Importance of Tourism in a Recession

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The Importance of Tourism for the Malaysian Economy in a Recession

Given the relatively small size of our economy, Malaysia is a country heavily reliant on exports as a source of income. Manufacturing, our biggest foreign exchange earner, currently accounts for the bulk (70%) of total exports led by electronic parts and components, followed by commodities such as oil and gas as well as palm oil.

As long as this over-dependency remains, Malaysia will always be exposed to the risks of the cyclical nature of global ICT product demand and the speculative prices of raw materials. Based on the growth experience of industrialized economies, manufacturing has also already reached its optimum share of 30% contribution to the Malaysian GDP.

In other words, traditional means of exports will continue to decline and diversification of our export earnings is imperative for us to compensate for the resulting gaps.

Dato Seri Najib Razak’s recent announcement of further liberalization to the services sector couldn’t have been more well-timed. Through this, we can expect to speed up our reduction of on imported services while boosting our exports (in various other categories) to register a healthier overall bank balance.

We’ve only just started seeing trade surplus for services since 2007. This would not have been possible without tourism, which contributes to almost 50% of the services sector and Malaysia’s 2nd largest foreign exchange earner.

Besides having an incredible multiplier effect in terms of income and employment distribution due to far-reaching linkages to other sectors (construction, finance, insurance, manufacturing etc.) – tourism, unlike other goods or services, has no exact substitutes; meaning demand for holidays is more likely to grow rather than be traded with something else.

Neither is it subjected to price fluctuations affected by speculative factors like commodities for example. If the index of average international tourist expenditure equals the price of the international product, prices received enjoy greater stability versus raw materials. In fact, prices have tended to increase in a stable manner due to among other things, demand for holidays and the rigidity of destination supply in the short and medium term.

Tourism also has the capacity to recover foreign-currency investment in a shorter time – a strong motivation for FDI inflows to the country. The UNWTO estimates that a medium-class beach hotel in a developing country will earn back in 1 year the entire foreign exchange required to build and equip it.

In this bleak climate however, decline in international arrivals is naturally expected. Unless enough measures are put in place to safeguard the industry – the impact would overwhelming on not just travel per se, but on a massive chunk of businesses that rely on tourism as a demand stimulus.

There are several key things we need to do.

Firstly, we need to be extremely targeted in terms of our source markets.

This recession is quickly speeding up the shift of economic power to emerging economies – the result of the contrast between the excess of savings in Asia and the debt burden of Europe and North America. While it is a global downturn, China, India, and MENA region are still expected to post positive growth – which is a far cry from the -3% growth forecasted for developed countries. Besides ASEAN, contribution of international arrivals from these countries will make up a substantial share of our prospects.

What this also means, is that our ASEAN counterparts would be vying for the same piece of the pie.

Even more difficult is the fact ASEAN destinations share their own equivalent of what Malaysia offers as a travel destination – common key interests like cultural experiences, beaches and spas, historical monuments, shopping, local cuisine, sports etc. As witnessed from most communication efforts both regionally and globally, countries have more often than...
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