The Effect of Exchange Rate Trends on Travel & Tourism Performance
For a unique view on Travel & Tourism (T&T) , perhaps it’s worth looking at exchange rates. While there are some seemingly straightforward ways that exchange rates impact the sector, a nuanced view also provides an intriguing look at how a shift in one major economy can impact T&T in the global community. The most notable exchange rate trend in recent years is the strengthening of the US dollar exchange rate against most other major economies. Changes in currency rates influences spending in a destination. In T&T, those same changes can sometimes also belie the true strength of one country’s currency against the primary currency used by their visitors. The currency strength of the U. dollar often takes precedent in discussing the effect of exchange rates on world economies. But for Travel and Tourism, another measurement provides additional insights — measuring a destination’s currency against the currency in that destination’s primary visitor markets. This measurement is the called visitor-weighted exchange rate, and it is a nuanced way to assess the impact of exchange rates on T&T trends.
The visitor-weighted exchange rate varies over time as the distribution of tourist arrivals to a country changes, but at the core, this measurement creates a more relevant measure for the impact of exchange rates on T&T. In essence, it actually quantifies the exchange rates faced by travellers to the that particular country. And while the specific strength of the US dollar has a place in any exchange rate discussion, WTTC research is particularly interested in laser focusing on how comparative currencies affect key T&T markets.
With the visitor-weighted exchange rate, we have to look at several factors for a country. Countries that rely on a large proportion of tourists coming from one specific country are susceptible to changes in the exchange rate between these two countries. One notable example of this in practice is the T&T sector in Mexico, where 84% of international arrivals come from countries using the US dollar. The strength of the US dollar against the Mexican peso has a significant impact on Mexico’s T&T sector. In comparison, Thailand’s largest source market is China, which accounts for just 18% of the country’s arrivals. In Thailand’s tourism sector, the diversified range of visitor source markets tends to provide some resiliency in the country against specific exchange rate fluctuations in any one other country or economy.
In this way, it’s easier to see how a nuanced view of exchange rates provides a different perspective. Let’s take a closer look at the effect of exchange rates on some of the largest T&T destinations around the world.
As noted before, the US dollar has shown strength in recent years. Apart from China, where the exchange rate is carefully managed and has been allowed to appreciate gradually, many major economies’ currencies weakened against the US dollar in the period between 2012 and the end of 2015. This underscores the truly remarkable strength of the US dollar over this period. This strengthening appears to have had a direct impact on performance of the T&T sectors in Canada, Mexico, and the United States, which rely heavily on visitors from each other’s countries. This strong US exchange rate has also shifted the dynamics in markets reliant on US based tourists — outbound travel from the United States became relatively cheaper. And with a stronger dollar, inbound travel to the United States from Canada and Mexico became relatively more expensive. WTTC economic impact reports for Canada and Mexico bear out this growth and show direct contribution of T&T to GDP is expected to rise in 2016 for both countries; 3.9% and 4% respectively.
China and Japan provide another interesting study in the effect of exchange rates — since 2012, Japan and China’s exchange rates diverged significantly. And the impact of this shift is most starkly evident when looking at the flow of T&T between the two countries. Chinese visitors to Japan have surged since 2013, while Japanese visitors to China have fallen each year since 2012 — of note, a period of anti-Japanese sentiment in China may also have been a factor deterring Japanese visitors. And there are other factors at work in this situation too. New policies, like duty-free shopping, were developed and specifically aimed at attracting Chinese visitors to Japan. That said, it’s hard to argue against the important role that exchange rate movements have played in Asia’s two largest T&T markets.
Shifting to the Eurozone, despite being part of a single currency bloc, T&T destinations within the Eurozone have experienced significantly different exchange rate dynamics in recent years. This is often attributable the differing visitor origin profiles for each country’s T&T sector.
Ireland makes a good case study since it has experienced the most significant competitiveness gain in the region. Ireland showed strong inbound arrivals performance in recent years, with visitors primarily originating in the UK and the United States. In looking closely, this can be, in part, attributed to the euro’s significant depreciation against the pound and US dollar. Ireland’s existing visitor profile before the currency depreciation — primarily visitors from the UK and the United States — primed the country for growth once the euro weakened.
Using that same idea of the euro’s depreciation the affecting influx of US and UK visitors, many other Eurozone countries have not seen the same gains because their country’s visitor profiles. Destinations that are largely dependent on other Eurozone origin markets have seen little change in competitiveness — in short, because these origin markets share the same currency.
Looking elsewhere in Europe, however, Finland’s visitor-weighted exchange rate contrasts starkly with Ireland. Finland’s Travel & Tourism sector depends on the Russian market for about 1/8 of its international visitors. The depreciation of the Russian rouble created the first layer of impact against Finland’s tourism sector, but it was exacerbated even further by the Russian economy falling into a deep recession and facing sanctions after the Ukraine crisis. The nature of Finland’s visitor profile has affected the country’s T&T, with WTTC data indicating direct contribution of Travel & Tourism to GDP expected to rise just 1.5 % in 2016. In recent years, Finland’s tourism board launched a massive marketing campaign specifically stated as a way to reach new markets around the world and to expand the country’s visitor demographics. That’s a prime example of one destination increasing the resilience of its T&T sector through diversifying its source markets.
In every tourism economy around the world, it’s clear that the outward exchange rate is just one piece of the equation. While it’s only one part of a larger picture on a country’s T&T situation, this measurement clearly has a place in thinking about the growth and sustainability of each country’s Travel & Tourism sector. Going forward, it will be important for the sector to monitor, track, and predict exchange rate movements, and respond accordingly.