New visa rules a barrier to expanding South African tourism sector

A powerhouse industry, major employer and economic mainstay during troubled times, South Africa’s tourism sector has risen to rival its mining sector in terms of overall contribution to GDP, with 2014 witnessing record levels of foreign visitor arrivals, drawn in by the country’s natural beauty, outdoor attractions, food and culture, and increasingly by its business and conference facilities. However, a dramatic turnaround was witnessed in the sector in 2015, caused by stringent new visa regulations severely impacting on foreign arrivals, and the industry now faces the loss of thousands of jobs and millions in revenues. Despite steady growth in hotel revenues and visitor spending, the new visa rules pose a major obstacle to growth, and could see domestic arrivals become the dominant tourist cohort over the medium term.

Sector Overview

South Africa’s tourism sector is overseen by the National Department of Tourism (NDT), which is tasked with promoting and developing the sector both at home and abroad. The NDT’s principle legislation is the Tourism Act (No. 3 of 2014), which emphasises sustainable tourism development, clarifies the role of the South African Tourism Board (SAT), establishes the Tourism Grading Council and details the regulatory framework for tour guides.

Under the supervision of the NDT, SAT is responsible for marketing the country internationally and maximising the sector’s economic potential. SAT emphasises domestic and emerging market tourism, and moved in 2013 to open offices in Angola, Brazil, Kenya and Nigeria. In July 2014 SAT unveiled its updated five-year strategy, which targets 1.5% growth per annum in tourism’s revenue contribution to the economy, and also aims to increase foreign visitor arrivals to 15m and domestic tourists to 18m by 2020.

National Tourism Sector Strategy

The NDT is guided by South Africa’s National Tourism Sector Strategy (NTSS), which aims to position South Africa as one of the top 20 global tourism destinations by 2020, in addition to expanding the country’s tourism economy, enhancing visitor experiences and sustaining good governance within the industry. The NTSS targets expanding domestic tourism from 30.9m domestic trips in 2009 to 54m in 2020, creating 225,000 new jobs and increasing tourism’s total direct and indirect economic contribution from R189.4bn ($16.36bn) in 2009 to R318.2bn ($27.49bn) by the end of 2015, and R499bn ($43.11bn) by 2020.

Although the feasibility of some of these targets remains in doubt given the challenges currently facing the sector, the country has already made solid progress on a number of NTSS goals, with government allocations to the NDT rising 19.1% between 2013-14 and 2014-15 to hit R5.6m ($484,000), while a new focus on marketing the country to emerging markets in Africa, South America, and Asia has delivered “astounding” results, according to the NDT: South Africa ranked first on the continent and 48th globally in the World Economic Forum’s “Travel and Tourism Competitiveness Report 2015”, a sharp improvement over 64th place globally and third in Africa in 2013, and ahead of other markets such as Indonesia (50th), India (52nd), Puerto Rico (55th) and Mauritius (56th).

“International tourism has been strong, driven by the weakened rand, which has made South Africa a cheap destination internationally. But the area where we see big potential growth is from the Asian market, particularly China and India. However, this is being hampered by the changes in visa restrictions,” Marcel von Aulock, CEO of Tsogo Sun Group, told OBG.

Economic Contribution

According to the World Travel and Tourism Council’s (WTTC) 2015 report on South Africa, the direct contribution of travel and tourism to GDP, which includes spending on both business and leisure tourism by residents and non-residents, as well as government spending on cultural and recreational attractions, and tourism services such as hotels and travel agents that deal directly with tourists, was R113.4bn ($9.78bn) in 2014, or around 3% of total GDP. The WTTC forecasts this will rise by 3.8% to reach R117.8bn ($10.18bn) in 2015, and then grow by 4.6% annually until 2025 to reach R184.7bn ($15.96bn), or 3.4% of total GDP.

In addition, the sector is a significant employer, with the WTTC reporting that tourism generated 679,500 direct jobs, or 4.5% of total employment in 2014, and has forecast that employment growth will reach 3.8% in 2015. Tourism employment is forecast to rise 3% annually until 2025 to reach 948,000 direct jobs, 5.4% of total employment.

Spending

According to the WTTC, visitor spending by international tourists for both business and leisure trips (in real prices) rose from R105.3bn ($9.1bn) in 2013 to hit R112.9bn ($9.7bn) in 2014, a considerable year-on-year (y-o-y) expansion of 7.2%. Meanwhile, leisure travel spending for both inbound and domestic tourists amounted to R162.3bn ($14.02bn) in 2014, equal to 66% of direct travel and tourism GDP, compared to R83.6bn ($7.22bn) in business travel spending. Leisure travel spending is expected to grow by 3.4% in 2015 to reach R167.7bn ($14.49bn), expanding a further 4.9% annually until 2025, while business travel spending is forecast to rise by 2.1% in 2015 to hit R85.4bn ($7.38bn), and rise by 3.9% annually to hit R124.7bn ($10.78bn) in 2025. Although expanding at a more modest pace than leisure spending, business travel, especially in the meetings, incentives, conferences, and exhibitions (MICE) segment, has been identified as one of the most high-potential segments within South Africa’s tourism industry, with the government targeting high-spending visitors in a bid to diversify and enhance the sector (see analysis).

Domestic travel remains a significant contributor to the economy. In 2014 it generated 54.1% of direct tourism GDP, more than international visitors at 45.9%. Going forward, however, the WTTC forecasts international visitor spending to surpass that of domestic travellers in 2015, rising 4.5% in 2015, and 5.5% annually, to hit R201.8bn ($17.44bn) in 2025, while domestic spending is expected to grow 1.6% in 2015 to hit R135.2bn ($11.67bn), and rise by 3.6% annually to hit R192.8bn ($16.66bn) in 2025, although these predictions were made before the impact of the new visa regulations had fully hit the industry.

New Visa Regulations

The most significant recent development within the tourism industry occurred in May 2014 when the Department of Home Affairs introduced two new visa regulations that have had a dramatic impact on foreign arrivals.

The first is a requirement that all children under the age of 18 crossing South Africa’s border be in possession of an unabridged birth certificate, a passport and, where applicable, a visa. The second, and most damaging, stipulates that tourists from countries requiring visas appear in person during the application process in order to obtain a biometric visa.

“The new regulations were well-intentioned, designed to prevent child trafficking and improve industry security, but the unintended consequences have been quite severe,” Martin Jansen van Vuuren, the director of tourism at Grant Thornton, told OBG.

The Tourism Business Council of South Africa (TBCSA) released an official response to the decision in April 2015, voicing “extreme concerns” over the impact the new regulations will have on foreign visitor arrivals, while an industry impact report published in June 2015 by the TBCSA, in collaboration with Grant Thornton, found that the industry is expected to lose R4.1bn ($354.24m) in visitor exports and 9300 jobs as a result of the visa changes. Grant Thornton has described the South Africa tourism sector as being in the midst of its “first serious crisis stage”.

“The study was based on quite a detailed analysis, and we even took a conservative view on how many of those arrivals would be dissuaded as a result of the new regulations. I think people might be surprised in terms of the amount of foreign currency that tourists do bring to Africa,” Jansen van Vuuren told OBG.

The regulations have also hit business tourism, with destination management companies seeing booking contractions of between 40% and 70%, as outside operators are no longer recommending the country as an incentives destination. According to a report by PwC, “Hospitality Outlook: 2014-2018”, visitors from China constituted South Africa’s fourth-largest tourism market in 2012 and 2013, following the introduction of non-stop flights to the country in 2012. This market is expected to be especially hard-hit by the visa changes, negatively affecting government plans to expand the MICE segment and the nation’s broader tourism industry (see analysis.) ARRIVALS: South Africa recorded strong growth in foreign tourism arrivals between 2011 and 3013 with investment consultancy StanLib reporting 10% annual growth during those years. However, growth has slowed significantly in recent months, and 2014 marked the first year the tourism industry witnessed a decline in foreign tourist arrivals since 2003.

In August 2015 Statistics South Africa reported that the total number of travellers who visited the country through all ports of entry in 2014, including South African residents, was 15.09m, a 0.4% decrease from 15.15m in 2013. Total visitors stood at 14.53m in 2014, of which 4.98m, or 34.3%, were same-day visitors, in the country for shopping, work, or to visit family, while 9.55m were overnight tourists, a 0.1% increase over 9.54m in 2013. Holidaymakers comprised 93% of total foreign traveller arrivals, while the business traveller segment made up 2.4% of the total.

According to Statistics South Africa, the five main non-African countries for international tourist arrivals in 2014 were the UK with 401,914 visitors, the US (309,225), Germany (274,571), France (131,502) and the Netherlands (131,287). The agency noted that arrivals from overseas countries decreased in number everywhere except for the Netherlands, while arrivals from China fell by 45.1%.

The WTTC had reported that international tourist arrivals would hit 13.53m in 2014, and estimates that they will stand at just 10.47m in 2015, although the council anticipates this number will rise by 5.5% annually to hit 16.23m arrivals in 2025. These projections could be overly ambitious, however; tourist arrivals began to drop off in 2015, with Statistics South Africa reporting a 6.8% y-o-y contraction, or 42,840 arrivals between first-quarter (Q1) 2014 and Q1 2015 for a total of 589,802 foreign arrivals.

According to investment consultancy StanLib, the situation is more serious than the numbers indicate – out of the 1.3m visitors (domestic and foreign) arriving in January, only 877,712 stayed for one night or longer, while the rest were day visitors offering little to the industry by way of export spending. StanLib reports that although same-day tourism continued increasing modestly in early 2015, tourism of a longer duration fell by 7.6% y-o-y in January 2015, while visitor spending showed a corresponding decline.

Sustained Slump

Figures for Q1 2015 show a sustained decline. Arrivals from mainland Africa, South Africa’s largest source market, fell by 5.6% y-o-y between January and March to rest at 1.69m, driven by a 7.8% decline in visitors from Lesotho, a 7.4% decline in visitors from Swaziland and a 7.5% decline from Zimbabwe. Outside of Africa, Europe is the largest source market for tourists to South Africa, and here too visitor arrivals fell, albeit by only 0.9%. The sharpest declines were seen in arrivals from the Netherlands (8.3%, or 2791 visitors), Germany, (3.1%, or 2695 visitors) and Russia (46.5%, or 1612 visitors).

Factors outside of visa regulations are affecting tourism arrivals, including economic volatility within the EU, fears over the 2014 Ebola outbreak in West Africa – despite the fact that there were no reported cases in South Africa, and that many European countries are in closer proximity to Ebola-hit areas – as well as a spate of violence in Johannesburg which rattled tourist confidence in April and May 2015. “We’ve yet to see the full impact of the riots on the sector but advanced bookings are down and arrivals from neighbouring countries have begun to slow dramatically,” Jansen van Vuuren told OBG.

Positive Indicators

Despite the fall in arrivals, there are some bright spots within the sector, particularly in Cape Town, South Africa’s most popular tourism destination. According to Cape Town Tourism’s May 2015 monthly dashboard, domestic arrivals increased by 10.7% to reach 283,724, while regional arrivals rose by 14.8% to 6453 and international arrivals by 20.4% to 43,291. Stakeholders argue that under-served secondary markets also hold potential, despite a lack of direct international air connectivity.“Cape Town is still a major industry driver. There is certainly room for more hotels, particularly hotels in second cities like Nelspruit, and small towns close to large mining projects. These won’t be 200-room hotel projects, but there is space in the market for smaller facilities,” Jansen van Vuuren told OBG.

Hotel indicators in Cape Town also did well in May 2015, with occupancy rates rising by 0.9% to reach 51.5%, average room rates growing by 8.7% to hit R1111 ($96.00) and revenue per available room increasing by 10.6% to R572 ($49.00). PwC projects that room revenues will continue expanding at a compound annual growth rate of 10.7% between 2014 and 2018 to reach R28.74bn ($2.48bn). Overall, the hotel segment will record 11.2% compound annual growth to reach R20.87bn ($1.80bn), supported by modest economic growth, low-rate rises and a depreciating rand impacting positively on foreign visitor arrivals.

Outlook

Although South Africa has become a global hot spot, recording strong growth in the years following its hosting of the 2010 FIFA World Cup, and exceeding expectations during a period of muted global tourism activity in 2011-13, the tourism industry is facing some serious challenges in 2015. New visa regulations have had a powerful impact on foreign arrivals, and although the full extent of revenue and job losses will not be known until the end of 2015, early evidence indicates the industry will take a hit. Meanwhile, a significant number of positive indicators, particularly within Cape Town, could help some operators weather the worst of the near-term shocks.