The economics of SA tourism

Jeremy: South Africa needs faster growth and more jobs; tourism could help deliver both. Last year, the country welcomed 10.5 million international tourists above pre-pandemic levels, with arrivals rising another 12.3% in the first half of this year.

Tourism now contributes 4.9% directly to GDP and supports over 950,000 jobs. But the headline numbers mask a harder question: Are more visitors translating into enough economic value?

Hello, I'm Jeremy Maggs. This is No Ordinary Wednesday, it's Investec's fortnightly podcast on the forces shaping economies, business and markets.

For South Africa, the challenge is not simply attracting more tourists, it's getting them to stay longer, spend more and travel more widely. This challenge is moving up the economic agenda, with tourism now included in phase three of the government-business partnership with reforms focused on air access, visas, safety, marketing and infrastructure. And with tourism month beginning on the 1st of September, attention is turning to the season ahead.

So can tourism move from a recovery story to a meaningful driver of growth, investment and employment? Joining us now is Investec Economist Lara Hodes.

Lara, welcome to No Ordinary Wednesday.

Lara: Hi, Jeremy. Thanks very much for having me.

Jeremy: Lara, South Africa is seeing high numbers of international tourists. Are we now looking at a new expansion phase for tourism, or do you think we might still be in the final stage of the post-COVID recovery?

Lara: I believe South Africa's tourism sector has moved beyond simply recovering from COVID-19 and now is entering more of an expansion phase. Tourism was one of the sectors hardest hit by the pandemic, but international arrivals have lifted notably with room for further growth.

This has been supported by improved global travel demand, South Africa's competitive pricing, and initiatives to improve the ease of travel and growing interest from new source markets.

Jeremy: More than three-quarters of visitors, as I understand it, come from the continent. So, Lara is that regional base a strength, or does South Africa need more long-haul visitors?

Lara: Yes. So, as you mentioned, the majority of South Africa's international visitors do come from the rest of Africa, making this source markets absolutely essential. Travelers, particularly from the SADC region, visit South Africa for a range of reasons, including business, shopping, education, and alike, providing a stable base of tourism demand.

However, growing the overseas visitor component remains imperative. A long-haul tourists tend to stay longer and are a valuable source of foreign exchange earnings. So, in order to increase these overseas arrivals further, South Africa needs to continue with its initiatives like improving air connectivity and strengthening its marketing capability to these source markets, and very important, enhancing tourist safety.

Jeremy: Laura, foreign exchange earnings is one thing, but tourism supports almost 954,000 jobs. That is big. How much bigger, though, could its contribution to employment realistically become, do you think?

Lara: Yes, so considerably larger. It's definitely a growth sector. It's a labor-intensive industry with links to a number of other sectors of the economy, which is very important.

Government has identified tourism as a key driver of employment because it can create a number of jobs, and importantly, across a range of skill levels.

Jeremy: Laura, if I made you Minister of Tourism for just one day, what would matter the most to you? Would it be more arrivals? Would it be higher spend, longer stays, or repeat visits?

Lara: So, I think all of these metrics definitely matter as they each contribute to the sector's overall economic impact. More arrivals obviously increase the scale of tourism activity and support employment, while higher spending, of course, boosts foreign exchange earnings and business revenues and profitability.

So longer stays tend to increase spending across, a spread of activities, accommodation, restaurants, transport. Repeat visits signal that people have had a positive visitor experience, strengthening South Africa's reputation as a destination and providing a more sustainable source of demand.

So, I think I'd promote all of these different areas, definitely.

Jeremy: Laura, you're painting a very rosy and bullish picture, but you'll also agree that South Africa is exposed to global shocks - anything from weaker growth and higher fuel costs to the ongoing geopolitical disruption, and we need to be cognizant of that, right?

Lara: Definitely. So, I think a number of other countries, when there's weaker global growth, it tends to weigh on consumer confidence and discretionary spend.  So, households tend to postpone international travel or opt for destinations closer to home, maybe perhaps cheaper options.

Same with geopolitical disruption. Travelers tend to be more cautious, tend to rather maybe travel closer to home or within their home country. And of course, higher fuel prices, which we've seen the oil price, surge as a result of the Middle East war, obviously is a huge deterrent for long-haul flights weighing heavily on costs.

Jeremy: Laura, as we record this conversation, we've got the rand at R16.02 against the dollar. It has gone below 16. How important is our currency to tourism competitiveness? With the rand now, I think, at its strongest level against the dollar in four years, do you think further appreciation could weaken the country's value proposition, or do you think other factors perhaps matter a little more?

Lara: I don't think it fundamentally undermines the country's tourism value proposition as a whole. Even at the current exchange level, we have seen the rand perform robustly.

South Africa remains still very affordable compared to a number of other competing long-haul destinations, and it also continues to offer a lot of value. So, for price conscious, very price conscious travelers, it may affect their travel decisions slightly.

But people do come to South Africa to experience its beauty and its unique travel experiences and its unique sights. So might influence, as I said, price conscious travelers, but generally, I think we still offer a lot of value.

Jeremy: Now, Lara, tourism is now part of phase three of the government business partnership. How significant is that shift, do you think, for the sector?

Lara: So, I think it's very significant. It reinforces how important the sector is as a driver of growth and employment creation. It increases focus on addressing some of the key constraints facing the sector, and this coordinated action between government, and the private sector can have a meaningful impact.

Jeremy: Now, there is a lot of work to do, though. We know the reform priorities include visas, air access, safety, and infrastructure. If you, again, were to look at this broadly, which constraint needs fixing first to unlock the most growth?

Lara: So, I think first line priorities, you first need to deal with ease of travel. Air access, of course, more long-haul flights, better air connectivity, and visa accessibility would be first to allow people to travel to the country in the first place. So that will have an immediate impact on visitor numbers, particularly from high-value long-haul markets.

That said, safety is another major consideration for many international travelers and can be a significant deterrent. The Department of Tourism has started a number of initiatives in this regard, but we need further reform.

Investment in infrastructure is also essential to ensure a positive visitor experience, and we need reliable transport networks, adequate water and electricity supply for the tourism sector to operate effectively.

Everything working smoothly helps determine travelers' experience and their likelihood of returning.

Jeremy: Let me circle back to visitor numbers, and China and India remain well below their previous visitor peaks. How much upside could easier visas and better air connectivity unlock from those markets, do you think?

Lara: So yes, these are extremely large source markets. Given their size, even modest gains could generate substantial benefits.

Beyond improving access through visa accessibility and air connectivity, which is essential, one needs to also understand their digital behavior. Specifically what platforms they follow and use to book holidays, their travel preferences, and cultural motivations can also help improve SA’s competitive position for these source markets.

As I said, Department of Tourism has been involved in a number of initiatives. One's the Trusted Tour Operator scheme, which is a very positive development. It streamlines and accelerates visa applications from group markets such as China and India, reducing administrative bottlenecks and improving the ease of travel.

So that's definitely a positive development in this regard.

Jeremy: All right. I want to finish this conversation with looking ahead if we can. Let's assume we're having this conversation a year from now. What three indicators would tell you that tourism is genuinely becoming a structural driver of South African growth rather than simply enjoying a strong cyclical recovery?

Lara: looking forward, if governments and business work together and it's a priority, we definitely would look at things like a persistent rise in employment in the sector, and also industries that it has strong links to.

Perhaps increased private sector demand and investment in like hotels, transport, attractions, tourism infrastructure, and of course, a sustained increase in tourist arrivals from a variety of source markets, which would lift foreign exchange earnings.

So those are the ones that I would earmark.

Jeremy: And that's where we are going to leave it. Lara Hodes, Economist at Investec, thank you so much for joining me on this episode of No Ordinary Wednesday.

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