Economy | IMF warns casino-funded coffers won’t keep up with social welfare costs

The International Monetary Fund has released its concluding statements from an earlier visit to the SAR to assess the health of Macau’s economy. Despite a generally positive evaluation, the international organization says that city faces several medium-term risks, including the diminishing spending power of mainland tourists and the possibility that gaming revenue tax, which provides the bulk of government income, will be unable to keep up with mounting social welfare costs incurred by an ageing population.

The IMF’s concluding statements outline three top policy priorities for the government: an increase in targeted public spending; the retention of the exchange rate peg of the pataca; and the formation of a medium- and long-term fiscal framework to manage the “efficient use of gaming-dependent fiscal resources.”

The assessment found that risks to the Macau economy are “tilted to the downside” and “mainly emanating from mainland China.”

“[The] Macau SAR’s small and open economy is highly vulnerable to economic, financial and policy developments on the mainland,” said the IMF. “With most tourists coming from the mainland, any policy that undermines their spending power abroad would negatively affect growth.”

Following a strong rebound from the 2014 gaming slump, economic growth in Macau moderated in the second half of 2018 on the back of weaker foreign investment and reduced VIP revenues from mainland Chinese clientele.

Gross domestic product growth in 2018 amounted to about 5.6 percent, dropping significantly from the 9.7 percent seen in the previous year. The IMF predicts that economic growth will slow to about 5.3 percent in 2019 and then hold at about 5 percent in the medium-term.

The main driver of medium-term economic growth will continue to be the tourism industry, fueled by consistent mass gaming and non-gaming activities, but offset by a more subdued VIP sector in line with the diversification efforts of authorities.

“Over the medium term, the economy will likely expand moderately. […] While the [growth] outlook is more subdued than historical averages, it is also less volatile,” the IMF noted.

The concern, according to the international institution, is that more moderate growth in gaming will deliver “less buoyant tax revenue” just as social spending will grow on the back of ageing and social pressures.

Even as the Macau government holds one of the world’s healthiest fiscal and foreign currency reserves per capita, the IMF recommends that authorities produce a long-term fiscal sustainability report, citing Australia and New Zealand’s as a model.

Macau might face further trouble should there be a sharp tightening of global financial conditions with unexpected interest rate hikes from the U.S. Federal Reserve.

“Given the indirect exchange rate peg to the U.S. dollar, the pataca would appreciate relative to the renminbi possibly reducing [the] Macau SAR’s competitiveness and weakening gaming spending per visitor.”

Nevertheless, “the peg to the Hong Kong dollar continues to serve [the] Macau SAR well,” providing “a credible nominal anchor.”

A final note of concern in the concluding statements was the emergence of rival gaming jurisdictions in East and Southeast Asia that threaten to divert mainland tourists from Macau.

Long on the city’s radar, the threat is considered minimal in the short- and medium-term on account of Macau’s gaming infrastructure and its proximity to mainland China.

The IMF expects Macau’s economy to continue to perform adequately in other areas. Credit should remain readily available and the city will continue to see a low unemployment rate. Investment in the years ahead is expected to remain weak, although improve in the medium-term in part due to the upcoming expiration of gaming licenses.

Meanwhile, property prices recovered with the economic rebound and, although flat in the second half of 2018, are now subject to new measures that will ultimately reduce market risks.