices. Risks to the outlook are tilted to the downside. A steeper-than-expected global slowdown, especially in the U.S., could reduce tourist arrivals. Climate change is an ever-present risk through both rising sea levels and more volatile weather events. Domestically, risks to the outlook are largely related to the potential of insufficient fiscal adjustment. Increasing resilience to climate change is a priority. A concrete action plan for adaptation would help prioritize infrastructure investments that improve the physical resilience of low-lying areas.
International Monetary Fund. Western Hemisphere Dept.
This technical assistance report on Aruba highlights the financial stability diagnostic and scoping mission. The economy of Aruba is tourist dependent, which is an important source of vulnerability. The major source of risk comes from lending. Banks are increasingly exposed to the real estate market and compete with nonregulated lenders. Residential house prices have increased significantly in some regions since the start of the pandemic driven by strong demand from nonresidential buyers as well as higher construction costs due to coronavirus disease-related supply constraints. The future Financial Stability Department (FSD) is advised to develop a strategy on Macroprudential Policy (MaP). Based on the macroprudential strategy, the FSD should prepare the methodology for the introduction of the MaP instruments chosen as well as ensure the necessary preparations in terms of data collection for this purpose. The data available to the Central Bank of Aruba is sufficient for starting systemic risk monitoring, but some data gaps should be addressed. The monitoring of systemic risk and the development of macroprudential tools requires more granular, frequent, and timely data.
Olga Bespalova
This paper improves short-term forecasting models of monthly tourism arrivals by estimating and evaluating a time-series model with exogenous regressors (ARIMA-X) using a case of Aruba, a small open tourism-dependent economy. Given importance of the US market for Aruba, it investigates informational value of Google Searches originating in the USA, flight capacity utilization on the US air-carriers, and per capita demand of the US consumers, given the volatility index in stock markets (VIX). It yields several insights. First, flight capacity is the best variable to account for the travel restrictions during the pandemic. Second, US real personal consumption expenditure becomes a more significnat predictor than income as the former better captured impact of the COVID-19 restrictions on the consumers’ behavior, while income boosted by the pandemic fiscal support was not fully directed to spending. Third, intercept correction improves the model in the estimation period. Finally, the pandemic changed econometric relationships between the tourism arrivals and their main determinants, and accuracy of the forecast models. Going forward, the analysts should re-estimate the models. Out-of-sample forecasts with 5 percent confidence intervals are produced for 18 months ahead.
International Monetary Fund. Western Hemisphere Dept.
Aruba managed to contain the pandemic in the first months of the outbreak but experienced a resurgence of new infections in the summer. The economic impact of COVID-19 is particularly severe given Aruba’s high dependency on tourism. While the authorities’ swift response has helped contain the human and economic damage, it could not avoid a severe GDP contraction.
International Monetary Fund
Finance & Development, June 2020