All posts in Economics

The Global Economy in November

Global markets in November were affected by a number of noteworthy developments. The latest US Federal Reserve meeting minutes reconfirmed the high possibility of a December rate hike, while Deutsche Bank, Goldman Sachs and JPMorgan Chase have altered their forecasts to the possibility of four Fed rate hikes in 2018. In Europe, some political uncertainty has crept in again due to the failure of Germany’s Angela Merkel to form a governing coalition, opening up the possibility of fresh elections in Europe’s largest economy. In Britain, the Bank of England’s first rate hike in a decade has been followed by renewed optimism about Brexit negotiations after last week’s talks with the EU turned out to be fruitful.

Political risk continued to influence Emerging Markets during the month. Dozens of royals and high officials in Saudi Arabia were detained, which was seen as a centralization of power by Crown Prince Mohammed bin Salman, and raised concerns about the Kingdom’s internal stability. It also coincided with increased tensions between Saudi and Iran in the region. In addition, Venezuela finally defaulted on some of its debt repayments bringing into focus the need for investors to be mindful of the risk they take on. During the end November/ early December period, EM equities have sustained some loses, mainly driven by the technology and energy sectors.

In Asia, analysts have pointed to South Korea’s rate hike as the start of what could be a gradual tightening pattern by Asian central banks taking advantage of the healthy growth rates. Meanwhile, the Indian economy received a boost in the month when Moody’s upgraded India’s sovereign credit rating for the first time since 2004.

Brent oil prices stayed above the US$60 mark, with a two-year high of US$64.27 being reached on November 6th. Driving prices up were geopolitical tensions in the Middle East and optimism on an extension to the OPEC-led production limitation agreement. However, prices have moderated since early November, standing at US$61.22 on December 6th. The moderation has been due to the lack of any major market-moving geopolitical events in the Middle East and on concerns about increasing US oil output amidst higher prices.

The Global Economy in October

October was marked by the implementation of a number of steps towards monetary policy normalization by major central banks and speculation on who President Trump would nominate as the Federal Reserve chairman. The month ended with markets pricing in the nomination of current Fed Governor Jerome Powell, which was confirmed on November 2nd ahead of Trump’s tour of Asia. Powell’s nomination is seen as marking the continuity of Yellen’s gradual rate hike policies and the possible relaxation of some US banking and financial regulations. In the meantime, progress on Trump’s promised tax reforms has increased the optimism for tax cuts happening in 2018 and boosting US growth. These factors helped push markets higher following the nomination.

The month saw the start of the Fed’s balance sheet shrinking process and further confirmation of a December rate hike as US economic data painted an optimistic picture even though inflation continued below the 2% target. The European Central Bank (ECB) cut its bond purchases by half to 30 billion euros on the 26th as expected, but its tone in doing so was very dovish. The ECB kept its options open by continuing the purchases till the end of September 2018 and stating that an extension beyond that is possible if needed.

Meanwhile, the Bank of England hiked interest rates by a quarter percentage point for the first time in a decade to 0.5%, despite weak economic growth in the UK. The Bank has a dovish outlook on future rate hikes and has retained its bond purchasing programs.

China’s Communist Party Congress also occurred in the month, where President Xi Jinping laid out his vision for China up to 2050. With the outgoing central bank governor warning about the level of debt, some are concerned, now that the congress is over, authorities will launch a concerted effort at deleveraging that could slow down the Chinese economy.

Emerging markets saw the return of political risk affecting performance during the month. This was mainly on the back of South Africa’s budget woes, Turkey’s diplomatic row with USA and Germany and Brazil’s tenuous politics. However, according to initial estimates, the Institute of International Finance (IIF) has recorded US$13.8bn in overall portfolio inflows to emerging markets in October. The moderation in inflows from previous months could also be due to rising US yields and a strengthening US dollar.

Brent crude oil prices continued to increase in the month passing the US$60 mark at the end of the month for the first time since July 2015. This was driven by continued optimism over the major oil producers seeking an extension to their production limitation beyond March 2018. Also helping the movement were geopolitical tensions, surprise drops in crude stockpiles and Chinese demand.

Regaining GSP+ In Sri Lanka – Interview transcripts

Topic: Sri Lanka Regaining GSP+ – opportunities for firms

Speaker: Travis Gomez, CFA – Product Head

Video length – 9:10 mins

Starting point:

1:20:      How has the loss of GSP+ impacted local companies?

  • Between 2010 to 2017, companies that were traditionally more export oriented, were affected and the extent of this impact depended on their exposure to European Markets
  • A case in point is the HAYL’s group where some of its subsidiaries such as; Dipped Products, Haycarb and Hayley’s Fabric performance was affected due to the global slowdown
  • As a result, HAYL pivoted towards investing in the domestic sector and subsequently the contribution from these traditional export segments to the firm’s performance saw a dip
  • This shift was also facilitated by the ending of the war which opened up more opportunities in the local economy and the company invested heavily in sectors such as construction, power & Energy and Leisure.
  • Now with the regaining of GSP+, we could potentially see some turnaround in the performance of some of these s export segments of HAYL’s.

2:55: How important is GSP+ for Sri Lanka?

  • This is a somewhat controversial issue as we don’t have a lot of empirical evidence to gauge the impact
  • One reason for the difficulty is because we don’t have many listed companies that are exposed to European Markets and one of the few listed companies that have this exposure is Tee Jay Lanka (TJL)
  • Considering their revenue performance and margins over time, the loss of GSP+ seems to have had only a minimal material impact the benefit of GSP+ is in the form of allowing firms in certain sectors to get a leg up in terms of a cost advantage compared to competing countries.
  • This could explain the minimal material impact on TJL’s performance because in the case of Garments, companies like TJL, MAS, Hirdaramani do not attempt to compete in terms of cost with competitors such as Bangladesh (that also enjoys the benefits of GSP+).Instead they compete in terms of quality, use of new technologies as well as better lead times
  • Another reason in the case of large scale garment manufacturers is that they have been investing in manufacturing capacity in countries such as Bangladesh which enjoys the GSP+ benefit.

5:20 What has been the stock market’s reaction to the news of regaining GSP+?

  • Minor reaction from the market
  • The perception is that this has been talked about for a long time hence it’s been factored in
  • At the same time, it will take time for tangible benefits to materialize

6:08 What are the sectors that stand to benefit from the regaining of GSP+?

  • The obvious sector is garments, given the sector’s large exposure to the EU
  • Sri Lanka could benefit from the added cost advantage as well as the need of global garment buyers to diversify risk in terms of their geographical exposure
  • Hence, it is possible that some of the garment operations that were moved to countries like Pakistan to return to Sri Lanka
  • But the focus of garments should remain on the innovation side and competing on quality
  • An important point brought up by the EU delegation is that we need to diversify our exports to other segments. Hence other sectors that can benefit are the Agribusiness and fisheries segment.
  • Products such as Organic fruits and vegetables as well as canned fish and ornamental fish have high growth potential too.

The Global Economy in September

September marked a resurgence in the US Dollar, as reflected in the Bloomberg Dollar Spot Index, after a prolonged weakening during the year so far. This resurgence was helped by the increasing likelihood of a December rate hike by the US Federal Reserve, positive US economic data and renewed optimism on tax cuts to be introduced by the Trump administration.

In addition, the dollar was helped by sudden weakness in a number of major currencies. The Euro weakened following the controversy around the independence referendum in Spain’s Catalonian region. The British pound was affected by renewed political uncertainty in UK over Brexit. The Yen weakened as Japan’s PM announced snap parliamentary elections.

Meanwhile, President Trump is to announce his nomination for the next Federal Reserve Chairperson in October. Analysts and betting markets have speculated on who it could be with Gary Cohn and Kevin Warsh among the names being discussed. Markets are concerned about the possibility of someone as hawkish on interest rates as Kevin Warsh having a fair chance of being nominated.

With both the US Fed and the European Central Bank (ECB) talking about reducing their quantitative easing measures amidst the US Dollar strengthening; emerging markets could see some of their gains chipped away. In fact, some report of caution by investors in emerging markets (EMs), with overall inflows slowing down. The Institute of International Finance (IIF) reported that September saw $14.5bn in overall inflows to EM stocks and bonds, the least since January. But many analysts expect to see the emerging market rally continuing.

Brent crude oil prices increased in the month reaching a two year high of $59.02 a barrel on the 25th. This was caused by increased optimism over the OPEC-led oil producers extending their production limitations beyond March 2018 and optimistic demand outlooks by the International Energy Agency and OPEC. Aiding bullish sentiment was the possible shut down of the Kurdish oil pipeline via Turkey amidst controversy over its independence referendum. However, prices have moderated to the mid-$50s since then, with Kurdish supply continuing and the possibility of increased US shale oil supply amidst higher market prices. In fact, US oil exports have increased as the spread between Brent and US crude futures expanded.

The Global Economy in August

The highlight during the month of August was the growing tensions and uncertainty created by North Korea’s aggressive actions; threatening the US pacific territory of Guam, firing a missile over Japan and carrying out its sixth nuclear test – claimed to be a hydrogen bomb. Their actions were met by President Trump’s rhetoric when he threatened North Korea with “fire and fury”.

The rising tensions caused major stock markets to dip while there was increased demand for ‘Safe Haven’ assets like the Yen and Gold. However, markets as a whole have not moved dramatically. As some analysts put it, markets cannot price in an existential situation like a North Korea focused nuclear exchange.

According to the Institute of International Finance (IIF), emerging markets have seen a slowdown in capital flows during August with a $4bn drop from the previous month and the lowest since January. IIF earlier said that while EM investors continue to take on credit risk in search for yield, they appear to have turned slightly negative on EM currency risk despite recent U.S. dollar weakness. US dollar weakness has allowed most EM currencies to appreciate vis-à-vis the dollar.

The search for yield in fixed income assets has seen Tajikistan issuing its first ever international dollar bond with a yield of 7.125%, while the yield on Mongolia’s 2021 dollar bond dropped below 6%. This risk appetite continues even as certain bearish market commentators see EM trades as being crowded and due for a correction.

Markets also focused on the minutes of the US Federal Reserve meeting, which showed that there was disagreement on whether the weak inflation was transitory or not. While some officials claimed that the inflation numbers do not support further rate hikes, others, including the Chairperson, insisted on its transitory nature. September 6th saw the Fed Vice Chair, Stanley Fischer, resigning – effective from mid-October – due to ‘personal reasons’ and increasing the empty seats on the Board of Governors to four.

Brent crude oil prices stayed above the $50 a barrel mark during the month and was majorly affected by three factors. First, prices reduced early in the month as the July OPEC output reached record highs. Second, prices were helped up by supply disruptions in Libya and drops in US stockpiles. Finally, the end of the month saw Hurricane Harvey creating an interesting situation. Despite affecting US oil infrastructure in Texas, crude oil prices reduced due to the reduced demand for crude as refineries shutdown.

The Global Economy in July

July began with a scare of a potential selloff  in emerging market (EM) assets. This was triggered by talk of developed market Central Banks starting to end the era of monetary easing. Alongside the US Federal Reserve’s interest rate hikes and balance sheet unwinding, the Canadian central bank raised rates and the European Central Bank signaled willingness to consider changes to its bond buying program. However, the switch in market sentiment was short lived thanks to Fed Chairwoman Janet Yellen’s dovish statements in her testimony to the US Congress. The outflows reversed and the Institute of International Finance (IIF) reported $20 billion in portfolio inflows to EMs in July.

To some market commentators the episode of EM weakness signaled that international investors were ready to let go of their EM debt investments as soon as global markets wobble. This has prompted fund managers to be cautious of their investments especially in terms of market liquidity giving them space to exit. However, analysts saw the episode as a short period of time in which asset prices adjusted to reflect the hawkishness of developed market central banks.

While Emerging Markets were helped by a weakening US dollar, developed markets were helped by an improving Eurozone economy. In the IMF’s July World Economic Outlook report, it highlighted that global growth in 2017 was being driven by the EU alongside Japan and China. In the meantime it also downgraded US growth outlook slightly, citing the failure of the Trump administration to deliver on its promised fiscal stimulus. The IMF also indicated that the US dollar and British pound were overvalued, relative to fundamentals, while the euro, yen and yuan are seen as being in line with fundamentals.

Brent oil prices made gains in July and increased above the $50 mark reaching $52.65 on July 31st. This was largely driven by higher US demand and reductions in crude oil stockpiles in the US. It was also helped by outcomes of a meeting among major oil producers in St. Petersburg on the 24th, where Nigeria agreed to cap its output and Saudi indicated limits to their exports. But the gains were capped by high OPEC production, primarily due to Libyan and Nigerian output.

Snapshot of the Economy – July 2017

At Frontier, we love trying out new ways to help our audience make sense of the economy.

Here’s a quick look at how key economic indicators are performing so far in the year, with an easy-to-understand snapshot.

For this update we have chosen the variables we consider to be most important in understanding the health of the Sri Lankan economy.

*Please note this does not indicate our outlook on each of these variables, but provides our understanding of how it has been performing based on the latest available data.

The key to understanding their performance:

    Improving

   Manageable

   Worsening

 

Gross Official Reserves: Stable at US$6.9bn levels in June following inflows from the sovereign issue

Trade deficit: Imports growing at a faster pace than exports in the Jan to May period

Foreign holdings: Consistent inflows slowly trickling in; Rs. 40 bn inflows from mid-Feb to end-June

Global situation: Positive for EMs and FMs

USD/LKR: Gradual depreciation

 

Credit to private sector: Rs.300 bn absolute growth during the first half of 2017, despite YOY slowdown

Inflation: Easing from record-highs despite sustained supply side pressures

 

If you want a look at the underlying numbers on each of these variables, please click here

Tourism Insights – Experiential tourisms – Part 2: Is it something worth worrying about?

In this second part of our review of the potential for experiential tourism in Sri Lanka, we investigate the tourism earnings from experiential tourism and ask the question as to whether promoting experiential tourism should be a focus for the tourism strategy of Sri Lanka.

What the Data has to say

Again, turning to the data provided by the SLTDA’s in its latest annual report, here are a couple of interesting insights we discovered from the data:

Earnings growth from Experiential Tourism negligible

The earnings growth from experiential tourism related activities has historically shown a tendency to lag the overall earnings from tourism. As a result, the contribution of experiential tourism to overall earnings has been on a declining trend and by 2015, its contribution was less than 1% of total earnings. However, in 2016 there was a significant jump in tourist arrivals for such activities which contributed towards a 78% growth in earnings from such activities. This led to an increase in its contribution to 1.2% of total tourist earnings.

 

Sigiriya outpaces other attractions in terms of its earning potential

As we observed earlier with tourist arrivals, where the lion share of arrivals was accounted for by a few sites (Sigiriya and Polonnaruwa in the case of Cultural sites and Yala, Horton Plains and Udawalawa in the case of wildlife parks), a similar trend can be observed with regard to foreign tourist earnings at these sites.

Hence, Sigiriya which accounts for the highest number of foreign tourist arrivals also brought in LKR 2.2 bn in earnings from the foreign tourists, outpacing most other attractions.

 

But Earnings per tourist is highest for Anurahapura historical sites

Considering the tourist earnings from a per visitor point of view also reveals some interesting insights in terms of the earnings trends of varied attractions.  With regard to attractions in the cultural triangle, it is Interesting to note that while Sigiriya attracts more visitors than Anuradhapura (in 2016 Sigiriya attracted 562 k visitors vs. 77k visitors to Anuradhapura) the per tourist earnings is higher for the latter and in 2015 & 2016 it was the highest when compared with all other attractions.

With regard to nature based attractions, the earnings per tourist at Pinnawala has been fairly unchanged while some of the Wildlife parks have witnessed a moderate improvement. The Colombo Museum too has witnessed some improved earnings though it remains at a much lower level compared to other attractions.

 

 

The role of pricing in earnings

This also brings up the question as to whether some of these attractions are priced optimally. A comparison of the significant attractions in Sri Lanka reveal that Sigiriya which is the most recognized and distinct site in Sri Lanka commands a premium which may partly account for it recording the highest tourist earnings. In contrast, the Colombo National Museum is amongst he most affordable attraction.

Source: Leisure Tours

 

Source: Leisure Tours, attraction websites

Key Question: Should we focus on promoting experiential tourism given the low returns?

Hotel Operators claim that for the vast majority of tourists to Sri Lanka, the main appeal is the Sandy Beaches and tropical climate. Some veterans in the hotel industry have therefore claimed that given this factor, tourism in Sri Lanka should be promoted in accordance with this and be geared towards attracting “Sun, Sand and Beach” tourists. Hence they raise the question of the return on investment in promoting attractions such as heritage, wildlife, nature reserves etc. that fall under the purview of experiential tourism, particularly given the low returns in terms of tourism earnings arising from such activities.

However, we would argue that while the pristine beaches of Sri Lanka maybe the main draw for visitors to the country, if the government is to achieve its objective of increasing the foreign guest nights and the daily tourism expenditure, there needs to be a greater focus on experiential tourism in order to encourage repeat visitors. A recent panel discussion organized by the Hotel association of Sri Lanka highlighted the fact that increasing the number of guest nights in Colombo by even a single day through the promotion of more activities/ points of interest in Colombo can have a significant impact on the earnings from tourism.

In addition, given that most of these sites such as Sigiriya, Yala, Pinnawala that draw many tourists are not contemporary attractions but rather ancient ruins or nature based resources, there is a much greater need to invest in the conservation of these resources. Hence part of the motive for enhancing the earnings potential of such sites should be to better conserve the sites thus ensuring its sustainability for future generations.

Looking at it from a global perspective, we have compared the entry fees of some of the Sri Lankan attractions which are classified as UNESCO World Heritage sites with other similar attractions found abroad and we have observed that the earning potential of these sites are far greater than the current earnings of the attractions in Sri Lanka which indicates that there is greater potential to increase the earnings from these experiences.

Source: Travel & Leisure website

The Bottom line: So what can be done about it?

Taking into account the data that was highlighted with respect to the tourist arrivals and earnings of experiential tourism in Sri Lanka, the key challenge therefore would be to increase the attractiveness and earnings potential of these attractions while avoiding the problems of overcrowding.

Promote more sites to reduce overcrowding at popular sites

It is clear that part of the reason for the overcrowding is that tourists tend to congregate in few locations leading to overcrowding. While from the tourist’s point of view it would be rational for them to focus on the “main attractions” given the limited time, overcrowding at these locations could result in diminishing the experience and attractiveness of a location.  Hence, there is a need to broad base the appeal of attractions that tend to get overlooked in order to reduce overcrowding and facilitate the development of other sites.

Limit number of visitors to enhance earnings

At the same time, in the case of attractions such as the Wildlife parks, Sigiriya rock where there would be stricter limits on the optimal carrying capacity of a location, tighter measures may have to be followed in order to ensure the long term sustainability of such locations. By the use of systems such as timed entry tickets, day/night time entry as well as having a cap on the maximum number of tourists that can visit the site during a day, you can better ensure that the resources of the site are not overtaxed while providing a more pleasant experience for the tourists that visit the site. This would also enable popular sites to possible charge higher entry rates and thus improve the earnings potential.

Improve the accessibility of attractions to limit overcrowding

Incremental investments can be made at selected attractions in order to improve the accessibility of certain sites to accommodate a larger volume and variety of tourists. For example, installing more ticket counters and restroom facilities can reduce the waiting times at attractions which is a key challenge at many locations. In addition, in the case of historical sites such as Anuradhapura and Pollonaruwa, low cost strategies such as having a designated route for tourists to take can greatly improve the flow of visitors and minimize overcrowding.

Create more activities at a given attraction

Incremental developments can be made at certain attractions in order to increase the variety of activities that can be found at the location in order to reduce overcrowding. For example, a lot of the overcrowding in Sigiriya happens at the Lion’s paws where everyone makes a beeline to climb the rock. Instead of restricting the experience of Sigiriya to simply climbing a rock, it can be broadened to include tours of the water gardens and the ancient town, an interactive museum. Walks through the nature reserves surrounding the rock which are filled with wildlife and birds and has the potential for bird watching activities. This would also help improve earnings of a given site as most comparable attractions abroad charge combined ticket prices which gives full access to varied sites in a given location.

 

Written by :Travis Gomez
For any queries and comments contact travis@frontiergroup.info
Disclaimer:
This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice.

Tourism Insights – Experiential Tourism – Part 1: too little or too much of a good thing?

The changing face of tourism in Sri Lanka

Sri Lanka has been experiencing double digit growth in tourist arrivals with over 2 mn tourists visiting the country in 2016. With a target of 2.5 mn arrivals for this year, and a target of over 4.5 mn arrivals by 2020 set by the government, the direction of the government as well as the private sector is that, more is better. At the same time, there has been growing concern with regard to the problem of overcrowding at certain popular tourist attractions in the Island. There have been reports of overcrowding in Sigiriya as well as traffic jams in Yala Wildlife park leading to even animals getting run over (Read More: Daily Mirror). While this has sparked a debate within the industry on what is the optimal balance of tourist arrivals, the overcrowding at some of these cultural and natural attractions indicates a growing interest in what can be termed as “Experiential tourism”

The rise of Experiential tourism

Since independence, the traditional markets of tourist arrivals to Sri Lanka were from Europe (including countries such as Germany, France and UK) where the main attraction of Sri Lanka; as veteran’s in the hospitality Industry would put it; is “Sun, Sand and Beach”. More recently, a shift in consumer preferences is noted with the change in economic circumstances which has led to a growth in arrivals from non-traditional markets led by tourists from India and China, along with growing awareness amongst visitors of the environmental impacts of tourism and the need for sustainability and conservation.  While “sun, sand and Beach” remains a core component of Sri Lanka’s offerings, the above reasons have led to a widening of Sri Lanka’s offerings to include more experiential and culturally rewarding tourist attractions. This could range from taking curated walks in a city’s historic centre, camping outdoors in a bird sanctuary, visiting museums, art galleries etc. to get a sense of the culture of the destination. The Sri Lanka Tourism Development Authority’s (SLTDA) annual report, classifies a number of tourism activities in Sri Lanka as Museums, Wildlife Parks, Zoological & Botanical gardens and the cultural triangle. For the purpose of this analysis, we have treated all of these activities as being part of “Experiential Tourism”.

What the data has to say

Based on the data provided by the SLTDA, here are a couple of interesting insights we noted:

Faster growth in experiential tourists in 2016

The experiential tourist arrivals grew at a rate of 48% YoY in 2016, outpacing overall tourist arrivals growth which increased at a rate 14% over the same period. Visitors to the cultural triangle alone saw a 2.5x growth from 355 k tourists in 2015 to 905k in 2016.

 

But less than 50% of foreign tourists choose to go for experiential tourism.

While 2016 saw a strong growth in experiential tourism, in the context of total tourist arrivals which stood at 2.05 mn in 2016, the attractiveness of even popular locations is comparatively low. Sigiriya was the most popular attractions with a little over 1/4th of total tourist arrivals in Sri Lanka visiting the site while Yala was the most popular wildlife park attracting 13% of tourists.

 

Wildlife parks gaining popularity

The proportion of experiential tourists visiting popular wildlife parks such Yala, Horton Plains which are in a natural setting has increased while the number visiting places with “Built-in environments” such as the Pinnawala Elephant Orphanage, the Dehiwela Zoo and the Peradeniya and Hakgala Botanical gardens have witnessed a slower pace of growth and hence a decline in their relative share.

 

Few sites/activities account for the lion share of the tourist arrivals

In 2016, the two sites; Sigiriya and Polonnaruwa had accounted for nearly 90% of all visitors to the cultural triangle . With respect to Wildlife Parks, nearly 70% of arrivals were distributed among 3 parks while there are 23 locations throughout the island that have been identified by the SLTDA as Wildlife parks. This trend highlights the fact that tourism in Sri Lanka is not sufficiently broad based and to a certain extent explains the issue of overcrowding which takes place at certain popular locations.

Key Question: Is there already too many tourists?

It is clear from the above data that while experiential tourism is has not been as significant in the past, the trend is clearly that it is growing in importance and is expected to continue to do so in the future. Hence a question that can be raised is if given the overcrowding that is taking place at some of these attractions, should attempts be made to restrict tourist arrivals.

To provide some context to this question, we did a global comparison of the tourist arrivals numbers of some of Sri Lanka’s UNESCO world Heritage Sites with some other similar attractions found abroad and we observe that these sites are able to accommodate much larger volumes of annual tourist arrivals.

 

Source: Travel & Leisure website

 

Hence, we believe that with proper planning and by increasing accessibility it is possible to increase the popularity of experiential tourism attractions in Sri Lanka while limiting the negative impacts of overcrowding.

 

In part 2 we will explore the earnings contribution of experiential tourism and give our recommendations on what can be done to enhance experiential tourism in Sri Lanka

Click here to continue to Tourism-insights – experiential tourism Part 2    

 

Disclaimer:
This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice.

The Global Economy in June

The major highlights of the month of June were the events that unfolded around the isolation of Qatar by its Gulf neighbors, developments in the oil market and signs that major central banks were beginning to end monetary easing. Despite these developments, global markets continued the upward trend even as analysts continued to raise questions about its sustainability.

The US Federal Reserve hiked interest rates, as expected, on June 14th for the second time this year and signaled that it will start to unwind its massive balance sheet. However, doubts have been raised whether the Fed will go for a third rate hike this year amidst US economic data falling below expectations in the second quarter. Taking cues from the Fed, the European Central Bank (ECB) and the Bank of England have also signaled that they will begin to end the era of easy money. Emerging Market investors are watching this development closely to see how it affects risk appetite.

Emerging markets continued to see positive investor sentiment, as reflected by a seventh consecutive month of foreign portfolio inflows, up to June. According to the Institute of International Finance (IIF), June saw US$17.8 billion in inflows to EM debt and equities, the majority of which went to the Asian region. Volatility in commodity prices, especially oil, did not appear to trouble EM equities. Analysts have pointed to increasing weight of technology shares relative to commodities-based shares in the MSCI Emerging Markets Index as making this possible. However, some have pointed to robust demand for debt from Russia, Argentina and Ivory Coast as evidence of an investment bubble in high yielding EM assets.

China’s A-shares were finally able to gain entry to the MSCI Emerging Markets Index, from next year. China also opened up its US$9 trillion debt market to foreign fund managers through its new ‘Bond Connect’ service through Hong Kong. Meanwhile, India finally put into force its new Goods and Services Tax (GST) on the 30th of June, promising to simplify the country’s tax regime.

In Europe, Brexit negotiations got underway, while Prime Minister May managed to come to an official agreement with the coalition partner from Northern Ireland. The coalition gives her government a slim majority in parliament. Despite some stability in the parliament, the British economy showed signs of trouble as consumer spending dipped considerably for the first time since Brexit. The Sterling pound also continued to remain weak.

Brent oil prices were rather volatile in June, seeing a drop to the mid-US$40s on fears of a rising supply glut amidst increased OPEC output in May. Despite an OPEC agreement to limit production, the countries excused from it – mainly Nigeria and Libya – have continued to increase output. However, as of the first week of July, prices saw seven consecutive days of gains, rising to near US$50 due to a slowdown in the growth of the US shale oil sector, reduction in US crude oil reserves.  But analysts do not see any support from fundamentals for a sustained rise, reflected in the sharp drop seen on July 5th to US$47.79 a barrel.

The situation over Qatar’s isolation by its Arab neighbors did not have a major impact on oil prices. While the risks of the escalation seem to have reduced, analysts say the crisis is likely to be protracted in its current form. The Saudi-led coalition sent a list of 13-demands, which included ending relations with Iran and shutting down Al Jazeera. Despite Qatar’s rejection of these demands, the Saudi-led coalition have not yet taken any retaliatory measures, raising hopes of the tensions gradually easing out.