Marion Williams: The tourism sector - growth prospects and challenges
Address by Dr Marion Williams, Governor of the Central Bank of Barbados, to the Barbados Hotel
Association, Christchurch, 8 September 2004.
* * *
Good morning, ladies and gentlemen.
It is a great pleasure for me to deliver the feature address to the annual meeting of the Barbados Hotel
and Tourism Association. This association along with the BTA and the Ministry of Tourism has worked
extremely hard over the years and especially hard since 2001, to ensure the survival and the rapid
growth of the sector.
My address will describe the economic landscape and will address issues of repositioning and will also
flag issues to be considered but will stop short of prescribing solutions.
Repositioning
In recent years, Barbados' dependence on the performance of the tourism sector has never been
more obvious. International developments and external challenges have forced the country to focus on
policies and programmes to ensure that Barbados is able to compete successfully within an
increasingly challenging environment. We have thus far weathered the storm (no pun intended) but
important challenges lie ahead both at a broad macroeconomic level and at the sectoral level. At the
broader economic level, Barbados will need to focus on developing our physical and economic
infrastructure. There comes a time when incremental increases will not do unless the structure is
revamped and repositioned. Yet we need to be continuously mindful of what is fiscally prudent. We
also need to keep our energy policy under review in the light of rising oil prices, and we need to
ensure that our manufacturing and agricultural sectors are so repositioned as to have viable futures
given global trade developments. The issues of financial liberalisation and liberalisation pressures on
services are also continuing challenges both within CSME and within other negotiating fora. We need
also to get the maximum advantage out of the tourism sector and give this key sector our fullest
support. In the medium term it will continue to be our flagbearer.
Credit rating
In spite of the recent downgrade of Barbados' sovereign credit rating, the medium term prospects for
Barbados are promising. We still expect to grow by approximately 2.5%, led by tourism. The financial
markets have in fact recognised that Barbados continues to be a good credit and the risk premium on
Barbados' sovereign debt has not been affected by the recent ratings action.
Not only has tourism been the best performing sector, but its performance last year and this year so
far has been at its highest in recent years. While we do need to have balanced growth, and I am a
great advocate of that approach, we should not be apologetic about the fact that the tourism sector
has outperformed all others.
Foreign exchange earnings
The foreign exchange earning capacity of the sector has helped to offset some of the downside risks
of the country's debt levels. Earning as it did about $1.3 billion in foreign exchange in 2003 (expected
to rise to $1.4 billion in 2004) contributing to close to 16% of gross domestic product, and employing
over 11% of the labour force; the sector has contributed handsomely to the economic performance of
the Barbadian economy even when international developments have presented tremendous
challenges. I think it is a credit to the hard work of the officials in the sector and to Government's
willingness to provide support, that this outcome has been possible. The sector was able in 2003 to
register output growth of 7.3% (6.7% in long stay arrivals) against a global decline of 1%. This
compared with an annual average of 3% between the period 1994-2003. However, in 2004 growth has
been particularly robust, reaching as high as a real value added of 10% in January to June.
Satellite accounting for tourism
I read with interest the recent report of the Private Sector Trade Team's sectoral profile on the tourism
industry - an excellent document. The tourism satellite accounting approach which measures the
indirect contribution of the sector to output and which puts this at 52%, is and interesting statistic.
Statisticians have always known that tourism's overall contribution to GDP is much greater than
15-16% of GDP, when indirect effects are taken into account, but the double counting that results has
hindered that approach. How, for example can we say that the construction of - say Hilton hotel -
should not be included in statistics for the construction sector, but rather be included in the output of
the tourism sector. These are the statistical challenges, and they are governed by international
standards which, for international comparability, require standard measurements. However the
satellite approach is a very useful one for giving us a more precise and measurable appreciation of the
indirect impact of the sector on the Barbados economy, and can assist in strategising on the
intersectoral linkages between tourism and other sectors, thus allowing allied sectors to spot
opportunities.
The growth rates predicted for tourism and its anticipated continuing expansion, and are dependent on
specific conditions, such as a growing world economy, low energy prices and a global decline in
conflicts.
Energy costs
In the case of energy, the current level of oil prices must be of concern as the cost of utilities,
operating costs and investment have constantly been an issue with respect to their cost impact on the
tourism product in Barbados. Therefore, continued buoyancy in the price of oil will impact on economic
prospects. Government earlier this year passed on some of these price increases to the consumer.
This had an impact on all sector of the economy, including tourism. This was however prior to the
since galloping increase in oil prices. Even the airlines have imposed a fuel tax but it is unclear
whether this will have far-reaching implications. In a simulation run by the economists at the Central
Bank it was found that a 25% rise in domestic fuel prices reduces nominal GDP by approximately one
percentage point, implying that higher oil prices do impact on overall output. An analysis by sector has
not however been conducted so we are unable to say what proportion of this impact would borne by
the tourism sector.
Exchange rate changes
Meanwhile exchange markets have been dominated by declines in the US dollar. Not withstanding
some rebound since last February, World Economic Outlook, an IMF Report, notes that the US dollar
depreciated by 3 1/4 percent in trade weighted terms since September 2003 and by 16 1⁄2 percent
since its peak in February 2002. The dollar depreciated significantly against the Euro and against the
Yen. This would have made travel from these source markets more attractive, and because the
Barbados dollar is tied to the US, would not have affected travel from the US market. The Report also
indicates that in developed economies (our main source markets) business confidence is rising,
unemployment is improving, consumer confidence is up and global investment is promising. This
augurs well for travel in late 2004 and 2005.
The Latin American market
While Latin America is not a major source market for the Caribbean, ECLAC reports that rising
commodity prices in Latin America have resulted in the highest surplus in goods and services in
13 years and the best current account surplus in half a century. This would have positively affected
discretionary income available for travel. However, it is not clear that the improvements are sufficiently
significant as to lead to greater travel to the Caribbean from those markets, but the information should
be noted and monitored when future strategies involving that market are being developed. Many
Caribbean markets also provide a continuing growth opportunity, particularly since some of our
neighbours to the South are experiencing prosperous times.
Comparative advantage
In preparing for increased competitiveness, any country is best able to reap benefits if it specialises in
areas on the basis of its comparative advantage. Clearly tourism is an area in which Barbados has a
comparative advantage. In the case of tourism, our comparative advantage is one with which we were
endowed. But competitive advantage can be built and engineered. Also, the buoyant sectors can help
to support other sectors. The offshore services sector is able to support the tourism sector.
Developments in that sector therefore ought to be of great interest to tourism officials and changes in
the face of this sector should be monitored closely. It is important that we identify these linkages and
build on these synergies. The development of local craft is an example of synergies between tourism
and local manufacturing. In fact, the craft industry is largely a foreign exchange earner like any other
export industry though it is not always so perceived.
Sectoral linkages
Tourism-linked sectors grow strongly when tourism performs well. Consequently, distribution, utilities,
and the transport and communication sectors have exhibited good growth rates over the same period.
Much of the major increases in construction activity, in particular, over the past five years, has been
tourism-related. Capital investment in the sector has also been a source of long term capital flows
which benefit the balance of payments and help to boost our foreign exchange reserves. This
emphasises the catalytic role which the tourism sector plays. If we can ensure that our service industry
is globally recognised for its quality, we can also use our visiting tourists as marketing agents (by word
of mouth) for our service products on a broader scale. The service and the quality of our products
therefore have to be superior if we are going to use our tourism linkages to effectively sell them
abroad, and this includes the ambience and the environment in which these sales take place.
The cruise industry
Despite the rapid growth in long stay visitors, the fastest growth in numbers has been in the cruise
business. I read recently that fifty percent of new cruises are destined for Caribbean waters. Yet the
value-added from cruise visitors is very much lower than that for long stay visitors. This is something
on which Barbados and the region must strategise together so as to reap greater benefits. After our
failed attempt to raise a tax on cruise passengers regionally, it may be time for us to seriously consider
an entrance into the cruise business, either on our own or in partnership with others. It is a market
from which we need to reap greater benefits. This industry is expected to reach the 800,000 mark this
year, and so far this year cruise arrivals have grown almost 30%. This is clearly a booming business.
Currently however, it is the ship owners who are reaping the greatest benefits. They have the capital,
we have the waters. Our private sectors need to work on getting into joint ventures with the ship
owners and we should consider using a common cruise policy to give ourselves leverage. We should
not give up on this.
Market forecasts
Future forecasts of world economic growth can have important implications for tourism's sources and
markets. Forecasts differ among individual regions and groups of countries. Generally however,
whereas growth in the industrialised nations is expected to converge and is unlikely to change
significantly, some individual markets will do better than others. In addition, there is an evident
widening of the gap between, not only rich and poor countries, but between the rich and the poor
within countries in our tourist markets. This suggests that upmarket tourism will continue to be an
important target market. Indeed, in those countries whose economies are flagging, the high end of the
travel market is expected to be less affected. This suggests that we should continue to market
ourselves, among other things, as a playground for the rich, as this may lead to reliance on a more
inelastic type of demand which is not particularly affected by economic slumps.
Source markets
Economic performance of our source markets will influence the travel market. Global trends suggest
that in the euro area the recovery remains subdued. While there are signs of a pickup in investment,
household consumption remains weak but a gradual strengthening in domestic demand is expected.
In Japan, GDP growth continues to exceed expectations with strong external demand - notably from
China - accompanied by rising investment and latterly a pickup in consumption. This may have
implications for the marketing thrust by the industry in these countries. Indications are that
international tourism will continue to be concentrated from the main source regions of the world. The
US economy is projected to grow by 4.6% in 2004 and 3.9% in 2005, the euro area by 1.7% in 2004
and 2.3% in 2005, and Canada by 2.6% in 2004 and 3.1% in 2005. The heaviest international travel
flows will therefore continue to be within Europe and the USA - at least over the medium-term - partly
because of growth, but also because of higher per capita incomes and longer leisure time. The IMF
Outlook refers to the global recovery as becoming "increasingly well established".
Dynamic growth markets
Countries regarded as dynamic growth travel markets are: China and the Southeast Asia region, and
in some cases the Mediterranean and eastern European countries. Other Europe's market share
decreased slightly from 1995, but with a 57.8% share of the market there are still by far the most
dominant tourist destinations. Only a few developing and emerging market countries are expected to
do especially well. However, within CARICOM itself, travel has grown even faster than international
travel to the region. The Caribbean must however continue to work on increasing its share of the
global market.
National treatment
It will be important during the next few years that tourism investors are not put off by what appears to
be the impending prospect of liberalisation and a scenario where because of "national treatment"
considerations they may feel uneasy. It may appear that countries will have to offer similar
concessions to non-residents which they now offer to Barbadian residents, but some of these positions
can be negotiated and it will be influenced by what the country commits to. Also, changes in position in
the negotiating arena appear possible and it would be unwise not to grasp the opportunities offered by
the various concessions and special legislation such as the Tourism Development Act and others
while they are still available based on the fear that they will not last. I urge you to grasp these
opportunities now.
Industry consolidation
Given that tourism's growth globally has been reinforced by consolidation among every component of
the major tourism service suppliers and by technological advances, our tourism sector cannot afford
not to take advantage of these incentives so as to counteract some of the diseconomies of scale which
small countries like ours face. All stages in the tourism value-added chain - travel agents, travel
organisers, the transport and hotel and catering industries - are subject to growing competition.
Growth in size, trends towards concentration, and strategic alliances are pervasive. Expansion and
concentration strategies are increasingly pursued internationally through investment, mergers and joint
ventures, both horizontally and vertically. I am not necessarily recommending mergers but I am
suggesting that this region needs to respond pro-actively by forming alliances and partnerships among
themselves and with the big players so as to increase its economic and operational space even if
ownership is not increased or even though mergers may not take place.
Bargaining and negotiation
The increasing trend towards concentration, makes it difficult for small and medium-sized companies
in this segment to survive without a broad regional or even global presence. We must be agile and
respond to these challenges to small developing states, as we seek to negotiate the most appropriate
deals with tourism suppliers as there are likely to be fewer actors among which to bargain and possibly
more uniformity in price.
A consumer driven sector
It is not far-fetched to say that tourism is moving from a supplier-dominated industry to a consumer
driven business. Some destinations, in an effort to either remain demand-driven have embarked on
providing man-made travel and adventure environments which will entice the customer to choose their
destination on grounds of specific performance and not on price alone. As a relatively high cost
destination the Caribbean may need to adopt this approach. Scale diseconomies again may require
the use of existing incentive support to assist in providing these ancilliary attractions.
Accessibility and air travel
Transport is increasingly being determined with the co-operation of strategic partners and alliances -
and Barbados' officials are becoming more adept at negotiating their way through this network. I am
going to be very provocative here. As a tourism dependent economy, it might well be worthwhile for
Barbados to consider getting back into long haul airline ownership jointly with one of our regional
partners. As a tourism destination, Barbados has a lot of leverage. We need to use it. I am speaking
here to the private sector.
Brand name hotels
Fewer brand name hotels are getting involved in real estate ownership today than say 10 years ago
but they are willing to supply services to the industry. Because of the advantage of marketing under a
brand name, this has become more and more attractive for small destinations, but somehow Barbados
has not been too successful in this regard - Hilton hotel being a more recent exception. We may wish
to opt to place greater energies into this search to bring brand names to Barbados and utilise existing
unused prime locations more effectively. Again this is a challenge to the private sector to pool
resources so as to take advantage of existing opportunities.
Barbados as a retirement destination
The recent thrust to market Barbados as a retirement destination is also an interesting one - tourism
for senior citizens is a growing area. In the industrialised nations the most critical aspect of population
growth is the reversal of the age distribution. This comparatively larger proportion of retired people in
the total population will also influence the structure of tourist demand.
In addition, the growth in tourism continues to be closely tied to the relationship between working
hours and leisure. In the majority of the advanced western industrialised nations' average working
hours under collective bargaining agreements have fallen steadily over the past 20 years, while
vacation length has increased. Florida is a perfect example of the employment of such a strategy for
retirees. In the Florida case the added advantage is that there is no state tax, only federal taxes. We
may not need (or be able to afford) to offer any other tax advantage. However, as Barbados is
presently embarked on reducing its personal income taxation, this together with the double taxation
treaty benefits may be sufficient.
New forms of marketing
The use of the Internet as a platform specifically enables service providers, hotels tour companies and
the like, to reduce costs by contacting customers directly. With the cost of communication being
lowered in Barbados, there may be opportunities for greater use here.
Although figures on the number of current bookings made through the Internet to local businesses are
not available, it can nevertheless be assumed that the number, given the proper attention, will
increase in future as usage costs decline. It would be useful for forward planning to get a better idea,
on the basis of an industry survey, of how much this is used and how effective it has been.
With direct marketing, there is the opportunity to compare prices directly, there are no opening hours
to worry about, and additional information can be obtained through other media. However, the retiree
market which we hope to target more, may be less inclined to use these facilities as they are likely to
be less computer dependent.
Restructuring the market
In sum, global competition in tourism will be further intensified. However, there are a number of
requirements for continuing success which will continue to be important for the industry over the
medium term of which you as industry specialists are already well aware. Among them:
•
The increased concern for safety and security;
•
Permanent investment on quality;
•
Incorporation of new technologies;
• Stress on value for money; and
• Developing public-private sector partnerships.
In respect of quality output and value for money we need to encourage job flexibility.
Performancebased pay or some means of creating incentives to encourage production of higher quality output, is
therefore desirable.
Barbados as a small economy has managed to cater to varying segments of the market and to
combine up-market with the middle-market tourism. The challenge of combining the retirement market
and the up-market tourism should not be beyond us. The tourist industry may in future have to focus
more on a "hybrid consumer" whose travel choices and vacation activities will be increasingly complex.
This multiple-segment marketing may have implications for ancilliary services - but this is where the
linkages will become evident and where the satellite measurement of tourism's impact will become
important for estimating where the opportunities lie.
Tourism and the environment - a dilemma
For many countries, an undisturbed natural balance, unspoilt landscapes and varied fauna and flora
are their tourist attractions. Damage to the environment arises firstly as a result of processes unrelated
to tourism, and secondly as the result of inappropriate utilisation of resources by the tourism sector
itself. It is not only an environmental problem, but also an economic one. There is a cost to
preservation of the environment and the industry may have increasingly to bear some of that cost so
as to relieve Government of some of this burden.
Hurricanes and tourism in the Caribbean
Will any of the foregoing analysis change with the advent of hurricane IVAN?
It is possible that over the short term there may be some reticence about travelling to the region during
the hurricane season, particularly if the clean up and recovery is prolonged.
In some part, Barbados may even benefit from diversion of visitors formerly heading for Grenada or
even Cayman. It is unfortunate that we should benefit from the misfortunes of others but this is the
reality. We have had hurricanes before and we have not seen a medium term impact on long haul
flights to the region. Also, Florida has been badly hit as well, so we may also benefit from a diversion
by visitors originally headed to Florida. With respect to cruises, in my view, Cruises are more likely to
bypass the affected islands than bypass the Caribbean. You, the specialists in the sector are in a
better position to make these predictions. This is just a layman's view.
Tourism as a model industry?
I would like to conclude with the remark that planning tourism like monetary and economic strategies,
is today an increasingly demanding challenge. Given the number of variables to be taken into account,
the industry will be faced with the task of dealing with increasing complexity.
However, Barbados is a highly regarded brand. Our product will speak for it self. What we need are
resources to market ourselves effectively to the world.
Thank you ladies and gentlemen.