Press Release No. 24/192

IMF Executive Board Concludes 2024 Article IV Consultation Discussions with People’s Republic of China—Macao Special Administrative Region

May 30, 2024

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation discussions[1] with the People’s Republic of China—Macao Special Administrative Region (SAR) and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis.

Macao SAR’s economy rebounded strongly after the relaxation of COVID-19 containment measures in Mainland China. Real GDP increased by 80.5 percent in 2023, recovering much of the decline during the pandemic. A surge in services exports was the main driver, while private consumption and public investments also grew strongly. Public consumption declined due to the withdrawal of pandemic support measures. However, the growth momentum softened somewhat towards the end-2023, probably reflecting weaker private consumption in the Mainland. Declining rental prices helped keep inflation low around 1 percent during 2023. The current account balance is estimated to have improved significantly in 2023 thanks to the sharp rebound in services exports.

Looking forward, strong growth is expected to continue in the near term. GDP is projected to grow by 13.9 percent in 2024, driven by further recovery in the gaming sector and pickup in private investment, partly due to commitments from gaming concessionaires to invest in non-gaming sectors. Headline inflation is projected to accelerate only gradually and stabilize around 2.5 percent over the medium-term. With the expected return of tourists to Macao SAR, the current account balance is set to reach to pre-pandemic levels in the medium-term. A stronger contraction in the Mainland property sector and higher-for-longer interest rates in the major economies are the main short-term risks to the outlook. Declining medium-term growth in Mainland China and an increase in the expected frequency of extreme climate events could weigh on Macao SAR’s medium-term growth, while a faster-than-expected pace of integration with the Greater Bay Area and successful diversification policy efforts could boost growth.

Executive Board Assessment[2]

In concluding the 2024 Article IV consultation discussions with the People’s Republic of China–Macao Special Administrative Region (SAR), Executive Directors endorsed the staff’s appraisal, as follows:

The strong post-pandemic economic rebound was uneven. A surge in services exports after Mainland China lifted COVID-19 containment measures propelled GDP growth. However, the pace of the recovery softened recently. In addition, the expansion of some segments of the economy with weak links to the tourism industry was constrained by higher interest rates and increased competition from neighboring Mainland regions and e-commerce.

Economic growth is expected to remain strong in the near term. Further recovery of the gaming sector and increased investment in non-gaming sectors underpin growth in the near term. Inflation is expected to increase only gradually due to low imported inflation from the Mainland. In the absence of an increase in public investment in human and physical capital and rapid progress towards economic diversification, the current account balance is set to reach to pre-pandemic levels as tourists return to Macao SAR.

Downside risks cloud the outlook. Sharper-than-expected contraction in the Mainland’s property sector and higher-for-longer interest rates in the major economies could negatively affect Macao SAR’s financial system and growth. Extreme climate events could adversely affect critical infrastructure, financial institutions, and corporates. On the upside, a stronger-than-expected recovery of the gaming sector and faster-than-envisaged integration with the GBA could boost growth.

In staff’s preliminary assessment, Macao SAR’s external position in 2023 was substantially stronger than warranted by medium-term fundamentals and desirable policies. Macao SAR’s persistent saving-investment gap is partly driven by high precautionary savings and subdued investment.

Fiscal policy should support economic activity in the non-gaming sector, enhance sustainability of medium-term growth, and contribute to external rebalancing. With ample fiscal space, negative output gap, and limited room for spending reallocation, a slower pace of fiscal consolidation is needed to support still incomplete recovery, address diversification bottlenecks, strengthen economic resilience to climate change, and contribute to external rebalancing. This could be achieved through scaling up spending on human and physical capital. Moreover, developing a credible Medium to Long-Term Fiscal Framework would help better manage trade-offs from multiple demands on fiscal resources.

Proactive policies are needed to strengthen the soundness of the financial system and manage emerging risks. Encouraging banks to hold higher provisioning will strengthen their resilience to a potential asset quality deterioration, while collecting more granular data on NPLs and interbank credit would enable improved systemic risk assessments of the Monetary Authority of Macao. There is a need to enhance the insolvency and debt resolution and restructuring frameworks as well as strengthening the risk monitoring of borrowers from Mainland China, the liquidity position of banks with large short-term foreign liabilities, and the non-bank financial sector. Prudent fiscal policy conduct, the maintenance of flexible labor markets, a healthy banking sector, and adequate foreign currency reserve coverage will help to support the exchange rate peg.

The authorities’ initiatives to modernize and strengthen the financial system should go hand-in-hand with efforts to manage related risks. The revision of Financial System Act (FSA) and actions to strengthen the AML/CFT framework are welcome. The authorities should establish a robust resolution framework for credit institutions, underpinned by the AMCM’s operational independence. There is a need to introduce safeguards in the process for granting exemption from supervisory requirements to qualified entities engaged in financial innovation and extending the validity period for temporary authorization.

The economic vulnerabilities from the dominance of the gaming sector underscore the importance of fostering economic diversification. Macao SAR’s high growth volatility due to its heavy dependence on the gaming sector was amplified by the pandemic. To address the macrostructural challenges stemming from Macao SAR’s overreliance on tourism, small population, and limited land, the authorities stepped up their efforts to facilitate economic diversification through tax incentives and subsidies.

Economy-wide structural reforms that improve efficiency and resource allocation should be a key pillar of Macao SAR’s diversification agenda. The focus should be on incentivizing R&D and innovation, upskilling and reskilling the labor force, and streamlining labor and business regulations. Meanwhile, the government’s industrial policies aimed at facilitating diversification could give rise to negative spillovers, trade distortions, and governance risks, necessitating careful consideration.

Diligent implementation of the government’s environmental-protection and disaster prevention plans would help guard against costly natural disasters. Authorities should continue the implementation of the adaptation and prevention measures, conduct a comprehensive assessment of investment needs for adaptation, and ensure the appropriate integration of financing for these projects in the medium-term fiscal plan. 

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. At the request or with the consent of the member, IMF staff may hold separate discussions with respect to territories or constituent parts of a member. These Article IV consultation discussions form a part of the member’s Article IV consultation. In such cases, a staff team visits the territory or constituent part, collects economic and financial information, and discusses with officials the territory’s or constituent part’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board, which in turn constitutes an integral part of the member’s AIV consultation for the relevant cycle.” 

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.