Macau: A look at diversification of the economy

As reported by the Macau Daily Times, the state of Macau’s current economical system and Gaming’s dominance as tax income is seen as “unhealthy”. Two other industries (Real Estate / Financial Industries) are mentioned and this post is looking at both of these industries with a subjective view on the helpfulness of these:

In the context of diversification it would be interesting to understand how an increase in the real estate and financial industry would benefit the economic stability of Macau when a crisis occurs that would hit the Gambling business. In the following a reasoning:

Looking at real estate, the space in Macau is limited and current real estate projects tend to be in either of two categories:
– Public housing or government-financed projects (such as LRT)
– Casino developments in Cotai

The overall real estate market has seen a rise in recent years with rents as well as housing prices exploding. Principally speaking that rise is in line with expansion of the Gaming industry in Macau (more foreign workers, more long-term visitors, more local workers). As can be seen from below graphic, the average price of residential units has risen constantly over the last years, very much in line with growth in Gambling.

Average Price of Residential Unit

Hence what would be the case if a crisis in Gambling occurs? Depending on the severity of the crisis, there might be job cuts, laying off of foreign workers, less visitors in general and less long-term visitors. A crisis would definitely also cause a delay in any Gambling-related real estate development, e.g. new casinos or renovations to existing properties. Such has happened in 2008 with Sands Cotai halting its development for Plot 5 and 6, costing up to 11,000 construction workers to loose their job (albeit including China quota labor). With only 28-30,000 workers in construction in Macau, this is still a considerable amount of the construction workforce that had a hard time.

Hence rents would either not be able to be paid or re-negotiated with lower rent apartments becoming a scarcity and high-end apartments being abandoned. Give or take the extend of the Gambling crisis this might result in a real estate crisis as well. Hence an invest in real estate would not benefit the basic problem: reliability of revenue on sole industry “Gambling”.

Now, looking at the other proposed source of income: taxation from financial industries, such as bankings and insurances. Once again, Macau is a small area with a limited amount of residents. For as long as banking or insurances are not trying to do business outside of Macau (and have their taxable headquarter in Macau), the taxable income is limited to the revenue of these enterprises in Macau. And looking at the transactions currently happening, I would assume once again that these are driven tremendously by the main source of money in Macau: Gambling and Casinos.

Now, I do not have any specific data to analyze on that matter, same as I do not have any data on the influence on these figures due to Macau’s position as offshore financial centre, tax haven and free port, yet I would assume that given a crisis in the Gamling industries also the attractiveness of the financial industry of Macau would suffer.

I would understand the above two options stated especially risky as both are sources of income that are dealing with intangible services and not with hard goods, such as manufacturing. Even an IT industry would be established on a considerable different basis than the above described ones.

Hence I would recommend to consider also branching out into the following industries, to achieve a diversified economny:

  • Specialized Manufacturing
  • IT Services
  • Sustainable City Consulting
  • Regional Educational / Healthcare Hub

Yet in order for all of these industries to take root, certain incentives would have to created in the market.

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