Financing your Tourism business in Vanuatu
In a previous post, we discussed ‘5 tips for investing in business in the Pacific’
I am receiving an increasing level of enquiry from Australian investors wishing to invest in the tourism sector in Vanuatu….
And why wouldn’t you want to invest in paradise, the flights have recommenced, there are significant infrastructure projects in train and tourism is on the improve…particularly in Espiritu Santo.
Top 5 questions
Here are the top 5 questions that I receive from clients.
1. What is the interest rate?
2. Foreign Investment – what is the process?
3. Land system – how does it differ from Australia?
4. What are the costs?
5. Borrowing – what level of equity do I need?
In this 3-part series, I will discuss these topics in more detail and include a suggested financing structure for your tourism property in Vanuatu.
Interest rates – Vatu or AUD?
The local currency in Vanuatu is the Vanuatu Vatu (VUV) and the current exchange rate is 1AUD = 79.55VUV.
Due to the smaller size of the finance sector, fixed rate borrowings are not available in Vanuatu. Business borrowing rates in Vatu are approximately 10-11% and I am regularly asked, why so high?
Vatu interest rates are influenced by:
(a) liquidity i.e. the Vatu is not a globally traded currency,
(b) sovereign or country risk i.e. risks of government, civil unrest and natural disaster and
(c) competitor activity i.e. the market comprises four commercial banks
Are there other options?
Yes, there is an alternative option for you.
In Vanuatu, there is the option of borrowing in a foreign currency i.e. Australian dollars (AUD). Capacity to borrow in AUD is subject to your Vanuatu business stream being in AUD however in tourism, room rates are typically sold in AUD. This is due to the major tourism market being from Australia and for us ‘aussies’ having difficulty in understanding the conversion between AUD to Vatu…there are too many zeros.
The commercial banks in Vanuatu source AUD either from client liquidity (AUD deposits) or via the respective global treasury. As a result, AUD borrowing rates are competitive and not too much higher than what you would expect to borrow for commercial purposes in Australia.
I recommend that any operating / working capital facility be structured in Vatu as the majority of your local expenses will be in Vatu.
Stay tuned for part 2 – I will cover more of the detail…specifically for Foreign Investors…