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Tourism ‘market mix’ can beat Fed’s interest hike

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ROBERT SANDS

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas Hotel and Tourism Association’s (BHTA) president yesterday voiced optimism that “pent-up” travel demand and a high-end “market mix” can sustain the post-COVID rebound despite the Federal Reserve’s latest tightening.

Speaking after the US central bank unveiled its latest 75 basis point hike in short-term interest rates, Robert Sands told Tribune Business that the industry has yet to see any negative impact on visitor bookings and spending due to the increased cost of credit in its major source market.

Around 90 percent of The Bahamas’ tourist base comes from the US, and credit plays a major part in financing vacations and related spending for many, but he added that the desire to travel following COVID lockdowns and restrictions remains albeit not as strong as previous.

“I would say that the market mix principally for The Bahamas should not be impacted from a tourism perspective by this,” Mr Sands told this newspaper. “Pent-up demand still exists, although it perhaps is not at the same level it was.

“The reality is, too, that in addition to pent-up demand for travel, the normalisation and reduction of impediments to travel will help continue to increase awareness of The Bahamas as a destination and increase the level of bookings which is manifesting itself not only in the return of stopover visitors but in the return of cruise ship passengers.”

The BHTA chief added that the Federal Reserve’s rate hike was “not unexpected”, with the financial markets having largely anticipated and priced in an increase ranging from 0.5-1 percentage point. Yesterday’s action fell in the middle of that range, and Mr Sands said: “We must be aware of the real reason why it was done, which is the greater threat to the tourism industry - inflation.

“The increased cost of goods and services means there’s a reduced amount of money available for spending by certain segments of the market. We don’t see that at the moment, though, and let’s not worry about ‘what if’s’. Let’s take it [US interest rate increases] one at a time. If this particular strategy works, and inflation begins to correct itself to levels that are manageable in the US, that’s a major win-win for the major market for The Bahamas.”

The Bahamas’ post-COVID economic revival is almost entirely dependent on the strength and pace of tourism’s recovery, but there are multiple external global forces that can derail that including still-high oil, energy and gasoline prices; high food prices and shortages; global inflation; supply chain bottlenecks; Russia’s ongoing invasion of Ukraine; and the possibility that the US and other major economies may slip into recession via interest rate hikes.

The US Federal Reserve is attempting the finest of balancing acts - bringing 40-year high inflation under control, and then lowering it to acceptable levels, without plunging the economy into a recession that contracts it. It is aggressively raising rates at levels unseen since the mid-1990s as it struggles to tamp down soaring prices, which rose by an annual rate of 9.1 percent in June, the fastest inflation rate since 1981.

The increase raises the Federal Reserve’s cost of borrowing to between 2.25 percent and 2.5 percent, and is its fourth rate increase in 2022. It comes as central banks worldwide seek to calm price rises with higher rates. However, Larry Gibson, chief operating officer of CG Atlantic Pensions, backed Mr Sands’ assertion that tourism has thus far seemed relatively immune to global economic headwinds.

“There seems to be pent-up demand that hasn’t worked itself out, so the impact may be less,” he told Tribune Business. “You couldn’t travel, and had to spend disposable income on domestic things like cars, so that pent-up demand may stay strong which will be a positive for us. 

“We need to be careful that are pricing in the tourism sector is not exorbitant and is still perceived to be competitive. I think the big thing is that once we get stability in energy prices, and they come down, you’ll see a trickle down effect for all manufactured goods.” However, Mr Gibson agreed that slower global economic growth, headwinds and a cautious outlook are the immediate reality for all countries including The Bahamas.

“The best case is we’ll work out the supply chain issues, oil prices will come down, gas prices will come down and we will have more flowing trade. There are so many co-dependents,” he added.

Hubert Edwards, principal of Next Level Solutions, a Bahamas-based risk management consultancy, also agreed that tourism may be relatively insulated from the latest Federal Reserve rate hike. “It may not have a huge, drastic impact, but it will have some,” he added. “We know persons usually fund their trips by credit card or borrowing.

“To the extent the Federal Reserve has done that, that will put a dent in the funds available. If the US economy starts to slow down, there could be a reduction in disposable income and we could see some impact on tourism. I don’t, though, anticipate any immediate impact from this change where we see any drastic shift or push back on tourism. In terms of reservations, we have things going out three, four, five months. A lot of things have been secured.”

Comments

JokeyJack 2 months ago

Good points, except you should consider a sharp drop in travel beginning around October 20th as the new MTE COVID Variant may take root. MTE of course stands for Mid-Term Election in early November. This new illness will be needed in order to have all the mail-in ballots that will be needed for various purposes. After the 1st Tuesday in November, that variant will magically disappear. So maybe a good tourism result for December, depending on the number of mall shootings in the USA during the lockdown.

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