Effects of Short-term Fluctuations of Renminbi Exchange Rates on Macao’s Economy and Fiscal Reserve

Attributable to the recent announcement by the People’s Bank of China (PBOC) on further improvement in the renminbi (RMB) exchange-rate mechanism to promote the RMB internationalisation and market-driven rate, the exchange rate of the RMB against the USD has weakened in the past few days. Under the current exchange rate regime of the SAR, the exchange rate of the pataca against the RMB has strengthened correspondingly. After its preliminary assessment, the AMCM summarises the effects of the recent development of the RMB exchange rate on Macao’s economy and its Fiscal Reserve as follows: Effects on the Macao Economy • The RMB devaluation would undermine export competitiveness in the short term but would not affect the long-term and diversification developments of local industries. Tourism is the dominant sector of the economy and the Mainland is the top visitor-generating area for the SAR, accounting for over half of the SAR’s visitor arrivals. Hence, the weakening of the RMB might reduce the attractiveness of the SAR as a tourism destination for Mainland visitors. Tourism and retail businesses would be adversely affected in the short term. However, the current devaluation is still mild compared to the revaluation in the past few years. The SAR’s development towards a World Tourism and Leisure Centre through diversifications in industrial structure and visitor sources remains intact. • Imported prices would be further lowered, leading to moderated inflationary pressure. Local inflation has receded in tandem with economic consolidation. In the first half of 2015, the CPI inflation slowed to 4.92% from 6.05% in 2014. The import unit value index, which reflects imported prices, declined by 1.4% year-on-year in the first quarter of 2015. As most of the foodstuff in the SAR are imported from the Mainland, the weakening of the RMB would further lower imported prices and alleviate the cost-of-living pressure for residents. Effects on the Fiscal Reserve • Short-term returns will be adversely affected while appropriate risk-control measures have been taken. In the past few years, interest rates in developed countries have hovered at around near-zero levels and the exchange rates of their currencies were weak. The return provided by the RMB was outstandingly attractive, leading to allocation of Fiscal Reserve assets into RMB assets. Since the outset of this year, with a view to a shift in global monetary policies, particularly reflecting in the uptrends of USD interest rates and exchange rates, the Fiscal Reserve has gradually reduced its proportion of RMB assets to control risks. At end-June 2015, after the adjustment of currency swap positions, the share of RMB assets in total Fiscal Reserve assets was 33.0%, compared to 48.6% at end-2014. As of June 2015, the annualised rate of return on the Fiscal Reserve was preliminarily estimated at about 4.0%. It is expected that the fall in the exchange rate of the RMB against the USD would lower the annualised rate of return for the first eight months of 2015. The performance for the whole year will depend on the global financial-market development in the remaining months while a positive return for the entire year of 2015 is expected. • As a response to the recommendations by international organisations, the improvement in the RMB exchange-rate mechanism will enhance the medium-to-long term returns. The financial market generally believes that the reform measure implemented by the PBOC aims to respond to the International Monetary Fund (IMF)’s assessment report on Special Drawing Rights (SDR) published last week. The exchange-rate reform policy will remove obstacles of the RMB to be added to the SDR currency basket and help promote the shifting of central banks and institutional investors’ assets towards the RMB in the long run. Therefore, under the investment strategy to control the risks strictly, RMB assets held by the Fiscal Reserve will help enhance medium-to-long-term returns.