The International Monetary Fund (IMF) estimates that the Macau SAR economy will only reach pre-pandemic levels by 2025, stressing that to maintain economic growth local authorities should avoid premature fiscal tightening and boost vaccination rates.
The estimates were published as preliminary findings of IMF staff at the end of an official staff visit to the SAR.
‘[Macau’s] GDP is projected to grow by 15 per cent in 2022 driven by the gradual return of foreign tourists and the recovery of domestic demand. Boosted by increasing investment linked to the issuance of new gaming concessions and further integration with the Guangdong‑Hong Kong‑Macao Greater Bay Area (GBA), growth is expected to accelerate to 23 per cent in 2023 before gradually converging to its long‑term potential of around 3.5 per cent over the medium term,’ the IMF noted in a preliminary statement report.
However, the IMF warned in its report that given the depth of the economic losses during the pandemic, the level of GDP is expected to surpass its pre‑crisis level only in 2025.
‘In the absence of rapid progress towards economic diversification, the current account balance is set to return to pre‑pandemic levels as tourists return to Macau SAR’.
The IMF also underlined that the strong pandemic prevention policy response, including strict containment and border control measures, has helped the city contain the spread of the novel coronavirus and soften its economic impact, with the SARs large fiscal reserves allowing the government to stabilize employment and consumption.
At the same time, the international body warned that the crisis brought Macau SAR’s overreliance on the gaming sector into ‘sharp relief’, with the key growth driver in the past two decades almost coming to a stop as tourist flows dried up.
‘Despite the strong financial support and the financial strength of casino groups cushioning employment and consumption, aggregate GDP shrank by 54 per cent in 2020, mostly on the collapse of services exports. This highlights the vulnerability of Macau SAR’s economy to external forces affecting the inflow of tourists, such as travel restrictions related to the pandemic,’ the IMF noted.
Still, the monetary body considered that the local financial sector managed to ‘weather the pandemic well’, but with ‘pockets of vulnerability’ emerging.
‘The banking system remains well capitalized with solid levels of liquidity and profitability. Capital adequacy is in double digits, and the nonperforming loan ratio remains low, in part due to policy support and low exposure to the gaming sector,’ the report added.
‘Household debt to banks, half of which are mortgages, accounts for more than half of banks’ domestic credit exposing banks to shock to household income. The external side of banks’ balance sheet has a large exposure to Mainland China, while a significant share of foreign liabilities has less than one year maturity, creating funding vulnerabilities’.
The city’s economy also faced several macroeconomic risks on its path to recovery, namely the resurgence of Covid-19 outbreaks and follow-up containment policies; further tightening of gaming policy regulations; spill-over from large‑scale defaults in Mainland China’s real estate sector or the slowing down of the country’s economy.
Therefore, the IMF considered that the SAR’s economy hinged on boosting vaccination rates, keeping the pandemic at bay, reopening to tourists and maintaining fiscal support.
‘Building on the government’s vaccination efforts, further boosting vaccination rates will be critical in this regard. Moreover, establishing additional travel corridors between Macao SAR and other economies with high inoculation and low infection rates could accelerate the recovery of the gaming sector.,’ the IMF noted.
The international body also warned that the fiscal tightening envisaged in the 2022 budget was premature, given the still-large output gap and significant downside risks.
‘Given fiscal space remains ample for now, a neutral fiscal stance in 2022 would be better tailored to support economic activity in the non‑gaming sector and mitigate any long‑term impact of the pandemic on the economy’s potential’.
The Macau SAR Fiscal Reserve stood at MOP643.5 billion (US$80.1 billion) as of the end of November, 2021.
In 2020 the Macau SAR Government drew, for the first time, on the Excess Reserve to finance its budget deficit caused by the pandemic impact on the world economy.
Despite this, the Fiscal Reserve recorded an investment income of MOP31.1 billion – the highest ever reported – equivalent to a rate of return of 5.3 per cent in 2020 and ended the year with a total of MOP616.1 billion.
Since the start of the pandemic, local authorities have repeatedly made adjustments to annual public budgets, recurring to some MOP100 billion from the vast local financial reserves to compensate for increased expenses in economic stimulus to counter the impact of the pandemic.
Local authorities also plan a MOP30.3 billion injection from the financial reserve to compensate for the decrease in public income in the approved 2022 government budget.
According to the IMF, authorities should maintain cash transfers to the most vulnerable households, which have a high propensity to consume as a more effective way to support economic recovery.
‘Incentivizing job creation will support the recovery and facilitate resource reallocation. In this regard, the government’s job placement and matching efforts, particularly for youth, are encouraging,’ it noted.
At the same time, additional spending on healthcare and education and scaling up macro‑critical public investments in climate resiliency would also boost demand in the near term while facilitating economic diversification and adaptation to climate change in the medium term.
