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RR RUEHCN RUEHGH RUEHVC
DE RUEHHK #0331/01 0541050
ZNY CCCCC ZZH
R 231050Z FEB 09
FM AMCONSUL HONG KONG
TO RUEHC/SECSTATE WASHDC 6944
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RHEHNSC/NSC WASHDC

C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 000331 
 
SIPDIS 
 
STATE FOR EAP/CM AND EEB/IFD, TREASURY FOR OASIA AND OTFI 
 
E.O. 12958: DECL: 02/20/2019 
TAGS: ECON EFIN PREL MC HK CH EINV
SUBJECT: MACAU OFFICIALS NOT WORRIED BY SLOWING ECONOMY 
 
REF: A. HONG KONG 92 
     ¶B. HONG KONG 164 
 
Classified By: Consul General Joe Donovan, Reason 1.4 b/d 
 
¶1.  (C) Summary: Macau's economy shrank in the last three 
months of 2008 as casino receipts fell for the first time 
since 2002.  Despite poor prospects for early 2009, Macau's 
massive official reserves will allow the government to 
increase spending and keep Macau's official unemployment rate 
around the current three percent.  Casino revenues are being 
squeezed by the general economic slowdown, not visa 
restrictions, said Macau economists and bankers.  Most banks 
in Macau are in good shape, having avoided most exposure to 
complex investment products, and the small size of Macau's 
market makes it easy to determine customer credit-worthiness. 
 With Macau's export industries all but gone, the government 
is eager to turn Macau into an entertainment and service hub. 
 Mainland Chinese investors have focused on speculative 
property purchases; job-creating investments in entertainment 
and services tend to come from foreign or Hong Kong 
investors.  End Summary. 
 
¶2.  (C) Comment:  Macau's economy is likely to contract in 
2009 as high-rollers, who account for 70 percent of Macau's 
gaming revenue, are unwilling or unable to risk their cash at 
the tables.  Our non-gaming interlocutors, both in the public 
and private sectors, seemed sanguine, even relieved.  Macau's 
economy has boomed since the gaming market was liberalized in 
2002, with 2007 growth reaching 27 percent and tourist 
arrivals increasing from eight million in 2002 to 30 million 
in 2008.  The increasing numbers of tourists and foreign 
workers have strained Macau's infrastructure and government 
capacity.  The Central Government has been urging Macau to 
diversify its economy away from gaming, but PRC Vice 
President Xi Jinping's January visit to Macau highlighted the 
lack of productive Mainland Chinese investment in Macau.  End 
Comment. 
 
============================================= 
Macau's Economy Slows as Gaming Revenues Fall 
============================================= 
 
¶3. (SBU) Macau's economy shrank in the fourth quarter of 2008 
as gaming receipts fell from the previous quarter for the 
first time since Macau,s gaming market was opened to foreign 
investment in 2002.  Although official statistics have not 
yet been released, Financial Services Bureau Director Orieta 
Lau said negative fourth quarter growth lowered Macau,s 2008 
economic growth rate to 12 percent.  Gross gaming revenue 
fell seven percent in the fourth quarter to 24.38 billion MOP 
(US$ 3 billion).  January's gross revenues were just 7.2 
billion MOP (US$ 900 million) despite the normally busy Lunar 
New Year period. 
 
¶4. (C) Macau Monetary Authority (known by its Portuguese 
acronym "AMCM") Chief Economist Benjamin Chan noted that 
first quarter economic activity in Macau is expected to fall 
further and predicted Macau,s economy would shrink in 2009. 
Chief Executive Edmund Ho has chaired several meetings, said 
Chan, to discuss the government's response.  Additional 
government spending is planned to compensate for falling 
investment and consumption.  Several years of massive revenue 
collection as the gaming industry took off in Macau allows 
the government to easily boost its role in the economy.  2007 
revenues were double Macau,s government expenditures, and 
the 2008 surplus is expected to be even bigger.  According to 
Chan, the government could spend at current levels for three 
years, even without any new revenue. 
 
¶5.  (SBU) The Macau Special Administrative Region Government 
(MSARG) will increase infrastructure-related spending by 30 
percent in 2009, said Lau, in an attempt to ease unemployment 
in the construction sector.   Both small public improvement 
projects and large-scale infrastructure projects will receive 
rapid approval in the coming year.  The MSARG is also 
considering MOP 8,000 (US$ 1,000) tax rebates to Macau 
residents and has announced the opening of 
government-sponsored food banks for low-income households in 
Macau, to subsidize the poorest residents. 
 
======================================= 
Macau's "Vanilla" Banking System Stable 
======================================= 
 
¶6.  (C) Macau,s small banking sector is still in relatively 
good health, despite the global economic slowdown.  Most of 
the banks in Macau are subsidiaries of large international 
banks and are engaged in "vanilla" banking services, 
 
HONG KONG 00000331  002 OF 003 
 
 
according to Herculano Da Sousa, Chairman of Banco Nacional 
Ultramarino (BNU), one of Macau,s most prominent banks. 
Macau,s small size means that it is easy to judge borrowers' 
repayment capability.  With most job losses borne by foreign 
workers for now, Macau residents and businesses remain a good 
risk.  The exception is Banco Delta Asia, which continues to 
struggle along with AMCM forbearance, despite having capital 
adequacy ratios that would force it to close in other 
jurisdictions, said Da Sousa.  BNU is the local bank for four 
of the six gaming concessionaires in Macau: LVS 
(Venetian-Sands), MGM, Wynn, and PBL-Melco (Crown).  Casino 
cash revenue should be enough to fund the current obligations 
of these companies, he said, and there is very little risk of 
default.  Housing lending is slowing, said Da Sousa, and 
certain sectors, including construction sub-contractors, are 
no longer borrowing, but credit continues to expand.  Chan 
agreed, noting that SME credit applications have increased 
since the government announced it would guarantee 50 percent 
of SME loans.  The non-performing loan (NPL) ratio in Macau 
is just 0.9 percent. 
 
========================================= 
Slow Growth Looks Good to Macau Officials 
========================================= 
 
¶7.  (C) Macau officials are happy to see slower growth in the 
gaming sector, said Chan.  He discounted claims that relaxing 
visa restrictions for Chinese tourists would boost Macau,s 
economy.  As Chinese high rollers are affected by the 
economic slowdown, they are less likely to be able to afford 
to gamble, he said.  The junket operators who provide credit 
to these players are reportedly requiring increased 
collateral and some are even going out of business.  These 
players are unlikely to return to Macau until the economy 
recovers, regardless of the visa regime in place.  As long as 
the gaming sector can continue to generate revenues of 
roughly seven billion MOP per month (US$ 875 million), the 
casinos should be fine, according to Chan.  The pace of 
gaming growth in Macau has been too rapid, he said, putting 
pressure on Macau,s limited infrastructure, the capacity of 
government regulators, and the social fabric of Macau.  In 
addition, the massive investment in the gaming sector has 
crowded out investment in other areas.  During his recent 
visit to Macau (reftel A) Vice President Xi Jinping 
reiterated the PRC Central Government's call for Macau to 
diversify its economy.  As the gaming market slows, other 
sectors may begin to attract resources, Chan said. 
 
¶8.  (C) Da Sousa, however, disagreed.  A small city like 
Macau can afford to base its economy on tourism and 
entertainment, as long as it has a large fiscal cushion to 
support it when times are tough, he said.  Da Sousa agreed 
with AMCM's Chan that relaxing Chinese visa restrictions 
would have little affect on declining gaming revenues until 
the global economy recovers.  Macau's export production 
capacity is virtually gone and is unlikely to return, said Da 
Sousa.  Since the end of the Multi-fiber Arrangement in 2005, 
Macau's textile and garment industry has been shrinking. 
BNU's export-oriented manufacturing customers have almost all 
gone out of business.  The government will provide additional 
support to Small and Medium Enterprises (SMEs) still 
producing for export, but it cannot provide enough funding to 
turn this sector around.  The MSARG has been trying to 
develop higher value added services in Macau, but Macau 
cannot compete with Hong Kong in these areas, he said. 
 
============================================ 
Mainland Chinese Investment Lacking in Macau 
============================================ 
 
¶9.  (SBU) Vice President Xi's January visit highlighted the 
relative lack of mainland Chinese investment in Macau. 
According to Da Sousa, Chinese investors are coming to Macau, 
but only to invest in property.  Without a gaming license, it 
is difficult to justify investments in entertainment or 
tourism-related businesses, he said.  Mainland Chinese 
companies are conspicuously absent in the list of 
job-generating investments in the entertainment or service 
industries in Macau.  Executive Director of Macau,s Trade 
and Investment Promotion Institute (IPIM) Echo Chan confirmed 
that despite spending some 70 percent of its time courting 
investors and promoting Macau,s SMEs in China, relatively 
few Chinese investors have put their money into job-creating 
enterprises in Macau.  Efforts to establish cross-border 
export processing zones have not been very successful. 
Foreign or Hong Kong-based investors seeking to open 
franchise operations in Macau, produce for Chinese tourists, 
or use Macau as a base to get into the Chinese food and 
beverage market seem to be having more success. 
 
HONG KONG 00000331  003.2 OF 003 
 
 
DONOVAN