Comments on the Economic Overview

Twenty-five page of the Economic Outlook 2021- 2023 were recently circulated by The Department of Economic Affairs, Commerce and Industry, they said that are prudent with the projection for 2022 and 2023 due to increasing uncertainties in time. Therefore, these estimations have to be considered preliminary and used with care.

I asked some economist friends to comment, I think they made very interesting points:

Economist #1 says three interesting things

The projections for tourist arrival numbers are probably reasonable although I am hearing rumblings that while the summer will be good there may be some softening in demand in the fourth quarter as inflation in key source markets (particularly the USA) and the threat of recession put a damper on customer sentiment, and 2023 may not be a strong as people expect.

I am more concerned about their comments on tourist expenditure. They use the increase in hotel average rate comparing 2022 with 2021 as a good indicator which has some validity but it is worth noting that the percentage of visitors staying in hotels fell from 51.0% in 2019 (Jan-May) to 44.7% in 2022, so more people are using cheaper accommodation.

I am more worried about the assumption that spending outside the hotels has also substantially increased and will remain high. I have no clue where they get that data from. Anecdote?

Interestingly the average length of stay (nights) dropped from 7.60 nights in 2021 (Jan-May YTD) to 7.35 nights in 2022.

So, visitors were staying for a shorter period of time but spending substantially more?

By the way, the average length of stay in 2022 was about the same as for the same five months of 2019, 7.35 nights in 2022 and 7.37 nights in 2019.

And the percentage of visitors from the USA has grown from 75.0% in 2019 to 80% in 2022 and that has to have some impact on average visitor spend.

So basically, while it is not too difficult to estimate the number of visitor arrivals, I’m less confident how accurate the expenditure projections are.

I will be amazed if those inflation numbers for 2023 come in as projected. I think they will be much higher.

I do not see the words national debt or borrowing anywhere in the document. How do they account for the infusion of cash from the Netherlands as a component of the growth in GDP in 2021 and 2022? And how do they account for the fact that that money has to be repaid?

But overall, I am a big fan of E.F. Schumacher’s book from 1973 Small is Beautiful: A Study of Economics as if People Mattered” in which he said “Predictions are always unreliable, especially predictions about the future.”

Economist #2

I think Aruba’s inflation is understated in the report. Our tourism economy is operating in an unprecedented “bubble” with spending and consumption at levels we have not seen in Aruba in a long time, if at all. I don’t think this is sustainable. There will be corrections and all the signs are pointing to that – revenge tourism will fade out and normalize, the reality of inflation and the value of our visitors 401K’s going down will soften demand and force hotels to lower ADR’s, etc., and VAT will make Aruba significantly more expensive for both tourists and locals. The question is not “if”, it’s “when”. Tourism is a volatile industry and we could see changes in demand as early as Q4 or Q1 next year. If not, then by mid-next year for sure. My advice – enjoy the ride but proceed cautiously because there’ll be a few bumps in the road ahead.

Economist #3

The inflation rate is forecasted to be at 4.3 percent in 2022 and 5.5 percent in 2023: while the USA and Europe have much higher inflation rates, this assumed number seems way too low. It will be more than double this estimate.

The growth in the Export Tourism is forecasted in 2022 at 31.3 percent and is 11.6 percent higher compared to 2019: this forecast is not reasonable or likely, markets are under huge inflationary pressures and resources for tourists are much less than in 2019. So how can we expect a higher tourism income?

Furthermore, compared to the forecast in October 2021, higher Import of Goods and Services are expected in 2022, mainly driven by a higher expected imported inflation: The local consumption is constrained by available income, this income is squeezed by higher gas and (upcoming) utility expenses, so less will be available for goods and services. Tourist, as previously mentioned, also has fewer expendable resources, so why is an increase forecasted? Inflation does not increase the total sum of imported goods and services. Higher available resources do.

The Value Added Tax in each of the 2023 scenarios adds an additional inflation to the baseline. The Value Added Tax rate of 6 and 14 percent will create an additional inflation between 5.3 percent and 9.9 percent considering two different scenarios for the rollover effect of indirect-taxes on the end prices. This is above the projected inflation in the base scenario of 5.5 percent for the year 2023. This base scenario for inflation is way too low. So additional inflation on top of the actual base inflation will throw our economy in a tailspin.

Nothing is being said by the increasing Interest rates, making our 7.5-billion-florin debt much more expensive to maintain, which will require even more income, by taxing our dwindling resources.

Will not read the rest since this paper is a waste of time to read.

Economist #4.

My fundamental problem with these outlooks is that they are produced by a department of the same government that uses these outlooks to forecasts tax income. This was exactly one of the core problems that led to the economic crisis in Greece and other nations. A higher economic growth estimate leads to higher estimated tax income, which gives government more money to spend. When these estimated tax incomes do not materialize (which is usually the case….), this leads to deficits. That is why it is best practice to create an independent entity to produce these estimates (like the Centraal Plan bureau CPB in The Netherlands).

Another entity on Aruba may not be the best solution.

In my opinion the CBA would be independent enough to produce credible estimates.

Because of the above my attention was drawn to the growth estimates in the near future. From previous economic shocks waves in Aruba we know that after recovery from every shock, the long-term growth rate shifts to a lower average. For now, 3.3.% is estimated for 2023, which seems high given the uncertainty related to Ukraine. I am interested to hear the CBA´s opinion on this estimate.

What do you think?


Share on:

June 29, 2022
Rona Coster