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Tourism-Dependent Caribbean Fears Sinking Under U.S. Financial Storm

With popular destinations from the Caymans to Cuba still reeling from the devastation of this summer’s hurricanes, Caribbean islanders are no doubt relieved that the 2008 hurricane season officially ended Nov. 30.

Yet for the region’s tourism industry, Fanny, Gustav, Hanna and Ike were mere drops in the bucket compared to the real threat on the horizon: financial disaster in the United States.

Today, fewer tourists are booking cruises to Jamaica. In the Bahamas, sales at duty-free shops along Nassau’s Bay Street are flat. And in the Turks and Caicos Islands, a group of disgruntled Chinese construction workers recently took their Israeli bosses hostage after a Ritz-Carlton resort they were building fell through following the collapse of its chief backer, Lehman Brothers.

In fact, the repercussions of this crisis on the Caribbean could be deeper and longer lasting than those caused by the Sept. 11 terrorist attacks seven years ago.

“In 2001, it was an issue of security. In this instance, you’re talking about people’s livelihoods,” said Wayne Cummings, director of business administration for Sandals Resorts International and president of the Jamaica Hotel and Tourist Association.

“Eight months ago, I started hearing about problems with subprime mortgages and that’s when I knew the very foundations of the American economy were shaky,” Cummings told The Washington Diplomat.

“Even so, I don’t believe this crisis is a singular event. It’s going to have international catastrophic consequences,” he said, adding that “9/11 was a challenge of great proportions, but with this one, nobody seems to be able to tell what the endgame is.”

In addition to the worsening U.S. economy, tourism-related businesses also face rising energy costs, increased competition and dramatically reduced air service to the Caribbean — all of which could result in a financial meltdown for the island market, with lower hotel occupancy levels and losses for retail and duty-free outlets that depend on sales to travelers.

According to Cummings, before all hell broke loose on Wall Street, Jamaica’s tourist industry was cheerfully looking at a 10 percent growth in tourism revenues. “Now, we’re recalibrating the numbers,” he said. “We think we’ll be closer to 6 percent growth, and even that is optimistic. To lose four or more points from our projections has an immediate effect on GDP and all the things that go with that.”

And contrary to the once-popular advertising jingle, it’s no better in the Bahamas. “Obviously, we’re going to expect a decline in tourism,” said Marcus Grammatico, financial controller for John Bull Ltd., a leading luxury retailer based in Nassau.

“During the first part of this year, the number of arrivals was steady, but spending had dropped. Now we’re starting to see a drop in both spending and arrivals,” Grammatico said in a phone interview. “People who had already booked their tickets continued with their vacations or they’d lose money, but they watched their spending. Now that we’re well into the [financial] downturn, we’ve noticed that arrivals are also dropping.”

During the first six months of 2008, the Bahamas welcomed 848,700 stopover visitors, 81.5 percent of them Americans. That unhealthy dependency on the United States has led the ministry to step up its marketing efforts in Great Britain and elsewhere in Europe in part because of the favorable exchange rate of the British pound and euro against the Bahamas dollar, which is linked to the U.S. dollar.

But the mess on Wall Street has already spread to Nassau’s once-bustling Bay Street — where John Bull’s flagship store is one of the few that remain open for business. “It’s shocking to see how many small businesses have closed,” said Grammatico, whose company operates 22 retail shops. “They were not able to weather the storm.”

The crisis has taken its toll in other ways. Lehman Brothers had been involved in financing a Ritz-Carlton mega-luxury project on privately owned Rose Island, a 10-minute boat ride from Nassau.

“When Lehman filed for bankruptcy, that came to a stop,” said Grammatico. “With the way things are, it could be quite some time before they find a bank willing to pick up a project in the Bahamas.”

Lehman’s demise also fueled an ugly dispute in the upscale Turks and Caicos — where hundreds of Chinese laborers on a stalled resort allegedly detained the project’s Israeli contractors — and it’s had a profound effect in the Dominican Republic as well.

“The Monday before Lehman went bust, Cap Cana had given them the mandate to issue 0 million of debt. Obviously, that went down,” said Santo Domingo financial analyst Alejandro Fernández. “But even if Lehman had not gone broke, who is going to invest ,000 per square meter in real estate in the Dominican Republic? I don’t think it’s going to happen anymore, at least not for awhile.”

Haydée Rainieri, president of the Santo Domingo-based Dominican Hotel and Restaurant Association, said her country will nevertheless try to capitalize on its proximity to the United States and its reputation as a travel bargain compared to a trip to Europe or the beaches of Rio.

“There’s not a country in the world that isn’t worried about what’s happening,” said Rainieri, whose organization represents 139 hotels, 60 restaurants and 180 other tourist-related entities. “But we think this crisis could have a positive aspect, in that Americans who were thinking about traveling to Europe or Asia might consider the Caribbean. We’re a much closer and much cheaper option. In this sense, we could have a good winter season despite the crisis.”

Eduardo Chaillo, director of the Mexico Tourism Board office in Washington, certainly hopes that will be the case for the Mexican resort of Cancún, one of the Caribbean’s most popular getaways for American tourists, which competes directly with such destinations as Punta Cana in the Dominican Republic and Montego Bay, Jamaica.

“With our convenient flights from the U.S. to Mexico and our stable currency, we can attract those travelers who would have gone to Europe or Asia,” said Chaillo. “We think that in the midst of this crisis, there are some opportunities we should take advantage of.”

That’s exactly what Puerto Rico is trying to do. Earlier this year, the Puerto Rico Tourism Co. (PRTC) kicked off a multi-city U.S. tour with promotional events in Washington, Boston, Chicago, Los Angeles and New York — all of which highlighted the fact that American citizens don’t need a passport to visit the island.

“There has never been a better time to visit Puerto Rico,” said PRTC Executive Director Terestella González Denton in a prepared statement. “In spite of the current economic climate, travelers can find a wide array of vacation options on our island, from deluxe hotels to family-owned inns, all of which offer access to our beaches, mountains and cultural attractions. Through this U.S. tour, we aim to highlight that Puerto Rico has something for everyone at all price points.”

Yet all the hype in the world won’t change the fact that average Americans are deeply concerned about the future, and about their own financial security.

“We know this crisis is going to have an impact, there’s no question. It’s just to what extent,” said Richard Kahn, spokesman for the Miami-based Caribbean Hotel and Tourism Association. “In the Caribbean, it hasn’t been felt yet because the summer season was soft anyway. But we’re expecting an impact for the fall and winter seasons. How much is anyone’s guess.”

Kahn added: “We’re dealing with one of those perfect storms where economics and the presidential elections coincide, and every four years we have a presidential election, there’s always a soft travel market in the fourth quarter. Everyone stops what they’re doing.”

That’s why most of the top destinations for U.S. travelers are taking an anxious wait-and-see approach. For instance, the economic downturn is already being felt in the U.S. Virgin Islands, which like Puerto Rico is almost entirely dependent on the U.S. mainland tourism market.

“We are looking carefully at the developments,” said Edward Thomas, president and chief executive officer of the West Indian Co. in St. Thomas, which, along with Cancún and the Bahamas, ranks as one of the Caribbean’s leading cruise ship destinations.

“The one good thing about cruising is that folks book a year in advance, so it takes awhile for the impact to hit. By that time, we hope conditions will turn themselves around,” said Thomas. “Most folks who are cruising now have already booked their tickets a year ago, so the issue isn’t whether they come, but how much discretionary income they spend while on the island.”

“Clearly, our business is all discretionary, and we’re hoping we can weather this storm,” Thomas continued. “We do firmly believe that, in spite of it all, people still want their vacations, and the cruise has proven to be a good bargain for their dollar.”

Even though the relatively low cost of Caribbean cruises has made the region the world’s leading cruise market, that industry is feeling the economic pinch along with everyone else.

“Despite the strength of the market, we have seen shifts in the cruise industry that have been influenced by the rising cost of fuel,” said Scott Smith, senior vice president of PKF Consulting. “Cruises to more remote ports in the southern Caribbean, such as Aruba, are being cut from itineraries due to the length of the trip and fuel required to get there.”

An even bigger problem though is the cutbacks in the airline industry.

“Given the region’s dependence on airlift, the most daunting issues facing the Caribbean hotel industry are the rising cost of airfares and the announced cutbacks in air service,” said Smith, whose Atlanta-based consulting firm has just released the 2008 issue of its study, “Caribbean Trends in the Hotel Industry.”

“Due mostly to the rising cost of fuel, four of the five leading air carriers to the Caribbean have announced cutbacks in service,” Smith said. “The Caribbean has always been attractive to price-sensitive travelers…. If airfares continue to rise, hotels may have to reduce their room rates in an effort to maintain the Caribbean’s position as an affordable destination.”

But whether arriving by sea or air, the truth is that most visitors don’t have as much money as they once did — meaning they have less to spend onshore.

Cummings of Sandals Resorts said the U.S. market comprises 70 percent of Jamaica’s tourism business, and that the average tourist spends 0 to 0 per day while in Jamaica. “I can immediately see people spending at least 50 percent to 60 percent less than before,” said Cummings, whose chain operates 12 Jamaican hotels with a combined 2,500 rooms.

On the bright side, the number of Canadians visiting Jamaica grew by 25 percent last year, while European arrivals were also up, though to a lesser extent. “However,” he said, “Canada is still small compared to the U.S. market, which can never be replaced in the short term.”

Yet not all Caribbean destinations will be affected by the drama in the United States.

Cuba, with its 41,000 hotel rooms and 2 million visitors a year, is off-limits to American tourists anyway because of the long-standing U.S. embargo. At any rate, Cuba is preoccupied with cleaning up from two devastating hurricanes, Gustav and Ike, which caused a combined billion in damages.

Another Caribbean destination insulated from the American turmoil — for a very different reason — is Trinidad and Tobago, whose economy thrives not on tourism but on oil and gas exports.

“The immediate impact of the financial crisis for us has been negligible,” said Karen Nunez-Tesheira, the country’s finance minister, during a recent visit to Washington. “Our stocks are doing extremely well, with investment in local and regional markets. Therefore, the contagion you see happening throughout the world has not happened in Trinidad.”

She added: “No one welcomes this crisis, but Trinidad and Tobago is in a very strong position because the commodities market is doing very well and our story is different from that of the rest of the Caribbean.”

But for the majority of Caribbean countries, the financial hurricane sweeping the world might be worse than anything Mother Nature has thrown at them recently. Cruising used to be a fast-growing moneymaker for Barbados, which received 370,956 cruise passengers during the first four months of 2008 (a 32.9 percent increase over the same period in 2007). Now, the island’s short-term economic health — like many of its neighbors — is a big question mark.

“Tourism is a major part of our economy and an important foreign-exchange earner,” said the ambassador of Barbados in Washington, Michael Ian King. “People can only travel if they have money to buy an airline ticket or a cruise. But it’s too early right now to predict what will happen. Whether upscale or not, this will affect everybody.”

About the Author

Larry Luxner is news editor of The Washington Diplomat.