The coronavirus outbreak, pandemic restrictions and gaming industry woes forced the government to once again resort to the city’s fiscal reserve. Analysts call for new ways to raise money to make up for budget deficits, such as land auctions or even issuing bonds.
Following more than a month of restrictive measures, including a 12-day partial lockdown that forced all “non-essential” businesses like casinos and shops to suspend operations, Macau’s worst community COVID-19 outbreak seems to be finally over. While normality is gradually coming back, the city is reeling from the loss, financially and macroeconomically, caused by this recent outbreak and the fluctuations of the pandemic as a whole throughout the past three years.
There has been no official estimate yet about the economic loss incurred by this community outbreak since June 18, but the local economic recovery has already lost momentum prior to this upset this year over surges of sporadic cases in Mainland China and Beijing’s harsh stance towards cross-border gambling. Latest official figures show that the city’s gross domestic product (GDP) fell 8.9 per cent year-on-year in the first quarter of 2022 after a rise of 18 per cent in 2021, while the casino industry—Macau’s main economic pillar—reported a 46.7 per cent plunge in gross gaming revenue in the first half of this year after a 43.7 per cent hike in 2021.
In light of the latest outbreak that the officials said “has presented unprecedented pressure” on the already lacklustre economy, the government has pledged in the past month two financial relief packages of MOP10 billion (US$1.25-billion) each to support residents and enterprises and afford pandemic-related expenses. These support measures, coupled with the lower than expected tax receipts on gaming revenue, mean the government must take out again nearly MOP35.16 billion from the city’s fiscal reverse, in addition toMOP167.8 billion the administration has already depleted from the public coffers in the past three years to avoid deficits in the annual budgets.
“In the near term, Macau’s public finances are fine as long as the fiscal reserve can sustain the government running for 18 months without any income,” says Jacky Yuk Chow So, Vice President and Dean of the School of Business of Macau University of Science and Technology (MUST). He refers to the fiscal reserve law that mandates the minimum amount of capital in the public coffers to be no less than 150 per cent of the government’s annual expenditures in the previous fiscal year.
According to the authorities, the fiscal reserve amounted to MOP557.3 billion now after the recent drain of MOP35.16 billion, an amount that is enough to cover the government expenditures—which averaged about MOP100 billion annually in the past few years—for slightly over five years with zero income.
“The money in the public coffers is not unlimited and it is not the last time there will be an outbreak,” Secretary for Economy and Finance Lei Wai Nong remarked in the Legislative Assembly in late July, defending the cautious usage of the fiscal reserve. He revealed about half of the government’s expenditures in the past three years were covered by the fiscal reserve: public coffers covering about 49 per cent of the public expenses in 2020, 46 per cent in 2021and 57 per cent so far this year.
Though the government stated it has spent over MOP167.8 billion from the fiscal reserve in the past three years, this reduction has not been clearly reflected in the public data yet. The balance of the fiscal reserve amounted to MOP579.4 billion in December 2019 before the pandemic began, translating to just MOP22.1 billion less or a decline of 3.8 per cent to the current tally of MOP557.3 billion.
This is due to the lag in accounting rules because, for instance, the fiscal surpluses recorded in 2018 and 2019 were only transferred to the fiscal reserve in 2020 and 2021respectively. Another reason is the investment profits of the reserve, which in the past three years totalled about MOP76 billion, including MOP30.2 billion in 2019 (a yield rate of 5.6 per cent), MOP31.1 billion in 2020 (5.3 per cent), and MOP14.7 billion in 2021 (2.3 per cent).
Macau-based economist António Félix Pontes comments, “In the last three years, the government has withdrawn about MOP56 billion on average per year from the fiscal reserve, and we can still ‘survive’ financially for a few more years. But if we continue along the same path, the fiscal reserve will be weakened and thus the implementation of relevant economic and social projects of the Macau Special Administrative Region will be hampered,” he says.
The ‘dynamic zero-COVID’ policy adopted in Macau now is the “the same path” Mr Félix Pontes refers to, which he describes as being “effective in causing irrecoverable damage” to the local economy and public finance. “Such a policy can be justified at an early stage of the emergence of a pandemic, but with greater knowledge of the virus and the introduction of effective vaccines and specific medication, the rationale for continuing it is very questionable,” he says, who is also a former official of the Monetary Authority of Macau.
“This policy has the ultimate objective of achieving zero-COVID cases, which, for me, is a ‘mirage’, as it is impossible to maintain this goal permanently,” he continues. “Even when the zero case is achieved at a given time, it’s a ‘Pyrrhic victory’ until new epidemic outbreaks arrive, as they have occurred and will continue to happen in all latitudes.”
While most parts of the world have adopted “living with COVID” and gradually lifted any relevant restrictions, Mainland China is one of the few remaining places that is still committed to the containment strategy. As the city has only maintained the largely quarantine-free travel arrangement with the mainland—which is also Macau’s larger feeder market—since the start of the pandemic, the territory apparently has no other choice but to mirror the decision across the border. Macau officials have also reiterated in the past fortnight that the Macau economy could only regain momentum again when the quarantine-free travel arrangement between the two sides, which has been suspended since June 18, is reinstated.
The city’s public finances and economy will suffer in the medium-to-long term, if the COVID-19 situation continues to linger with no changes in the zero-COVID strategy, Professor So agrees. “Zero-COVID is an ideology that is not sustainable in the long term: Macau cannot afford to have more lockdowns because not only small-and-medium-sized companies will go bankrupt but also larger companies will be in trouble,” he says.
“Human life is valuable, but many of the deaths are caused by something else [rather than COVID-19]. As long as the medical system does not collapse, the zero-COVID approach should not be adopted,” the academic adds. Macau has so far reported over 1,800 cases since June 18, and six patients have passed away, but all were senior citizens with chronic diseases.
“Let’s see whether there might be changes following the political meeting later this year, because [Mainland] China’s economy has also suffered major challenges over this [zero-COVID] policy,” the academic says, as the mainland only reported a growth of 0.4 per cent in the second quarter and an overall hike of 2.5 per cent in the first half of this year, which is far below the official annual target of a 5.5 per cent growth for 2022. Meanwhile, the political meeting he refers to is the 20th National Congress of the Communist Party of China, expected to take place in October and November, in which Chinese President Xi Jinping is likely to be elected for a third term as the general secretary of the party.
On the other hand, Joey Lau Chi Ngai, president of the Macau Economic Association, supports the dynamic zero-COVID strategy. “The [containment] measures taken by the government have caused temporary disruptions to the city’s economic development, but have been effective in reining in the outbreak,” he says. “In the long run, committing to the ‘dynamic zero-COVID’ policy can ensure the quarantine-free travel arrangement with the mainland and restart the local economic activities, guaranteeing a healthy, safeand stable environment for the development of Macau.”
While the latest monthly survey on the local economic climate published by Mr Lau’s association underscored that the business environment “is under severe challenges” and “in deep trouble” over this community outbreak, the association president hails the “decisiveness” of the government to pledge two MOP10 billion relief packages. “As it is difficult to forecast the development of the COVID-19 pandemic, it is of paramount importance [for the government] to use its resources wisely,” Mr Lau adds.
Nevertheless, the problem of Macau’s economy and public finances goes beyond the virus outbreak. Mr Félix Pontes points out that there are “two dark clouds on the horizon”: the continuation of the zero-COVID approach and the gaming tax, which accounts for over 80 per cent of the government revenue. “There are many doubts about the level of revenue the concessionaires will get in the near future in view of the meaningless number of tourists from [Mainland] China and the almost total closure of borders of Macau, both directly outcomes of the zero-COVID tolerance policy, and the unknown impact of the new gaming law,” he explains. The new gaming law, which represents heightened supervision for the sector, was approved and implemented in late June.
“Macau’s revenue is mainly determined by the gaming industry. Given the COVID 19and the policy of the Chinese [central] government policy, the revenue will not be as high as the peak several years ago even if the COVID-19 situation is under control,” Professor So of MUST agrees. “The Chinese government does not want the casino sector to expand, meaning the best is over!”
He refers to the fact that Beijing has strengthened its clampdown on cross-border gambling, as well as the arrests of two local junket bosses Alvin Chau Cheok Wa and Levo Chan Weng Lin since the end of last year that have led to the closure of most junket operators in the city. As a result, the VIP gaming segment, which accounted for half of the gaming revenue prior to the pandemic, is long gone, only representing less than 10 per cent of the total gaming revenue in the first half of 2022.
The authorities drafted the budgets for 2021 and 2022 respectively, specifying that the gaming revenue must reach MOP130 billion annually—or 44.5 per cent of the pre-pandemic volume at MOP292.5 billion in 2019—to afford the government expenditure, but the casino revenue only hit MOP86.9 billion in 2021 and MOP26.3 billion so far in the first six months of this year.
Macau Responsible Gaming Association President Billy Song Wai Kit believes that even if the COVID-19 situation can be kept under control, it’s difficult for the annual gaming revenue to reach the level of MOP130 billion a year, or more than MOP10 billion a month, in the near future. “It’s really challenging for the gaming revenue to reach this level next year even without the COVID-19 fluctuations, as our VIP segment is non-existent,” the local gaming industry commentator says.
“It is a downward trend for the prospect of the local gaming industry” over the pandemic impact, Beijing’s crackdown, competition from other markets in Asia and other factors, Mr Song says. “The scale of the gaming industry has expanded so much since the liberalisation of the sector [in 2002] and now it’s time for this scale to shrink slowly and gradually.”
In light of the gaming industry’s woes, authorities have been committed to developing other segments in recent times from new finance to technology to tourism-related segments. But it is expected that they could not fill the hole in public finance left by the gaming segment. “The tax bases for Macau will definitely be different: gaming will not provide as much revenue as in the past and [the gap] cannot be made up by new initiatives, such as tourism-plus segments, new finance, and others, at least not in the near term,” Professor So says.
Tackling the smaller contributions from the gaming segment and maintaining a balanced budget without only relying on the fiscal reserve, the scholar believes the government should launch the land auction again on a regular basis, following a hiatus since 2008, as well as adopt a “more efficient and aggressive approach” for making investments of the fiscal reserve. “These are some wild ideas, but the government might also consider issuing public debt securities or government bonds in case of the continuous downturn in public finance,” Professor So says. “This can fund deficits in the budget but also advance the local bond market that the government aims to develop.”
“The recovery of Macao’s economy will be slow in the near future and it will need the long-term financial assistance from the local government that will face the cruel reality of lower income and more expenditure,” Mr Félix Pontes acknowledges. There is limited room for the administration to cut its expenditure, and increase its income through other types of new levies in the worries of the city losing its competitiveness, the economist says, adding the government will likely have to continue using the fiscal reserve or issue public debt securities to fund the budget deficits in the near future.
But he remains optimistic about the city’s prospects. “The central government of China has assigned Macau a key role in the development of Hengqin Island and the [Guangdong-Hong Kong-Macau] Greater Bay Area Initiative,” he says. “Based on this, I think that Macao will continue to receive strong support from the mainland.”