Contraction, depression, recession

IMF forecasts are the most negative in a while for Macau, but since it was revealed that the local economy contracted by 4.5 percent in the third quarter, no one will be surprised if the end line is worse.

MB Jan 2020 Special Report | IMF: from glory to recession

The IMF’s October report fell like a bomb on Macau as it revealed a scenario of economic recession until 2024, but the fact is that the IMF’s previous document (February) had already anticipated much of what was to come. 

The ‘problem’ with this report is that –  and this is a sign of the uncertain times we are living – it was redacted while Macau was still ‘hungover’ from its 2018 economic growth (4.7 percent). “The economy has returned to expansion since mid-2016, driven by gaming and tourism growth”. 

The report stated: “Risks are tilted to the downside, mainly emanating from Mainland China”. 

IMF’s report mentioned “prudent macroeconomic policies and high reserves which provide strong buffers against shocks”, identifying “three top policy priorities”, besides supporting diversification and fulfilling social needs: a higher public investment would support the diversification agenda, while further targeted social spending would foster inclusion; a medium/long-term fiscal framework would facilitate a judicious and efficient use of gaming-dependent fiscal resources; and, finally, the exchange rate peg continues to serve Macau SAR well and should be maintained through supportive policies (including a prudent fiscal policy, sound financial sector, and adequate reserves). 

Eight months later, however, there came a sentence nobody wanted to hear: Macau’s GDP is expected to fall by 1.3 percent in 2019 and by 1.1 percent this year, in a sharp contrast with the latest forecast (May). This time, the 2019 GDP would be 4.3 percent and around 4 percent in the medium term. 

Unfortunately for Macau, IMF forecasts were not out of line with those that had already emerged, either through the Economist Intelligence Unit or the University of Macau – see information in this page. 

Of course, these numbers are supported by the statistics released by DSEC. 

The local economy contracted by 2.5 percent in the first half of 2019, enduring two consecutive quarters of negative growth: a 3.2 percent decline in the first quarter and a negative growth of 1.8 percent year-on-year in the second quarter (officially, a technical recession happens when there are two consecutive quarters of negative growth). In the third quarter, the drop was even greater, 4.5 percent, which added credibility to the forecasts. 

“Investment and exports — driven mainly by gaming tourism — have contributed the most to this contraction”, said Mariana Colacelli, IMF Mission Chief, to Macau Business. “We projected a contraction for 2019, as gaming revenue is negatively affected by China’s slower growth, among other factors. In addition to that, the uncertainty created by the scheduled expiration of gaming licenses in 2022 will have to resolve for investment in order to recover”. 

In macroeconomic readings, the 0.8 percent drop in the second quarter of the real exports of gaming services from Macau – a measure of what visiting gamblers contribute to GDP – weighs heavily. 

“Mainland China is Macau’s top trading partner, so it is inevitable that global economic events like the trade war between China and the US have a significant impact on Macau’s growth” – Florence Lei 

The year-on-year decline in gross fixed capital formation or investment as a result of the low level of public investment (probably lower than MOP 10 billion in the last year) deriving from the slowdown in the construction of resorts from the gambling concessionaires is decisive for the current situation. 

But it is not the only factor. 

“As Macau’s GDP highly depends on mainland China visitors, we need to make forecasts on Chinese economy”, explained to us Chi-shing Chan, the spokesperson from Macro-forecast project (University of Macau). 

“The US-China economic relations deteriorated, and China’s accommodating policies did not revive the economy enough. Hence, we need to revise our GDP forecast downward”, this researcher from the Centre for Macau Studies added. 

Florence Lei, Coordinator for the Bachelor of Government Studies programme, School of Business and Law, University of Saint Joseph, also refers to the China factor, accentuating the issue of the economic war launched by the US: “As a small open economy, Macau’s growth volatility should depend on the external trade environment – terms of trade volatility, capital flow volatility, trade policies of its trading partners, etc. Mainland China is Macau’s top trading partner, so it is inevitable that global economic events like the trade war between China and the US have a significant impact on Macau’s growth”. 

(The IMF forecasts a growth of 5.8 percent this year for the Chinese economy, with 2019 figures not expected to rise significantly from 6 percent.) 

Ho Iat Seng like Edmund Ho 

Ho Iat Seng received a recessionary economy from Fernando Chui. 

After all, it is the same thing that had happened to Edmund Ho when the Portuguese flag came down from the Praia Grande Palace. 

At the presentation of his first Policy Address (at the end of 2000), the first Chief Executive spoke of “tough times”. 

“It’s like a person recovering from a long illness, who is still very weak. The moving atmosphere and intermittent animation of the market does not imply the immediate emergence of a continuous global recovery. The possibility of survival of some sectors of activity and the still difficult exploitation of others are persistent situations”, warned the then Chief Executive. 

Still, Edmund Ho was not lacking optimism: “After more than 10 months since the creation of the MSAR, the economy is beginning to see the light at the bottom of the tunnel”. 

The first budget approved by the MSAR Legislative Assembly was worth MOP 13.52 billions. The expected expenditure for 2020 is MOP 100 billions.