Statement by Ping Sun, Alternate Executive Director for China, and Georgina Lok, Advisor to Executive Director April 24, 2019

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

On behalf of the Macao SAR authorities, we would like to thank staff of the Article IV team for the constructive discussions during the mission, as well as their professional and comprehensive assessment. The Macao SAR authorities appreciate this consultation with the Fund, which has been the third for Macao SAR since 2014. We broadly agree with staff’s assessment of the economic outlook and welcome staff’s recognition of the authorities’ efforts in enhancing growth resilience of Macao SAR through diversification. We are pleased to confirm the authorities’ intention to publish the staff report.

Economic updates and outlook

The Macao SAR economy has swiftly rebounded since mid-2016, following a two-year consolidation in 2014–16. Boosted by the strengthening of external demand, real GDP grew sturdily by 9.7 percent in 2017 and further by 7.6 percent in the first half of 2018. Nevertheless, the growth momentum decelerated to 2.0 percent in the second half of 2018, attributed to weaker investment and slowdown in service exports growth. For 2018 as a whole, the economy witnessed a growth rate of 4.7 percent. Nominal GDP per capita reached MOP666,893 or USD82,609.

Inflationary pressures picked up moderately as labor and rental costs fed into consumer prices. The average composite CPI increased by 3.0 percent in 2018, as against 1.2 percent in 2017. In the meantime, the unemployment rate fell to 1.8 percent in 2018 from 2.0 percent in 2017.

While the outlook of 2019 is clouded by uncertainties, external demand is expected to remain solid. This is underpinned by cross-border infrastructure upgrades, in particular, the commissioning of the Hong Kong-Zhuhai-Macao Bridge (HZMB) in October 2018, which would bolster the visitor base of Macao SAR. Furthermore, new integrated resorts to be opened in 2019 will lend support to external demand for tourism services.

Price pressure is likely to remain steady and the unemployment rate is expected to hover around levels of below 2.0 percent in 2019. Foreign workers, accounting for 47.8 percent of employment in February 2019, have been playing a major role in alleviating the issues of labor shortage and providing sufficient cushion for labor-market flexibility.

Economic diversification

The authorities have attached great importance to the transition towards more stable sources of growth and strived to make progress in diversification. A roadmap towards economic diversification has been laid down in Macao SAR’s first Five-Year Development Plan (2016–2020), where both intra- and inter-sectorial diversification plans were proposed. Policy priorities have been given to accelerate the development of the emerging industries, including MICE (meetings, incentives, conferences, and exhibitions), Chinese medicine, and featured financial services (FFB).

The authorities welcome staff’s assessment that envisages a more stable growth path for Macao SAR as diversification progresses, with the economy forecast to grow steadily at about 4 percent over the medium term.

Macao SAR endeavors to bolster featured financial services as a core component of the commercial and trade service platform between China and Portuguese-speaking countries (PSCs). Staff’s assessment concurs that the China-PSCs niche market is a natural area for expansion of the financial sector. To this end, the authorities have strived to improve the operating environment for providing the related financial services. For example, the “Leasing Companies Law” was enacted on 9 April 2019 to facilitate easier entry into Macao SAR’s financial leasing market and raise the economy’s overall competitiveness in this sector.

In December 2018, the “Arrangement between the National Development and Reform Commission and the Government of the Macao Special Administrative Region for Advancing Macao’s Full Participation in and Contribution to the Belt and Road Initiative” was signed. This would support Macao SAR’s provision of financing services for implementing the Belt and Road Initiative and help build Macao SAR into a financial service platform for commercial and trade cooperation between China and PSCs.

The “Outline Development Plan for Guangdong-Hong Kong-Macao Greater Bay Area” (GBA plan) was unveiled in mid-February 2019, which would offer huge opportunities for Macao SAR to broaden its development space and diversify its economy through regional cooperation. The authorities see large potential gains for Macao SAR as the GBA would expand the demand base for Macao SAR’s economic diversification. In 2017, the 11 cities in the GBA had a total population approaching 70 million, contributing a total GDP of USD1.5 trillion.

Linked Exchange Rate System

The existing Linked Exchange Rate System (LERS) has been the anchor of Macao SAR’s monetary stability for over three decades. The authorities welcome staff’s affirmation that the LERS remains well-suited for Macao SAR and the credibility of currency board arrangement has been upheld by fiscal prudence, adequate reserve coverage, a liquid and well-capitalized banking sector, as well as a flexible labor market.

Fiscal policy and Fiscal Reserve

The authorities have noted staff’s proposal for a more formal counter-cyclical fiscal policy framework to smooth sharp private demand fluctuations. Even though fiscal space is ample, the authorities believe that the Macao SAR Basic Law mandate of balanced budgets has served as an important policy anchor to safeguard Macao SAR’s fiscal sustainability.

To enhance efficiency in Macao SAR’s reserve asset investment, in particular the Fiscal Reserve, the authorities have planned to establish the Macao Investment and Development Fund in 2019, which would be managed by a newly independent public company in accordance with the Santiago principles.

Property market

The property market remained buoyant in the first quarter of 2018 but cooled off in the second half of 2018 after the authorities rolled out new macro-prudential measures in February 2018. The authorities welcome staff’s assessment that the current housing macro-prudential stance and related fiscal measures to mitigate systemic risks associated with the property market are broadly appropriate. Property-related credit activities have remained as a significant portion of bank lending though they have moderated. The share of property-related loans (residential mortgage and commercial real estate loans) in total private-sector loans dropped to 39.9 percent at end-February 2019 from 41.7 percent a year ago. Moreover, the asset quality of these loans has held up well. The delinquency ratio of property-related lending edged down to 0.17 percent at end-February 2019 from 0.18 percent at end-February 2018. Nonetheless, the authorities will remain vigilant of developments in the property market and deploy appropriate measures based on evolving macroeconomic and financial stability risks facing Macao SAR.

Property prices continued to face upward pressures in 2018, rising by 7.5 percent. To alleviate the housing affordability issue for the youth, the maximum loan-to-value ratio of mortgages granted to Macao young first-time homebuyers was relaxed to assist young adults in purchasing their first homes in February 2018. Subsequently, the proportion of local first-time homebuyers rose notably to 82.1 percent in 2018, from 45.0 percent in 2017.

On the supply side, ongoing public housing projects are expected to satisfy public housing needs by 2026 when about 50,000 additional public housing units would become available.

Financial sector

The authorities have exerted tremendous effort in safeguarding the financial system and welcome staff’s assessment that Macao SAR’s financial sector remains sound. Liquidity and asset quality remain healthy. Regarding rising banks’ exposure to Mainland-related lending, the authorities have maintained close monitoring of banks and strengthened supervision to ensure that Macao banks adhere to prudent credit underwriting standards and risk management. Asset quality associated with Mainland-related lending remains healthy and a significant portion of such lending is backed by collateral or guarantee. Furthermore, the Monetary Authority of Macao continues to strengthen financial supervisory and regulatory cooperation with the People’s Bank of China.

The authorities appreciate staff’s support for their efforts in strengthening the anti-money laundering and combating the financing of terrorism (AML/CFT) framework. The assessment by the Asia/Pacific Group on Money Laundering (APG) in 2016 recognized Macao SAR’s substantial progress in implementing international standards, including the filing of suspicious transaction reports (STR) and large sum transactions in the gaming sector. In 2017, the authorities introduced the “Control of Cross-Border Transportation of Cash and Bearer Negotiable Instruments” to further strengthen the AML/CFT framework.