MACAU ECONOMIC GROWTH ACCELERATING

C O N F I D E N T I A L SECTION 01 OF 03 HONG KONG 002981

SIPDIS

NOFORN
SIPDIS

NSC FOR DENNIS WILDER
DEPT FOR EAP/CM

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

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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

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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