Bachelor Introduction Despite its small industry, Singapore has












Bachelor of Arts with Honours in
Business and Finance

Topic: The Impact of Exchange Rate
Volatility on Singapore Tourism

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Name: Chia Su Yi

Cohort: FTB Arts B&F 2/17

Module: Professional and Academic
Competencies (279ACC)

Date Submitted: 15 January 2018


Word Count:




of Contents
1.0  Introduction. 3
2.0 Literature Review.. 4
2.1 Inflation Rate. 6
2.2 Interest Rate. 6
2.3 Income Rate. 7
2.4 Unemployment Rate. 7
3.0 Research Methodology. 7
3.1 Research Design. 8
3.2 The Model and Empirical Result 8
3.3 Research sampling. 11
3.4 Data Collection Methods. 12
3.5 Ethical considerations. 12
4.0 Conclusion. 12
4.1 Potential outcomes. 12
4.2 Academic Implications. 12
4.3 Managerial Implications. 12
References. 13














1.0  Introduction


its small industry, Singapore has been recognized as one of the most open
economy by the Heritage Foundation’s Index of Economic Freedom (, 2017). Due to
especially lack of natural resources, tourism industry plays an important role
in Singapore. It brings in millions of tourists every year and also provide
huge revenue for the Singapore economy. With its nominal gross domestic product
(GDP) of US297 billion in 2016 (,
2018). Close to 70% of the nominal value are contributed by the service
sector. It has been growing rapidly as compared to the last decade of US147.8
billion in 2006 (, 2016). It has
become one of the highest GDP in the world. According to the figures of the
performance released by the Singapore Tourism Board (STB) in 2016 , total
international arrivals was $16.4 million grew by 8% and total receipts was
S$24.8 billion grew by 13% as compared to 2015, tourism receipts weakened at
$22 billion due to challenging economic conditions. China, Indonesia, India,
Malaysia and Australia travelers are among the top list of spending and
visiting in Singapore (TAY, 2017). Emerging industries like
casinos, education, medical, infocomm and media are also making significant
contributions to the Singapore economy.


has become one of the most important and fastest growing sector in many
countries around the world. It is the biggest impact that most countries rely
on as it could promote economic growth and maintain stability such as increase
in production, income rise, life level improvement, public welfare and increase
employment rates. Many countries have been focusing on restructuring to provide
a more stable growth path for their economy.


tourism generates growth to the economy, there are some impact that may affect visitors
from visiting the country, such as the disease outbreak of SARS in 2003 which shows
a double digit falls in arrivals of visitors as well as other countries such as
Hong Kong, China, Taiwan and Vietnam. (, 2004). (Meng et al.,
2010) used a Computable General Equilibrium (CGE) model to examine the
negative impacts of the 2008 World Financial Crisis on Singapore. The results
demonstrate that the negative tourism shock has a severe impact on
tourism-related sector, except for the F sector which reflects mild
impact. The largest impact comes from the
volatility of exchange rate which affect tourists holiday plan and adjust their
spending to the country as travel, transportation, hotels, restaurants,
attractions and retail services depend heavily on tourist’s dollars. The
inbound visitors are more likely to be influenced by the exchange rate
volatility (ERV) in the destination. However, according to the report on
tourism receipts during 2015 shows huge decline due to economic conditions and
weak currencies.


paper aimed to examine the economic effects of exchange rates on the demand of
international tourists to Singapore. How does the exchange rate influence the
tourism sector? How the possible effect on employment, income, expenditure and
inflation will also be examined. Section 2 will provide relevant literature on
exchange rate impact to the economy and tourism sector, while Section 3 details
the methodology and data description and analyzed issues and finally ending
with conclusion as Section 4.


Literature Review


exchange rate could be explained as the price of one country’s currency in terms
of another country’s currency. ERV defined as the risk related to unexpected movements
in exchange rates (Mohd Abdoh et
al., 2016). Economists knew that poorly managed exchange rate can cause
adversely affect in economic growth (Dani
Rodrik, 2009). ERV or stability are the main concerns about the
direction of foreign trade. Devaluation of a country’s currency will attract
more tourists as spending will be less expensive, while the increase in the
value of a country’s currency will make spending more expensive that results in
drop of tourist flow.


In Singapore,
monetary policy is focused on the management of the exchange rate to maintain
price stability and the promotion of economic growth. Singapore recognized for
their successful exchange rate regimes able to maintain low and stable inflation
and stability in its exchange rate. Singapore’s managed floating exchange rate
system has delivered low currency volatility except during the Asian financial
crisis (Wilson and Ng, 2006).
High volatility may influence macroeconomic performance such as economic growth,
unemployment rates, inflation, interest rates, and income.


There are numerous
researchers’ studies the relationship between volatility exchange rate and
tourism industry. The ERV may signal the risk associated with a destination.
This could impact on tourists’ decision to visit or cancel their trips. The
research also identifies the important factors affecting international tourism
flows, such as exchange rates, tourist’s income, the transportation cost, and
the relative price between destination and origin country (Geoffrey I. Crouch, 1993), (Hertinmalyana, 2016), (Uysal and Crompton, 2011). Agiomirgianakis, Serenis and Tsounis (2014) investigated the correlation
between ERV and tourist’s inflows for the period from 1990 to 2012 on UK and
Sweden. A negative results shows that there is indeed a respond to the changes
of the exchange rate between the tourists and Travel Agent Company. This
affects the number of tourist arrival and the total contribution of tourism
sector to the GDP of that country.


Likewise, Choy (2012) used multivariate conditional volatility
regressions to model the time-varying conditional variation of international
tourism growth and exchange rates for the period 1991 to 2011. Result stated that
tourists are relatively more sensitive to currency shocks and may have long-run
reminiscences shocks. Factors such as GDP, number of population, price
competitiveness and social and political condition may require the demand of
tourism. The cost of living and tourism services in the destination, and the
cost of transportation between the origin and destinations are the important
price factors that affect by the fluctuation in exchange rates (Geoffrey I. Crouch, 1993). ERGEN and YAVUZ2 (2017) investigated
on whether the exchange rate volatilities are related to long-term
co-integration with tourist flows using ARDL method for the period of
2003:Q1-2016:Q1 in Turkey. The result shows the long-term co-integration
relation was determined between the related variables.


As mentioned above
high volatility on exchange rate may even influence macroeconomic performance
such as economic growth unemployment rates, inflation rate, interest rate,
income and wages.


2.1 Inflation Rate


Inflation rate cause a evolve
of the country’s currency and its rate is often
used as an indicator of price levels and the general cost of living in an
economy, measured by the consumer price index. In general, a country with
higher inflation rate face depreciation on their currency, countries with lower
inflation display less favorable on its currency (ref). Cheung and Yuen (2001) examined how the
inflation rates across three country economies, namely U.S, small open
economies like Hong Kong and Singapore interact. The findings shows that the
price levels are co-integrated.


2.2 Interest Rate


Interest rate is
the amount charged by the banks to the borrower for the use of money or assets.
The interest rate are set by the country’s central bank. Liu and Yan (2012) has done and examined by Zheng (1995) the impact on tourism and found that
interest rate and travel demand is negatively correlated. The effect of income
and duration influence by vary of interest rate have a major impact on the
tourism demand. Higher interest rate tend to reduce the rate of economic growth
due to increase cost of borrowing, causing a decrease in disposable income and may
lead to the abortion of expensive holiday plans for many consumers.


2.3 Income Rate


Income is a
critical variable to take in consideration for tourists to make their decision
and is often used to monitor to gauge the overall state of the economy as sales
, profits, jobs, tax revenues and income contribute by tourists covered estimated
tourism revenues. Tourism revenue are significantly important in most of the
countries as tourism revenue constitute a great income of a country (ERGEN and YAVUZ2, 2017).


2.4 Unemployment Rate


Employment rates
is one of the important factors that tourism contributes. It is derived as the
percentage of people unemployed in the country’s total labor force. According
to (Hina Chimnani et al., 2012)
investigation on the effect between ERV and unemployment rate has a positive
and significant effect in ASIAN countries.


Research Methodology


3.1 Research Design


Most of the researcher’s
studies on tourism usually focus on visitor’s arrival and expenditure because
data are readily available. Explanatory research will be used to analyze the
exchange rate volatility influence the Singapore tourism sector. The analysis
involve specifying with panel data regression models and theoretical model for
ERV influence tourist flows in and macroeconomic variables that effect on
exchange rate. In this paper, quantitative method is used to study the research
as it is more suitable to examine the relationship between ERV and macroeconomic
variables namely interest rate, inflation rate, unemployment rate and income
rate etc. Quantitative research method assess the statistical and numeric
analysis data which are collected from the website, surveys, or questionnaires
and observations (John W.Creswell,


3.2 The Model and
Empirical Result


Panel data
analysis has been used for the identified variables factors that affects
tourists flows into Singapore based on the previous research by Agiomirgianakis,
Serenis and Tsounis (2016) the
four factors which they used to examine in a model are (1) tourists’ disposable
income, (2) competitiveness of the destination country, (3) ERV and (4)


Where I represent
country I; t represent time; ARR is tourist arrival figure from country I at
time t to Singapore; p, l, m, n represent time-lags of each regression; per
capita GDP, constant prices and purchasing power parities represent the GDP measurement  for the tourists’ disposable income; ER represent
real exchange rate use for calculation nominal exchange rate by multiplying the
ratio for both price level between Singapore and each of the tourists’ origin
country; ERV measures and calculated the time varying ERV; lastly D_TEMP
variable is to examine the affected holidays by the weather between the
temperature in Singapore and the capital of the tourists’ origin country.


The estimated
results is shown below.



All tests are
performed using the 5% level of significance. As a result, both lnD_TEMP and
ERV was rejected. While lnARR, lnGDP and lnR_ER were found to be non-stationary
at their level for all panels. Therefore, it is concluded that the variables
lnD_TEMP and ERV are I (0) while lnARR, lnGDP and lnR_ER are I (1).


ERV measurement
have regards as one of the most prime issue of the topic by many researchers as
there is no evident of right, or
wrong, volatility measurement. There are alternative measurement of
volatility examined by different researchers. Most of them will utilize the
standard deviation of the moving average measure of the logarithm of the
exchange rate. Below is the measurement of ERV:                            

Where R represent real
effective exchange rate and m represent the duration, ranging between 4 -12.

Such measurement
has its benefits and drawbacks as it potentially fails to capture the effects
of high and low peak values of the exchange rate. According to some
researchers, these values capture the unpredictable factor which alters the
tour operators’ behavior and this is the main advantage of its measurement (Agiomirgianakis, Serenis and Tsounis,


The Regression
modeling technique used by Ramasamy and Karimi Abar (2015) to investigate the relationships between the
macroeconomic variables and exchange rate by estimating numerical and evaluate
the importance for each independent variables.

Where y represent
Exchange rate, a represent Intercept, ? represent Regression coefficient to be
estimated, x represent Independent variable, I is the List of independent
variables, x1, x2, x3, x4, x5, x6, x7, x8, x9 are the relative of interest
rates, inflation rate, balance of payments, employment rate, corruption index,
Relative gross domestic product, deficit/surplus rate, tax rate, borrowing
rate, respectively.


The results are
tested in separate model using the currencies of United States (USD), Australia
(AUD), and Germany (EURO) exchange rate as they are strong developing countries
least in unemployment, corrupt and deficit in their budgets. The table below is
the statistics information of exchange rate and relative economics variables collected
from the central banks of respective countries by the researchers.



The estimated
result are done in an overall tests for each model.


The overall model
result show that variables such as interest rate, BOP and inflation rates show
a negative results due to their strong currencies, public and investors
strength,  independent variables  with interrelationships and own interactions
does captured weak traditional regression model.


3.3 Research sampling


It is important to
choose the sampling that is suitable for our research data. Sampling frame
reacted by the potential respondents, sample size and sample procedure. The two
types are probability and non-probability sampling. Probability sampling will
be used in this research where every sample gets an opportunity to be
representative sample. Mostly are done by using random sampling techniques. Convenience,
highly support data, provide greatest number of possible samples, easy to
calculate as on the advantage side. However, this method is tedious, time
consuming with biased sample which can be difficult to assess.


3.4 Data Collection


For this paper,
the information gathered are from secondary data. Secondary and primary data
are the two methods that can be use in the data collection. Secondary data are
pre-exist data which have already been collected by other researchers and is
readily available for others to use.

Secondary data
will be collected through journals, annual report, online or books. Primary
Data are data collected and observed from firsthand experience. Data can be
collected specifically for the design of our research project and it is
expensive to obtain (Joop J. Hox
and Hennie R. Boeije, 2005).


3.5 Ethical


considerations is important in the research. It helps to achieve research
projects and ensures that all procedures meet ethical standards. To seek for
maintaining quality research, the participants must provide agreement before participation
and treated with dignity, their rights and welfare must be protected, prevent them
from potential harm or risk from researchers (Datt, 2016).



4.1 Potential outcomes


This paper has attempted to study the exchange rate volatility on Singapore
tourism sector by using the two model analysis generated from secondary data
sources. The first estimated model is the panel data analysis model, the ERV measurement
is also included for the test and the second model is done by using the regression
model. The tested results for both model stated that in the long run on Singapore
tourism sector affected positively. The decline of tourist arrival may have impact
on its economic which suffers from some indices like inflation, unemployment, exchange
rate, income wages, interest and other problems. The overall research review were
being carried out by developed countries and with the help of many impressive researchers.


4.2 Academic Implications


             The important of the academic
implications from the research outcome will helps the  

             future academic students achieve
an insight view of the exchange rate evolve on Singapore  

             tourism sector. And also conclude some of the studies implications
for examining such as

             equation model analysis and to guide them
through their research.


4.3 Managerial Implications


implications is the overall research contribute by the researcher around the
world. The research methodology is based on the chosen quantitative data and
the case study collection, the research outcome show the fact that how
Singapore tourism business manage to take a better judgment to resolve the
exchange rate impact and other policies factors to make the tourism sector a successful
business market.




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