Bhutan’s Economy stands to take an unprecedented hit due to Corona

Hit to be taken by Hotels, Financial Institutions, Trade, Transport, Tour Operators and Guides, Handicrafts and Construction among others

The biggest casualty of the Corona virus or COVID-19 on Bhutan will be its economy as the economy is already starting to hurt and is scheduled to take a big hit as the weeks go by.

The President of the Bhutan Chamber of Commerce and Industry (BCCI) Aum Phub Zam said that this is the worst economic crisis in her living memory, and is definitely worse than the 2012 Rupee Crisis or the impact of the 2008 Global Financial crisis before that.

She said even before the advent of democracy she cannot remember an economic situation as serious as this.

She said that in 2008 and 2012 certain sectors were hit, but at least people were doing business, hotels were running, shops had customers and business was going on but the current crisis is having a major snowball effect and is impacting everybody and revenue is being hit on all fronts.

The biggest impact, as a result of the international fall out of Corona will be on tourism sector in terms of Hotels, Tour Companies, Guides, Tour Drivers and Handicrafts. The Prime Minister has already made it clear that the Tourism ban would go beyond the two-week period given the adverse international situation.

Given the high percentage of service loans from the above sectors owed to Financial Institutions, especially by Hotels, the next sector which could be hit will be the Financial Sector.

Apart from the above, there is also an ongoing impact on Bhutan’s large retail trade market in the forms of shops, restaurants and other outlets as people come out less and adopt social distancing.

There is also an impact of Bhutan’s transportation sector starting from its airlines, to even public transport like buses and taxis.

Construction sites are struggling with and worried about labour shortage while manufacturing has its own concerns.

A minister said that while the government is worried about COVID-19 virus and is taking measures, a big worry in the longer term is the impact on the economy due to domestic and international factors.

Hotels

Lyonchhen, said there are around 650 small hotels in the country, 100 home stays, 150 Three-star hotels, 13 to 14 Four star hotels and another 13 to 14 Five Star Hotels.

The Hotel and Restaurant Association of Bhutan (HRAB) Chairman, Sonam Wangchuk said that the hotel sector easily employs around 15,000 to 20,000 people.

He said that the hotels can absorb the two-week tourism ban for the nation, but if the issues persist beyond that then the survival of all hotels would be in question.

Sonam pointed out that even smaller hotels have around 15 to 20 staff each and so all their livelihoods would be impacted.

He said that within the two-week ban around 10,000 rooms worth of reservations got cancelled out of which 6,000 rooms were of three-star hotels.

He said that given the current situation, it looks like a bad tourism year unless a new drug or vaccine can be found.

Sonam said that once hotels don’t have an income then many of them would have to send staff on leave without pay.

He said that around 80 to 90 percent of the hotels have some kind of loan with the banks and without income it would be difficult for hotels to pay their loan interest as well as their employees. He also pointed out that Hotels owed the chunk of the Service and Tourism loan.

As of the latest figures with RMA until October 2019, Service and Tourism loans were at Nu 33.720 bn as the second biggest sector out of a total credit of 135 bn.

The HRAB Chairman said that the solution is in either reducing the loan interest rate for hotels or allowing deferment of monthly interest payments for a few months. Sonam said the service sector loan interest is around 7.92 percent and this could be reduced to around 4.5 percent.

He said if the situation gets tough then hotels would have to let staff go on leave without pay and at that time the government may have to come up with schemes to help these staff.

The HRAB along with the Association of Bhutanese Tour Operators (ABTO) in a recent Tourism Council of Bhutan meeting, that includes these two associations, have also recommended that the Sustainable Development Fee (SDF) for regional tourists should be deferred by around a year from July 2020 given the current situation.

Sonam said that he heard the government is coming up with an economic contingency plan but neither HRAB or ABTO are members of that committe. He said a cross sectoral approach is needed to help the sector.

However, Sonam also admitted the the Hotels crisis is part of a global crisis.

He said that hotels and employees by themselves would not be the only ones suffering but also the entire supply chain that hotels rely on, which are grocers and vegetable suppliers.

He said that the situation would not be as bad had the government, during normal times, taken action on the 200 or so Bed and Breakfast outlets in Thimphu and more in other places who do not pay tax, unlike hotels.

He said they do not want just flowery words from the government but something concrete.

What makes a bad situation worse for hotels is that even with record tourist arrivals last year hotels already suffered from under occupancy due to the excess number of hotels.

In one sense this a perfect storm with a hotel sector already in crisis due to excess hotels now heading into a tourism season with no tourists.

Currently, Bhutan has more numbers of hotels than tourists in the country at only 43 and even they are scheduled to leave.

Hotels and Restaurants made up 2.41 percent of the GDP in 2018 according to NSB.

Tour Operators, Guides and Drivers

The ABTO Executive Director Sonam Dorji said that the situation was already bad for the tourism sector even before the first case in Bhutan. He said that in February itself there was a 50 percent decrease in tourist arrival compared to the same month last year.

He said when he checked the bookings for the month of March and April 2020 in February there was already an 80 to 90 percent reduction.

He said in April 2019 there were 8,180 tourists who came but the April 2020 booking in February showed only 715 tourists and even those would have dropped now.

Sonam said that while the government extending the two-week tourism ban would have an impact, the international situation is so bad that even if the government did open up tourism it would still be a bad season.

He said that firstly Bhutan’s major tourism markets like USA, China, Europe and Japan were all badly hit and had issued travel advisories against travelling. Sonam also highlighted that several international airlines have cancelled their flights and are only flying minimal flights like ghost airlines.

For the few that would travel, the problem is that regional connecting hubs like Delhi and Kathmandu are no longer allowing tourists so that would impact Bhutan.

He said another smaller hub of Singapore is also affected. Sonam said while the Bangkok hub remains open there are already issues cropping up like withdrawal of visa on arrival for 18 countries and restrictions could get worse.

He said even if the government at some point allows tourists in there will be a lot of tension for tour operators because what would happen if another case is detected in Bhutan or hubs cancel movement or airlines cancel scheduled flights. He said there is also the issue of how tourists would be treated by locals in the event of an outbreak.

He said in terms of impact, though there are around 3,000 tour operator licenses only around 700 are active and of this most of the guests are brought in by the top 100 or so companies.

He said a hit would be on these 700 or so companies and their employees and owners.

He said that another big hit would be taken by guides. There are around 4,000 registered guides but only around 1,000 are actively involved in guiding.

Sonam said that these 1,000 or so guides rely on the two peak tourist seasons for their income and so they would be badly hit.

He said that there would also be private vehicle owners and drivers who buy cars on loan and then ferry tourists around for tour companies.

Sonam said the solution for now would be to mitigate the impact by encouraging domestic tourism within Bhutan, loan interest payment reduction or deferment as even tour operators have loans in buying vehicles and equipment, having government meetings in hotels and restaurants to help them and using the period to upgrade the skills of guides through online trainings and also development of new tourism markets products within Bhutan and finding new markets outside Bhutan.

Sonam said the future focus has to be on restoring tourism market confidence and even when tourism is opened there should be adequate training and instruction for all tourism staff from drivers, to guides to hotel staff on taking precautions and being sensitized.

Sonam said that there is not as much impact in the initial phase but it would be much worse if the situation persists.

The ABTO ED said that at the current rate it looks like both the spring and the autumn peak tourism seasons in Bhutan will be affected this year.

The ED said that while the 21st  Century Economic Road Map is a long term measure there is an urgent requirement for short term and medium term measures to revive the industry and use tools like marketing.

Handicrafts

The Executive Director of the Handicrafts Association of Bhutan (HAB), Chorten Dorji pointed out that there are 180 handicraft shops in Thimphu, Paro, Punakha and Bumthang with 520 employees and 220 handicraft suppliers and employees which is a total of 740 depending on the handicrafts sector.

A HAB report says 90% of the shops are closed since 6th March 2020, upon announcement of the 1st coronavirus case detected in Bhutan.

However, it says the handicrafts sector has felt the impact immediately after the coronavirus case detected in China with reduced sales due to reduced tourist flows.

It says since there is zero sale, some shops have already sent their staff on unpaid leave for a month.

The HAB says very few shops could sell their products to local customers but even that is shrinking every day and there is hardly anyone visiting the shops now.

It says 95% of the shops are operating their business in rented house and they have at least two to three employees and since their sales have dropped employees are worried about their monthly salary.

In term of the handicraft suppliers or artisans, HAB says the suppliers are mostly home based and contract workers and few are established production house.

The report says, “Those firms and families who are totally dependent on the business have no income for almost one and half week and they worried how they can pay house rent and staff salaries in coming months.”

It says that since the beginning of the detection of 1st coronavirus in the country, shopkeepers have stopped talking their supplies.

The report says the home based and contract weavers of handicraft shops have no income and are worried of their livelihood. Tailoring shops who are producing handicrafts have also seen a total drop in their orders.

The HAB has requested that the government and RMA could defer the loan repayment of Handicraft shops and producers without interest and penalty until the market situation is back to normal.

It has also requested that the MOLHR through their relevant schemes could subsidize their youth employees with monthly minimum salary so it could reduce the threat to day-to-day livelihood of the employees.

Trading and shops

March 6th saw many customers rushing to the vegetable market and the grocery shops in Thimphu and other places to stock up, however, Thimphu and other places turned into virtual ghost towns during the usually bustling weekend of 7th and 8th with even stocks of unsold vegetables.

Many shops and businesses that the paper talked to said that business has not been the same since March 6th and it is affecting shops, vegetable vendors, barbers, restaurants and many others who depend on local customers.

Pema Choden who owns a small Pan Shop along Changlam said her business nosedived by around 50 percent and the nearby barber’s shop had the same sentiments as workers stood by idly.

The BCCI President said that local customers are not coming out and eating and shopping due to social distancing and advice to avoid crowds. She said that as hotels are affected even the sale of items like vegetables, mineral water, juices and others are impacted.

Trade and Commerce is the third highest loan segment owing Nu 18.9 bn in October 2019 to the banks. Wholesale and Retail Trade represented 8.99 percent of the GDP in 2018.

Construction

The BCCI President said that the main worry in the Construction sector is that a lot of the construction workers have gone home in the winter months and the ban has come in place just when they are supposed to come back.

She said that this would affect contractors and even individual construction projects and so if the ban continues then loan repayment may become difficult and the sector would also request for loan interest payment deferment by a few months.

The largest chunk of bank credit is in the building and construction sector which as of October 2019 owed Nu 35.8 bn to the banks.

Construction made up 11.27 percent of the GDP in 2018.

Transportation

Another sector bearing the brunt of the COVID-19 fall out is the transportation sector. While the airlines, tourist vehicles and taxis are taking the brunt of the fall in tourism there is a wider concern among taxis and transport buses in the noticeable decrease in the number of people travelling. This sector also owes huge loans to the banks. As per October 2019 Transport loans worth Nu 6.6 bn were held by banks.

Transport, storage and communication made up 9.99 percent of the GDP in 2018.

Manufacturing

The BCCI President said that while manufacturing has not yet been hit there are fears on how they can get workers to their factories or import raw materials and export goods in case of a lockdown either in Bhutan or India.

The President said that the industries also want to request for a loan interest payment deferment in case such a situation comes to pass.

Manufacturing is composed of the fourth largest segment of credit and owes the banks Nu 15.23 bn as of October 2019. Manufacturing made up 7.53 percent of the GDP in 2018.

Financial Institutions

With almost everyone from Hotels to handicrafts asking for loan deferments and other planning to do so there is a lot of expectation and burden on the Royal Monetary Authority and the Financial Institutions.

As of October 2019 all the FIs held a total credit of Nu 135 bn leaving out the NPPF.

However, the FIs themselves are not in an ideal place faced with high and even record Non Performing Loans along with a serious liquidity crunch much before Corona and so in that sense the virus and its impact could not have come at a worse time for FIs.

Here the President of the Financial Institutions Head of Bhutan and RICBL CEO Karma said that currently loan repayments are going on normally and they would cross that bridge when they get to it.

He said that the banks would only know the real situation towards the end of the month when the loan interest payment is due.

The FIAB head said that all the Financial Institutions  are constantly sharing data with the RMA which in turn is studying the situation.

The FIAB head shared that the priority for the banks right now is to ensure uninterrupted services and the availability of cash flow and credit to customers who needed it. He said the banks would also promote e-payments to ensure less crowding at the banks.

He said that the FIs are a mirror of the economy and if the economy takes a hit then the FIs would also take a hit.

He declined to comment on any of the potential measures being looked at by the RMA and FIs to deal with current situation saying that it is not good to raise false expectations.

The FIAB said a factor at play is nobody really knows how long the current problem will last.

Finance, Insurance, Real Estates and Other Business made up 7.76 percent of the GDP in 2018.

The Finance Minister outlined certain financial and contingency measures that would be take to help the tourism sector in particular among others (see story on pg 1).