Update Country Report Maldives 12 Jun 2020

• Several countries in Asia have announced plans to open their borders for the first time since the start of the coronavirus (Covid-19) pandemic, creating restricted "travel bubbles".
• These include a trans-Tasman bubble encompassing Australia and New Zealand, as well as China-South Korea and China-Singapore "fast lanes", motivated by strong investment and tourism flows before the pandemic.
• Implementation will be tentative, with business travel set to resume first. Should travel bubbles cause a spike in new infections, we expect them to "burst" quickly.
• Even if government policy is supportive of travel arrangements, The Economist Intelligence Unit expects consumer sentiment to remain weak in 2020-21, which will prevent tourism flows from returning to 2019 levels.

A "travel bubble" is a term that has emerged in the wake of the coronavirus pandemic to refer to an arrangement between two or more countries that allows each other's citizens to visit, while maintaining existing restrictions on arrivals from other parts of the world. Other terms include travel "corridor", "bridge" and "fast-track channel".

In May, Estonia, Latvia and Lithuania in Europe became the first grouping to re-open their borders to one another following the pandemic. Similar steps are under way in Asia. Some of the proposed schemes include:

• a trans-Tasman bubble between Australia and New Zealand, which could be extended to include the Pacific Islands;
• a north-east Asia corridor for business travel between China (including Hong Kong) and South Korea, which may add Japan and Macau; and
• a bubble in the Greater Bay Area (GBA), covering China's southern Guangdong province, Hong Kong and Macau.

There is also discussion about setting up an arrangement among some members of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP), a trade agreement which in Asia includes Australia, Japan, New Zealand, Singapore and Vietnam (and may be extended to Malaysia if that country decides to ratify the agreement). There is also a strong case for an Association of South-East Asian Nations (ASEAN) travel bubble, although some countries in the grouping have suffered worse coronavirus outbreaks than others, which will make it difficult to form a block-wide agreement.

Tight-knit

Border closures and quarantine measures put in place to stop the spread of the disease have cut the capacity of major airports globally by two-thirds. Along with the fear of travelling during a pandemic, this has prompted many thousands of passengers to cancel existing bookings and to put off plans for any new trips. Some governments are now looking to revive visitor flows gradually, aware that they could support a recovery in investment and tourism.

The groupings considering setting up travel bubbles were deeply interconnected before the pandemic. The Economist Intelligence Unit estimates that Australia and New Zealand accounted for nearly one-quarter of each other's visitors in 2019. Meanwhile, travellers between China, Japan and South Korea accounted for 80% of total visits in that region, and travel within ASEAN accounted for 45% of international visits.

In ASEAN, international labour flows are significant. Singapore, for example, is dependent on foreign labourers, who made up 1.4m (or 36%) of its labour market in 2019. Many of them were Malaysians commuting across the border on a daily basis. For countries that share a land border, such as Thailand, Cambodia, Laos and Vietnam, border trade was also an important source of people's livelihoods.

The groupings also share sturdy business ties. A rough calculation based on the IMF's Co-ordinated Direct Investment Survey values the aggregated foreign direct investment position of the trans-Tasman travel bubble at US$129.4bn in 2019. The North-east Asia bubble could be valued at up to US$1.6trn. Meanwhile, the GBA and ASEAN travel bubbles will also be meaningful in securing foreign investment-a driver of economic activity.

Slow, but not necessarily steady

The reopening of borders will be gradual. Before a vaccine is commercially available (which we do not expect until end-2021), pre-departure testing will become a new norm. We expect quarantine periods to be reduced from the current average of 14 days, although travellers will still need to be isolated while waiting for their test results.

The China-Singapore fast lane, which was set up in June for essential travel, requires travellers to test negative for the coronavirus before they are allowed to board any aircraft, and again upon arrival. At present, travellers must largely navigate this process themselves. Governments are likely to set up dedicated services to accompany travel schemes and to work with commercial partners to do so. This will create opportunities for businesses that can provide coronavirus testing, visa assistance and other travel-related services.

Business comes first

Essential business travellers will be the first to be allowed to fly, as they are important for restarting economic activity and relatively small in number, which makes them manageable in terms of testing. However, the uptake for such schemes will be limited, given that most business trips last only a few days and do not justify the troublesome application process. Foreign nationals who are long-term residents (or are planning to move permanently) will be more interested, and we expect schemes to be extended to include this group next.

Reduced airline capacity also poses a challenge for roll-out. Many airlines have suffered huge financial losses during the pandemic. Even those that stay afloat may not have the capacity to restart certain routes, especially if the demand is not there. We expect airlines to have to charge higher prices for air travel, which will act as a further deterrent to uptake.

We believe that governments will not begin to ease restrictions on tourism until the fourth quarter of 2020 at the earliest. Although the industry is an important contributor to economic growth for many countries in Asia, governments will be wary about the risks. Unless quarantine and testing are made easier, or removed completely, receiving arrivals would be a logistical challenge. Furthermore, if a coronavirus cluster emerges at a tourist site, the long-term reputational damage could be irreparable. Governments might reopen administrative regions that are more reliant on foreign direct investment or tourism first. The Thai government has mentioned plans to open some isolated tourism spots for high-end visitors, whereby a luxury quarantine experience at a resort would constitute their trip.

Navigating geopolitics

Post-pandemic travel arrangements are likely to mirror existing political and economic ties, and may also be used to expand political influence. Australia, for example, may try to counter Chinese influence in the Pacific Islands with the promise of the return of Australian tourists. China is the largest source of tourist spending in both absolute and per capita terms for many countries, particularly in Asia, and it could use the promise of a travel corridor to gain concessions from governments on political issues, such as support among ASEAN governments for its ambitions in the South China Sea.

In 2019 the route between Hong Kong and Taipei, the capital of Taiwan, was the busiest in Asia. There is strong commercial reasoning for the restoration of this flight path. Both Hong Kong and Taiwan also have their coronavirus outbreaks under control, meaning that such an arrangement would not pose a high risk. However, the mainland Chinese government is likely to block any move by Hong Kong to set up a scheme with Taiwan, amid strained relations across the Taiwan Strait.

The demand problem

Regardless of government policies, we expect consumer appetite for international travel to remain weak in 2020-21, as fear of infection will persist and job and income losses mean that people will be more thrifty. In addition, we do not expect major source markets for outbound tourism, such as China, the US or the EU, to ease quarantine restrictions for returning citizens before the fourth quarter of 2020. Overall, travel arrangements are likely to facilitate limited business travel in 2020. Companies should be prepared for tourism flows to begin to return only in 2021, and even then they will remain below 2019 levels.