Limited Upside For Tourism In East Caribbean

BMI View: Tourist arrivals in the East Caribbean will continue to tick up in the coming quarters, primarily on the back of a rise in visitors from the United States. However, growth in arrivals will remain below historical trend, underpinning our subdued outlook for real GDP growth in the region.

A subdued outlook for tourism will ensure that economic growth in the East Caribbean Currency Union (ECCU) remains below levels seen during the years prior to the 2008-09 global financial crisis. Indeed, slower growth in tourist receipts and industry value means that less tax revenue will be generated and fewer jobs will be created, thus weighing on private consumption and reducing the need for fixed investment into the sector ( see 'Tourism Weakness Will Drag On Regional Economic Growth', September 3 2013). While we forecast that real GDP growth in the ECCU will strengthen to 1.8% and 2.1% in 2014 and 2015 respectively, from 0.9% in 2013, this is much slower than average real GDP growth of 5.6% during the five years preceding the financial crisis.

Mixed Outlook For Growth In Major Sources Of Visitors

Past The Worst, But Subdued Growth Ahead
ECCU - Real GDP, % chg

BMI View: Tourist arrivals in the East Caribbean will continue to tick up in the coming quarters, primarily on the back of a rise in visitors from the United States. However, growth in arrivals will remain below historical trend, underpinning our subdued outlook for real GDP growth in the region.

A subdued outlook for tourism will ensure that economic growth in the East Caribbean Currency Union (ECCU) remains below levels seen during the years prior to the 2008-09 global financial crisis. Indeed, slower growth in tourist receipts and industry value means that less tax revenue will be generated and fewer jobs will be created, thus weighing on private consumption and reducing the need for fixed investment into the sector ( see 'Tourism Weakness Will Drag On Regional Economic Growth', September 3 2013). While we forecast that real GDP growth in the ECCU will strengthen to 1.8% and 2.1% in 2014 and 2015 respectively, from 0.9% in 2013, this is much slower than average real GDP growth of 5.6% during the five years preceding the financial crisis.

Past The Worst, But Subdued Growth Ahead
ECCU - Real GDP, % chg

Mixed Outlook For Growth In Major Sources Of Visitors

Our view for a moderate rebound in real GDP growth in the ECCU over the next two years is due to our expectation that an uptick in overnight arrivals from the US, the region's largest source of arrivals, will boost the tourism sector. We believe that labour market gains in the US are likely to provide US citizens, who make up around 40.0% of stay-over arrivals in the ECCU, with increased disposable income to spend on travel.

East Caribbean Currency Union: Real GDP Growth
Country Real GDP, % chg (10-Year Ave.) 2014f 2015f
Anguilla 3.5 1.5 2.2
Antigua and Barbuda 1.7 1.6 2.0
Dominica 1.9 1.2 1.3
Grenada 0.9 0.9 1.2
Montserrat 2.1 1.5 2.0
St. Kitts and Nevis 2.0 2.5 2.7
St. Lucia 1.9 2.5 2.7
St. Vincent 1.8 1.5 2.0
Source: Bloomberg

However, we believe that the US economy is 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 departures from the US will continue to grow more slowly than during the Caribbean's tourism and conference-hosting boom years . Moreover, we expect that US travellers will increasingly be drawn to destinations other than the Caribbean in the coming years, driven by increasing investment in tourist infrastructure in Central and South America. Furthermore, the East Caribbean Central Bank is committed to maintaining the region's fixed exchange rate, which means that, in a period of broad emerging market currency weakness, vacations in the Caribbean will become more expensive relative to those in otherwise comparable destinations in Latin America.

Total Arrivals And Visitor Expenditure Headed In The Right Direction
ECCU - Total Arrivals (LHS) & Total Visitor Expenditure (RHS)

The outlook for arrivals from other major sources of visitors is similarly mixed. In the UK, stronger economic growth has not been accompanied by a rebound in real wages, which will keep discretionary spending on travel below historical trend ( see 'The Strong But Fragile Recovery', April 1). In Canada, an improving labour market is likely to feed through to stronger arrivals in the Caribbean, reversing a recent downtrend in visitors. However, high consumer debt levels mean that upside potential for growth discretionary spending is limited ( see 'Consumption To Drive Growth, But Leverage Looms Large', April 2). In other major Caribbean countries, such as Trinidad & Tobago, Jamaica, and the Dominican Republic, a weak outlook for economic growth will preclude a major uptick in vacationing in the East Caribbean.

US Recovery To Pay Moderate Dividends
ECCU - Stay-Over Visitors From The United States

Panama Canal Expansion May Bolster Cruise Ship Arrivals

One potential source of upside for tourism in the East Caribbean over the long term is the expansion of the Panama Canal, due to be completed in 2015, which could lead to greater cruise traffic from the Pacific. Such a development would provide a much needed boost to businesses in the East Caribbean that cater to cruises, as passenger arrivals have fallen in each of the past four years ( see chart below). That said, 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.

Canal Expansion Could Give Cruise Industry Much Needed Boost
ECCU - Arrivals On Cruise Ships

Winners & Losers In The East Caribbean

Within the East Caribbean Currency Union, some countries' tourism sectors will to continue to fare better than others. In particular, St. Kitts & Nevis is likely to remain a regional outperformer, owing to major investments to rebuild its tourist infrastructure over the past 15 years, following severe damage suffered during Hurricane Georges in 1998. Indeed, St. Kitts & Nevis has gone from receiving 9.2% of total visitors to the ECCU in 2000, to 20.0% in 2013, while accounting for only 13.0% of the region's nominal GDP. St. Lucia also punches above its weight as a tourist destination, receiving 27.9% of total arrivals, while amounting to 23.3% of the ECCU's nominal GDP. The outlook for tourism on the island has improved in recent months, owing to British Airways expanding its direct flight service from London ( see ' Strengthening Tourism Sector To Bolster Economic Growth', January 15).

St. Kitts & Nevis Grabbing Market Share From Its Neighbours
ECCU - Total Arrivals, % of Regional Arrivals (LHS) & Change In Share Of Regional Arrivals Between 2013 and 2000, pp

Meanwhile, in Montserrat, the Development Corporation's plan to create a new capital city on the island's northwest coast, replacing Plymouth, which was buried by a volcanic eruption in 1995, will provide a significant boost to tourism in the next five to 10 years. The city is set to include a resort hotel, luxury villas, apartments, shops, a marina, as well as a commercial port ( see 'Tourism A Potential Growth Area', March 20).

Tourism Sector Well Developed In St. Lucia
ECCU - Nominal GDP, % of Regional GDP & Total Arrivals, % of Regional Arrivals

The outlook for other countries is less promising. In St. Vincent & The Grenadines, damage from a major storm in late 2013 has driven erratic growth in cruise ship passengers and stay-over visitors by air in recent months, underpinning our view that while the tourism sector has likely passed the worst, it continues to face notable challenges ( see 'Economic Recovery To Hit A Bump In The Road', May 29). We expect that a new airport will help encourage an uptick in tourist arrivals, although construction delays in light of storm damage will forestall any major improvement in the next few months. We also have a poor outlook for tourism in Dominica, which ranks well below the broader Caribbean average in our proprietary Tourism Risk/Reward Ratings, scoring particularly poorly in the 'country rewards' sub-component of our ratings, due to poor physical infrastructure ( see 'Cautious Economic Outlook Remains Warranted', November 20 2013).

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Related sectors of this article: Economy, Economic Activity
Geography: Caribbean, Antigua and Barbuda, Anguilla, Dominica, Grenada, Saint Kitts and Nevis, Saint Lucia, Montserrat, St Vincent
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