IMF recognizes ‘bright outlook’ in Macau, calls for diversification

The International Monetary Fund (IMF) has released its first Staff Report on Macau regarding the territory’s economic development and policies. It has concluded that the city’s economy will continue to see strong growth of up to 10 percent in the next few years. Nevertheless, the report also warned against risks such as slowdown in tourism. It has recommended a sovereign wealth fund and the diversification of the local economy in order to achieve stable growth.
The IMF report suggested that Macau’s economic growth will “remain robust” following the strengthening of the global economy and the “continued investment related to several casino expansion projects.” It also predicts that inflation will stay at a level between 5 and 5.5 percent.
Moreover, the report estimated that private investment will shrink in the 2018/2019 period due to the completion of expansion projects. This means that the growth “is likely to moderate to mid-single digits.” The current account will also show a slowdown in goods imports and an increase in service exports.
Furthermore, the report points out that “a core risk” for the Macau economy will be the “potential sharp drop in tourism and gaming revenue.” It claimed that “a renewed downturn or protracted stagnation in the United States and the Euro area” could stall the global economic recovery and hence lead to this risk becoming a reality.
The report also warned that the property market in Macau could face “a sharp correction.” It suggested that “a shock to the gaming and tourism industries that stunts economic growth or a sharp rise in interest rates, due to faster-than-anticipated withdrawal of unconventional monetary policy abroad” can trigger this correction, which could have huge ramifications for the credit quality, fiscal revenue and overall economic performance of the city.
IMF believes that Macau is in a fiscally sound position now. Nevertheless, it pointed out that the government relies heavily on gaming revenue, a situation which it describes as “volatile.” It also suggested that the government will experience more spending pressure in the future due to the aging population.
As a result, it suggested that the authorities allocate part of their fiscal reserve to set up a sovereign wealth fund (SWF), which bears a mandate “to achieve better risk-adjusted returns over a long-term horizon.”
The report suggested that a SWF can build “sustainable buffers” that can “offset the impact of potential adverse shocks and set money aside to fund long-term aging expenditures.”
IMF also described economic diversification as “crucial” for sustaining the growth of Macau in the long term. It has recommended that Macau nurture its competitive advantages, and devote more public investment to infrastructure and social sectors, as well as on health and education.
The report also argues that the region should broaden its links with the mainland so that it can benefit from the future economic rebalancing and capital liberalization of the mainland by catering to the new demands of mainland residents. JPL