A team from the International Monetary Fund (IMF), led by Geoff Gottlieb, visited Macao Special Administrative Region (SAR) from November 3 to 14 to
conduct discussions on the Article IV review of the Macao SAR economy. The mission held highly constructive and candid discussions with senior officials
from the SAR government, the Monetary Authority of Macao (AMCM), private sector representatives, and academics to exchange views on recent developments,
economic prospects, reform progress, and policy responses.
At the end of the visit, Mr. Gottlieb made the following remarks:
“The Macao SAR economy has started an important transition. Developments in mainland China have triggered a large and likely permanent reduction in
external demand from high-net worth visitors. In response, the authorities have embraced the opportunity to move toward an economic model with less
volatile and more sustainable sources of income. Fortunately, policy choices taken during the boom have allowed Macao SAR to enter this transition from a
position of strength: large fiscal buffers, a liquid and well-capitalized banking sector, and a credible nominal anchor in the exchange rate peg. Going
forward, the challenge will be to deploy these strengths in a way that maximizes support for both steady, inclusive long-term growth.
“The medium-term outlook for Macao SAR remains strong. Though the economy will contract for a third consecutive year in 2016, external demand has begun to
recover with three consecutive months of positive gaming revenue growth. Moreover, there are signs that this is manifesting itself in better consumer
sentiment: There has been an incipient recovery in housing prices and transactions in recent months. Going forward, Macao is well-positioned to have stable
and sustainable growth in the low- to mid-single digits. In addition to its still highly valuable gaming monopoly within China, it is a known tourist brand
with significant geographic proximity to – and cultural affinity with – the largest and fastest growing middle class in the world in mainland China.
“With respect to growth, the authorities’ five-year plan correctly identifies the importance of diversifying from VIP to mass-market gaming, from gaming to
non-gaming tourism, and from tourism to financial services exports. With respect to tourism, the single biggest priority is ensuring that public sector
infrastructure investment is adequate in both quality and quantity to accommodate further increases in external demand: the move from VIP to mass market
tourists inevitably requires additional capacity to achieve the same amount of growth. On financial services, more granular work is needed to establish the
extent of Macao SAR’s existing competitive advantage and the needed policy changes to succeed, particularly with respect to off-shore activities like
leasing and wealth management. Attracting the necessary non-resident investors and professionals may require considerable cuts in tax rates and substantial
increases in supervision. To increase the likelihood that such costs are merited, the authorities should seek to maximize spillover benefits to local
employment with well-targeted government training programs and educational investment.
“The peg to the Hong Kong dollar continues to serve Macao SAR well, providing a credible nominal anchor. Its success is in large part due to steady
application of the necessary supportive policies by the authorities including adequate foreign exchange coverage, a stable banking sector, appropriately
tight fiscal policy, and flexible markets. In this regard, the gaming operators’ ability to cut non-gaming prices, as seen recently in the hotel sector,
illustrates an important flexibility for maintaining competitiveness.
“Under a currency peg, fiscal policy always has a particularly important role to play. In Macao SAR, given the extent of fiscal reserves, there is adequate
policy space to accommodate future shocks rather than offsetting any temporary reductions in revenue by pro-cyclical tightening. Nonetheless, discretionary
loosening such as that seen in recent years can be politically difficult to reverse, resulting in permanent commitments. To ensure that such loosening
remains consistent with long-run fiscal sustainability, Macao SAR should develop a medium-term fiscal framework that explicitly takes into account
developments such as the expected move away from the tax-rich gaming sector and the projected material rise in pension spending due to aging.
“Despite the sharp fall in housing prices witnessed since early 2014, the financial sector remains well-protected, due in part to regulations put in place
by the authorities. In particular, the average loan to value and debt service to income ratios remain low, enabling non-performing loans to remain near
zero. The price correction has also substantially improved affordability when measured against after tax income. To the extent that further improvements in
affordability are desired, the focus should be facilitating additional supply at market (rather than subsidized) prices. The authorities could also explore
the scope for tighter loan-to-value ratios on second home purchases if speculative demand is a concern."
We thank the authorities for their warm welcome and the productive discussions we have had during the visit.
