IMF Staff Completes 2016 Article IV Mission to the People’s Republic of China—Macao Special Administrative Region
IMF News, November 15, 2016
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- Published: November 15, 2016
Mission summary
- IMF team led by Geoff Gottlieb visited Macao SAR from November 3 to 14 to conduct discussions on the Article IV review of the Macao SAR economy.
- The mission held discussions with senior officials from the SAR government, the Monetary Authority of Macao (AMCM), private sector representatives, and academics.
- Views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Staff will prepare a report, subject to management approval, for presentation to the IMF's Executive Board.
Economic outlook and recent developments
- “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.”
- 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.
- There are signs of incipient recovery in housing prices and transactions in recent months.
- Macao is well-positioned to have stable and sustainable growth in the low- to mid-single digits.
- Macao retains a highly valuable gaming monopoly within China and is a known tourist brand with significant geographic proximity to – and cultural affinity with – mainland China’s middle class.
Diversification priorities and policy recommendations
- The authorities’ five-year plan correctly identifies the importance of:
- Diversifying from VIP to mass-market gaming;
- Diversifying from gaming to non-gaming tourism;
- Diversifying from tourism to financial services exports.
- 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; moving from VIP to mass market tourists requires additional capacity to achieve the same amount of growth.
- 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 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.
Exchange rate peg, fiscal policy, and resilience
- “The peg to the Hong Kong dollar continues to serve Macao SAR well, providing a credible nominal anchor.”
- Success of the peg is attributed to adequate foreign exchange coverage, a stable banking sector, appropriately tight fiscal policy, and flexible markets.
- Under a currency peg, fiscal policy has a particularly important role. Given the extent of fiscal reserves, there is adequate policy space to accommodate future shocks rather than offsetting temporary reductions in revenue by pro-cyclical tightening.
- Recent discretionary loosening can be politically difficult to reverse, resulting in permanent commitments.
- Recommendation: develop a medium-term fiscal framework that explicitly takes into account:
- the expected move away from the tax-rich gaming sector;
- the projected material rise in pension spending due to aging.
Financial sector and housing market
- 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.
- Average loan to value and debt service to income ratios remain low, enabling non-performing loans to remain near zero.
- The price correction has substantially improved affordability when measured against after tax income.
- Policy options:
- Facilitate additional housing supply at market (rather than subsidized) prices if further affordability improvements are desired.
- Explore the scope for tighter loan-to-value ratios on second home purchases if speculative demand is a concern.
Key findings and exact figures from the mission
- Mission dates: November 3 to 14.
- Press release date: November 15, 2016.
- Economy contraction: third consecutive year in 2016.
- Gaming revenue: three consecutive months of positive growth (recent months).
- Growth outlook: stable and sustainable growth in the low- to mid-single digits.
- Housing price decline began: since early 2014.
- Non-performing loans: remain near zero.
- Contact (IMF Communications Department): Phone: +1 202 623-7100; Email: MEDIA@IMF.org
IMF Staff Completes 2016 Article IV Mission to the People’s Republic of China—Macao Special Administrative Region (Press Release No. 16/508), November 15, 2016.