The International Monetary Fund (IMF) concluded the Article IV Consultation with Macao Special Administrative Region (Macao SAR) for the first time since the establishment of the SAR in December 1999 and published its Staff Report today (24 July, 2014, Washington, DC time; 25 July, 2014, Macao SAR time).
The Macao SAR authorities welcome a thorough assessment by the IMF Staff Mission that commends the SAR Government’s prudent macroeconomic management framework – anchored by the combination of the linked exchange rate between the Macao pataca (MOP) and the Hong Kong dollar (HKD), flexible markets, and a commitment to safeguarding fiscal discipline and financial stability, which has served Macao SAR well in maintaining a strong external position and financial stability while navigating it through a number of challenges, including the recent global financial crisis. Macao SAR’s external position is broadly consistent with medium-term fundamentals and desirable policies.
The IMF affirmed that the currency board linked to the HKD is the best arrangement for Macao SAR and should be maintained. The Linked Exchange Rate System (LERS) has provided a crucial nominal anchor for Macao SAR, helped maintain economic and financial stability, and kept the real effective exchange rate broadly in equilibrium. The SAR also meets the pre-requisites for sustaining a currency board, namely flexible labour and product markets that prevent sizable or persistent misalignments, fiscal discipline, prudent management of foreign exchange reserves, and robust financial sector regulation and supervision.
The IMF Mission noted that the health of Macao SAR’s banking system further strengthened with the capital adequacy ratio rising to nearly 15.0% and the non-performing loan ratio falling to merely 0.1%. The macroprudential and demand-management measures towards the property boom have slowed market transactions, particularly by non-resident buyers, amid some evidences for overvaluation and threat of housing bubble. Should property-price acceleration persist, international experience indicates that tighter housing-related tax policies and additional macroprudential measures, such as limits on credit exposure to the property sector and lower loan-to-value ratios for purchases of second or more homes, could be used to curtail excessive price growth and contain systemic risk. Conversely, if the property market experienced a sharp downturn or disorderly correction in housing prices, the Mission emphasised that preserving financial stability should be the primary objective in deciding whether to ease some of these counter-cyclical prudential measures, especially in the downward phase of the economic cycle. Meanwhile, banks continued to raise their foreign asset position with limited domestic lending opportunities. Given rising banks’ exposure to a few jurisdictions, the Mission suggested that close monitoring and cooperation with their home supervisors would help guard against adverse cross-border financial spillovers.
The Mission suggested the Macao SAR Government establishing a medium-term budget framework, which would help promote transparency, support fiscal discipline, and ensure that growth in spending is consistent with development and fiscal objectives. It also recommended the SAR Government to conduct fiscal assessments with policy options in the context of some long-term issues, such as population ageing, economic diversification and a possible slowdown associated with tourism and gaming.
The Mission pointed out that the authorities have appropriately devoted more attention to the sound management of the Fiscal Reserve. The Monetary Authority of Macao has taken a more proactive approach to investing fiscal reserves by diversifying asset allocations and introducing more asset classes, such as equities, with the help of external managers.
The Mission concurred that the economic outlook of Macao SAR is bright and projected the Macao SAR economy to stay strong over the medium term with annual real GDP growth of 8-10%, driven by service exports and investment while inflation to stay at around 5.0-5.5% amid a tight labour market. The unemployment rate would remain low at 1.7%. As Macao SAR is a highly-open and narrow-based economy, the Mission cautioned that Macao SAR should prepare for any anticipated and unanticipated changes from some external factors, such as withdrawal from unconventional monetary policy in the USA, and setbacks to the global recovery and regional slowdown. Macao SAR would also need to stay vigilant of domestic risks, such as a possible course change in the property market if demand fundamentals shift.
The Mission agreed with the Macao SAR Government that economic diversification is a key policy objective and would help provide an additional growth engine and bolster the economy’s resilience over the long term. It suggested some strategic options, including nurturing Macao SAR’s comparative advantages through fiscal spending in infrastructure and social sectors and broadening its linkages with the Mainland through regional cooperation agreements and cross-border infrastructure. Some relaxation of policies related to labour importation and further facilitation of workers commuting from neighbouring parts of the Mainland may help address the issues of labour shortage.
The IMF Mission visited Macao SAR during 22-29 April, 2014 to conduct the 2014 IMF Article IV Consultation. From 2014 onwards, the IMF Article IV Consultation with Macao SAR, China is proposed to be conducted on a 24-month cycle. Under Article IV of the IMF’s Articles of Agreement, the international organisation holds bilateral macroeconomic discussions with individual members on a regular basis. A staff team visits the member country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to the headquarters, the staff prepares a report, which forms the basis for discussion and conclusion by the IMF Executive Board. The IMF conducts separate Article IV Consultation with the Mainland, Hong Kong SAR and Macao SAR under the membership of China.
Links to the relevant press release and Staff Report of the 2014 Article IV Consultation with Macao SAR, as endorsed by the IMF Executive Board, are listed below:
1) Staff Report of the 2014 Article IV Consultation with Macao SAR:
http://www.imf.org/external/pubs/ft/scr/2014/cr14229.pdf
2) Press release of the IMF Executive Board conclusion:
http://www.imf.org/external/np/sec/pr/2014/pr14360.htm
