People’s Republic of China—Macao Special Administrative Region: Staff Concluding Statement of the 2019 Article IV Mission

February 25, 2019

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

The economy has returned to expansion since mid-2016 driven by gaming and tourism growth. Risks are tilted to the downside, mainly emanating from Mainland China. Prudent macroeconomic policies and high reserves provide strong buffers against shocks. There are three top policy priorities. First, higher public investment would support the diversification agenda while further targeted social spending would foster inclusion. Second, a medium/long-term fiscal framework would facilitate judicious and efficient use of gaming-dependent fiscal resources. Third, the exchange rate peg continues to serve Macao SAR well and should be maintained including via supportive policies (including prudent fiscal policy, sound financial sector, and adequate reserves). In addition to supporting diversification and fulfilling social needs, these policy priorities will reduce external imbalances.

Recent Economic Developments and Policies

The economy returned to expansion in mid-2016. Gaming and tourism revenue returned to strong growth in 2017 and early 2018, after negative growth over 2014-16 following developments in Mainland China that reduced external demand from high-spending visitors (i.e. VIP). Growth moderated in the second half of 2018, including from weaker investment and reduced VIP gaming linked to Mainland’s deleveraging effort and U.S.-China trade tensions. Growth is estimated at 5.6 percent in 2018 (from 9.7 percent in 2017). Inflation picked up over 2018 driven by housing, food, and energy prices. Credit has continued to expand over 2018, while the lending interest rate slightly increased. Property prices recovered with the economic rebound, but they were flat in the second half of 2018. Unemployment remains low.

Fiscal stimulus has reduced, measures were introduced to contain housing market risks, and diversification efforts continue. As the economy rebounded, the fiscal surplus increased in 2017 and 2018, reducing fiscal stimulus. In light of the pickup in residential property prices, measures were introduced in 2017 and 2018 to contain risks. Progress in several areas support diversification, including (i) recently developed reclaimed land in Cotai and the newly opened Hong Kong-Zhuhai-Macao Bridge that support mass-market gaming and non-gaming tourism, and (ii) authorities’ progress in bolstering the financial sector, including the facilitation of banks’ involvement with issuance and local distribution of bonds from the Mainland.

Outlook and Risks

Over the medium term, the economy will likely expand moderately, with surpluses in the fiscal and external current accounts. Progress with diversification efforts towards mass gaming and non-gaming tourism, together with the important China gaming monopoly, are expected to deliver continued growth in the coming years.

  • Growth is projected at 5.3 percent in 2019 and to remain solid over the medium term at about 5 percent. While the outlook is more subdued than historical averages, it is also less volatile. The main driver of medium-term growth is tourism, with mass gaming and non-gaming tourism further expanding, but more subdued VIP gaming growth, in line with authorities’ diversification efforts towards more stable sources of growth. Investment is anticipated to remain weak, though improving over the medium term, partly due to the upcoming expiration of gaming licenses.
  • Fiscal. More moderate growth in gaming will deliver less buoyant tax revenue, while social spending is expected to grow over time due to ageing and social pressures. Overall, fiscal surpluses (in percent of GDP) are expected to continue in the medium term, though of smaller magnitude.
  • Balance of Payments. Private and public savings are expected to decrease due to moderation in gaming revenues. Overall, current account surpluses are expected to continue, delivering further accumulation of foreign assets by the private and public sectors.

Risks are tilted to the downside with the economy being particularly vulnerable to risks originating in Mainland China:

  • Mainland China . Macao SAR’s small and open economy is highly vulnerable to economic, financial and policy developments in the Mainland. With most tourists coming from the Mainland, any policy that undermines their spending power abroad would negatively affect growth. The introduction of gambling in the Mainland or weaker than expected growth in the Mainland would also negatively affect growth. Main channels include shocks to gaming revenue, reduced investment, and banking sector exposures to the Mainland.
  • U.S.-China trade tensions. Worsening of trade tensions between the U.S. and the Mainland could significantly impact Macao SAR, including via a fall in tourism inflows from the Mainland and reduced investment by the three U.S. casino operators. In addition, the banking sector’s investments linked to global trade, including the Mainland’s, would be affected.
  • Sharp tightening of global financial conditions with unexpected Fed hikes. Given the indirect exchange rate peg to the U.S. dollar, the pataca would appreciate relative to the renminbi possibly reducing Macao SAR’s competitiveness and weakening gaming spending per visitor, though gaming revenue has been resilient to the exchange rate. In addition, sharp increases in the cost of credit would reduce investment projects, potentially slow banks’ balance sheet growth, and it may abruptly cool the housing market.
  • Increased competition in the gaming industry. Emerging gaming centers in Asia could start diverting Mainland tourists from Macao SAR.
  • On the upside: faster diversification progress and further land reclamation could boost sustainable growth by widening non-gaming tourism options and helping housing affordability.

High reserves provide strong buffers against shocks. This small open economy has grown rapidly since its return to Chinese sovereignty in 1999 and the liberalization of the gaming sector in 2002. Over this expansive period, prudent macroeconomic policies have endowed Macao SAR with large fiscal and foreign reserve assets—standing at 121 and 40 percent of GDP respectively in 2017—with zero public debt, which provide strong buffers against shocks.

Economic Policy Priorities

Fiscal Policy

Medium/Long-Term Fiscal Framework Including the Sovereign Wealth Fund

A comprehensive reform agenda to support prudent and efficient medium/long-term fiscal policymaking is needed. Macao SAR would benefit from a medium/long-term fiscal framework (MLTFF) for judicious and efficient use of gaming-dependent fiscal resources. Even though fiscal space is ample, with large fiscal reserves and no public debt, fiscal policy decisions are rather discretionary while following the conservative Basic Law mandate of balanced budgets. In addition to infrastructure development needs and social spending considerations, a key long-term spending pressure stems from the projected fast increase in the old-age dependency ratio that will boost pension and healthcare spending.

A MLTFF will help increase efficiency in the use of fiscal reserves while helping ensure long-term fiscal sustainability and intergenerational equity. Key pillars of the framework are a medium/long-term fiscal strategy and medium/long-term orientation within the annual budget process. The MLTFF should incorporate a counter-cyclical framework (discussed below) that can be layered over the fiscal targets from MLTFF to account for needed cyclical adjustments. The authorities should start with producing a long-term fiscal sustainability report—Australia and New Zealand’s can serve as a model.

The authorities should ensure that their planned Sovereign Wealth Fund (SWF) is integrated into the MLTFF. The authorities plan to establish a SWF in 2019 with the objectives of furthering Macao SAR’s development and enhancing its stability and fiscal buffers. Key considerations should include: integration of SWF within the MLTFF and annual budget including through clear but flexible inflow/outflow rules, and clear management guidelines and accountability as outlined in the “Santiago Principles.”

Near-Term Fiscal Policy

An explicit counter-cyclical fiscal framework would also improve near‑term budget preparation. Given the large output volatility due to external conditions affecting gaming, and given the substantial fiscal space, the economy can benefit from a more formal framework for counter-cyclical fiscal policy to smooth out sharp private demand fluctuations. An explicit counter-cyclical framework within budget preparation, including macro projections and improved estimates for fiscal outcomes, will help improve the calibration of the desirable discretionary fiscal response. Importantly, the counter-cyclical framework should be integrated with the MLTFF discussed above.

In the absence of a cyclical need, the projected reduction in fiscal stimulus for 2019 is appropriate, though the policy stance could be made more expansionary if driven by priority spending under a medium/long-term fiscal plan. A reduced fiscal stimulus is projected for 2019 as the anticipated expansion of spending across several categories (including social spending) is largely compensated by a reduction in capital spending. Discretionary fiscal policy is expected to provide very modest support to the economy. However, additional fiscal loosening in 2019 could be judged appropriate if driven by properly-targeted priority infrastructure and social spending that is desirable from a long-term perspective under the MLTFF.

Social spending considerations. Because of its rapid growth, Macao SAR’s income per capita is one of the highest in the world. However, inequality is higher than the OECD average. In the context of fiscal policy, it is desirable to consider boosting targeted social spending to alleviate distributional concerns. Housing affordability has been eroded, so the government should advance its efforts to increase access to housing for the vulnerable. Health and education spending are also comparatively low, suggesting that there is room to boost them in a targeted manner. In addition, to foster inclusion, government considerations to expand the minimum wage to more sectors is welcome, though assistance may be needed for smaller employers who may be unable to afford higher costs.

Financial Sector Policies and Housing

Balance sheets of the banking system continue to suggest that the sector remains sound, but large short-term foreign liabilities warrant ongoing attention. Foreign banks are the bulk of the financial system. The large scale of the banking system calls for continued supervisory caution. However, several factors moderate risks on the domestic and external side of the balance sheet.

  • Domestic operations remain strong regarding liquidity and asset quality, helped by moderate private sector leverage. Exposures to gaming remain large, though balance sheets of gaming operators remain strong.
  • The external side of the banking sector balance sheet shows large foreign liabilities, over 65 percent short term, increasing funding risks. Moderating this risk, banks’ foreign assets far exceed foreign liabilities which increases banks’ ability to fund potential withdrawals—as long as the quality and liquidity of assets allow it. In addition, about 30 percent of the foreign liabilities of the Macao SAR’s banks are due to related foreign banks—and the foreign banks provide some backing to the local branches. Regarding risks to foreign assets, given the significant bank exposure to the Mainland (about 30 percent of external assets), recent efforts by the Monetary Authority of Macao (AMCM) and People's Bank of China (PBOC) to strengthen financial supervision and regulation cooperation, with plans to set up an information exchange system, are welcome.

The AMCM could further facilitate Fintech adoption. Measures could be taken to further increase cyber resilience in financial institutions and Fintech firms, to promote RegTech to reduce regulatory costs, and incentivize Fintech firms to participate in a regulatory sandbox. Enhanced cross-border supervisory collaboration could help prevent regulatory arbitrage and avoidance. In this regard, recent financial regulation cooperation efforts by the AMCM and PBOC, including to coordinate work on Fintech and mobile payment regulation in Macao SAR, provide an opportunity for progress.

Steps to strengthen the AML/CFT framework are welcome and should be sustained. The AML/CFT framework was assessed in 2016 under the 2012 revised international standard. The assessment report recognized Macao SAR’s progress in enhancing AML/CFT framework, including on preventive measures and supervision of the gaming sector, while noting the need for more improvements. Since the evaluation, Macao SAR has intensified efforts to limit the number of junket promoters, which could be supported by an upgraded regulatory framework to promote robust AML/CFT controls by junket promoters. Macao SAR introduced a regulatory framework for monitoring cross-border movement of cash and bearer negotiable instruments in 2017 and is encouraged to ensure its effective implementation.


The housing market has strongly recovered with the economic rebound that started in mid-2016, but the market appears to be cooling in the second half of 2018. After falling between mid-2014 and mid-2016, the residential property price index recovered fully between mid-2016 and mid-2018 (in real terms), though it stayed flat in the second half of 2018. Even though residential property prices are estimated to have remained below trend in 2018, they appear to remain somewhat overvalued, for smaller units in particular.

The current housing macroprudential stance and related fiscal measures appear broadly appropriate. Measures were put in place in 2017 and 2018:

· New measures were introduced to mitigate housing market risks via containment of demand. The loan-to-value limit for non-first-time homebuyers was tightened in May 2017. In February 2018, property tax exemptions on vacant properties were removed and a special stamp duty tax on the purchase of non-first residential property was introduced.

· On the other hand, the AMCM eased loan-to-value limits for young first-time homebuyers to help affordability in February 2018 that boosted demand in this segment.

The authorities should continue monitoring residential property prices and the effects of recent housing market measures, as they may usually play out with a lag. Further actions should take into account evolving market conditions, including the recent growth deceleration and leveling off in residential property prices. In the event that residential property prices resume strong growth and may pose a risk to financial stability, the authorities should consider additional tightening measures.

A broader set of policies should support housing affordability, where continued efforts to boost housing supply will be key. The apparent cooling of the housing market is welcome and may contribute to improving housing affordability. However, affordability concerns remain. To alleviate this, beyond recent measures targeting young first-time homebuyers via macroprudential policy that may have unintentionally boosted demand and prices in this segment, a broader set of supply policies should be pursued instead. Planning, zoning, and other reforms affect supply and prices only with long lags, and underlying demand for housing is expected to remain robust. Housing supply reforms should, therefore, not be delayed. Building on the government’s recent efforts to boost housing supply, plans should advance regulatory policy within a transparent framework that supports private sector supply and boosts well-targeted public housing supply, including via higher infrastructure spending. A coordinated government strategy to foster public and private housing supply, including an urban planning framework and urban renewal plan, would help guide reform efforts. While completing needed environmental, design, transportation and other assessments, procedures should be expedited.

Diversifying sources of growth

The authorities have wide-ranging plans to enhance growth resilience by diversifying away from VIP gaming. Macao SAR is part of the “Greater Bay Area” plans for regional cooperation, linking it with Hong Kong SAR and the Mainland’s Guangdong province. The authorities are focusing on three areas: (i) from high-end VIP to mass-market gaming, (ii) from gaming tourism to non-gaming tourism, and (iii) bolstering the growth of financial services. Some progress has been made in these areas, evidenced by a decrease in the VIP share of gaming (from 66 percent in 2013 to 49 percent in January 2019). There is also evidence of growth in non-gaming tourism, including due to the new Hong Kong-Zhuhai-Macao Bridge. Lastly, the authorities are focusing on financial sector development through several channels: (a) financial intermediation between China and Portuguese-speaking countries (PSCs), (b) financial partnerships with Mainland bond issuances, and (c) more financial services including financial leasing and wealth management, and (d) participation in the Belt and Road Initiative (BRI).

Diversification policies should be guided by careful study of Macao SAR’s comparative advantage. With all six gaming concessions expiring in 2020 and 2022, the authorities have the opportunity to further advance their growth strategy and should craft the new regulations with stronger incentives for operators to expand non-VIP tourism. In addition, to accommodate the higher number of tourists under a mass-market and non-gaming model, infrastructure plans should advance in order to ease supply-side bottlenecks. Some of these areas are expanded entertainment, convention and exhibition options, hotels and retail, including via integrated resorts and family-oriented facilities. Regarding financial sector policies, the China-PSCs niche is a natural area for diversification, but potential gains hinge on the extent to which Mainland’s bilateral relationships reach PSCs. New investments in the Mainland can help diversify banking system portfolio away from gaming, tourism and other domestic activities, but, with the Mainland already accounting for over a third of banking sector external assets, investments should aim to diversify risks, including, for example, among different Mainland issuers or regions. If expansion of financial services contributes to developing an offshore financial center, high standards for transparency of legal persons and trusts should be ensured. In addition, policies should foster a highly educated workforce, ensuring that the educational system delivers the skills for financial services provision, and attract foreign talent as needed. Careful analysis of specific potential growth areas for Macao SAR and high project quality would be important regarding BRI participation.

External Sector Stability

Macao SAR’s current account is assessed as substantially stronger than medium-term fundamentals and desirable policies, and infrastructure investment and social spending should be boosted. The current account (CA) surplus is estimated at 34 percent of GDP in 2018, down from a peak of 41 in 2011, but higher than the 25 percent in 2015. Under the assumption that the gaming monopoly is not temporary, the CA is assessed as substantially stronger than fundamentals and desirable policies. The real effective exchange rate depreciated by 0.9 percent per year in 2017 and 2018, but it appreciated on a monthly basis since July 2018 in line with renminbi depreciation, standing at a level assessed to be broadly consistent with fundamentals and desirable policies. Overall, structural distortions including bottlenecks to investment and policies that cause excessive savings, such as low social spending—and not the exchange rate—are assessed as the reasons that prevent the external balance from adjusting to equilibrium.

The peg to the Hong Kong dollar continues to serve Macao SAR well. The pataca has been pegged to the Hong Kong dollar since 1977 and set at 1.03 patacas per Hong Kong dollar since 1983. The peg has provided a credible nominal anchor, as inflation expectations remain broadly anchored. This success is largely driven by steady application of the necessary supportive policies of prudent fiscal policy, flexible labor markets, liquid and well-capitalized banking sector, and adequate reserve coverage. Continuation of these policies will maintain the support to the exchange rate regime.

The IMF team would like to thank the authorities and other interlocutors in Macao SAR for their gracious hospitality and the open and productive discussions.

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