## IMF Executive Board Concludes 2016 Article IV Consultation with People’s Republic of China—Macao Special Administrative Region

_IMF News, February 14, 2017_

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## Bibliographic details
- Published: February 14, 2017

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### Recent growth dynamics and shock
- Over the 15 years after the return to Chinese sovereignty in 1999, Macao SAR averaged real GDP growth of 10.6 percent.
- The boom was driven largely by the de jure monopoly on gaming within China and rising Mainland consumer spending; gaming exports fell by a cumulative 50 percent beginning in 2014.
- The contraction was concentrated in high-end (“VIP”) casino business amid a sustained anti-corruption campaign on the Mainland.
- The sharp fall in exports led output to fall by one-third in cumulative terms, but spillovers were limited:
  - Unemployment has remained below 2 percent.
  - Median real wages stabilized and remained up 7 percent over end-2014 levels.
  - Nonperforming loans in the financial sector continue to hover around zero.
- Tourist numbers were basically stable even as average spending per tourist fell, keeping capacity utilization relatively high and converting the contraction into lower extraordinary profits rather than large employment losses.

### Fiscal position, reserves, and external accounts
- Macao SAR entered the transition with substantial buffers:
  - Fiscal reserves equal to 95 percent of GDP.
  - Zero gross public debt.
  - Foreign exchange reserves roughly US$ 19 billion or around 100 percent of pataca M2.
- After 15 years of double-digit current account surpluses, foreign assets are substantial and support the credibility of the currency board.
- Selected indicators (annual percent change or levels as shown):
  - Real GDP: 25.3 (2010); 21.7 (2011); 9.2 (2012); 11.2 (2013); -1.2 (2014); -21.5 (2015); -4.0 (2016); 2.8 (2017, proj.).
  - Total domestic demand: -0.4 (2010); 13.9 (2011); 10.3 (2012); 6.5 (2013); 16.7 (2014); -6.4 (2015); -2.4 (2016).
  - Net exports (contribution to growth): 25.5 (2010); 15.4 (2011); 4.9 (2012); 8.5 (2013); -7.9 (2014); -22.9 (2015); -0.1 (2016); 4.2 (2017, proj.).
  - Fiscal reserve fund (percent of GDP): 29.2 (2010); 41.0 (2011); 55.7 (2012); 95.2 (2013); 124.6 (2014); 128.8 (2015).
  - Foreign exchange reserves (in billions of US dollars): 23.7 (2010); 34.0 (2011); 16.6 (2012); 16.4 (2013); 18.9 (2014).
  - Current account (percent of GDP): 39.4 (2010); 39.3 (2011); 40.2 (2012); 34.2 (2013); 25.4 (2014); 27.1 (2015); 29.5 (2016).
  - Nominal GDP (in millions of US dollars): 28,123.7 (2010); 36,708.0 (2011); 43,031.8 (2012); 51,552.4 (2013); 55,347.8 (2014); 45,415.0 (2015); 44,071.0 (2016); 45,689.1 (2017, proj.).
  - Per capita GDP (in thousands of US dollars): 50.9 (2010); 65.9 (2011); 73.9 (2012); 84.9 (2013); 87.0 (2014); 70.2 (2015); 67.0 (2016); 68.3 (2017, proj.).

### Outlook and projections
- Real output was expected to contract for a third consecutive year in 2016.
- External demand began to recover with gaming revenues posting six consecutive months of positive annual growth.
- In 2017, a low base was expected to help increase growth above 2 percent despite continued weak domestic demand.
- Over the medium term, Macao SAR is projected to be well-positioned to record sustainable growth in the mid-single digits due to:
  - Continued value of the gaming monopoly within China.
  - Established tourist destination status and geographic/cultural proximity to Mainland China.
  - Aggressive investment in non-gaming tourism and financial services.

### Executive Board assessment and policy recommendations
- Diversification strategy
  - The external shock highlights the urgency of transitioning to a more diversified economic model.
  - Authorities’ strategy to diversify to mass‑market gaming, non-gaming tourism, and financial services is important.
- Fiscal policy
  - No need for further discretionary fiscal loosening in the near term given the closing output gap.
  - Authorities appropriately loosened fiscal policy during the downturn; further substantial discretionary loosening should be avoided to prevent over-stimulation.
  - Authorities should establish a medium-term framework to anchor fiscal policy and ensure long-run solvency, including long-run projections to account for future pension obligations.
  - With abundant fiscal reserves from taxing gaming economic rents, there is a substantial opportunity to invest in human capital and close infrastructure gaps.
- Housing and macroprudential policy
  - No clear need to loosen macroprudential regulations for the housing market now.
  - Macroprudential regulations specific to housing should be relaxed only if there is a risk of a spiral of falling house prices, falling mortgage credit, and increased defaults.
  - Current information (healthy bank balance sheets and recovering prices) suggests that threshold has not been met.
  - To increase housing accessibility, priority should be increasing supply of market-priced units and providing targeted transfers to the most vulnerable.
- Financial sector oversight
  - Financial sector soundness indicators (asset quality, earnings, liquidity) remain robust despite the fall in output.
  - The size of the financial sector and the supervisory challenge of monitoring liquidity and quality of foreign assets warrant ongoing attention.
  - Much of the foreign asset exposure is concentrated in branches to related parties, suggesting contained risks.
- Exchange rate and competitiveness
  - The currency board regime continues to serve Macao SAR well; price flexibility is an increasingly important supporting factor.
  - Past depreciation against the RMB (indirectly due to the peg to the U.S. dollar) and the rising share of tourists from China (now accounting for two-thirds) mean external competitiveness may become more of an issue.
  - Downward price flexibility, as displayed by the hotel sector, will likely be increasingly important.

### Financial sector and other vulnerabilities
- The nature of the correction (disproportionately on gaming operator profits) and prudent regulation helped keep bank nonperforming loans low.
- Supervisory focus should remain on liquidity and the quality of foreign assets in a large financial sector.
- Macroprudential stance on housing remains appropriate given current indicators.

*Press Release No. 17/48. February 14, 2017. IMF Communications Department.*

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## References

- [The Executive Board](http://www.imf.org/external/np/sec/memdir/eds.aspx)
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- [People's Republic of China - Macao Special Administrative Region and the IMF](http://www.imf.org/external/country/MAC/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
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