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Economic Update: Africa

The ICAEW Economic Update: Africa, is a quarterly economic forecast for the region prepared directly for the finance profession.

Tourism in Africa: Q1 summary

Published 25 February 2020

  • Africa’s medium-term tourism prospects remain promising, supported by improvements in infrastructure, better air transport connectivity and easing visa regulations.   
  • More African countries are also prioritising the promotion of tourism as part of their economic diversification strategies. 
  • Apart from adversely affecting tourism, the coronavirus epidemic will hold broader implications for the continent resulting from slower growth in China. 

Focus: Tourism and Africa

Uncertainty about global developments remains especially elevated as we head into the new decade. The easing of trade tensions between the US and China lowers downside global GDP and trade growth risks. However, new challenges have surfaced. Mounting geopolitical tensions, especially relating to the stand-off between the US and Iran, have soured investor sentiment and provided a temporary boost to global oil prices. 

More recently, however, the outbreak of the coronavirus represents a more significant threat. While it still seems most likely to end up being a short-term event, the severity of the impact on China’s growth prospects will hold major implications for Africa given the continent’s close ties to the Asian giant. The broader impact will also be exacerbated if efforts to contain the outbreak prove inadequate, thus extending both the reach and duration of the shock.

Challenges also persist on the domestic front. Regional powerhouses South Africa and Angola continue to weigh on Southern Africa’s prospects: the region’s growth is seen remaining sluggish at 1.3% in 2020, with risks firmly stacked to the downside. Power outages are taking a toll on the South African economy, and fiscal pressures mean the country could well lose its investment-grade credit rating. Angola’s real GDP, meanwhile, looks to have contracted for a fourth straight year in 2019. Although growth is projected to turn mildly positive this year, low oil prices and much-needed reforms will keep the economy under pressure. 

East Africa remains the continent’s growth hotspot, with regional output seen expanding by 6% in 2020. Although regional growth is now clearly decelerating, East Africa still boasts some of the fastest growing economies globally. Rwanda, for instance, recorded growth of 10.9% y-o-y during 2019 Q1-Q3, with public investment stimulating industry and rising consumption supporting the blossoming services sector. Certain West African countries also warrant mention in this regard, especially the likes of Côte d’Ivoire and Senegal. Unfortunately, the sluggish performance of the Nigerian economy continues to weigh on West & Central Africa’s prospects, with regional growth seen rising only marginally to 3.1% in 2020. Low oil prices raise the risk of additional foreign exchange restrictions being imposed. Such restrictions, along with the protectionist policies pursued by Abuja (most recently illustrated by a decision to shut Nigeria’s land-based borders), prevent economic activity from gaining more traction. 

Regional growth rates in Africa

Africa’s commendable growth performance in the context of dismal returns in the developed world continues to attract investor interest. Some of this interest has taken the form of calls to privatise some of the continent’s numerous state-owned enterprises (SOEs), not just to benefit private investors but also to improve the performance of these institutions to the benefit of the nations they are meant to serve. But Africa has a fraught history when it comes to privatisation. At the time of independence an ideological predisposition towards a central role for government in poverty alleviation, and an affinity with the Soviet Union shared by many independence movements, pressed many governments in newly free countries to nationalise large private enterprises.   

However, in the decades since  privatisation has proliferated across the continent. Côte d’Ivoire was an early proponent of privatisation in the 1960s and in the 1990s many SOEs across the continent were privatised due to pressure from the IMF and World Bank. The process initially started with small- and medium-sized enterprises in competitive sectors but extended to larger utilities in the latter half of the 1990s. That being said, the privatisation process in sub-Saharan Africa has proceeded at a much slower pace than that observed in other regions of the world and remains incomplete. Even South Africa, the continent’s most industrialised nation, remains burdened with a hodgepodge of underperforming SOEs in numerous sectors, the most infamous being energy utility Eskom.

Resistance to privatisation largely stems from the idea that SOEs’ performance should not just be assessed in terms of commercial efficiency but also in terms of social welfare. From this perspective SOEs can play a central role in pursuing progressive policies such as subsidising the poor and creating jobs while also supporting the development of local capacity over the longer term. It should also be noted that, according to a 2018 World Bank research paper, the literature now reflects a more cautious and nuanced evaluation of privatisation, with pre-conditions (especially the regulatory infrastructure and institutional framework) and an appropriate process of privatisation critical in ensuring a positive result.

Tourism’s total contribution to GDP

Africa’s medium-term tourism prospects remain robust, supported by improvements in infrastructure, better air connectivity and easing visa regulations. Even countries with fairly developed tourism sectors are expected to see rapid growth in tourist arrivals. The United Nations World Tourism Organisation (UNWTO) predicts that growth of tourist arrivals will exceed 5% p.a. over 2020-23 in the likes of Tanzania, Egypt, Madagascar, Mali, South Africa and Togo. 

The positive spillover effects of the sector to other parts of the economy, and the fact that it generates foreign exchange inflows, have prompted more African countries to prioritise tourism promotion as part of their diversification strategies. Unfortunately, the coronavirus now represents a significant downside risk over the short term. While China still does not rival certain European countries and the US in terms of the origin of international tourists, arrivals from the Asian giant have increased sharply in recent years. Markedly slower growth in China and its effect on demand for Africa’s exports will, however, hold more serious economic implications for the continent. 

Focus: South Africa

South Africa’s economic outlook has deteriorated over the past year due to persistent policy uncertainty and indications that energy constraints will be much more severe than previously expected. However, the services sector has proven to be resilient in downturns relative to other sectors. The services sector, particularly tourism, is thus considered key to enabling inclusive growth and economic transformation. Tourism is characterised by low barriers to entry as most businesses are small, providing services such as accommodation, tour guiding, day tours and taxi services. Consequently, tourism is a key focus sector in recent policy documentation, including the economic policy paper released by the Treasury towards the end of 2019. More specifically, the document recommends reforms such as destination marketing, easing the regulatory burden related to tourism activities, and the adoption of policies that support tourism (such as relaxing visa restrictions and improving safety and security). 

Inbound visitors to South Africa totalled 10.5m in 2018, staying a total of 71.3m nights. This represents a longer average length of stay than most destinations. South Africa’s largest source markets in 2018 were Zimbabwe, Lesotho and Mozambique. In fact, regional countries dominate South Africa’s inbound tourist composition, with Southern African Development Community members accounting for over 70% of arrivals in 2018.

International tourism spending

Looking at overall size, South Africa is the second largest tourist destination in Africa in terms of spending, with total receipts from international visitors amounting to an estimated $9bn in 2019. Egypt is the only country on the continent with a larger tourism market, estimated at $12.2bn last year. However, Cape Town is estimated to outperform all other cities on the continent in terms of international tourist spending, generating just under $2bn in revenue in 2019. 

In the context of a generally bleak economic outlook, the South African tourism sector has the potential to be one bright spot. The country’s relatively developed infrastructure and variety of tourist attractions mean that visitors will continue to flock to the country despite some economic hardships. In addition, expected currency depreciation in the future will increase the country’s attractiveness for international holidaymakers, while the sophisticated retail sector means that South Africa will remain a key shopping destination, particularly in a regional context.  

Focus: Mauritius

Over the past four decades Mauritius has transformed from an Indian Ocean backwater reliant on sugar production to a flourishing services-oriented economy. This was in great part due to the rapid expansion of its luxury tourism industry, as well as its emergence as a tax-friendly jurisdiction which spurred the development of its finance industry. The country is blessed with tropical white-sand beaches, a melting pot of cultures and culinary delights to entice foreign tourists.

The hotel industry in Mauritius is very well organised, with the government exercising close control over the entire coastline to ensure that new properties conform to environmental standards. The island has developed a variety of entertainment opportunities aside from the traditional beach tourism. As a result of this work, tourist numbers have risen substantially: from 18,000 arrivals in 1970 to 1.39m arrivals in 2018. Employment in the tourism industry increased from 4,360 in 1983 to around 31,000 in 2018, with roughly 70% of all employees in this industry working in hotels.

Following a period of swift growth during 2014-18, the country’s tourism industry was in the doldrums in 2019. The number of tourists visiting the island nation’s shores declined by 1% last year compared to positive growth of 4% in 2018.

Looking at the regional breakdown for arrivals, declines in some traditionally important tourism partners, namely China, India, the UK and South Africa, have weighed heavily on total arrivals. The slowdown in arrivals from these countries reflects their respective weaker disposable incomes and currencies. Travel restrictions related to the outbreak of the coronavirus will most probably further hamper Chinese tourist arrivals in 2020, which will hurt overall tourism growth.

On the other hand, travellers from some wealthy European countries such as France, Italy and Switzerland have been more resilient to the global economic slowdown. Furthermore, arrivals from Saudi Arabia have soared recently thanks to new direct flights from this country and increased marketing.

Tourists visiting Mauritius are primarily Europeans, who make up 60% of all visitors. European tourists are mainly French, British and German, but the government has undertaken numerous initiatives to diversify its tourism market, with a special focus on Asia, Oceania and America. In addition, regional tourism (targeting fast-growing African countries) is a predominant part of the government’s tourism market diversification strategy. However, the shortage of direct flights from these destinations (partly due to the protection that the flag carrier Air Mauritius receives) is a constraint to the tourism industry. Mauritius also faces increased competition from destinations with similar attractions such as the Maldives and Sri Lanka.

 

Mauritius tourist arrivals & earnings growth

Looking at tourism earnings (which are not updated as regularly as tourist arrivals), the country’s gross tourism revenue (estimated by Statistics Mauritius from banking records and foreign exchange dealers’ returns) is estimated to have totalled Rs50.6bn ($1.4bn) in the 10 months to the end of October, which is 2.2% lower compared to the same period in 2018. The decline reflects the lower tourist arrivals and reduced travel services receipts (as measured by the Bank of Mauritius in the balance of payments accounts). These factors have contributed to a smaller surplus on the services balance of the current account, and will also bite into real GDP growth and government revenue.

Economic Insight reports are produced with ICAEW's partner Oxford Economics, one of the world’s foremost advisory firms. Their analytical tools provide unparalleled ability to forecast economic trends.