Tuesday, April 3, 2007

Macau's Growth

According to the most recent data, Macau is now officially richer than Hong Kong! In real terms, GDP in Macau grew at 16.6% in 2006, taking per capita GDP to the equivalent of $222,000HKD, compared with $214,700 in Hong Kong.

But are they really better off? The main source of Macau's growth is the burgeoning gambling sector in Macau, an increasing portion of which is foreign-owned. The profits generated from foreign-owned firms accrue to their foreign owners, not Macau's residents. Given recent reports on the profitability of these new gambling establishments (see, for example, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aTWqxxBfz_B8), how much benefit to the Macanese see from this rapid growth?

One simple way to test this is to compare GDP with GNP. To the extend that Wynns Resorts, a US-owned entity, is earning profits from their casinos, these contribute to Macau's GDP but not GNP. Unfortunately, GNP data does not appear on the Macau government statistics website (http://www.dsec.gov.mo/).

An alternative is to look to labour market data: if the unemployment rate is falling, and labour earnings are rising in real terms, then it is safe to conclude that Macau residents are benefitting from their massive growth. That is clearly the case, as the following charts show. In the second chart, Hong Kong is included as a comparison, with both real wages normalised to 100 in 2001 Q1.

What about the future? Clearly the current growth rates are unsustainable. A large part of this growth is due to real estate investment, as new casinos and hotels are build; this should slow to more sustainable levels in future. A good scenario would be a gradual slowing of the growth rate to the 5-10% range in the coming few years.

One possibility is that the new-found wealth in Macau could fuel a broad real estate bubble, where property prices move far above equilibrium levels due to speculation, resulting in more real estate investment than is really warranted by underlying market demand. If that is the case, Macau may continue to grow in the near term at break-neck speeds, but this will be followed by a crash in property values, a fall in perceived wealth, and a slump in the local economy. The longer the high growth rates remain, the more likely this scenario is to play out.

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