It's not unusual for people to find unexplored interiors frightening. The classic example is the role of "the forest" in Grimm's fairytales, which dates to the time before the internal colonisation of the inland areas - previously, most inhabitation was of the coast and the waterways.
And in this case, there are not major waterways, because it's an island. A big island, but not with a lot of room for rivers (it's also got a hilly ridge through the middle). And they're a traditionally waterborne people, so their fear of the interior is increased. They've never had to colonise it, other than the odd mining town, logging camp and border fort. At first, they had enough arable land on the coasts - and more recently, they've got crops that are so high-density that they can support high populations without masive amounts of land. It's also economic: when the money comes from a) fishing, b) trade from overseas via ports, and c) trade in general, which occurs in cities, which are on the coast for reasons a) and b)... they don't want to be inland in the hills and forests. There's nothing to gain. They don't even like being in the countryside anymore - they're a very urban population for their time-period.
Regarding foreigners: they're xenophobic, yes, but it's not so much hatred as mistrust. Their society is structured around 'concord' - the agreements by which law and custom can operate; they know that foreigners do not abide by their concord, so they fear them. How can they trust them? They can try to impose laws on them, but they know that the imposition of laws cannot enforce legality: only having concord in the heart can ensure that people do not become criminals. Given that even natives can become criminal, what hope do foreigners have?
They also have a split attitude toward outsiders: they historically, and recently, have been underdogs bullied and sometimes invaded by foreigners, so they fear them. At the same time, not that long ago they had a great empire of their own which was gained with remarkable ease. Together, these create a picture of the foreigner as somebody who is servile and controllable when subject to force, but is bestial and malignant when free.
But the river tripped on her by and by, lapping
as though her heart was brook: Why, why, why! Weh, O weh
I'se so silly to be flowing but I no canna stay!