IMF Executive Board Concludes 2016 Article IV Consultation with People’s Republic of China—Macao Special Administrative Region
IMF News, February 14, 2017
Source details
- Canonical URL
- IMF Executive Board Concludes 2016 Article IV Consultation with People’s Republic of China—Macao Special Administrative Region
Other formats
Bibliographic details
- Published: February 14, 2017
Recent growth dynamics and shock
- Over the 15 years after the return to Chinese sovereignty in 1999, Macao SAR averaged real GDP growth of 10.6 percent.
- The boom was driven largely by the de jure monopoly on gaming within China and rising Mainland consumer spending; gaming exports fell by a cumulative 50 percent beginning in 2014.
- The contraction was concentrated in high-end (“VIP”) casino business amid a sustained anti-corruption campaign on the Mainland.
- The sharp fall in exports led output to fall by one-third in cumulative terms, but spillovers were limited:
- Unemployment has remained below 2 percent.
- Median real wages stabilized and remained up 7 percent over end-2014 levels.
- Nonperforming loans in the financial sector continue to hover around zero.
- Tourist numbers were basically stable even as average spending per tourist fell, keeping capacity utilization relatively high and converting the contraction into lower extraordinary profits rather than large employment losses.
Fiscal position, reserves, and external accounts
- Macao SAR entered the transition with substantial buffers:
- Fiscal reserves equal to 95 percent of GDP.
- Zero gross public debt.
- Foreign exchange reserves roughly US$ 19 billion or around 100 percent of pataca M2.
- After 15 years of double-digit current account surpluses, foreign assets are substantial and support the credibility of the currency board.
- Selected indicators (annual percent change or levels as shown):
- Real GDP: 25.3 (2010); 21.7 (2011); 9.2 (2012); 11.2 (2013); -1.2 (2014); -21.5 (2015); -4.0 (2016); 2.8 (2017, proj.).
- Total domestic demand: -0.4 (2010); 13.9 (2011); 10.3 (2012); 6.5 (2013); 16.7 (2014); -6.4 (2015); -2.4 (2016).
- Net exports (contribution to growth): 25.5 (2010); 15.4 (2011); 4.9 (2012); 8.5 (2013); -7.9 (2014); -22.9 (2015); -0.1 (2016); 4.2 (2017, proj.).
- Fiscal reserve fund (percent of GDP): 29.2 (2010); 41.0 (2011); 55.7 (2012); 95.2 (2013); 124.6 (2014); 128.8 (2015).
- Foreign exchange reserves (in billions of US dollars): 23.7 (2010); 34.0 (2011); 16.6 (2012); 16.4 (2013); 18.9 (2014).
- Current account (percent of GDP): 39.4 (2010); 39.3 (2011); 40.2 (2012); 34.2 (2013); 25.4 (2014); 27.1 (2015); 29.5 (2016).
- Nominal GDP (in millions of US dollars): 28,123.7 (2010); 36,708.0 (2011); 43,031.8 (2012); 51,552.4 (2013); 55,347.8 (2014); 45,415.0 (2015); 44,071.0 (2016); 45,689.1 (2017, proj.).
- Per capita GDP (in thousands of US dollars): 50.9 (2010); 65.9 (2011); 73.9 (2012); 84.9 (2013); 87.0 (2014); 70.2 (2015); 67.0 (2016); 68.3 (2017, proj.).
Outlook and projections
- Real output was expected to contract for a third consecutive year in 2016.
- External demand began to recover with gaming revenues posting six consecutive months of positive annual growth.
- In 2017, a low base was expected to help increase growth above 2 percent despite continued weak domestic demand.
- Over the medium term, Macao SAR is projected to be well-positioned to record sustainable growth in the mid-single digits due to:
- Continued value of the gaming monopoly within China.
- Established tourist destination status and geographic/cultural proximity to Mainland China.
- Aggressive investment in non-gaming tourism and financial services.
Executive Board assessment and policy recommendations
- Diversification strategy
- The external shock highlights the urgency of transitioning to a more diversified economic model.
- Authorities’ strategy to diversify to mass‑market gaming, non-gaming tourism, and financial services is important.
- Fiscal policy
- No need for further discretionary fiscal loosening in the near term given the closing output gap.
- Authorities appropriately loosened fiscal policy during the downturn; further substantial discretionary loosening should be avoided to prevent over-stimulation.
- Authorities should establish a medium-term framework to anchor fiscal policy and ensure long-run solvency, including long-run projections to account for future pension obligations.
- With abundant fiscal reserves from taxing gaming economic rents, there is a substantial opportunity to invest in human capital and close infrastructure gaps.
- Housing and macroprudential policy
- No clear need to loosen macroprudential regulations for the housing market now.
- Macroprudential regulations specific to housing should be relaxed only if there is a risk of a spiral of falling house prices, falling mortgage credit, and increased defaults.
- Current information (healthy bank balance sheets and recovering prices) suggests that threshold has not been met.
- To increase housing accessibility, priority should be increasing supply of market-priced units and providing targeted transfers to the most vulnerable.
- Financial sector oversight
- Financial sector soundness indicators (asset quality, earnings, liquidity) remain robust despite the fall in output.
- The size of the financial sector and the supervisory challenge of monitoring liquidity and quality of foreign assets warrant ongoing attention.
- Much of the foreign asset exposure is concentrated in branches to related parties, suggesting contained risks.
- Exchange rate and competitiveness
- The currency board regime continues to serve Macao SAR well; price flexibility is an increasingly important supporting factor.
- Past depreciation against the RMB (indirectly due to the peg to the U.S. dollar) and the rising share of tourists from China (now accounting for two-thirds) mean external competitiveness may become more of an issue.
- Downward price flexibility, as displayed by the hotel sector, will likely be increasingly important.
Financial sector and other vulnerabilities
- The nature of the correction (disproportionately on gaming operator profits) and prudent regulation helped keep bank nonperforming loans low.
- Supervisory focus should remain on liquidity and the quality of foreign assets in a large financial sector.
- Macroprudential stance on housing remains appropriate given current indicators.
Press Release No. 17/48. February 14, 2017. IMF Communications Department.