People’s Republic of China—Macao Special Administrative Region: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, January 24, 2022
Source details
- Canonical URL
- People’s Republic of China—Macao Special Administrative Region: Staff Concluding Statement of the 2022 Article IV Mission
Other formats
Bibliographic details
- Published: January 24, 2022
I. Macroeconomic situation: elevated uncertainty ahead
- Pandemic impact and recovery
- Aggregate GDP shrank by 54 percent in 2020, mostly on the collapse of services exports.
- The economy is estimated to have expanded by 17 percent in 2021 helped by the partial recovery of the gaming sector.
- GDP is projected to grow by 15 percent in 2022 driven by the gradual return of foreign tourists and the recovery of domestic demand.
- Growth is expected to accelerate to 23 percent in 2023 before gradually converging to its long‑term potential of around 3.5 percent over the medium term.
- Given the depth of the economic losses during the pandemic, the level of GDP is expected to surpass its pre‑crisis level only in 2025.
- External and financial position
- Staff’s preliminary assessment: Macao SAR’s overall external position remains substantially stronger than warranted by medium‑term fundamentals and desirable policies.
- The current account surplus in 2021 is estimated at less than half of the level observed in 2019.
- The banking system remains well capitalized with solid levels of liquidity and profitability; capital adequacy is in double digits; the nonperforming loan ratio remains low.
- Household debt to banks, half of which are mortgages, accounts for more than half of banks’ domestic credit.
- Banks’ external exposures: large exposure to Mainland China; a significant share of foreign liabilities has less than one year maturity, creating funding vulnerabilities.
- Balance of risks (tilted to the downside in the short term)
- Resurgent pandemic: renewed COVID‑19 outbreaks and mobility restrictions could stall recovery and prompt persistent behavioral changes (e.g., a permanent shift toward online gaming).
- Tighter regulation of the gaming industry: uncertainty from gaming law reforms and the recent ban on gaming services’ marketing in the Mainland could affect the VIP segment.
- Spillovers from Mainland China: large‑scale defaults in Mainland China’s real estate sector or a sudden Mainland slowdown could prompt negative spillovers.
- Financial risks: reduced household income lowers debt‑servicing capacity; tighter global financial conditions could pressure non‑financial firms and the banking system.
- Climate change: intensification of climate‑related risks could adversely affect financial institutions and corporates.
II. Fiscal policy: near‑term support and medium‑term strategy
- Near-term guidance
- Premature withdrawal of policy support should be avoided.
- Fiscal support remains essential; the fiscal tightening envisaged in the 2022 budget is premature given the still‑large output gap and significant downside risks.
- Given fiscal space remains ample, a neutral fiscal stance in 2022 is recommended to support non‑gaming activity and mitigate long‑term potential losses.
- Recalibration and priorities
- Target cash transfers to the most vulnerable households (high propensity to consume).
- Incentivize job creation and continue job placement and matching efforts, particularly for youth.
- Additional spending on healthcare, education, and scaling up macro‑critical public investments in climate resiliency to boost demand and assist diversification.
- Maintain strict fiscal transparency and accountability for COVID‑19‑related spending consistent with other government spending.
- Medium/long‑term fiscal framework
- A well‑articulated medium‑term fiscal strategy would support diversification and climate resiliency efforts, preserve fiscal space, and ensure fiscal sustainability and intergenerational equity.
- A medium/long‑term fiscal framework (MLTFF) should integrate fiscal decisions, specify short- and medium‑term priorities, ensure spending and tax efficiency, and provide clear guidelines for fiscal sustainability.
III. Financial sector policies and stability measures
- Monitoring and resolution
- Strengthen monitoring of enterprises and households to anticipate potential increases in insolvencies.
- Encourage banks to conservatively provision to withstand potential asset quality deterioration.
- Enhance insolvency and debt resolution and restructuring frameworks, including special out‑of‑court solutions, to avoid overloading courts.
- Managing spillovers and liquidity risks
- Enhance regulatory and supervisory frameworks to manage risks from significant exposure to Mainland China.
- Monitor credit risk of borrowers from Mainland China and conduct forward‑looking risk assessments.
- Maintain close supervisory cooperation with the Mainland to minimize regulatory arbitrage.
- Carefully monitor liquidity positions of banks with large short‑term foreign liabilities.
- Macroprudential policy
- To curb risks from residential property price growth, link differentiation in LTV limits to banks’ risk assessment of loans and borrowers rather than current residency‑based differentiation.
- Exchange rate regime
- The peg to the Hong Kong dollar continues to serve Macao SAR well as a credible nominal anchor.
- Its success is underpinned by countercyclical fiscal policy, flexible labor markets, a healthy banking sector, and adequate reserve coverage; maintaining these policies will ensure continued success.
IV. Structural reforms and economic diversification
- Diversification strategy and opportunities
- The government’s Master Plan of the Development of the Guangdong‑Macao Intensive Cooperation Zone aims to develop four nascent industries and facilitate integration into the Guangdong‑Hong Kong‑Macao Greater Bay Area (GBA).
- Progress in promoting modern financial services is welcome; diversification will require addressing structural bottlenecks.
- Key reforms to support diversification
- Skill building: invest in outcome‑orientated occupational and on‑the‑job training; strengthen science‑business linkages.
- Talent attraction: streamline administrative requirements for hiring non‑resident skilled workers.
- Regional integration: leverage GBA integration to access a larger pool of skilled labor and offshore activities.
- Physical and ICT infrastructure: close infrastructure gaps vis‑a‑vis OECD countries, including digital infrastructure; AMCM steps to deploy new financial infrastructure are welcome.
- Housing and regulatory reforms: boost public housing supply; reform regulatory frameworks to increase private sector housing supply.
- Public institutions and business environment: increase regulatory predictability, raise judicial independence, strengthen protection of property rights, and streamline labor and business regulations.
- Financial sector development balance
- Balance financial sector development with the need to preserve financial stability and integrity.
- Identify and mitigate ML/TF risks as the financial sector expands.
V. AML/CFT and governance actions
- Actions and remaining gaps
- The government has made good progress in addressing technical compliance deficiencies in AML/CFT.
- Further strengthening needed for the offshore sector and for investigation and prosecution of laundering of foreign proceeds of crime, particularly through the gaming sector.
- Enhanced cooperation
- Government diversification initiatives are spread across different agencies; enhanced interagency cooperation would improve policy effectiveness.
VI. Climate change: exposure and adaptation priorities
- Climate exposure and risks
- Macao SAR faces high risks of cyclones and medium risk of coastal floods and water scarcity.
- Some critical infrastructures are at risk of being below the annual flood level within ten years.
- Adaptation and financial resilience measures
- Align public policies with climate objectives and build early warning systems to monitor climate change exposure.
- Update land‑use planning strategy to address sea‑level rise and storm surges; strengthen coastal protection and mitigate coastal erosion.
- Scale up public investments in critical infrastructure, water security, and coastal management.
- Improve understanding and management of financial risks due to climate change; the authorities’ intention to improve insurance coverage for climate‑related disasters is positive.
VII. Key policy recommendations summary
- Fiscal
- Avoid premature withdrawal of policy support; adopt a neutral fiscal stance in 2022.
- Target cash transfers to vulnerable households; incentivize job creation; increase spending on healthcare, education, and climate‑resilient infrastructure.
- Develop a medium/long‑term fiscal framework to support diversification, climate resiliency, fiscal sustainability, and intergenerational equity.
- Financial sector
- Strengthen monitoring of household and enterprise debt; encourage conservative provisioning.
- Enhance insolvency and debt resolution frameworks; monitor banks’ liquidity and exposure to Mainland China; deepen supervisory cooperation with the Mainland.
- Adjust macroprudential measures (LTV differentiation linked to risk assessments).
- Structural reforms
- Invest in skills and training; streamline hiring of non‑resident skilled workers; close physical and digital infrastructure gaps; improve regulatory predictability and judicial independence.
- Coordinate interagency efforts to implement diversification strategies effectively.
- Climate
- Scale up public investments in climate adaptation, coastal management, and water security; enhance insurance coverage and financial-sector climate‑risk management.
People’s Republic of China—Macao Special Administrative Region: Staff Concluding Statement of the 2022 Article IV Mission, January 23, 2022