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Saturday, 6 November 2010

On global gaming, Aussie dollar and SGX-ASX merger

Rising Australian dollar and national interest


JUST returned from Brisbane, Australia where I was a keynote speaker at the 2010 World Lottery Association Convention.

It’s a grand affair, attracting 800 participants, mostly involved in the lottery business around the world.

It also coincided with the Melbourne Cup. Enjoying this special event by having a bet, experiencing the party atmosphere and watching the big race, has become part of Australian folklore. Mark Twain said of the Melbourne Cup in 1895: “Nowhere in the world have I encountered a festival of people that has such a magnificent appeal to the whole nation. The Cup astonished me!”

In 2010, the global gaming market attracted revenues of between US$350bil and US$400bil, with casinos, lotteries and gaming machines accounting for close to 85%. The online component is beginning to edge up to 10%. Here, the push is led by the Organisation for Economic Cooperation and Development (OECD) group, representing three-quarters of this business. The world-wide lottery business is worth about US$200bil-US$240bil, growing at below 5% a year lately. Growth is, however, uneven – 20% in Latin America & Africa; 10% in Asia (23% in China, where revenues in the first eight months of 2010 amounted to US$16bil); flat in Europe and the United States.

In addition, global casino and other regulated gaming had revenues in the region of US$150bil in 2010, with 45% in the United States, 30% in Asia-Pacific and 20% in Europe, Middle East and Africa (EMEA). But growth is fastest in Asia-Pacific, up about 20% per year in 2008-2012; while US growth is expected at 4% and EMEA, 5%. Casino gaming accounted for 90%. In Asia-Pacific, business in China (Macau) is growing the fastest, rising by 59% in the first 10 months of 2010 from a year earlier, with revenues passing US$21bil for the entire year, while Asean-5 expanded just as fast with revenues of US$7bil. Australia and South Korea have revenues of US$2bil-US$3bil each – growing much slower annually.

Conventional wisdom that the gaming industry is recession proof is a myth. During the recent great recession, the Bank of America Merrill Lynch HY Gaming Index declined 56% from early 2008 to its trough in March 2009. However, since then the index has risen 136%.

The ride has been anything but smooth. Despite growing risks, Asia will lead economic growth this year and the next. The World Bank has upgraded China’s 2010 GDP growth to 10%. Meanwhile, the OECD cut growth estimates for its 33 members to 2-2½% in 2011, downgrading the United States to 1.75-2.25%.

Growth in Asian disposable income will continue to expand; so will growth in Asian household consumption of goods and services. Since the beginning of this decade, Asia’s gaming revenues have been the fastest growing – especially in Macau and Singapore. Latest record never ceases to amaze.

Back in 2007, most analysts figured the Macau market to be worth US$13bil in 2010. Today, based on recent results, it’s worth US$21bil. I am told that in the United States, every available table and slot machine serves 250 people. In South-East Asia and India, the number is as many as 45,000-50,000. So, Asian gamers are underserved.

It is estimated that Asians spend almost twice as much on gaming as Americans do. Singapore has gone from zero to near US$5b just this year alone. By 2012, Morgan Stanley estimates that Singapore could generate revenues of US$7-US$10bil. Macau took about the same time to hit US$6bil.

Undoubtedly, Asia provides the best prospects in gaming and betting. It will utilise advances in technology to enhance its innovative and creative potential to lead in contemporary interactive gaming entertainment, in a socially responsible way. For this vibrant, exciting and colourful industry, a bright future lies ahead.

The Aussie dollar

The Aussie dollar hit a 28-year high on the back of an unexpected interest rate hike on Melbourne Cup day. It has been hovering just below parity with the US dollar for some time. The growing strength of the Aussie dollar benefited from the Fed’s continuing efforts to drive US interest rates down (it’s already near zero). But its core strength is centred on a China-driven mining boom that has boosted its exports of iron-ore, coal and other minerals. Australia’s terms of trade – its export prices relative to its import prices, have doubled in the past decade to record highs. So much so its persistent current account deficit was all but eliminated last quarter. Above all, inflation is held well in check. The Reserve Bank had kept the benchmark interest rate unchanged since May and economists had predicted that the rate would stand pat again – indeed, swap traders betted there to be only a 23% chance of a rate increase, against a 60% chance before the 3Q’10 inflation rate turned weaker, thereby giving policy makers breathing space.

Over the past decade, the central bank has raised interest rates on Melbourne Cup day four times. True to form, it raised interest rates by 25 basis points to 4.75% on Nov 2 in the face of expectations that the US Fed will add massively once more to global money supply (on Nov 3 it unveiled plans to purchase US$600bil of US government debt over the next eight months). The Aussie dollar promptly reached past parity against the greenback, recording a high of US$1.0025. Since deregulation in 1983, the Aussie dollar has never been higher. Many see it as a proxy for Asia, and its worries about inflation reflect Asian central banks’ concern as well. Regional currencies also rallied – the Indian rupee, Thai baht and the Malaysian ringgit all gained against the US dollar. The euro traded above US$1.40, up 1.1%.

The rate hike shifted the Reserve Bank’s focus to fight inflation with a pre-emptive strike, even though the rise in consumer prices in 3Q’10 was well within its comfort zone. But like it or not, inflation is an obvious outcome of Australia’s strong economic growth. In Asia, growing domestic demand and rising food & commodity prices can be expected to push inflation higher. Most forecasts place Asia’s inflation in 2011 at 4%-5%, up from 3.3% previously. India’s case is more urgent – where inflation is running at above 10%, and too obvious to ignore. Tuesday’s rate increase is India’s sixth in just over seven months. It looks like its tightening cycle is not yet over.

SGX-ASX Merger

On the controversial Singapore Exchange Ltd (SGX)-ASX Ltd merger, for most Australians, this issue is divisive as it touches lots of raw nerves. The central question – Is it in Australia’s interest to proceed with the merger? Actually it’s a takeover since the SGX will pay A$8.4bil (US$8.3bil) to ASX for it. According to the CEO of ASX, “the combined exchange will be both more regionally relevant and globally relevant than the sum of its parts.” So, we can’t see how this is contrary to the national interest.

The takeover requires the approval of both governments and regulators. For the deal to go through, the Australian parliament needs to lift the ASX’s 15% single shareholder cap following a screening process by Australia’s Foreign Investment Review Board. The deal is expected to cut costs and better place the merged exchange to fight growing competition. The takeover creates a US$1.9 trillion market to become the world’s fifth largest exchange, rivalling Japan and Hong Kong. Politicians have voiced concern over the takeover. The leader of Green Party (a member of the sitting Gillard government) is a vocal critic. Temasek Holdings, a 23.45% shareholder of SGX, has since stated publicly that this Singapore-controlled wealth fund was not involved in the governance, operations or investment decisions of SGX. Frankly, Australians are not convinced.

Australia used to have a stock exchange in every state. In 1987, these markets were consolidated into the Australian Stock Exchange in Sydney. The Victoria government made what many still consider a “crucial” error in closing the Melbourne Stock Exchange. According to Prof Sam Wylie of the Melbourne Business School, the experience of Australian stock markets is best understood as a global process involving three discrete steps – consolidation, demutualisation and mergers across national boundaries. Australia has taken the first two steps; the United States, all three, where trading is now concentrated in New York city in the NYSE and Nasdaq. Inevitably, ASX will merge with a global exchange; if not SGX, then some other exchange.

It would appear that the global process of consolidation is inevitable. Whichever group the ASX joins, it has to be run commercially, regulated to meet Australian standards and free from government influence in its effective management.

The main objections to the proposed deal are that it’s not in line with national interest as it encourages shifting the processing, technology, analytical capacity, fund management and investment bankers to Singapore, and more importantly, passing management of ASX to the Singapore government; Australia is forsaking its ambitions to become an Asian financial hub; Australia does not allow major banks to be controlled from offshore, so why tolerate this for its stock exchange?; ASX is efficient, ahead in Asia in derivatives and in innovative products (initiated the REITs market in Asia-Pacific); and that the benefits (technology sharing, co-listing of stocks and access to new pools of capital) can be enjoyed without an ownership change.

Supporters of the deal cut at the very heart of Australian capitalism. They say it’s an arms-length business deal and as long as the boards of both stock exchanges deem it to be in their best interest and vital domestic interests are protected, why not?; on pricing, a 40% premium above market price of ASX is fair enough; national interests are ultimately protected by the Corporations Act of Australia; “the attractiveness of a combined pool of listings and a combined pool of liquidity would make this combination unique”; and for ASX, merger is inevitable and SGX is a good enough suitor.

The Australian government and regulators have the final say. This simply means politics as usual, involving interaction of vested interests and self-interest. The real issue behind the fuss – as I see it – is slippage in the separation of business from politics. The final outcome? Discarding all the “noise”, anger and resentment and no doubt, assurances to protect the national interest, the key issue focuses on national identity and how closely attached Australians are to its liberal free-market system which politicians so proudly and often identify with the national good. Only Australians can tell.

● Former banker, Dr Lin is a Harvard educated economist and a British Chartered Scientist who now spends time writing, teaching & promoting the public interest.