Profiting from tourism

Tom Traill - 26 April 2017

In contrast to world trade volumes, which are little better than stagnant, world tourist volumes are buoyant (figure 1). For some countries, particularly small island economies, the tourism industry assumes huge significance. Tourists bring in significant sums of money, mostly in ‘hard’ currencies, enabling purchases of local goods and services.  Whereas some countries have an established tourism industry, others are eagerly climbing aboard this gravy train.

 

Iceland is an extraordinary example, ranking 13th in the league table (figure 2) of the importance of tourism in national income. Following the global financial crisis, the Icelandic government made a concerted attempt to boost tourism as an offset to the disastrous performance of its financial sector, in the light of a substantial currency depreciation.  The payoff is shown in figure 1. Without question, Iceland is a spectacular country: glaciers, geysers, volcanoes and the Northern Lights. More recently, the TV show Game of Thrones has showered attention on Iceland, proving that it is more than just Bjork, fish and bearded strongmen.

Icelanders have seized the opportunity, doubling the number of tourists from 600 thousand in 2012, to 1.3 million in 2015. Reykjavik airport welcome 40% more passengers in 2016 than 2015! The fifty percent fall in the Icelandic Krona in 2008 made the country more affordable, but the currency has been one of the stronger ones in recent years – thanks in part to tourism. In a sample of 63 unpegged currencies, the Krona performed the best against the US Dollar between 2012 and 2015.

The tiny pacific island nation of Palau (which is not included in the dataset below, but by other measures occupies a high ranking for the importance of tourism) has taken a different approach. It has sought to impose a new law whereby only 5 star resorts are built on the island – taking the quality over quantity approach to tourism.

 

As with exports of goods, the exchange rate is important for tourism; a sharp weakening of the exchange rate offers the opportunity of a cut-price holiday and the consumer response can be amazing. One recent example is a company advertising 2 weeks in Turkey for £90.

 

Also, however, tourism can be important for the exchange rate. A recent calculation showed that an increase in tourism (relative to population) can help strengthen the exchange rate. This calculation shows that there is a correlation, albeit not strong, between countries that have seen an increase in the number of tourists relative to population, and the change in the currency relative to the US Dollar. Of course, there can be external factors – Ukraine’s civil war is the likely culprit for the fall in the currency and the number of tourists.

 

For those looking for an investment off the beaten path, it is worth examining the countries in which tourist numbers are exploding. Provided the visitors send back good reports, success breeds success: double-digit volume growth is an easy target in the current climate.

Figure 1

Data source: World Bank

Figure 2

Data source: Knoema.com
 



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