Our Desk | Rising interest rates could spell trouble

Daniel Beitler

Macau interest rates are expected to rise significantly in the next few years, as local authorities pay close attention to the monetary situation in both Hong Kong and the United States.

Held artificially low for years in the aftermath of the 2008 global financial crisis, base rates around the world are rising as monetary authorities fear inflation is beginning to set in.

Earlier this year, the World Bank issued a warning that investors and regulators were not taking seriously enough the possibility of a sharp increase in interest rates should inflation appear to be taking hold more rapidly than previously thought.

The monetary authority of Macau – and to a lesser extent it’s counterpart in Hong Kong – finds itself in an unusual situation.

On the one hand, the economic reality of the two SARs is one heavily dependent on China, given the scale of imports from the mainland, not least in tourism. But on the other, the monetary situation is largely dependent on the U.S. and its central banking system, the Federal Reserve.

The Macau pataca is fixed to the Hong Kong Dollar, which is in turn pegged to the U.S. dollar. Accordingly, Macau tends to follow Hong Kong when deciding its monetary policy, and Hong Kong follows the United States.

The U.S. Federal Reserve has hiked interest rates six times since December 2015, ending a seven-year freeze at a record low of 0.25 percent. The base rate now stands in the window of 1.5 percent to 1.75 percent, and Federal Reserve officials project a steeper path of hikes in 2019 and 2020 as the economic outlook continues to improve.

Interest rates in Hong Kong and Macau must eventually increase at more or less the same rate. The base rate of the discount window in Macau now stands at 2 percent – slightly higher than in the U.S. – having been elevated most recently on March 22.

The Monetary Authority of Macau says that “the movements of policy rates in Hong Kong and Macau should be basically consistent in order to maintain the effective operation of the linked exchange rate system,” meaning that it will rely on U.S. and Hong Kong policymakers to continue determining interest rates.

The most pronounced effect of rising interest rates on the general population in Macau will concern property owners who, depending on the terms of their mortgage, may soon face an increase in monthly repayments.

That hasn’t happened yet as Macau mortgage lenders have thus far kept their rates the same even as the de-facto central banking authority ramps up the pressure. But equally, that can’t last forever.

The Monetary Authority of Macau has acknowledged that local banks will adjust their deposit and lending rates for retail customers according to their own discretion and to market developments.

Indirectly-elected lawmaker and chairman of the Macau Association of Banks, Ip Sio Kai, warned in February that property owners who acquired their assets in the last decade or so may soon find it “tough” when the rates suddenly increase. The government separately warned residents to be wary of the increases and “prudently assess their repayment ability.”

But another danger lurks in the near future for the two SARs.

As Hong Kong and Macau continue to follow U.S. Federal Reserve decisions, their economies may begin to feel the stress of adopting economic policies designed with not them in mind, but the world number one.

The weakness of the Hong Kong dollar – which last month touched its lowest point in more than three decades – “suggests an imminent risk of capital flight,” according to Francis Chan, a Bloomberg Intelligence analyst.

Moreover, Hong Kong’s private debt-service ratio now stands at 28 percent, the highest in the world. As borrowing costs begin to rise, the ever-resilient Hong Kong banking system may be stretched so much that the snap is felt even in Macau.