Sinking: How Emerging Market Currencies May Roil the International Education Sector

Emerging market currencies are plummeting against the US dollar. What will be the impact on the international education market?  If we are to judge by the amount of discussion within the industry on this topic, the answer would lie somewhere between not much and who cares. Which may be extremely short-sighted.

Recall that the 1997 Asian financial crisis, and the Tequila and Russian crises punctuated around it, offer very little guidance to what can happen to international education demand and the movement of students around the world. The main reason is that the size and depth of the international education market was a fraction of what it is today, so there is no historical precedent. Moreover, forecasting international currency markets is about the last thing college admissions officers and development executives need to think about as the academic year begins, assuming they even have the analytical training and background to make sense of it what is happening.  

This analyst does not see how the international education market will be immune to dramatic changes in currency values and their impact on affordability across an international student base largely drawn from developing economies. And in a world of relative US dollar strength and a material decline in emerging market spending power (in USD terms), the full brunt is going to be felt by the US education market.  There is scope for winners and losers--and some emerging market currencies may strengthen against the dollar--but the current pull-back in emerging market economies is in its early phases and will have profound and unexpected implications for the industry.

Here's why.

International education is being driven by students from Emerging Economies

Emerging markets have long been a driver for internationally mobile study around the world and to US universities specifically.  By 2014, EM students represented 7 of the top 10 source countries for study in the US  and 17 of the top 25 markets. Figures 1A and 1B illustrate the aggregate foreign enrolments by nationality over the 2005 to 2014 period--with leading EM countries such as China and India, followed by others such as Korea, Saudi Arabia, Mexico and Turkey.  In short, the US market is highly sensitive to these regions.

It's worth noting that China's dramatic gains in international student enrollments have taken place largely within the framework of a strengthening and stable RMB against the US dollar, and outsized economic growth in the country (not to mention peak high school demographics and other factors). Chinese student enrollment trends are expected to moderate, for reasons I outlined previously, but the current turn in China's economic cycle and potentially the RMB threatens spending decisions in countries far beyond its borders.

Figures 1A and 1B:  International Enrolments in US Higher Education and Training is Predominantly Driven by Emerging Markets

The bottom line is that declining local currencies against the US dollar will have an immediate impact on international study in the US particularly since higher tuition and related expenses are usually paid in cash by foreign students rather than financed over the long-term.  To be sure, student decisions are not only based on affordability but also programmatic quality, academic reputation, geographic proximity, prospects for future immigration and other intangibles.  But for many students and their families, a difference as much as 10 to 15 per cent in cost can hit hard on household budget decisions.

What will be the impact of a strong dollar education market?

Market participants should now be asking how deep the current directional trends in EM currencies will impact specific countries and student cohorts who are most sensitive to rising costs; what strategic options exist for Universities and education groups that are targeting this young and dynamic market; and which host countries will lose or benefit from these structural shifts in key emerging economies.  

Let me offer a few ways of analyzing this.

First, declining local currencies directly increase the real cost of study in terms both tuition, travel and associated expenses.  Students and their families that are most vulnerable to these changes, and who reside in countries where currency declines against the dollar are particularly steep, may opt out of US study entirely, switch to a cheaper country (eg. Australia, whose own currency has dramatically weakened against the US dollar over the past year and may offer a more affordable alternative) or reduce the overall "seat time" spent overseas as part of a multi-year degree program.

Figures 2A and 2B chart percentage changes in US student enrollments by nationality with a specific highlight on India and China, the former experiencing significant growth volatility at high volume over the 2005-2014 period. Vietnam and Turkey, both important source countries for the US, have also shown uneven growth trends, yet at different times.  Why?

Figures 2A and 2B: International Student Enrollment Growth Rates in US by Source Country, 2005-2014

As a first shot, Figure 3 illustrates the annual change in local currency v. US dollar with annual changes in US international enrollment. The results are charted individually for India, Vietnam, Turkey and China and show clearly that declining enrollments are correlated with sustained local currency weakness against the USD over the historical period. In fact, enrolment declines in these examples (apart from China, which until recently has been mainly appreciating against the USD) were almost always preceded by local currency declines: in India (2008-09 and 2011-12), Turkey (2009, 2011), and Vietnam (2007-2010), three major US source markets.

There are caveats in reading too far into this analysis:  these are only correlations, we do not know if the currency was simply the cause or lagging indicator of another reason for enrolment drops (e.g. a weak real economy, visa problems), or if any unusual short-term programmatic enrollments have skewed the data.  Having said that, we cannot dismiss the impact of weakening currencies on international education demand in the US in these cases, as it evidently matters.

Figure 3: Annual Percentage Change (%) in Local Currency v. USD and US International Student Enrollments shows correlation for India, Turkey, and Vietnam

Second, the fall in local currencies may prompt students to explore higher education options closer to home--including the provision of foreign degree programs locally via transnational education ventures ("TNE")--or to look at relatively cheaper destinations such as Australia, which has experienced its own collapse of value against the greenback and offers lower-cost alternatives to students worldwide.  In my experience, US universities tend to believe that foreign competition doesn't matter. Intensifying growth in enrollments outside the US suggest otherwise.

In fact, we are projecting that TNE in many non-US countries around the world will experience a further nudge forward as the dollar strengthens.  Australia should be a major beneficiary at home and indeed has already experienced positive trends (see Figure 4); other, smaller regions such as the UAE, Mauritius and Malaysia may also provide more value to students from parts of Africa and the Middle East. With the advent of English language University programs across a number of leading Asian Universities, this analyst would expect that Intra-Asian study will also increase in popularity.

Online education, which is often an after thought, should also benefit from any pullback in international student mobility, perhaps mostly in the case of non-degree training and MOOCs such as Coursera and Udemy that serve the global market. 

Figure 4:  Australian International Enrollments and the Aussie Dollar (Annual % Change) 

Third, and on a related point, a relatively strong dollar against EM currencies will reduce the cost of delivery for American higher education providers, ranging from teaching and curriculum support, technology use and local administrative costs. This trend will favor more robust US TNE expansion in selected markets in Southeast Asia, Africa and Latin America. For example, students at NYU Shanghai may be willing to pay the relatively expensive tuition but save on living and travel expenses, which can be a significant proportion of overall study cost. Other TNE programs may be offered at significantly lower tuition overseas than at the parent institution back home, a model that may become more compelling if real costs are lowered to run such programs.  

Fourth, a stronger dollar could accelerate US outbound study--which, accounting for only 1.5 per cent of total students in 2013, offering ample room for expansion--and provide a needed source of revenue to education providers in host countries.  To date, most US study abroad programs have been short-term exchange and year abroad programs with only 3.5 per cent deemed "long-term" study, according to Open Doors statisticssinice .  In a strong dollar environment, cost-conscious (and perhaps more adventurous) US students might be prompted to take a degree from overseas. 

Figure 5 : US Students Abroad by Region (Percentage of Total), 2013

International Education as Non-Trivial and Export Sensitive

Final question: why does this matter?

The annual impact of international student revenue on the US economy is non-trivial; and higher education is one of America's most prized exports. According to this analyst's estimates the aggregate tuition revenues for international higher education were USD 76 billion in 2015 and will grow to between USD 111 to 130 billion by 2025, a figure that does not account for the large ecosystem of services that feed into and support the study abroad market.  American universities have come to rely on a constant stream of foreign student revenue (USD 27 billion in 2015 alone) based on differentiated pricing at the high end, which support their own fiscal targets as well as those of local communities. Whether this cozy arrangement continues is an open question.

In sum, the recent currency rout in emerging markets, if proven sustainable for a multi-year period and seeping into real economic growth, will create more budget conscious international students considering US study; prompt the rise of TNE development options overseas and renewed competition from Universities outside the US that offer greater value; potentially increase US outbound study, and create knock-on effects for online learning and students choosing to stay at home.  Meanwhile US Universities who lack the means to lower costs through tuition discounts or scholarships, believe that sky-high tuition levels for foreign students are here to stay, or who may not be offering differentiated value to foreign students for the price being charged, might want to check their prior assumptions, diversify their student recruitment strategies, and plan for a more uncertain future.