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October 09 2014
In recent months the government and lawmakers have been discussing creating a sovereign wealth fund. A sovereign wealth fund was also suggested as an option by the International Monetary Fund (IMF) in its July 2014 staff report.
Under Article 4 of the IMF Articles of Agreement – which sets out the obligations of members regarding exchange arrangements – the IMF conducted a consultation with Macau, the first since the handover of sovereignty in 1999.
The staff report describes Macau's economy as open and tourism dependent. Macau has no public debt and noteworthy fiscal reserves. The Macau financial system was highly commended in the report and the outlook appeared bright. Notwithstanding this, the IMF pointed out some changes that might occur in this framework in future.
In order to protect Macau's economy from a deceleration that may arise due to its dependence on gaming revenues and increased social spending on an ageing population, the IMF proposed setting up a sovereign wealth fund to invest a part of the fiscal reserves, which in April 2014 amounted to Pte249.1 billion (approximately $31.1 billion).
In the staff report, the IMF praised the prudent macroeconomic management of public funds. However, changes that might result from both external and internal factors (including the threat of a housing bubble in a market where property prices increased by nearly 40% in 2013) may demand a different approach. The path to strengthen Macau's economy, further enhancing financial soundness and external stability, will include diversifed options.
The cautious attitude of the Macau Monetary Authority towards financial investments has been criticised due to the low returns on investment. Thus, the allocation of a percentage of public moneys to a sovereign wealth fund, even though it would involve higher risks, might also help to improve economic stability. The management of the fund is another issue, which may lead to the creation of a specialised company to manage public funds. However, this might trigger further difficulties relating to the lack of specialised manpower in the region.
Setting up a sovereign wealth fund would necessitate the establishment of a team focused on the assessment of risks and the evaluation of how best to achieve returns in the investment of public funds. The creation of this entity would require the revision of the Legal Regime of the Financial Reserve (8/2011) and the Governing Rules of the Monetary Authority of Macau (Decree Law 14/96/M, as amended by the Administrative Regulation 18/2000).
The discussions on a sovereign management fund suggest that Macau may have its own way of generating further wealth in future and of playing a role in the international financial scene like other similar jurisdictions (eg, Singapore).
For further information on this topic please contact Pedro Cortés or Marta Mourão Teixeira at Rato Ling Vong Lei & Cortés Advogados by telephone (+853 2856 2322), fax (+853 2858 0991) or email (firstname.lastname@example.org or email@example.com). The Rato Ling Vong Lei & Cortés Advogados website can be accessed at www.lektou.com.
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