In view of the forthcoming Budget which will be presented next Monday, the former Minister of Finance writes the third part of a series of articles. He speaks of a triple-shocker affecting our tourism industry.
A qualifying remark
Dictated by what is grabbing the headlines and in view of its critical importance for economic growth, employment , foreign exchange earnings and tax receipts, I shall devote this article on sectoral assessment, mostly to the tourism sector that faces strong headwinds. While the direct share of tourism is computed by Statistics Mauritius at 8.6% of GDP and 8.5% of total employment, its total contribution to the economy is much higher when the indirect, induced and catalytic effects are captured. Even if I have qualms with the fanciful estimates of 24% of GDP and 25% of employment professed casually by some.
A snapshot of other sectors
First, I shall briefly review the other sectors. i) Spurred by major public sector infrastructure projects and investment in real estate, the construction cluster is doing very well. It grew by 7.5% in 2017 and 9.5% in 2018 and is forecast to expand by 8.6% in 2019. It comes after a contraction of 25% over five consecutive years between 2011 and 2015. There are three caveats though. It would peter out as from the next two years, after the completion of these major projects, it is bleeding the external balance and raising the public sector debt substantially;
ii) Sugar is reeling from a combination of sharply lower international prices and rising costs of production, plunging it into an unprecedented crisis. Unless bold, decisive and concrete measures are taken swiftly to rescue the sector, it will continue its secular decline with the most vulnerable stakeholders more exposed as they do not have diversified sources of income;
iii) Non-sugar agriculture is underperforming and we have not been able to build a resilient high value added agrobased industry to attain a reasonable level of food security and some exports;
iv) The share of manufacturing has steadily declined to an anxiously low 12.3% of GDP in 2018 compared to the projection of Government at 25%. Its contribution to output, jobs, investment and exports has receded dramatically;
v) Textiles and clothing have dwindled, with negative growth of 5.8% in 2016, 0.7% in 2017 and 6.8% in 2018;
vi) The share of export-oriented industries to GDP has shrunk from 5.2% in 2016 to 4.9% in 2017 and 4.4% in 2018. Only the sea food hub is gaining traction;
vii) The domestic-oriented industry continues to confront the effects of tough competition, unfair practices from abroad and falling tariffs. They also have difficulties to penetrate the regional market while there is low technology absorption and little additional import substitution;
viii) Obstacles to SME's growth and development in terms of access to finance, markets, technology, capacity building have not changed and they are experiencing closures and job losses;
ix) The global business sector has recorded a lower growth of 4.3% in 2017 and 4% in 2018 and is forecast to expand at only 3.8% in 2019. It is being challenged by the modification of the India tax treaty, the changing regulatory, tax and substance landscape and pressure from global standard setting institutions;
x) The ICT cluster, which used to post an average of 10% growth, has moderated to around 5.3% in 2018 and is predicted to expand by 4.8% in 2019. It is not shifting its focus fast enough to the digitalisation of the economy to reap the benefits of the fourth industrial revolution that will deeply affect every aspect of the economy and society;
xi) The country is struggling to identify new pillars that will contribute significantly to growth and development. The ocean economy is blocked in the starting stall while robotics, blockchain and fintech remain motherhood statements. The Africa strategy is dispersed and making very slow progress while the prospects of the green and the circular economy are mostly untapped.
Tourism: end of cycle, events-related problem, cyclical or structural challenge or paradigm shift?
Tourism is currently navigating in troubled waters after yearsof sustained growth. Its woes are unprecedented.
The causes of its ailment are multiple and varied.
i) The end of a good cycle and the absence of a new vision to adapt and better prepare the industry for emerging challenges. So as to enhance the country's attractiveness, sharpen its visibility, develop a diversified product mix and increase its value addition within a framework of sustainable tourism;
ii) A lack of alignment, if not a self-defeating blame game, among the three main actors in the industry - Government, hoteliers and Air Mauritius - on the accessibility of the destination;
iii) A correction after some years of strong growth as other countries in North Africa and Turkey are regaining the market share that they lost for security-related reasons. Just like some destinations would benefit from what has unfortunately happened to Sri Lanka;#
iv) A cyclical occurrence because of uncertainty and risks in some of our key markets such as the UK with Brexit, France with the 'gilets jaunes' and La Reunion with the riots.;
v) A structural challenge as our brand has not been reinvigorated, our image blurred because of the degradation of the environment, beach erosion and the decline in cleanliness, our reputation impaired as a very safe destination by deteriorating security and a fall in the quality of services. In essence, we have lost our shine;
vi) A reluctance to embrace an innovative, skill-intensive and technology-driven strategy to enhance the competitiveness of the destination;
vii) Fiercer competition from destinations that offer similar and more affordable experience to Mauritius;
viii) Policy mistakes in our strategy especially with respect to market diversification. China is collapsing with the loss of almost 50% of the market while the Africa-Asia corridor has been a non- starter;
ix) Failure to recognise and respond to the paradigm shift and disruption affecting the Hotel industry by the sharing economy (Airbnb and other peer to peer platforms) that is leading to disintermediation, hot competition while also democratising the travel business.
It is more than just a fall in overall arrivals
Table 1 shows that arrivals by air, which account for 97% of tourists and constitute the bedrock of the sector in terms of value added, are down by 2.6% for the first four months of the year compared to 2018. The low contribution tourists by sea grew by 90.9% to produce an apparent decline of only 0.11%.
Table 1. The decline is much more for 97% of tourist arrivals
The reality is very different and is illustrated in a glaring way at Table 2.
The figures are very revealing as in the case of Germany. The key statistics of tourists by air fell quite substantially by 5.5% while the low value tourists by sea grew by a huge 96.5%, giving a misleading impression of an overall rise of 7.5% in total arrivals from Germany. A similar pattern, albeit less dramatic, exists for France, Italy and the UK. We need tourists who stay in our hotels for an average of 10.5 nights and spend money on accommodation, food, recreation, leisure, shopping and other activities! Not those in transit for very few hours with hardly any value added.
Table 2: The flaw in the growth of tourist arrivals (%)
The signal is worrying as average spend per tourist is dwindling
In fact, earnings from tourism are down since September 2018 while average spend per tourist has consistently fallen from the beginning of the 2018/19 financial year, as displayed at Table 3.
i) In the quarter July to September 2018, tourist numbers grew by 6.28% while earnings remained flat and average spend decreased by 5.76%;
ii) For the Oct-Dec 2018 period, arrivals were up by 4.21%, earnings fell by 2.12% and average expenditure dropped by 6.08%;
iii) From January to March 2019, arrivals are lower by 1.15%, earnings down by 10.64% while average spend fell sharply by 9.59%;
iv) For the nine months of the 2018/19 fiscal year, arrivals grew by 3.02%, earnings dipped by 4.72% and average expenditure per tourist declined by 7.52%.
As valued added from tourism, which is a key contributor to GDP growth has decreased by 4.72% over 9 months compared to an annual forecast of a rise of 4.2%, it is plain that overall economic growth will be much lower that the 4.1% predicted by the PM for 2018/2019. We shall find out on Monday.
Table 3. Earnings are lower while average spend is much lower
The contrasting fortunes of Seychelles and Maldives
Table 4 compares our arrivals with those of our two closest competitors in the Indian Ocean.
Table 4: What a difference with Maldives and Seychelles
The cyclical argument does not pass the comparative empirical test as Seychelles and Maldives are doing very well. They are simply adapting better and faster to emerging challenges. In the first four months of 2019, tourism has grown by 13% in Seychelles and 19.7% in Maldives. Both countries had double digit growth from the four key European markets. Seychelles achieved a growth of 11.9% from France, 14.8% from Italy, 24.8% from the UK, and 67.4% from Germany. Maldives recorded growth of 12.6% from the UK, 26.9% from France, 31% from Germany and 36.1% from Italy. Maldives did very well with tourists from India growing at 95.3% and China expanding at 8.7%. Mauritius pales in comparison with such achievements. It is plain that the problems are more structural with many and multiple causes as elicited above. Maldives and Seychelles do a better job at protecting their environment, maintaining their high end brand, improving their products and sharpening their competitiveness.
The impact of the sharing economy
One of the most critical developments shaking up the hospitality industry is the growth of the sharing economy. A number of decentralized peer-to-peer markets are driving changes and innovation and have emerged as alternative suppliers of goods and services traditionally provided by long-established hospitality industries. Companies, such as Airbnb and Expedia, are affecting the hotel industry and forcing it to respond. Today, it is common for consumers to book hotel or flight reservations with a few clicks and this trend has evolved into highly profitable business models. It has reached our shores where many private apartments, houses, and villas are competing with the hotel industry to attract tourists. It will grow and the industry must adapt to cope with such disruption just like banks are responding to the challenges of new technologies.
We need an informed and comprehensive brainstorming to identify the root causes of the decline in arrivals, earnings and spending per tourist and implement remedial measures quickly to reverse the trend as the sector is key for growth, employment, foreign exchange earnings and tax receipts and has significant indirect, induced and catalytic effects on the economy.
Will the Budget on Monday acknowledge the chasm between promises, wild forecasts and 'effets d'annonce' on the one hand and dismal performance and poor delivery on the other? Or, will the spin doctors continue to lull in complacency, maintain their unabated elated demeanour and hoodwink the population with short term goodies that will be expensive in the medium and long term and inflict irreversible harm to the economy. We shall find out on Monday.