All posts in Economics

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.

The Global Economy in May

The month of May was characterized by political risks affecting markets. Scandals over Russian involvement in the Presidential election and the removal of the FBI director affected the Trump administration, with some politicians even invoking calls for impeachment of President Trump. However, major US equity benchmarks continued their upward movement with only minor impact from the political scandals. Some argue that this is because the ‘Trump Trade’ has been replaced by a liquidity trade fueled by rising inequality and higher profits for firms.

Amidst its usual political uncertainty, emerging markets continued their positive run so far this year, raking in over $20 billion in non-resident portfolio inflows for a third consecutive month in May according data from the Institute for International Finance (IIF). Data from IIF and Dealogic point to over $100 billion in such inflows so far in 2017, driven by nearly $100 billion in sovereign debt issuance by EM countries in the period. EMs were, however, affected by Moody’s downgrading of China’s sovereign credit rating and the fresh political scandals affecting Brazil’s President Temer. Analysts have begun to throw into doubt the sustainability of the EM’s bullish run, citing high valuations of equities and the upcoming US interest rate hikes. In the meantime, Frontier Markets seem to have gained investor interest in the first few months of the year, with increased fund inflows, fueled by political uncertainties elsewhere.

In Europe, markets did celebrate the victory of Emmanuel Macron over the populist Marine Le pen, but now the question remains how he will use a probable parliamentary majority to push through his ambitious reform promises. It is a question well highlighted by the delays facing President Trump’s reform agenda, despite having a republican majority. However, Europe continued to face a number of uncertainties, including the continuation of the European Central Bank’s debt buying program, overcoming Italy’s banking sector problems and finding a suitable compromise with the Greek government on its debt repayments.

But after the June 8th general elections, the future of the Brexit negotiations in the context of a hung parliament in Britain is going to be a major uncertainty. The Conservative Party’s coalition partner, the Democratic Unionist Party (DUP) from Northern Ireland, is likely to push for a ‘softer’ Brexit. The situation is also likely to make the Sterling Pound volatile, after losing  its gains over the last two months on election night.

Oil prices reduced from its mid-$50s height to below $50 during the month due to doubt over the OPEC’s production limitation agreement. Prices did rise as the agreement’s extension to March 2018 came to being, but the market was not impressed by it. Analysts were concerned that oil markets are headed for a supply glut despite the OPEC agreement. Prices have dipped below the $50 mark by early June, helped by the isolation of Qatar by Gulf states led by Saudi Arabia, which could unravel the OPEC agreement.

The Global Economy in April

April was characterized by geopolitical tension triggered by tensions between the US and North Korea as well as in the Middle East. Following the chemical weapons attack which killed dozens of people in Syria, the US launched an airstrike on the country in early April. This put a strain on Russian-American relations as Russia denounced President Trump’s decision to use force in Syria. The following week the US dropped its most powerful non-nuclear bomb targeting an ISIS controlled area in Afghanistan.

Tensions between the US and North Korea escalated during the month with the latter launching ballistic missiles twice. Even though both missile launches failed, it was viewed as a “provocative action” by the country. This led the US to retaliate by taking steps to increase its military presence in the region including staging large military drills with South Korea and Japan. These military interactions in the region caused tensions to rise between China and South Korea as well with China objecting to the deployment of an anti-missile system in South Korea by the US.

Concerns over global trade arose after the Trump administration announced the draft of an executive order withdrawing the US from NAFTA (North Amercian Free Trade Agreement) and after President Trump threatened to renegotiate or terminate the free trade deal with South Korea. However, the administration backed down on its decision to withdraw from NAFTA and later announced that it would look to renegotiate the deal.

In the UK, Prime Minister Theresa May announced an early general election to be held in June this year – 3 years before it is due. Analysts point out that this is a step taken by the PM to ensure strong parliamentary support in the Brexit negotiation process.

The geopolitical tensions in the Middle East buoyed oil prices in the first half of the month. However, increasing US oil production and doubts over an extension of OPEC production cuts weighed on prices in the second half.

The Global Economy In August

Throughout most of August global markets were about the continuation of the Emerging Market rally from July as the yield search carried on. Emerging market debt might even reach record levels by end 2016. But the month end was marked by concern that positive US economic indicators would push the US Federal Reserve to hike interest rates in September. The Jackson Hole Symposium on 25th August was expected to provide indications of the direction of monetary policy of the US Federal Reserve’s (Fed), where Fed Chairwoman, Janet Yellen, stated the Fed saw reason to raise rates in 2016. The statement rattled the emerging market rally, as investors became averse to riskier assets. However, the August US non-farm payroll data released on 2nd September has reduced chances of a hike in September, improving sentiment and allowing markets to move up again.

 

Economic indicators, especially Purchasing Managers Indices (PMI), have improved in the Euro region and the UK over the last month, providing some breathing space for Central Bankers and Policymakers. Yet, economic growth in Europe continues to be underwhelming and analysts expect the Pound to depreciate further by the end of the year, due to long term structural issues and uncertainty.

 

Oil prices continued to be volatile within the $40 to $50 range, with July’s fears of supply disruption being replaced by fears of a supply glut building up owing to Saudi Arabia reaching a record summer output. The issues caused by low oil prices were reflected in the Saudi Arabia’s commitment to reaching an OPEC and non-OPEC consensus for an oil production freeze. Russia and Saudi Arabia used the recent G20 summit to come to an agreement to work towards stabilizing the market and the end-September OPEC meeting in Algeria is expected to produce an outcome in this regard. The talk of a freeze created a rally in prices but some analysts are divided as to whether a freeze is feasible or even effective.

 

Within Emerging Markets, the issue of political risk was highlighted by recent uncertainty over the policies of Philippine’s new President, Duterte. Philippines stocks have tumbled following his harsh remarks against President Obama which prompted the US President to cancel a visit to the island nation. Meanwhile, analysts continue to worry about the debt problem in China and see a pattern of investors avoiding Chinese assets to reduce exposure to a possible future crisis. India is going through a transition period as its much respected Central Bank Governor, Raghuram Rajan, hands over the reins to his successor. Some are concerned about reversals in reforms and policies taken by Rajan, but his successor, Urjit Patel, is known to be an avid supporter of his policies.

The Global Economy in July

In the immediate aftermath of the Brexit vote, global market volatility has fallen and the global economy is now steadier than it has ever been. While not everyone will survive the fallout unscathed, Europe shrugged off the Brexit vote, as economic confidence in the EU rose during the month. However, despite the markets’ recovery, some say the uncertainty it created is still a concern. The Bank of England (BOE) cut interest rates for the first time in over seven years, while expanding its bond-buying program, noting that economic indicators had “fallen sharply”.

The Bank of Japan (BOJ) also announced further stimulus measures, albeit less than what was expected by markets. Some say the lackluster measures may mean the BOJ has acknowledged the limits on monetary policy. In addition, the Japanese government announced a 28 trillion yen fiscal stimulus package earlier in July, of which 4.6 trillion yen has been budgeted for the current fiscal year. Analysts say the modest monetary stimulus raises the pressure for the government to deliver on its promise of fiscal stimulus.

The US Federal Reserve (Fed) left rates unchanged last month, while highlighting that risks have diminished. Analysts say this could indicate that economic conditions could warrant further rate hikes in the US.

The constant flow of monetary stimulus has depressed yields in many developed nations, pushing investors to riskier assets in the search for greater returns. Investors have poured a record amount of funds into emerging market bonds and have even turned to emerging market stocks. Indonesian stocks, for example, have benefitted from the investor confidence, amid optimism for growth and reform. Yet, the Bank of America (BofA) notes that it may not be a search for yield, but a search for safety. They note the recent outperformance of government debt even as their yields fell as evidence of this phenomenon.

However, a failed coup in Turkey served as a reminder that the higher yields on emerging market assets come at the cost of greater economic and political challenges. The Malaysian Ringgit has also come under pressure recently, as the nation contemplates further rate cuts to boost growth, amid a political scandal and low oil prices.

Demand for commodities has grown this year, fueled by safe-haven demand, particularly with gold. Yet oil prices have fallen into bear market territory in July, weighed by a revival in concerns that the supply glut in crude oil has returned. While many expect prices to recover by the end of the year, some say they could fall as low as $30 a barrel again. The OPEC has scheduled an informal meeting in September, while stating that it expects the recent price drop to be temporary. Many do not expect much to come from the meeting.

The Global Economy in June

Global markets were shocked on the 24th of June when the results of the UK’s referendum on its EU membership – dubbed ‘Brexit’ – saw a majority in favor of leaving the EU. The volatility and uncertainty that had persisted in the run up to the ‘Brexit’ vote spiked as markets around the world fell dramatically.

However, the market drop did not last long. Emerging and North American markets recovered their ‘Brexit’ losses in the weeks following the vote. This was aided by a number of other factors affecting investor sentiment. Investors favored Asian and Emerging markets as they were seen as being sheltered from the uncertainty affecting European markets, with Jakarta’s stock market leading the rise in South-East Asian stocks.

Europe is expected to remain mired in uncertainty, however, with no clarity on when – or even if – ‘Brexit’ would actually happen. Odds makers still show a significant chance for Britain being a part of the EU by 2020.

Uncertainty over ‘Brexit’ also played a part in the US Federal Reserve’s (Fed’s) decision to hold out on an interest rate hike in June. Analysts now put a greater possibility of a rate cut as opposed to the previously anticipated hike. This has also brought relief to emerging market companies that were expected to find it difficult to pay back $800 billion in maturing debt over the next few years.

In the Middle East, Saudi Arabia has taken steps to sell bonds to foreign investors for the first time. The decision was pressured by the increasing budget deficit created by low oil prices. Meanwhile, Nigeria decided to abandon the peg on the Naira and adopt a free float system, amidst an economic recession due to the oil price plunge. The currency depreciated immensely. But it was accepted by markets gleefully with stocks rising and bond yields falling.

Oil prices were volatile, rising above the $50 mark several times this month. The volatility was caused by fears of supply disruptions in Nigeria and Canada, amid some risk-off sentiment following the ‘Brexit’ vote. Oil traders expect the current price range to persist till the end of the year.

China continues to remain a major concern for markets with a large number of bad loans affecting the banking system in the country. Analysts predict a bailout of about US$ 500 billion might happen over the next two years to recapitalize the banks. It could drag down Chinese markets and the yuan, while increasing government borrowing costs and credit risk. Accordingly, many warn that investors should be warier of China’s economy than Britain’s.

Remittances fall; just a blip or the new normal?

While the fall in global oil prices helped us almost halve the cost of fuel import costs in 2015 it has also been a key reason behind the slowdown in remittances growth. Workers’ remittances in 2015 contracted 0.5% compared to 2014; this is the first time we  saw a contraction in remittances inflows since 2001 (-0.4% YOY). The main culprit is weak oil prices.

 

It is a known fact that foreign remittances are a source of income for thousands of families in Sri Lanka. On top of that, remittances also have a significant macroeconomic value; it is the second largest source of inflows to the Current Account in our Balance of Payments (BoP) after export earnings (goods exports). While export earnings constitute 47% of the inflows to the Current Account, remittances inflows make up 29% of it. This means remittances play a big role in reducing the Current Account deficit (CAD) and a significant slowdown in remittances inflows can have adverse effects on our external balances.

More than 50% of our remittances inflows come from the Middle East (2014 – Middle East: 54%, European Union: 18%) and within the Middle East, Saudi Arabia and Qatar accounts for more than half of our migrant workers (Qatar: 28%, Saudi Arabia: 27%). The economies of these countries depend a lot on revenue generated from oil exports. For instance, oil forms more than 80% of Saudi Arabia’s export revenues and about 90% of its government revenue comes from oil. Persistently low oil prices have put a lot of strain on economic activities of these countries. Saudi Arabia recorded a budget deficit for the first time in several years in 2014 (SAR 65bn) and Qatar is expected to record its first budget deficit this year in a decade (estimated at 4.8% of GDP).

According to the IMF, most migrant workers in countries of the Gulf Corporation Council (GCC – a political and economic union of six Middle Eastern countries consisting of Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) are employed in non-oil sectors such as construction, wholesale and retail trade and other services. As such non-oil sector performance is the key determinant of remittances outflows of these countries. However, as IMF highlights, the oil industry is a significant driver of the non-oil sector performance.

“In the GCC, non-oil GDP is a key determinant of remittance outflows, while oil GDP is a significant driver of non-oil GDP. Based on historical trends, a 1 percent decline in real non-oil GDP in the GCC is estimated to reduce remittance outflows by ½–¾ percent annually.” – How the Oil Price Decline Might Affect Remittances from GCC, IMF

This is apparent in Saudi Arabia’s case where non-oil GDP has been seeing a slowdown in growth in line with the fall in oil prices – in 3rd quarter of 2015 it slowed down to 3.3% YOY, compared to 6.1% YOY recorded in same period in 2014.

This has led to a general decrease in remittances outflows from oil-producing nations and in turn, countries like Philippines and India have also experienced a slowdown in their remittances inflows growth in recent times.

According to IMF estimates, many of the oil producing countries in the Middle East which are our main sources of remittances require oil prices to be at least above USD 50/barrel to keep their fiscal finances intact. Tightening fiscal finances and falling foreign reserves in these countries have even led to talks of a possible tax on remittances outflows (no confirmations on this as yet).

As such, it will be difficult to see a rebound in remittances inflows if oil prices continue to remain depressed. However, the upside is that according to historical trends remittances tend to rebound quickly in line with a rebound in oil prices. The short-term trajectory of inflows would largely depend on the direction of oil prices among other factors.