1 of 6 Late – 2006 Dollar Exchange Rate Impact on Inbound Tourism1 December 2006 Mr Chris Greenwood Research Analyst VisitScotland, Ocean Point One 94 Ocean Drive Edinburgh EH6 6JH Email: chris.greenwood@visitscotland.com Tel: 00 44 (0) 131 472 2389 Dr. Ian Yeoman Scenario Planning Research Manager, VisitScotland, Ocean Point One 94 Ocean Drive Edinburgh EH6 6JH Email: ian.yeoman@visitscotland.com Tel: 00 44 (0) 131 472 2388 1 This research bulletin has been prepared for VisitScotland and the Scottish tourism industry. No representation or warranty is given (expressed or implied) as to its accuracy or the correctness of the information and of the opinions contained in this report. The material should not be regarded as specific advice and no action should be taken with reliance on it. Neither the authors nor VisitScotland accepts any liability whatsoever for any loss or damage in any way or reliance placed upon the material. All of the events and portraits referred to within the scenarios are fictitious or viewed in context. Publication date: December2006 2 of 6 Introduction On the 30th November 2006, Sterling reached its highest level against the US dollar in 14 years. During currency trading, according to HSBC, sterling / dollar exchange rates touched $1.97, before retreating to $1.9626, a 0.8% rise on the day. The excitement generated by the press on this news is partly due to the unexpected nature that the exchange rate rise occurred. This level of currency activity is of obvious impact to currency traders. However, what impact does it have on the UK economy and to Scottish Tourism? The Impact of the $1.97 Dollar to Scottish Tourism In response to the question in the introduction, the impact in the medium term (2 to 5 years) is negligible (subject to there being no major shocks). The forecasts provided by Oxford Economic Forecasts and Royal Bank of Scotland show that exchange rates will remain around the $1.85 region until Q4 2007. This translates to an approximate 2% to 4% growth in the US market to the UK (based on VisitBritain projections). For the next month or so, impulse travellers to Scotland from America may be put off by the exchange rate and UK visitor numbers to the US may increase for the shopping opportunities; however tourists that have planned to come to the UK will already be committed to travel and the exchange rate will be an unfortunate but inescapable part of their travel spending. The Fall of the Dollar The longer term issues over the dollar exchange rate are due to the ongoing concerns of the US economic slowdown. It would be fair to say that Sterling’s gains against the dollar are due to the dollar’s decline against the world currencies. Increasing interest rates around the world (Europe and Japan mainly but also the UK), brought on by economic growth have increased interest in monetary vehicles other than the dollar. Poor economic data from the US, which has left the Federal Reserve with the decision to halt or lower interest rates to stimulate the economy, has also had an impact on the dollar exchange. The charts below show the dollar exchange rates against Sterling and the Euro for 2006. Increasing energy costs in the middle of the year pushed dollar rates up as the US spent more on importing oil adding to the increasingly unsupportable trade imbalance (6.6% of GDP). The growing economies of Europe and Japan have maintained the exchange rates at the levels shown for the second half of the year. 12 Month Sterling / Dollar Exchange Rate (Source: BBC) 3 of 6 China has built up foreign reserves in excess of $1000bn, of which 70% is in US dollars. China’s trading partners, particularly the US say the Chinese renminbi is undervalued. Should the renminbi strengthen this would drive down the US current account and ease pressure on the dollar. China sees the problem as an overvalued US dollar and could seek to replace its dollar holdings into other reserves (such as the Euro, Swiss francs, Yen or gold). With such high dollar reserves and a lucrative export market such as the US, China is caught in a paradox of being able to threaten the US with fiscal pressure whilst seeing their dollar holdings devalue as a result. What does this mean? While no one can predict the course of currency markets, the pressures on the dollar are growing. Analysts have been speculating for many years that a rebalancing of the dollar is necessary to readdress the growing current account. Forecasts from RBS and OEF show that up to 2007 exchange rates will be around the $1.80 to $1.90 mark until the end of 2007. It should be noted that the forecasts are based on no unexpected shocks such as major environmental, political or economic events which could alter global markets. Whilst dollar exchange rates remain low insular domestic spending by the US consumer may be beneficial as this will promote US manufacturing and domestic production and therefore begin to lower the trade imbalance. The downside is that exporters to the US will suffer as their goods will remain high priced, affecting their home economy. The US consumer is still increasingly indebted and the housing market is finely balanced to either burst or deflate gently. Economic growth in the US is slowing and this is adding to the short term reactions of the currency markets. Longer term outlooks are not as pessimistic for the US and this is reflected in the forecasts given by RBS/OEF. For 2007/8, growth rates for US-bound tourists are predicted at 2%-4%, however spend may be slightly muted due to the domestic situation. Careful monitoring of the US economy is necessary to watch for any tipping points (rising energy costs, changes in inflation, interest rates and exchange rates) to pre-warn of any possible collapse. Only a few pessimistic analysts are predicting a recession in the US for 2007. From a tourism perspective, preparation to promote discounted travel fares, observing possible travel packages (which can be bought in dollar therefore avoiding inflation, with the agent taking the rate disparity) and ensuring the US visitor is aware of the savings that can be made on Scottish attractions (free galleries, city passes etc), therefore any expense can go towards specifics (upgrading in restaurants, visits to specific charged attractions like Edinburgh Castle). This will maximise experience and revenue. 12 Month Euro / Dollar Exchange Rate (Source: BBC) 4 of 6 Moffat Model Forecasts The impact on Scottish tourism of the fluctuating dollar exchange rate was modelled using the Moffat Model. Two scenarios were developed; firstly a benchmark model (“Benchmark”) was run showing the current trend for US tourism arrivals and spends. Using the forecast exchange rates from the Royal Bank of Scotland (RBS), a second scenario (“RBS Exchange Rate Forecasts”) was developed showing the effect the lower dollar exchange rate on US tourists. The RBS Exchange Rate Forecast is shown in Table 1. As detailed in the preceding analysis, the rate of exchange with sterling fluctuates from $1.80 to $1.90. Details of the exchange rates from Q1 2005 are also shown for reference. Table 1: RBS Sterling Exchange Rate forecasts for US Dollar. Period $ per £ 2005 Q1 1.89 Q2 1.79 Q3 1.77 Q4 1.72 2006 Q1 1.73 Q2 1.85 Q3 1.87 Q4 1.87 2007 Q1 1.87 Q2 1.89 Q3 1.83 Q4 1.83 Source: RBS Group Economics Interest and Exchange Rate Forecasts (November 2006) The figures generated from the Moffat Model are shown in Table 2. The data shows arrivals and spend from 2003, with figures prior to 2006 representing the published figures from the IPS (International Passenger Survey). Figures in italics are the forecast figures. To assist in analysis the figures have been charted (Charts 1 and 2) using a four point average trend (average value for each year). This trend provides a guide for growth but does not represent actual value as represented in Table 2. The chart trends show an undulation around the second half 2005. This undulation has been associated with a four year growth and decline pattern which can be seen over a longer time series. IPS figures have shown a decline in US visitor arrivals and spend for the past four years which the Moffat Model has incorporated and predicts will start on an upturn from 2006. With the exchange rates effect, the difference between the predicated cyclical upturn and the forecast is illustrated within the charts. 5 of 6 Table 2: Moffat Model Forecast for US visitor volume and value 2003 – 2008 Benchmark RBS Exchange Rate Forecast Period Arrivals Real Spend £ (000) Arrivals Real Spend £ (000) 2003-1 45843 13408 45843 13408 2003-2 107289 59346 107289 59346 2003-3 189237 108973 189237 108973 2003-4 71425 31652 71425 31652 2004-1 44847 14624 44847 14624 2004-2 112286 61075 112286 61075 2004-3 182930 139210 182930 139210 2004-4 65092 35077 65092 35077 2005-1 36205 11319 36205 11319 2005-2 102669 42803 102669 42803 2005-3 155252 89598 155252 89598 2005-4 50236 29447 50236 29447 2006-1 37572 20170 37572 20170 2006-2 117670 62960 112880 54664 2006-3 201360 118200 193070 102460 2006-4 70574 40440 68213 36024 2007-1 39908 21477 38647 19257 2007-2 121240 64802 116650 56838 2007-3 208150 122620 205850 118060 2007-4 73552 42685 72877 41369 2008-1 41378 22425 40861 21487 2008-2 125080 66972 123100 63445 2008-3 213660 125440 209580 117490 2008-4 75117 43230 73436 40031 From charts one and two, the benchmark scenarios show a marked growth through 2006 for arrivals and spend that plateaus through 2007 and 2008. For the Exchange Rate scenario, the average $1.85 to £1 rate shows a slower growth over the same period. For the period 2006 to 2008 the difference in the number of arrivals between the Benchmark and Scenario 2 is 28729 visitors; the difference in the Real Spend is £52.9 million. Chart 1: USA Visitors Real Spend Moffat Forecast. USA Real Spend Moffat Forecast (4-point Average Trend) 40000 45000 50000 55000 60000 65000 70000 20 03 -4 20 04 -1 20 04 -2 20 04 -3 20 04 -4 20 05 -1 20 05 -2 20 05 -3 20 05 -4 20 06 -1 20 06 -2 20 06 -3 20 06 -4 20 07 -1 20 07 -2 20 07 -3 20 07 -4 20 08 -1 20 08 -2 20 08 -3 20 08 -4 Date (Quarter) Real Spend £ (000) Benchmark Exchange Rate Forecast (RBS) 6 of 6 Chart 2: USA Visitor Arrivals Moffat Forecast. USA Arrivals Moffat Forecast (4-point Average Trend) 80000 85000 90000 95000 100000 105000 110000 115000 120000 20 03 -4 20 04 -2 20 04 -4 20 05 -2 20 05 -4 20 06 -2 20 06 -4 20 07 -2 20 07 -4 20 08 -2 20 08 -4 Date (Quarter) Volume Benchmark Exchange Rate Forecast (RBS)