Thursday, October 25, 2012

Thrills and shrieks gone east

Awakened and welcomed by the activity and chatter in the air, I couldn't help but wonder if this was really a typical weekday in Singapore. A sense of excitement and anticipation came over me even before I approached its gates – the only barrier that stood between me and the “other world”. I felt like I time-travelled.  My whimsical experience began the moment I passed over from a hectic sunny island into a veritable giant capsule loaded with ton of thrills and shrills – Universal Studio Singapore (USS). Breath-taking – and that is not an overstatement - is how I would describe my first encounter with the theme park

With the accompaniment of thrill-seeking comrades, we went straight on the world’s tallest dueling coaster. This was certainly not another day at the office. Even in the midst of all the adrenaline, I couldn’t help but be captivated by these masterworks that covered my path - done with such intricacy and soul, every character is played out to life. No small feat indeed considering that this magical world evolved from European fairs and pleasure gardens during the beginning of industrial revolution.

With heightened fanfare that included the dazzling array of stars that descended, the precision of its grand-opening time (8.28 a.m.) and the highly publicized lineup of attractions – USS opened in 2008 and became the only one of its kind in Southeast Asia. Posting a stellar performance of 3.4 million visitors in its first full year of operations with further room to grow, USS is not an isolated example of the industry’s future in this region - a recent report had noted that the area of themed attraction, gaming, entertainment and retail in Singapore and South East Asia is a booming market.

According to AECOM and the Themed Entertainment Association's 2011 Theme Index - Global Attractions Attendance Report, Asia hit an attendance milestone of 105.1 million. At that sheer figure (to North America’s 127 million), Asia’s share of the pie was reported as about a third of the global theme park attendance. It also mentioned that by adding 5-10 more theme parks, Asia will probably catch up to North America and then surpass it. And the nation that is poised to help boost those numbers is none other than China.

China, the world’s second largest economy has seen a huge rise in affluence and disposable incomes, coming from an economy that grew at an annual pace of 8.1% in the first quarter of 2012. The outlook is bright and the country looks set in the theme park race - holding the current record of having 9 out of the top 20 theme parks in Asia with several more to be added in the next few years – the most prominent icon being Shanghai Disney. The numbers gap will definitely narrow when Shanghai Disney finally opens in 2015, but not without first spilling its economic effects on the region. There is no doubt where the focus and capital will be heading to in the next decade or so. Ranking at number 8 on the world with an annual growth of 12.6% in 2011, the country’s largest park operator, OCT Group is expanding its operations with an addition of a tenth park to its brood of assets. Surely, now is the time to hop onto the Chinese entertainment bandwagon, which will probably resemble more a roller-coaster ride - up.

Monday, October 1, 2012

Malaysia's Budget 2013 - an overview

The more cynical of us would come to understand that economic policy is essentially economics mitigated by a large dose of politics. And in a crucial elections year (which have to be called by April 2013, against a resurgent opposition), the Malaysian government has increasingly dipped into the national coffers to offer a ‘people-friendly’ budget – in essence, dealing out cash and subsidies as political sweeteners.

In an expected move, the federal government has run a deficit budget again (for the 15th consecutive year), chalking up a total federal debt of some half a trillion Ringgit, standing at 53.7% of GDP. The expected budget deficit of 4.5% ranks third in Asia, behind only Japan and India – both economies which have seen better days.

Against an increasingly uncertain global economic climate, such a high level of debt naturally raises some concern. Countries have gone bust almost overnight, and key trade partners are experiencing weak growth, if at all. Bearing in mind that Malaysia is an export-dependent trading nation, can the Malaysian government continue to service its debts and deliver on its promises to rein in government spending, or is it just a bust away from fiscal disaster?

Perhaps it would be fairer to consider what the government spends its expansionary budgets on. Significantly, four-fifths of this year’s budget is allocated towards operational expenditure, while only RM49.7 billion is channeled towards developmental expenditure. In essence, while the government spends a huge budget, it is not spending so much for the future, as much as meeting present commitments. The multiplier effects and capacity-building is thus small despite a large expansionary budget being tabled.

Besides the continuous spending on expansionary budgets (the government has run deficits for the past 15 years, since the 1997 Asian Financial Crisis), the government’s revenue stream is also some cause for concern – around 45% of this comes from Petronas, the national oil and gas giant. Oil and gas prices are still high, but will it remain so, given that the world economy will probably remain weak for the foreseeable future?

There is an insidious addiction and overreliance to petroleum revenues, which has been likened by critics to leaning more and more heavily on a crutch that is getting shorter and shorter – oil and gas reserves, after all, are finite. 

Besides the addiction to petroleum revenues, Malaysia is also addicted to subsidies – these, covering everything from fuel to sugar, make up a significant portion of the huge operational expenditures. Quite simply, there has been no political will to reduce the subsidy bill, as well as broaden the government’s revenue base by implementing an unpopular but deeply needed Goods and Services Tax. Similarly, efforts to restructure and reform the economy to promote greater competitiveness and efficiency, as well as to plug leakages from corruption, have been half-hearted and lacklustre.

There is an increasingly pressing need for the government to be decisive in implementing deep cuts and structural reforms, that while painful now, will save the country from traumatic pain further on especially as dark clouds drift over the economic horizon. These are essentially politically unpalatable but economically necessary measures that hopefully will be carried out by the  government after the elections.

There indeed have been murmurs of a possible credit downgrade by Fitch and Standard & Poor if the government does not exercise fiscal discipline and stop trading economic prudence for short-term political expediency. As of now, chilling comparisons have been made between Malaysia and its more debt-laden A- peers, notably Italy.

Among the weak Southern European economies, Malaysia’s problems also bear a resemblance to Greece’s, with a bloated and relatively inefficient public sector, and its corresponding wages and pensions to be paid out. Spain’s propensity for mega-projects that become white elephants is also shared by Malaysia’s ruling classes. 

Having run a decade and a half of deficits budgets, the government clearly has not saved while the going is good, even as oil prices soared to new heights during that period. This lack of fiscal discipline could come back to haunt the government in these uncertain days. 

As conventional investing wisdom goes, when everybody is greedy, be fearful; when everybody is fearful, be greedy. The Malaysian economy, which can only be described as ‘gravity-defying’, as the Financial Times have, is not a cause for jubilation but rather concern. The relatively weak fundamentals in a state-dominated economy, dulled competitiveness and uncertain global economic outlook are not reflected in the present 5.2% growth rates, leading to the unpalatable question that has to be asked – is this a Potemkin economy, propped up by state spending, and is this sustainable?

As of now, there is still confidence that the Malaysian economy will continue to grow and the debt, which is held mostly domestically, will be serviced. However, in an increasingly volatile global economic climate with huge financial flows, where even advanced economies are just one crisis away from disaster, perhaps it is wiser to err on the side of caution.