The year of living dangerously
While the experts say Macau's economy remains fundamentally sound, it is easy to become jittery while watching the world in turmoil.
For the past six years many in Macau have acted as if the economy and property prices would continue to rise, casinos would prosper and everyone would get richer.
Now that the tide of history has turned and Macau’s party is over, everyone is guessing about the final impact of what is being referred to as the “global financial tsunami”.
Assistant Professor of Economics at Macau University, Henry Lei Chun-kwok, says the global crisis will impact almost every sector of the economy. Dr Lei predicts property prices will drop by up to 40 per cent, unemployment will grow and many will lose their jobs. The gaming and real estate sectors will be hardest hit.
“Already casinos have started to lay off workers, real estate prices have dropped 20 per cent in some luxury developments, wage levels have decreased and people’s purchasing power has been weakened,” Dr Lei says. “Even before the economic crisis, before the stock market plunged in September/October, as early as the first and second quarters this year, there were signs of trouble in the gaming and real estate sectors in Macau.”
While no-one is predicting overnight demise, the exact extent of the damage to Macau’s economy is still largely unknown. Already some real estate agencies have closed, thousands have lost their life savings in the stock market crash, construction work has been halted, the financial sector is feeling the pinch and the government has lost a considerable amount of its foreign reserves.
Albano Martins, an economist and observer with decades of knowledge of the inner workings of Macau’s business community, says the biggest concern is the impact on the gaming sector. Mr Martins predicts dark clouds ahead.
“The ability for big casinos to get funds is a drama that we are following everyday because without investment, growth of the casino industry cannot continue,” Mr Martins explains. “The majority of Macau’s gross domestic product relies on casinos, so this is by far the biggest area of concern for us.”
Jonathan Galaviz, a partner in Las Vegas-based gaming consultancy firm Globalysis, says the shocks to the global economic system have already hit the Asian tourism market. “It is possible that resort project development pipelines will be scaled back or eliminated in Macau,” Mr Glaviz says. “The financial capitals of New York and London have been major conduits of debt and equity capital to Macau’s casino industry over the last five years and this conduit is now severely restricted.”
There is no shortage of US and local experts predicting that several of the big casino companies could face bankruptcy. Las Vegas Sands, which is the largest international investor in Macau, is facing a moment of truth as the collapsing credit market and bankrupt financial institutions drag the global economy down and stocks continue to free fall. In October Sands’ stock price dropped to around US $8, a whopping 94 per cent less than its high last year of US $148. Melco Crown stock lost 72 per cent, MGM Mirage fell 89 per cent and Wynn dropped 67 per cent.
US-based KeyBanc Capital Markets analyst Dennis Frost describes the market situation for gaming companies as “very worrying”. Frost says there is little hope of improvement in the short-term. “Investor sentiment is very low and we cannot see that improving any time soon,” he says. “It could be a very ugly year ahead.”
Assistant Professor of Economics and International Finance at Macau University, Gu Xinhau, says there is no doubt Sands is facing an “unpredictable future” and bankruptcy is a real concern. Dr Gu believes Macau is the key to ensuring Sands’ survival. He says without Macau, the situation would be impossible. “Fortunately Sands has a big operation in Macau with a constant stream of customers from mainland China,” Dr Gu explains. “Without this it would be likely to go bankrupt because in the past decade there has been too much expansion in the gaming business in the US, demand did not grow so fast and profitability is declining. But here, before the central government stepped in to tighten the free travel scheme, Sands was making big bucks in Macau.”
Earlier this year the central government tightened visa restrictions for visitors from the mainland in an effort to cool growth in Macau. It was also behind the announcement of a moratorium on new casinos made by Macau’s chief executive, Edmund Ho, in April. According to figures from Macau’s Gaming Inspection and Coordination Bureau gaming revenue in Macau dropped 10 per cent in the third quarter this year, to 25.99 billion patacas, when compared to the same time last year.
Dr Gu and Dr Lei agree this is a direct result of the tougher visa restrictions and global slowdown. Despite the gloomy outlook both men believe that Sands has the ability to pull through the crisis, which is good news for Macau’s economy, but they say the company will have to accept another party buying in. Dr Gu says the market situation will not allow Sands to “sit around and wait” to finish its Macau developments.
“If Sands is willing to give part of its ownership to another company with money, maybe it has a way out,” he explains. “Waiting costs money, they have got to pay interest on all loans and they will not want to suspend construction for long, they need to get the projects finished... but under these circumstances it will be almost impossible for them to raise money from the public market, if they can, the interest rates on offer will be too high.”
Both men concede that if the situation continues to worsen, the Macau or central governments could be forced to step in. Dr Gu explains that it would not be in either government’s interest to see Sands falter. “This is a very sensitive topic but perhaps the only way for Sands to survive is to cooperate with the Macau government,” he says. “They could borrow from the Macau government to see the situation out.” Dr Lei adds that if this was to happen, it would “not take place openly”. He says if Sands collapsed thousands would lose their jobs and the ripple effect in all sectors of Macau’s economy would be “very significant”.
Grim scenarios aside, Dr Lei says Macau’s economic success is overwhelmingly reliant on the mainland’s economy, which many believe is well
placed to ride out the economic storm. “The only source of good gaming customers remaining in the world now is the mainland,” Dr Lei explains. “China is a semi-isolated market and companies like Sands need to find a way to continue attracting these good quality customers.”
Mr Martins describes the mainland as Macau’s “major market for everything” and says while its economy is cooling, it has not been that badly affected to date. Mr Martins agrees the impact of the crisis on Macau will be directly related to the impact on the mainland. “If something goes drastically wrong in Macau, the central authorities will try to avoid any danger in terms of Macau’s long-term future,” he explains. “They could change policies, including the travel scheme restrictions, to assist because if the casinos are in trouble it will snowball to all other sectors that depend on the casinos.”
Macau Daily Times reported last month that lawmakers Chan Meng Kam, Leong Iok Wa, Leong On Kei, Leong Heng Teng, Ieong Tou Hong and Lee Chong Cheng were calling on the government to come up with some imaginative footwork to ensure Macau was not seriously affected by the crisis. A cut in the number of imported workers was one suggestion. Lawmaker Jose Coutinho fears the full impact of the financial crisis has not yet reached Macau. Mr Coutinho says he expects the situation to worsen and problems to compound. “I don’t think we have seen the worst of it yet,” he says. “We are now just waiting to see what the full impact will be.”
There are many others who see the global financial crisis as the ideal time for Macau to take a breath and catch up. A time for the government to upgrade infrastructure, implement effective controls on casino operators and work towards diversification and sustainable growth. The idea that it might make economic sense to embrace the slowdown, appeals to a lot of residents who have been complaining for years that development was out of control and there was too much reliance on gaming at the expense of quality of life for residents and visitors.
Gaming specialist and Assistant Professor of Economics and International Finance at Macau University, Ricardo Siu, believes the visa restrictions imposed earlier this year were “healthy” for Macau’s economy. Dr Siu says the global economic crisis also provides an opportunity. He says it is clear that Macau’s infrastructure and labour resources cannot sustain the level of growth experienced over the past few years.
“With all that is happening we can expect less visitor arrivals and those who come will have a smaller budget to spend,” he says. “But you have to look at the growth in the casino industry over the past three to four years and it was much faster than what was expected, this is a good time for Macau to consolidate, to take a much needed break and solidify the foundations.”
Dr Siu believes Macau’s casino operators can afford to retain the majority of employees through the slowdown, traffic flow will decrease and there will be less pressure on the “physical structure” of the city. “After this period when growth returns, Macau will have had time to get itself into a better position to resume its growth at a more sustainable pace,” he says. “The government needs to take this time to improve the enforcement of the law to make competition between casinos fairer, ensure the correct balance of local and imported labour, upgrade infrastructure and give a hand in retraining programs to improve skill levels. Competition in Asia is increasing in the gaming industry and we need qualified labour to ensure sustainable growth.”
There is no doubt that outgoing chief executive Ho and his advisers decided long ago that Macau’s best chance at sustainable growth was to diversify its economy, with less focus on gaming and more focus on entertainment and meetings, incentives, conventions and exhibitions (MICE). Dr Siu says such heavy reliance on gaming is risky and now is the time to change. “In Macau more than 90 per cent of total value is from gaming and in Las Vegas more than 50 per cent is from non-gaming,” he explains. “Macau may not follow such a high proportion of non-gaming revenue, but 20 per cent from non-gaming would be fair enough.”
Dr Gu says Beijing’s tightening of the individual travel scheme was a direct message to “casinos that were encouraging pathological gambling” via VIP services. He defines gambling in Macau as not an entertainment activity, but “real casino gambling with large amounts of money at stake”.
“Macau casinos need to be self disciplined and not too greedy,” he says. “They cannot support pathological gambling and money laundering. People lose huge sums of money and when it happens over and over again it forces the central government to act. Gambling should be an entertainment activity; it should not be used to plunder people out of their wealth. This is what the operators need to ensure.”
Dr Lei says despite the mainland’s move earlier this year to cool the city’s gaming industry, if things “go wrong” in Macau
due to the financial crisis, the central government will act. “The solution for Macau is pretty straight forward and simple,” he says. “Given these problems it would not be surprising for the central government to readjust its travel policy and more people would come and casinos’ performance could be maintained to a certain extent.’
Director of Macau’s Gaming Inspection and Coordination Bureau, Manuel Neves, says there is no doubt that since the introduction of the visa restrictions gaming revenue has dropped. Despite the dip, Mr Neves is tipping Macau’s gaming revenue will be up at least 30 per cent this year when compared to last year’s figure of MOP $83.847 billion. He also believes that in the wake of the financial crisis, Beijing will abandon its visa restrictions in an effort to ward off any potential damage to Macau’s economy.
“If the decision was reversed it would help us to fight this crisis,” Mr Neves explains. “It is difficult to predict what will happen in Macau but it appears major projects will be delayed and we all know people will only play and travel if they have money, so it is all very uncertain.”
Without a crystal ball, Mr Neves says it is impossible to forecast Macau’s gaming revenue for 2009, but he concedes he would be happy to maintain current levels. “We will achieve over 30 per cent growth this year and I have no idea about next year, but I am afraid we will have a downturn,” he says. “If we can maintain the 2008 level next year it will be a very good thing, but I am not so sure.”
Dr Siu believes Macau’s government is in a good position, with a large stock of financial reserve, to stabilise the economy. Dr Gu adds that the large number of immigrant workers could “provide a cushion” to save local jobs. “In terms of employment Macau’s situation is different because there are so many workers from the mainland, South East Asia and the Philippines,” he says. “If a company is in trouble they will lay these workers off first. I think the overall impact on people in Macau could be bad, but it will not be severe.”
Dr Lei agrees the impact in Macau will not be as bad as it will be in other areas, including Hong Kong. He says the financial crisis will no doubt slow growth, but Macau was “moving too fast anyway”. “The unemployment rate will go up, but it makes far more sense for employers who will save on subsidies and allowances they pay to foreign workers, to keep the locals,” he explains. “Real estate prices are adjusting too, but even at today’s prices it is still too high for local residents to buy, there is a tremendous bubble in the real estate sector.”
No-one can be sure whether the frantic activity of government intervention around the globe will turn into - to use that overworked phrase of the American presidential election - a “game changer”. Nor, for all the speculation, can anyone be confident where the Macau economy will end up. But none of the experts believe Macau is facing a recession. “We will most likely drop to single digit growth,” says Dr Gu. “But double digit growth is too high anyway and I think a recession is unlikely to happen in Macau.”
Dr Lei says Macau is well placed in two key respects. The city’s financial reserve is strong to assist in times of need and its financial system is unburdened by the crook loans that helped sink the US system. “I would say that the financial sector is not one that will be hit hardest in Macau due to its conservative practices in the past and underdeveloped financial instruments,” he explains. “They are not involved in aggressive speculation...it will be hard to make good profit anymore and they might face increased problems with bad debts, but all of this is an expected risk, it is not unexpected.”
Mr Martins says it is difficult to gauge the impact on Macau’s financial system and companies, because there is no stock exchange in the city. “We just do not know how involved the banks are in this crisis, our market is not as transparent as it is in Hong Kong,” he says. “If we had a stock exchange companies would have to provide a lot of information about their performance and dealings, but in Macau there are no rules for that. It is very, very hard to evaluate any company without a stock exchange; nobody knows how much they have lost.”
Mr Martins describes the “non-transparent” way Macau’s economy works as dangerous. “There needs to be more transparency so people know what is going on,” he explains. “Everything is completely closed in Macau and it would be better to know what is going on so the government could work to minimise any impact.”
The Macau Monetary Authority has stressed that the banking system in Macau remains sound and robust. In an effort to restore confident the government committed to giving full protection for all customer deposits held with banks in Macau. It also promised to provide support ranging from liquidity and even capital to banks if necessary.
With a global crisis continuing to rage around it, Macau must now sit and wait to see how it plays out. Mr Martins says while everyone hopes this will be a temporary collapse, there is no way of knowing. “The situation in the capital market is very dramatic, it is so uncertain, I think it will be corrected but I do not know how long it will take,” he says.
Mr Neves believes the rebound period will be two to three years, while Dr Lei is predicting at least five years. “The impact in Macau really depends a lot on the central government policy and outside forces, because there is no debt market, no bonds market, no investment bank and not much financial speculation,” Dr Lei explains. “Macau people need to be patient and wait for a correction and we have had this experience before, so it is not new to us.”