• A problematic opportunity for PH casinos

    Ben D. Kritz

    Ben D. Kritz

    For nearly two years, the Chinese government under President Xi Jinping has been on an aggressive anti-corruption drive, and the effort is apparently having a disastrous effect on the casino industry of the semi-autonomous enclave of Macau, the only place in China where gambling is legal, according to a recent report by Reuters.

    Macau’s gambling industry took in about $45 billion last year, and is the biggest in the world, something like six or seven times larger in revenue terms than Las Vegas. About two-thirds of Macau’s gaming revenue—which accounts for at least 80 percent of the city’s tax base—is generated from VIP junkets, operations that bring in high-rollers from mainland China, the sort of people whose spending for an evening or over a weekend easily runs into six- or seven-digit figures.

    Those junket operations are a magnet for two kinds of clients: The first, which are the sort of clients Macau and even the central government would like to keep, are the ‘nouveau riche’ who have spectacularly benefited from China’s years of economic boom and have more legitimately earned money than they know what to do with. The second, however, are the ones Beijing is trying to put the collar on as part of the anti-corruption effort—officials from various levels of the government laundering bribes through Macau’s casinos, tax evaders, and individuals from both the government and private sector who are trying to move wealth out of the country.

    Economic conditions in China are not as favorable as they were a year or two ago, and that is starting to put a pinch on credit and the assets of China’s extreme upper class. That alone is having a negative effect on the junket business, but not one serious enough to threaten the existence of the sector.

    The central government’s anti-corruption effort, however, is another story; according to the Reuters report, the government is putting intense pressure on the operators to provide information on who their clients are and how much they are spending. Anyone with illicit motives has, of course, instantly disappeared from Macau’s VIP tables, and even legitimate players are being driven away, feeling their privacy under threat—which is not a minor issue, because of the risk of making oneself a target of wealth-motivated crimes like extortion and kidnapping for ransom.

    As a result, some junket operators are simply closing down their businesses, while others are shifting their operations to new locations, primarily Vietnam and the Philippines, according to the Reuters report.

    The effect on Macau’s gaming industry has been profound; from June to August, VIP room revenue plummeted by HK$40 billion (about $5.2 billion, or P230 billion), roughly half of what it was at the same time a year ago. Analysts expect that Macau’s annual gaming revenue could be cut by as much as a third, or $15 billion, due to the loss of junket business.
    Obviously this presents an opportunity for the rapidly growing Philippine gaming industry, but it is a problematic one. Even if the Philippines splits Macau’s lost business with Vietnam, the other alternative mentioned, that is still a potential annual revenue boost of $7.5 billion (P334.8 billion).

    Or it would be, if the combination of the perceptions of out-of-control crime in the Philippines and the political squabble over maritime borders had not led China to issue a blanket travel warning for its citizens regarding the Philippines. That means junket clients—who have already been spooked by official prying in Macau—will be put under more scrutiny by their government before being allowed to come here, if they are allowed at all. And because gambling activity is, from the Chinese government’s point of view, relevant to their anti-corruption drive, it is possible that Beijing could use the issue to demand concessions from the Philippine government in terms of disclosing gambling spending by its citizens here, which could have an impact, or at least a perceived impact, on non-Chinese customers as well.

    The best course the government could follow, given that ‘the ball is in the Chinese court,’ so to speak, is to take some immediate, substantial, and very visible steps to remove the legitimate non-political justification for China’s current travel advisory, the poor state of public safety in the Philippines. That might not cause the Chinese to loosen their travel restrictions, but would lend credence to any subsequent Manila complaint that Beijing was unfairly conflating tourism and leisure travel with a political issue, and would serve as a means to attract further international attention to the Philippine gaming industry.

    Even so, under the best of circumstances—which would be a free flow of legitimate Chinese high rollers to Philippine casinos—at some point Chinese efforts to resolve their own corruption issues will bear fruit, and Macau will recover at least some of its lost business, because it is very much in Chinese national interest that it does so. If there is an opportunity for the Philippine gaming industry, it is likely to have a time limit; development and investment must look beyond that to different markets if the industry wants to avoid its own “Macau scenario” sometime in the future.



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