Monday, September 26, 2022

Economies reliant on tourism face second Covid summer slump


Tourism-dependent emerging economies that were already struggling before the pandemic with stretched finances and ballooning debt are counting the cost of their second successive summer season slump as the spread of coronavirus keeps visitors away.

In the first five months of this year global international arrivals were on average 85 per cent down on the pre-pandemic total of 540m in 2019, according to data released in July by the UN’s World Tourism Organization. That is even worse than the same period last year, when arrivals were on average 65 per cent down year on year.

Asia-Pacific was particularly badly hit, with a 95 per cent fall in arrivals compared with 2019 levels — due largely to the continuing absence of Chinese travellers. By contrast the return of US tourists has eased the hit to the Caribbean.

The slump in tourism revenues across much of the emerging world comes as governments’ debts mount as they struggle to meet the costs of the pandemic. Average government debt in large emerging economies rose from 52.2 per cent of gross domestic product to 60.5 per cent in 2020, according to the Institute of International Finance — the biggest surge on record.

The damage has not been evenly spread. Some economies entered the pandemic in better shape than others and are better able to weather the storm.

IMF chief economist Gita Gopinath warned earlier this year that economic performance was “diverging dangerously across and within countries, as economies with slower vaccine rollout, more limited policy support and more reliance on tourism do less well”.

The countries most as risk, said David Rogovic, senior analyst at Moody’s Investors Service in New York, were “the smaller, less diversified economies that entered the pandemic with weak fiscal conditions. Places like the Bahamas, the Maldives and Fiji are incredibly reliant on tourism and have seen a significant shock.”

Line chart of international tourist arrivals (% change from pre-pandemic level) showing global tourism is still in the doldrums

Luiz Eduardo Peixoto, emerging markets economist at BNP Paribas in London, said that so far this year had been worse than predicted last year.

“Last year, there was an assumption that in 2021 we would see a rebound,” he said. “But the drop [in numbers] last year was close to the most pessimistic scenario [forecast] by the UNWTO because we didn’t get a recovery during the [northern hemisphere] winter — quite the contrary. This year, things are not recovering as expected.”

He cited as causes the slow pace of vaccine rollouts in many developing countries and the spread of new variants of the virus, which have stymied countries’ plans to ease border restrictions.

For example, China has kept tight limits on inward and outward travel since the start of the pandemic, depriving destinations in south-east Asia of their biggest source of visitors.

Bar chart of International tourist arrivals (Jan to May 2021, % change from pre-pandemic* level, selected regions) showing Asia-Pacific hardest hit by global tourism slump

Thailand generated 20 per cent of GDP and employment from tourism in 2019, according to Moody’s. Its attempts to open tourism bubbles for vaccinated visitors this summer have had a bumpy start, with visitors testing positive for the virus despite entry controls.

However, the collapse of tourism has not tipped its public finances into crisis, Moody’s noted. This is because the strength of other areas of the economy such as manufacturing and other parts of the services sector have offset the shock to tourism. Other well-diversified Asian economies such as the Philippines and Cambodia are in a similar position.

But diversification is less of an option for small island economies, especially where the fall in tourism receipts has exacerbated pre-existing problems.

The Bahamas, whose credit rating had already been downgraded several times in the past decade because of its growing debt burden, is one such place. When the pandemic struck Moody’s downgraded it again in June last year, by two notches, and kept it on negative outlook for a possible further downgrade.

Fiji and the Maldives face similar challenges because of rising debts and the difficulty of refinancing them among a limited range of international lenders, Moody’s has warned.

The one bright spark is local tourism is that countries with a sizeable middle class are benefiting from holidaymakers choosing to stay at home this year.

Peixoto at BNP notes that scheduled airline capacity for the third quarter of this year in Russia and China is greater than it was in the same period of 2019, thanks to a sharp rise in domestic travel.

Countries such as Brazil, the Philippines, Argentina and Mexico are also benefiting.

“We saw this for a couple of quarters last year, that Brazilian people who would usually go abroad were staying in the country and generating more income at home,” he said. “In Russia, it is contributing to inflationary pressures.”

Bar chart: When do you expect international tourism to return to pre-pandemic levels in your country? (% of tourism experts surveyed) showing slim chances for a swift rebound

This may not replace foreign currency earnings for such countries, he added, but it does keep hotels and other businesses open and workers employed.

The UNWTO data show a hint of recovery in May, when international arrivals ticked up to 82 per cent below their pre-pandemic level, from being 86 per cent down in April.

Most of the recovery is in advanced economies, however, leaving little positive news for tourism-dependent countries in the developing world. The sector’s reopening in the worst-affected regions is indefinitely on hold.

“For them, it will be difficult to make a case for significant reductions in travel restriction this year,” said Peixoto. And as a result, “we don’t see a significant recovery in foreign tourism for emerging markets this year”.

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