2010 World Cup - Considering the Consumption Boost
February 03, 2010
By Michael Kafe & Andrea Masia | Johannesburg
Africa's First FIFA World Cup Tournament
For the first time ever, the world of professional football will descend on South Africa in June/July 2010 for the 2010 FIFA World Cup. Thus far, around 675,000 tickets have been sold under the first two out of five sales phases, with just under half of those (46.4%) purchased by foreigners. Details on ticket sales under sales phase III are not yet available. However, preliminary estimates from FIFA show that foreigners applied for more than 20% of the 1 million tickets that were up for sale under the third sales phase, suggesting that foreigners are likely to have purchased some 620,000 tickets or 37% of the 1.8 million tickets on offer so far.
We estimate that, on the whole, around 350,000 international football fans/tourists with a total wallet size of some US$2 billion (R15 billion) in disposable income will descend on the country in June/July 2010 to celebrate the tournament. This is equivalent to circa 0.5% of nominal GDP, spread over the four quarters beginning 4Q09. We also expect an additional R15-20 billion (some 0.5-0.8% of nominal GDP) boost from domestic resources.
Focusing on International Tourist Flows
Clearly, there are huge uncertainties and measurement issues associated with estimating the potential impact of such a large-scale event on overall consumption spend. These range from the challenges associated with the estimation of tourist arrivals, through the forecasting of ticket sales to the estimation of idiosyncratic spending patterns, etc.
To gauge the number of tourist arrivals, we first attempt to estimate the size of total foreign purchases of tickets. Our investigations reveal that, on average, most tourists applied for 3-4 tickets. Assuming an average effective stadium capacity utilisation rate of 90%, and supposing that foreigners take up some 25% of the remaining 2.3 million tickets (600,000) available for purchase points to around R1 billion in ticket sales to international tourists. Dividing this by the number of tickets purchased suggests that there could be some 255,000-340,000 international football fans visiting the country. Our final estimate of 350,000 tourists includes delegates, journalists and other VIP guests. In line with FIFA reports, we assume that the average international tourist buys a category 2 or category 3 ticket. Multiplying the average ticket cost by the number of fans at each game gives around R1.2 billion in total ticket sales.
Next, we estimate non-ticket expenses such as transport, food, hotel, telephony, etc. Here, we assume that South African Airways captures some 20% of the international tourist market; that at least one in every three international tourists makes a domestic trip on a local airline; and that 40% of all tourists share a room/car. We then estimate that each tourist spends R11,250 (US$1,500) on international flights, R2,500 on domestic flights, R2,500/night in hotel expenses for some two weeks, R300/day on food and beverages, R300-350/day on ground transport and a further R500/day on other expenses including telephony, entertainment, World Cup regalia, etc. This yields total non-ticket revenues of R13.6 billion (around US$1.8 billion).
Estimating Domestic Tourist Flows
For our estimate of local ticketed fans, we simply take the residual stadium capacity. Given a total stadium capacity of 3.8 million fans, and our earlier assumption of 90% effective capacity utilisation, this points to local purchases of around 2.4 million tickets. Dividing this by the number of ticket applications per fan implies some 600,000-800,000 ticketed fans. For our analysis, we assume 750,000 local fans in total. Further assuming that each of these fans buys a category III or category IV ticket suggests that total ticket revenues could be in the order of around R1.2 billion.
For non-ticket revenues (R17.8 billion), we assume that 20% of ticketed local fans spend some R2,000/night in hotel and/or other accommodation expenses; that local fans incur an average transport expense of around R250/day (including long-distance travellers) to and from the various stadia; that 10% of fans travel by air at a cost of some R2,500/return ticket; that half of the country's 13 million households follow the games and spend R100/day on the three days that the national team plays and R20/day on the other days, as well as a further R10/day on other expenses such as telephony, regalia and entertainment.
Quantifying the Benefits
Based on these assumptions, we estimate that the domestic and foreign outlays directly associated with the World Cup could lift nominal consumption spend by a combined R34 billion, and boost real personal consumption expenditure growth by 0.5pp (domestic 0.3pp; foreign 0.2pp) - with a pass-through of some 0.3pp into real GDP growth. Additional benefits from infrastructure rejuvenation and related externalities over these four quarters could help lift overall GDP growth by around 0.5pp.
The inflows from foreign tourists should help to swell net travel receipts and support the current account deficit - particularly in 1H10. For example, we estimate that net travel inflows will rise by some R2 billion, while hotel expenses should bring in close to R6 billion, and other services such as food, transport, tours, telephony, personal care, visas, etc. should net a further R5 billion or so.
Importantly, South Africans who would usually have gone on holiday during the local winter season are likely to stay and watch the matches too. From a balance of payments perspective, this should also take some pressure off the net travel payments line of the invisible balance. On the whole, we look for a sharp improvement in net service payments from an average of R22 billion in the first three quarters of 2009 to no more than R8 billion in 2Q10.
Balance of Payments: Timing Is Everything
The timing of these flows will no doubt have important implications for balance of payments accounting. For example, most flight bookings have already been paid for, and our investigations revealed that most of the hotel bookings done in 2009 required a 50% initial deposit, with the remainder to be paid by March 31, 2010. Presently, some holiday bookings require full and immediate settlement. This suggests that some of the associated flows are likely to take place well ahead of the event. Technically, if these flows are held on account of the client as a liability against the service provider, the inflow should show up as inward ‘other' investments in the financial account. However, once they get recognised as a credit against service delivery, this should then flow into the current account as an international service receipt.
In our analysis, we make provision for some of the World Cup-related expenditure that has already begun. For example, we assume that foreign payments for services (mainly flight and hotel accommodation) are spread 20%, 30%, 35% and 15% over the four quarters starting 4Q09. We also assume that the local expenditure on semi-durables such as the World Cup regalia has already begun and is gaining momentum. For foreign consumption of non-durables (mainly food and beverage), however, we assume that no payments are made until tourists arrive in 2Q10, where we expect 65% of the non-durable goods budget to be incurred, with the remaining 35% in 3Q10. This takes into account the fact that roughly half of the competing teams may have been knocked out by the first week of July.
Implications for the Currency
Even so, it is important to realise that an significant proportion of the World Cup-related expenses may have already gone through by the time the games begin in June. This ties in with our baseline view that the rand may trade stronger for another quarter or so, but will weaken in the second half of the year as recovery in domestic demand combines with higher dividend and interest outflows to push the current account deficit towards 5.5% of GDP at a time where the strong tide of capital flows may have ebbed.
Some Reporting Issues
In line with best international practice, the South African Reserve Bank subscribes to the guidelines of the 2008 United Nations System of National Accounts (SNA) for national account reporting. According to paragraphs 9.79-80 of the SNA, in order to calculate total household final consumption expenditure, it is important to adjust total household expenditures within the economic territory by adding expenditures by residents abroad and subtracting that by non-residents within the economic territory.
Due to the paucity of data, most statistical agencies (including the SARB) are unable to make these adjustments to each type of consumer spend (i.e., durables, semi-durables, etc.). Instead, the ‘miscellaneous' component of the services basket is adjusted by the full amount, and an equal and opposite adjustment is made to net exports, thereby keeping the overall impact on GDP unchanged.
Conclusion
We expect the 2010 FIFA World Cup to attract some 350,000 foreign fans into South Africa over 2Q/3Q10, with a total wallet size of around R15 billion in disposable income (0.5% of nominal GDP). Together with local expenditures of some R15-20 billion (0.5-0.8% of nominal GDP), we expect the FIFA World Cup to boost real GDP growth by at least 0.3pp.
Contrary to popular belief, we do not expect a huge tide of tourist-related foreign currency flows to hit the country over 2Q/3Q10, as we believe that payment of accommodation and travel already began in earnest in 4Q09. This is in line with our view that the rand could remain supported in 1H10 by buoyant commodity prices, World Cup-related flows and emerging market risk appetite. However, we warn that all this could change in the second half, where we expect a recovery in consumer demand to combine with rising oil and capital imports and higher interest and dividend payments to lift the current account deficit to around 5.5% of GDP. This is likely to weigh on the currency - particularly if our view that the momentum in risk appetite is likely to slow in 2H10 pans out. Our base case accommodates a USDZAR rate of 7.00 by March 2010, followed by a major correction to 8.50 by year-end.
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CEEMEA: Sensitive to Oil...but How Much?
February 03, 2010
By Oliver Weeks, Pasquale Diana, Tevfik Aksoy | London, Michael Kafe, Andrea Masia | Johannesburg, Mohamed Jaber | Dubai
In the CEEMEA region, oil is responsible for large current account surpluses in certain countries while either widening C/A deficits or at least limiting the surpluses in others. Our commodity analysts have recently revised up their oil price forecast, and now see oil prices at US$95/bbl (WTI) by end-2010, and averaging US$100/bbl in 2011. With oil set to remain a key topic for investors, we looked at some sensitivities to various oil prices moves. In this note, we concentrate mainly on the current account and inflation consequences of moves in oil prices. On the former, we focus on the changes in the energy-related components of the trade balance keeping everything else constant, and we estimate the direct impact of a change in the oil price on the overall C/A balance. Looking at inflation pass-through, the exercise is somewhat more complicated, due to subsidies and taxes, which mute the impact on final prices (say, fuel), and regulated prices, which are adjusted rather infrequently and with long lags. Moreover, some second-round effects on core components (travel, processed food) take even longer to materialise.
When preparing CEEMEA 2010 Outlook - Bouncing Back from the Brink, January 18, 2010, we used the oil futures curve, which yielded an average price of US$82/bbl, which we kept unchanged. Hence, our current account and inflation forecasts are based on this assumption. In this note, we use a US$10/bbl change in oil prices to calculate the impact on the current account. We also simulate the impact of certain moves in the prices of oil on countries' current account balances, using prices of US$60, US$80, US$100 and US$120/bbl. To test the inflationary sensitivities, we use a 10% change in oil prices in order to make the analysis straightforward.
C/A and Oil Prices: Exploring the Sensitivities
Only three countries - the UAE, Russia and Israel - are expected to yield current account surpluses in 2010, under our base case assumptions for oil prices and other factors. In the case of Israel, the surplus is not related to oil but rather a cyclical issue, while in the UAE and in Russia energy exports are clearly in the driver's seat.
In the UAE, hydrocarbon exports account for around 60-70% of the country's total exports (net of free zone re-exports), and the country does not import any oil. According to our estimations, a US$10/bbl increase in the price of oil results in a US$9 billion increase in the current account. This figure amounts to roughly 4% of GDP. We also estimate that the average breakeven oil price for the current account (over the period covering 2010-11) stands at around US$59/bbl. Next in the line comes Russia, with energy exports amounting to some 62% of total exports (including crude oil, petroleum products and natural gas). Based on our calculations, we estimate that for each US$10/bbl rise in oil prices, Russia's export revenue by US$30 billion, or 2.0% of GDP. RUB appreciation will slightly dampen the impact on the current account.
Turning to the group of countries that are net importers of energy, the extent of C/A deterioration in response to a rise in the oil price does not vary hugely from country to country. Turkey remains to be one of the major importers of oil and natural gas, with an important portion of electricity production, heating and manufacturing depending on energy imports. The high current account deficits posted during 2004-08 were essentially due to energy imports. In fact, Turkey ran a small non-energy current account deficit, which indeed turned to a surplus in 2009. Turkey's energy imports averaged around US$33 billion in the past four years and this figure constituted roughly 22% of total imports. According to our calculations, Turkey's imports would rise by around US$4 billion for each US$10/bbl permanent increase in the price of oil. In terms of the impact on the current account balance, this would raise the deficit to GDP by 0.6pp. In Israel, the country's annual fuel import bill stands at around US$8 billion. This is roughly 17% of total imports and, according to our calculations, each US$10/bbl rise in the price of oil would cause a deterioration of some 0.6pp of GDP in the current account. In South Africa, each US$10/bbl increase in oil adds roughly 0.8pp to the CAD, which translates into US$3 billion. In terms of the share of energy imports in the overall import bill, South Africa lies in between Turkey and Israel, at 20%. In Ukraine, import of fuel constitutes 32% of total imports. Following US$10 rise in oil prices, we estimate that the current account would deteriorate by 1.6% of GDP. The impact is primarily through gas prices, which currently track the average oil price in the preceding three quarters.
In Central Europe, every country is a net importer of energy. As the economic structures are broadly speaking similar across the countries in the region, the sensitivities to changes in oil prices do not vary widely. We note that Hungary, with an estimated sensitivity of a 0.9%-of-GDP widening in the C/A for each US$10/bbl rise in oil prices, stands at the upper end of the range. Given that it has the widest energy trade deficit as a share of GDP, this is intuitive.
The rest of the countries in the region have lower energy trade gaps, so their deficits tend to widen by comparatively less as oil prices rise. The sensitivities we estimate are 0.6% in the Czech Republic, 0.4% in Poland and 0.3% in Romania.
Pass-Through from Oil to CPI
In the region, we expect inflation in 2010 to be lower than in 2009 with the exception of Turkey and the Czech Republic. Our views reflect the base case assumption of oil prices we mentioned previously. We look here at how a 10% change in oil prices impacts our inflation forecasts in the countries under our coverage. In Turkey, the immediate impact of global oil price changes on the inflation rate occurs via frequent adjustments of gasoline prices, using a formula combining oil and currency changes. Based on the CPI basket weights and previous correlations, we estimate that the short-term impact of a 10% rise in oil prices translates into a 0.3pp hike in CPI as an immediate effect. Electricity and various transportation costs as well as heating (natural gas) and other factors respond with a lag. We estimate that the overall impact, when all factors are considered, would reach as much as 1pp. Similarly, in Israel, the retail pump prices for gasoline are set automatically for a given month, which is calculated by using a formula taking the international fuel prices and exchange rate for the last five days of the preceding month into account. This seems to be the main channel of the oil price pass-through on CPI. Taking into account the 2% share of fuel in the CPI, we estimate the immediate impact of a 10% price in oil prices on CPI to be limited to 0.2pp. With the indirect effects factored in, such as electricity and transportation, the cumulative pass-through might reach 0.6-0.7pp over a 12-month period.
In South Africa, prices are marked-to-market on a daily basis, and reset once a month (the first Wednesday of each month). Similar to the case in Israel, we estimate that a 10% shock to our oil price profile raises South African CPI inflation by 0.2pp. There are no interventionist mechanisms, and although higher oil prices may eventually have an impact on electricity prices, this would be minimal, as more than 90% of South Africa's electricity supply is generated from coal. Also, prices are set just once a year. The share of fuels in the Russian CPI basket is 2%. The direct impact of a 10% oil price rise will be minimal, around 0.3pp, as household gas and electricity prices are controlled, and well below market prices. Even this is counteracted in the short term by RUB appreciation. The indirect longer-term impact from incomes and excess liquidity has been large in the past but will depend on monetary policy and whether the CBR reaction function has changed (we think inflation tolerance is slightly lower).
In Ukraine, the share of fuels in the CPI basket is even smaller, 1.4%. We estimate the cumulative impact of a 10% rise in oil prices will be small, around 0.5pp, mainly because retail gas prices are controlled and well below market import prices. These will have to rise, but largely independently of global oil prices. In the UAE, the impact of a change in oil prices on the CPI will very much depend on the government's willingness to absorb the impact of a price increase. For instance, gasoline prices have historically been around 40-50% lower than that of US retail prices (although this number dropped to about 20% in mid-2008). Depending on the degree of pass-through to transportation costs (which account for about 10% of the CPI basket), we estimate that a 10% increase in oil prices will likely lead to an increase of about 0.1-0.5pp in annual CPI inflation.
Finally in Central Europe, energy is around 15% of the total CPI basket. Calculating the pass-through, however, is much more complex than just looking at the weight. The initial impact takes place mostly via fuel prices, but the presence of a significant tax wedge means that the pass-through to consumer prices is not one-to-one. Moreover, gas, electricity and heating are regulated in almost all countries and hence significant delays in pass-through occur. Assuming that fuel prices react rapidly (as they indeed seem to) and other components of energy respond with a lag somewhat, over a 12-month period we estimate a pass-through of 0.15% in Poland, 0.2% in Romania and the Czech Republic, followed by 0.3% in Hungary (all assuming a 10% change in oil prices). In our view, the knock-on impact on core components should add c.0.15-0.2pp to these estimations. Second-round effects happen primarily via components which are not in energy (like travel, processed food), but which tend to react with a lag if the move is seen as permanent, rather than transitory.
Fiscal Impact Is Limited to a Few Countries in the Region
The two countries most affected by changes in the price of oil are the UAE and Russia when it comes to the fiscal consequences. In the UAE, a US$10/bbl increase in the price of oil is estimated to increase the fiscal balance by about US$9 billion, or 4% of GDP. We should note that the fiscal revenues from hydrocarbon exports accounted for an estimated 70-80% of total government revenues during 2007-09. We also estimate that the average breakeven oil price for the fiscal account (over 2010-11) stands at around US$62/bbl. Turning to Russia, oil and gas revenues were 41% of federal budget revenues in 2009, and the direct impact of a US$10/bbl oil price increase would be a hike of 1.7% of GDP in budgetary revenues. Metals prices will amplify this, but exchange rate appreciation will dampen it, in our view. The federal budget assumes Urals oil at US$58 this year. We think that Urals would need to average around US$95 to balance the budget, in practice, since pressure to revise up spending will be intense at high oil prices. In Ukraine, the impact of oil prices on the budget is indirect. Household gas is heavily cross-subsidised by Naftogaz, and ultimately by the government. Quasi-fiscal costs of this will depend how far a new government raises retail gas prices, but were in the order of 3.5% of GDP in 2009.
On the other hand, with automatic pricing mechanisms in place and either no or minimal subsidies, the fiscal impact of oil price changes would be limited, in our view. For instance, in Turkey in recent years, the domestic price adjustment mechanism in retail gasoline and very recently in the electricity market had been automated to bring minimal, if any, burden on the budget. While there might have been certain delays in reflecting changes in global oil (especially natural gas) prices onto domestic tariffs, the overall impact does not change, but perhaps happens with a lag. Similarly in South Africa, we see no fiscal impact, as oil levies are fixed independently of the price of oil. In Israel, there are no fuel or gasoline subsidies and, with the automatic gasoline pricing mechanism in place, we expect no fiscal impact from a change in oil prices.
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