Better prepared for the next one?

Opinions are divided when one wonders whether, 10 years on, Macau is better prepared for a new crisis. There are those who guarantee that we are, but there are also those who warn that crises of this kind cannot be prepared for . . .

Macau is “better prepared to weather unexpected shocks,” according to Macau Monetary Authority (AMCM), in a statement sent to Macau Business. 

AMCM justifies this idea with several measures taken since 2008. 

The first is economic. “Macroeconomic stability plays an important role in upholding financial soundness of the MSAR. In line with the MSAR’s Five-year Development Plan (2016-2020) the economy has entered into a stage with a goal of proper diversification, which will enable it to grow at sustainable pace in the medium term.” 

The other is the front of financial stability: “The MSAR financial sector has been growing on a robust development track. Throughout the past 10 years, banks have maintained adequate capital and liquidity; asset quality has improved with the non-performing loan (NPL) ratio moving down from about 1 per cent in early 2009 to 0.2 per cent in early 2018; banks’ profitability has been steadily rising.   

“Meanwhile, banks have been constantly enhancing risk management effectively.  As a result, the MSAR financial sector achieved an ideal rating of ‘substantial effectiveness in supervision’ in the report published by the Asia-Pacific Group on Money Laundering (APG) in 2017.”  

In January 2011, AMCM issued the ‘Guidelines on Management of Liquidity Risk,’ which sets out the key requirements for the management of liquidity risk by banks and outlines the AMCM’s approach in the supervision and assessment of banks’ policies and practices related to the management of liquidity risk. 

In this chapter, AMCM also states that “the global financial crisis revealed a need for macro-prudential policy tools to mitigate the build-up of systemic risk in the financial system and to enhance the resilience of financial institutions against such risks once they had materialised,” underlining  the ‘Guidelines on Residential Mortgage Loans’ issued in October 2010, “which sets out the basic principles and standards for residential mortgage lending, and introduces macro-prudential measures (i.e.) loan-to-value (LTV) limit and debt servicing ratio) to ensure the stable long-term development of banks’ residential mortgage lending business. In particular, the LTV limit has undergone a series of revisions and enhancement since implementation in order to cope with the relevant condition of the housing market.” 

At least the public finances. According to AMCM information, “the MSAR government’s commitment to fiscal prudence has persistently built up strong credit fundamentals. The government’s sturdy fiscal condition, together with its strong external financial position, continued to thicken the Fiscal Reserve and foreign exchange reserves.  Concurrently, the debt-free status of the MSAR Government has remained.  Strong fiscal discipline of the MSAR Government and steady economic development will be crucial to safeguarding medium-term fiscal sustainability.”  

An example of that: international rating agencies “have shared similar views on the MSAR Government’s strong credit profiles.” 

In short: “all these improvements on the fronts of macroeconomic situation, financial stability and MSAR Government’s fiscal position support Macau becoming better prepared to weather unexpected shocks. Nevertheless, the MSAR authorities will remain highly vigilant to potential economic and financial disturbances.” 

“I am unsure whether Macau is better prepared today than before to deal with a severe external shock (such as a major global crisis) in the near future” – Xinhua Gu 

However, Professor Xinhua Gu told Macau Business: “I share the same feeling as many others that no preparation is viable or useful for an uncertain future given the fact that the U.S. has a large global repercussion for the world economy and that its government is unpredictable in terms of its policies and consequences under the Trump Administration.”  

As the Head of the Department of Finance and Business Economics, University of Macau, states: “I am unsure whether Macau is better prepared today than before to deal with a severe external shock (such as a major global crisis) in the near future.” 

Catching cold? 

“When Wall Street sneezes, Macau is one of the first economies to catch the cold,” wrote Macau-based scholars Zhang Yang and Fung Kwan in Financial Crisis Offers Respite for the Macau Economy (2010). 

In other words, the fact that there are several international players (mainly Americans) in the gambling industry makes the Region more vulnerable in the event of financial turbulence in the markets, according to these University of Macau teachers. 

The opinion, however, is not unanimous. 

From the same Faculty of Business Administration, Xinhua Gu finds “I do not think that any external shocks from remote places (like the recent global financial crises) would exert a large impact upon the Macau economy since it is directly affected by tourist flows from Mainland China. Evidence shows that the rest of the world makes a slim or trivial contribution to tourism development or economic growth in Macau. Mainland China was less badly hit by the 2008-09 global crisis than were other economies so that the adverse effects of that crisis on Macau proved quite limited.” 

What worries Professor Xinhua is “the unbalanced growth” – the ratio of gross gaming revenue to GDP rose from 40+ per cent in 2002 to 90+ per cent in 2014, “indicating that Macau’s economy had become increasingly polarised” – and tending “to be ultimately unsustainable, especially for small open economies (like Macau) that are usually vulnerable to external shocks (such as Mainland China’s tightening of visa policy to curb compulsive gambling).” 

“Image yourself to be a local government,” proposes Professor Xinhua. “What should you do to mitigate various problems and seek healthy growth? Should you still grant more gaming licences or offer more land resources at no or little cost to casino operators for problematic expansion? Can the U.S. be as liberal as Macau? Is it possible for the U.S. to be as open to foreign gaming operators as in Macau?” asks the Head of the Department of Finance and Business Economics, University of Macau. 

But at least for existing casinos the prospects for the future appear brighter. Grant Govertsen of Union Gaming tells Macau Business: “Quite frankly, the Macau operators are almost all in significantly better financial health than in 2008. Specifically, their respective balance sheets are much stronger, and they should much more readily weather any financial storms that could be on the horizon.  

“Should there be a broader financial crisis, I think they will also react to it more quickly and make defensive moves more quickly (e.g.) cost-cutting. In a nutshell, while the last financial crisis almost resulted in multiple bankruptcies of the major players, a similar dynamic is unlikely to occur again.”