Until last year, Macau’s nascent Cotai Strip was the darling of gaming analysts the world over touting the idea that supply creates demand. Now, lifeless shells of sprawling resorts at various stages of completion dot abandoned construction sites, offering a tantalizing glimpse of the glittering critical mass that was supposed to arrive this year.

Much of that critical mass was being single-handedly built by Las Vegas Sands Inc., which in the wake of the global financial crisis has placed an indefinite moratorium on billions of investment in Macau until its liquidity position improves.

But Macau’s resort pipeline was encountering considerable delays even before the capital markets tuned sour. Melco Crown Entertainment’s US$2.1 billion City of Dreams was originally to have opened in the middle of 2008 but is now set to be the only new addition to Cotai this year, coming in the third quarter. LVS has not offered revised schedules for several properties originally slated to be ready in 2009 or shortly after. They include developments by Shangri-La/Traders, Sheraton/St. Regis, Hilton, Conrad and Fairmont/Raffles. Other properties removed from the 2009 pipeline include a $1.3 billion megaresort by Galaxy Entertainment Group and the $2.5 billion Macao Studio City. Galaxy now says it will open in 2010, and though it has yet to set an exact date, work on the external structure will continue this year. Work at the Studio City site, on the other hand, appears to have ground to a halt, and the prevailing sentiment is that it could be delayed beyond its rescheduled 2011 arrival and faces serious financial issues.

Macau’s casino industry is perhaps more recession-proof than most and managed to continue growing in the first half of 2008, when other major casino markets were already tumbling. Revenue growth was eventually halted in September but only after the central government in Beijing imposed stricter visa restrictions on mainland Chinese wishing to visit, significantly reducing the frequency with which individual travelers could come to Macau and the duration of their stays. It’s a major problem because Macau’s casino boom has been driven by the same factors underlying the many years of uninterrupted growth Las Vegas enjoyed until last year — demand from growing and increasingly affluent feeder markets met by a steady expansion of capacity in the form of ever-grander and more expensive crowd-pulling gaming venues. Macau’s primary feeder market is neighboring Guangdong, a wealthy province on China’s southern coast with a resident population of more than 94 million and a floating migrant population of around 16 million.

Macau has been deluged by mainland Chinese visitors ever since the central government began progressively easing travel restrictions from the second half of 2003. The mainland flood gates were suddenly shut in the third quarter of last year, causing growth in visitor arrivals to slow drastically, just as the impact of the global recession became more pronounced in China. Beijing’s munificence in reopening the flood gates will play a bigger part in restoring Macau’s gaming- and tourism-led economic growth than any stimulus measure the local government can enact, and the peninsula’s casinos are pinning their short-term hopes on an easing of the visa restrictions.

SINGAPORE SWING

Singapore may have coveted both the spectacular economic boom created by the liberalization of Macau’s casino industry and the sizeable revenues generated by neighboring Malaysia’s Casino de Genting, where many Singaporean gamblers flock to get their table games fix because there are no casinos at home. The squeaky-clean city-state reversed its four-decade ban on casino gaming in April 2005 and awarded two licenses to develop large-scale casino-centric resorts — one to Las Vegas Sands at Marina Bay in the city’s downtown business district and the other to Genting International, operators of Casino de Genting, on the resort island of Sentosa.

Singapore will not only offer a lower gaming tax rate than Malaysia and Macau but has devised an even lower, separate rate for VIP play. The “integrated resorts,” as they are called, will pay 15 percent of gross revenue on their main floors but only 5 percent on the “premium” play of high rollers and players brought in by junkets. Neither Malaysia nor Macau offer such tiered rates. Malaysia collects 28 percent of gross revenue as tax. Macau collects 35 percent and an additional 3-4 percent in mandatory social and welfare contributions.

Owing to the Macau government’s heavy reliance on gambling tax receipts —which accounted for 77.5 percent of its total revenues in 2008 — there is no discussion of reducing the tax burden, even though Singapore will soon offer much more attractive rates. There is also a growing perception within Macau that foreign casino operators have been expatriating huge profits from the city and not giving back enough to the local community. In light of their suspension of billions in investment in the city, it will be difficult for operators to ask the government for further breaks. So not only will the glitzy new IRs in Singapore pay lower taxes, their hunger to make a return on their high investment costs will intensify competition at a time when Macau’s casinos are already reeling from a fall in revenue and squeezed margins in the VIP baccarat market, which accounted for 68 percent of the peninsula’s casino revenue in 2008.

On the other hand, Singapore’s indoor smoking ban and stringent financial transaction reporting requirements will keep away much of Macau’s mainstay market of VIP gamblers from mainland China. Both VIP and mass-market players from Guangdong will also be put off by the cost and inconvenience associated with taking the long flight to Singapore when Macau is a short trip by car or bus. It is thought, therefore, that Singapore’s casinos will cater more to players from Southeast Asia, particularly high-net-worth ethnic Chinese from Indonesia, Thailand, Vietnam and even Malaysia, where well-heeled gamblers will probably welcome an alternative to the aging Genting Highlands Resort, where Casino de Genting is located.

Also worth considering is Singapore’s determination to charge its citizens and permanent residents a fee to enter the casinos — S$100 (US$65) per day or S$2,000 per year. (Admission for tourists will be free.) A senior government official described this entry fee as “exorbitant” when discussing how it would prevent an increase in the incidence of problem gambling among locals. The fee is one of several measures intended to minimize the potential negative social impacts of the casinos.

At mid-2008, Singapore’s population was 4.8 million, while Macau’s stood at 551,900. Macau’s population could certainly not generate sufficient demand for the city’s gaming capacity, which included 4,017 gaming tables and 11,856 slot machines at the end of 2008. According to Macau government data, non-residents contributed around 98 percent of all gaming revenue in the city, although considering that local casinos are not required to identify patrons this could be a rough estimate. In Singapore then, even without having to worry about an “exorbitant” entry fee holding back local demand, the high development costs of the IRs (US$5.4 billion for Marina Bay Sands alone) make generating a healthy return on investment a daunting task. In Macau, Las Vegas Sands managed to build the world’s largest casino resort, Venetian Macao, at a cost of US$2.4 billion — less than half the latest budget for Marina Bay. Still, Venetian Macao struggled to turn a profit even before the economy headed south. Big budget megaresorts are risky ventures, especially now that their developers — including LVS, the most bullish of the bunch in Asia — are facing financial problems. Singapore’s resorts will need to tap every revenue source available to them, and allowing locals unrestricted access could make a material contribution to their financial survival.

Singapore’s current slot market consists of more than 2,000 machines at low-key slot clubs. Even though the clubs are relegated to non-prime locations, the average slot win per machine per day might be higher than that of any other market in the world, according to one local source, suggesting significant pent-up demand and insufficient capacity. By limiting local visitation, the casino entry fee could hamper the release of this pent-up demand. The fee will also prove an administrative nightmare because of the need to identify citizens and permanent residents — the latter generally carry foreign passports so separate checks will need to be made to verify whether they also have Singapore residence permits.

Critics see the fee as either a blatant money-grab or another misguided attempt by the nanny state — notorious the world over for banning chewing gum — to protect its citizens from themselves. Neither explanation is satisfactory, however. In setting its gaming tax rates well below Malaysia’s and Macau’s the government certainly seems to want to ensure the IRs are competitive and conducive of its broader employment- and tourism-boosting objectives. It seems the government wants to emulate modern-day Las Vegas, using the IRs to position the city-state as a major leisure and business tourism destination while skipping past Vegas’ evolution from hard-core gambling getaway, where Macau still finds itself mired. As much as a means of keeping problem gambling at bay, the entry fee, viewed in this light, could be seen as an indirect policy tool to achieve the government’s original intention to limit the contribution of gaming within the total IR revenue mix, a temporary measure to win quick public acceptance of the casinos. After the IRs open, if all goes to plan, they will create thousands of jobs and boost tourism. The IRs will increase demand for various local goods and services as well as improve the appeal of Singapore in general. Once they start operating, and theoretical concerns about a rise in problem gambling give way to real economic benefits, the local population will join the chorus of support for the industry. The operators will use that to argue that the entry fee is impractical and jeopardizes their financial viability. The government will then find a convenient way to abolish it.

THE BURDENS OF SUCCESS

Whereas the Singapore government has a reputation for sometimes going too far with its attempts at social engineering, the Macau government is better-known for its general neglect — beyond populist quick fixes such as last year’s giveaway of 5,000 Macau patacas in cash to all residents and reserving high-paying croupier jobs for locals. Such measures generally come at the expense of the diversification and long-term development of Macau’s economy. At the same time, there has been a perceived increase in the prevalence of problem gambling among Macau locals, while a rise in problem gambling across the border is believed to have factored into Beijing’s decision to restrict visitation by mainland Chinese. Ironically, the improved perception of Macau’s gaming industry following the arrival of the megaresorts is considered a big reason for the rise in problem gambling. Macau has also witnessed an explosion in salaries for unskilled dealer jobs because of the government’s ban on casinos employing foreign workers for those positions. School dropout rates have risen as young people forego further education to take up croupier positions offering higher starting salaries than most non-casino jobs for university graduates. The new casinos are a potent lure for young people working shifts and endowed with considerably more disposable income than the majority of the working population.

All this can hardly be used to prognosticate what will happen in Singapore, however.

What we do know is that Macau’s economic growth spurts since 2004 have coincided with the unveiling of new casino resorts, and there will now be a longer wait for many of those. Still, it could be a welcome gap, providing the government much-needed breathing space to improve the city’s infrastructure, which has been straining under an increase in visitor arrivals (from 11.5 million in 2002 to 30.2 million in 2008).
But even during periods when the growth of visitor arrivals and casino revenues slowed — as occurred in 2005, when no major new resorts were unveiled — Macau’s economic expansion between 2003 and last year was sustained by soaring investment spending as operators plowed billions into development. As a result, the government has accumulated budget surpluses on the back of soaring gaming tax revenues that swelled its fiscal reserves to more than US$10 billion at the end of 2008. Foreign-exchange reserves grew 19.6 percent last year to $15.93 billion. Expenditures on gaming by non-residents constitute around three-quarters of service exports, by far the biggest component of GDP.

On the down side, the steadily widening budget surpluses have been boosted by the government’s failure to meet its public works spending targets. Delays in approving infrastructure projects became more pronounced in 2008, with public investment expenditure coming in at only 3.1 billion patacas (US$387.5 million). Spending on roads and bridges shrank to 61.2 million patacas, from 358.7 million patacas in 2007 and 747 million patacas in 2006.

So although the government’s approach to the local economy has thus far been decidedly laissez-faire — perhaps excessively so — it is now in the rare position of having more than sufficient reserves to fund a slew of long-delayed improvements. While other governments struggle to pay for essential services, Macau’s government can pick up the slack in the local economy by finally honoring its commitment to provide for the sustainable development of the local tourism and gaming sectors. In his 2009 budget address, delivered in November, Chief Executive Edmund Ho earmarked 10.5 billion patacas for public investment expenditure. He also announced several measures to support small and medium-sized businesses, which were struggling to compete for resources with powerful gaming and tourism interests even before the financial crisis took hold.

That said, for all the lip-service that is paid to the city’s need to diversify its economy, and several high-ranking officials from Beijing have repeatedly stressed the issue in public, the government as yet has no concrete strategy to work toward this. In the absence of such a plan, all the industry can do is hope that Beijing keeps the travel flood gates open and resists calls to legalize casinos on the mainland.