Financiers still favour Caribbean tourism despite inflation risk
No matter what happens with the international economy, it seems the sunshine and sea breezes of Caribbean tourism will always be attractive for investment.
It’s an industry that’s weathered the heaviest of storms, with natural disasters, economic shocks and even a global pandemic unable to shake confidence among institutional investors, high net worth individuals and family offices around the prospects of solid returns on Caribbean investment.
“Tourism is just a remarkable industry,” Baker Tilly Turks & Caicos Managing Director Gary Brough says.
“Before the pandemic, it was contributing around 10 to 11 per cent of global GDP.
“Everyone realised it was seriously hurt by the pandemic, but I don’t think many realise just how hard it was hit.
“There was a near US$5 trillion fall in contribution to global GDP, and the loss of 62 million jobs.
“It’s hard to come back from anything like that, but not only has it come back, it’s come back stronger and reinvented itself.”
Baker Tilly’s annual Caribbean Hospitality Financing Survey showed that while confidence levels dipped by around 10 per cent for both banks and non-bank financiers in 2023, as compared to last year, they remain historically high.
Confidence around future tourism numbers is similarly bullish, with the World Travel and Tourism Council predicting the sector to return to pre-COVID levels by the end of this year.
Caribbean real estate remains strong and investment dollars continue to flow, with half of non-bank respondents to the survey indicating their deal flow and pipeline is stronger now than before COVID, and further investments flagged for the next 12 months.
Mr Brough says one of the biggest drivers of confidence is the Caribbean’s proximity to the North American tourist market.
“North America is a huge feeder market and the Caribbean is considered a safe bet in many respects,” he says.
“It’s close, they know and understand it. Most destinations are English speaking, airlift is excellent and the Caribbean is generally considered safe.
“There are always things we can improve on as highlighted in our survey, but once a tourist is sitting on their balcony in the Caribbean sipping on a pina colada in the sunshine, they don’t tend to complain!.”
While Caribbean tourism has rebounded swiftly from its challenges, Mr Brough says that’s not to say things haven’t evolved, particularly since the pandemic.
“We’re very cognisant that things have changed,” he says. “COVID has changed the landscape forever, and if you didn’t learn anything during the pandemic, from a personal and professional perspective, you’re never going to learn anything.
“Tourism hasn’t come back with people saying ‘we went to a certain destination for the last 10 years, now we can go back to that same destination’.
“It’s more like ‘I’ve learned something about myself during the pandemic and I want to go somewhere which exhibits those new attributes that I personally value’.
Inflation, recessionary risks
Even as Caribbean tourism appears to be resilient, Mr Brough says global inflation may take a significant toll if it remains stubbornly high.
Mr Brough says inflation was first flagged as a possible headwind in 2022, with that pressure only being exacerbated in the following 12 months as rising prices and input costs became entrenched across all sectors of the global economy.
Just less than half (45 per cent) of banks and 26 per cent of non-banks say they are very concerned about inflation, while 36 per cent of banks and 68 per cent of non-banks are a little concerned.
The prospects of recession, however, are a smaller concern, according to the survey.
Nearly two thirds of banks (64 per cent) and non-banks (65 per cent) do not believe we are in a recession now, and do not expect one over the next 12 months.
Mr Brough says the prospect of banking contagion added to those concerns over the survey period, with inflation a contributory factor in the collapse of several high-profile banks in the United States and Europe, including Silicon Valley Bank.
“We have pretty much had a 30-year holiday from the serious ravages of inflation, so it certainly hasn’t been front of mind during that period,” he says.
“There’s some indication that we’re off our game a little bit in terms of how to deal with inflation, and that’s partly what’s affected confidence.
“For years it has been record level of confidence after record level but levels have come down 10 per cent this year for both banks and non-banks.
“It’s not earth shattering, but it’s consistent among both groups and we need to pay attention to it.”
To date, however, existing borrowers have not been hugely impacted by the higher interest rates put in place by central banks to curb inflation.
The Baker Tilly survey showed nearly three quarters (73 per cent) of established borrowers had taken the higher rates in their stride, with just 27 per cent having to restructure their loans.
“In 2015, most borrowers taking out a 20-year loan weren’t envisaging that they would be looking at high inflation in 2023,” Mr Brough says.
“I would have thought that category was most at risk because they still have to pay their loans off and under most agreements, interest rates reflect market conditions.
“At least with new loans, borrowers are entering into them with their eyes open, and starting with higher interest rates already in their projections.
“In the current environment you may think there won’t be too many offers of financing, but we are seeing financing being available across the Caribbean – the most likely deployment of those funds in the next 12 months is expected to be on renovations and refurbishments.”