The Effects of Exchange Rate Risk on Tourism - Essay Example

The Effects of Exchange Rate Risk on Tourism The Case of Australia Insert Name Course, Class, Semester Institution Instructor Date Executive summary Tourism is one of the most important avenues through which all countries earn foreign exchange (Cooper, 2003). Australia, being no exception to this fact carries out annual statistics on the tourism industry so as to establish the causes of the fluctuations in the volume of tourism activity and find possible remedies to such causes. Australia, as a tourist destination is a favorite to many. The hospitable nature of the Australian people coupled with its beautiful natural setting, makes it rank top among the most preferred tourist destinations in the world. Just like any other trade, tourism faces a number of challenges and unforeseen disturbances (Rinaldo et al, 2008). Top among these unpredictable variables is the exchange rate. The exchange rate in Australia refers to the number of Australian dollars that an individual has to give up to acquire a unit of another currency. This paper looks into the impact of the exchange rate on the tourism activities in Australia. Table of contents page Introduction…………………………………………………………………………….4 An overview of the tourism industry in Australia………………………………………4 The impact of the exchange rate risk on the tourism industry…………………………..5 Recommendations……………………………………………………………………….8 Conclusions………………………………………………………………………………8 References……………………………………………………………………………….9 Introduction One of the major indicators of the economy is the foreign exchange market. It is the foreign exchange market that interprets the forces of demand and supply to come up with the rate at which the local currency trades in relation to other currencies. The exchange rate in Australia is not fixed like it was two and a half decades ago (Song et al, 2009). It is floating and as such is bound to be affected by the dynamics in all sectors of the economy. The exchange rate can be affected by such variables as inflation and international trade. The demand and supply of the country’s products is also a key determinant of the exchange rate. The exchange rate determines to a great extent all sectors of the economy that touch on foreign exchange or involve the use of currency. Typically, when tourists come into a country, they come with money that is in their currency. In order to transact in the local arena, they have to convert their money from their currency to the currency of the country they are visiting. In essence, when a tourist comes with a certain amount of money, he or she may be certain about its value when they consider it in the currency of their country. However, they can only estimate the value they should expect in the currency of the country they are visiting. Research has established that most tourists are very skeptical about traveling without having sufficient knowledge of the economic situation in the country they are visiting. This has been linked to the rapid overnight changes affecting all economies through the exchange rate. Discussed herein is the link between the exchange rate fluctuations and the tourism industry in Australia. An overview of the tourism industry in Australia The tourism sector accounts for a big percentage of the country’s income. According to the statistics of the 2010/2011 financial year the tourism industry was among the biggest contributors to the country’s Gross Domestic Product, GDP having accounted for well over 2.5% of the country’s gross income. The tourism industry generated 35 billion Australian Dollars. This can be translated to approximately 95 million Australian Dollars per day. According to the same statistical information, the tourism sector has employed well over 513, 800 men and women, both citizens and foreigners. The industry has brought so many developments to the region and this include excellent infrastructure around the areas with magnificent tourist attractions (Woodside & Martin, 2008). The major tourist destinations in Australia include: the cities and towns in the coastal region, key among them Melbourne and the capital Sydney; queens land area and most prominently the biggest reef in the entire globe, the Great Barrier Reef. The outstanding Australian wildlife is no doubt a major attraction as well. It is projected that by the year 2020 the tourism industry shall be valued at 140 billion Australian dollars. The impact of the exchange rate risk on the tourism industry As of the year 2011, the Australian dollar was ranked number three among the most traded currencies in the world. This implies that the chances of it being affected by the fluctuations and risks in the world market are very high. It is however worth noting that most of the fluctuations in the value of the Australian dollar are prompted by dynamics in the world market and not from within as is the case with many countries. This can be attributed to the stable political climate in the country as well as their nature of zero corruption. When the exchange rate fluctuates in favor of the Australian dollar, the Australian dollar, the dollar is said to have appreciated. On the contrary, when the economic dynamics are not in favor of the Australian dollar, the currency is said to have depreciated. In trying to understand the link between the exchange rate and the tourist activity in the country, it is only reasonable to look at the situations from the points of depreciation and appreciation (Mak, 2004). When the Australian dollar depreciates in value, it implies that a tourist will get more Australian dollars than he would have received for the same amount of his home currency during the times when the dollar appreciated (Pender & Sharply, 2005). From this understanding therefore, it simple to comprehend that during the time when the value of the Australian dollar has gone down, the country expects more tourists and consequently a busy environment in the tourism industry. This is because the tourists are sure of getting more of the Australian dollars from the same amount of money. As such, during the times when the dollar is performing well, the country should expect fewer tourists and hence low volume of activity in the tourism industry (Rosenberg, 2003). When the dollar appreciates, the tourists receive little money in terms of Australian dollars upon conversion. During the times when the dollar is performing well in the world exchange market, the number of tourists expected is small as tourists expect little money to spend on their trips and visits while in Australia. It is therefore worth noting that while the other sectors lose during the time when the dollar has depreciated, the tourism industry is among the few that stand to gain. In a relatively stable economic period, the tourists will come visiting as usual. The difference however will be the manner in which they spend (Shareef et al, 2009). During the stable economic times they are likely to spend less money as compared to the depression period. Research among the tourists visiting Australia in the year 2011 established that, sixty percent of the tourists were aware of the impact of the exchange rate fluctuations and that they studied economic trends very keenly before fixing the date for their tour. This was especially applicable to tourist from the United Kingdom and China. The study revealed that twenty percent of the foreign tourists were unaware of the impacts of the foreign exchange risks and as such, never took the time to study the trend of the economy before planning for their visit. The same research established that most of the people from this sample were people of the affluent class. The research then came to a conclusion that the people that are most concerned about the fluctuations of the rates are people of average class who are the majority in the countries that contribute most to the Australian tourism industry. Another twenty percent was found to be unconcerned with the stability of the Australian dollar. They were found to be neither optimists nor pessimists with regard to the fluctuations in the dollar (Rosenberg, 2003). They would visit Australia at any time of the year, the economic conditions notwithstanding. The fundamental conclusion of the report was that, even at the lowest depression of economic times, Australia would still have some foreign tourists visiting. It also established that the country should and indeed does expect high volume of tourist activities during the time when the Australian dollar is depreciating. One of the factors that keep the tourism sector of Australia relatively stable is the fact that a considerable percentage of the tourism income is accounted for by the local tourists (Graham et al, 2010). The 2010 statistics on the tourism sector indicated that about sixty-five percent of the income that the tourism sector contributed to the Gross Domestic Product was from the domestic tourism subsector. The relative stability of the local tourism can be explained by the fact that the Australian citizens operate and transact within the frame work of the local economic setting. They are not exposed to foreign risk because they do not need to convert their currency in order to make use of it. Recommendations The government of the given country should find proper strategies to promote domestic tourism. This will be of great help in stabilizing the tourism industry in times when the foreign tourists are not likely to visit following the effects of the unforeseen fluctuations in the exchange rate (Stabler et al, 2010). As part of its foreign policy markets the tourism sector with the aim of winning the confidence and loyalty of customers. Loyal customers will always visit irrespective of the economic conditions. The tourist destination should to put in place strong international finance strategies aimed at mitigating the detrimental effects of the exchange rate exposure to risk. The government, through the Australian revenue authorities, reduces or does away with the taxes on tourism exports. As a way of stabilizing the tourism industry, the government advises the actors in the tourism industry to implement differential systems of charging tourists at the entry points such that local tourists pay less. Tourism sectors should put measures in place that will ensure the actors in the tourism sector, adjust the charges to match the fluctuations in the exchange rates. From the research carried out, relevant organizations should practice selective credit control in favor of tourism and other related sectors (Rosenberg, 2003). Discriminatory credit control is one of the ways of dealing with exchange rate fluctuations. Conclusion In conclusion, the effects of the exchange rate fluctuations are apparent. The tourism industry is extremely vital to the economy of Australia. Considering the number of people it employs and the amount of money it contributes to the country’s national income, it is worth the efforts of the government as far as marketing, and policy formulation is concerned. Domestic tourism is a very important aspect of the tourism industry and the government ought to invest more in it as a way of accommodating the fluctuations associated with foreign tourism. References Cooper, C. (2003). Aspects of Tourism: Classic Reviews in Tourism. NSW. Channel Review Publications Graham, A; Papatheodorou, A. & Forsyth, P. (2010) Aviation and Tourism: Implications for Leisure Travel. Burlington. Ashgate Publishing Company Mak, J. (2004). Tourism and the Economy: Understanding the Economics of Tourism. Hawaii. The University Of Hawaii Press Pender, L. & Sharply, A. (2005). The Management of Tourism. London. Sage Publications Rinaldo, B. Lanza, A & Usai, S. (2008) Tourism and Sustainable Economic Development: Macroeconomic Models and Empirical Methods. Cheltenham. Edward Elgar Publishing Ltd Rosenberg, M. (2003). Exchange Rate Determination: Models and Strategies for Exchange Rate Forecasting. New York. McGraw-Hill Books Shareef, R.; Hoti, S. & Mcaleer, M. (2009). The Economics of Small Island Tourism: International Demand and Country Risk Analysis. Cheltanham. Edward Elgar Publishing Limited Song, H; Witt, S. & Li, G. (2009). The Advanced Econometrics of Tourism Demand. New York. Rout ledge Stabler, M; Papatheodorou, A. & Sinclair, M. (2010). The Economics of Tourism (2nd Edition). New York. Rout ledge Woodside, A. & Martin, D. (2008). Tourism Management: Analysis, Behavior and Strategy. London. CAB International Read More