11 Apr, 2012

Asian Development Bank Highlights Tourism’s Critical Role in Recovering, Diversifying Economies

Imtiaz Muqbil

BANGKOK / MANILA — Travel & tourism is playing an increasingly critical role in helping Asia-Pacific countries recover from a wide range of problems, ranging from economic downturns to geopolitical crises and natural disasters, according to an Asian Development Bank report issued today.

The Asian Development Outlook (ADO) 2012, the ADB’s flagship annual economic publication, notes the importance of travel & tourism in helping Sri Lanka rebuild its economy after years of civil war, the Maldives recover from the impact of the internal political changes and Thailand recover from the impact of the floods. It highlights the role tourism could play in the future development of Myanmar and drive the economies of landlocked countries such as Laos and Bhutan.

The report contains an increasingly prominent mention of travel & tourism within the broader context of the Asia-Pacific development agenda and cements its role as contributor to a new dimension of social and economic change. Key drivers of growth include income generation from tourism-related remittances to diversification of economies in places such as Brunei and the Central Asian Republics.

The theme of the report, however, is “Confronting Rising Inequality in Asia”, a reference to the growing income gaps and imbalanced distribution of wealth, widely considered to be one of the most serious socio-economic challenges facing Asia.

“Continued uncertainties in the eurozone and a further slump in global trade pose the biggest threats to the growth outlook,” said Changyong Rhee, ADB Chief Economist. “At the same time, Asian economies are gradually diversifying into new markets, private consumption is trending up and the region has limited direct financial exposure to the eurozone—which should help sustain its momentum.”

The report forecasts gross domestic product (GDP) growth in developing Asia at 6.9% in 2012, rising to 7.3% in 2013. GDP expanded by 7.2% in 2011 after growing 9.1% in 2010, as the region rebounded strongly from the global financial crisis.

It clearly identifies the challenges that lie ahead. Says the report, “From the collapse of Lehman Brothers in September 2008 through the initial stages of the global recovery in 2010, external factors generally dominated developing Asia’s outlook such that countries and subregions largely moved in sync. In contrast, 2011 has seen general factors give way to country-specific factors driving the outlook.

“As external demand has swung less widely — although it is still softer than before the global crisis — country- or subregion- specific shocks are playing an important role, leading to variation among economic trends at those levels. Factors include natural disasters, the availability of resources, and the strength of domestic demand.

“The deteriorating global outlook in the second half of 2011 affected directly the contribution to growth of net exports and indirectly investment and consumption. The deteriorating terms of trade from elevated oil prices also contributed,” the report says.

It adds, “Asia must be ready to respond to any further major shocks in the eurozone which could stall an exports recovery, dry up trade finance or undermine key global supply chains – where Asia plays an integral role. Most economies in the region have sharply improved finances in the wake of the 2008 global financial crisis and have the capacity to respond to further external weakness.”

According to Mr Rhee, “There is no clear case for short-term policy responses, but if inflationary pressures build up again and capital inflows resume, there may be a need to readjust monetary policy to maintain price stability. In the longer term, policymakers will need to strike a balance between paying down debt while supporting growth that is both inclusive and environmentally sustainable.”

An entire theme chapter looks at widening inequality. Says the report, “Over the past two decades, developing Asia has reduced poverty faster than any other region of the world, at any time in history. But the bulk of developing Asia’s population lives in countries with rising inequality. This is in contrast both to the “growth with equity” story that marked the transformation of the newly industrialized economies in the 1960s and 1970s, and to recent trends in other parts of the developing world, in particular Latin America, where income inequality has been narrowing since the 1990s.”

The report adds, “In spite of developing Asia’s great success in raising living standards and reducing poverty, swelling income disparities threaten to undermine the pace of progress. Regional policy makers need to ensure that the benefits of growth are widely shared.”

The following are some of the key references to tourism in the context of national economic development agendas for specific countries, especially those considered to be “least developed economies.” The full report can be downloaded by clicking on this link.

++ THE PACIFIC ISLANDS: The Pacific economies are relatively insulated from developments in the eurozone. Robust expansion in the resource-exporting economies of Papua New Guinea (which accounts for roughly 60% of Pacific GDP), Timor-Leste, and Solomon Islands, and strong growth in the tourism-oriented economies of the Cook Islands, Fiji, Palau, and Vanuatu, lifted subregional growth to 7.0% in 2011—making this the only subregion to post faster growth in 2011 than 2010.

++ REPUBLIC OF PALAU: The economy grew by 5.8% in FY2011 (ended 30 September 2011), up from 0.3% the previous year. Growth reflected strong data for tourism, which accounts for about half GDP. Arrivals from Asia, particularly East Asia, rose steeply (Figure 3.35.10), aided by the addition of Delta Airlines flights between Palau and Japan. In FY2011, visitor arrivals increased by over 25% and exceeded 100,000 for the first time.

++ FIJI: The government foresees a budget deficit of 1.9% of GDP for 2012, based largely on expectations of improvements in the economy. Revenue is forecast at $1.1 billion 12.7% higher than in 2011. Corporate and personal income tax cuts are expected to boost spending and investment. Tax revenue will be supplemented by the conversion of the 5% hotel turnover tax to a service turnover tax applying to most tourism-related services. This is expected to generate $32.6 million in 2012. Other measures include increases in the airport departure tax, higher excise taxes, and new levies, including voice call charges and credit card fees.

++ SRI LANKA: The current account deficit is projected to edge down to 6.4% of GDP in 2012, reflecting the more stable trade gap and continued large gains in remittance receipts. Growth in tourism-related inflows will take a hit but the sector will stay a major earner.

Private consumption remained the main driver of economic expansion, fueled by remittances, greater demand from the northern and eastern provinces, and salary increases for civil servants and the defense forces. Investment activity also strengthened owing to implementation of major infrastructure development initiatives (especially in transport, energy, water, sanitation, and irrigation) and rising business investment, including international companies seeking a foothold in a fast-expanding economy. Private investment focused on tourism, telecommunications, manufacturing, and housing.

Growth is expected to edge down to a still high 7.0% in 2012 as trends in investment, exports, tourism, remittances, and consumption remain broadly favorable; agriculture growth should be high, assuming normal weather. With the expected stronger performance of the global economy in 2013, growth is expected to recover to 8.0%, driven mainly by domestic and foreign investment.

++ THE MALDIVES: The economic outlook is of course tightly interwoven with developments in tourism. The political instability and unrest in the capital Malé and other atolls in early 2012, which were widely reported in the foreign media, caused some cancellations and will likely hold back the growth in bookings in 2012.

Still, the Maldives has an established reputation as a high-quality destination and has traditionally strong marketing links with Europe and demand is fast growing among Asia’s increasingly affluent middle class. Assuming no major incidents of unrest in the lead-up to the presidential election, tourism should stay robust. With the outlook underpinned by a sizable expansion in government expenditure, economic growth is expected to moderate to 3.5% in 2012 and then pick up to 4.5% in 2013.

The economy grew by 7.5% in 2011, supported by continued buoyant growth in tourism and related sectors such as construction, transport, and communications. Tourism, accounting for about 30% of GDP, saw a second year of strong recovery with arrivals up by 17.6%. An influx of visitors from the Peoples’ Republic of China (up by 67%) and elsewhere in Asia (up 13%) again drove the expansion, while growth of European tourists slowed to 6%. Asian visitors now make up a third of the market.

++ NEPAL: Economic growth dipped to 3.5% in FY2011 (ended 15 July 2011), restrained by slower growth in the worker remittances that underpin consumer spending, a deep correction in the real estate market, and continued political uncertainties. Expansion in services slowed sharply on hesitant consumer spending and a marked decline in tourism receipts. Industrial growth fell by half, reflecting severe fuel and electricity shortages, weak construction, and the closure of several manufacturing plants owing to labor–management disputes. Favorable weather allowed agricultural output to rebound, but the gain was too little to prevent overall GDP growth from slowing.

Apart from the slower worker remittances — possibly affected by the unsettled times in the main employment destination of the Middle East — a key hindrance to greater improvement in the current account was the higher oil import bill, as non-oil imports were essentially unchanged from a year earlier. The Nepal Tourism Year 2011 campaign did attract tourists over and above the usual numbers, but as most were budget tourists from neighboring countries earnings fell by nearly 10% from a year earlier.

Assuming that the peace process shows success — and that the weather is normal — GDP is projected to grow by 4.5% in FY2012. The improvement from a year earlier will come from faster growth in agriculture and services. Strengthening remittances and rebounding tourism earnings (foreshadowed in the early months of the fiscal year) will buttress services. Industry is notable by its absence as a growth driver: with no improvement expected in power supply, its performance will remain sluggish.

++ CAMBODIA: Despite the worst floods in over a decade, economic growth remained robust in 2011, underpinned by exports of garments and footwear and by tourism. This year growth is forecast to soften, before picking up next year. Average inflation, lifted by higher prices for food and fuel in 2011, is projected to moderate this year. Better public debt strategies led to an upgrade in the debt sustainability rating.

The trade deficit in 2012 is set to widen slightly due to softening external demand. Increases in tourism receipts will keep the services account in surplus. The current account deficit (excluding official transfers) is projected to widen to 7.6% of GDP in 2012 before narrowing a little as the global economy picks up.

++ LAOS: In the capital Vientiane, the government is investing more than

$180 million on building facilities for the 2012 Asia-Europe meeting of

senior officials from 50 countries to be held in November 2012. The PRC is providing loans for conference facilities and airport expansion. Tourism will get a lift from international promotion of 2012 as Visit Laos Year and from the ASEAN University Games to be held in December 2012. Lao Airlines has launched flights between Vientiane and Singapore after acquiring the Airbus planes in late 2011.

++ AZERBAIJAN: The non-oil sector recorded growth in agriculture, construction, and services. Agriculture grew by 5.8%, mainly from higher crops and livestock production, reflecting expanded cultivation and the impact of government tax credits and lending programs for improving access to modern farm equipment. Construction climbed by 20%, lifted by non-oil government projects and foreign investment in tourism. Industry contracted by 4.3% because of the lower oil output. Services rose by 6.5%, led by 10.3% growth in the wholesale and retail sector and some expansion of communications and tourism.

++ SINGAPORE: Similar to manufacturing, financial services are expected to face continued headwinds during the next couple of years, but recently international equity markets have seen a big lift, including those in Singapore, one of Asia’s biggest wealth management centers. Demand from the region for services such as finance, logistics, and tourism is likely to continue growing.

Singapore will continue to have very large current account surpluses, the equivalent of 18.0% and 16.0% of GDP in 2012 and 2013. Merchandise exports, although with subdued growth, will remain an important source of growth. The services account will likely remain in surplus, boosted by tourism receipts and strong external demand for Singapore’s financial services.

++ TURKMENISTAN: Hydrocarbon products account for over 90% of exports, and high specialization in energy exports entails risks for sustainable economic development. The government has already taken some steps through the National Program of Socio-Economic Development to diversify the economy, aiming to develop agriculture, food processing and other agro-industry, textiles, chemicals and petrochemicals, electricity generation, tourism, and construction materials.

++ THAILAND: Closure of factories during the floods and supply disruptions from March 2011’s earthquake in Japan cut import growth to 24.7%, despite much higher prices for imported oil. The surplus in goods trade fell, but the deficit in services narrowed slightly, reflecting higher receipts from tourism and insurance (from flood claims). That left a current account surplus equivalent to 3.4% of GDP, a decline of about a half percentage point from the previous year.

++ BRUNEI: Heavy reliance on oil and gas leaves the economy vulnerable to swings in global hydrocarbon prices. It also exposes it to dwindling production, unless exploration companies find new oil and gas fields. Oil output declined from a peak of 219,000 barrels a day in 2006 to 170,000 barrels in 2010. Moreover, the oil and gas sector employs only about 3% of the work force. The government provides jobs to the majority of those in work, but says it can no longer absorb the growing number seeking employment.

A government drive to attract petrochemicals and other energy-related industries is having some success. Port facilities and an export processing zone are being built to attract manufacturers. The authorities have identified Islamic businesses including halal products, financial, logistics, and telecommunications services, and tourism for development, and have allocated funding for public– private partnerships.

++ BHUTAN: The government is the employer of choice especially among the young but the absorptive capacity of the public sector to hire more staff is nearing saturation. Hydropower — the industrial mainstay — offers very few jobs.

The government recognizes the problem. Its Economic Development Policy, issued in 2010, specified fiscal incentives to attract foreign direct investment (FDI). It has, therefore, drafted new FDI regulations that include clearer provisions for owning land as well as liberalizing other features of current regulations. The policy also identified niche business opportunities for cottage and small industries and tourism, where the government believes it can promote local entrepreneurship.

++ AZERBAIJAN: Growth in the oil sector will affect transport, communications, and wholesale and retail trade, particularly the development of new rail and sea transport links for petroleum. Current road projects will stimulate transport, while agricultural projects and subsidies for imported seeds should help boost agricultural output. These measures will also encourage farmers to shift more into cash crops.

Services are expected to stay largely driven by trade and tourism in 2012. The government’s investment program should, by expanding infrastructure, support industry and construction through boosting demand for local production of cement, steel pipes, and other building materials. Although the non-oil sector will remain small, its development and an improved business environment would improve domestic employment opportunities, possibly reducing remittances over the medium term.

++ MYANMAR: Easing of economic sanctions imposed on Myanmar by industrial countries would lead to higher levels of trade and investment, as well as the resumption of assistance and concessionary financing both from these countries and from international financial institutions.

Extending transport networks to link Myanmar more closely with neighbors would enable its businesses to participate in East and Southeast Asian, as well as global, production chains.