People’s Republic of China—Macao Special Administrative Region: 2019 Article IV Consultation Discussions—Press Release; Staff Report; and Statement by the Executive Director for Macao SAR

2019 Article IV Consultation Discussions-Press Release; Staff Report; and Statement by the Executive Director for Macao SAR

Abstract

2019 Article IV Consultation Discussions-Press Release; Staff Report; and Statement by the Executive Director for Macao SAR

Context and Recent Developments

1. Macao SAR is the largest casino center in the world and gaming tourism drives its growth. This small open economy has grown rapidly since its return to Chinese sovereignty in 1999 that brought a de jure gaming monopoly within China. In addition, the 2002 liberalization of the gaming sector attracted external investment and foreign competition, while the 2003 liberalization of tourist travel policies by China increased visitors. Over this expansive period, prudent macroeconomic policies have endowed the economy with large fiscal and foreign reserve buffers—standing at 121 and 40 percent of GDP respectively in 2017—with zero public debt. Macao SAR is part of the “Greater Bay Area” (GBA) plans for regional cooperation, linking it with Hong Kong SAR and the Mainland’s Guangdong province.

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China Greater Bay Area’s combined GDP is twice as big as San Francisco Bay Area’s

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: CEIC, Tableau.

2. 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 (VIP) visitors. (VIP gaming revenue, as opposed to “mass,” is derived from high-spending gamers.) The 2014–16 decline broadly mirrored developments in luxury spending elsewhere in the region (including in Hong Kong SAR) and followed the anticorruption campaign on the Mainland. 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 recorded 4.7 percent in 2018 (from 9.7 percent in 2017). Inflation picked up over 2018 driven by housing, food, and energy prices. Credit 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.

uA01fig02

Gaming revenue strengthened since 2017 driving growth

(In MOP billions)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: CEIC.
uA01fig03

Growth moderated in the second half of 2018

(Contribution to real GDP growth, in percentage points)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Sources: CEIC; and IMF staff calculations.

3. Recent policies:

  • Fiscal. As the economy rebounded, the fiscal surplus increased in 2017 and 2018.

  • Housing. Measures were recently introduced to contain housing market risks, though loan-to-value limits for young first-time homebuyers were increased to help affordability.

  • Diversification efforts continue. Gaming and junket activities (i.e. VIP support and financing business, Box 1) still amount to almost half of GDP. The recently developed reclaimed land in Cotai and the newly opened Hong Kong-Zhuhai-Macao Bridge (HZMB) are supporting mass-market gaming and non-gaming tourism. To support financial sector development and diversification, the authorities have started facilitating banks’ involvement with issuance and local distribution of bonds from Mainland local governments and SOEs.

  • Overaii, recent policies broadly align with past staff advice (Annex VIII).

uA01fig04

Fiscal surplus increased Since 2017

(Output gap and change in GG Balance, in percent of Potential GDP and GDP, respectively)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Sources: IMF staff estimates.

Outlook and Risks

4. 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 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 4.3 percent in 2019 and to remain solid over the medium term at about 4 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 new gaming licenses. Unemployment is expected to remain low as the significant presence of foreign workers (under limited-term contracts) provides labor market flexibility.

  • 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.

uA01fig05

The economy is expected to moderately expand over the medium term

(In percentage points)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Sources: CEIC and IMF staff estimates.

5. Risks are tilted to the downside with the economy being particularly vulnerable to risks originating in Mainland China (Annex I):

  • 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 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, 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 exchange rate movements. 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 (i.e. Singapore, Philippines, Japan, Vietnam, South Korea).

  • On the upside: faster diversification progress and further land reclamation could boost sustainable growth by widening non-gaming tourism options and helping housing affordability.

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Macao SAR’s growth is highly affected by Mainland’s growth

(Real GDP growth in percent quarterly yoy annualized)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: CEIQ Haver Analytics.
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VIP and mass gaming are highly correlated with mainland China’s property prices

(In percent, yoy)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: Haver Analytics.
uA01fig08

Over 70 percent of visitors come from Mainland

(Visitor arrivals, in percent of total)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: Haver Analytics.

6. Authorities’ Views. The authorities broadly agreed with staff’s baseline outlook. They confirmed that the China gaming monopoly will remain with Macao SAR for the foreseeable future and they shared the view that VIP-driven growth will be lower going forward but also more stable, including due to progress with diversification and an enhanced AML/CFT framework. They broadly agreed with highlighted risks, with U.S.-China trade tensions as one of the key factors, acknowledging the multiple exposures to China shocks. They highlighted Macao SAR’s reduced external vulnerabilities due to strong fiscal and foreign reserve buffers, a resilient banking sector, and the lack of domestic money or capital market instruments. They pointed out Macao SAR’s advantage as a “domestic tourism destination to Mainland China” shielded itself from increased competition from Asia. On the upside, they highlighted diversification potential from recent regional cooperation efforts (i.e. GBA), and the new high-speed Guangdong rail and the HZMB Bridge as boosting Macao SAR’s attractiveness to the Mainland and international tourists.

Fiscal Policy

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

7. 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 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 (with official projections showing a tripling in the number of old-age pensioners between 2021 and 2056).

8. A MLTFF will help increase efficiency in the use of fiscal reserves while helping ensure long-term fiscal sustainability and intergenerational equity in an aging society. Key pillars of the framework are a medium/long-term fiscal strategy and medium/long-term orientation within the annual budget process. This approach would entail developing (i) a medium/long-term macroeconomic framework, which would provide realistic multiyear projections of key economic variables; (ii) a MLTFF that would provide clear multiyear targets on aggregate fiscal variables; and (iii) a medium/long-term budget or expenditure framework, which would translate the overall budget envelope into a set of multiyear expenditure ceilings for main spending ministries. In the context of recent rapid accumulation of fiscal reserves with no public debt, the fiscal reserve-to-GDP ratio could be used as one possible fiscal anchor—though a view on optimal reserves would need to be formed—while any chosen anchor should be consistent with the MLTFF. The MLTFF should incorporate a counter-cyclical framework (discussed below) that can be layered over the fiscal targets from the 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.

9. The authorities should ensure that their planned Sovereign Wealth Fund (SWF) is integrated into the MLTFF (Annex II). 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 following best practice as outlined in the “Santiago Principles” (designed by the International Working Group of Sovereign Wealth Funds).

10. Authorities’ Views. The authorities are not using an explicit medium/long-term fiscal framework to ground fiscal budget decisions. However, they may consider the cross-country cases and best-practice examples provided by staff. Regarding the planned Macao Investment and Development Fund (MIDF), the authorities took note of staff’s recommendation that the fund is integrated within a MLTFF and stated that a new independent public company is to lead the MIDF, following the Santiago principles.

B. Near-Term Fiscal Policy

11. 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 sharp private demand fluctuations. In recent years fiscal policy tended to be countercyclical, but 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.

12. The projected 2019 fiscal policy stance is appropriate and could be made more expansionary if driven by priority spending under a medium/long-term fiscal plan. Overall fiscal tightening is projected for 2019 as the anticipated expansion of spending across several categories (including social spending) is more than compensated by a significant reduction in capital spending (partly due to one-off completion of projects). However, the fiscal policy stance—measured by the non-gaming structural balance in percent of potential non-gaming GDP—is appropriately supportive in light of a closing but still-negative output gap in 2019. Moreover, additional fiscal loosening in 2019 could be appropriate if driven by properly-targeted priority infrastructure and social spending (including education to boost needed human capital) that is desirable from a long-term perspective under the MLTFF.

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Overall fiscal tightening is expected for 2019 due to lower capex, but structural balance shows a supportive stance

(General Government Balance)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

1/ Estimated by removing capital expenditure from non-gaming cyclically adjusted balanceSource: IMF staff estimates.

13. 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 (Annex III). It is desirable to consider boosting targeted social spending to alleviate distributional concerns. Yet the largest social protection program (i.e. Wealth Partaking Scheme) is not targeted (Box 2). Housing affordability has been eroded, and 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.

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Inequality is higher than the OECD average

(In Gini points, 2013, average across the region)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Sources: SWIID Version 5.0; IMF WEO database; and IMF staff calculations.Note: ASEAN = Association of Southeast Asian nations; OECD = Organization for Economic Co-operation and Development. Data shown is disposable income gini index except for Macao SAR (gross income Gini).
uA01fig11

Social spending-to-GDP ratio is low when compared with Other countries

(General Government Social Spending, in percent of GDP) 1/

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

1/ Social Spending = Social Protection + Health + Housing + EducationSource: Government Finance Statistics.
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Per capita spending has been increasing

(GG Expenditure by Function, thousand MOP per resident)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: Government Finance Statistics.

14. Authorities’ Views. The authorities took note of staff’s proposal for a more formal countercyclical fiscal policy framework. They stated that the completion of large capital projects is driving the decline of the 2019 capital expenditure budget, while current expenditure is expected to grow based on the 2019 budget. The authorities shared the view that additional targeted spending to support diversification and social inclusion should be calibrated. Nevertheless, the authorities believed that the principle of keeping expenditure within its means to avoid deficits as stipulated by the Macao SAR Basic Law has served as an important policy anchor to safeguard Macao’s fiscal sustainability. To foster inclusion, the authorities noted that they are considering expanding the minimum wage to more sectors.

Financial Sector Policies and Housing

15. Balance sheets of the banking system continue to suggest that the sector remains sound, but ongoing attention to large short-term foreign liabilities and to the quality and liquidity of foreign assets is needed. Foreign banks are the bulk of the financial system—with 24 foreign branches and subsidiaries, and 4 local banks. The large scale of the banking system (about 400 percent of GDP in total assets) 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 (Annex IV). Moderating this risk, banks’ foreign assets far exceed 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 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 supervisory and regulatory cooperation, with plans to set up an information exchange framework, are welcome.

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Domestic real estate is over 40 percent of domestic lending to residents and over 10 percent of bank’s assets

(Domestic lending to resident private sector by sector, in percent of total, 2018Q4)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: Government Finance Statistics.

Balance Sheet of the Banking Sector

article image
Memo:

Related parties’ share is 53 percent in 2018.

Related parties’ share is 71 percent in 2018.

Source: AMCM.

16. The AMCM could further strengthen the framework for sound 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. 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.

17. 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 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 assessment, Macao SAR has further strengthened AML/CFT requirements in the gaming sector. Although it has intensified efforts to limit the number of junket promoters (Box 1), this needs to be complemented by strengthening the regulatory framework for market entry in line with the 2017 assessment. The oversight of junket promoters’ AML/CFT measures also needs strengthening. Ongoing efforts to enhance the sanctions regime—to hold casinos accountable for breaches of the junkets associated with them—should be taken forward. 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.

18. Authorities’ Views.

  • Financial system. The authorities highlighted the strength of the financial system with ample liquidity and sound asset quality. They noted continuous supervision of short-term foreign liabilities where they see contained funding risks due to the prominent funding from related foreign banks. With almost 70 percent of banks’ external assets in Hong Kong SAR and the Mainland, and almost 5 percent in BRI countries, they highlighted recent efforts to strengthen financial supervision and regulation cooperation across jurisdictions. The authorities reported on satisfactory results from regular stress tests on banks’ assets, including from shocks to the real estate portfolio and the Mainland exposure. They noted that the AMCM established a Fintech team, and is considering digitizing reporting and supervisory processes, and introducing a regulatory sandbox.

  • AML/CFT. They stressed the progress in strengthening the AML/CFT framework, including in the gaming sector, as reported by the 2017 report on international standards. The authorities are aware of the risks associated with junket promoters, including money laundering, and have taken steps to mitigate them including by limiting the number of junkets. They indicated that they are working on further steps, including strengthening the regulatory framework for market entry, intensifying AML/CFT oversight, and enhancing the sanction regime (for junkets’ compliance with AML/CFT requirements) to reinforce joint liability between a casino and its junket promoters.

A. Housing

19. The housing market has strongly recovered with the economic rebound that started in mid-2016, but the market appears to have cooled 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 remained below trend in 2018, they appear to remain somewhat overvalued, for smaller units in particular (Annex V).

uA01fig14

Property prices moderated in recent months

(3mma, 2011=100)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: DSECand IMF staff estimates.
uA01fig15

Prices of small properties continued to increase

(Average residential unit price by size of usable area, in percent year-on-year)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: CEIC.
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Macao SAR’s residential property price growth is in line with that in other cities in mainland, but higher than in other countries

(Property price index, 2016Q1= 100)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

20. 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 may have unintentionally boosted demand and prices in this segment.

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Macroprudential measures in Macao SAR are somewhat looser than in Hong Kong SAR

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: IMF’s Annual Macroprudential Policy Survey.Note: Tighter policy measures are closer to the center.

Systemic risks in the housing market appear broadly contained. 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 could consider tightening macroprudential and/or fiscal-based measures.

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Most Macroprudential and Housing Fiscal Measures Were Recently Tightened

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

1/ In Jun 2013, a new regulation for title transfer of uncompleted units was introduced. Real estate agency law, land law, the urban planning law and the cultural heritage protection law were also promulgated.2/ “Non-resident” refers to individuals without Macao SAR identity card.Source: CEIC, DSEC, Haver Analytics and IMF staff estimates.

21. The residency-based LTV is classified as a capital flow management measure and macroprudential measure (CFM/MPM) under the IMF’s Institutional View on capital flows (IV), and the authorities are encouraged to replace the residency-based differentiation feature of the LTV. The residency-based LTV was introduced in response to the surge of residential property transactions by nonresidents during the housing market boom in 2010–2011. The main objective was to put in place a preventive measure to strengthen banks’ risk management considering the spike in nonresident NPLs during the Asian Financial Crisis. In 2017, to curb financial stability risks from strong growth in residential property prices, the AMCM tightened LTV for residents and nonresidents simultaneously.

  • To attain the same policy objective without differentiating between residents and nonresidents, the authorities could examine whether they can protect against greater credit risk from lending to nonresidents through the existing multi-tiered-LTV structure but without the residency-based feature or by linking the differentiation in LTV limits directly to banks’ risk assessment of loans and borrowers, supported by additional measures such as enhancing information requirements and enforcement across borders and requiring banks to take into account country transfer or legal risk in their risk assessment. Further strengthening supervisory capacity of banks’ mortgage lending, broadly in line with FSAP recommendations (Annex VII), will be important to help ensure that these alternative measures are feasible.

22. 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, remaining affordability concerns should be addressed by a broader set of supply policies:

  • 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.

uA01fig19

Housing prices have grown faster than wage and inflation

(2011Q1=100)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: CEIC, Haver Analytics and IMF staff estimates.

23. Authorities’ Views.

  • Housing market and policies. The authorities agreed that the housing market cooled in 2018 but remained somewhat overvalued. They noted that they stand ready to take further actions dependent on market conditions. They considered that the 2018 LTV loosening (for young first-time homebuyers) was effective in increasing credit for this group, but acknowledged its contribution to higher prices in the small-property segment. On the residency-based LTV, they took note of the recommendation to replace the differentiation between residents and nonresidents with alternative measures. They highlighted that the objectives of the LTV framework are to strengthen banks’ risk management, curb investment/speculation motives, and moderate risks to the financial sector. They explained that the LTV framework is key for Macao SAR’s stability in light of its open capital account and large spillovers from its real estate sector. They highlighted that the 2017 LTV tightening was not aimed at nonresidents as it was done for both residents and nonresidents. They may consider other alternative measures as suggested when appropriate.

  • Housing affordability. They agreed that boosting housing supply is key to address affordability concerns. In terms of public housing, they noted that ongoing projects will satisfy public housing needs by 2026 (by when they plan to add 50,000 public housing units) and they will carry on research analysis on public housing demand (including post-2026). They also noted measures under consideration to make public housing more targeted to the vulnerable. They explained that there are authorities which coordinate the strategy on public and private housing and noted that a draft master plan (to be completed in 2019) will support private housing development.

Diversifying Sources of Growth

24. The authorities have wide-ranging plans to enhance growth resilience by diversifying away from VIP gaming. The authorities are focusing on three areas:

  • From high-end VIP to mass-market gaming

  • From gaming tourism to non-gaming tourism

  • Bolstering the growth of the financial sector

uA01fig20

VIP share in gaming revenue has decreased aver the last year

(In percent)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: CEIC.
uA01fig21

The share of gaming value added in GDP has decreased since 2013

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: CEIC, DSEC and IMF staff estimates.

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). There is evidence of growth in non-gaming tourism, including due to the new HZMB Bridge. The authorities are also focusing on financial sector development—presently relatively low—through several channels: (i) financial intermediation between China and Portuguese-speaking countries (PSCs), (ii) financial partnerships with Mainland bond issuances, (iii) more financial services including financial leasing and wealth management, and (iv) participation in the Belt and Road Initiative (BRI).

uA01fig22

Macao SAR’s Financial Sector Development Lags Compared with Other Financial Centers

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

1/ The assessment is based on two key features of a country’s financial sector: size and interconnectedness with financial sectors in other countries.2/ Calculated as value traded in percent of total stock market capitalization.3/ Measures information communication technology development from three dimensions: readiness (infrastructure and access), usage (intensity), and capability (skills).Source: 2013 IMF FSAP Board Paper, IMF financial development index (Svirydzenka, 2016), OECD, World Bank. Finstats database, WDI, UN ICT index,

25. Diversification policies should be guided by careful study of Macao SAR’s comparative advantage. Guiding principles should include:

  • Incentives for new concessions: With all six gaming concessions expiring in 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.

  • Infrastructure upgrades: 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.

  • Financial sector policies: The China-PSCs niche is a natural area for financial sector growth, but potential gains hinge on the extent to which Mainland’s bilateral relationships reach PSCs. New investments in the Mainland should aim to diversify portfolio and 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. 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 and transparency would be important regarding BRI participation.

uA01fig23

Hong Kong-Zhuhai-Macao Bridge (HZMB)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: Transport and Housing Bureau of Hong Kong SAR.

26. Authorities’ Views. The authorities agreed with the guiding diversification principles proposed by staff and highlighted recent progress that will support Macao SAR’s success. They noted that within the recently unveiled GBA plans for regional cooperation, Macao SAR has the role of promoting cooperation with PSCs and promoting its example as a multicultural Chinese city that is a World Centre of Tourism and Leisure. They noted large potential gains from plans to facilitate the movement of people and goods inside GBA. They noted that the tourism industry development master plan was completed in 2017, and that MICE events (meetings, incentives, conferences, and exhibitions) grew five-fold between 2002 and 2017 (gross value added of MICE activities constituted 0.9 percent of total 2017 gross value added). They highlighted growth potential in the Chinese medicine sector (with exports to PSCs), with the progressive development of “Guangdong-Macao Cooperation Industrial Park” in Hengqin. They also highlighted that the recent investment agreement, as well as the economic and technical cooperation agreement under CEPA (Closer Economic Partnership Arrangement) with the Mainland are expected to boost FDI and trade in goods and services.

External Sector Stability

27. Macao SAR’s external position is assessed as substantially stronger than medium-term fundamentals and desirable policies, and infrastructure investment and social spending should be boosted (Annex VI). The current account (CA) surplus is estimated at 35 percent of GDP in 2018, down from a peak of 41 percent 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 1 percent annually in 2017 and in 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.

uA01fig24

Annual REER depreciated in 2017 and 2018

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Sources; IMF staff estimates.Note: REEK and NEER equal to 100 in 2010, An increase in each series indicates pataca appreciation.
uA01fig25

REER appreciated since July 2018 in line with renminbi depreciation

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Sources; Haver Analytics and IMF staff estimates.Note: REER and NEER equal to 100 in 2010. An increase in each series indicates pataca appreciation.

28. 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.

29. Authorities’ Views. The authorities took note of staff’s CA assessment and agreed with the recommended boost in infrastructure investment (to support diversification plans) and public social spending to help deliver a CA in line with the level consistent with fundamentals and desirable policies. They acknowledged bottlenecks to investment due to land scarcity while noting continuous reclamation efforts. They continue to view the currency board as critical for the stability of the economy. They agreed that the policy framework continues to provide the needed credibility for the exchange rate regime to be a lasting nominal anchor.

Staff Appraisal

30. Macao SAR returned to expansion since mid-2016 and is expected to expand moderately—at about 4 percent—over the medium term. Gaming and tourism revenue returned to strong growth in 2017 and early 2018. Growth moderated in the second half of 2018, including due to spillovers from Mainland’s deleveraging effort and U.S.-China trade tensions. Over the medium term, the economy is expected to grow moderately at about 4 percent. The outlook is driven by tourism and more subdued VIP gaming growth in line with diversification efforts towards more stable sources of growth. Risks are tilted to the downside, mainly emanating from Mainland China. Prudent macroeconomic policies and high reserves provide strong buffers against shocks.

31. A comprehensive reform agenda to support prudent and efficient medium/long-term fiscal policymaking is needed. A MLTFF will help increase efficiency in the use of fiscal reserves while helping ensure long-term fiscal sustainability and intergenerational equity in an aging society. The authorities should start with producing a long-term fiscal sustainability report and should ensure that their planned SWF is integrated into the MLTFF.

32. The projected 2019 fiscal policy stance is appropriately supportive in light of the recent growth deceleration. Accounting for the one-off completion of capital projects in 2018, the policy stance is appropriately supportive. However, an explicit counter-cyclical fiscal framework—integrated with the MLTFF—is needed to improve near-term budget preparation and smooth domestic demand. The 2019 policy stance could be made more expansionary if driven by priority spending under a medium/long-term fiscal plan. This priority spending would include properly-targeted priority infrastructure and social spending (including education spending to boost needed human capital) to support the diversification agenda and foster inclusion.

33. The financial sector remains sound. However, the large scale of the banking system calls for continued supervisory caution. Large short-term foreign liabilities warrant ongoing attention, while strengthened supervisory and regulatory cooperation across jurisdictions over the quality and liquidity of foreign assets is welcome. The AMCM could further strengthen the framework for sound Fintech adoption. Steps to strengthen the AML/CFT framework, particularly for the gaming sector, should be sustained. Efforts to limit the number of junket promoters need to be complemented by strengthening the regulatory framework for their market entry, and strengthening the oversight of AML/CFT measures in this sector. In addition, ongoing efforts to enhance the sanctions regime—to hold casinos accountable for breaches of the junkets associated with them—should be taken forward.

34. The current housing macroprudential stance and related fiscal measures appear broadly appropriate. With new measures in place in 2017 and 2018, systemic risks in the housing market appear broadly contained. 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 could consider tightening macroprudential and/or fiscal-based measures. The authorities are encouraged to replace the residency-based differentiation in the LTV framework with alternative measures. Housing affordability concerns should be addressed by a broad set of supply policies including advancing regulatory policy within a transparent framework that supports private sector supply and boosts well-targeted public housing supply, including via higher infrastructure spending.

35. Diversification policies should be guided by careful study of Macao SAR’s comparative advantage. Guiding principles include: (i) new regulations for gaming concessions should support diversification with stronger incentives for non-VIP tourism expansion, (ii) infrastructure plans should advance to ease supply-side bottlenecks and support a higher number of tourists under a mass-gaming and non-gaming model, and (iii) in support of financial sector development plans, 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.

36. Macao SAR’s external position is assessed as substantially stronger than medium-term fundamentals and desirable policies, and infrastructure investment and social spending should be boosted to reduce external imbalances. The exchange rate peg continues to serve Macao SAR well and should be maintained including via prudent fiscal policy, sound financial sector, and adequate reserves.

37. It is proposed that the next Article IV consultation discussions take place on the standard 24-month cycle.

Junket Finance in Macao SAR1

VIP gaming plays a big role in Macao SAR’s economy. For example, in 2017, the value added from gaming and junket activities was close to 50 percent of GDP, and the game of VIP Baccarat alone accounted for around 55 percent of all gross gaming revenue.

VIP gaming activities are mostly facilitated by junket promoters (“junkets”). Junkets provide complementary facilities to VIP patrons including transportation, accommodation, meals, entertainment, and financing. In exchange for attracting VIP patrons to Macao SAR’s casinos, junkets are remunerated by casinos. Junkets are locally incorporated companies or local legal persons, and need an annually-renewed license from the Gaming Inspection and Coordination Bureau (DICJ).

A key service provided by junkets is the extension of credit to VIP patrons. The extension of credit to VIP patrons is mainly to facilitate patrons to gamble without bringing large amounts of cash to Macao SAR. By law, junket gaming credit is extended in the form of unconvertible casino chips. When VIP patrons gamble and win, they collect chips that are convertible to cash, and when they lose, the junket credit becomes collectible debt.

Junkets have been subject to anti-money laundering and combating financing of terrorism (AML/CFT) obligations since 2006. Under the regulations, casinos are liable to ensure compliance with AML/CFT obligations of their associated junkets. Requirements were strengthened in 2016 to align the framework with the revised international standard. In recent years there have been more instances of revocation of junket licenses by DICJ. However effective implementation of existing measures remains a challenge.

uA01fig26

Number of Active Junkets

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: DICJ
uA01fig27

Stock Market Performance of Two Listed Junkets

(Both series = 100 for 1/1/2009)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: Thomson Reuters

Following changes in business environment and strengthened regulation, the junket industry has consolidated over the last six years. Peaking in 2013 with 235 approved licenses, the number of junkets has declined to 100 in 2019.2 In parallel, several junkets have shown poor performance in the stock market. In line with the consolidation in the sector, the market share of the top five junkets has increased from 65 percent in 2014 to 80 percent in 2018.3

As the economy diversifies away from VIP gaming, the junket segment is expected to contract further. Staff projects the observed decline in the number of junkets to continue under the government diversification plans where economic activity is expected to move towards mass-market gaming and non-gaming tourism, and away from VIP gaming.

1 Prepared by Sakai Ando (STA).2 End-January figures for each year as published in “Approved Licensed Junket Promoter List.”3 “Equities Hotels Restaurants & Leisure, Macau Gaming,” HSBC Global Research, October 2018.

Universal Cash Transfers: Wealth Partaking Scheme1

Macao SAR adopted a universal cash transfers program in 2008. Macao SAR’s level of government spending and social spending are below OECD’s average. However, Macao SAR has a universal cash transfers program. Within social spending, the universal cash transfers program—Wealth Partaking Scheme (WPS)—accounts for one third of social protection and 16 percent of social spending. A remarkable feature of WPS is that it is a universal basic income program (UBI) as it transfers an equal amount of cash to all permanent residents.

uA01fig28

Government Expenditure

(In percent of GDP)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source; Government Finance Statistics
uA01fig29

Social Spending in 2017

(In percent)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: GFS, Macao SAR Financial Services Bureau

Cash transfers under the program amount to 5 percent of median annual income. The amount received by each permanent resident was 9,000 patacas in 2017, amounting to 5 percent of annual median income. The transfer is scheduled to increase to 10,000 patacas in 2019, representing a 34 percent increase in real terms of the initial amount of 5,000 patacas in 2008.

WPS is the second oldest ongoing UBI program. Several countries have implemented or studied UBI programs recently, such as Finland, Iran, and India.2 However, most UBI programs are short-lived. WPS is one of only two ongoing programs that have lasted more than 10 years, together with the pioneering Alaska Permanent Fund (APF) that started in 1982. WPS and APF are similar in generosity, with 2017 benefits around 1.5 percent of GDP per capita in both cases.

uA01fig30

Amount of Basic Income per capita

(In percent of GDP per capita)

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: Staff estimates.
1 Prepared by Sakai Ando (STA).2 In Finland, to study a potential UBI, 2,000 randomly selected unemployed individuals received 17 percent of GDP per capita in 2017 and 2018, and the program will be ended in 2019. In Iran, over 90 percent of Iranians received 6.5 percent of GDP per capita between 2011 and 2015, and the program was ended in 2016. India plans to take a step toward UBI in 2019 by distributing 6,000 rupees to farming family with less than 2 hectares.
Figure 1.
Figure 1.

Macao SAR: Real Sector

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: CEIC, DSEC, Haver Analytics, and IMF staff calculations.
Figure 2.
Figure 2.

Macao SAR: External Position

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: CEIC, DSEC, Haver Analytics, and IMF staff calculations.
Figure 3.
Figure 3.

Macao SAR: Banking Sector Developments

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: CEIC, DSEC, Haver Analytics, and IMF staff calculations.
Figure 4.
Figure 4.

Macao SAR: Fiscal Outlook

Citation: IMF Staff Country Reports 2019, 123; 10.5089/9781498313360.002.A001

Source: CEIC, DSEC, Haver Analytics, Macao Financial Serices Bureau, IMF GFS database, and IMF staff calculations.
Table 1.

Macao SAR: Selected Economic and Financial Indicators

article image
Sources: CEIC; Haver Analytics; IMF, International Financial Statistics; national authorities; and IMF staff estimates.

Contribution to annual growth in percentage points.

Fiscal Reserve was established on January 1, 2012 with a transfer from foreign exchange reserves.

Table 2.

Macao SAR: Medium-Term Macroeconomic Framework

article image
Sources: CEIC; Haver Analytics; IMF, International Financial Statistics; national authorities; and IMF staff estimates and projections.

Contribution to annual growth in percentage points.

BPM6 methodology.

Table 3a.

Macao SAR: General Government Accounts (million MOP)

article image

Fiscal Reserve was established on January 1, 2012 with a transfer from foreign exchange reserves.

Sources: Financial Services Bureau and IMF staff estimates.