Elevated Inflation To Keep Pressure On Minority Government In Aruba

  • Fitch Solutions expects the popularity of the ruling Movimiento Electoral di Pueblo (MEP) government to face pressure from elevated inflation in 2023. Fitch gave Aruba a score of 72.1 (out of 100) on the Short-Term Political Risk Index (STPRI), down from 75.2 previously which places Aruba in 14th position out of the 18 markets covered in the Caribbean region.  This is down several places from Fitch’s last update in 2022.
  • The main reason for the downward STPRI revision is the expected impact of elevated inflation on social stability and the pressure it will put on the minority MEP government in 2023.
  • Higher inflation will erode real household disposable incomes and weigh on living conditions in Aruba. Consumer price inflation was 6.6% y-o-y in January due to elevated global oil and food prices.  Fitch forecasts inflation will remain elevated in 2023, averaging 5.0%, well above an average of 2.3% registered in 2000 to 2022. This trend will be exacerbated by wage subsidy programmes implemented during the COVID-19 pandemic coming to an end.
  • To combat some of the impacts of elevated inflation on household incomes, the MEP rolled back a 5.0% cut to public sector wages implemented during the pandemic in July 2022. It also increased the minimum wage by 4.3% to USD1,051.88 on 1 January 2023. However, elevated inflation means some public sector workers and those on low incomes will still face real-terms declines in their incomes.
  • Declining real wages and stagnating living standards are likely to weigh on support for the MEP. Given that protests are relatively rare in Aruba and small-scale in nature when they do occur, a more likely outcome is that small-scale, targeted protests or strikes could take place in 2023. Reflecting this, public sector employees and labour unions held a walkout on 17 March 2023, to protest a new local government performance management system for civil servants. As a result, Fitch gave Aruba a score of 60.0 in the ‘social stability’ subcomponent of its STPRI, the lowest of its STPRI subcomponents.
  • Challenging conditions for households are likely to dent popular support for the MEP. While opinion polling data is largely not available for Aruba, the MEP’s position in parliament is already fairly weak.

 (Source: Fitch Solutions)