IMF: Mainland slowdown a risk to MSAR

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The International Monetary Fund (IMF) believes that the MSAR’s outlook is reliant upon external developments, in particular those related to Mainland China, according to its latest report on Macau.
The Fund notes in its 53-page tome that Mainland China’s sharp slowdown would be the biggest risk to the city if it is ‘accompanied by a material depreciation in the Renminbi against the dollar, which would directly affect external competitiveness.’
‘Macau SAR was depreciating against the RMB as a result of the peg, indirectly, to the U.S. dollar,’ the Fund wrote. ‘With China now accounting for two-thirds of tourists and balance of payments pressures raising the potential for depreciation, external competitiveness may be more of an issue.’
The report also says Macau remains at risk to policy changes related to developments on the Mainland; in particular, measures controlling capital outflows.
In addition, it believes a large contraction in China’s output would further affect local gaming revenue, given the majority of the city’s visitors are from the Mainland.
‘While the recent shock could be absorbed via a reduction in the gaming sector’s extraordinary profits, a further adjustment from current reduced revenue levels could be more consequential for employment and the broader economy,’ the Fund added.

To the mass
Declaring that volatility may undermine increasing macro-economic uncertainty, the Fund notes that the MSAR Government’s strategy to diversify to mass market gaming, non-gaming tourism and financial services is important.
Apropos mass market tourism, the Fund points out that the critical parameter for this development would be whether the city could offer adequate infrastructure – in terms of quality and quantity.
‘The move from VIP to mass market tourism likely requires a larger physical footprint to achieve the same amount of growth due to lower per capita tourist spending and there are already material infrastructure bottlenecks,’ the report found.
‘[The bottlenecks] may constrain Macau SAR’s ability to accommodate the needed additional tourists. For this reason, execution of current infrastructure plans is likely the single most important part of the growth strategy going forward,’ it pointed out.
Meanwhile, the International Monetary Fund believes the city’s mass market gaming ‘still has significant scope for growth,’ despite it noting that the effective management of the money-laundering risks is the key to sustainable growth for the industry.
For non-gaming development, however, the Fund says it is still premature to access Macau’s potential in the area, given that it is ‘only recently that gaming operators have invested in the necessary supply.’
Nevertheless, it added a further relaxation in China’s visa policy for visits to the MSAR could be a positive factor for the city’s outlook.

Financial development
On the other hand, the IMF commented that the city’s intention of developing financial services such as RMB settlement of external trade, financial leasing, and global wealth management, is ‘logical.’
‘China’s recent and high-level official support for Macau SAR’s diversification into financial services is important. Nonetheless, further work would be useful to establish both Macau SAR’s comparative advantage in these areas and the potential cost-benefit of seeking this business,’ the report reads.
The Fund adds that the city may need to provide larger cuts in its income tax in order ‘to attract the necessary non-resident investors and professionals, with potentially limited spill-over benefits to local employment,’ especially for becoming a form of offshore financial centre for leasing and wealth management.
‘It will be important that Macau SAR ensures a high standard for transparency of legal persons and trusts in line with international standards, in particular on the issue of beneficial ownership,’ it added.

Fiscal loosening unnecessary
Meanwhile, the body pointed out that there is no need for the MSAR Government to further loosen fiscal discretion in order to avoid ‘over-stimulating the economy.’
It added that the authorities should also establish a medium-term framework to anchor fiscal policy and ensure long-run solvency.
‘Although there is not an urgent concern, the authorities should establish long-run projections to better understand how much of the fiscal resources are accounted for, particularly with respect to future pension obligations,’ it wrote in the report.
For the local property market, the Fund perceives “no clear need” for the government to loosen its current macro-prudent regulations for the market as well.
‘Current information – including healthy bank balance sheets and recovering prices – suggests this threshold has not been met,’ it said.
The report was released yesterday following the Executive Board of the Fund’s 2016 Article IV Consultation with the MSAR. The consultation, required by Article IV of the Fund’s Articles of Agreement, took place last November with a team of IFM economists visiting the city, meeting local government officials.