Economy

Macao to keep pegging pataca to HKD despite inflation pressure

(Xinhua)
Updated: 2010-08-21 16:59

MACAO - The government of Macao Special Administrative Region (SAR) deems it "undesirable" to change its existing exchange rate mechanism which has seen the pataca pegged to the Hong Kong dollar, the SAR's Monetary Authority said in a statement released on Friday.

The Monetary Authority made the statement after local legislator Au Kam San filed a written interpellation regarding the existing monetary policy of Macao in the face of the rising RMB accompanied by prices increase.

Macao has been an advocate of free trade policy for a long time, and its legal tender, the pataca, has long been pegged to the Hong Kong dollar. Given the Hong Kong dollar has a similar relations with the US dollar, the pataca is indirectly pegged to the US dollar.

Au pointed out in his interpellation that the appreciation of RMB against the US dollar has resulted in the value drop of the pataca, and since most of Macao's food and commodity are imported from the Chinese mainland, the price of these goods have become more and more expensive.

Therefore, the current exchange rate mechanism should be re-examined as the market situation has changed, Au also said.

However, the Monetary Authority explained that there is no obvious correlation between the exchange rate of the pataca and inflation, since the exchange rate index which gauges the strength of the pataca has remained stable from the beginning of this year till now, and its exchange rate vis-a-vis the RMB has only slid by 1 percent.

Meanwhile, as foreign currencies rise against the pataca, it will in one way or another enhance the competitiveness of the service exports of Macao, the Authority also said.

Official figures indicated that tourism-related sectors account for over 50 percent of Macao's employed population, and the revenues contributed by service exports amount to over 140 billion patacas ($17.5 billion) every year.

The pataca is freely convertible in the absence of exchange control, and if the pataca is to hook up with a currency that is not freely convertible, such as the RMB, it will not only impair the convertibility of the pataca, but pose grave technical problem in the management of local exchange reserves.

According to international practice, exchange reserves can only be composed of assets denominated in freely convertible foreign currencies.

Hong Kong Dollar deposits, valued at more than 110 billion patacas ($13.75 billion) equivalent, account for 55 percent of the total deposits of local residents, and over 60 percent of local bank loan portfolio is denominated in Hong Kong dollars, according to the latest official figures.

All these have indicated that the existing exchange rate system has been an important factor in maintaining the stability of Macao financial system, and "the SAR 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 Monetary Authority also said.

Macao's inflation rate for the first seven months of this year stood at 2.22 percent, according to the SAR's Statistics and Census Service (DSEC).

Macao residents' confidence in prices of goods has dropped significantly in the second quarter, a sign that lots of the people were facing stronger inflation pressure, according to the 2010 Second Quarter Consumer Confidence Survey, conducted by the Macao University of Science and Technology.

Related readings:  Macao's retail sales up 32% in Q2  Macao's CPI increases 2.96% in July  Macao's forex reserves reach $20.72b in July  Macao manufacturers affected by material price hike

Although it is not going to tackle the inflation by making any changes to the exchange rate mechanism, the SAR government has rolled out measures which was aimed at relieving inflation pressure exerted on the livelihood of local residents.

The SAR's Social Welfare Bureau launched the "Measures to Assist the Underprivileged to Alleviate Inflationary Pressure" in July, benefiting more than 5,000 families which receive regular economic subsidy.
Three kinds of underprivileged families totaled more than 3,000 also received in August an one-off payment equivalent to doubling the special subsidy under the "Special Living Subsidy Distribution Scheme Phase II."
In addition, there is an extension of short term food subsidy scheme.

The beneficiaries are those who have not yet been eligible for comprehensive assistance. They will receive short term food subsidies for up to six weeks.

The SAR government has already considered available policy options in tackling the inflation issues and is well-prepared to meet the challenge, said Chui Sai On, the chief executive of the SAR, in a previous circumstance.