The Global Capitalist: Tourism Edition
I wanted to take a quick breather from covering South American nations to talk about the impact of COVID-19 on the global tourism industry.
Welcome to the Global Capitalist - A newsletter on emerging and frontier markets viewed through the lens of history and culture.
Hey everyone, welcome back. My apologies for the delay again! Busy few weeks at my day job.
This week I wanted to do a deep dive into the global tourism industry, given the current landscape of travel during COVID-19.
Thank you all again for your continued support! Please let me know if you have any other topics you’d like for me to explore in a future edition!
Last Week Briefing:
U.S. dollars were used in only 46% of Russian-Chinese transactions during the 1st quarter of 2020. This marks the first time ever recorded in which USD did not comprise over 50% of these transactions. Meanwhile, the Euro’s share of these transactions hit an all time high of 30%. - Financial Times
The reelection of President Alexander Lukashenko have ignited protests across Belarus. Belarusian citizens are skeptical of the legitimacy of Lukashenko’s victory, given his reputation as “The Last Dictator in Europe”. Russian President Vladimir Putin warned European nations to keep out of the former Soviet territory, citing the threat of exacerbating civil unrest. - NPR
Speaking of protests… Thailand has been protesting a controversial law that forbids criticism of the nation’s king, Maha Vajiralongkorn (Rama X, for short.) Protests began back in June as Wanchalearm Satsaksit, a prominent Thai activist, was arrested in Cambodia. - Sydney Morning Herald
Huawei boasts resilience in Africa. Throughout all of 2020, Huawei has yet to lose an order from the African continent. Countries such as South Africa, Ethiopia, and Kenya have defended their partnership with Chinese phone maker, highlighting the investment the company has delivered to the African continent. - Bloomberg
A Stepping Stone
In previous editions, I’ve written about how tourism can be a useful lever for generating growth in a developing market. Some countries use their abundant natural resources to attract foreign capital. Others rely upon their lush, arable land for an edge in agricultural exports. The rest will often resort to monetizing their scenic geography and historic landmarks to catapult their economy forward.
Tourism has shown to be an incredibly effective way of channeling wealth throughout an emerging market. For starters, tourism is an enormous industry. Tourism contributes nearly 10% (about $10 trillion) to global economic output, annually. In 2019, travel and tourism (T&T) grew 3.5%, punctuating 10 straight years of outpacing global GDP growth. This performance cements tourism as the second fastest growing sector in the world, lagging just behind manufacturing (+4%). T&T companies also comprise 10% of global employment and have created over 25% of new jobs over the last 5 years. While domestic tourists normally dominate the majority of tourism spending, we’re seeing international tourists occupy a larger share of global tourist spending. From 2010 to 2019, international tourists spending rose from 18.7% of global tourism spending to 28.7%. Overall, international tourist spending is up 44% since the beginning of 2010.
More often than not, tourists fit a specific mold. They are traditionally affluent individuals or families hailing from developed, high-income economies. These travelers naturally bring over their domestic currency along with an increased appetite for spending (after all, they’re on vacation!)
The technicals of tourism transactions generally benefit the local economy. Think about it: Tourists use their home currency to purchase (exchange) the local currency. The newly acquired foreign currency is then used to bolster the nation’s foreign reserves. By reinforcing foreign reserves, a country can strengthen the integrity of their currency and stabilize their local economy. In addition, wealth created from tourism does not idle in the pockets of wealthy restaurant and hotel owners. Instead, tourism businesses are valuable contributors to the local economy. These businesses pay wages to their staff, purchase inventory from local vendors, and pay taxes. In fact, tourism businesses employ women and youths at a higher clip than the general economy. Lastly, tourism propagates entrepreneurship and private enterprise. This helps a budding economy by creating new jobs and preventing “leakage” in the marketplace. (I’ll get to that in a second.)
World Travel & Tourism Council — 2020 Report
Tourism, despite its benefits as a vehicle for wealth creation, is limited in its viability. After all, it is extremely difficult to scale and sustain tourism. Even prior to COVID-19, we saw cities such as Venice, Amsterdam, and Bruges take steps to curb “over-tourism” as the influx of new visitors have overwhelmed the local populace. Additionally, tourism is highly cyclical. Businesses in a city such as Reykjavik, Iceland depend upon the warm summer months to drive the lion’s share of revenues. In the same vein, tourism exhibits heightened exposure to recessionary environments. During economic slowdowns, consumers are likely to reduce travel spending in favor of saving, or other discretionary expenses. Funny enough, Wall Street analysts have theorized that the superb earnings growth from home-improvement stores such as Home Depot and Lowe’s have stemmed from the fact that people have no travel expenses and thus, more money to spend on their home.
Economically speaking, the tourism industry is subject to diminishing marginal returns. That is, for every new hotel, restaurant, or attraction that is introduced into the market, incumbent players will suffer. Tourism’s inherently low barrier to entry threatens the viability of smaller enterprises. Multinational corporations can effectively supplant the services provided by smaller, local enterprise at a lower cost to the consumer. While this is a benefit of foreign direct investment, it virtually erases the monetary benefits of tourism. Profits made in a foreign country will return to the origin country of the multinational corporation, known as “leakage”. Monney enters the host country yet escapes elsewhere. Leakage is a cousin of a broader economic phenomenon called the “Dollar Milkshake Theory”, which I will talk about in a future newsletter.
Quite the Spectacle: Can you name the top 5 most visited cities in the world for 2019? Answer at the bottom.
Show Me The Damage
At this point you may be saying, “Alright shut up, Tom… Just tell me: What countries can I travel to?” Well, if you’re an American, you’ve got limited options. The U.A.E., Bangladesh, Brazil, and Mexico, among a few others will happily take you in! Otherwise, don’t hold your breathe. Europe has enough coronavirus to deal with on their own home turf. Another shutdown? Likely not.
The World Travel & Tourism Council (WTTC) predicts that between 121 to 197 million travel & tourism jobs will be lost in 2020. The Council also anticipates a $3-$5 trillion dollar contraction of the total global tourism industry. Other estimates anticipate a $200 billion drop in global tourism spending this year. This absent traffic and spending has pushed both developed and emerging economies across the globe to seek fiscal or monetary relief to help cushion their struggling markets. The International Monetary Fund (IMF) has earmarked up to $1 trillion in lending power, should they need to backstop any ailing countries.
Pirates of the Empty Tiki Bar
Let’s start with the Caribbean: Yikes. As shown in the picture above, 13% of the Caribbean’s GDP can be traced to travel & tourism, placing them atop the globe as the most reliant region on the trade. Additionally, Caribbean countries occupy 5 of the top 10 countries with the largest relative reduction in tourism spending. Several countries have tried reopening their doors to foreign visitors, with the aim of recouping some of the losses incurred in the first half of the year. That won’t be easy, however, as looming hurricanes and the lingering threat of infection have extinguished the goals of aspiring travelers. We will see whether or not the appetite for travel will return for the final stretch of 2020.
Aruba: Aruba reopened their doors to American travelers on July 10th after being shut down since March 13th. Aruba’s decision to shut down was widely contended, as nearly 75% of Aruba’s GDP and 85% of its employment can be derived from its tourism sector. ESTA predicts that Aruba will shed over 9% from their overall economic output in 2020.
Thankfully, Aruba has seen over 11,000 new visitors since its reopening. Unfortunately, most of the damage has already been done.
Antigua & Barbuda: If you thought Aruba’s economic concentration was concerning, just skip to the East Asian section to save yourself the misery. Antigua & Barbuda can link over 90% of their workforce and 42% of economic output to their tourism industry. The two islands have shed over $110 million in tourism revenue while anticipating an economic contraction of over 7%. The nation reopened to foreign visitors in June, although their proposed health and safety measures have not been as smooth as anticipated. Some tourists have threatened to sue the country, asserting that “[They] don’t have the right to put anything in my nose” after being administered a test immediately after they landed.
Virgin Islands: To round out the Caribbean, let’s segue to the British & U.S. Virgin Islands. The Islands are not far behind Aruba, Antigua and Barbuda when it comes to reliance upon tourism for economic output and employment. The Virgin Islands, on average, derive 56% of its economic output and 67% of its employment from the tourism businesses. To add insult to injury, the U.S. Virgin Islands are closing once again, after briefly opening their borders on August 19th.
Now, onto Asia:
Asia, as shown above, is home to some of the fastest growing T&T industries in the entire world. The top five countries by job creation are all located on the Asian continent and one of every three new jobs created in Asia are created by the tourism business. Countries such as Korea, Japan, and China have seen unprecedented inflows of new visitors, stemming from years of economic prosperity and development. Interestingly enough, Chinese visitors have been one of the fastest growing segments of the tourism business. In 2018, over 140 million Chinese people traveled to a foreign country, spending a collective $260 billion. In the first quarter of 2019, over 250,000 Chinese tourists traveled to Japan, Thailand, and Korea. While we don’t have the data for the first quarter of 2020 quite yet, we can all assume that the volume of Chinese travelers is nowhere near the levels of 2019, given China’s draconian lockdown measures. To kickstart the region’s tourism industry, some Asian countries have considered “travel bubbles” in which travelers from "safe" countries can travel freely within the bubble. Nonetheless, the slowdown in Asian tourism will likely scar the region for years to come.
Indonesia: Indonesia’s struggles with the coronavirus are multifaceted. Not only have their oil revenues plummeted, but the country is at risk of a decimated tourism sector, which employs over 12 million people. Since 2014, Indonesia has created nearly 2 million jobs in the tourism and travel sector. This growth can be attributed to the boom in tourist traffic over recent years. Nearly 16 million people visited Indonesia in 2019, up 2% from the year prior. 2% may not move the needle that much, but in 2018, the country saw an 8% gain in the number of visitors to their islands. Fast forward to today and tourism traffic has nearly vanished. June of 2020 saw an 88% decline in visitor traffic versus the same period a year ago. Sadly, Indonesian President Joko Widodo’s goal of 20 million visitors per year will likely have to be put on hold.
Indonesia has deployed two different fiscal stimulus packages, worth an estimated 695.2 trillion rupiah (~$50 billion) stimulus package to help their ailing populace. In previous economic crises, Indonesia’s ‘informal economy’ was able to keep them afloat.
Thailand: The Kingdom of Thailand saw a 71% drop in tourist volume between January and July of 2020. This is especially problematic given Thailand’s historically enormous tourism sector. Thailand’s tourism sector comprises over a fifth of economic output. The nation’s T&T sector added $70 billion to Thai exports in 2019. This endows the country with the fourth largest visitor exports in the world, trailing only Spain, China, and the U.S.. In addition, over 8 million people are employed by Thailand’s T&T sector, the sixth largest contribution to employment in the world. Given the absence of tourist traffic this year, the UN Tourism Organization predicts that tourism output will shrink over 6% in 2020, the worst contraction from any country’s tourism sector.
Thailand’s government has unloaded three separate stimulus packages to help combat the economic fallout. The stimulus is worth a collective 1 trillion baht, or USD$31 billion.
China: The People’s Republic of China, along with its special administrative regions (SAR), have the largest absolute number of people employed by the travel and tourism business and the second largest total contribution to GDP in the world. In 2019, nearly 80 million Chinese citizens were employed by T&T enterprises. Again, I don’t have the precise data but I can safely assume that number is a lot lower now. China’s top-down approach to tackling the coronavirus pandemic has produced some favorable (albeit, nominal) numbers out of the world’s second largest economy.
Macau — also known as the Vegas of the East — was built for tourism. Over 90% of Macau’s GDP can be drawn from its T&T sector. Visitor traffic to the luxurious destination dropped 77% through the first 7 months of the year. Macau, however, is not necessarily concerned about the slowdown. Because of the lucrative gambling taxes, the Chinese government pays Macau residents 9000 patacas a month, or around $1200 USD.
Macau SAR, China
Bet the spread: Who does more casino revenue? Las Vegas or Macau?
A quick stop in the Gulf:
The Middle East boasted the second fastest growing T&T sector in the world last year, just lagging behind East Asia. In fact, while Middle Eastern output as a whole contracted -0.5% in 2019, the tourism industry grew a defiant 5%. This is rather symbolic, given the trends taking place in the Middle East now. Oil, which was historically the region’s "Cash Cow" continues to fall out of favor as the Middle East strives to modernize their economy. In doing so, Arab leaders prioritized tourism as an alternate vehicle in which they can capture foreign capital.
U.A.E.: Prior to the COVID-19 pandemic, the Emirati city of Dubai had expected to host over 20 million visitors to the Persian Gulf. In fact, Dubai was chosen to host the World Expo this year, only only to have it pushed back to 2021. Over the last decade the United Arab Emirates has emerged as the second largest tourism hub in the Middle East, with T&T contributing $50 billion to economic output. The success in attracting foreign visitors can be tied to their massive infrastructure investments into tourism. These plans had been mostly successful, up until a few months ago.
What’s concerning about the Emirati tourism business is how dependent they are upon foreign spending. As mentioned above, domestic tourists tend to outspend their international counterparts. In the U.A.E.’s case, however, the Kingdom relies upon 77% of its total tourism spending from international spenders. Now, if there are no tourists, there will likely be a problem. The Emirati government has teed up a 3-pronged stimulus initiative to support the non-oil private sector. Looking forward, the Arab tourism industry should flourish amidst easing tensions between Israel and the Gulf states.
Saudi Arabia: Saudi Arabia was the fastest growing tourism economy in the world last year, growing at a 14% clip. The Saudi Kingdom has cemented themselves as the most visited destination and the largest tourist economy in the Middle East. Like the Emiratis, the Saudis have encapsulated their goals for tourism growth within the state-led Saudi Vision 2030 Initiative.
The Saudi Kingdom is also home to Mecca, the sacred city of the Muslim faith. During the Hajj, or “pilgrimage”, the Mecca and Medina will normally take in over 2 million visitors. This year, a mere 1,000 select people were allowed to attend the event.
Mecca, Saudi Arabia (Before & During Coronavirus)
A few others…
Seychelles: Seychelles, for those who may be unfamiliar, is a beautiful, sandy island off the east coast of Africa. Seychelles has lost over $73 million in tourism revenue this year, which may not seem like much, although consider that tourism receipts account for over 35% of Seychelles’ GDP. In 2018, tourists spent over $600 million in the Island nation. That number is likely to capitulate this year as tourism traffic has quite literally disappeared for the island nation. In April, only 22 people visited the nation.
Seychelles has also banned cruise ships from docking throughout all of 2021. This is rather ill-advised, given the nation’s dwindling foreign reserves.
Iceland: So I mentioned earlier how nobody wants to visit Iceland in the winter. It also just so happens that nobody really likes to visit Iceland during a global pandemic, either. In fact, IcelandicAir, the state-sponsored airline company, reported that international flight volumes have plummeted nearly 75% at the end of July. Visitor traffic hit an all time in 2019 only to fall to zero in 2020.
Over 50% of Iceland’s export revenue can be derived from its tourism sector. Iceland’s Central Bank has slashed interest rates to all time lows and is prepared to “do what [they] need to do to get the economy thorough this shock,”.
Iceland — Foreign Visitors Since 2010
Quite the Spectacle:
1) Hong Kong
2) Bangkok, Thailand
3) London, England
Bet The Spread:
Although Macau is often referred to as Las Vegas of the East, Las Vegas should actually be called the Macau of the West as the Chinese territory has been bigger than Las Vegas in casino revenue since 2007, despite Western casinos only arriving in Macau in 2002 and the first hotel on the infamous Cotai Strip opened its doors in 2006
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