Australians have always been proud of their tourism industry. It enables us to show the world what a diverse and beautiful country we have and also generates substantial revenue for many parts of regional Australia and for the economy as a whole. However, the world is changing and the competition for international tourists is intensifying. Governments the world over spend enormous amounts of money trying to attract tourists to visit their country to generate export income.

The problem for Australia is that we suffer from a major competitive disadvantage, being the distance from major North American and European markets. The resulting cost and time to travel in and around Australia deters many travellers, and with the strengthening AUD this will be exacerbated.

For our tourism businesses the AUD strength is a double-whammy with more Australians now travelling overseas than in the past and not holidaying in Australian locations. This is having a significant impact on our balance of trade with Australia’s tourism imports exceeding Australia’s tourism exports every year since 2004/05 and with the deficit of tourism exports to tourism imports reaching $5.0b in 2009/10 according to the Australian Bureau of Statistics. There is significant economic downturn in many parts of regional Australia as a result.

There is no easy fix and any solution must be long term. Tourism Australia has developed an initiative “2020 Tourism Industry Potential” focused on overnight visitor expenditure. There is clearly great potential from increasing visitor night expenditure and the benefits to the Australian economy are clearly enormous but the key question is how can this be achieved? Australia always had great potential as a tourist destination but has rarely fulfilled the potential with the exception of the mid 1980’s when there was a influx of Japanese tourist which incidentally created an significant inbound investment from Japan focused on the tourism industry.

However, past experience has shown that the potential interest in Australia as a tourist destination has not been fulfilled. Many campaigns have been successful in raising awareness of Australia and respondents to surveys indicated that Australia would be a place they would like to visit, but the intentions were not acted upon. I suspect that the recent Oprah Winfrey campaign will raise awareness but not visitor numbers by a significant factor.

Tourism Australia does anticipate that a substantial portion of the potential increase in visitor night expenditure will come from the emerging countries of China and India. This is a logical approach that can be supported on the basis of proximity as well growing economies with large populations. The issues, clearly identified by Tourism Australia that must be addressed to achieve the potential from these markets are more quality accommodation, improved aviation infrastructure, more skilled labour force (including language skills) and new, interesting tourism products.

Leisure tourism must not dominate the discussion on the potential of tourism. Business tourism which includes conventions, conferences, meetings, incentives and events is more rewarding and has some great long term prospects. This has been recognised by governments and now additional infrastructure around business events such as the new convention and exhibition centre in Melbourne and the proposed new centre is Sydney will enable Australia to compete and win additional business events that will generate additional tourism to Australia.

In recent years various governments have funded improved and better infrastructure. In addition to the convention and exhibition centres there have major improvements to regional airports in major tourist destinations such as Gold Coast and Cairns. For tourism to reach its potential this must continue with infrastructure developed that will provide a better standard of amenity for tourists.

The infrastructure, business tourism opportunities, growth from emerging markets, new tourism products  and addressing skilled labour problems may well assist in achieving the “Tourism Industry Potential” by 2020. However, the impact of a strong $A could negate all these improvements to industry. For the Australian tourism industry to reach its potential it is crucial that products are not sold on price but on quality – that is critical.

Employment figures slightly stronger than expected, underscoring robustness of economy

RBA decides to maintain interest rates at 4.75 percent with a markedly similar statement to after its March meeting

EVENTS:

The Australian Bureau of Statistics announced on Thursday morning that Australia’s unemployment rate fell to 4.9 percent in March from 5.0 percent in February. Total employment increased by a seasonally adjusted 37,800 to 11.457 million. Market analysts had expected 20,000 jobs to be added last month and for the unemployment rate to remain at five percent.

The employment data follows on the heels of the RBA’s decision on Tuesday to keep interest rates on hold at 4.75 percent for a fifth consecutive month. The RBA’s April statement was very similar to its statement last month. The similarity of the last two RBA statements reflect the Bank’s confidence that current interest rate settings are appropriate for current economic conditions.

IMPACTS:

The release of the employment data saw the AUD soar to yet another 29 year high against the USD, reaching $1.0508 cents in late trading on Thursday. The AUD is currently trading at the top of our expected range of $0.9900-1.0500. We expect the AUD to run out of momentum and be capped at $1.0500.

Whilst the employment data was slightly better than expected, the RBA signalled that growth in employment is likely to moderate in the short-term. CPI inflation data due towards the end of the month should offer a clearer indication of the direction in which the RBA will travel with interest rates. Any significant shift in inflation could recalibrate the Bank’s thinking on timeframes for potential rate increases.

It should be noted, however, that the RBA has already acknowledged that the reconstruction efforts in Queensland could see short-term inflationary pressures. These pressures will continue to be contextualised by the RBA as it assesses the national inflationary environment.

CONSIDERATIONS:

The AUD has been driven higher recently on the back of M&A flows and a weakening of the JPY. This had led to a renewed focus on the carry trade, with the AUD appreciating almost 20 percent against the JPY since the earthquake and tsunami on 11 March.

Thus far, the currency markets have ignored the previous risk aversion events this week, including the Portuguese Government’s request for an economic bailout from the EU and China increasing its interest rates by 0.25 percent. These events have passed without any significant movement in the AUD.

With the AUD trading up to $1.05, the dollar is in dangerously overbought territory. Profit taking could see the AUD drop back to $1.035 as investors move to take some risk off the table. Against this backdrop, businesses that trade overseas, especially importers, need to ensure that they properly cover their currency exposure for when the AUD inevitably runs out of momentum.

There has been increased speculation that the US Federal Reserve could raise interest rates this year to keep inflation in check. Federal Reserve Bank of Richmond President and former voting member of the Federal Open Market Committee, Jeffrey Lacker, noted this week that inflationary pressure has increased appreciably in the last six months. Any increase in interest rates in the US would reduce the gap in interest rates between the two countries and put downward pressure on the AUD.

One additional issue of interest is the very real prospect of a shutdown of the US Federal Government triggered by a budgetary dispute between President Obama and the Republican Congress. A shutdown would result in a freeze of many Federally funded government services and the Federal payroll. The last US Federal Government shutdown in 1995 had negative ramifications on all sectors of the US economy. The ramifications of another shutdown could be impactful on the USD.

1. Indian student attacks

Two attacks on Indian students in Melbourne, seemingly racially motivated, threatened to curtail this multimillion-dollar industry in a significant source market. However, it was not just education, Australia’s third largest export and our highest value service export, at risk. Australia’s image in India was at least temporarily tarnished as this issue, unresolved since 2009, increased in profile.

Diplomacy was in full force as former acting Prime Minister and Minister for Education Julia Gillard, and acting Minister for Foreign Affairs Simon Crean, met with their Indian counterparts to ease tension.

2. China versus Rio Tinto

In 2009, Chinese authorities arrested detained four Rio Tinto employees, including Australian executive Stern Hu, for five weeks before formally charging them with commercial bribery and trade secrets infringement. Hu attended a closed trial in March 2010 and accepted the Chinese court’s 10-year sentence.

The sentence came as a warning for exporters to avoid corrupt practices when doing business in China, particularly in the resources sector, which is Australia’s biggest earner in China.

3. Mining tax debacle

The resources sector came out in force against the Henry Tax Review suggestion that the sector pay 40 percent tax on its so-called ‘super profits’. The Federal Government decided to adopt the suggestion and the industry spent millions in a nationwide advertising campaign in protest. Economists believe the tax will curb some investments and affect mineral exports, which may have a trickle-down effect in the wider economy.

4. Rising Australian dollar

The Australian dollar reached parity with the US dollar in mid-October after months above US80c and US90c. The weakness of the US economy, in addition to flailing markets in the UK and eurozone (particularly Portugal, Ireland, Greece, Spain), boosted the Australian dollar in global markets, and threatened to chew at exporters’ margins. Competing on a lower dollar is no longer an option for exporters as near-parity is predicted to continue well into 2011.

5. Global travel woes

An ash cloud created by the eruption of Eyjafjallajökull, the Icelandic volcano most found difficult to say and spell, interrupted much of Europe’s airspace for five days in April. Airlines had to deal with thousands of stranded passengers and airfreight routes had to be re-routed or delayed.

Let’s not forget natural disasters in Haiti, China, and Pakistan, the Gulf oil spill, and the US Department of Homeland Security’s Transportation Security Administration body-scanning controversy added to the mix. On a domestic front, Virgin Blue suffered a system crash that saw several planeloads of passengers stranded in September.

Things to celebrate

But it wasn’t all bad. Exporters started the year with a larger backyard market thanks to the ASEAN-Australia-New Zealand Free Trade Agreement (AANZFTA). Australia’s foray into China at the Shanghai World Expo and as country of honour at the China International Small and Medium Enterprises Fair was also successful, and we also launched a nation brand, Australia Unlimited, as distinct from our tourism campaigns.

Not that we forgot about tourism, which received a lot of attention in December when US talk show host Oprah Winfrey decided to visit for her last show, Oprah’s Ultimate Australian Adventure, bringing an entourage of 302 dedicated audience members and employing hundreds of US and Australian staff. Organised by Winfrey’s Harpo Productions in conjunction with Tourism Australia and local airline Qantas, the tour will be televised in January 2011.

What events rocked your exports in 2010?

Guest presenter Sanjay Gnanadickam from Travelex will speak on the volatile global foreign exchange market, imparting valuable information and advice to help manage currency issues in international business. Learn how to lock in favourable exchange rates, eliminate risk and plan for upcoming payments.

The event is part of the AIEx’s Future Leaders in Export club for active importers and exporters.

When:
8-9.30am
Wednesday November 3, 2010

Where:
Industry & Investment NSW
Level 2, 470 Church Street
North Parramatta

RSVP: Lisa McAuley at lisamcauley@aiex.com.au

According to the Australian Bureau of Statistics (ABS), the balance of goods and services recorded a surplus of $134 million in April, seasonally adjusted, compared with a deficit of $2.04 billion the month before.

The small surplus was enough to see the Australian dollar climb to almost US$0.85 after the dollar dropped into the low US80-cent mark last month.

Much of the trade surplus came from the increase in value of iron ore exports, up 29 percent, according to the ABS.

The Aussie Dollar Barometer, an initiative of the bank, surveys medium-sized importers and exporters to gauge their expectations, risk management procedures and exposure to changes in foreign exchange rates. The latest report indicates that traders are not doing enough to protect themselves from currency fluctuation, with only 38.8 percent of importers and 49.2 percent of exporters planning to hedge their exposure to variations in currency value.

The optimism among traders is a concern to Robert De Luca, executive general manager of Corporate Financial Services at the Commonwealth Bank. “The data suggests that many importers could be leaving themselves exposed to falls in the Australian dollar. Now may be the time for businesses to reassess their currency position, rather than leaving their business open to cost pressures down the track.”

The Commonwealth Bank is forecasting the value of the Australian dollar to drop to 90.0 US cents by the end of this year.

SA exports dropped more than 20 percent to $8.3 billion on the back of a 51.1 percent decrease in trade with the USA. Car exports declined by a massive 85 percent.

However, exports to China rose by 21.3 percent to $1.18 billion and sales to India lifted by more than 50 percent to $367.6 million.

Nationwide, Queensland suffered an 18 percent drop in exports, while Tasmania and Victoria were down 16 percent, NSW down 10 percent and Western Australia down 10 percent.

“The strength of the Aussie dollar against the greenback or British pound means corporate travellers don’t have to exchange nearly as many Aussie dollars for spending when they arrive. This makes overseas travel much more appealing financially,” said FCm  national marketing manager Chris Preston.

The travel management consultancy polled travellers when the Australian dollar passed US90c, with 56 percent indicating that they were more likely to head overseas on business when the dollar was in a strong position. The other 44 percent said they would travel overseas regardless of the health of the Aussie dollar.

The poll results match an expected rise in overseas business travel for this year, following the strengthening Australian dollar.

“When combined with the great value business class fares currently available, the favourable exchange rate means businesses can stretch their travel budgets further and get more value for money out of their travel,” said Preston.

The latest annual Australian Agriculture in Focus report sees increasing global demand for agricultural commodities such as dairy and sheepmeat, while the supply of many of these commodities is limited.

After the freefall of the market last year, this is a welcome change, said Rabobank’s general manager for Food & Agribusiness Research and Advisory Justin Sherrard. But he warned that businesses had to manage rising costs as well. “To benefit from higher commodity prices, farmers and agribusinesses need to manage any related increases in production and processing costs, and see higher prices passed down to consumers.”

The rising Australian dollar and rising energy prices will also be a major factor in increased commodity prices, particularly as resources such as oil and natural gas are used in manufacturing farm inputs, such as fertilisers and chemicals.

“Dairy, sheepmeat, sugar and fibres are the sectors that appear best placed to capitalise on the positive outlook,” Sherrard said.

At 07:00 (AEDT), the dollar was trading at $US0.8919/24, up 0.39 percent from Friday’s close of $US0.8885/89.

CMC Markets analyst David Taylor said the dollar had been boosted by further improvement in German business confidence, which rose for the ninth consecutive month in December, IFO Institute figures reveal.

“Fortunately, we got some good business confidence data out of Germany: it rose for the ninth consecutive month,” he said. “I think that’s seen a little bit more risk appetite in the market. The Aussie dollar has benefited from that, and naturally we’re just seeing a little bit more money flowing into the riskier sectors today.”