The hospitality industry is often the first victim of economic slowdown – when times are hard, businesses and individuals make cuts to their travel arrangements. Yet, despite the gloomy outlook elsewhere, the Middle East’s hospitality industry has thrived.
In fact, the industry has actually benefited from the crisis. As other regions became unstable, the Middle East became a safe-haven for international business, a trend ultimately reflected in their travel trade. “Bookings have really held up during the crisis,” explained Rohit Talwar, CEO of Fast Future Research and author of a study on the future of travel and tourism in the Middle East. “Especially from business travelers as more and more people switch their business focus to the Middle East.”
However, things could be about to change as the Middle East finally feels the pinch.
Not So Invincible
Since the beginning of the credit crisis, the Middle East has remained impervious. There was even doubt over whether this “western problem” would affect the region at all because countries in the region were able to build up large cash reserves while oil prices were high. The theory was that even if the slowdown affected the region, there would be enough liquidity to cushion the blow.
Yet, at the end of October, the crisis claimed its first Gulf billionaire. Bassam Alghanim, chairman of Kuwait’s second-largest lender, resigned after the bank reported losses of $800 million.
In a story now so familiar in the west, government intervention soon followed. As the Kuwaiti authorities stepped in, the United Arab Emirates injected $32 billion into its banking system and placed government guarantees on bank deposits. Even Saudi Arabia has made moves to minimize the economic impact of the slowdown and reassure concerned investors.
“As the scale and pace of the global turndown increases, it is becoming clear that the Middle East is not immune from either financial uncertainty or economic slowdown,” explained Talwar. “The downturn is moving from Wall Street to Main Street and firms are beginning to cut back as demand slackens. This is almost certainly going to flow through to the region’s travel sector.”
A Fragile Industry?
To make matters worse, the Middle East’s hospitality industry has been affected by a number of external factors. As nearly all food products are imported into the Middle East, the combination of high food and oil prices has really affected the profitability of food and beverage operations across the region.
Also, oil prices have made it more expensive for foreigners to travel to the region and a reduction in business travelers could force airlines to reconsider their schedules. “Airlines were already on course for a $5 to $10 billion loss globally,” confirmed Talwar, “and the downturn in the region could make this picture even bleaker. Schedule reductions, route closures and staff redundancies are inevitable. This in turn will affect the viability of many airports.”
The Slowdown
This could be a major blow to the region’s travel industry. By 2020, there are plans to build over 200 new hotels across the Middle East and invest over $3 trillion into the industry and supporting infrastructure. The impact of the credit crisis on this long-term vision remains to be seen.
“A prolonged downturn will lead to some projects being less viable with higher finance costs – ultimately, these projects could get cancelled,” concluded Talwar. “Bigger chains will slow their investment and expansion plans and owners will look to asset managers to try and increase yields from their existing properties.”
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