Bachelor of Arts with Honours inBusiness and FinanceTopic: The Impact of Exchange RateVolatility on Singapore TourismName: Chia Su YiCohort: FTB Arts B&F 2/17Module: Professional and AcademicCompetencies (279ACC)Date Submitted: 15 January 2018 Word Count: Table 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 Despiteits small industry, Singapore has been recognized as one of the most openeconomy by the Heritage Foundation’s Index of Economic Freedom (Heritage.org, 2017).
Due toespecially lack of natural resources, tourism industry plays an important rolein Singapore. It brings in millions of tourists every year and also providehuge revenue for the Singapore economy. With its nominal gross domestic product(GDP) of US297 billion in 2016 (Tradingeconomics.com,2018). Close to 70% of the nominal value are contributed by the servicesector. It has been growing rapidly as compared to the last decade of US147.8billion in 2006 (Stb.gov.
sg, 2016). It hasbecome one of the highest GDP in the world. According to the figures of theperformance released by the Singapore Tourism Board (STB) in 2016 , totalinternational arrivals was $16.4 million grew by 8% and total receipts wasS$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 andvisiting in Singapore (TAY, 2017).
Emerging industries likecasinos, education, medical, infocomm and media are also making significantcontributions to the Singapore economy. Tourismhas become one of the most important and fastest growing sector in manycountries around the world. It is the biggest impact that most countries relyon as it could promote economic growth and maintain stability such as increasein production, income rise, life level improvement, public welfare and increaseemployment rates. Many countries have been focusing on restructuring to providea more stable growth path for their economy. Althoughtourism generates growth to the economy, there are some impact that may affect visitorsfrom visiting the country, such as the disease outbreak of SARS in 2003 which showsa double digit falls in arrivals of visitors as well as other countries such asHong Kong, China, Taiwan and Vietnam. (Asiabiotech.com, 2004).
(Meng et al.,2010) used a Computable General Equilibrium (CGE) model to examine thenegative impacts of the 2008 World Financial Crisis on Singapore. The resultsdemonstrate that the negative tourism shock has a severe impact ontourism-related sector, except for the F sector which reflects mildimpact. The largest impact comes from thevolatility of exchange rate which affect tourists holiday plan and adjust theirspending to the country as travel, transportation, hotels, restaurants,attractions and retail services depend heavily on tourist’s dollars. Theinbound visitors are more likely to be influenced by the exchange ratevolatility (ERV) in the destination. However, according to the report ontourism receipts during 2015 shows huge decline due to economic conditions andweak currencies. Thispaper aimed to examine the economic effects of exchange rates on the demand ofinternational tourists to Singapore. How does the exchange rate influence thetourism sector? How the possible effect on employment, income, expenditure andinflation will also be examined.
Section 2 will provide relevant literature onexchange rate impact to the economy and tourism sector, while Section 3 detailsthe methodology and data description and analyzed issues and finally endingwith conclusion as Section 4. 2.0Literature Review Anexchange rate could be explained as the price of one country’s currency in termsof another country’s currency.
ERV defined as the risk related to unexpected movementsin exchange rates (Mohd Abdoh etal., 2016). Economists knew that poorly managed exchange rate can causeadversely affect in economic growth (DaniRodrik, 2009). ERV or stability are the main concerns about thedirection of foreign trade.
Devaluation of a country’s currency will attractmore tourists as spending will be less expensive, while the increase in thevalue of a country’s currency will make spending more expensive that results indrop of tourist flow. In Singapore,monetary policy is focused on the management of the exchange rate to maintainprice stability and the promotion of economic growth. Singapore recognized fortheir successful exchange rate regimes able to maintain low and stable inflationand stability in its exchange rate. Singapore’s managed floating exchange ratesystem has delivered low currency volatility except during the Asian financialcrisis (Wilson and Ng, 2006).High volatility may influence macroeconomic performance such as economic growth,unemployment rates, inflation, interest rates, and income. There are numerousresearchers’ studies the relationship between volatility exchange rate andtourism industry. The ERV may signal the risk associated with a destination.This could impact on tourists’ decision to visit or cancel their trips.
Theresearch also identifies the important factors affecting international tourismflows, such as exchange rates, tourist’s income, the transportation cost, andthe relative price between destination and origin country (Geoffrey I. Crouch, 1993), (Hertinmalyana, 2016), (Uysal and Crompton, 2011). Agiomirgianakis, Serenis and Tsounis (2014) investigated the correlationbetween ERV and tourist’s inflows for the period from 1990 to 2012 on UK andSweden. A negative results shows that there is indeed a respond to the changesof the exchange rate between the tourists and Travel Agent Company. Thisaffects the number of tourist arrival and the total contribution of tourismsector to the GDP of that country.
Likewise, Choy (2012) used multivariate conditional volatilityregressions to model the time-varying conditional variation of internationaltourism growth and exchange rates for the period 1991 to 2011. Result stated thattourists are relatively more sensitive to currency shocks and may have long-runreminiscences shocks. Factors such as GDP, number of population, pricecompetitiveness and social and political condition may require the demand oftourism. The cost of living and tourism services in the destination, and thecost of transportation between the origin and destinations are the importantprice factors that affect by the fluctuation in exchange rates (Geoffrey I. Crouch, 1993). ERGEN and YAVUZ2 (2017) investigatedon whether the exchange rate volatilities are related to long-termco-integration with tourist flows using ARDL method for the period of2003:Q1-2016:Q1 in Turkey. The result shows the long-term co-integrationrelation was determined between the related variables. As mentioned abovehigh volatility on exchange rate may even influence macroeconomic performancesuch as economic growth unemployment rates, inflation rate, interest rate,income and wages.
2.1 Inflation Rate Inflation rate cause a evolveof the country’s currency and its rate is oftenused as an indicator of price levels and the general cost of living in aneconomy, measured by the consumer price index. In general, a country withhigher inflation rate face depreciation on their currency, countries with lowerinflation display less favorable on its currency (ref). Cheung and Yuen (2001) examined how theinflation rates across three country economies, namely U.
S, small openeconomies like Hong Kong and Singapore interact. The findings shows that theprice levels are co-integrated. 2.2 Interest Rate Interest rate isthe 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 thatinterest rate and travel demand is negatively correlated. The effect of incomeand duration influence by vary of interest rate have a major impact on thetourism demand.
Higher interest rate tend to reduce the rate of economic growthdue to increase cost of borrowing, causing a decrease in disposable income and maylead to the abortion of expensive holiday plans for many consumers. 2.3 Income Rate Income is acritical variable to take in consideration for tourists to make their decisionand 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 estimatedtourism revenues.
Tourism revenue are significantly important in most of thecountries as tourism revenue constitute a great income of a country (ERGEN and YAVUZ2, 2017). 2.4 Unemployment Rate Employment ratesis one of the important factors that tourism contributes. It is derived as thepercentage of people unemployed in the country’s total labor force. Accordingto (Hina Chimnani et al., 2012)investigation on the effect between ERV and unemployment rate has a positiveand significant effect in ASIAN countries. 3.
0Research Methodology 3.1 Research Design Most of the researcher’sstudies on tourism usually focus on visitor’s arrival and expenditure becausedata are readily available. Explanatory research will be used to analyze theexchange rate volatility influence the Singapore tourism sector. The analysisinvolve specifying with panel data regression models and theoretical model forERV influence tourist flows in and macroeconomic variables that effect onexchange rate. In this paper, quantitative method is used to study the researchas it is more suitable to examine the relationship between ERV and macroeconomicvariables namely interest rate, inflation rate, unemployment rate and incomerate etc.
Quantitative research method assess the statistical and numericanalysis data which are collected from the website, surveys, or questionnairesand observations (John W.Creswell,2014). 3.2 The Model andEmpirical Result Panel dataanalysis has been used for the identified variables factors that affectstourists flows into Singapore based on the previous research by Agiomirgianakis,Serenis and Tsounis (2016) thefour factors which they used to examine in a model are (1) tourists’ disposableincome, (2) competitiveness of the destination country, (3) ERV and (4)weather.
Where I representcountry I; t represent time; ARR is tourist arrival figure from country I attime t to Singapore; p, l, m, n represent time-lags of each regression; percapita GDP, constant prices and purchasing power parities represent the GDP measurement for the tourists’ disposable income; ER representreal exchange rate use for calculation nominal exchange rate by multiplying theratio for both price level between Singapore and each of the tourists’ origincountry; ERV measures and calculated the time varying ERV; lastly D_TEMPvariable is to examine the affected holidays by the weather between thetemperature in Singapore and the capital of the tourists’ origin country. The estimatedresults is shown below. All tests areperformed using the 5% level of significance. As a result, both lnD_TEMP andERV was rejected. While lnARR, lnGDP and lnR_ER were found to be non-stationaryat their level for all panels. Therefore, it is concluded that the variableslnD_TEMP and ERV are I (0) while lnARR, lnGDP and lnR_ER are I (1). ERV measurementhave regards as one of the most prime issue of the topic by many researchers asthere is no evident of right, orwrong, volatility measurement.
There are alternative measurement ofvolatility examined by different researchers. Most of them will utilize thestandard deviation of the moving average measure of the logarithm of theexchange rate. Below is the measurement of ERV: Where R represent realeffective exchange rate and m represent the duration, ranging between 4 -12.Such measurementhas its benefits and drawbacks as it potentially fails to capture the effectsof high and low peak values of the exchange rate. According to someresearchers, these values capture the unpredictable factor which alters thetour operators’ behavior and this is the main advantage of its measurement (Agiomirgianakis, Serenis and Tsounis,2014). The Regressionmodeling technique used by Ramasamy and Karimi Abar (2015) to investigate the relationships between themacroeconomic variables and exchange rate by estimating numerical and evaluatethe importance for each independent variables.
Where y representExchange rate, a represent Intercept, ? represent Regression coefficient to beestimated, x represent Independent variable, I is the List of independentvariables, x1, x2, x3, x4, x5, x6, x7, x8, x9 are the relative of interestrates, inflation rate, balance of payments, employment rate, corruption index,Relative gross domestic product, deficit/surplus rate, tax rate, borrowingrate, respectively. The results aretested in separate model using the currencies of United States (USD), Australia(AUD), and Germany (EURO) exchange rate as they are strong developing countriesleast in unemployment, corrupt and deficit in their budgets. The table below isthe statistics information of exchange rate and relative economics variables collectedfrom the central banks of respective countries by the researchers. The estimatedresult are done in an overall tests for each model. The overall modelresult show that variables such as interest rate, BOP and inflation rates showa negative results due to their strong currencies, public and investorsstrength, independent variables with interrelationships and own interactionsdoes captured weak traditional regression model. 3.3 Research sampling It is important tochoose the sampling that is suitable for our research data. Sampling framereacted by the potential respondents, sample size and sample procedure.
The twotypes are probability and non-probability sampling. Probability sampling willbe used in this research where every sample gets an opportunity to berepresentative sample. Mostly are done by using random sampling techniques. Convenience,highly support data, provide greatest number of possible samples, easy tocalculate as on the advantage side. However, this method is tedious, timeconsuming with biased sample which can be difficult to assess. 3.4 Data CollectionMethods For this paper,the information gathered are from secondary data. Secondary and primary dataare the two methods that can be use in the data collection.
Secondary data arepre-exist data which have already been collected by other researchers and isreadily available for others to use.Secondary datawill be collected through journals, annual report, online or books. PrimaryData are data collected and observed from firsthand experience. Data can becollected specifically for the design of our research project and it isexpensive to obtain (Joop J. Hoxand Hennie R. Boeije, 2005).
3.5 Ethicalconsiderations Ethicalconsiderations is important in the research. It helps to achieve researchprojects and ensures that all procedures meet ethical standards. To seek formaintaining quality research, the participants must provide agreement before participationand treated with dignity, their rights and welfare must be protected, prevent themfrom potential harm or risk from researchers (Datt, 2016). 4.0Conclusion4.
1 Potential outcomes This paper has attempted to study the exchange rate volatility on Singaporetourism sector by using the two model analysis generated from secondary datasources. The first estimated model is the panel data analysis model, the ERV measurementis also included for the test and the second model is done by using the regressionmodel. The tested results for both model stated that in the long run on Singaporetourism sector affected positively. The decline of tourist arrival may have impacton its economic which suffers from some indices like inflation, unemployment, exchangerate, income wages, interest and other problems. The overall research review werebeing carried out by developed countries and with the help of many impressive researchers. 4.
2 Academic Implications The important of the academicimplications from the research outcome will helps the future academic students achievean insight view of the exchange rate evolve on Singapore tourism sector. And also conclude some of the studies implicationsfor examining such as equation model analysis and to guide themthrough their research. 4.
3 Managerial Implications Managerialimplications is the overall research contribute by the researcher around theworld. The research methodology is based on the chosen quantitative data andthe case study collection, the research outcome show the fact that howSingapore tourism business manage to take a better judgment to resolve theexchange rate impact and other policies factors to make the tourism sector a successfulbusiness market. References Agiomirgianakis, G.,Serenis, D. and Tsounis, N. (2016).
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