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Since the U.S. started loosening Cuba travel restrictions in January 2015, the opening up of Cuba to U.S. tourists spelled potentially bad news for other vacation destinations in the Caribbean.

An agreement between Cuba and the U.S. that allows commercial flights to resume between the two countries will see six major carriers, including American Airlines, Delta and Jet Blue, launch new routes, starting this fall.

In March, Starwood Hotels became the first U.S. hotel chain to sign a landmark deal with the Cuban government to take over and manage three prominent hotels in Havana. In May, Carnival Cruise Line became the first U.S. cruise operator to sail to Cuba in 50 years. And the home-sharing website Airbnb, which entered the Cuban market last year, is growing fast.

In Cayman, tourism officials have observed the developments and their impact on the local tourism product with an “it’s too early to tell” attitude. Yet, as U.S. tourists increasingly flock to Cuba, the growth of stay-over tourist arrivals in Cayman has largely stalled.

In mid-June, Cuba hit 2 million stop-over arrivals – a month earlier than when the number was seen last year. The 17.4 percent increase was the fastest rate of growth for stop-over arrivals in the Caribbean region, and it is growing from a large base, says Marla Dukharan, group economist for the Royal Bank of Canada’s Caribbean operations.

http://www.journal.ky/wp-content/uploads/2016/07/Cayman-stopover-arrivals-US-Cuba-rapprochement-Read-Only-300x192.jpg 300w, http://www.journal.ky/wp-content/uploads/2016/07/Cayman-stopover-arrivals-US-Cuba-rapprochement-Read-Only-696x445.jpg 696w, http://www.journal.ky/wp-content/uploads/2016/07/Cayman-stopover-arrivals-US-Cuba-rapprochement-Read-Only-1068x682.jpg 1068w, http://www.journal.ky/wp-content/uploads/2016/07/Cayman-stopover-arrivals-US-Cuba-rapprochement-Read-Only-658x420.jpg 658w" sizes="(max-width: 1071px) 100vw, 1071px" />Between January and April, the number of American and Cuban-American visitors to Cuba nearly doubled compared to the same period in the previous year. Together, both groups represented 14 percent of all visitors to the country during that time.

“To think that this is happening and it won’t have an effect on the Caribbean is probably a bit naïve,” Dukharan said at an RBC-sponsored event in June about the economic impact of Cuba opening up to the United States.

Tourism figures for the Cayman Islands show that since President Barack Obama announced the rapprochement with Cuba, the growth of stay-over tourists has taken a dip. Cayman had about 0.76 percent growth in stopover arrivals last year, the lowest growth rate since the financial crisis in 2009.

“You can see how the growth has turned largely negative since [President Obama’s announcement],” Dukharan said. “Now, I am not saying that this has 100 percent to do with the increase in tourism from the U.S. going to Cuba, but I think it would be naïve to think that it has not been a factor.”

The International Monetary Fund has called the development a seismic shift, or a one-in-a hundred-year event in the tourism industry, and there are indications that CARICOM as a whole has already lost market share in tourism to Cuba since the turn of the century.

The Inter-American Development Bank identified Jamaica and the Bahamas as the two countries likely to suffer the most as a result of Cuba’s opening up to U.S. tourists.

However, Dukharan says, Barbados and the Eastern Caribbean could benefit, since some operators may choose not to compete with U.S. travel organizations and aim instead at other Caribbean destinations.

Whether Cuba’s tourism revival will lift tourism to the region in general, or whether it will lure visitors from other Caribbean destinations, is not clear. The RBC economist notes there has been some substitution effect, but overall, travel from outside the region has increased. For instance, in addition to attracting more U.S. tourists, Cuba has drawn many more visitors from Latin America.

Investment

While rating agency Moody’s states that Cuba’s economy suffers from chronic underinvestment in general, at a rate of just 9.4 percent of GDP, the country accounts for the highest total tourism investment in the region. Between 2000 and 2013, Cuba reported an annual average of $1.1 billion invested in the tourism sector.

Expectations are that if Cuba joins the World Bank, tourism development is going to be one of the main focus areas for early stage lending. The Inter-American Development Bank is also active in tourism development and would likely fund new projects.

Occupancy rates in Cuba ranged from 45 percent in 2013 to 49 percent last year. “So Cuba can accommodate about twice as many people,” says Dukharan. “For all of those who say, ‘where are all the U.S. tourists going to stay?’ there is room, there is capital intensive activity taking place. They are investing in lots of buildings and construction. They will find somewhere to stay whether it is in a formal hotel or in an Airbnb.”

According to the World Tourism Council, tourism accounts for 10 percent of Cuba’s GDP, 9.3 percent of jobs, 14.3 percent of foreign exchange and 17.4 percent of total investment. Despite these figures, Cuba has one of the lowest levels of economic dependence on tourism in the region, where the sector typically represents 15 percent or more of the economy.

Economy

Before Cuba’s tourism product can become the success story it promises to be, political and economic roadblocks have to be overcome. First, the trade embargo still has to be completely unwound. President Obama has made clear that his successor will have to carry out many of the measures needed to complete the easing of relations between the U.S. and Cuba.

Depending on who wins the U.S. presidential elections in November, this may not be at the top of the list of priorities, Dukharan says. And a solution has to be found for dealing with claims on assets that were expropriated during the revolution.

More importantly, Cuba is still a planned economy. Simply opening up to the United States and eliminating the embargo will not cure all of the country’s ills.

Although the country is growing at 3 percent per year, transitioning the economy to free enterprise will be slow as the current five-year reform continues to stifle private sector development. The financial sector, which is largely state-run, is a particular concern.

Venezuela figures in the equation

Another major factor is the crisis in Venezuela. “The scary thing about Venezuela is that it is no longer just a political crisis, it is now a humanitarian crisis, where people are literally starving,” Dukharan says. “And even where there is money, there is nothing to buy.”

This has not only created a migrant crisis in neighboring Guyana, the Dutch Caribbean and Trinidad and Tobago, it also has very serious implications for the Cuban economy since Venezuela is Cuba’s largest trading partner, but it can no longer support the Cuban economy the way it used to.

Venezuela would send crude oil that Cuba would refine and either use domestically or export to acquire foreign exchange. Cuba was able to repay Venezuela without using U.S. dollars by paying in kind, for example, with agricultural produce or medical services.

“Now Cuba has to go in the open market to buy oil and supplies, so the U.S. dollar is increasingly becoming an issue for Cuba. With that and with the drought problems that Cuba experienced late last year and early this year, we are expecting growth to be cut by about one half this year,” Dukharan says.

And low inflation based on strict control, especially for wages, cannot continue.

But the economy of 11 million people with a labor force participation rate of 74 percent also has massive potential for growth.

The average salary in 2015 was just $28.67 per month.

“How that compares to the rest of the region boggles the mind,” says Dukharan. “When these wages start going up and these people have purchasing power and they can really buy things, and they need to import and consume, therein lies the opportunity for the rest of the region.”