Publication Date: 3 May 2009 | Coverage Period: 3 April – 2 May 2009
Morning Briefing
- WHO declares H1N1 swine flu a Public Health Emergency of International Concern on 25 April — Caribbean governments scrambling to respond
- Caribbean tourism authorities issue cautious reassurances as traveller enquiries spike with concern about regional safety
- Global recession deepens: IMF projects world GDP contraction of 1.3% for 2009, the worst since the Second World War
- Caribbean property transaction volumes remain near-frozen as mortgage lending tightens and buyers adopt a wait-and-see posture
- Jamaica’s fiscal position deteriorates sharply; government borrowing costs rising as debt-to-GDP approaches critical thresholds
- Trinidad and Tobago energy revenues slide as oil prices, though recovering from late-2008 lows, remain well below the boom-era peaks that funded public spending
H1N1 Swine Flu: The Caribbean on High Alert
The emergence of a novel H1N1 influenza strain, first identified in Mexico in late April 2009 and rapidly spreading across North America and beyond, has sent shockwaves through Caribbean tourism ministries and health authorities alike. On 25 April, the World Health Organization declared a Public Health Emergency of International Concern — the most serious level of alarm available to it short of a full pandemic declaration — and the implications for the Caribbean’s visitor economies are already being felt in hotel booking enquiries and airline load factors.
The Caribbean’s overwhelming dependence on North American source markets — the United States and Canada account for the majority of stopover arrivals across most island destinations — means the region is acutely exposed to any disruption in transatlantic and trans-Gulf travel sentiment. Tourism ministers across Jamaica, Barbados, the Dominican Republic, Trinidad and Tobago, and the smaller Eastern Caribbean islands are monitoring developments with intense anxiety. The question being asked urgently in every ministry of tourism is simple and alarming: are travellers going to cancel their Caribbean holidays out of health fears?
As of the close of our coverage period, the H1N1 strain has not been confirmed as present in significant numbers across Caribbean island communities, and regional health authorities are pointing to robust airport screening measures and enhanced public health protocols. However, the psychological impact on potential visitors is already measurable. Travel agents in the United States report a notable uptick in cancellation enquiries, though the volume of confirmed cancellations remains relatively modest at this stage. The situation is evolving by the day.
Global Recession: The Caribbean’s Deepest Crisis in Decades
The H1N1 emergency arrives at the worst possible moment. Caribbean tourism was already suffering through what analysts are describing as the most difficult year in living memory, driven by the catastrophic global financial crisis that followed the collapse of Lehman Brothers in September 2008. Consumer confidence in North America and Europe — the Caribbean’s primary visitor source markets — collapsed through late 2008 and has not recovered. Discretionary spending on international travel is among the first casualties of economic hardship, and the Caribbean, perceived by many as a premium holiday destination, is feeling the full force of this retrenchment.
Preliminary data for the first quarter of 2009 suggest Caribbean stopover arrivals are running 5-8% below the equivalent period of 2008, which was itself already showing signs of slowing. Hotel occupancy rates across the region have fallen sharply, and many properties — particularly in the luxury segment — are reporting occupancies that would have been unthinkable eighteen months ago. The response has been aggressive discounting: rate packages that would have commanded a premium in 2007 are now being offered at substantial reductions in an effort to stimulate bookings. This protects volume to some degree but significantly damages revenue per available room.
Caribbean Property Market: Transaction Volumes Near Zero
The Caribbean’s real estate market, which experienced a sustained boom through the mid-2000s driven by foreign investment, rising second-home demand from North American and European buyers, and easy credit conditions, has entered a period of profound dislocation. Transaction volumes in the high-value coastal and resort segments — the bellwether of the market — have collapsed to levels not seen in decades. Buyers who might have been active in the market a year ago are sitting on their hands, either because their own asset values have declined, their credit has tightened, or simple uncertainty makes any major capital commitment feel reckless.
Sellers, for the most part, are not yet meeting the market. Many vendors — particularly those who purchased at or near the peak of the boom — are unwilling to accept the price reductions that buyers are demanding. The result is a standoff that is producing very little transactional activity. Agents across Jamaica, Barbados, Turks and Caicos, and the Eastern Caribbean report that their pipelines contain enquiries but few completed sales. Financing remains the central obstacle: international mortgage lending to non-resident buyers has tightened dramatically, and local bank lending conditions have also firmed considerably.
Jamaica and Trinidad: Fiscal Pressures Mount
Jamaica’s public finances are under severe strain. The government of Prime Minister Bruce Golding, which came to power in September 2007, inherited a debt burden that was already among the heaviest in the world as a proportion of GDP, and the global recession has dramatically worsened the fiscal arithmetic. Tax revenues are falling as economic activity slows, while the government’s debt service obligations — which consume an extraordinary share of the annual budget — remain fixed. The options available to Kingston are narrowing, and discussions about the potential role of international financial institutions in providing support are growing more pointed.
Trinidad and Tobago, cushioned by its energy revenues in ways that other Caribbean economies cannot access, is facing a different but still significant challenge. Oil prices, while recovering from the catastrophic lows of late 2008, remain well below the levels that underpinned the expansive public spending of the Manning administration in recent years. Prime Minister Patrick Manning faces the task of recalibrating public expenditure commitments made during the boom era to a more constrained revenue environment, all while managing the social expectations built up during years of petrochemical prosperity.
Caribbean Leaders This Month
Bruce Golding, Prime Minister of Jamaica, convened an emergency cabinet session to assess the H1N1 risk to Jamaica’s tourism-dependent economy, ordering enhanced airport health screening and issuing public guidance on hygiene measures. His administration simultaneously faces the grim task of managing a fiscal deficit that threatens to spiral beyond control without external support.
Patrick Manning, Prime Minister of Trinidad and Tobago, oversaw the activation of the national H1N1 response protocol through the Ministry of Health, while his Treasury officials worked on revised revenue projections that account for oil prices substantially below the budgeted assumptions for fiscal year 2009-10.
David Thompson, Prime Minister of Barbados, faced a deteriorating economic picture as the island’s tourism-heavy economy absorbed the double blow of recession-hit visitor numbers and the emerging H1N1 concern. Thompson’s Democratic Labour Party government, less than eighteen months in office, is navigating conditions for which no recent precedent exists.
Leonel Fernández, President of the Dominican Republic, authorised enhanced border health controls and worked with the tourism ministry to issue reassurances to international operators about the safety of the country’s all-inclusive resort corridor, which represents by far the largest single component of Caribbean tourism.
Regional tourism ministers convened in emergency consultations through the Caribbean Tourism Organization framework to coordinate messaging on the H1N1 situation, conscious that a fragmented response could amplify negative perceptions among source market travellers.
Caribbean hotel operators in the luxury segment continued to slash rates in an effort to stimulate bookings for the traditionally quieter summer season, with some properties offering packages at discounts of 30-40% against their published 2008 rack rates.
International property agents active in the Caribbean reported that while buyer enquiries had not ceased entirely, conversion rates — the proportion of enquiries resulting in actual transactions — had fallen to historic lows, with most prospective purchasers citing uncertainty about both the economic outlook and their own personal financial positions as reasons for deferring decisions.
Looking Ahead
The trajectory of the H1N1 situation will be the defining variable for Caribbean tourism over the coming weeks. Should the WHO escalate its alert level further, or should confirmed cases begin appearing in significant numbers across Caribbean communities, the impact on summer bookings could be severe and potentially season-defining. Tourism ministries will need to calibrate their public communications with exceptional care — underplaying the risk risks credibility, while over-alarming risks precisely the visitor deterrence the region cannot afford.
On the economic front, there are no credible signals yet of a near-term recovery. The IMF’s latest projections suggest the global recession will persist through 2009, with recovery — if it comes — likely to be gradual and uneven. Caribbean economies with heavy dependence on tourism receipts and remittance flows from the United States will remain under significant pressure for the foreseeable future. Property markets are likely to remain in their current semi-frozen state until economic confidence begins to return and credit conditions ease.
For Caribbean property investors with long time horizons and sufficient liquidity to weather the current downturn, the coming months may eventually reveal opportunities — distressed assets coming to market at prices that reflect the current dysfunction rather than fundamental long-term value. However, the timing of any such opportunity window remains impossible to call with confidence, and the prudent posture for most participants in the market is watchful patience.
The Caribbean Property & Investment Review is published monthly for professional investors, property developers, and tourism industry stakeholders across the Caribbean region. Edition 207, covering 3 April to 2 May 2009.
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