Thursday, May 20, 2010

The Wisdom of the Markets

"Because crises can be self-fulfilling, sound economic policy is not sufficient to market confidence - one must cater to the perceptions, the prejudices, the whims of the market. Or rather, one must cater to what one hopes will be the perceptions of the market. And that is how the Keynesian compact [my words: the logical and proven understanding that recessions are managed by decreasing interest rates or increasing budget deficits - less taxes more spending] got broken: international economic policy ended up having very little to do with economics. It became an exercise in amateur psychology, in which the IMF, and the Treasury Department tried to persuade countries to do things they hoped would be perceived by the market as favorable."

The quote is from Paul Krugman's "The Return of Depression Economics", which outlines the lessons that should have been learned from countless previous crises, mainly, in Latin America and Asia and that should have been applied to the now largely gone subprime mortgage crisis and the increasingly looming threat of the fiscal crises in debt-burdened economies around the Western world.

While the economic soundness of the decisions that the Euro zone is making as a response to Greece's dire financial state can and should be debated by those with more knowledge of the field of economics than myself, the fact remains that there is a very real sense that the value of any decision taken is measured by the market's reactions rather than by its potential to remedy the situation at hand. People may point out that the market's reactions should depend on whether a particular course of action is beneficial or not. Yes, the reaction should depend on the validity of a decision; however, it does not because of differing time horizons and incentives.

The role of policy makers is to ensure that the long-term prospects of the country are favorable while investors are motivated by the same thing that most other business people are motivated by - short-term profits. Why have we entrusted so-called investors with deciding what a good company and a good country look like? Surely, a good company is defined as a well run organization with a clear and sustainable strategy, not necessarily one with high stock valuation - more often than not a reflection of a company's balance sheet than of its strategy. Likewise, a good country is surely defined as one in which its citizens live in peace and harmony, have access to basic necessities and have the possibility to make an honest living, not necessarily one which can convince the markets that it will not default on its debt obligations.

Regardless of whether the current market-led system is ideal or not, the fact remains that it is what we have to contend with nowadays and largely because of its self-fulfilling ways, we are now looking at a fiscal budget crisis as we begin to emerge from the worst recession in a life-time.

Tuesday, May 11, 2010

Singapore's Gamble

Over the last month, Singapore has gone from having no casinos to being home to two of the most expensive casinos ever built - Resorts World Sentosa and Marina Bay Sands. While both casinos have anecdotally been successes since they opened, attracting thousands of visitors, it will be months, if not years, before it can be determined whether they have indeed been successful. Of course, the casinos are not only gambles for their owners but also for the Singapore government that has bet that they will go a long way to increasing Singapore's reputation as a tourism destination.

It has widely been documented that Las Vegas Sands, the owners of the Marina Bay Sands expect to recover their investment in about 5 years, in spite of having gone more than $2 USD billion over budget. Las Vegas Sands' expectations, coupled with Asia's seemingly insatiable appetite for gambling (in terms of revenue, Macau has overtaken Las Vegas as the world's premier gambling destination and industry analysts state that there is room for the equivalent of 5 Las Vegas' in Asia) surely means that both casinos should stand every chance of proving to be financial successes.

While the casinos will surely help to increase Singapore's tourist numbers, what is less clear is how Singaporean society at large will cope the with the presence of the two massive Casinos. Singapore's traditionally conservative society and government has long made its anti-gambling posture clear. In an effort to consolidate its traditional posture with its recent pro-gambling actions, the Singapore government has established a few precautionary social policies: a $100 SGD entrance fee for locals, a ban on bankrupts gambling and the establishment of a free telephone line for families to call to get their relatives (that may presumably be addicted to gambling) banned from the casinos' premises. It is obvious that the government is treading a fine line and what the future holds in terms of how the citizenry will react to world-class gambling facilities on its doorstep is far from certain. Furthermore, the demand for thousands of low-skilled workers to man the casino floors and clean guest rooms will surely translate into the arrival of thousands of foreign workers in a country in which immigration is a touchy issue.

With the social impact of the presence of the casinos in mind, it seems like their eventual success rests squarely on the government's ability to grapple with these issues and ensuring that social costs do not undermine the benefits of the surge of tourism that is expected.

Monday, May 3, 2010

The World Cup for Everybody

After months of long and drawn-out negotiations with FIFA, it seems that Singapore's two telcos have finally secured the rights to broadcast all of the 2010 football World Cup matches. Although the final terms are unclear - it is not yet actually certain that a deal has indeed even been reached - everyone can rest assured that it will have cost Starhub and Singtel far more than the SGD 15 million that they paid for the 2006 World Cup as FIFA were reportedly initially asking for upwards of SGD 40 million. While the fact that seemingly all 64 World Cup matches will be shown in Singapore is undoubtedly good news for football fans here, who else stands to profit?

By all accounts, it seem that the two telcos will not make money directly from the event. Early reports suggest that the fact that the negotiations took so long and that the final decision was made so close to the opening match means that traditional big sponsors will not be advertising on TV but will rather look at alternative mediums, like online advertising campaigns. The imminent pull-out of large traditional sponsors, coupled with the small domestic market clearly signals that neither Starhub nor Singtel stand to re-coup the large sum dished out for the broadcast rights. However, while direct revenues from the event may not justify the telcos' decision, it is thanks to that decision that they have managed to avoid losing a lot of goodwill which may have costed them dearly in the future.

Beyond the two telcos, there are several other sectors of the Singapore economy that stand to be affected by the decision to purchase the rights for what is largely regarded as the largest sporting event in the world. Bars, restaurants, sports retailers, private football pitches for hire and many other industries were surely hoping that the Starhub, Singtel and FIFA would come to an agreement sooner rather than later. Had Starhub and Singtel failed to secure the rights to the World Cup, the above-mentioned businesses would have been severely affected by failing to reach the increased revenues that they will have budgeted for the World Cup period.

The case of football-mad Singapore's telcos almost failing to secure the rights to such an important event serves a wonderful example that helps to prove the point about the importance of long-term strategic decision making as well as about the inter-connectedness of the economy.