Tourism Analysis in Malaysia
Tourism is identified as a crucial growth engine by developing countries around the world including Malaysia in its effort to transform itself into a high-income country by the year 2020. Malaysia’s tourism industry serves as a vital foreign exchange generator, magnet for investments and a major contributor to the nation’s employment rates. Tourism makes up 5% (RM124.7 billion) of Malaysia’s GDP in 2011 and 13.8% of total employment (World Travel & Tourism Council 2011). According to Dato’ Sri Dr. Ng Yen Yen, the country’s pleasant weather and eco-diversity attract over 25 million tourists a year, earning over RM60 billion in tourist receipts. These figures refer to international inbound tourists, meaning the number of tourists from overseas who travel to Malaysia without exceeding 12 months of stay.
This essay aims to study the international tourism sector in Malaysia by first analyzing the demand trends of Malaysia’s international inbound tourism and thereafter presenting the long-run effects of demand determinants as a justification of tourist arrival patterns. The tourism supply perspective focuses on the two major components, namely the supply of hotels and airlines. Together with complementary data from the supply and demand of international tourism, the affect on prices is surveyed. Lastly, distinct government policies aimed at tackling shortcomings in the development of the industry will be addressed.
In the efforts of broadening Malaysia’s economic base, the government realized the potential of the tourism industry to drive up the country’s economic growth. This lead to an increase in tourism activities development since the late 1980’s such as providing incentives to enhance tourism related private sectors. Due to the assistance, the number of international tourist arrivals to Malaysia presented an upward trend annually.
Year 1990 marks the introduction of the Visit Malaysia Year (VMY) promotion (Mohd Salleh, Othman & Ramachandran 2007). As a result, total tourist arrivals experienced a rise from 4.8 million in 1989 to 7.4 million in 1990, in reference with Table 1 in the appendix. The increase these figures generated a positive incline in international tourism and tourist receipts within a decade from RM618.9 million in 1980 to RM4500 million in 1990. The World Tourism Organization defines the term tourist receipts as the expenditures of international inbound of tourists, taking in account of national carrier payments of international transport and prepayments made for goods and services received in Malaysia. However, due to the short-run affects of Gulf War in 1991 and a decline in tourism efforts to promote Malaysia, both international tourist arrivals and tourism receipts decreased by 21.47% and 4.44% respectively. The industry recovered gradually in 1992 plotting an increase in rate of growth of international tourist arrivals and tourism receipts from 2.9% to 10.7% and 6.9% to a great percentage of 63.81% respectively. Refer to Figure 1, decrease in those figures resumed in 1996 to 1998 mainly attributed to the Asian Financial Crisis in 1997. The outset of SARS also dragged the growth rates down in 2003 (Tourism Malaysia 2004).
As stated by the United Nations World Tourism Organization (UNWTO), the tourist arrivals and receipts registered a steady growth from year 2004 to 2008 before another two factors such as the outburst of the H1N1 pandemic and Global Financial Crisis (GFC) in 2009 interrupted the ascending pattern of tourism receipts, refer to Figure 2. Nonetheless, Singapore helped to recover the plunge by recording as the largest contributor of tourist arrivals and receipts to Malaysia in 2010 with a soaring figure of 13.04 million arrivals that amount to 46.9% of total arrivals in the nation and RM28.4 billion in receipts, refer to Table 2 and 3.
As observed from the tables above, the sudden fluctuations in tourist arrivals and receipts are caused by several distinct negative demand shocks such as economic crisis, diseases and war, that deployed unfavorable impacts on Malaysia’s tourism economy. These demand shocks are unpredictable factors that decrease the aggregate demand of tourist inbounds in the short-run.
There are several visible demand determinants to be discussed that shifts the tourism demand curve to either left or right indicating a decrease and increase in demand respectively.
Firstly, the income factor is measured using to the Gross National Income (GNI) per capita of origin countries. GNI per capita is identified as the best measure of economic development and a positive coefficient coincide with the purchasing power (Kulendran 1996). Normally, as income of origin country increases, total tourist arrivals to Malaysia increases as well. Income is considered to be a major determinant of demand as the tourism industry is income elastic meaning a small change in income per capita or origin countries decreases tourist arrivals by a great sum. A coefficient of 0.16 is derived from the demand equation indicating that 1% increase in income per capita in tourist generating countries leads a 0.16% increase in tourist arrival (Salleh 2007). This shifts the demand curve to the right showing an increment. Tourism in Malaysia not categorize as a luxury good from the data above shows inelastic coefficient. Although Malaysia is a cheap destination, its sensitivity to income change is also imputes to other factor such as competition from other similar tourist destinations.
Prices of substitute goods, in this context are referred to the alternative tourist destinations to Malaysia such as Thailand, Indonesia and Singapore. Prices are calculated based on the Consumer Price Index (CPI) of the country as it describes the cost of living, prices for food, transportation and lodging. A 1% increase in the CPI ratio brings a decline of 5.16% tourist arrivals to Malaysia. Data from The World Bank shows the increment in the CPI ratio of Malaysia from 0.6 in 2009 to 1.7 in 2012. Whereas Singapore’s CPI ratio as 0.6 in year 2009 and skyrocketed to 4.5 in 2012. The more profound increase in figures in Singapore drives more international tourist to Malaysia instead presenting a direct relation between prices of substitute good and demand for original good.
Another significant determinant of demand is the price of complementary goods namely prices of air tickets in this case, as it is one of the most important aspects to consider when choosing a travel destination. There has been a rise of budget airlines in Malaysia the prominent one being Air Asia that has expanded and is operating in Indonesia, priced its tickets 40% to 50% lower compared to other domestic carriers (O’Conell & Williams 2005). The Air Asia Report states the fare for a one-way trip from Jakarta to Johor Bharu cost Rp 100,000 (approximately RM88.88) and a flight from Bandung to Kuala Lumpur at Rp 150,000. The availability of budget airlines instead of just traditional airlines indicates a decrease in the prices of complementary good, which in turn increases the tourist arrivals in Malaysia.
Amidst the bloom of the tourism industry and increasing tourist arrivals in Malaysia, number of hotels also experienced a rapid growth. Referring to Table 4 in the appendix, tourist expenditure on hotels continues to increase within the last decade. The number of hotel supply in 2012 increased from 2707 to 2742 and total hotel rooms also multiplied from 193,340 to 195,441.
Number of budget hotels has soared in recent years totaling to an estimated sum of 10,000 to accommodate backpackers or tourists on a budget. Hotels classified below three stars are recognized as budget hotels according to the Ministry of Tourism. Majority of the budget hotels are priced in the range of RM70 to RM120 per night. In demand desired islands and resorts, budget hotels occupancy consist 70% of foreign tourist. Due to the launch of Legoland and Hello Kitty theme park in Johor, there is a 15% increase of foreign tourist lodging at budget hotels. These factors have undoubtedly caused a right shift on the supply curve.
Collecting factors of supply and demand, market forces alter the prices of hotel rooms. In Malaysia, given that hotels are dominant in terms of tourist lodging and the constant growth in hotel sales, the increment was not at par with the rise in tourist arrivals. There was only a 4% (RM10,311.9) growth in hotel sales in year 2006 (Euromonitor 2007). This caused an oversupply of hotel rooms forcing the prices to decline in order to overcome the surplus. Stiff price competition amongst hotels also suppressed the hotel room rates pushing hotel owners to compete by offering various discounts and promotions. This issue also applies to the mushrooming of budget hotels in Malaysia, as travel accommodations are price elastic due to the alternative substitutes available. In the meantime, there are a minority group of tourists who will settle for different accommodation such as motels, campsites and chalets (Euromonitor 2007).
Knowledge of the economic factors that impact the demand for international tourism to Malaysia is advantageous to policy makers in formulating strategies to enhance the tourism industry. The government focuses on three effective stimulants that are tax exemptions, increase in funding and expand tourism campaigns.
Government imposed a tax incentive to individuals and firms whom are contributing to the tourism industry. Tax exemptions were applied for fair organizers on income earned from managing international trade exhibitions. The exemption is effective on the condition that exhibition organizers bring in a minimum of 500 foreign tourists per event. Income tax exemption for tour operators has been extended for another three years in previous year’s 2013 Budget on the terms of 750 foreign tourists per annum (Astro Awani 2013). This stands as a strategy to motivate labors in the tourism industry to increase their productivity.
In the efforts of broadening tourism campaign, Visit Malaysia Year (VMY) is the most prominent event that has generated an increase in tourist arrivals. Since the declarations of VMY in 1990 and continuous carry out in 1994, 2000 and 2007, tourist arrivals rose to 7,445,908 (1990) as compared to numbers below 5.0 million in the years before. Due to the success of the event in earlier years especially year 2007, VMY 2014 has been launched in 19 January 2013 by the Prime Minister, Dato’ Sri Mohd Najib Tun Abdul Razak. The various phenomenal festivals that come together in this event would help expose tourist to the attracting factors of Malaysia thereafter generating more tourist arrivals in the succeeding year.
Malaysia’s Budget 2014 set up a fund of RM2.0 billion provided to the Special Tourism Fund to promote the tourism industry (The Malay Mail Online 2013). This fund targets on financing infrastructure establishment such as resorts, hotels and theme parks together with replacement of tourism-related equipment. Low interest rates for soft loans ranging from 4% to 6% and a subsidy of 2% are also provided. This allocation is to ensure sufficient supply of 4 and 5 stars hotels namely international-standard accommodation, drawing more high-spending tourists. The government estimates a target of RM65 billion in tourist receipts in 2014.
To conclude, the analysis of demand pattern of tourist arrivals in Malaysia shows an overall positive incline since 1980 to 2012. Several demand shocks that possess a short-run impact on tourist arrivals have been determined to justify the cause of the fluctuations on the demand curve of arrivals. Vital demand determinants such as income, price of complementary and substitute goods are explained to affect the shift of the demand curve, as the tourism industry is price elastic. Increasing competition of hotels and rising tourist arrivals adjusted the prices for accommodation. Government has implemented several policies in the efforts of improving the tourism industry, the largest employment provider in the service industry. These effective actions are in line to produce fruitful results in the upcoming year.