In the process of formulating and thoroughly implementing the currency exchange rate policy of Macao, the MSAR Government needs to safeguard the long term benefit of the general public, maintain stability of the financial system and prudently consider the benefits and woes inflicted on various economic sectors by the policy. According to the practical economic situation of Macao, the MSAR Government deems it undesirable to change existing exchange rate mechanism which has been proven effective. The Monetary Authority of Macao lately replied the written interpellation of the legislator, Mr. Au Kam San, regarding the existing monetary policy of Macao in the face of the rising RMB accompanied by prices increase. In the wake of 2010, the Macao economy started its recovery. The MSAR Government has noted the inflationary pressure triggered by the accelerated growth of the overall economy and understands the increasing worry of the general public in the face of inflation and the discussion on the currency exchange rate system arising therefrom. In scrutinizing our economic structure, there are a number of factors which cause inflation. These can be classified as external and internal. The former are price increases of imported goods, such as foodstuffs and fuels, which are affected by the exchange rate fluctuations between the local currency and currencies of exporting regions. The latter arise as under the lack of excess capacity, economic growth and strong aggregate demand drive up costs such as rises in rent, wages and service fees. According to analysis on consumer price index, inflation arising from external factors has been reflected in the prices of tradable products while the part related to internal factors has been reflected in the prices of non-tradable products. As a matter of fact, rise in prices of “non-tradable” has become the major component of inflation in Macao in the past few years. Inflation rates for 2007 and 2008 were 5.6% and 8.6% respectively, in which 1% and 3% respectively were attributed to rise in “tradable” prices. Our inflation rate fell precipitously by 1.2% in 2009 due mainly to the stable prices of “non-tradable”. Therefore, there is no obvious correlation between the exchange rate of the Pataca and inflation. The exchange rate index which gauges the strength of the Pataca has remained stable from the beginning of this year till now, while its exchange rate vis-a-vis the RMB has only slid by 1%. However, the strength of the exchange rate of a currency will have a multifaceted impact on an economic system. If foreign currencies rise against the Pataca, it will in one way or another enhance the competitiveness of the service exports of Macao. The tourism services industry is our economic pillar which has a locomotive effect on the development of the other local economic sectors which affects vastly the livelihood of our citizens. It is estimated that tourism related sectors account for over 50% of our employed population. The revenues contributed by service exports amount to over MOP140 billion every year. Furthermore if we peg the Pataca to the RMB, it may possibly trigger asset prices inflation. When international investors are generally expecting the RMB to be on a long term rising trend vis-a-vis other foreign currencies, if a mechanism is adopted to peg the Pataca to the RMB, international investors will look upon the Pataca to be a “proxy currency” for the yet to be freely convertible RMB. Huge amount of liquidity will flood the local market to take advantage of the Pataca denominated assets to be an indirect vehicle to speculate the potential appreciation of the RMB. In view of the fact that Macao at this stage is still devoid of effective financial investment channels, part of the idle funds will go into local property market. Given the size of the local property market, such new come funds will probably accelerate the overheating of the local property market and create asset bubble. High property prices will push up expenses related to dwelling, rent will be further pushed up which will be reflected in local “non-tradable” prices which will give rise to a new round of inflationary pressure. Macao has been an advocate of free trade policy for a long time. The Pataca is freely convertible in the absence of exchange control. If the Pataca is to hook up with a currency which is not freely convertible, apart from impairing the convertibility of the Pataca, it will pose grave technical problem in the management of our exchange reserves. According to international practice, exchange reserves can only be composed of assets denominated in freely convertible foreign currencies. At the same time, it is noted that Hong Kong Dollar deposits, valued at more than MOP110 billion equivalent, account for 55% of the total deposits of our residents. There is no obvious increase in the proportion of deposits denominated in other currencies. It reflects that, when comes to choice of freely convertible foreign currencies, our residents have a long term predilection for Hong Kong Dollars. Our top of that, over 60% of our bank loan portfolio is denominated in Hong Kong Dollars. All these have indicated that existing exchange rate system has been an important factor in maintaining the stability of our financial system. Based on the practical situation of Macao and objective data analysis, the MSAR Government does not deem the deviation from a policy to peg the Pataca to the Hong Kong Dollar is an indispensable measure to combat inflation. The existing policy has effectively protected the well being of the general public. On the other hand, the MSAR Government is putting the development of inflation under close surveillance, and is timely rolling out measures which will relieve pressure exerted on the livelihood of our citizens, such as the “Measures to Assist the Underprivileged to Alleviate Inflationary Pressure” administered by the Social Welfare Bureau in July this year. The scheme benefits more than 5,000 families which receive regular economic subsidy. Apart from subsidy for the month of July, they received an one-off additional sum which is equivalent to the two months’ subsidy. Moreover, three kinds of underprivileged families totalled more than 3,000 received in August an one-off payment equivalent to doubling the special subsidy under the “Special Living Subsidy Distribution Scheme Phase II”. Furthermore, there is an extension of short term food subsidy scheme. The beneficiaries are those who have not yet been eligible for comprehensive assistance of the Bureau. They include low income persons or families, unemployed, new arrivals (continuously living in Macao for less than 18 months), homeless, families which have suffered inadvertent traumas, person queuing up for economic assistance, and persons or families who are already receiving subsidies due to inadvertent suffering. They will receive short term food subsidies for up to 6 weeks, with a maximum period of up to 12 weeks in 12 months.
