Tourism Weakness Will Drag On Regional Economic Growth

BMI View: We expect that tourism industr y growth throughout the Caribbean, traditionally a key driver of economic activity, will continue to slow in the years ahead, keeping real GDP growth relatively subdued. Moreover, while we expect some countries to outperform, weak fiscal revenues and higher borrowing costs will limit the capacity of most governments in the region to reverse the trend in slower growth.

W hile undoubtedly in better shape than during and after the 2008-2009 global financial crisis, w e expect that the next several years will see sustained weakness in Caribbean economies' tourism industries, compounding an already weak outlook for real GDP growth in the region . We believe that lower trending growth in the tourism sector - particularly in international tourism receipts and hotel and restaurant industry value - weigh on economic growth in the region over the next several years . Slower growth in receipts and industry value means that less tax revenues will are generated, fewer jobs are created , weighing on private consumption, and that there is less need for fixed investment.

The opposite of this was on display in the late 1990s and mid-2000s, when a sustained surge in tourism receipts and industry value helped propel regional GDP growth. But rather than the average regional real GDP growth of 3.9% in 1999-2000 and then 4.9% from 2003-2007, when receipts and industry value grew rapidly, we forecast weakness in the tourism sector will keep regional GDP growth contained to a more moderate 2.6% from 2013-2015, with risks likely weighted to the downside.

GDP Growth Tied To Tourism
Caribbean - Real GDP & Tourism Industry Growth

Tourism Weakness Will Drag On Regional Economic Growth

BMI View: We expect that tourism industr y growth throughout the Caribbean, traditionally a key driver of economic activity, will continue to slow in the years ahead, keeping real GDP growth relatively subdued. Moreover, while we expect some countries to outperform, weak fiscal revenues and higher borrowing costs will limit the capacity of most governments in the region to reverse the trend in slower growth.

W hile undoubtedly in better shape than during and after the 2008-2009 global financial crisis, w e expect that the next several years will see sustained weakness in Caribbean economies' tourism industries, compounding an already weak outlook for real GDP growth in the region . We believe that lower trending growth in the tourism sector - particularly in international tourism receipts and hotel and restaurant industry value - weigh on economic growth in the region over the next several years . Slower growth in receipts and industry value means that less tax revenues will are generated, fewer jobs are created , weighing on private consumption, and that there is less need for fixed investment.

Caribbean - Regional GDP & Tourism Growth Forecasts
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 10-year Average 2013f 2014f 2015f
Note: f=BMI forecast; Source: BMI Calculations, Regional Central Banks & Statistics Agencies
Real GDP, % chg 3.2 3.5 7 6.9 3.9 1.6 -1 1.1 2.7 2.1 3.1 2.3 2.7 2.8
Real Private Consumption, % chg 2.1 2.3 4.4 7.3 2.8 0.6 -0.1 4.5 1.2 1.8 2.69 1.7 2.1 2.4
Real Government Consumption, % chg 1.1 1.7 6.1 3 4.2 2.3 0.3 0.2 -0.3 2.9 2.15 1.1 1.7 1.7
Real Fixed Capital Formation, % chg -7.2 7.7 12 12.3 3.7 3.4 -14.3 2.9 2.9 2.8 2.62 1.5 2.4 3.9
Hotels & Restaurants Industry Value, % chg 14.9 8.7 24 6.3 8.1 0.6 -6.4 6.1 4.3 3.6 7.02 2.5 4.2 4.9
International Tourism Receipts, % chg 7.8 8.7 9.4 5 3.7 0.3 -7.5 3.4 2.7 -0.1 3.34 6.1 3.4 3.8

The opposite of this was on display in the late 1990s and mid-2000s, when a sustained surge in tourism receipts and industry value helped propel regional GDP growth. But rather than the average regional real GDP growth of 3.9% in 1999-2000 and then 4.9% from 2003-2007, when receipts and industry value grew rapidly, we forecast weakness in the tourism sector will keep regional GDP growth contained to a more moderate 2.6% from 2013-2015, with risks likely weighted to the downside.

GDP Growth Tied To Tourism
Caribbean - Real GDP & Tourism Industry Growth

Unsurprisingly, the growth in industry value and tourism receipts is predominantly a factor of growth in tourist arrivals, with the period of greater industry value and stronger receipts overlapping closely with years of relatively more rapid arrivals growth. The 1999-2000 and 2003-2007 periods identified above were times when arrivals growth was at its strongest, consistently well above the 14.2% average growth recorded from 1994-2012 ( see chart, below ). Our expectation that arrivals growth will remain well below its historical average underpins our forecast for slower trending real GDP growth in the Caribbean over the medium term.

Weaker Growth Due To Weaker Arrivals
Caribbean - Overnight Tourist Visitor Arrivals

The principle driver of slower arrivals growth is that the two countries that send the vast majority of tourists to most Caribbean nations - the US and the UK - are set for lower trend real GDP growth than during the late 1990s and mid-2000s, meaning that income growth and discretionary spending on travel is unlikely to hit previous highs. As a result, we expect total tourist departures from these countries will continue to grow more slowly than during the Caribbean's tourism boom years. In addition , we expect fewer UK and US tourists, as a percentage of total travellers, will choose the Caribbean as a destination, continuing a trend that has been in place for the last several years ( see right hand side chart, below ).

Slower US & UK Departures Growth Will Weigh On Region
Tourism Departures To Select Caribbean Countries, % chg (LHS) & % Of Total (RHS)

Winners & Losers

While we expect the region as a whole to see slower tourism growth, with the regional economy likely to suffer as a result, we acknowledge that not all countries will be affected in a uniform manner. Indeed, there is already a great deal of divergence playing out within the region in terms of tourist arrivals, trends that may continue and allow some countries to become or remain regional outliers. For example, Dominican Republic , Cuba , and Jamaica all experienced more or less uninterrupted growth in arrivals following the financial crisis ( see chart below ) , and others that were hit hard in recent years , such as Montserrat and Anguilla , have seen arrivals bounce back for two consecutive years.

A Few Are Faring Well...
Caribbean - Tourist Arrivals By Country, '000

On the other hand, there are many regional economies whose tou rism sectors seem stuck in down trends. After posting a very strong 2011, Puerto Rico saw a steep drop-off in tourist arrivals in 2012, suggesting that the downward trend in the US territory's arrivals remains in place. The surge in 2011 likely helped end a multi-year period of real GDP contraction in the 2011-2012 fiscal year, but the decline in 2012 suggests that the economy has softened again this fiscal year. And while the Bahamas tourism industry saw a rebound in 2012, with 1.4mn overnight stays, tourist arrivals remain below the average of 1.5mn arrivals from 2000-2012.

...But Many Are Feeling The Squeeze
Caribbean - Tourist Arrivals By Country, '000

With arrivals set to trend lower, success of a national tourism sector will depend largely on the capacity to win market share, and in this effort, government spending, as well as public-private partnerships, can prove very important. For example, the Puerto Rico Tourism Company, an executive branch agency in the Department of Economic Development and Commerce, has planned significant improvements in infrastructure that will support arrivals. In addition to port modifications in order to cement long-term agreements with cruise liners, the government has opened new direct flights from Colombia , Mexico, and the US east coast in an effort to attract more arrivals. Similarly, in Bermuda , a US$4.8mn marketing plan is seeking to attract arrivals from the US, Canada, and Europe. The government is trying to combat a decline in both business and leisure tourist arrivals, with aging infrastructure, rising crime, and high prices encouraging tourists to look elsewhere.

On the whole, however, we are sceptical of government capacity to reverse the slowdown in regional tourism. Partially, this is due to our view that arrival growth will slow, meaning that even if there are some outperformers, most islands will see growth rates slow. But more than that, we believe many governments throughout the region are no longer in the position to supply massive infrastructure investment over a sustained period. Barbados in particular is a good example of these dynamics at work, as slower growth in both tourism and the offshore financial services industry has depressed revenue growth and widened fiscal deficits, making it difficult for the government to support the industry without borrowing. But a weaker fiscal situation , combined with a broad move higher in emerging market interest rates , means that borrowing capacity will be increasingly limited going forward. Furthermore, many islands already have sizeable debt loads that will limit government stimulus options over the medium term ( see ' Additional Credit Events Only A Question Of Time', June 4 ) , and a slowdown in tourism arrivals will exacerbate already weakened current account dynamics.

Shifting Trends?

Yet another headwind for Caribbean tourism is the increasing diversity in destinations for travellers from the region's top two originators of tourists, the US and the UK. We believe British and US travellers are increasingly drawn to destinations other than the Caribbean by lower prices, cheaper airfare, and increasing investment in tourist infrastructure in regions that can be thought of non-traditional destinations. US tourists departing for Africa, Asia Pacific, and the Middle East grew from 9.7% of total departures in 1999 to 20.5% in 2012, and that percentage increased from 11.2% to 17.3% in the UK over the same timeframe .

We believe this trend will likely be exacerbated by the fact that many countries across the Caribbean are on fixed currency regimes, which means that, in a period of a strong dollar and emerging market currency weakness, vacations in the Caribbean will become more expensive relative to those in otherwise comparable destinations, particularly in Latin America. Mexico and Central America are well-positioned to benefit due to their proximity, but slightly more distant Latin American countries may also prove potential substitutes for erstwhile Caribbean-bound tourists. Additionally, countries that host major international events - such as Brazil, which is scheduled to host both the 2014 FIFA World Cup and the 2016 Olympic Games - will grow their profiles as potential travel destinations, perhaps to the detriment of the Caribbean.

Much of our forecast s above are based on the assumption that tourists to the Caribbean will continue to come from developed markets in North America and Europe, predominantly the US and the UK, as has historically been the case. However, some have argued that there is potential over the coming years for rising incomes in emerging markets to spur more international travel, potentially offsetting the slowdown in arrivals from developed markets. A preliminary review of the data suggests that such a shift is still quite a long way off.

While we expect tourism arrivals from Latin America and Asia Pacific to average growth of 4.3% per year from 2013-2015, stronger than 3.2% from Europe or 2.1% from North America, they are starting from such a low base that it will be quite some time before arrivals from emerging markets will make a substantial difference in the tre nd. Indeed, total tourist arriv als from Latin America, Asia Pacific, and the Middle East have only increased from 16.5% of arrivals in 2001 to 17.7% of arrivals in 2011.

Emerging Market Tourist Has Yet To Emerge
Caribbean - Tourist Arrivals By Region, '000

Moreover , we believe that a slowdown in China will weigh on emerging market growth in the years ahead, with developed markets set to outperform, particularly the US and the UK. As such, we see little to suggest a major shift away from the strong linkage between tourism departures from developed markets in the North America and Europe, and tourism and economic growth in the Caribbean.

Finally, we believe that shifting weather patterns could significantly alter Caribbean tourism trends in the years ahead. Global climate change science suggests that we may see more intense tropical storms than during the late-20 th century, a dynamic to which the Caribbean tourism industry is particularly adversely exposed. More violent hurricane seasons will increase the likelihood of delayed or cancelled flights and cruise sailings, and greater property damage intersecting with slowing revenue growth would only further weigh on the industry's profitability.

Risks To Outlook

We believe that the largest risk to our view is that US consumers make a stronger recovery than we currently expect in H213 and through to 2015. A strong resurgence of consumers from the US, or potentially the UK and Canada, though we view this as less likely, could go a long way to limiting any regional slowdown in tourism growth . Similarly, we acknowledge that the expansion of the Panama Canal could lead to greater cruise traffic from the Pacific coming through to stop in the Caribbean, but we note that each cruise ship visitor has traditionally spent less time and money on a given island, meaning that they will continue to have less economic impact than each overnight tourist arrival.

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