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DE RUEHHK #2981/01 2021047
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P 211047Z JUL 06
FM AMCONSUL HONG KONG
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RUEHC/SECSTATE WASHDC PRIORITY 7855
INFO RUEHOO/CHINA POSTS COLLECTIVE PRIORITY
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C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 002981 
 
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NSC FOR DENNIS WILDER 
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E.O. 12958: DECL: 07/21/2031 
TAGS: PGOV PHUM PREL HK CH PINR MC
SUBJECT: MACAU ECONOMIC GROWTH ACCELERATING 
 
REF: 05 HONG KONG 4376 
 
Classified By: E/P Acting Chief Jeff Zaiser.  REASONS: 1.4(b,d). 
 
¶1. (C) Summary:  Macau's economy is again picking up steam as 
GDP growth surged 18.8 percent in the first quarter of 2006. 
Growth is being driven largely by the booming tourism and 
gaming sectors, and by massive investment in a number of 
large-scale casino and infrastructure projects.  Tax receipts 
from the casino industry, which generates 75 percent of 
Government revenue, pushed the Government's budget surplus to 
$870 million (6.7 billion patacas) in the first half of 2006, 
prompting Moody's Investors Services on July 7 to upgrade 
their outlook for Macau's Government bond rating from neutral 
to positive.  Each of our contacts emphasized that the 
biggest problem facing Macau is a shortage of skilled labor. 
Macau Monetary Authority Chairman (MMA) Anselmo Teng also 
fears that the booming economy will push inflation above 6.0 
percent by the end of 2006, though he said the MMA "could 
live with" inflation of up to 9 percent.  Teng told us that 
the banking sector is "doing quite remarkable," and that the 
U.S. Treasury Department's designation of Banco Delta Asia 
(BDA) as a primary money launderer in September 2005 (see 
reftel) has had little lasting impact on Macau's banking 
sector as a whole.  End Summary. 
 
¶2. (C) On July 19, we discussed Macau's economic developments 
with MMA Chairman Anselmo Teng, Wynn Resorts Macau President 
Grant Bowie, and English-language daily "Macau Post" Director 
Harald Bruning. 
 
Let the Good Times Roll 
----------------------- 
 
¶3. (C) After turning in lackluster growth (for Macau) of only 
6.7 percent in 2005, Macau's economy is again picking up 
steam.  The economy expanded 8.9 percent (in real terms) in 
the fourth quarter of 2005 compared with the same period in 
2004, then grew 18.8 percent in the first quarter of 2006, 
year-on-year, according to the Macau Economic Bulletin. 
Growth is being driven largely by the booming tourism and 
gaming sectors, and by massive investment in a number of 
large-scale casino and infrastructure projects.  Total 
investment was up 56.9 percent in 2005 in real terms, and 
accelerated further in the first quarter of 2006, rising 68.1 
percent, year-on-year.  Private and public investment climbed 
67.9 percent and 79.8 percent, respectively, in Q1 2006. 
This investment is plainly evident upon arriving in Macau, as 
the entire city seems to be under construction.  The pace of 
road construction in particular seems to have accelerated 
just within the past few months.  Bruning told poloff that in 
addition to the numerous road and bridge projects now 
underway, several tunnels are being planned, including one 
that would link the Macau peninsula with Taipa and Coloane 
islands, where Macau's version of the "Las Vegas strip" is 
currently being built. 
 
¶4. (C) Despite the many inconveniences associated with all 
this construction, the number of visitors to Macau continues 
to climb, rising 12.2 percent to 18.7 million in 2005, and up 
another 17.7 percent, year-on-year, in Q1 2006.  Most 
importantly, the number of overnight visitors (versus 
daytrippers from Hong Kong and Zhuhai) climbed 17.3 percent 
in Q1, while per capita visitor spending rose 4.8 percent. 
The number of mainland tourists increased 19.8 percent in Q1 
2006 to 2.9 million -- 53.5 percent of the total. 
 
¶5. (C) According to figures released on July 18, the 
Government's budget surplus surged to $870 million (6.7 
billion patacas) in the first half of 2006 on the back of 
strong casino tax receipts.  Government revenue was $1.6 
billion (12.5 billion patacas), up 18.2 percent from a year 
earlier, and expenditures were $753 million (5.8 billion 
patacas), up 6.4 percent.  Casino tax receipts rose 14.7 
percent to $1.2 billion (9.3 billion patacas), accounting for 
nearly 75 percent of total Government revenue.  Anselmo Teng 
said that the MMA invested the surplus funds primarily in 
foreign debt instruments, including US Dollar, Euro, and 
Japanese Yen-denominated Government bonds, though he declined 
to give a precise break-down.  On the other hand,  Grant 
Bowie told us that he believed much of these surpluses were 
being wasted through corruption.  He worried that the Macau 
Government was not taking full advantage of an historic 
opportunity to make long-term investments in Macau's social 
and physical infrastructure, particularly in education.  He 
said that Macau's antiquated bureaucracy was simply not up to 
 
HONG KONG 00002981  002 OF 003 
 
 
the task. 
 
¶6. (C) The strong budget figures prompted Moody's Investors 
Services on July 7 (they apparently had prior access to the 
figures) to upgrade their outlook for Macau's Government bond 
rating from neutral to positive -- though Macau has no public 
debt.  Moody's said in a press release that the Macau 
Government "has recently recorded strong surpluses on the 
back of tax revenues from the gambling industry."  Moody's 
also raised Macau's local currency rating from Aa1 to Aaa, 
the highest possible for debt denominated in local currency. 
The statement said there was "minimal risk" of a currency 
revaluation. 
 
Too Much of a Good Thing 
------------------------ 
 
¶6. (C) Each of our contacts emphasized that the biggest 
problem facing Macau is a shortage of labor, particularly of 
skilled labor in the fields of information technology, 
accounting, and finance.  Anselmo Teng told us that Macau's 
universities simply can't provide enough graduates in these 
fields.  The unemployment rate now stands at 3.9 percent, 
though Bruning told us that even this relatively low figure 
is probably biased upward.  Bruning said that many workers 
who were nominally unemployed were actually working in the 
informal economy, which includes various illicit businesses 
and a vibrant underground cross-border trade between Macau 
and Zhuhai.  According to Bruning, "anyone who wants a job in 
Macau can easily get one."  Teng told us that the Government 
is trying to attract professionals, particularly accountants, 
from throughout South East Asia.  Macau's various labor 
organizations, particularly blue-collar workers in the 
construction industry, have a history of vigorously opposing 
the importation of labor.  However, Teng told us that such 
opposition is softening as the labor shortage becomes more 
acute.  Teng said that the Government and labor organizations 
have essentially reached a consensus that Macau needs to 
import more "human resources," and the Government has given 
assurances that it will "exercise very good control" over the 
process. 
 
¶7. (C) Teng also fears a pickup in inflation, which he 
predicted could rise from the current 5.5 percent to more 
than 6.0 percent by the end of 2006.  Rising prices are being 
fueled not only by the massive inflow of investment, but also 
by the increasing price of imports, specifically oil.  With 
the Macau Pataca linked to the Hong Kong Dollar, which, in 
turn, is linked to the U.S. Dollar, the MMA lacks the ability 
to conduct an independent monetary policy.  However, Teng was 
thankful that the U.S. and Macau economies seemed to be in 
relative macroeconomic sync at this point, so that rising 
U.S. interest rates came at the right time to help cool 
Macau's overheating economy.  Teng said that some local 
economists were arguing for a delay in Government 
infrastructure projects to help cool the economy.  However, 
Teng said that the Government would not agree to such delays 
because of the need to provide critical infrastructure for 
the many casino projects.  Teng said the MMA "can live with" 
an inflation rate of up to 9 percent, but that double-digit 
inflation would be a cause for concern. 
 
¶8. (C) Teng lamented that as the economy becomes increasingly 
dependent on the gaming sector, Macau was now "quite 
vulnerable" to a downturn in the mainland economy, and to 
threats such as Avian Flu.  Mainland visitors now account for 
more than 53 percent of all tourists coming to Macau, and 
Teng predicted that that percentage would continue to rise as 
other mainland cities are brought into the Individual Visit 
Scheme (IVS) over the next year.  (Note: the IVS allows 
mainland residents in certain cities and provinces to travel 
to Macau on an individual tourist basis for a maximum of 7 
days.  Previously, mainland residents could only come to 
Macau as part of a group tour or on a business visa. 
Currently, all of Guangdong province, and 11 other cities, 
including Beijing and Shanghai, are included in the IVS.  End 
Note.)  To counter this threat, the Government is trying to 
diversify the economy through the promotion of the 
Macau-Zhuhai cross-border industrial zone.  While Teng also 
stressed that the Closer Economic Partnership Agreement 
(CEPA) with China would provide a boost to non-gaming 
industries, he admitted that Macau's economy would become 
increasingly one-dimensional in the coming years.  When we 
asked about the possibility of an eventual link between the 
Pataca and the Renminbi given the increasingly close 
relationship between the mainland Chinese and Macau 
 
HONG KONG 00002981  003 OF 003 
 
 
economies, Teng said there was no consideration of such a 
move.  Teng said that Macau "had 20 years of stability with 
its link to the Hong Kong Dollar," and he saw "no reason to 
change." 
 
No BDA Hangover for the Banking Sector 
-------------------------------------- 
 
¶9. (C) Teng told us that the U.S. Treasury Department's 
designation of Macau's Banco Delta Asia (BDA) as a primary 
money launderer in September 2005 has had little lasting 
impact on Macau's banking sector as a whole.  He said the 
sector was "doing quite remarkable."  He said the aggregate 
non-performing loan ratio for Macau banks was currently 1.7 
percent, and the capital adequacy ratio was more than 15 
percent -- much higher than the 8 percent required by 
international banking standards.  He said that in supervising 
banks, the MMA was moving from an approach based on asset 
quality to a risk-based approach.  Teng was not overly 
concerned about the risk to the banks of a downturn in the 
gaming and tourism industries.  Macau banks have remarkably 
little direct exposure to the gaming industry, and the 
branches of mainland banks operating in Macau have no 
exposure, Teng said.  The casino projects were funded 
primarily by Hong Kong banks through syndicated loans. 
Sakaue