Modelling International Tourism and Country Risk Spillovers for Cyprus and Malta

Small Island Tourism Economies (SITEs) are developing sovereign countries that rely on tourism as a source of exports, and need a consistent inflow of foreign investment in order to facilitate economic growth. Access to international capital markets helps SITEs smooth out their consumption over time, while absorbing adverse domestic production shocks. However, SITEs are perceived to suffer from frequent natural disasters, are susceptible to adverse macroeconomic shocks, and are considered to have high risk. The main impediments to lend to SITEs are considered to be the costs of obtaining information and country risk. This paper provides a comparison of tourism growth, country risk returns and their associated volatilities (or uncertainty) for 2 SITEs, namely Cyprus and Malta. Monthly data are available for both international tourist arrivals and composite country risk ratings compiled by the International Country Risk Guide (ICRG) for the period May 1986 to May 2002. The time-varying conditional variances of tourism growth and country risk returns for the 2 SITEs are analysed using multivariate models of conditional volatility. These models are able to capture the dynamics in the conditional variance, and hence risk, as well as the existence of risk spillovers between tourism growth and country risk returns for Cyprus and Malta. Such issues based on models of uncertainty have not been considered previously in the tourism growth and country risk literature. Acknowledgements: The authors acknowledge the financial support of the Australian Research Council.