Modelling International Tourism Demand and Uncertainty in the Maldives and Seychelles: A Portfolio Approach

The sovereign archipelagos of the Maldives and Seychelles in the Indian Ocean are small island tourism economies (SITEs), both of which have small populations and are geographically isolated from the rest of the world. These two SITEs vary profoundly in their territorial size, total land area, prospects for self-reliance in economic development, and an overwhelming reliance on tourism as a source of exports. As a result of time-varying effects such as oil shocks, natural disasters, ethnic conflicts, crime, and the threat of global terrorism, among others, there have been dramatic changes in the arrivals of international tourists to these two countries. An examination of these variations in international tourism demand, particularly the conditional volatility (or uncertainty) in international tourist arrivals to the Maldives and Seychelles, is essential for policy analysis and tourism marketing purposes. This paper models the conditional mean and the conditional variance of the weekly international tourist arrivals to the Maldives and Seychelles from 1994(1) to 2003(12) from the 5 main European tourist source countries. Univariate models of uncertainty will be estimated and tested. An assessment and interpretation of the estimates will be made so that policy makers and tour operators would be able to reach optimal decisions on the basis of this portfolio approach to international tourism demand. The paper also makes an assessment of the country spillover effects between the Maldives and Seychelles. There are four sets of effects that need to be considered: (i) the own country effects for the Maldives and Seychelles; (ii) the country spillover effects from the remaining four countries within each of the Maldives and Seychelles; (iii) the own country spillover effects between the Maldives and Seychelles; and (iv) the cross-country spillover effects between the Maldives and Seychelles. The empirical results for both the Maldives and Seychelles will be discussed in terms of each of these components.