People’s Republic of China—Macao Special Administrative Region: Staff Concluding Statement of the 2024 Article IV Mission

March 6, 2024

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.

Washington, DC: China’s reopening in early 2023 breathed life into Macao SAR’s pandemic-hit economy. The gaming sector witnessed a sharp rebound, though non-gaming sector’s performance was less impressive. Despite the strong growth, inflation remained weak. Robust growth is expected to continue in 2024. In the near term, policies should focus on supporting the still incomplete recovery, strengthening financial stability, and deploying proactive policies to manage emerging financial risks. In the medium term, the priority is to facilitate the economy’s diversification and external rebalancing and enhance its resilience to future shocks through mutually reinforcing reforms and public investments in human capital and climate resilient infrastructure.

I. Recent developments, outlook, and Risks

Economic activity rebounded sharply in 2023.Macao SAR’s economy expanded by 80.5 percent in 2023, driven by a surge in services export after Mainland China lifted COVID-19 containment measures. The gaming sector had a stellar performance, bolstered by the mass tourism segment. Non-gaming services export also expanded strongly. However, the growth momentum slowed in the last quarter of 2023 and the recovery was uneven, with less impressive growth in other non-gaming sectors. High interest rates and increased competition from e-commerce and neighboring Mainland regions limited the recovery of local small and medium enterprises (SMEs). Headline inflation hovered around 1 percent in 2023, due to declining rental prices. With economic recovery, fiscal policy consolidated in 2023, driven by withdrawal of pandemic relief measures, higher gaming revenues, and under-execution of current spending. The Monetary Authority of Macao (AMCM) has increased the Base rate by 525 basis points since March 2022 following similar increases by the Hong Kong Monetary Authority and the US Federal Reserve.

Strong growth is expected to continue in 2024.GDP is projected to grow by 13.9 percent, due to the further recovery in the gaming sector and solid private investments, partly linked to the commitment of gaming concessionaires to invest in non-gaming sectors. GDP is expected to regain its pre-pandemic level in 2025. The medium-term growth trajectory hinges on the pace of Macao SAR's integration with the Greater Bay Area (GBA) and the success of economic diversification efforts. Growth is projected to converge to 3 percent over the medium term. With narrowing output gap and increasing wages, inflation is projected to accelerate to 1.7 percent in 2024 and stabilize around 2.5 percent in the medium term. The current account surplus is expected to stabilize around 30 percent of GDP supported by the rebound in services exports. Macao SAR’s external position is assessed as substantially stronger than warranted by medium term fundamentals and desirable policies, in part reflecting the high precautionary savings and subdued investments.

The balance of risks to the outlook is tilted to the downside . Sharper-than-expected slowdown in the property sector, local government financing stress and decline in investment, or rising geopolitical tensions would slow economic activity in Mainland China, with knock-on effects on Macao SAR’s financial system and economy. Higher-for-longer interest rates in the major economies could exert pressure on Macao SAR banks’ balance sheets through the impact on asset valuation and quality. Large foreign liabilities of Macao SAR banks with short maturity could pose risks. Emerging gaming centers elsewhere in Asia could reduce tourism to Macao SAR in the medium-term. Extreme climate events driven by rising temperatures 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.

II. Economic Policies

Fiscal Policy

A slower pace of fiscal consolidation would support economic activity in the non-gaming sector and buttress sustainability of medium-term growth. Fiscal policy is set to consolidate further in 2024 driven by a decline in capital spending and a substantial increase in government revenues. The unequal pace of recovery between the gaming and non-gaming sectors and a negative output gap call for continued government support. In addition, there is a need to scale up public spending on climate resilient infrastructure as well as on education and healthcare to support the economy’s diversification and external sector rebalancing. Given Macao SAR’s low level of government spending relative to GDP (less than half of the OECD average), the room for meeting these objectives through spending reallocation is limited, and the envisaged consolidation will further constrain the government’s ability to address them. A slower pace of consolidation would support the still incomplete economic recovery, address diversification bottlenecks, and strengthen economic resilience to climate change, without undue risks to the fiscal position.

Furthermore, developing a credible Medium to Long-Term Fiscal Framework (MLTFF) would help better manage trade-offs from multiple demands on fiscal resources. The balanced budget requirement stipulated in the Basic Law underpins Macao SAR's medium-term fiscal sustainability and has contributed to Macao SAR’s strong fiscal position. However, the need to diversify Macao SAR’s economy and enhance its resilience to climate change require advanced planning, prioritization and implementation of multiyear projects, and commitment of resources to these projects. A MLTFF offers a platform to integrate all fiscal decisions into a well specified framework with clear short- and medium -priorities and steps to ensure efficiency of spending and tax policies. These guidelines and plans will help better manage trade-offs from multiple demands on fiscal policy, including for multi-year projects.

Financial Sector Policies

Despite a considerable increase in NPLs, Macao SAR’s banking system remains resilient thanks to its large capital and liquidity buffers . NPLs increased by 2.1 percentage points to 3.8 percent in end-2023 mainly due to banks’ exposure to the Mainland property sector and the confluence of high interest rates and a slow pace of recovery in some segments of the economy. Nevertheless, according to stress tests conducted by IMF staff, the banking system is able to withstand large shocks to asset quality, collateral value, interest rates, and deposit outflow. Additionally, Macao SAR’s banking system should remain resilient to spillovers from a further contraction in the Mainland property sector, which could trigger depreciation of the RMB and further increase in NPLs due to Macao SAR banks’ exposure to the Mainland. However, the stress tests indicate that some not systemically important banks may be vulnerable in a scenario of a significant fall in the value of collateral and a large increase in NPLs.

Proactive policies should be deployed to strengthen the soundness of the financial system and manage emerging risks.

· Gradually unwinding policy intervention in the banking system and not extending the remaining pandemic-related forbearance measures beyond 2024 would be important.

· Encouraging higher provisioning by banks will help them withstand further asset quality deterioration.

· Enhancing the insolvency and debt resolution and restructuring frameworks, including special out-of-court solutions, would avoid overloading the court system and facilitate the exit of non-viable firms.

· Collecting bank-by-bank data on NPLs by economic sectors and interbank credit would improve the AMCM’s systemic risk assessment. 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 would be critical.

The authorities should strike a balance between modernizing the financial system and managing related risks. The revised Financial System Act (FSA) makes Macao SAR’s legal framework for financial regulation and supervision more flexible and establishes legal basis for promoting financial innovation, yet some provisions depart from international best practices. Including a robust resolution framework for credit institutions in the FSA, underpinned by the AMCM’s operational independence, would enable efficient resolution of such institutions. The conditions for licensing banks with restricted scope should be fit for the purpose and prudently established to manage potential concentration risks. Safeguards should be introduced in the guideline on granting exemption from supervisory requirements to qualified entities engaged in financial innovation. Using strict criteria for the extension of the validity period for temporary authorization for financial innovation would provide appropriate level of safeguards.

The authorities’ actions to strengthen the AML/CFT framework are welcome and should be sustained. The updated assessment of money laundering, terrorism financing and proliferation financing (ML/TF/PF) risks in Macao SAR is encouraging. The revised FSA and Trust Law that enhance licensing and “fit-and-proper” requirements for the financial sector and permit only AML/CFT-regulated financial institutions to act as trustees are welcome. The authorities should continue improving the investigation and prosecution of laundering of foreign proceeds of crime, particularly through the gaming sector. Ensuring accurate beneficial ownership information is readily available on a timely basis would also be important.

Structural Policies

Comprehensive reforms are needed to enable Macao SAR to leverage opportunities offered by the integration into the Greater Bay Area (GBA). The Guangdong region has an extensive knowledge base, which goes beyond the sectors targeted by the government. Economy-wide structural reforms that improve efficiency and resource allocation would enable Macao SAR to capitalize on the knowledge base available in the GBA. The authorities should be cognizant of possible negative spillovers, trade distortions, and governance risks related to their industrial policies (IP). Robust cost-benefit analysis, combined with transparent mechanisms for project selection, regular reviews, and clearly defined sunset clauses to ensure that policies are phased out, would help minimize negative externalities of the IPs. The authorities’ measures to facilitate diversification should be consistent with the WTO rules.

Digitalization and innovation have a potential to boost Macao SAR’s productivity and support economic diversification. A recent IMF study suggests that more innovative and digitalized Asian firms tend to be more productive. Macao SAR has experienced a significant increase in digitalization over the past decade, although it still lags regional peers. Improving the design and targeting of Macao’s R&D tax incentives, scaling up public spending on basic research, and SME’s access to finance and digital technologies would help further support digitalization and innovation. Increasing public investment in occupational and on-the-job training and strengthening science-business linkages would reduce skill mismatches. Streamlining administrative requirements for hiring non-resident skilled workers could help compete for foreign talent. Enhancing regulatory predictability, effectiveness of the judiciary, the protection of property rights, and streamlining labor and business regulations will improve Macao SAR’s business environment.

Diligent implementation of the government’s environmental-protection and disaster prevention plans would help to guard against costly natural disasters. Macao SAR has formulated environmental-protection and disaster prevention plans, including reinforcing infrastructure for disaster prevention and mitigation, improving the emergency management system, as well as strengthening risk management, monitoring and early warning capability. 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.

The mission would like to thank the authorities and other interlocutors in Macao SAR for the excellent discussion and organizational support throughout the visit.

[1] An IMF mission, led by Ara Stepanyan and including Pablo Gonzalez Dominguez and Danila Smirnov, conducted meetings in Macao SAR during February 21-March 6, 2024. The mission met with the Chairman of the Monetary Authority of Macao and other senior officials, along with representatives of the business community, financial sector, and academics.

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